Law Office Of Devin Sawdayi | Los Angeles Bankruptcy Lawyer Blawg
Law Offices of Devin Sawdayi represents people with loan modification; debt consolidation and negotiation; and bankruptcy matters. The firm also handles foreclosure; second mortgage; student loan debt; wage garnishment; and credit card debt issues.
The bankruptcy court system deals with a substantial number of cases, with thousands of new cases filed every year. The Federal Rules of Bankruptcy Procedure establish certain uniform standards and procedures, and district and bankruptcy courts may establish local rules to assist judges and court staff. Failure to comply with these rules can result in setbacks, delays, or even outright dismissal. A debtor recently appealed the dismissal of her Chapter 13 bankruptcy case to a federal district court in Los Angeles. The district court, after finding that the debtor had failed to comply with local rules, dismissed her appeal and denied her motion to reconsider. In re Pulliam, No. 5:15-cv-00250, order (C.D. Cal., Jun. 23, 2015).
The debtor filed a Chapter 13 proceeding in the Bankruptcy Court for the Central District of California in 2014. The district court’s order states that the bankruptcy court dismissed her case on January 30, 2015 in connection with the Chapter 13 confirmation hearing, although it does not state the specific grounds for the dismissal. The debtor promptly filed an appeal with the district court.
The district court issued a notice in February, advising all parties that they must comply with the Federal Rules of Bankruptcy Procedure and the Local Rules Governing Bankruptcy Appeals, Cases, and Proceedings for the Central District of California. It also stated that it would issue a briefing schedule once the appellate record was complete and that any party requesting an extension of time must do so “well in advance of the due date, and must specify good cause for the requested extension.” Pulliam, order at 2. The court cautioned the parties that a failure to comply with any applicable rules could result in dismissal.
The bankruptcy court certified that the record was complete on May 12. The district court issued a briefing schedule shortly afterwards that ordered the debtor to file her opening brief by May 26. Instead of filing a brief on that date, the debtor filed a “Motion for More Time to File Opening Brief.” Id. The district court issued an order two days later denying the debtor’s motion for more time, citing noncompliance with C.D. Cal. L. Bankr. R. 4.5, and dismissing the appeal under Fed. R. Bankr. P. 8018(a) (formerly 8009) and C.D. Cal. L. Bankr. R. 4.4.
The debtor filed a motion to set aside the dismissal, which she also titled a “motion for reconsideration,” stating that she could not locate a “Local Rule of Bankruptcy Procedure 4.5.” Pulliam at 3. She also filed an emergency motion requesting the court to expedite the hearing on her motion.
The district court held that the debtor’s motion to set aside the dismissal/reconsider did not meet the procedural requirements established by Rule 7-18 of the Local Rules. It explained that Local Bankruptcy Rule 4.5 required the debtor to request additional time for her opening brief well ahead of the due date, and that the debtor’s failure to do so authorized the court to dismiss the appeal under Local Rule 4.4. The court found that no hearing was necessary under Fed. R. Bankr. P. 8013, denied the debtor’s first motion, and denied the emergency motion as moot.
Since 1997, bankruptcy lawyer Devin Sawdayi has helped individuals and families in the Los Angeles area obtain relief from financial difficulties through Chapter 7 and Chapter 13 bankruptcies. Contact us online or at (310) 475-939 today to schedule a free and confidential consultation with a member of our team.
A California federal district court recently affirmed a bankruptcy court’s order lifting the automatic stay in a Chapter 13 proceeding, finding that the matter in question was not subject to the automatic stay under one or more exceptions found in the Bankruptcy Code at 11 U.S.C. § 362(b). The district court’s most recent ruling on the issue referenced two earlier orders: In re Silva, No. 2:15-cv-02061, order denying appellant’s motion for stay pending appeal (“Silva I”) (C.D. Cal., Apr. 24, 2015); order denying appellant’s ex parte motion for reconsideration (“Silva II”) (May 1, 2015). The court incorporated those orders’ reasoning in the most recent order (“Silva III”), issued on June 22, 2015. The various orders draw on dense statutory language in the Bankruptcy Code, which frequently defines exceptions to the automatic stay entirely by reference to other code sections.
The debtor/appellant has, according to the court, lived in her home since 1988. She and her husband/co-debtor borrowed $125,000, secured by a first-mortgage lien on the property, in 2004. They took out a second mortgage the following year for $30,000. At some point, they began to discuss modifying the first mortgage loan, but they then defaulted on the second mortgage in 2008. The second-mortgage lender sold the property to a family trust (the “Buyer”) in a foreclosure sale in August 2009. Several weeks later, an employee of a property management company owned by the Buyer (the “Company”) went to the residence to inform the debtor of the sale, but the debtor reportedly did not believe him because of the ongoing loan modification negotiations with the first-mortgage lender.
Although the Buyer had an executed trustee’s deed, it did not record the deed right away, opting “to allow [the debtor] and her husband to remain in the property rent-free until the property increased in value.” Silva I at 3. In April 2010, the first-mortgage lender recorded a foreclosure notice. The debtors filed for Chapter 13 bankruptcy in August 2010, but no one recorded a notice of the bankruptcy proceeding in the property’s chain of title. In October 2014, the Buyer recorded the trustee’s deed and then executed and recorded a quitclaim deed transferring title to the Company. Neither party was aware of the pending bankruptcy proceeding at the time.
Upon learning of the bankruptcy case, the Company moved to lift the automatic stay in December 2014. The debtor brought an adversary proceeding against the Company, seeking an injunction against transferring title. The bankruptcy court denied the preliminary injunction and granted the Company relief from the automatic stay. The debtor appealed to the district court.
Both the bankruptcy and the district courts reviewed the exception to the automatic stay found in § 362(b)(3), which excepts certain interests in property that are superior under state law to the bankruptcy estate’s interest. The district court ultimately concluded, however, that the residence was excepted under § 362(b)(24), which applies to transactions that are not avoidable by the bankruptcy trustee under §§ 544 or 549 of the Bankruptcy Code. Even though the Buyer did not record the deed until long after both the purchase and the bankruptcy filing, it was deemed to have recorded the deed on the same day as the sale under 11 U.S.C. § 546(b).
Bankruptcy lawyer Devin Sawdayi has represented individuals and families in the Los Angeles and surrounding areas in Chapter 7 and Chapter 13 bankruptcies since 1997, helping them repair and rebuild their finances with dignity and respect. Contact us online or at (310) 475-9399 today to schedule a free and confidential consultation with a knowledgeable and experienced financial advocate.
The federal Bankruptcy Code gives wide discretion to individual bankruptcy judges to issue orders, including the authority to impose sanctions on a debtor or other party for acts that it finds to be unlawful or otherwise counter to the purpose of a bankruptcy case. A “sanction” is a punishment for conduct that takes place during the litigation process. A federal district court recently affirmed a bankruptcy court’s sanctions order in a Chapter 7 case, which found bad faith on the part of the debtors and assessed monetary damages. In re Kellogg-Taxe (“K-T I”), No. 2:15-cv-00084, order (C.D. Cal., Dec. 7, 2015).
To sanction a party or its counsel, a court must find that the conduct in question “constituted or was tantamount to bad faith.” K-T II at 13, quoting Leon v. IDX Sys. Corp., 464 F.3d 951, 961 (9th Cir. 2006). A bankruptcy court’s “inherent sanction authority,” however, differs from federal district courts’ “civil contempt power.” K-T I at 6, citing In re Dyer, 322 F.3d 1178, 1196 (9th Cir. 2003). While civil contempt authority allows a court to impose sanctions for violations of specific orders, inherent sanction authority goes further, “allow[ing] a bankruptcy court to deter and provide compensation for a broad range of improper litigation tactics.” Dyer, 322 F.3d at 1196.
The facts of the Kellogg-Taxe case are, in the bankruptcy court’s words, “extremely complex and involv[ing] numerous parties and prior court decisions spanning nearly 30 years.” K-T II at 3. The issues surrounding the debtors appear to have begun with a lawsuit filed in Los Angeles Superior Court in the 1980s, resulting in a judgment against the debtors in excess of $2 million in 1989. A series of lawsuits followed, as well as multiple loans taken out by the debtors that were secured by various properties. The debtors filed for Chapter 7 bankruptcy in December 2012, identifying only one secured creditor in their petition. After some disputes emerged between the debtors and several creditors, the trustee filed an adversary proceeding to quiet title to one property.
In 2014, the trustee moved for sanctions against the debtors and several non-parties. The bankruptcy court granted the motion, finding that the individuals in question “participated in perpetuating a scheme that has been found to be fraudulent by several state court rulings since 1994.” K-T II at 14. The district court affirmed the ruling, noting that it could only review the lower court’s order “under the abuse of discretion and clearly erroneous standards,” and it found that the debtor did not “overcome this high standard.” K-T I at 11.
Since 1997, bankruptcy lawyer Devin Sawdayi has advocated for individuals and families in the Los Angeles area who are dealing with financial distress. We help our clients obtain relief in Chapter 7 and Chapter 13 bankruptcy cases. To schedule a free and confidential consultation with a knowledgeable, experienced, and compassionate financial advocate, contact us today online or at (310) 475-939.
A Texas bankruptcy case, in which the former owner of a debtor business spent about seven weeks in jail for refusing to turn over passwords to several social media accounts, may have a substantial impact on the legal status of social media accounts as assets of a bankruptcy estate. The court ruled that several social media accounts belonged to the business, not the individual, and were therefore the property of the bankruptcy estate. In re CTLI, LLC, No. 14-33564, mem. opinion (Bankr. S.D. Tex., Apr. 3, 2015). The ruling could affect individual and family bankruptcies around the country, including in California, in which individuals use social media for any sort of business purpose. This seems especially true when one considers that social media is a very new phenomenon, and the law is always slow to catch up to new technologies.
The business owner (the “Owner”) operated a gun store and shooting range in the Houston, Texas area. He and his wife initially owned the entire business. He recruited an investor (the “Investor”) in 2011 to help purchase a larger facility in exchange for a 30 percent ownership stake. Problems developed among the three owners, according to the bankruptcy court. The Owner and his wife began proceedings for divorce in late 2012, and the Investor filed a state court action in November 2013 requesting a receivership.
The Owner filed a Chapter 11 bankruptcy petition for the business in June 2014, one day after a state judge ordered a receivership. The bankruptcy court allowed the Investor to propose a plan, and it approved his proposed plan in December 2014. The plan made the Investor the sole owner of the reorganized business and required the Owner to turn over passwords to accounts used for the business on Facebook, Twitter, and other social media platforms.
The Owner objected to turning over the passwords, but on April 3, 2015 the court ruled that the social media accounts fell within the Bankruptcy Code’s definition of “property of the estate.” 11 U.S.C. § 541. It rejected the Owner’s claim that the social media accounts were his personal property. The social media accounts in question, it held, primarily served to market the business, and all posts and updates were made under the name of the business, not the Owner.
The court held that the situation would be different if the accounts “related to the interest known as a persona.” CTLI, mem. op. at 10. A persona could be treated as property in many situations, but it might not be considered bankruptcy estate property because of “the 13th Amendment’s prohibition on involuntary servitude.” Id. at 10-11. California law might view personal social media accounts similarly, based on laws like the “password protection law,” Cal. Lab. Code § 980.
The Owner continued to refuse to turn over the social media passwords to the Investor, and on April 9 the court ordered him taken into custody by the U.S. Marshals Service. It denied his motion to reconsider and his request to stay the contempt order on April 21. It ordered him released from custody on May 27 after finding that he had complied with its order. The Owner had also filed an appeal in U.S. District Court on April 24.
Since 1997, Los Angeles bankruptcy attorney Devin Sawdayi has helped individuals and families find their way out of financial distress through the Chapter 7 and Chapter 13 bankruptcy processes. To schedule a free and confidential consultation with a knowledgeable, experienced, and compassionate financial advocate, contact us today online or at (310) 475-939.
A California bankruptcy court ruled that a debtor couple’s federal tax liabilities were subject to discharge under Chapter 7 of the Bankruptcy Code. In re Martin, 508 B.R. 717 (Bankr. E.D. Cal. 2014) (PDF file). The debtors did not file Form 1040 tax returns for those tax years before the IRS assessed the amount of tax liability and began efforts to collect the debt. The court had to determine when tax liability becomes a “debt” for purposes of bankruptcy law: when the IRS assessed the debt or when the debtors filed their returns. It ruled that the filing of the returns was the critical factor, and therefore it ruled for the debtors.
According to the court’s ruling, the debtors, a married couple, did not file federal income tax returns for the tax years 2004, 2005, and 2006. The IRS conducted an audit of the debtors in June 2008. The following August, it sent them a “notice of deficiency” for each of the three years. An accountant completed the three tax returns for the debtors in December 2008, but the debtors did not sign the returns or send them to the IRS until June 2009.
Meanwhile, in March 2009, the IRS assessed the debtors’ total tax liability and sent them several notices and demands for payment. It issued a due process notice, which initiated the collection process, in late May 2009. The debtors signed the returns and mailed them to the IRS about a week later.
In November 2011, the debtors filed for Chapter 7 bankruptcy, having not yet paid any of this tax debt. They filed an adversary proceeding against the IRS in July 2012, claiming that the tax debt was dischargeable. The IRS moved for summary judgment. It argued that the exception to discharge covering tax debts for which a return “was not filed or given,” 11 U.S.C. § 523(a)(1)(B)(i), should apply because the debtors did not file their Form 1040 returns until after it had assessed the debt and commenced collection efforts.
The question for the bankruptcy court was whether the tax debt accrued when the IRS assessed the amount due in March 2009, or when the debtors filed their returns in June 2009. The court found the IRS’ argument—that its assessment established the debt—to be unpersuasive. It also rejected the IRS’ arguments based on appellate court rulings from other circuits:
– The Fifth Circuit’s “One-Day-Late” rule, which holds that a late-filed tax return is “not a ‘return’ for bankruptcy discharge purposes under § 523(a).” Martin, 508 B.R. at 726, quoting In re McCoy, 666 F.3d 924, 932 (5th Cir. 2012); and
– The Sixth Circuit’s “Post-Assessment” rule, which holds that a late-filed return may still count as a “return” under § 523, but only until the IRS makes an assessment of tax debt. In re Hindenlang, 164 F.3d 1029 (6th Cir. 1999).
Instead, the court went with the “No-Time-Limit” rule established by the Eighth Circuit, which holds that “timeliness” is not a factor in determining whether a return meets the requirements of § 523. Martin, 508 B.R. at 731, quoting In re Colsen, 446 F.3d 836, 840 (8th Cir. 2006).
If you need to speak to a tax debt attorney in the Los Angeles area, contact the Law Offices of Devin Sawdayi online or at (310) 475-939 today to schedule a free and confidential consultation. We help individuals and families use the Chapter 7 or Chapter 13 bankruptcy processes to rebuild their finances with dignity and respect.
Student loan debt is among the largest financial burdens Americans face, with many estimates placing the total amount of debt at more than $1 trillion. Bankruptcy law, unfortunately, only offers limited relief. Since 2005, nearly all student loans are excepted from discharge in bankruptcy cases, except in very limited circumstances. Many debtors must consider other options in addition to bankruptcy if their student debt becomes overwhelming. A series of debt relief measures recently announced by the federal Department of Education (DOE) may offer relief to some debtors. One can hope that the DOE’s actions also offer hope for additional reforms in the future.
The Bankruptcy Code identifies certain debts that are not dischargeable in bankruptcy. 11 U.S.C. § 523. These exceptions could be broadly categorized as (1) debts owed to the government or subject to a court order, such as certain tax debts or child support obligations; and (2) debts incurred through some fault of the debtor, such as those arising from civil judgments for fraud or other injury.
Student loans do not quite fit into either category. Prior to 2005, the only student loans excepted from discharge were those “made, insured or guaranteed by a governmental unit,” or made by an organization that receives government funding. 11 U.S.C. § 523(a)(8) (2004). The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, amended that section to include private student loans as well.
Another notable feature of the Bankruptcy Code’s exceptions to discharge is that, while they include multiple mechanisms by which a debtor’s bad behavior could affect their bankruptcy case, they do not expressly take the misbehavior of a creditor into account. The analysis focuses almost exclusively on the debtor. In order to discharge student loan debt, a debtor must prove that they will experience “undue hardship,” as narrowly defined by various court decisions, if they are forced to continue to repay the loans. The DOE’s recent debt relief measures are based on alleged misconduct by a creditor.
In April 2015, attorneys general from nine U.S. states, including California, sent a letter to DOE Secretary Arne Duncan asking him to offer loan forgiveness to students who enrolled at for-profit schools and colleges operated by Corinthian Colleges, Inc. While this company is not the only for-profit education company accused of predatory student loan programs, it is perhaps the most well-known.
The California-based company, which ceased operations in April 2015, once operated over 100 campuses around the country under the names Everest, Heald, and WyoTech. The DOE fined the company $30 million the same month. Multiple states are still investigating the company, and a lawsuit filed by the federal government is still pending.
The DOE’s plan offers relief to about 15,000 students who enrolled at Corinthian schools and took out $208 million in loans. The students will have expanded eligibility to apply for closed school discharges. The DOE is also streamlining procedures for borrower defense relief, which allows a debtor to object to the repayment of a student loan based on a school’s alleged misconduct. The DOE’s plan is far from perfect, but it could offer substantial relief to thousands of people.
For the past 20 years, bankruptcy attorney Devin Sawdayi has helped individuals and families in the Los Angeles area get a fresh start by restructuring or discharging their debts through Chapter 7 and Chapter 13 bankruptcies. We are committed to representing our clients with respect and dignity, with a focus on each client’s unique circumstances. To schedule a free and confidential consultation, contact us today online or at (310) 475-9399.
Chapter 7 bankruptcy enables qualifying debtors to pay down their debts by liquidating their non-exempt assets, followed by a discharge of many remaining debts. In order to qualify for a Chapter 7 discharge, debtors must demonstrate that they meet the criteria set out in the “means test,” 11 U.S.C. § 707(b). A trustee or creditor may ask the court to convert a Chapter 7 “liquidation” case to a Chapter 11 “reorganization” case for good cause, such as if they believe that the debtor does not qualify under the means test. Individual debtors rarely use Chapter 11, but a court cannot convert a Chapter 7 case to Chapter 13 without the debtor’s agreement. 11 U.S.C. § 706(c). A bankruptcy court recently ruled that a married couple could not file under Chapter 7 and essentially encouraged them to use Chapter 13 instead. In re Decker, No. A14-00065, memorandum (D. Alaska, Mar. 31, 2015).
The debtors in Decker have a complicated history of financial problems, as described by the bankruptcy court. Their adult daughter has required their ongoing support for medical problems and addiction recovery since 2009. The debtors began having serious issues with the Internal Revenue Service (IRS) in 2007, when it assessed deficiencies for the previous two tax years. Those debts have reportedly continued to accrue.
When the debtors filed their Chapter 7 petition in March 2014, they identified almost $426,000 in debts. Debts owed to the IRS included over $102,000 in priority debt and $81,000 in non-priority debt. The IRS filed a proof of claim for more than $204,000 in taxes, interest, and penalties. They also identified tax debts owed to the states of California and Alaska. The $35,000 in personal property identified in their schedules is all exempt or subject to liens.
The court-appointed trustee challenged the debtors’ accounting of monthly income and expenses, which initially showed a negative monthly cash flow of about $130. The wife admitted that they had overstated certain monthly expenses, but the trustee claimed that the overstatements were even more extensive. The trustee moved to convert the case to Chapter 11 under 11 U.S.C. § 706(b).
A court has discretion to convert a case under § 706(b) if it finds that it would benefit both the debtors and the creditors. The court found that conversion would benefit the creditors because the debtors apparently had a greater ability to pay their debts than what they stated in their schedules. It noted that the debtors were opposed to conversion, but that this did not preclude the court from finding that conversion would be to their benefit.
Since the debtors had primarily tax debts rather than consumer debts, the court found that Chapter 11 would be more beneficial to the debtors than Chapter 7. It noted that Chapter 13 might be an even better option for them, but it was prevented from converting the case to Chapter 13 by § 706(c). It ordered a conversion to Chapter 11, but it deferred the order for two weeks to give the debtors a chance to elect Chapter 13 instead.
If you are in financial distress, without sufficient income to continue paying your debts, an experienced and knowledgeable bankruptcy attorney can help you understand your rights and options. Devin Sawdayi has represented individuals and families in Chapter 7 and Chapter 13 personal bankruptcy cases in Los Angeles since 1997. To schedule a free and confidential consultation to see how we can help you, contact us today online or at (310) 475-939.
A bankruptcy court recently ruled on a seeming conflict between two sections of the Bankruptcy Code dealing with proofs of claim (POCs) for tax debts. In re DeVries, No. 13-bk-41591, mem. dec. (Bankr. D. Id., Apr. 28, 2015). The Chapter 13 trustee objected to a POC filed by the debtors on behalf of the Internal Revenue Service (IRS) for their 2013 federal income tax. The court ruled that only a creditor may file a POC for tax debts incurred after the date the debtors file their petition, drawing on multiple precedent cases to determine precisely when tax debt is “incurred.”
The debtors filed a Chapter 13 petition in December 2013, and the court set a deadline in June 2014 for creditors, including the IRS, to file POCs. The IRS timely filed POCs for tax debts from 2011 and 2012. The debtors filed their 2013 federal income tax return in April 2014, which showed that they owed $1,021 to the IRS. The bankruptcy court confirmed the debtors’ Chapter 13 plan that May. The plan included full payment of all allowed tax claims.
The IRS did not file a POC for the 2013 tax debt by the June 2014 deadline. The debtors therefore filed a POC on behalf of the IRS the following month. The Bankruptcy Code generally allows a debtor to file a POC for a creditor if the creditor misses the filing deadline. 11 U.S.C. § 501(c), Fed. R. Bankr. P. 3004. The trustee objected to the debtors’ POC, however, arguing that only creditors may file “for taxes that become payable to a governmental unit while the case is pending.” 11 U.S.C. § 1305(a)(1).
In response to the trustee’s objection, the debtors argued that they could file a POC for income tax debt that “arise[s]…after the commencement of the case.” 11 U.S.C. §§ 502(i), 507(a)(8). Since their 2013 tax return was not due until after they had filed their petition, they claimed, they could file a POC for that year’s tax debt. The question for the bankruptcy court was therefore whether § 502(i) or § 1305(a) applied.
The bankruptcy court ruled in the trustee’s favor, finding that § 502(i) did not apply in the debtors’ circumstances. It identified two possible scenarios in which § 502(i) would apply, based on Ninth Circuit precedent:
1. Section 502(i) is based on § 507(a)(8), which addresses taxes due during a three-year “lookback period” prior to the petition date. In re Jones, 420 B.R. 506, 510 (BAP 9th Cir. 2009). The debtors’ 2013 tax return, however, was due after they filed their petition.
For over 20 years, bankruptcy attorney Devin Sawdayi has helped Los Angeles individuals and families repair their finances through the Chapter 7 and Chapter 13 bankruptcy processes. Contact us today online or at (310) 475-939 to schedule a free and confidential consultation with an experienced and knowledgeable financial advocate.
The loss of a job is one of the biggest factors that lead people to file for Chapter 7 and Chapter 13 bankruptcy. State and federal programs exist to assist people who have lost their job and are looking for a new one. When losing a job puts a person in such financial distress that they must consider bankruptcy, the question emerges as to whether or not unemployment benefits constitute “income” for the purposes of a bankruptcy case. The short answer to that question is yes, it is considered income. The answer can be more complicated, however, when applied to specific parts of the bankruptcy process, like the Chapter 7 means test.
California, like most states and the federal government, maintains a system of unemployment insurance (UI). Employers pay into the insurance fund, which is available to pay temporary benefits to qualifying former employees. In order to qualify for benefits, individuals must have lost their job through no fault of their own, such as through a layoff; must have received a minimum amount of wages during an earlier 12-month period; and must be physically capable of working, willing to work, and actively seeking work. The amount provided through these programs is usually not much, but it at least keeps people from losing any and all income.
The general rule in bankruptcy is that unemployment compensation received through state or federal UI programs is included in a debtor’s income calculations. Chapter 7 bankruptcy cases rely on a “means test” based on a debtor’s “current monthly income.” A debtor whose “current monthly income” is greater than a certain amount, determined by a rather complicated formula, is not eligible for Chapter 7 bankruptcy. 11 U.S.C. § 707(b)(2). Some courts disagree on whether this income calculation includes unemployment compensation.
Chapter 7 debtors must identify all sources of income on Form 22A. “Current monthly income” is defined to include most sources of income, but specifically excludes “benefits received under the Social Security Act” (SSA). 11 U.S.C. § 101(10A)(B). Social Security payments are inarguably excluded from the means test. Debtors are permitted to claim unemployment compensation as an SSA benefit on Line 9 of Form 22A by entering any amounts claimed as such in two boxes to the left of the columns for the debtor’s and the debtor’s spouse’s income.
The U.S. Trustee Program takes the position that “[u]nemployment compensation is not a ‘benefit under SSA’” and “opposes any entry in the boxes to the left of Columns A and B.” A few courts around the country have found, however, that unemployment compensation should not be included when calculating current monthly income. See, e.g., In re Sorrell, 359 B.R. 167 (Bankr. S.D. Oh. 2007); In re Munger, 370 B.R. 21 (Bankr. D. Mass. 2007). No California courts seem to have reached similar conclusions, so unemployment compensation most likely remains part of current monthly income here.
Bankruptcy attorney Devin Sawdayi has represented individuals and families in the Los Angeles area in Chapter 7 and Chapter 13 bankruptcy cases since 1997, helping them to repair their finances with dignity and respect. To schedule a free and confidential consultation to see how we can help you, contact us today online or at (310) 475-939.
Business owners, entrepreneurs, and investors often create business entities as a means of protecting themselves from liability, as well as protecting their business or investment from their own liability. If an individual debtor has some form of individual liability for unlawful business activity, however, those activities may be considered a factor in the bankruptcy proceeding. This was the case in a claim brought by the U.S. Department of Labor (DOL) against a business owner accused of withholding employee retirement contributions in violation of the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1001 et seq.
The debtor was the sole member and manager of a limited liability company (LLC) organized in Massachusetts. The LLC operated a weight loss business through a Jenny Craig franchise at eight locations around New York state. It established a retirement plan and trust for its employees in 2012, with the debtor named as the plan’s fiduciary and trustee. Employees funded the plan through contributions withheld from their paychecks. The debtor was responsible for transferring the withheld amounts to the employees’ retirement plan accounts.
The DOL claimed that the debtor failed to transfer a total of $8,646.00 to the plan during pay periods in 2012 and 2013. Under ERISA, funds withheld from an employee’s paycheck for the purpose of contributing to a retirement plan automatically become an asset of that plan, and the plan’s trustee has a fiduciary duty to remit those funds to the plan promptly. The debtor, according to the DOL, violated ERISA by failing to transfer those funds to the retirement plan.
The LLC ceased business operations in January 2014, and the debtor and his wife filed for Chapter 7 bankruptcy in May of that year. In re Herring (“Herring I”), No. 14-12482, vol. pet. (Bankr. D. Mass., May 28, 2014). He claimed liabilities in an amount between $1,000,0001 and $10 million, and assets totalling $50,000 or less. Id. at 1. He identified the LLC as a creditor, id. at 7, but not the retirement plan.
In October 2014, the DOL filed an adversary proceeding against the debtor, alleging that he “breached his duty of loyalty” by failing to transfer the withheld funds to the retirement plan. In re Herring (“Herring II”), Adv. No. 14-01209, complaint at 4 (Bankr. D. Mass., Oct. 24, 2014). Any debt associated with this breach, the DOL claimed, was not subject to discharge under the exception for debts arising from “defalcation while acting in a fiduciary capacity.” 11 U.S.C. § 523(a)(4).
The debtor and the DOL filed a stipulation with the bankruptcy court in November 2014, in which the debtor stipulated that he was a fiduciary with regard to the retirement plan for ERISA purposes, and that debt in the amount of $8,646 was not dischargeable because of a breach of fiduciary duty. The bankruptcy court granted a discharge of other debts that month. The DOL filed a civil suit against the debtor for ERISA violations, along with a settlement agreement, two months later. Perez v. Herring, No. 1:15-cv-10034, complaint (D. Mass., Jan. 8, 2015).
Since 1997, bankruptcy attorney Devin Sawdayi has helped Los Angeles individuals and families with rebuilding their finances through the Chapter 7 and Chapter 13 bankruptcy processes. To schedule a free and confidential consultation with an experienced and dedicated advocate, contact us today online or at (310) 475-939.