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By BenFrantzDale (Own work) [GFDL (http://www.gnu.org/copyleft/fdl.html), CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0/) or CC BY-SA 2.5-2.0-1.0 (http://creativecommons.org/licenses/by-sa/2.5-2.0-1.0)], via Wikimedia CommonsA 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).

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PublicDomainPictures [Public domain, CC0 1.0 (http://creativecommons.org/publicdomain/zero/1.0/deed.en)], via PixabayThe 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.

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American Advisors Group [CC BY-SA 2.0 (https://creativecommons.org/licenses/by-sa/2.0/)], via FlickrBusiness 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. Continue reading

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See page for author [CC BY 2.5 (http://creativecommons.org/licenses/by/2.5)], via Wikimedia CommonsA 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. Continue reading

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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