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By Chuck Kennedy [Public domain], via Wikimedia CommonsCongress 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.
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By NASA/Bill Ingalls (NASA Image of the Day) [Public domain], via Wikimedia CommonsA 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. Continue reading

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Robert & Mihaela Vicol [Public domain], via publicphoto.orgOur bankruptcy system has found ways to deal with most types of assets, debts, and other interests, through both the federal Bankruptcy Code and the caselaw developed in the bankruptcy courts. Somehow, trademark rights have fallen through the cracks, but a recent bankruptcy court decision, In re Crumbs Bake Shop, Inc., No. 14-24287, mem. decision (Bankr. D.N.J., Oct. 31, 2014), provides some clarity. This sort of issue largely pertains to business bankruptcies, but individuals may occasionally deal with trademark rights in various ways. See, e.g., In re First Draft, Inc., 76 U.S.P.Q.2d 1183 (T.T.A.B. 2005).

“Intellectual property” (IP) is a broad legal term that addresses ownership and usage of creative works. Copyright law covers creative works, like songs, books, and pictures. Patent law covers inventions. Trademark law applies to names, brands, and logos used to identify a company, product, or service. The creator of a work may register it with the government to obtain the relevant type of IP protection. It may then sell those rights to others, or license others to use a particular work. An owner who licenses the right to use a trademark is known as the “licensor,” and the party that obtains usage rights is the “licensee.”

The Bankruptcy Code gives a court-appointed trustee wide discretion to accept or reject certain contractual obligations on a debtor’s behalf. When a licensor files for bankruptcy, the Code specifically gives IP licensees the right to continue exercising their rights, even if the trustee rejects their contract with the debtor. 11 U.S.C. § 365(n). Rejection of the contract by the trustee does not terminate the license, but rather gives the licensee the option of terminating it or finishing the term of the license. See In re American Suzuki Motor Corp., 494 B.R. 466, 482 n. 7 (Bankr. C.D. Cal. 2013). Oddly, however, the Bankruptcy Code’s definition of “intellectual property” omits trademarks, 11 U.S.C. § 101(35A), so the effect of a trustee’s rejection of a trademark license has remained unclear. Continue reading

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By Profoss (Own work) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia CommonsA bankruptcy court denied a Chapter 7 trustee’s motion for summary judgment in an adversary proceeding, which sought to avoid a mortgage that misspelled the debtor’s name. In re Thibault, No. 13-31204, Adv. Proc. No. 14-3001, mem. dec. (Bankr. D. Mass., Sep. 29, 2014). The trustee argued that the Bankruptcy Code gives him the authority to avoid debts that “do[] not correctly identify the Debtor.” Id. at 5. The court held that Massachusetts law allows an individual to use more than one spelling of his or her name, or even more than one name, for non-fraudulent purposes. California law has similar provisions regarding an individual’s right to choose his or her own name, often known as a common-law name change.

The debtor and her husband, who is now deceased, purchased real property for use as their primary residence in Springfield, Massachusetts in 1964. The deed conveying the property to them identified their last name as “Thibeault,” with an “e.” The couple granted a new mortgage on the property in 1990, and the mortgage documents also used the name “Thibeault.” The debtor refinanced the home several more times between 1992 and 2004. Most of the documents used the “Thibeault” spelling, but documents filed in 1992, 1993, and 1995 used the spelling “Thibault.” Id. at 4.

In her Chapter 7 petition filed in October 2013, the debtor identified herself with the name “Thibault” but included “Thibeault” in the section asking debtors to list other names used in the previous eight years. The trustee filed an adversary proceeding to avoid the debtor’s mortgage based on his “strong-arm” powers, 11 U.S.C. § 544(a), which allow a trustee to avoid certain debts. He argued that the mortgage failed to identify the debtor accurately, that “his only duty was to search the Registry under the Debtor’s ‘true’ surname,” Thibault at 5, and that this would not have led to the discovery of the mortgage. Continue reading

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Fotocitizen [Public domain, CC0 1.0 (http://creativecommons.org/publicdomain/zero/1.0/deed.en)], via PixabayThe Ninth Circuit Court of Appeals recently issued a series of rulings addressing the rights of Chapter 7 debtors to the funds in their bank accounts. In re Mwangi (“Mwangi I”), 764 F.3d 1168 (9th Cir. 2014); In re Mwangi (“Mwangi II”), No. 14-15265, slip op. (9th Cir., Oct. 21, 2014). The debtors, a married couple, claimed exemptions on several bank accounts and sought sanctions against the bank when it refused to lift an administrative freeze. The appellate court held that the accounts remained part of the bankruptcy estate until the deadline for creditors to object to the debtors’ claimed exemptions had passed, and then the accounts re-vested in the debtors. Since the alleged automatic stay violation occurred before re-vesting, the court held that the debtors lacked standing. Only the trustee has standing to bring claims to protect assets in the bankruptcy estate.

The debtors filed for Chapter 7 bankruptcy in August 2009. They held four accounts at Wells Fargo Bank at the time with a total balance of about $17,000, which they did not claim as exempt in their original Schedule C. Wells Fargo runs an automated computer program that compares the names of new Chapter 7 cases to those of account holders. It put an administrative freeze on all four accounts shortly after the debtors filed their petition and notified them by mail. It also notified the trustee, who instructed it to hold the funds until further instructions, or until 31 days after the creditors’ meeting.

About a week after the filing date, the debtors filed an amended Schedule C that claimed exemptions in 75 percent of the value of the four accounts, citing a state law that exempts that amount of disposable earnings. Nev. Rev. Stat. § 21.090(1)(g). They asked Wells Fargo to lift the freeze on the accounts, which it refused to do without the trustee’s agreement. Continue reading

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By Palagret [1] (Own work) [CC-BY-SA-2.5 (http://creativecommons.org/licenses/by-sa/2.5)], via Wikimedia CommonsThe Ninth Circuit Court of Appeals recently ruled in a bankruptcy case that almost literally involves international intrigue. The bankruptcy court ordered the debtor’s wife to turn over a substantial amount of assets, based on the Chapter 7 trustee’s adversary proceeding alleging fraudulent transfers of bankruptcy estate property. This led to a criminal indictment and an attempt to extradite the wife from France, where she had allegedly fled with her husband. The district court dismissed the wife’s appeal of the bankruptcy court’s order under the “fugitive disentitlement doctrine.” The Ninth Circuit reversed the district court’s dismissal and remanded the case for further proceedings on the first appeal. Mastro v. Rigby, No. 13-35209, slip op. (9th Cir., Aug. 22, 2014).

The Chapter 7 trustee brought an adversary proceeding against the debtor’s wife, alleging that she had transferred assets of the bankruptcy estate with the intent to defraud creditors. 11 U.S.C. §§ 544, 548. The bankruptcy court conducted a trial and found that the debtor and his wife had fraudulently shielded assets with “an increasingly elaborate series of transactions.” Mastro, slip op. at 4; In re Mastro, 465 B.R. 576 (Bankr. W.D. Wash. 2011). It ordered the wife to turn over specific pieces of personal property, including jewelry, gold bars, and cash totaling nearly $1.4 million.

The wife filed an appeal with the district court, but she “went missing” around the same time. Mastro, slip op. at 4. Authorities located her and the debtor in France, where they said they intended to stay. The wife was indicted on criminal bankruptcy charges in connection with the bankruptcy court’s order, but French courts have denied extradition requests by U.S. prosecutors. Continue reading

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Vladimir Makovsky [Public domain], via Wikimedia CommonsThe Bankruptcy Code provides individuals and families with several options when they need to file a bankruptcy petition, and it allows them to convert a case from one chapter to another in certain circumstances. A federal appellate panel in California recently considered an interesting question:  if a debtor converts a case from Chapter 11 or 13 to Chapter 7, what happens to income earned after the petition but before conversion? It would belong to the bankruptcy estate under Chapters 11 or 13, but to the debtor under Chapter 7. The court ruled that it reverts to the debtor once the case is converted from Chapter 11 back to Chapter 7. In re Markosian, 506 B.R. 273 (B.A.P. 9th Cir. 2014) (PDF file).

By filing a bankruptcy petition, a debtor creates a legally distinct “bankruptcy estate.” A court-appointed trustee has the right to make certain decisions about estate property and the duty to manage the estate responsibly. In general, any property that a debtor owns when he or she files a bankruptcy petition becomes part of the estate. 11 U.S.C. § 541. In Chapter 11 or 13 cases, property acquired and earnings received for services rendered by the debtor, including salary or wages, also become part of the bankruptcy estate until the case is dismissed, converted, or closed. 11 U.S.C. §§ 1115, 1306.

The debtors in Markosian, a married couple, filed a Chapter 7 bankruptcy petition in February 2009. The trustee moved to dismiss the case for abuse under 11 U.S.C. § 707(b), claiming that the debtors had enough income to pay their debts. In response, the debtors converted the case to Chapter 11. While Chapter 13 is much more common among individuals and families, the Bankruptcy Code sets upper limits on the amount of debt a Chapter 13 debtor can have. Currently, Chapter 13 is not available to debtors whose secured and unsecured debts exceed $1,149,525 and $383,175, respectively. 11 U.S.C. § 109(e), “Revision of Certain Dollar Amounts in the Bankruptcy Code Prescribed Under Section 104(a) of the Code”, 78 F.R. 12089 (Feb. 20, 2013). Continue reading

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By VISALIA2010 (Own work) [CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia CommonsA California bankruptcy judge recently ruled on a series of motions in a Chapter 7 case, including an effort by the debtors to have their residence declared exempt under California law and a motion by the court-appointed trustee to compel them to turn the property over to him. The trustee alleged that the debtors undervalued the residence in their original schedules, that they did not heed his warnings about the type of exemption they were claiming, and that the amended schedules they filed were not filed in good faith. He sought turnover of the property because he had already entered into a contract to sell it. The court ruled in the trustee’s favor. In re Gutierrez, No. 12-60444, mem. decision (E.D. Cal., Jan. 29, 2014).

The debtors filed a Chapter 7 bankruptcy petition in December 2012. Their Schedule A listed a residence in Visalia, California valued at $127,748, with two mortgages totaling $115,050. They claimed the equity of $12,698 as exempt, using California’s “wild card” exemption defined in Cal. Civ. Pro. Code § 703.140(b)(5). They claimed five other assets as exempt, with a total claimed value of $17,927. At the creditors’ meeting in January 2013, the trustee told the debtors that the residence had more equity than they claimed and was therefore more than they could claim under the “wild card” exemption. He “implicitly suggested” that they look at other exemptions allowed by California law. Gutierrez, mem. dec. at 3.

About a week later, the court issued a notice to creditors to file proofs of claim, meaning it anticipated the sale of assets by the trustee. The court entered a discharge without objection that April. The trustee moved for leave to hire a real estate broker in July. The debtors’ only response was to file a motion to convert the case to Chapter 13. The court granted the motion for sale. It authorized the trustee to sell the residence for $165,000, significantly more than the value claimed by the debtors. It denied the debtors’ motion.

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By Although (English Wikipedia) [Public domain], via Wikimedia CommonsA debtor’s withdrawal of money from a bank account less than a year before filing for Chapter 7 bankruptcy resulted in the denial of a discharge of debt, based on a bankruptcy court’s finding of fraudulent intent. The debtor claimed that he withdrew the money because of concerns about a creditor’s methods of collection. The Bankruptcy Appellate Panel (BAP) for the Ninth Circuit Court of Appeals affirmed the ruling. In re Haag (“Haag I”), Nos. AZ-11-1661, AZ-11-1662, AZ-11-1663, memorandum (BAP 9th Cir., Sep. 27, 2012) (PDF file). The Ninth Circuit also affirmed, rejecting the debtor’s arguments that the court should consider his good intentions regarding the creditor’s allegedly questionable collection practices. In re Haag (“Haag II”), No. 12-60074, memorandum (9th Cir., Aug. 20, 2014).

The debtor was the sole owner of an engineering company called HTI, Inc. that had a line of credit with Northwestern Bank (NWB). In mid-2007, the housing market collapsed, and the company was not able to generate enough revenue to pay the debt. After an unsuccessful attempt to sell the business, the debtor surrendered all of HTI’s assets to NWB in late 2008. He informed the bank that he intended to file for Chapter 7 bankruptcy, and that his only sources of income were IRAs, social security, and unemployment.

In early 2009, the debtor received federal and state tax refunds totaling almost $250,000. He deposited “some or all” of the funds, Haag I at 5, into a personal checking account at the Bank of Tucson. He withdrew $120,000 in cash from that account in July 2009 and placed it in a safety deposit box that he had jointly rented with his wife at another bank. About three weeks later, NWB obtained a judgment against the debtor in a Michigan court, based on his personal guaranty of business debts, for approximately $1.7 million. The bank obtained a domesticated judgment in Arizona, where the debtor resided, in February 2010. The debtor filed for Chapter 7 bankruptcy the following month. Continue reading

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Microsome at the German language Wikipedia [GFDL (http://www.gnu.org/copyleft/fdl.html) or CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0/)], via Wikimedia CommonsAn extravagant lifestyle was not enough to overcome the presumption that debts incurred prior to filing for bankruptcy, including tax debts, are dischargeable, according to the Ninth Circuit. Hawkins v. Franchise Tax Bd. of California, No. 11-16276, slip op. (9th Cir., Sept. 15, 2014). The court considered whether the debtor’s tax debt was not subject to discharge under the exception for “willful[] attempt[s]…to evade such tax.” 11 U.S.C. § 523(a)(1)(C). After noting that the question of the mental state required to prove a “willful attempt to evade tax” was a matter of first impression, it held that the statute requires proof that a debtor specifically intended to evade tax liability. The debtor’s spending prior to filing bankruptcy, while “lavish,” was not out of the ordinary for him, and the tax debt was therefore dischargeable in bankruptcy.

The debtor made a substantial amount of money in the technology industry. He was an early employee of Apple, which he left to found the software and video game company Electronic Arts (EA). In 1990, he left EA to run a newly-created EA subsidiary called 3DO, which was entering into the video game and console market. By 1996, his net worth was around $100 million. He sold much of his EA stock and invested in 3DO. The Ninth Circuit’s opinion describes a series of accounting techniques using offshore corporations in order to claim losses on the sales of EA stock.

3DO filed for Chapter 11 bankruptcy in 2003 and later converted the case to a Chapter 7 liquidation. The debtor never received any substantial payouts from the liquidation of the business. The IRS began challenging his tax shelters in the late 1990s, and in 2005 it and the California Franchise Tax Board (FTB) assessed a total balance of over $36 million in unpaid taxes, penalties, and interest. The debtor sold some real property and applied all of the proceeds to the IRS balance in 2006, and the FTB also seized some financial accounts. In September 2006, the debtor and his wife filed for bankruptcy. The IRS and FTB filed proofs of claim for $19 million and $10.4 million, respectively. Continue reading