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Late Challenge By Creditor Allowed in Chapter 7 Case Because Debtor Did Not Give Adequate Notice

svilen001 on stock.xchngA creditor who did not challenge the dischargeability of a debt in a Chapter 7 bankruptcy case within the statutory time frame could still assert their challenge, a federal appellate court held, because the debtor did not adequately identify the debt and did not properly notify the creditor of the bankruptcy proceeding. In re Perle, No. 11-60000, slip op. (9th Cir., Aug. 2, 2013). The Bankruptcy Appellate Panel (BAP) found the creditor’s challenge to be timely because of the deficiencies in the debtor’s filing. It further ruled that the debt was nondischargeable under provisions preventing discharge of debts arising from “willful and malicious injury” by the debtor. 11 U.S.C. § 523(a)(6). One question for the Ninth Circuit was whether the creditor could be deemed to have knowledge of the bankruptcy proceeding because the creditor’s lawyer knew about it. The court held that it could in theory, but not based on the facts of this case, and affirmed the BAP’s ruling.

The debtor filed for Chapter 7 bankruptcy in 2001. He did not correctly list a $350,000 arbitration award for securities fraud, made in 1998 in favor of a New York-based securities dealer, in his Schedule E. Specifically, he did not identify the creditor by name, stated that the amount of the award was “unknown,” and stated that he incurred the debt in 1999 instead of 1998. Perle, slip op. at 4. The securities dealer had retained the services of a New York attorney for the arbitration, but used a California lawyer to confirm the award in a California court. The attorney continued to represent the dealer in other, unrelated matters, but not in any matters involving the debtor. A private equity firm filed a challenge to the dischargeability of another debt, and was represented by the same New York lawyer. The lawyer never mentioned the bankruptcy to the securities dealer. The bankruptcy court granted a general discharge to the debtor in March 2002 and closed the case. More than four years later, in September 2006, the securities dealer filed a challenge to the discharge of the arbitration award. The bankruptcy court allowed the late filing and ruled in the creditor’s favor. The BAP upheld the ruling.

On appeal, the Chapter 7 debtor did not dispute that the arbitration award would not be dischargeable under the “willful and malicious injury” provision and a provision prohibiting discharge of debts that the debtor does not adequately identify or describe to the court. 11 U.S.C. § 523(a)(3). Instead, he argued that his description of the debt on his Schedule E was adequate and that the creditor had notice of the bankruptcy proceeding.

The Ninth Circuit rejected the debtor’s argument that he adequately identified the debt, noting that he correctly identified other creditors on the Schedule E, and that he therefore knew at the time how to identify the securities dealer as a creditor. Perle, slip op. at 7. His failure to do so meant that the securities dealer did not have adequate notice of the proceeding. The next question, then, was whether the New York lawyer’s knowledge of the bankruptcy proceeding was sufficient to impute knowledge to the securities dealer. The court noted that the lawyer no longer represented the securities dealer in any matter involving the debtor, and that the lawyer’s knowledge of the proceeding only came about through his representation of a different client. It held that the debtor offered no legal basis for imputing knowledge through the lawyer in this way.

Both Chapter 7 and Chapter 13 bankruptcy offers a fresh start to people in financial distress, allowing them either to liquidate some assets to pay down debts, or to create a new payment schedule for their debts. Since 1997, bankruptcy attorney Devin Sawdayi has represented clients in the Los Angeles area in Chapter 7 and Chapter 13 bankruptcies, helping them rebuild their financial lives. To schedule a free and confidential consultation, please contact us today online or at (310) 475-9399.

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Supreme Court Rules on Meaning of “Defalcation” in Statutory Provision for Nondischargeable Debts in Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, July 30, 2013

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