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When a debtor files a bankruptcy petition, the automatic stay prevents any pending litigation involving the debtor from moving forward. 11 U.S.C. § 362. Once a bankruptcy case is closed, or once a bankruptcy judge lifts the automatic stay, pending lawsuits and other proceedings may continue. A creditor in a California bankruptcy case recently raised a concern about the effect of an order from the bankruptcy court on a state court lawsuit that was still subject to the automatic stay. The legal doctrine of res judicata holds that once a court has made a final ruling on the merits of a specific claim or issue, that issue cannot be relitigated. The district court, hearing the creditor’s concern on appeal, held that the question of whether res judicata applies must be left to the state court. Restoration Homes, LLC v. Taniguchi, No. 3:15-cv-00032, order (N.D. Cal., Aug. 7, 2015).

The debtor and his wife purchased real estate in 2004. He obtained a mortgage loan modification in 2009, which lowered the total balance and the monthly payments, deferred part of the balance, and adjusted the annual interest rate. In June 2013, the creditor bought the debtor’s loan. It initiated foreclosure proceedings that October, claiming that the debtor had not made payments since July. The debtor disputed this and filed suit to enjoin the foreclosure in California state court. The court granted the debtor’s injunction, on the condition that he post a $40,000 bond. The debtor filed for bankruptcy, since he could not afford the bond.

The creditor’s proof of claim included over $53,000 in prior defaults, $47,000 in payment shortfalls, and other costs and charges. The debtor objected, claiming that the proof of claim was based on the original loan, not the 2009 loan modification. The bankruptcy court partly sustained the objection, ruling that the debtor could cure the default based on the loan modification provisions. The court’s order included a paragraph stating that the order was “without prejudice” to any “claims or defenses” in the state court case, specifically including the amounts owed to the creditor. Taniguchi, order at 3.

The creditor appealed, arguing that this paragraph improperly prevented it from asserting res judicata in state court. Res judicata works in two ways. “Claim preclusion” prevents a party from relitigating a cause of action once they have been subject to a final judgment on that same claim, based on the same set of facts. “Issue preclusion,” also known as “collateral estoppel,” prevents a party from relitigating a fact issue if a court has ruled on that issue in a case to which they were a party. Here, the creditor argued that the “without prejudice” language would prevent it from arguing in state court that the bankruptcy court’s ruling precluded the debtor from disputing the amount of the debt.

The district court noted that it did not share the creditor’s interpretation of the order, finding that it did not prevent any particular legal argument in state court. It also noted that a bankruptcy court lacks the authority to direct the actions of a state court and that the bankruptcy court was deciding a different issue than any issue before the state court. It affirmed the bankruptcy court’s order, holding that the state court retains authority to decide whether res judicata applies.

Since 1997, bankruptcy attorney Devin Sawdayi has represented individuals and families in the Los Angeles area in Chapter 7 and Chapter 13 bankruptcies. Contact us online or at (310) 475-9399 today to schedule a free and confidential consultation with an experienced and skilled financial advocate.

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Bankruptcy Court Considers Whether to Lift Automatic Stay for Foreclosure-Related Proceedings, Los Angeles Bankruptcy Lawyer Blawg, May 11, 2015

Violation of Automatic Stay Can Result in Emotional Distress and Punitive Damages, According to Ninth Circuit Ruling, Los Angeles Bankruptcy Lawyer Blawg, April 12, 2015

Photo credit: The original uploader was Jamidwyer at English Wikipedia (Transferred from en.wikipedia to Commons.) [CC BY-SA 2.0], via Wikimedia Commons.

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Current and former students in the U.S. reportedly owe more than $1 trillion in public and private student loans. For many, the burden of student loan debt nearly eliminates any benefit of the education obtained with the loan proceeds. Making matters worse is the fact that federal bankruptcy law specifically excludes student loans from discharge. The U.S. Department of Education (DOE) recently announced two changes to student loan repayment rules, which apply to loans made through various DOE programs. The new rules do not affect a student loan debtor’s rights in bankruptcy in any way, but they may ease their debt burden in other ways.

Consumer Protections

Federal and state regulators have gone to great lengths to prevent financial marketing that could potentially mislead students. The Credit Card Accountability Responsibility and Disclosure (Credit CARD) Act of 2009, for example, largely prohibits credit card marketing on college campuses.

The first new rule announced by the DOE addresses prepaid debit cards and similar financial products. Numerous colleges have deals with banks that allow them to market prepaid cards to students as a convenient means of accessing student loan funds, sometimes without clearly disclosing overdraft and other transaction fees.. The DOE’s new rule requires schools to let students choose where to deposit their student loan funds, and it prohibits them from creating an impression that students must use a particular kind of account for their funds. 80 Fed. Reg. 67125 (Oct. 30, 2015).

Expanded Repayment Options

The Obama administration’s first action on student debt relief, known as the the Pay As You Earn (PAYE) program, was passed by Congress at the end of 2012. This program caps monthly student loan payments at 10 percent of a debtor’s available income. Its availability, however, is limited to loans that originated after October 1, 2007 through the William D. Ford Federal Direct Loan (Direct Loan) Program. Income-Based Repayment (IBR) plans, which cap monthly payments at 15 percent of discretionary income, are more generally available to student loan debtors.

In June 2014, the White House issued a Presidential Memorandum calling on the DOE to develop rules expanding the PAYE program. The DOE announced the Revised Pay As You Earn (REPAYE) program at the end of October 2015. 80 Fed. Reg. 67203 (Oct. 30, 2015). Under the REPAYE program, as many as five million additional Direct Loan debtors will be able to take advantage of the 10 percent cap on monthly payments. The new rules take effect in December 2015.

Student Loans in Bankruptcy

Unfortunately, student loans remain excepted from discharge in bankruptcy, unless a debtor can prove that continued payment would cause them “undue hardship.” 11 U.S.C. § 523(a)(8). Most jurisdictions, including California and the Ninth Circuit, have adopted a three-part test for establishing undue hardship, known as the Brunner test:  (1) if required to repay the loans, the debtor could not maintain “a minimal standard of living”; (2) “additional circumstances” demonstrate that the current situation will “persist for a significant portion of the repayment period”; and (3) the debtor can show “good faith efforts to repay the loans.” Brunner v. New York State Higher Educ. Services, 831 F.2d 395, 396 (2d Cir. 1987).

If you need to speak to a Los Angeles bankruptcy attorney, contact the Law Offices of Devin Sawdayi today, online or at (310) 475-9399, to schedule a free and confidential consultation. We represent individuals and families in Chapter 7 and Chapter 13 bankruptcy cases, helping them repair and rebuild their finances with dignity and respect.

More Blog Posts:

Ninth Circuit Affirms Partial Discharge of Student Loan Debt in Chapter 13 Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, April 9, 2015

White House Takes Action on Student Loans; Executive Order Does Not Affect Nondischargeability of Student Loans in Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, October 14, 2014

Proposed Legislation Could Reduce Student Loan Interest Rates; Still Doesn’t Address Discharge in Bankruptcy or Cost of Education, Los Angeles Bankruptcy Lawyer Blawg, August 15, 2014

Photo credit: By bocian (Open Clip Art Library image’s page) [CC0], via Wikimedia Commons.

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The bankruptcy process allows individuals and families to rebuild their finances after they find themselves unable to continue paying their debts with their existing income. Under the federal Bankruptcy Code, bankruptcy judges can make rulings regarding the payment of debts and, at the end of many cases, the discharge of remaining debts. Disputes may arise between a debtor and one or more creditors, which the court may have to resolve. A recent decision by a Los Angeles federal court reviewed a bankruptcy court’s authority to modify the amount of a debt, which is a common topic of dispute. In re Spellman, No. 2:15-cv-00507, opinion (C.D. Cal., Sep. 17, 2015). It held that the bankruptcy court could not modify the debt because it was the result of a state court judgment.

The debtor is the beneficiary of a trust that includes a spendthrift clause limiting his access to the trust proceeds until his 35th birthday in 2017. In early 2007, the debtor hired an attorney to represent him in a lawsuit filed by members of his family disputing money received by the trust. The parties settled the lawsuit in September 2009. The debtor’s attorney, as part of the settlement, sought the removal of the spendthrift clause in order to claim his fee. The debtor claimed that he was unaware until then that the attorney would claim one-third of the trust proceeds, or approximately $200,000. He notified the attorney that he was terminating their attorney-client relationship, but the attorney reportedly continued working on the case until the court approved the settlement. The attorney filed suit against the debtor in December 2009 to collect his unpaid fee.

The debtor and the attorney submitted the case to arbitration. The arbitrator awarded the attorney 33 percent of the trust proceeds. The trustee of the trust obtained an order from the probate court setting aside the removal of the spendthrift provision, but the attorney obtained an order from the superior court confirming the arbitrator’s award and entering a judgment against the debtor for more than $214,000. With the spendthrift clause in place, the debtor was personally liable for the judgment amount. The debtor filed for Chapter 13 bankruptcy in March 2012.

The debtor objected to the attorney’s proof of claim, and the bankruptcy court ruled in his favor. The court reduced the amount owed to the attorney to just under $44,000, an amount it deemed the “reasonable value” of the attorney’s services to the debtor. 11 U.S.C. § 502(b)(4). The court rejected the attorney’s argument that res judicata precluded it from reviewing the state court’s judgment, or that federal law required it to give “full faith and credit” to the judgment. 28 U.S.C. § 1738. The attorney appealed to the district court, which reversed the ruling.

The district court noted that it, like the bankruptcy court, was “troubled” by the attorney’s conduct. Spellman, op. at 7. This was not merely a disputed debt, however. It was a judgment entered by a state court. The district court ruled that California’s preclusion doctrine barred the bankruptcy court from modifying the judgment, regardless of § 502(b)(4).

If you need to speak to a Los Angeles bankruptcy attorney, contact the Law Offices of Devin Sawdayi today online or at (310) 475-939 to schedule a free and confidential consultation. We represent individuals and families in Chapter 7 and Chapter 13 bankruptcy cases, helping them repair their finances with dignity and respect.

More Blog Posts:

Bankruptcy Trustee Files “Clawback” Suits Seeking Return of Allegedly Fraudulent Transfers, Los Angeles Bankruptcy Lawyer Blawg, April 22, 2015

Bankruptcy Court Grants Trustee’s Motion to Deny Discharge in Chapter 7 Case, Los Angeles Bankruptcy Lawyer Blawg, April 8, 2015

Debtors Allowed to Sue Loan Servicer for Charging Unapproved Fees During Chapter 13 Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, December 23, 2014

Photo credit: Sergio Roberto Bichara [FreeImages.com Content License], via FreeImages.com.

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A bankruptcy court recently denied a creditor’s motion to reopen a Chapter 7 case after discharge, finding that the creditor had failed to follow the proper procedure to preserve their claims. In re Lavandier, No. 14-bk-12553, mem. dec. (Bankr. S.D.N.Y., Aug. 27, 2015). The creditor sought to extend the deadline to claim an exception from discharge, 11 U.S.C. § 523; and to object to discharge, 11 U.S.C. § 727. The court held that, by not following the procedures established by the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure, the creditor had not established good cause to reopen the case.

The creditor, a money transmitter, entered into an agency agreement with a corporation wholly owned by the debtor in 2009. Under this agreement, the corporation would accept money from customers on the creditor’s behalf to send overseas. The debtor signed a guaranty agreement making him personally liable for all money owed by the corporation to the creditor.

In 2013, the creditor filed suit in state court to recover amounts owed under the agency agreement. It obtained a default judgment holding the corporation and the debtor jointly and severally liable for more than $54,000. The debtor filed for Chapter 7 bankruptcy in September 2014.

The bankruptcy court sent a notice to all creditors advising them of various important dates. This included a December 9, 2014 deadline for filing a complaint objecting to a discharge of debt under § 727(a), or filing a claim alleging that a debt is excepted from discharge under §§ 523(a)(2), (4), or (6).

The parties agreed on December 29 as a date when the debtor was available for deposition. Since this was after the December 9 deadline, the creditor needed to extend the deadline. The creditor’s counsel, claiming to be acting “in reliance on [debtor’s] counsel’s statement,” filed an agreed “stipulation of adjournment, extending the time to object to Creditor’s discharge” on November 19. Lavandier, mem. dec. at 3.

The creditor filed the stipulation with the court clerk but did not obtain an order from the bankruptcy court extending the deadline. The court granted a discharge on December 23, 2014. The creditor conducted the debtor’s deposition as scheduled, but when it asked the debtor’s counsel to consent to reopening the case, the debtor’s counsel refused. The creditor moved to reopen the proceeding under 11 U.S.C. § 350.

The court denied the creditor’s motion, finding that it had failed to obtain an order extending the deadline to object to discharge. Fed. R. Bankr. P. 4004(b)(1). The creditor’s right to object to the discharge under § 727 therefore expired on December 9. The creditor made a second mistake of law, according to the court, which was “fatal.” Lavandier at 7. The stipulation did not mention exceptions to discharge under § 523. The particular exceptions claimed by the creditor, §§ 523(a)(2), (4), and (6), require a claim to be filed within 60 days of the creditors’ meeting. 11 U.S.C. § 523(c)(1), Fed. R. Bankr. P. 4007(c). Since the creditor did not do this, its right to claim an exception under § 523 had also expired.

Since 1997, Los Angeles bankruptcy attorney Devin Sawdayi has guided individuals and families through the Chapter 7 and Chapter 13 bankruptcy processes, helping them rebuild their finances with dignity and respect. Contact us online or at (310) 475-939 today to schedule a free and confidential consultation with a knowledgeable and experienced financial advocate.

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Supreme Court Rules that Chapter 7 Debtor Cannot Strip Underwater Second Lien from Home, Los Angeles Bankruptcy Lawyer Blawg, September 12, 2015

Court Rules that Fines Under California’s Private Attorney General Act Are Not Dischargeable in Chapter 7 Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, August 14, 2015

Chapter 7 Bankruptcy Case Reopened for Creditors Left Out of Debtor’s Schedules, Los Angeles Bankruptcy Lawyer Blawg, August 7, 2015

Photo credit: Unsplash [Public domain, CC0 1.0], via Pixabay.

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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.

More Blog Posts:

Chapter 7 Bankruptcy Case Reopened for Creditors Left Out of Debtor’s Schedules, Los Angeles Bankruptcy Lawyer Blawg, August 7, 2015

Chapter 13 Case Dismissed Due to Failure to Disclose Prior Bankruptcy Filings, Other Acts Deemed in Bad Faith, Los Angeles Bankruptcy Lawyer Blawg, July 30, 2015

Bankruptcy Court Grants Trustee’s Motion to Deny Discharge in Chapter 7 Case, Los Angeles Bankruptcy Lawyer Blawg, April 8, 2015

Photo credit: ClkerFreeVectorImages [Public domain, CC0 1.0], via Pixabay.

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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.

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City of San Bernardino, California’s Bankruptcy Case Results in Multitude of Legal Disputes, Los Angeles Bankruptcy Lawyer Blawg, August 29, 2015

Bankruptcy Court Considers Whether to Lift Automatic Stay for Foreclosure-Related Proceedings, Los Angeles Bankruptcy Lawyer Blawg, May 11, 2015

Violation of Automatic Stay Can Result in Emotional Distress and Punitive Damages, According to Ninth Circuit Ruling, Los Angeles Bankruptcy Lawyer Blawg, April 12, 2015

Photo credit: Foundry [Public domain, CC0 1.0], via Pixabay.

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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).

Multiple federal statutes and rules permit courts to impose sanctions. The Bankruptcy Code gives courts broad power to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.” 11 U.S.C. § 105(a). See also, e.g. Fed. R. Civ. P. 11; Fed. R. Bankr. P. 9011; Chambers v. Nasco, Inc., 501 U.S. 32 (1991). In the order under appeal in the Kellogg-Taxe case, the bankruptcy court reviewed the caselaw interpreting § 105(a), which recognized “the inherent power to sanction vexatious conduct presented before the court.” In re Kellogg-Taxe (“K-T II”), No. 2:13-ap-01781, mem. of dec. at 13 (Bankr. C.D. Cal., Dec. 16, 2014), quoting In re Rainbow Magazine, Inc., 77 F.3d 278, 284 (9th Cir. 1996).

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.

More Blog Posts:

Violation of Automatic Stay Can Result in Emotional Distress and Punitive Damages, According to Ninth Circuit Ruling, Los Angeles Bankruptcy Lawyer Blawg, April 12, 2015

Bankruptcy Court Order Invalidating Sale of Real Estate Affirmed by Ninth Circuit, Los Angeles Bankruptcy Lawyer Blawg, September 23, 2014

Los Angeles Bankruptcy Court Rules on Whether Automatic Stay in Personal Bankruptcy Applies to Corporation Owned by Debtors, Los Angeles Bankruptcy Lawyer Blawg, February 22, 2014

Photo credit: By Nyttend (Own work) [Public domain], via Wikimedia Commons.

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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.

More Blog Posts:

Chapter 13 Case Dismissed Due to Failure to Disclose Prior Bankruptcy Filings, Other Acts Deemed in Bad Faith, Los Angeles Bankruptcy Lawyer Blawg, July 30, 2015

California Bankruptcy Court Considers Whether a Debtor Has the Burden of Proof in Claiming an Exemption Under State Law, Los Angeles Bankruptcy Lawyer Blawg, July 11, 2015

Bankruptcy Trustee Files “Clawback” Suits Seeking Return of Allegedly Fraudulent Transfers, Los Angeles Bankruptcy Lawyer Blawg, April 22, 2015

Photo credit: kropekk_pl [Public domain, CC0 1.0], via Pixabay.

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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.

More Blog Posts:

Tax Penalties Accrued More than Three Years Before Bankruptcy Filing Date Are Dischargeable, Court Rules, Los Angeles Bankruptcy Lawyer Blawg, July 24, 2015

Bankruptcy Court Rules that State Tax Debt Is Dischargeable in Chapter 7 Bankruptcy Case, Los Angeles Bankruptcy Lawyer Blawg, July 16, 2015

Discharging Tax Debts in Chapter 7 or Chapter 13 Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, August 4, 2014

Photo credit: 401(K) 2012 [CC BY-SA 2.0], via Flickr.

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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.

More Blog Posts:

Ninth Circuit Affirms Partial Discharge of Student Loan Debt in Chapter 13 Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, April 9, 2015

White House Takes Action on Student Loans; Executive Order Does Not Affect Nondischargeability of Student Loans in Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, October 14, 2014

Proposed Legislation Could Reduce Student Loan Interest Rates; Still Doesn’t Address Discharge in Bankruptcy or Cost of Education, Los Angeles Bankruptcy Lawyer Blawg, August 15, 2014

Photo credit: By Kurtis Garbutt [CC BY 2.0], via Wikimedia Commons.

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