Articles Posted in Bankruptcy Procedures

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Unsplash [Public domain, CC0 1.0 (https://creativecommons.org/publicdomain/zero/1.0/deed.en)], via PixabayA bankruptcy court recently denied a creditor’s motion to reopen a Chapter 7 case after discharge, finding that the creditor had failed to follow the proper procedure to preserve their claims. In re Lavandier, No. 14-bk-12553, mem. dec. (Bankr. S.D.N.Y., Aug. 27, 2015). The creditor sought to extend the deadline to claim an exception from discharge, 11 U.S.C. § 523; and to object to discharge, 11 U.S.C. § 727. The court held that, by not following the procedures established by the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure, the creditor had not established good cause to reopen the case.

The creditor, a money transmitter, entered into an agency agreement with a corporation wholly owned by the debtor in 2009. Under this agreement, the corporation would accept money from customers on the creditor’s behalf to send overseas. The debtor signed a guaranty agreement making him personally liable for all money owed by the corporation to the creditor.

In 2013, the creditor filed suit in state court to recover amounts owed under the agency agreement. It obtained a default judgment holding the corporation and the debtor jointly and severally liable for more than $54,000. The debtor filed for Chapter 7 bankruptcy in September 2014.

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ClkerFreeVectorImages [Public domain, CC0 1.0 (https://creativecommons.org/publicdomain/zero/1.0/deed.en)], via PixabayThe bankruptcy court system deals with a substantial number of cases, with thousands of new cases filed every year. The Federal Rules of Bankruptcy Procedure establish certain uniform standards and procedures, and district and bankruptcy courts may establish local rules to assist judges and court staff. Failure to comply with these rules can result in setbacks, delays, or even outright dismissal. A debtor recently appealed the dismissal of her Chapter 13 bankruptcy case to a federal district court in Los Angeles. The district court, after finding that the debtor had failed to comply with local rules, dismissed her appeal and denied her motion to reconsider. In re Pulliam, No. 5:15-cv-00250, order (C.D. Cal., Jun. 23, 2015).

The debtor filed a Chapter 13 proceeding in the Bankruptcy Court for the Central District of California in 2014. The district court’s order states that the bankruptcy court dismissed her case on January 30, 2015 in connection with the Chapter 13 confirmation hearing, although it does not state the specific grounds for the dismissal. The debtor promptly filed an appeal with the district court.

The district court issued a notice in February, advising all parties that they must comply with the Federal Rules of Bankruptcy Procedure and the Local Rules Governing Bankruptcy Appeals, Cases, and Proceedings for the Central District of California. It also stated that it would issue a briefing schedule once the appellate record was complete and that any party requesting an extension of time must do so “well in advance of the due date, and must specify good cause for the requested extension.” Pulliam, order at 2. The court cautioned the parties that a failure to comply with any applicable rules could result in dismissal.

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By Nyttend (Own work) [Public domain], via Wikimedia CommonsThe federal Bankruptcy Code gives wide discretion to individual bankruptcy judges to issue orders, including the authority to impose sanctions on a debtor or other party for acts that it finds to be unlawful or otherwise counter to the purpose of a bankruptcy case. A “sanction” is a punishment for conduct that takes place during the litigation process. A federal district court recently affirmed a bankruptcy court’s sanctions order in a Chapter 7 case, which found bad faith on the part of the debtors and assessed monetary damages. In re Kellogg-Taxe (“K-T I”), No. 2:15-cv-00084, order (C.D. Cal., Dec. 7, 2015).

Multiple federal statutes and rules permit courts to impose sanctions. The Bankruptcy Code gives courts broad power to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.” 11 U.S.C. § 105(a). See also, e.g. Fed. R. Civ. P. 11; Fed. R. Bankr. P. 9011; Chambers v. Nasco, Inc., 501 U.S. 32 (1991). In the order under appeal in the Kellogg-Taxe case, the bankruptcy court reviewed the caselaw interpreting § 105(a), which recognized “the inherent power to sanction vexatious conduct presented before the court.” In re Kellogg-Taxe (“K-T II”), No. 2:13-ap-01781, mem. of dec. at 13 (Bankr. C.D. Cal., Dec. 16, 2014), quoting In re Rainbow Magazine, Inc., 77 F.3d 278, 284 (9th Cir. 1996).

To sanction a party or its counsel, a court must find that the conduct in question “constituted or was tantamount to bad faith.” K-T II at 13, quoting Leon v. IDX Sys. Corp., 464 F.3d 951, 961 (9th Cir. 2006). A bankruptcy court’s “inherent sanction authority,” however, differs from federal district courts’ “civil contempt power.” K-T I at 6, citing In re Dyer, 322 F.3d 1178, 1196 (9th Cir. 2003). While civil contempt authority allows a court to impose sanctions for violations of specific orders, inherent sanction authority goes further, “allow[ing] a bankruptcy court to deter and provide compensation for a broad range of improper litigation tactics.” Dyer, 322 F.3d at 1196.

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kropekk_pl [Public domain, CC0 1.0 (https://creativecommons.org/publicdomain/zero/1.0/deed.en)], via PixabayA 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.

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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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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