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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.

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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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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.

More Blog Posts:

Debtor’s “Tortious Conduct” May Prevent Discharge of Debt in Chapter 7 Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, May 5, 2015

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

Transfer of Real Estate by Debtor More than One Year Before Filing Chapter 7 Bankruptcy Petition Does Not Bar Discharge of Debt, According to California Appellate Court, Los Angeles Bankruptcy Lawyer Blawg, January 9, 2015

Photo credit: Nicholas Eckhart [CC BY 2.0], via Flickr.

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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.

2. Section 502(i) could also apply to taxes incurred before a debtor files a petition, but payable afterwards. In re Joye, 578 F.3d 1070, 1076 (9th Cir. 2009). Federal income tax is considered to be “incurred” on the last day of the tax year. In re Pacific-Atlantic Trading Co., 64 F.3d 1292, 1299-1300 (9th Cir. 1995). The debtors therefore incurred their 2013 income tax debt on December 31, 2013, several days after they filed their Chapter 13 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.

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How Bankruptcy Might Help with Some California License Suspensions, Los Angeles Bankruptcy Lawyer Blawg, October 6, 2014

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

Court Does Not Allow Chapter 13 Debtor to Strip Unsecured Amount of IRS Tax Lien, Los Angeles Bankruptcy Lawyer Blawg, May 19, 2014

Photo credit: By BenFrantzDale (Own work) [GFDL, CC-BY-SA-3.0 or CC BY-SA 2.5-2.0-1.0], via Wikimedia Commons.

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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.

More Blog Posts:

California Bankruptcy Court Reviews Grounds for Dismissing a Chapter 7 Case for Abuse, Los Angeles Bankruptcy Lawyer Blawg, March 11, 2014

Understanding the Chapter 7 “Means Test”, Los Angeles Bankruptcy Lawyer Blawg, October 4, 2013

How Is Social Security Income Treated in a Chapter 13 Bankruptcy? Los Angeles Bankruptcy Lawyer Blawg, June 9, 2013

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

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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.

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Creditor Challenges Debtor’s Transfer of Business Assets to Himself Prior to Chapter 13 Bankruptcy Filing, Los Angeles Bankruptcy Lawyer Blawg, December 16, 2013

Photo credit: American Advisors Group [CC BY-SA 2.0], via Flickr.

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A bankruptcy case is different from other court proceedings. While most litigation pits two or more parties on opposing “sides” against each other, a bankruptcy case may involve disputes between creditors and a debtor, among creditors, or between a party to the proceeding and a third party. The bankruptcy case may act as an umbrella for multiple adversary proceedings with their own case numbers. The potential for confusion may result in uncertainty as to whether a particular ruling is “final” or not. Federal appellate courts only have jurisdiction over appeals of “final” rulings in bankruptcy cases. The Sixth Circuit recently considered the appeal of a Bankruptcy Appellate Panel (BAP) ruling on the dischargeability of certain debts. In re Bradley (“Bradley I”), 507 B.R. 192 (B.A.P. 6th Cir. 2014). The court held that it lacked subject matter jurisdiction because the BAP’s ruling was not “final.” In re Bradley (“Bradley II”), No. 14-3401, slip op. (6th Cir., Dec. 10, 2014).

The debtors, a married couple, filed a Chapter 7 petition in November 2010. The husband owned a limited liability company (LLC) that sold and rented construction equipment. He personally guaranteed financing provided by the creditor to the LLC. The creditor filed an adversary proceeding in March 2011, claiming that the LLC had sold equipment “out of trust,” or without forwarding the sale proceeds to the creditor as required by their contract. The debt owed to the creditor was allegedly excepted from discharge because of fraud, embezzlement, or “willful and malicious injury” to the creditor. 11 U.S.C. §§ 523(a)(2)(A), (a)(4), (a)(6).

The bankruptcy court ruled that the debt was not excepted from discharge, finding that the creditor failed to prove the intent required for fraud, failed to prove embezzlement because the equipment was sold in the “ordinary course of business,” and failed to prove willful or malicious injury because the debtor “always intended to repay the debts.” Bradley II, slip op. at 3. The BAP reversed the bankruptcy court’s rulings with regard to the fraud and “willful and malicious injury” claims. It held that the debtor benefited from the creditor’s reliance on his false statements, which supports a finding of fraud, and that the debtor knew that the failure to remit the proceeds of sale would harm the creditor. Bradley I, 507 B.R. at 209. It remanded the case for a determination of damages suffered by the creditor.

The debtor appealed to the Sixth Circuit Court of Appeals, asking the court to reverse the BAP’s decision. The Sixth Circuit did not address any of the debtor’s claims, however, since it made a sua sponte determination that it lacked subject matter jurisdiction. Federal appellate courts only have jurisdiction over appeals of “final decisions, judgments, orders, and decrees” from bankruptcy courts and BAPs. 28 U.S.C. § 158(d).

Since the BAP remanded the case, and the issues on remand were not “of a purely ministerial character,” Bradley II at 4, the court held that the BAP’s ruling was not “final.” In the Ninth Circuit, a lower-court ruling remanding a case is generally not considered “final” if it leaves relevant issues of fact unresolved. See In re Saxman, 325 F.3d 1168, 1171 (9th Cir. 2003); In re Dyer, 322 F.3d 1178, 1186 (9th Cir. 2003).

Since 1997, bankruptcy attorney Devin Sawdayi has represented individuals and families in the Los Angeles area in Chapter 7 and Chapter 13 bankruptcies. To schedule a free and confidential consultation to see how we can help you, contact us today online or at (310) 475-939.

More Blog Posts:

Federal Judge Gives Debtors Additional Time to Perfect Appeal in California Chapter 7 Bankruptcy Case, Los Angeles Bankruptcy Lawyer Blawg, September 28, 2014

Debtor’s Adversary Proceeding in Chapter 7 Bankruptcy Dismissed on Procedural Grounds; Appeal Dismissed as Untimely, Los Angeles Bankruptcy Lawyer Blawg, November 13, 2013

California Appeals Court Allows Involuntary Bankruptcy Case to Proceed Where Creditors’ Claims Are State Court Judgments Under Appeal, Los Angeles Bankruptcy Lawyer Blawg, July 2, 2013

Photo credit: By NASA/Bill Ingalls (NASA Image of the Day) [Public domain], via Wikimedia Commons.

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A drafting error in a security instrument rendered the security interest invalid, according to the Seventh Circuit Court of Appeals. In re Duckworth, Nos. 14-1561, 14-1650, slip op. (7th Cir., Nov. 21, 2014). Specifically, the date of the security instrument did not match the date of the promissory note. The bank argued, in part, that it should be allowed to reform the security agreement using parol evidence, which is evidence of the parties’ intent that is not found in the language of the document itself. The court held that the bank could not correct the error in this manner. The ruling ought to be good news for debtors, since it places the burden firmly on banks and other lenders to draft loan documents correctly and removes nearly all room for error on their part.

The debtor borrowed $1.1 million from the bank on December 15, 2008. On that date, he signed a promissory note for that amount and delivered it to the bank. Two days earlier, he had signed a security instrument that granted the bank a security interest in most of the debtor’s personal property, which included crops and farm equipment. The security instrument stated that it was securing a note “in the principal amount of $_______ dated December 13, 2008.” Duckworth, slip op. at 3 [emphasis in original].

Two years later, the debtor filed a Chapter 7 bankruptcy petition. The trustee’s position was that the bank’s claimed security interest was defective and therefore voidable under 11 U.S.C. § 544(a)(1). The bank filed two adversary complaints seeking to correct the drafting error and preserve its security interests. One proceeding claimed a security interest in the debtor’s crops, and the other in his farm equipment. The bankruptcy court ruled for the bank in both proceedings, holding that the mistaken date did not invalidate the security instrument. Different district judges heard the trustee’s appeals of the two rulings, and both affirmed the bankruptcy court.

On appeal to the Seventh Circuit, the trustee argued that the security instrument failed to create a valid security interest because it referenced a promissory note dated December 13, which did not exist. The bank argued that it could use parol evidence, such as communications between the debtor and the bank indicating their intention to create a security interest, to correct the error. The trustee’s argument may seem like hair-splitting, but contract law generally prefers to hold parties to the actual language of their agreements, even when the result might seem odd.

The Seventh Circuit reversed the lower courts, finding that the security instrument was invalid. It noted that the language of the security instrument was unambiguous on its face, and that courts generally do not allow the use of parol evidence with regard to an unambiguous contract. It cited a prior decision that specifically prevented a lender from using parol evidence to correct a security instrument in a challenge by a bankruptcy trustee. In re Martin Grinding & Machine Works, Inc., 793 F.2d 592, 595 (7th Cir. 1986). See also In re Robert Bogetti & Sons, 162 B.R. 289 (Bankr., E.D. Cal. 1993).

For more than 17 years, personal bankruptcy attorney Devin Sawdayi has represented individuals and families in Chapter 7 and Chapter 13 bankruptcy cases in the Los Angeles area. To schedule a free and confidential consultation with a skilled and knowledgeable consumer advocate, contact us today online or at (310) 475-9399.

More Blog Posts:

Transfer of Real Estate by Debtor More than One Year Before Filing Chapter 7 Bankruptcy Petition Does Not Bar Discharge of Debt, According to California Appellate Court, Los Angeles Bankruptcy Lawyer Blawg, January 9, 2015

Ninth Circuit Rules that Bankruptcy Trustee Has Authority to Recover Debtor’s Property at Any Time While the Case Is Pending, Los Angeles Bankruptcy Lawyer Blawg, December 30, 2014

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

Photo credit: See page for author [CC BY 2.5], via Wikimedia Commons.

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Congress passed the Affordable Care Act (ACA), also known as “Obamacare,” in 2010, but some of its more controversial provisions did not take full effect until last year. The requirement that individuals and families either have qualifying health insurance coverage or pay a penalty, formally known as the “Individual Shared Responsibility Payment” (ISRP), became effective on January 1, 2014. The penalty does not become fully effective, however, until 2016. This provision has proven controversial for a variety of reasons. Our goal here is not to delve into the politics, but rather to explore what is required of people who are in serious financial distress. Federal regulations allow multiple exemptions from the insurance requirement and the ISRP, including a hardship that prevents a person from obtaining qualifying insurance. The government has interpreted this to include filing for bankruptcy in the previous six months.

The ACA made a number of changes to the U.S. health care system. The most significant changes affect the health insurance business, which along with Medicare and Medicaid provides most of the financing of health care in this country. People without insurance coverage or access to government assistance often find themselves unable to afford medical care, and medical bills are often a factor in bankruptcy cases. Whether the ACA addresses this issue adequately or appropriately has been a subject of much contention, but it seems clear at this point that it has made a difference for many people.

The “individual mandate,” which requires people to obtain health insurance or pay the ISRP, has been one of the most controversial features of the ACA. The idea behind the individual mandate is that everyone who can afford health insurance should buy a minimal amount of coverage to ensure that enough money is available in the system to cover everyone’s health care costs. If healthy people waited until they were sick or injured to pay for insurance, the theory goes, costs would go up for everyone. This has reportedly happened in states that required insurers to cover pre-existing conditions but did not require people to have insurance.

The federal government and many state governments set up exchanges, or “marketplaces,” to help people shop for insurance, although some of those exchanges had some technical difficulties. This still left people who lacked the resources to purchase insurance facing a penalty for failing to do so.

The hardship exemption to the individual mandate and the ISRP applies to a person who is unable to obtain qualifying health insurance coverage due to a hardship, provided that this is approved by the government through the health insurance marketplace. 26 U.S.C. § 5000A(e)(5), 42 U.S.C. § 18031(d)(4)(H)(ii), 45 C.F.R. § 155.605(g)(1)(iii). Federal regulations identify several specific hardships but also give the Department of Health and Human Services (HHS), which operates the marketplace, discretion to identify additional circumstances meriting an exemption. HHS stated in a June 26, 2013 memorandum that a bankruptcy filing in the prior six-month period entitles a person to a hardship exemption. The individual must file an exemption request form with “official bankruptcy filing documents” dated within the previous six months.

Personal bankruptcy attorney Devin Sawdayi has helped individuals and families in the Los Angeles area deal with tax debt and other issues through the Chapter 7 and Chapter 13 processes since 1997. To schedule a free and confidential consultation with a knowledgeable and skilled advocate, contact us today online or at (310) 475-9399.

More Blog Posts:

How Bankruptcy Might Help with Some California License Suspensions, Los Angeles Bankruptcy Lawyer Blawg, October 6, 2014

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

Court Does Not Allow Chapter 13 Debtor to Strip Unsecured Amount of IRS Tax Lien, Los Angeles Bankruptcy Lawyer Blawg, May 19, 2014

Photo credit: By Chuck Kennedy [Public domain], via Wikimedia Commons.

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