Articles Posted in Bankruptcy Procedures

Published on:

A 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

Published on:

Our 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

Published on:

A 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

Published on:

The 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

Published on:

The 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

Published on:

A 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.

Continue reading

Published on:

A bankruptcy judge in Los Angeles granted the trustee’s motion to dismiss a Chapter 7 case, ruling that the debtors filed their bankruptcy petition in bad faith. In re Olen, No. 2:13-bk-38721, mem. decision (Bankr. C.D. Cal., Aug. 22, 2014) (PDF file). The trustee moved to dismiss the case on multiple grounds, including the claim that granting relief to the debtors would be an abuse of Chapter 7’s provisions. The court held that the debtors had not provided enough financial information to allow it to rule on the question of abuse. It then held that this same lack of information, combined with evidence of substantial consumer expenditures shortly before and after filing the Chapter 7 petition, supported a finding of bad faith.

The debtors, a married couple, filed a voluntary petition for Chapter 7 bankruptcy in December 2013. An amended schedule of unsecured debts identified five debts totaling $1,575,000, including at least one substantial judgment against them in Los Angeles Superior Court. They identified total after-tax income of about $4,500 per month, based on employment with a corporation that they wholly own and control. Their claimed monthly living expenses resulted in a negative monthly net income of approximately $10,000.

In the months prior to filing for bankruptcy, according to the court, the debtors spent significant sums on airfare, including round trips to Florida and Nigeria to visit each debtor’s parents, trips to New York and Massachusetts for other family events, and a trip to Dubai that was allegedly a layover during the Nigeria trip. They also paid about $1,200 for a “boarding and training” program for their two dogs during the Nigeria trip, and they claim to have paid off the loan on their Land Rover in the same month they filed for Chapter 7. Continue reading

Published on:

A creditor filed an adversary proceeding in a Chapter 13 bankruptcy case, seeking an exception from discharge based on alleged fraud and willful and malicious injury. The creditor had been involved in a business venture with the debtor and made numerous allegations of accounting irregularities and financial misrepresentations. After a bench trial, at which the plaintiff-creditor presented expert testimony from a forensic accountant and a certified public accountant, the bankruptcy court held that the plaintiff did not meet his burden of proof under either claimed exception to discharge and ruled in favor of the defendant/debtor. In re Olsen, No. 2:13-bk-60733, memorandum (D. Mont., Aug. 28, 2014).

The facts of the case might be best summarized as a business venture where the parties had different understandings of the business relationship. The defendant was the majority shareholder of Human Interactive Products, Inc. (HIPinc), a “business incubator” engaged in a wide range of activities, known as as “profit centers,” under different trade names. HIPinc had a system, including accounting methods, for evaluating the performance of its profit centers.

The plaintiff, a native plant restoration specialist, approached the defendant about starting his own business in 2006. He accepted an offer of employment with HIPinc as “Operations Manager/Senior Restoration Ecologist” with a venture called Great Bear Restoration (GBR). The defendant would be his supervisor. The plaintiff did not contribute any capital towards GBR but received a salary from HIPinc. Continue reading

Published on:

A debtor moved to dismiss her Chapter 7 bankruptcy case after the trustee sought to use half of a $5,000 monthly payment she received from her ex-spouse to pay creditors. The trustee claimed that half of the monthly payment, which was the debtor’s only reported source of income, was actually an asset under the terms of the divorce decree and was therefore part of the bankruptcy estate. The bankruptcy court granted the motion and dismissed the case. The Bankruptcy Appellate Panel (BAP) reversed, finding that dismissal of the case would prejudice the creditors. In re Grossman, No. NV-13-1325, memorandum (BAP 9th Cir., Feb. 4, 2014) (PDF file).

The central issue for the debtor was whether $2,500 of the $5,000 payment she received every month from her former spouse was spousal maintenance, which is an exempt form of income under bankruptcy law, or part of her share of the marital estate, which is a non-exempt asset. The settlement agreement between the debtor and her former spouse stated that she was entitled to $390,000 from the former spouse. He paid her $30,000 upon signing the agreement and began making monthly payments of $2,500 on February 1, 2005. This is known as an “equalization payment.” The full amount should be paid by 2017. He sends her an additional $2,500 per month, which all parties in the bankruptcy agree is spousal maintenance.

The debtor filed a Chapter 7 petition in April 2013. She did not include the equalization payment in the Schedule B list of personal property, nor did she include a copy of her divorce decree. She reported $5,000 per month in spousal maintenance income in the Statement of Financial Affairs. After receiving a copy of the divorce decree, the trustee claimed that the equalization payment was an asset of the bankruptcy estate that could be sold to pay creditors. Continue reading

Published on:

The city of San Bernardino, California is in the process of preparing a bankruptcy plan in its ongoing bankruptcy case. While a Chapter 9 case, applied specifically to municipalities, might have some superficial similarities to an individual’s Chapter 13 bankruptcy case, cities and towns typically have issues that differ from both personal and business bankruptcy cases. The city is currently considering removing its ban on medical marijuana dispensaries, which would provide new sources of tax revenue. This is legal for cities and counties under California law, but it still conflicts with federal drug laws. In personal bankruptcy, individual debtors may be able to find a higher-paying job, take additional jobs to supplement their income, or go back to school to improve their job prospects. A debtor risks criminal penalties by disclosing income derived from illegal activity in a bankruptcy case, but he or she also risks revocation of the bankruptcy discharge if he or she fails to disclose that income.

San Bernardino filed for Chapter 9 bankruptcy in 2012, and it is still working on its exit plan. The city attorney proposed medical marijuana dispensaries in July 2014 as a means of increasing revenue, and the matter went to the full City Council in mid-September. Voters in California passed Proposition 215 in 1996, which amended the state Health and Safety Code to exclude individuals from state drug laws if they possess small amounts of marijuana with a valid doctor’s prescription. Senate Bill 420, enacted in 2003, further defined the scope of the program and created a system of identification cards for medical marijuana patients.

A 2009 California Supreme Court ruling required all of the state’s counties to participate in the program. Cities, however, are not obligated to allow dispensaries to operate within their jurisdictions. Oakland became the first city to tax marijuana sales in 2009, and others have followed. San Bernardino’s city attorney cited Palm Springs, which has about one-fifth the population of San Bernardino but brings in about $500,000 per year from its ten-percent marijuana tax. Continue reading