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California Bankruptcy Court Rules on Discharge of Debt Allegedly Incurred Through Fraud

file3431250395716The Ninth Circuit Court of Appeals recently upheld a Bankruptcy Appellate Panel (BAP) ruling against a creditor who had sought to prevent the discharge of a debt in a Chapter 7 proceeding. In re Parker (“Parker 2”), No. 12-60047, memorandum (9th Cir., Jul. 15, 2013). The creditor alleged that the debt, a possible judgment in a civil lawsuit filed by the creditor against the debtor, was not subject to discharge in bankruptcy because it was the result of fraud by the debtor. The bankruptcy court ruled against the creditor, and the BAP rejected his argument that the debtor was judicially estopped from denying liability in the underlying lawsuit. In re Parker (“Parker 1”), 471 B.R. 570 (B.A.P. 9th Cir. 2012). The case demonstrates the often-complex relationship between the bankruptcy system and other civil legal claims.

The debtor, Bill Martin Parker, was a real estate broker who brokered several loans from the creditor, Albert P. Wilcox, to the Taylors, a married couple that was purchasing real property in Sacramento. Wlicox made three loans to the Taylors in the total amount of $640,000, secured by the Sacramento property and the Taylors’ residence. After the Taylors defaulted on their loan payments, Wilcox filed suit for alleged fraud against Parker in Contra Costa County Superior Court. Parker cross-claimed against the Taylors, seeking equitable indemnity and declaratory relief. Id. at 573. Parker obtained a default judgment against the Taylors, although a judge later set it aside. He eventually abandoned his cross-claim, and the court dismissed it.

At around the same time the state court set aside the default judgment, Parker filed for Chapter 7 bankruptcy. He identified $1,037,000 in unsecured debt, about $1 million of which was his potential liability in Wilcox’s state court claim. Id. at 574. Wilcox filed an adversary proceeding, objecting to discharge of Parker’s potential liability under statutory provisions prohibiting discharge of debts incurred through fraud. 11 U.S.C. § 523(a)(2)(A). The bankruptcy court ruled against Wilcox, finding the debt to be dischargeable.

Wilcox appealed to the BAP, arguing that the doctrine of judicial estoppel, which prevents a party in a lawsuit from taking a position that contradicts a previous position on which they succeeded, barred Parker from denying liability in the state civil suit. Wilcox claimed that Parker’s cross-claim for indemnity against the Taylors constituted an admission that he and the Taylors were jointly and severally liable to Wilcox for fraud. Judicial estoppel would therefore prevent him from denying liability to the bankruptcy court. The BAP disagreed, holding that Parker sought only “conditional” indemnity from the Taylors, with any actual liability being contingent on whether or not Wilcox prevailed in his lawsuit. Parker 1, 471 B.R. at 577. It upheld the bankruptcy court’s judgment discharging the debt.

Bankruptcy offers the possibility of relief for people whose income is not enough to maintain their debt payments. A Chapter 7 bankruptcy allows people to liquidate some assets in order to pay down debts, and then to discharge the remainder of those debts entirely. Chapter 13 offers the chance to propose a payment schedule that works with a debtor’s income, as well as the possibility of discharge after several years. Bankruptcy attorney Devin Sawdayi has guided clients in the Los Angeles area through Chapter 7 and Chapter 13 bankruptcies since 1997. To schedule a free and confidential consultation to discuss your case, contact us today online or at (310) 475-9399.

More Blog Posts:

Child Support and Spousal Maintenance Obligations Are Not Dischargeable in Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, August 12, 2013

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

Payroll Debts Ruled Nondischargeable in Chapter 7 Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, July 23, 2013

Photo credit: kconnors from morguefile.com.

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