Tag Archives: Bankruptcy

Should I File Bankruptcy Jointly With My Spouse?

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I will give you my opinion right now and say yes, if possible. If your spouse and you do not own any separate property then please file bankruptcy jointly and receive an order of discharge with both of your names and social security numbers listed. Doing this makes it black and white to your creditors. All debts are discharged as to both spouses. If only one spouse files for bankruptcy and receives a discharge you have entered the gray as to the non-filing spouse. While bankruptcy is governed by Federal Law to determine certain asset issues the Bankruptcy Court has to look to state property marital law to determine separate property and community property.

The Community Discharge

So in a community property state only the community assets are liable for community debts. If there are no separate property assets brought into the marriage by the spouses then there is nothing other than community assets at the time of filing and then post-discharge. 11 U.S.C. § 524(a)(3). “[Section] 524(a)(3) treats the effect on the nondebtor spouse of a discharge of a debtor in a community property state when the nondebtor spouse is liable on the community claim, but has not filed a bankruptcy petition.” In re Karber, 25 B.R. 9, 12 (Bankr. N.D. Tex. 1982). In summary, all actions to collect a “community claim” from section 541(a)(2) property acquired after the petition date is permanently enjoined unless timely objected to. A creditor is still free to seek collection against the non-filing spouse’s separate assets.

So What Is The Problem?

So you the issue is some of the debts are under one spouses name and social security number while some debts were incurred by the other spouse. Who files for bankruptcy then? All of the debts were incurred during their marriage too. If one spouse files for bankruptcy and receives a discharge will that discharge protect the spouse that did not file? Yes and no. This is the gray of only one spouse filing. What can a creditor do or not do to collect their debt against the non-filing spouse’s separate property? What is property of the bankruptcy estate or community assets after the spouse received a discharge? Can a judgment creditor suspend the non-filing spouses driver’s license? Is a driver’s license a community asset?

File Jointly If Possible To Avoid Confusion

As bankruptcy attorneys that have filed and been involved in thousands of b bankruptcy cases, if it is possible, we recommend spouses file jointly so that it is black and white post-discharge. Each spouse receives a discharge of all debts whether in their name and social security number or not. A creditor with a judgment can renew the judgment and then wait to collect. The entire time the judgment is also accruing interest. Also, once the judgment is renewed the total amount of the renewal will accrue interest. This accrual of interest will make the judgment increase significantly plus the cost of collection added in also. What is the judgment creditor waiting for? They are waiting for some separate property assets to be obtained by the non-filing spouse. If the non-filing spouse inherits assets from someone the inherited assets are arguably separate property of that spouse and now there are separate assets to collect from. Or the judgment creditor is waiting for the community to end via divorce or death. Once the community is terminated then the protection of the discharge of the filing spouse is also terminated.

We had a judgment creditor write us a letter once to explain their position and right to collect from the non-filing spouse. The judgment creditor argued that the community discharge pursuant to Section 524 is a “phantom discharge” since it only bars collection from community assets. Again, if there are no separate assets then how is the discharge merely a phantom discharge? If there are no separate assets then all assets are community assets and therefore protected. What procedure is there to make the determination that there are no separate assets? There really is none. If a creditor allegedly violates the order of discharge the only recourse is to seek sanctions from the bankruptcy court that signed the order of discharge. Litigating this issue will most likely cost more than what it cost to file the initial Chapter 7 bankruptcy case. No one really wants to have to deal with this after receiving a discharge and moving on. If you are married and do not file jointly this is a potential issue you will be creating by filing alone.

Prevent Possible Litigation

Again, the theme of this article is if you can file jointly then file jointly and eliminate the possibility of litigating whether a creditor is violating the order of discharge or not. It may not be possible though depending upon the circumstances. Bankruptcy attorneys have to look at all of the assets of clients and make a determination as to the best course of action. There are also circumstances in which a spouse refused to file for bankruptcy protection no matter what. The point of filing for bankruptcy is to discharge eligible debts or reorganize debts without causing additional stress or problems for the bankruptcy filer. Most bankruptcy filers do not have the means to litigate issues that sometimes arise. Like a creditor going after a non-filing spouse post-discharge. If you filed for bankruptcy protection you probably do not have thousands of dollars to litigate anything. In the event a creditor goes after a non-filing spouse and we are successful in obtaining sanctions there is no guarantee that the bankruptcy court will award attorneys’ fees and costs for seeking sanctions. It is usually a tough position to be in after the bankruptcy is long over and then a creditor decides to do some sort of collection activity against the non-filing spouse. So what then? To take this issue off the table completely and just file jointly.

Bankruptcy and Service of Motion To Avoid Judicial Lien

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The issue here is who must be served when filing a motion to avoid a judicial lien under Section 522 or 506 of the Bankruptcy Code. There could be a number of parties involved or a number of attorneys involved in obtaining and enforcing the judicial lien before a bankruptcy case is filed. So who has to be served with the motion to value or avoid the lien? Is service required on the state court attorney that obtained the judgment, the original creditor or the potential attorney now representing the creditor in the bankruptcy case?

FRBP 9014 and 7004

Once the bankruptcy case is filed the Federal Rules of Bankruptcy Procedure, Federal Rules of Procedure and local bankruptcy rules take over. All states have laws governing the enforcement and collection of lien rights and judicial lien rights. Procedures for contested matters in bankruptcy cases are governed by Federal Rule of Bankruptcy Procedure 9014, which requires service of a motion “in the manner provided for service of a summons and complaint by Rule 7004 . . . .” Rule 9014(a). So we have to look to FRBP 7004. Service of a summons and complaint varies depending upon the type of entity the creditor is. Whether the creditor is a sole proprietorship, limited liability company, corporation or is insured depository institution. If FDIC insured service shall be made by certified mail addressed to an officer of the institution unless— (1) the institution has appeared by its attorney, in which case the attorney shall be served by first-class mail; (2) the court orders otherwise after service upon the institution of notice of an application to permit service on the institution by first-class mail sent to an officer of the institution designated by the institution; or (3) the institution has waived in writing its entitlement to service by certified mail by designating an officer to receive service.

Ninth Circuit Bankruptcy Appellate Panel Case

In a recent 9th Cir. BAP case; Teresa Bryant, Appellant, vs. The Bank of New York Mellon; Select Portfolio Servicing, BAP No. CC-16-1009-DKuF, discussed the proper service of a motion to avoid a judicial lien. In this case Ms. Bryant’s bankruptcy attorney served the motion by certified mail on a bank officer of Mellon pursuant to FRBP 7004 and served each attorney that appeared on behalf of Mellon in the bankruptcy case. In the Northern District of California we have a local rule that says if a claim was filed for the lien, then the address provided on the claim has to be served in addition to the requirements of FRBP 7004 be met. Mellon tried to argue that since their state court attorney was not served the motion to value service was defective. This issue was addressed in Frates v. Wells Fargo Bank, N.A. (In re Frates), 507 B.R. 298, 301 (9th Cir. BAP 2014). The appellee bank in Frates argued their state court attorney should have been served with the motion to value or avoid. The Ninth Circuit BAP said no.

The Ninth Circuit Bankruptcy Appellate Panel previously concluded that compliance with Rule 7004(h) was all that was required. The court recognized that California law would have required service of post-judgment motions on the state court attorney, but the court did not “perceive any reason why compliance with California law should be compelled in light of the procedural due process safeguards provided by the rules themselves. This means that when enforcing the judicial lien under California law post-judgment motions must be served on the state court attorney for the judgment creditor. That is not the case after a bankruptcy case is filed.

You Do Not Have To Serve The State Court Attorney

Bankruptcy case rules make no mention of serving a motion to avoid a judicial lien on any state court attorney involved in the matter previously. In the Bryant appeal the debtor’s bankruptcy attorney served the attorney that made an appearance for Mellon and filed a motion for relief from stay filed in the bankruptcy case and still served an officer of Mellon by certified mail. The Ninth Circuit Bankruptcy Appellate Panel held nothing more was required. The lower bankruptcy court unfortunately evaluated the circumstances of not serving the state court attorney as a possible fraud on the bankruptcy court for not serving Mellon’s state court attorney with the motion to value. The 9th Circuit Bankruptcy Appellate Panel decidedly said no. There was no fraud on the bankruptcy court.

What Creditors Attorneys Should Do

If a state court attorney wants to be noticed or a creditor wants their state court attorney that obtained the judgment to be served then the state court attorney should file a request for special notice in the bankruptcy case. Then they have to be provided notice. In Chapter 7 bankruptcy cases judicial liens can be avoided in no assets cases. In a no asset case there is no call for creditors to file claims or even make an appearance in the case at all. Under these circumstances no attorney will make an appearance for a creditor in the Chapter 7 no asset bankruptcy case. The only viable service is pursuant to FRBP 9014 and 7004. In Chapter 13 bankruptcy cases claims are called to be filed on behalf of creditors. So in theory in a Chapter 13 case there could be an attorney or other party to provide notice to and meet the requirements of FRBP 7004.

How to Properly Request a Temporary Waiver or Exemption From the Credit Counseling Course Requirement

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If you are considering filing for bankruptcy protection and are researching how to request an exemption or waiver of the credit counseling course requirement for some exigent circumstance, just stop now. Making this request is a huge red flag on your bankruptcy case. Stop wasting your time and go on the internet and just do yourself a favor and complete the Credit Counseling course right now. Then come back and read the rest of this article. You will thank me later. 11 U.S.C. Section 521(b) requires debtors file with the court a certificate from the approved nonprofit budget and credit counseling agency that provided the debtor services under Section 109(h) describing the services provided to the debtor; a Credit Counseling Certificate of completion.

If you retained a bankruptcy attorney that is recommending that you not complete the credit counseling course and request an exemption or waiver please run away from that attorney as fast as you can. Our job is not to complicate the circumstances you are already dealing with. Not completing the credit counseling course is just asking for trouble. Look, yes, there are exceptions or circumstances where an exemption or waiver can be granted, but generally requesting an exemption or waiver of the credit counseling course requirement is not normal and rare. If I see a case that involves requesting any sort of exemption or waiver, without knowing any more information than that case, I already know the case has problems and the likelihood that the bankruptcy case will go smoothly is very little.

Incapacity or Disability Pursuant to Section 109(h)(4)

Please do not confuse Exigent Circumstances with actual Incapacity or Disability. 11 U.S.C. Section 109(h) waives the credit counseling course requirement for someone who is incapacitated due to incapacity, disability, or active military duty in a military combat zone. The credit counseling course can then be waived only after notice and a hearing though. You must file and serve a motion, declaration in support and notice of the hearing date and time. You are talking about anywhere from $500.00 to $1,200.00 in additional attorneys’ fees and costs. Incapacity means that the bankruptcy filer is impaired by reason of mental illness or mental deficiency so that he is incapable of realizing and making rational decisions with respect to his financial responsibilities. Disability means that the bankruptcy filer is so physically impaired as to be unable, after reasonable effort, to participate in an in person, telephone or internet briefing required under Section 109(h)(1).

Exigent Circumstances Pursuant to Section 109(h)(3)

So, for those of you who are not incapacitated, disabled or in an active military combat zone and do not follow my advice above, the following is how to actually request an exemption or temporary waiver regarding the credit counseling course requirement due to some exigent circumstance. I am not going to get into details about what an exigent circumstance is though. I truthfully do not know of any. Ms. Lin and I have filed over a thousand bankruptcy cases and every single one of our clients was able to fulfill the requirement to complete the credit counseling course prior to the case being filed.

The Three Part Test

All three parts of the test must be completed given the language of Section 109(h)(3) provides the three parts are conjunctive, not disjunctive.

1. The bankruptcy filer’s certification must describe the exigent circumstances meriting a waiver of the credit counseling requirement. 11 U.S.C. §109(h)(3)(A)(i)

2. The certification must provide the bankruptcy filer requested credit counseling services from an approved nonprofit budget and credit counseling agency, but was unable to obtain the service referred to in Section 109(h)(1) during the 7-day period beginning on the date on which the bankruptcy filer made that request. 11 U.S.C. §109(h)(3)(A)(ii)

3. Then the request must be satisfactory to the court. 11 U.S.C. §109(h)(3)(A)(iii)
Part 1 and 2 will be the most difficult parts of the test to satisfy. First you have to actually have some sort of exigent circumstance that prevents you from being able to complete the credit counseling course requirement. Then the court gets to evaluate whether the exigent circumstance and request for temporary exemption or waiver is satisfactory to the court.

Your home being subject to foreclosure sale should not usually be an exigent circumstance. Some other civil court lawsuit pending in another court should not usually be an exigent circumstance. Your vehicle about to be repossessed should not usually be an exigent circumstance. Facing eviction due to an unlawful detainer suit filed against you should not usually be an exigent circumstance. Again, I cannot really say what is an exigent circumstance warranting a temporary waiver of the credit counseling course requirement. I know the following list has been denied an exemption or temporary waiver in actual cases filed.

In re Davenport, 335 B.R. 218, 221 (Bankr.M.D.Fla.2005)
In re Watson, 332 B.R. 740, 745 (Bankr.E.D.Va.2005)
In re Hubbard, 332 B.R. 285, 289 (Bankr.S.D.Tex.2005)
In re Gee, 332 B.R. 602, 604 (Bankr.W.D.Mo.2005)
In re Wallert, 332 B.R. 884, 891 (
In re LaPorta, 332 B.R. 879, 883 (Bankr.N.D.Minn.2005)

The long and the short of it is just complete the credit counseling course requirement as soon as you start considering bankruptcy as an option. It does not take that long and you may learn something that is helpful. That was the entire point of the two required courses being created to begin with. You are provided information before you can file bankruptcy in the first course then additional information in the second course to obtain a discharge in your bankruptcy case.

What Should I Do If I Have Unfiled Tax Returns?

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You must file the late or unfiled tax return as soon as possible no matter how difficult and unpleasant going through that process is for you. I will be providing a number of reasons below for why it is so important to file tax returns on time, or as soon as humanly possible if you miss the deadline to file the tax return. Filing for an extension kicks the can down the road, but at least you will not miss the deadline or be considered to have an unfiled tax return.

As a bankruptcy attorney I have been part of thousands of bankruptcy cases in one shape or form at this point I am of the opinion that most people do not timely file returns because they will owe a significant amount of taxes. A little known fact is that most of our bankruptcy cases whether Chapter 7, Chapter 13 or Chapter 11 involve taxes that are owed to either the Internal Revenue Service or here in California the Franchise Tax Board. TAXES CAN BE DISCHARGED IN BANKRUPTCY. Almost every celebrity bankruptcy involves unpaid taxes. Read some of my other articles about celebrity bankruptcy cases like actress Teri Polo or actor Gary Busey and on and on. Just Google celebrity bankruptcy and Ryan C. Wood. Not filing a tax return for a year you owe taxes is the single worst thing you can do even if you know you are going to owe taxes that you cannot pay immediately. Even if you are going to owe so much you cannot possibly pay the taxes you still need to file your tax returns on time every time to get the best treatment for repayment. When you do not file a tax return on time it starts a chain of events that are designed to make it extremely difficult to get rid of the taxes owed. Please note there is a statute of limitations for taxes owed to the IRS, but that statute of limitations can be suspended or altered depending upon your circumstances and this article is not addressing issues related to the statute of limitations.

Do not wait to for the IRS to take action. File your unfiled returns.

Do not wait to for the IRS to take action. File your unfiled returns.

Do Not Ignore Notices From The IRS

First off, yes, life is not easy and for whatever reason you did not file your tax return on time. The IRS will give you notice after notice to file your return on your own. If you ignore these notices this will be a big factor in what I will be wrapping this article up with about Substitute File Returns or an SFR. You will be given all kinds of chances to file a tax return even after the deadline to file the return and pay any taxes owed has long passed. Do not ignore the notices you receive in the mail. You will not get a phone call. You will get notices in the mail that you must read and respond to. I tell client after client that you do not want to be in the pile of files that is for people who are not communicating with the IRS. You want to be in the pile of files for people who are communicating with the IRS and working the problem. I know it is not easy. You have to address the problem sooner than later for someone like me to someday make it all go away forever.

So, Have You Ever Heard of a Substitute Filed Return?

I hope for your sake this is the first time you have heard of this. You do not want this period. A Substitute Filed Return (SFR) is what the IRS puts together as best they can with the information they have to file a tax return on your behalf for a tax year you did not file a tax return for. The IRS will only file a SFR when you have ignored them over and over again. The IRS even knows the numbers they use are not completely accurate. The IRS knows certain deductions will not be made and potentially income not counted. The result is a SFR filed by the IRS on your behalf that everyone knows is not completely accurate, but nonetheless you get assessed the amount of taxes they say you owe in the SFR. Once the taxes on the SFR have been assessed you will then be given more notices about your rights to object to the assessed taxes and correct any errors. Again, do not ignore notices in the mail you receive from the IRS. If you again do nothing you have more or less sealed your fate

Why Substitute Filed Returns Are So Dangerous

In my bankruptcy attorney world SFR’s are very dangerous given the current interpretation of the law and whether the taxes owed and assessed from a SFR are ever dischargeable when filing for bankruptcy protection. You have to understand that when all else fails, us bankruptcy attorneys ultimately clean up the mess once and for all, if the law allows. Long story short you should file a tax return for a year the IRS already filed a SFR on your behalf. You must correct their numbers, add income, add deductions and more or less make the return accurate and the amount of taxes you owe accurate. This could lead to the amount of taxes owed to decrease or increase. But what happens to the taxes owed and assessed from a SFR if you file bankruptcy? As mentioned before taxes absolutely can be discharged when filing bankruptcy if the taxes meet certain requirements. The problem right now is that the Ninth Circuit Court of Appeals agreed with the Internal Revenue Service’s interpretation of what the definition of a “return” is when you file your own return after the IRS files a SFR on your behalf. Let me back up a little. The Bankruptcy Code addresses late filed returns and this is part of the issue I am discussing. Taxes owed for a late filed return can in theory be discharged under the Bankruptcy Code, but the requirements are even more narrow or stringent than when a return is filed on time and there are taxes owed. That is the short of it. So, the definition of what constitutes a “return” under the Bankruptcy Code is the issue. The Ninth Circuit Court of Appeals held that the tax return you file with the correct income, correct deductions and therefore correct amount of taxes actually owed may not be a “return” for bankruptcy purposes given this filed return is not an honest and reasonable attempt to comply with the tax laws since the return was late filed . . . . . . Well, that is unfortunately one way to interpret the law and right now that is it. Let me back up again. So you did not file a return, the IRS filed a SFR on your behalf and assessed you some made up amount of taxes, then you file an accurate return to correct the numbers in the SFR and if and when you seek to discharge these taxes owed according to the accurate return you just filed you may not be able to because the fact that the return was late filed and filed after the SFR has been interpreted that your accurate filed return is not an honest and reasonable attempt to comply with applicable tax laws and therefore not a “return” under the bankruptcy code so the taxes owed for that year cannot be discharged. Did that make sense to you? Let me try again. To allow taxes owed for a late filed return to be discharged when filing bankruptcy there has to be a “return” filed. See Bankruptcy Code §523(a)(1)(B)(i).
All this mess of analysis will take place because you did not timely file your tax return. If you had timely filed that tax return the taxes could easily be discharged when filing for bankruptcy protection, assuming the taxes owed meet the normal requirements to be discharged. The IRS will argue that the SFR assessed taxes will not be part of the “return” you later file that actually has the accurate information. You will forever be in the category of a SFR was filed and now there is an issue as to whether your return filed after the SFR is an honest and reasonable attempt to comply with the applicable tax laws. So far convincing the appellate courts that the later filed return is a “return” under the bankruptcy code has not been very successful. It is truly a fact based analysis on a case by case basis. So, again, file your tax returns on time even if you will owe a lot of taxes and if you miss the deadline to file the return or extended deadline to file the return file your return as soon as you can. Do not let the IRS file a Substitute Filed Return on your behalf.

Did A Creditor Violate The Bankruptcy Discharge By Suing The Debtors After Discharge?

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Apparently it depends upon the terminology used in the lawsuit and a demand for attorney fees and costs. A recent Ninth Circuit Bankruptcy Appellate Panel published opinion discusses this issue. Desert Pine Villas Homeowners vs. Gil Kabiling; Linda Kabiling (BAP No. NV-15-1380-BDF) Discrimination happens for all kinds of reasons unfortunately. One reason discrimination is not supposed to happen is when you seek bankruptcy protection and obtain a discharge of eligible debts. There are a number of issues in this case, but the outcome of the case is creditors should not use language in lawsuits or other documents post-discharge that disparage a debtor or do not accurately communicate the legal relationship post-discharge. A creditor cannot try and obtain attorneys’ fees and costs post-discharge for a claim that arose before the bankruptcy petition was filed. In this case it all started when the Kabiling’s defaulted on paying their homeowner association assessments for a property located in Las Vegas, Nevada. The Kabilings’ obtained a discharge of their debts in Chapter 7 after the defaults and therefore their personal liability no longer exists for the defaulted homeowner association dues. Generally in most states a homeowner association can attach a lien for the unpaid homeowner association dues and then enforce that lien post-discharge since the lien is not discharged, just the personal liability for paying the pre-petition unpaid homeowner association dues. A homeowner association can also foreclose on the home under state law for unpaid homeowner association dues. Each state has different laws about homeowner association dues and the legal rights involved with collecting unpaid dues. The is not a huge issue in this case, but you need to know your state law in this area as it relates to Section 523(a)(16) of the Bankruptcy Code. Section 513(a)(16) makes post-discharge unpaid homeowner association dues not dischargeable.

The Desert Pine Villas Lawsuit Against Kabiling

On February 1, 2011, the Kabilings’ bankruptcy attorney filed a voluntary chapter 7 petition on their behalf along with a statement of intention asserting that they would abandon the Property. Notice of the Kabilings discharge was mailed to creditors on June 30, 2011. Desert Pines nonjudicially foreclosed on its homeowner association liens in 2013 and thereby acquired title to the Kabilings property. On December 15, 2014, in the District Court for Clark County Nevada, Desert Pines, through its counsel, Alessi & Koenig, filed a complaint against the Kabilings and three additional named defendants seeking to quiet title to the foreclosed property and confirm that Desert Pines held good title to the Kabiling property based on its nonjudicial foreclosure in 2013. Just to be clear, Desert Pine Villas already foreclosed on the Kabiling property under Nevada state law, so why did they need to file an additional lawsuit to quiet title to the already foreclosed property? There could be facts regarding the other named parties in the lawsuit that are not included in the record of this case.

The Kabilings were served with the lawsuit and then retained counsel to inform Desert Pine Villas they violated the discharge injunction by filing the lawsuit against them. Attorneys for Desert Pine Villas of course denied violating the discharge injunction so the Kabilings attorney reopened their Chapter 7 bankruptcy case and filed a motion for contempt against Desert Pine Villas. The bankruptcy court agreed with the Kabilings and found Desert Pine Villas in contempt of court and held Desert Pine Villas liable for the Kabilings’ compensatory damages in the amount of $8,928.00.

The Law In Desert Pine Villas Appeal

A violation of the discharge injunction is enforced through the court’s civil contempt authority under section 105(a). Renwick v. Bennett (In re Bennett), 298 F.3d 1059, 1069 (9th Cir. 2002). The debtor has the burden of proving, by clear and convincing evidence, that the offending creditor knowingly and willfully violated the discharge injunction. The offending creditor acts knowingly and willfully if (1) it knew the discharge injunction was applicable and (2) it intended the actions which violated the injunction. ZiLOG, Inc. v. Corning (In re ZiLOG, Inc.), 450 F.3d 996, 1007 (9th Cir. 2006). Actual knowledge of the discharge injunction does not end the inquiry, however, as the creditor also must be aware that its claim against the debtor was subject to the discharge injunction. Emmert v. Taggart (In re Taggart), 548 B.R. 275, 288 (9th Cir. BAP 2016). The focus is on whether the creditor’s conduct violated the injunction and whether that conduct was intentional; it does not require a specific intent to violate the injunction. Knupfer v. Lindblade (In re Dyer), 322 F.3d 1178, 1191 (9th Cir. 2003) (citing Hardy v. United States (In re Hardy), 97 F.3d 1384, 1390 (11th Cir.1996); and Havelock v. Taxel (In re Pace), 67 F.3d 187, 191 (9th Cir. 1995)).

A chapter 7 discharge releases the debtor from personal liability for debts arising “before the date of the order for relief under this chapter.” § 727(b). A “debt” means a liability on a claim. § 101(12). Federal law determines whether such claim arose prepetition or postpetition. SNTL Corp. v. Centre Ins. Co. (In re SNTL Corp.), 571 F.3d 826, 839 (9th Cir. 2009); ZiLOG, 450 F.3d at 1000. The general rule in the Ninth Circuit is that “a claim arises, for purposes of discharge in bankruptcy, at the time of the events giving rise to the claim, not at the time the plaintiff is first able to file suit on the claim.” O’Loghlin v. Cty. of Orange, 229 F.3d 871, 874 (9th Cir. 2000).

9th Circuit Bankruptcy Appellant Panels Analysis

The Ninth Circuit BAP found the bankruptcy court applied and then held an evidentiary hearing to allow for testimony on the contempt motion properly. the bankruptcy court’s conclusion that The 9th Circuit BAP also found that Desert Pine Villas knew that the discharge order applied to its prepetition claims against the Kabilings is supported by the record and is neither illogical nor implausible. The Ninth Circuit BAP also found that during oral argument at the June 30, 2015 hearing on the motion for contempt, counsel for Desert Pines specifically admitted that Desert Pines filed the Complaint in the Quiet Title Action, that it named the Debtors as defendants, and that it sought recovery of attorneys’ fees and costs. Thus, the record supports the bankruptcy court’s conclusion that Desert Pine Villas intended to file the quiet title action and the only remaining question is whether the filing of the complaint violated the discharge order.

The mere filing of a complaint against a debtor by a prepetition creditor does not necessarily violate the discharge injunction. For example, pursuing a post-discharge lawsuit in which the debtor is named as a putative party to collect from a collateral source, such as an insurance policy or an uninsured employers’ fund, does not violate section 524 provided “the plaintiff makes it clear that it is not naming the debtor as a party for anything other than formal reasons.” Ruvacalba v. Munoz (In re Munoz), 287 B.R. 546, 550 (9th Cir. BAP 2002) (citing Patronite v. Beeney (In re Beeney), 142 B.R. 360, 363 (9th Cir. BAP 1992)).

Ninth Circuit Bankruptcy Appellate Panels Findings

The complaint filed by Desert Pines Villas did not provide anything about how the Kabilings failed to pay pre-petition HOA dues and that this default was discharged in their chapter 7 bankruptcy case. The 9th Circuit BAP also noted the Kabilings were not listed as just putative parties in the lawsuit and that the Kabilings were not being looked to for amounts listed in the complaint, such as attorneys’ fees and costs for bringing the lawsuit to quite title. The Ninth Circuit BAP continues to lambast Desert Pines Villas, “To the contrary, the Complaint alleges that Desert Pines was required to incur attorneys’ fees to file the action and prays for a fee award against each of the named defendants, including the Debtors.”

Desert Pine Villas tried to argue that there is no bar to seeking attorneys’ fees and costs in a post-discharge lawsuit. While potentially true see the above law regarding claims and when a claim arises under 9th Circuit law. The Ninth Cir. BAP clearly held that Desert Pine Villas made no distinction in their complaint between prepetition or post-petition claims they have or had against the Kabilings. The complaint reads like Desert Pine Villas is seeking redress for prepetition events or prepetition claims. The Desert Pine Villas complaint also did not identify any post-petition conduct by the Kabilings, a post-petition default by the Kabilings or any post-petition contract between Desert Villa Pines and the Kabilings in Desert Pine Villas quite title complaint.

Exception to Creditors Right to Post-Petition Attorneys’ Fees and Costs On a Pre-Petition Claim

There are a number of cases on this issue. The argument goes if a debtor starts the fight post-petition and returns to the fray, then a creditor has a right to seek attorneys’ fees and costs defending itself of dealing with the issue even though the issue arose about a pre-petition claim. Boeing N. Am., Inc., v. Ybarra (In re Ybarra), 424 F.3d 1018, 1026 (9th Cir. 2005).

Conclusion

Bankruptcy attorneys beware. If a creditor files some sort of post-petition or post-discharge complaint against your client and the facts of the complaint only include facts that are from pre-petition events and claims there could be a violation of Section 524. More time spent in drafting the complaint to quiet title could have solved this problem. It sounds like from the provided correspondence the attorney for the Kabilings did reach out to the Desert Pine Villas attorney about this issue to no avail. Desert Pine Villas could have just amended the complaint and changed the prayer or facts listed in the complaint and did not.

Why Did 50 Cent File Bankruptcy When He Is Rich and Famous Still?

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For the record many successful and rich people make the decision to file for bankruptcy protection under various chapters of the Bankruptcy Code. Curtis James Jackson, III, aka 50 Cent, is no different. Like many things in our society ignorance of the law rules the day. Hopefully this article and future articles about 50 Cent’s Chapter 11 bankruptcy case will help you understand bankruptcy law and why 50 Cent filed. That said, on July 13, 2015, 50 Cent filed a personal bankruptcy petition for protection under Chapter 11 of the Bankruptcy Code, Bankruptcy Case No. 15-21233, in the District of Connecticut, Hartford Division, to reorganize his debts.

Why Did 50 Cent File Bankruptcy?

The Merriam-Webster dictionary defines being insolvent as: (1) unable to pay debts as they fall due in the usual course of business; (2) having liabilities in excess of a reasonable market value of assets held. 50 Cent became unable to pay his debts as they came due in the usual course of business resulting from judgments entered against him and the cost of litigating with Sleek Audio and Lastonia Leviston lawsuits.

Sleek Audio, LLC Litigation

According to court documents back in 2011n 50 Cent entered into business with Sleek Audio, LLC to develop headphones and market the headphones under 50 Cent’s professional name. Sleek entered into a licensing brand agreement with G-Unit Brands, 50 Cent’s brand licensing company and allowed Sleek to use 50 Cent’s trademarks in the marketing of the headphones. For whatever reason Sleek did not follow through on making the headphone commercially viable by the February 15, 2011, deadline. As a result G-Unit Brands terminated the licensing agreement with Sleek and 50 Cent then created SMS Audio to develop his headphones on his own instead. Like most divorces Sleek did not go away quietly. Sometime in August 2011 Sleek filed an arbitration case against 50 Cent alleging he stole their designs for his new headphones and owed Sleek some money. Long story short Sleek won. Eventually a judgment was entered in Sleek’s favor totaling $17,247,426.11 plus post-judgment interest rate of 4.75%. 50 Cent’s list of 20 largest unsecured creditors provides the judgment has grown to $18,428,257.00 as of July 13, 2015.

Lastonia Leviston Sex Tape Litigation

Another reason for the personal Chapter 11 bankruptcy filing is a sex tape 50 Cent allegedly released of Lastonia Leviston without her consent. 50 Cent was in a rap war with William Leonard Roberts, aka Rick Ross. Ms. Leviston used to date Rick Ross and they have a child together. In 2008 Ms. Leviston was in a relationship with Maurice Murray. Leviston and Murray made a sex tape and Murray retained possession of the sex tape. At some point Murray gave the sex tape to 50 Cent and allegedly told 50 Cent he could do whatever he wanted with the sex tape. 50 Cent allegedly created a copy of the sex tape and then narrated the sex tape saying negative things about Ms. Leviston and mocking Rick Ross. 50 Cent alleged the edited version of the sex tape was leaked by someone other than himself and that he never released the edited sex tape on any of his websites. Ms. Leviston sued 50 Cent in state court and eventually she won a judgment for about $5 million (Leviston v Jackson, Index No. 102449-2010, pending before New York State Supreme Court, New York County).

July 13, 2015 Chapter 11 Bankruptcy Filing and Leviston Lawsuit

The jury in the Leviston lawsuit was then tasked with determining how much the punitive damages to punish 50 Cent for the alleged release of the edited sex tape should be. Before the punishment faze began 50 Cent filed for personal bankruptcy under Chapter 11 of the Bankruptcy Code. As soon as a bankruptcy petition is filed the automatic stay takes effect stopping any and all collection activity including lawsuits. So the day the punishment part of the state court lawsuit was supposed to start 50 Cent’s attorneys walked in with the notice of the bankruptcy filing and that ended the punishment faze for the time being. But, a creditor or party-in-interest, like Ms. Leviston, can request the bankruptcy court to allow a state court lawsuit to continue despite the filing of a bankruptcy case. This is what happened in 50 Cent’s bankruptcy case. Ms. Leviston’s Bankruptcy Attorneys filed what is called a motion for relief from the automatic stay on July 13, 2015, the exact same day 50 Cent filed for bankruptcy protection. Ms. Leviston asked the bankruptcy court to allow the state court punishment faze to continue despite the filing of the bankruptcy case. Ms. Leviston’s attorneys also requested and received an expedited hearing date to speed up the process.

Of course 50 Cent’s Bankruptcy Lawyers filed an opposition to the motion for relief from stay advocating why the stay should not be lifted. In my opinion the two most compelling reasons to not lift the automatic stay is that punitive or punishment damages are normally calculated based upon the wealth of the allegedly guilty party and that punitive damages claims are/can be subordinated or disallowed in bankruptcy pursuant to Section 510(c). When a person files for bankruptcy protection what the bankruptcy filer’s assets are worth is often a litigated issue because it matters a lot in the outcome of what creditors should receive through the Chapter 11 plan of reorganization. So how can a jury in the state court case determine the amount of punitive damages to award against 50 Cent if a determination of the value of his assets has not been made in the now pending bankruptcy case? Arguably punitive damages cannot be determined so why proceed? The other compelling argument in my opinion is how punitive damages are treated in bankruptcy. Generally punitive damages are disallowed or subordinated to other claims so that the other people who are owed money get paid more. The goal of bankruptcy is distribute the assets of the debtor to creditors fairly according to the Bankruptcy Code. The goal is not to punish the debtor like punitive damages seek to do. Therefore punitive damages are generally disallowed or paid after other types of claims are paid first. I will have more to day about this issue in future articles.

July 17, 2015, a hearing was held before the Honorable Ann M. Nevins regarding the motion for relief from stay and the motion was granted. As a result the punitive damages part of the Leviston lawsuit could continue. On July 20, 2015, the jury in the New York State Court lawsuit regarding the alleged release of the sex tape awarded an additional $2 million in punitive damages to Ms. Leviston for a total judgment against 50 Cent of $7 million. I am sure 50 Cent was not banking on the filing of his bankruptcy case to stop the punishment part of the lawsuit by Ms. Leviston. Nevertheless, there are still benefits to seeking bankruptcy protection and reorganizing his debts in Chapter 11.

So, 50 Cent found himself with a $17 million judgment against him owed to Sleek and then another judgment of $5 million owed to Ms. Leviston prior to filing for bankruptcy protection. Even if someone has significant assets and significant income can they write a $22 million check to satisfy their debts? That is why 50 Cent filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code. What will result in 50 Cent’s Chapter 11 reorganization case is still to be determined. Additional articles will be posted to discuss 50 Cent’s current financial circumstances and current status of the case in the future.

Can A Third Party Help Make A Chapter 13 Plan Payment?

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There are a number of requirements that must be met for proposed chapter 13 plans to be confirmed or approved by the bankruptcy court. See Section 1325 of the Bankruptcy Code for all of the requirements. The focus of this article is Section 1325(a)(6) which provides the court shall confirm a plan if, “the debtor will be able to make all payments under the plan and to comply with the plan.” The proposed chapter 13 plan must be feasible or possible. More or less the bankruptcy filer must be able to make the payments proposed in the chapter 13 plan for the entire life of the plan. Usually the plan will last three to five years depending upon the circumstances. So can a third party help make a chapter 13 plan payment each month for the entirety of the plan? The answer is yes under most circumstances.

Yes, A Third Party Can Help Make A Chapter 13 Plan Payment

This issue does not really come up too often for most bankruptcy lawyers. Most courts generally allow third party help, but it is disfavored for a number of reasons. See In re: Schwalb, 347 B.R. 726, 759 (Bankr. D. Nev. 2006. In Schwalb the court held that a debtor may rely on contributions from family and is not prohibited, but disfavored. Of course if the bankruptcy filer can get it done themselves that is much more favorable than having to rely on a third party for money each month. There has to be a firm commitment from the third party to make the contribution each month into the chapter 13 plan. If a third party contribution seems like it is speculative or will only be occasional then the chapter 13 plan can be considered not possible or feasible. The amount of the monthly contribution must be certain too. How can a court confirm or trustee recommend confirmation if the amount of the monthly contribution by the third party is not listed or known? There are a number of factors to consider: (1) the contributor’s relationship to the debtor and motivation in making the contributions; (2) the contributor’s long and undisputed history of making the contributions otherwise providing support for the debtor; (3) the commitment of the contributor to make the contribution in a specific amount for the duration of the chapter 13 plan; and (4) the financial stability of the contributor to make the proposed contribution. The bankruptcy filer and their bankruptcy attorney have the burden of proof in providing evidence to support confirmation of the proposed chapter 13 plan.

Why Would Someone Need Help With Their Monthly Chapter 13 Plan Payment?

The basic problem is the debtor or person filing bankruptcy does not have enough income after paying normal living expenses to meet their obligation under the bankruptcy code to creditors when filing chapter 13 bankruptcy. The bankruptcy filer may only have $100.00 left over each month, but they have taxes that must be paid back in the chapter 13 plan or mortgage arrears that must be paid back in the chapter 13 plan. To pay the unpaid taxes or mortgage arrears the bankruptcy filer, for example, would have to pay $300.00 each month to fund the plan and make it feasible. Again, the bankruptcy filer cannot afford the plan payment, so they obtain third party assistance from a friend or family member. The friend or family member pays the additional $200 a month to make the plan possible or feasible and meet the requirements of Section 1325(a)(6).

Are There Limits To Third Party Help In Chapter 13?

How these issues are dealt with is different from circuit to circuit, district to district and division to division. But generally speaking most jurisdictions allow third party help under most circumstances. In a recent case with third party help proposed, In re Carolyn Deutsh, 2015 Bankr. Lexis, 1368, the Bankruptcy Court actually denied confirmation of the debtor’s chapter 13 plan for not being feasible. What went wrong here? In this case the third party contributor was the debtor’s boyfriend. So, they are not married and the boyfriend is a new boyfriend who says he “intends to contribute only for so long as he is financially able” according to the declaration filed in the case. Okay, can that be relied upon? The bankruptcy court said no. The third party needs to have some sort of tie to the debtor that is not so new it cannot be depended upon. Also the language of the declaration leaves a lot to be said. Why the declaration in Deutsh or less says “I think or guess I will help” instead of “I will contribute $700 a month toward the chapter 13 monthly plan payment for the entire duration of the chapter 13 plan.” There still could have been an issue with the third party contributor being a new boyfriend, but if the language of the declaration had been more concise about the boyfriend’s willingness to help things in the Deutsh may have been different.

The moral of the story is make sure the third party contributor to the monthly chapter 13 plan payment is committed to help, you have known them for some time and the amount they will contribute each months is listed specifically in the declaration prepared and filed with the court.

How Do I Value My Stuff or Property When Filing Bankruptcy?

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Well, there really is no real good answer except do not intentionally undervalue the stuff you own. Value is in the eye of the beholder? Yes, sometimes that is true. Most of the time you just do the best you can and provide the fair market or replacement value of the asset. I do not know how much your used stapler that you bought in 1992 is worth. What about your house? The best we can do is look at comparable sales and how the market is at that moment in time. If the market is hot, like it is in San Mateo County, the listing price could be bid up by thousands of dollars. So was the house worth what it was listed for or what the house sold for?

Be Careful Filing A Chapter 7 Bankruptcy Case If The Client Owns A House

In the Bay Area and San Mateo County home prices are on the rise. So if you own a home and the value is close to what you owe be very careful filing a Chapter 7 bankruptcy. California has generous homestead exemptions to protect equity in primary residences, but what if there is a bidding war on the house and the price is bid up by twenty thousand dollars? Will you still be able to protect the equity and keep the house or will the house be sold out from under you in the chapter 7 bankruptcy case? The Chapter 7 Trustee assigned to the case will want to list the house for sale and let the market determine the value and see what happens. The Chapter 7 Trustee has a duty to administer the bankruptcy estate and liquidate unprotected assets for the benefit of creditors. Liquidating and disbursing funds to creditors is also how chapter 7 trustees make more money. Chapter 7 trustees get paid a percentage of the assets disbursed to creditors. So not only does the chapter 7 trustee have a duty to investigate your assets and liquidate them, but they have a financial interest in liquidating unexemptable assets also. If the chapter 7 trustee does seek to list the property for sale you can try and buyout the bankruptcy estate, oppose the listing of the property for sale or convert the case to Chapter 13 and pay the equivalent unprotected equity to creditors over 3 or 5 years to make sure you keep the home.

Do Not Intentionally Undervalue Your Assets

So after reading the preceding paragraph you may have the thought that you can just decrease the value of the asset to an amount that can be protected. Please delete that thought and never think it again. It is a dangerous game to play if you choose to manipulate the value of your assets. Just ask Jesus Bencomo. Mr. Bencomo filed for bankruptcy protection under Chapter 7 of the bankruptcy code for the first time in May of 1998. No real property was listed in his first bankruptcy case. On January 16, 2013, Mr. Bencomo’s bankruptcy lawyers filed his second Chapter 7 bankruptcy case listing in Schedule A that he owned real property located in Norwalk, California. Mr. Bencomo valued the real property at $175,000 with secured debt totaling $145,879. So there is approximately $29,121 in equity to protect. After the conclusion of the 341(a) Meeting of the Creditors the duly appointed Chapter 7 Trustee Wesley Howard Avery filed a motion with the court to employ a real estate broker to list and sell Mr. Bencomo’s house.

The trustee’s motion provides the value of the Norwalk property as around $305k to $333k. Two weeks later Mr. Bencomo’s bankruptcy attorneys amended the Schedule A to list the value of the Norwalk property as $245,000 with secured debt now totaling $214,929.27. Eventually the court approved the employment of the real estate broker.

The Chapter 7 trustee also filed an adversary proceeding, lawsuit in conjunction with the main bankruptcy case, objecting under Section 727(a)(2)(A) and (a)(4)(A). Section 727(a)(4)(A) provides that the debtor’s discharge may be denied where: (1) the debtor made a false oath in connection with the bankruptcy case; (2) the oath related to a material fact; (3) the oath was made knowingly; and (4) the oath was made fraudulently. Retz v. Sampson (In re Retz), 606 F.3d 1189, 1197 (9th Cir. 2010) (citation and internal quotation marks omitted). The adversary proceeding complaint alleges that Mr. Bencomo is an experienced real estate broker and therefore knew at the time of filing that the value of the Norwalk property was in the $300k range. Basically the Chapter 7 trustee is arguing Mr. Bencomo knowingly and intentionally undervalued the Norwalk property. Mr. Bencomo’s conduct in his first bankruptcy case became an issue in the second. Apparently Mr. Bencomo transferred the house out of his name, than back into his name, but failed to record the deed until 2002 and he failed to list the property in his first bankruptcy petition. Evidence of Mr. Bencomo’s prior bad conduct in the first case can be used in the second as impeachment evidence. So, the court ruled in the chapter 7 trustee’s favor and held that Mr. Bencomo knowingly made a false oath regarding the value of his house and that this is material. Mr. Bencomo was denied a discharge.

California Bankruptcy Exemptions May Increase Soon

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In California we have two set of exemptions to protect assets against collection efforts by creditors. There are limits to what can be protected and how much of the value of the asset can be protected. Under CCP Section 703 the defining feature of this set of exemptions is the Wild Card exemption that can be applied to anything under Section 703.14(b)(5) totaling $26,925.00. This Wildcard exemption can be used to protect equity in a home too. The other set of California exemptions under CCP Section 704 include homestead exemptions with higher limits. Recently the California State Senate passed SB 308 that proposes a number of great changes to California’s exemptions. One of the most important proposed changes is the exemption that protects equity in a primary residence. Right now the homestead exemptions in California to protect equity in a primary residence are: (1) single person $75,000; (2) married or have dependent children living in residence ($100,000); and (3) debtor is a senior 65 or older; disabled, or 55 years of age or older and has limited income. California Senate Bill 308, among other things, would change California’s exemptions to give everyone a $300,000 homestead exemption to protect equity in their primary residence. If California’s exemptions are changed as proposed in SB 308 California’s residence in financial distress will get little more help in recovering or staying afloat.

California Homestead Exemption Changes Under CCP Section 704 Exemptions

1. Homestead Exemption Limit Increased To $300,000

This is probably the most dramatic proposed change to the California exemption system. As the current limits are listed above an increase to $300,000 for everyone is a significant increase, especially for a single person. At the same time California’s exemptions have not kept pace with inflation and the cost of living in California. If you review the history of the increases in California’s exemptions you will clearly see the increases have not kept pace with California’s cost of living and inflation.

2. Removes The Six-Month Reinvestment Requirement

Right now CCP Section 704 homestead exemptions requires after sale of the home and the former owners receive the exemption amount of the proceeds they will lose the entire exemptions if they do not reinvest the proceeds in a new home. So if the bankruptcy trustee sells the home the debtors have six months from the sale date to reinvest the proceeds. Okay, but they just filed for bankruptcy and that means they most likely do not have the best credit. So how is someone supposed to qualify to purchase a new home? This is a badly needed change also. I far as I know exemptions are meant to protect assets to help someone in financial distress. Pulling the rug out from under someone in financial distress six months later does not seem to be consistent with the underlying goal of having exemptions to begin with.

Increase The Vehicle Exemption to $6,000 For Everyone

Right now under the CCP Section 703 vehicle exemption the limit of the exemption is $5,100 and under CCP Section 704 the vehicle exemption limit is only $2,900. These exemptions are badly in need of an increase. As a society we need everyone to be able to move about with reliable transportation period. It does not do anyone any good to someone with a car that cannot allow them safely to and from work or transport children. A $6,000 vehicle is usually just on the line of reliability anyway and getting up there if miles. This proposed increase will provide a modest increase in the type of vehicle that can be protected and is badly needed.

New Exemption for Small Business Owners

Right now a small business owner does not have a specific exemption to protect cash or deposit accounts, accounts receivable and business inventory up to $5,000 for debtors using the CCP Section 704 exemptions. For small business owners choosing the 704 exemptions this will be valuable addition to help them continue to operate their business and achieve success after bankruptcy. The limit of the proposed exemption is extremely reasonable at $5,000. This amount should not result in giving a windfall to a small business owner.

Amends California Code Section 2983.3 Regarding Vehicle Loans

Right now the law provides a person with a vehicle loan when filing bankruptcy has three options regarding the loan. They can surrender the vehicle to satisfy the loan, enter into a reaffirmation agreement and continue payments, or redeem the vehicle for its fair market value under Section 721 of the bankruptcy code and keep the vehicle. What is not supposed to be allowed anymore is someone just continues to make the payments and does not do either of the three options listed above. They are current with the payments, but technically under the law the lender can repossess the vehicle since the loan was not reaffirmed. This change would make the filing of bankruptcy not grounds for repossession if the person is current with their payments.

What Will These Proposed Changes Mean To Bankruptcy Attorneys and Their Clients?

The ramifications will most likely be far reaching and help thousands of California residents live happier and healthier lives by obtaining a fresh start. Regarding the increase in the homestead exemption, most bankruptcy attorneys will most likely see a decrease in the number of Chapter 13 cases they file given that same bankruptcy filer can protect more equity in their home and still file a Chapter 7 case. Currently one of the reasons to file a Chapter 13 case is to protect equity in a home while reorganizing debts and not have to liquidate the home in a Chapter 7 case. More people should qualify to file a Chapter 7 case if the homestead exemption is increased. At the same time the dynamic between someone’s assets and the available exemptions is complicated and there are compromises that have to be made given the limits to the amounts of the exemptions. Then you factor in the differences between the two sets of exemptions, CCP Section 703 and CCP Section 704, and bankruptcy lawyers will have a whole new evaluation to make when discussing which set of exemptions would be most advantageous.

In all these proposed increases will not provide windfalls, but make California’s exemptions consistent with the real world we live in. When pondering a perfect world I believe the exemption limits should be based upon a county by county measurement of income and cost of living. To truly treat everyone fairly based upon their circumstances we need to look at their circumstances more closely at the county level. In California the median income and cost of living vary widely throughout our huge state. Creating exemptions by county would be a huge undertaking and probably unmanageable by the bankruptcy courts. For now the increases of California bankruptcy exemptions proposed in California State Senate Bill 308 would be a huge and long needed improvement.

Potential Lawsuit Claims Need to be Listed When Filing Bankruptcy and Are Part of the Bankruptcy Estate

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Preparing a bankruptcy petition and filing for bankruptcy is actually a much more complicated process than most believe. Of course there are certain cases that really do not require too much work, but even those cases could have hidden landmines. One of the landmines I speak of is a bankruptcy filer’s claims or potential claims against a third party for damages (Money!!!). Most clients do not think about a potential claim as part of their assets. It is just the right to sue so . . . . . . . . The claim or potential claim could derive from an employment issue at work, slip and fall at a store or business, fraud, breach of contract or other way any of us can be hurt financially and potentially have a claim against a third party. Yes, your right to sue someone is a claim that should be listed in the bankruptcy petition schedules and could have value to be protected depending upon the circumstances. What happens if a claim is not listed in the bankruptcy petition schedules? A recent Ninth Circuit Bankruptcy Appellate Panel case discusses the treatment of an unlisted claim when the bankruptcy filer, after discharge and the case was closed, attempts to enforce the claim by filing a lawsuit. Goldstein v. Alberta P. Stahl, Chapter 7 Trustee; Wells Fargo Bank, N.A.; Bank of America, N.A.; BAP No. CC-14-1346-TaDPa, March 3, 2015.

What are Claims?

A claim when filing for bankruptcy is defined as the right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.

So a potential claim is the potential right to payment for damages that you have not yet filed a lawsuit for and obtained a judgment is an unliquidated and most likely disputed claim. A claim no less though. Sierra Switchboard Co. v. Westinghouse Elec. Corp., 789 F.2d 705, 707 (9th Cir. 1986)

Property of the Bankruptcy Estate

Section 541 of the Bankruptcy Code provides what is property of the estate. Part of the definition includes: Any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date, by bequest, devise, or inheritance; as a result of a property settlement agreement with the debtor’s spouse, or of an interlocutory or final divorce decree; or as a beneficiary of a life insurance policy or of a death benefit plan.

As you can see this definition includes all property at the time the case is filed to be listed in the bankruptcy schedules. In the Goldstein case one of the issues was whether the right to sue their mortgage companies arose prior to the chapter 7 bankruptcy case being filed. Of course the Goldstein’s bankruptcy attorney argued the right to sue arose after the case was filed. The mortgage companies bankruptcy lawyers argued the claims arose before the chapter 7 case was filed.

Goldstein v. Alberta P. Stahl, Chapter 7 Trustee; Wells Fargo and Bank of America

Long story short the bankruptcy filer’s in this case, the Goldstein’s, applied for a loan modification prior to filing for relief under chapter 7 of the Bankruptcy Code. They fulfilled the terms of the temporary loan modification but their mortgage company never provided them a permanent loan modification. The Goldstein’s paid over $22,000 in mortgage payments in reliance upon their mortgage companies offer to modify their mortgage though. This is the claim the Goldstein’s allegedly had at the time their chapter 7 case was filed against their mortgage companies. For whatever reason the Goldstein’s did not list this claim in their bankruptcy schedules and their case was discharged and closed. The Goldstein’s then sued their mortgage companies for the mortgage payments and other causes of action. Their mortgage companies used the defense that the claim was not listed in their bankruptcy schedules so the claim was actually still property of the bankruptcy estate and could not be pursued by the Goldstein’s. The Goldstein’s then reopened their bankruptcy case to add the claim to their schedules. As part of reopening the bankruptcy case a chapter 7 trustee was appointed to the case again. The Goldstein’s mortgage companies then entered in to negotiations for the settlement of the claim with the chapter 7 trustee and sought to extend the deadline for the chapter 7 case to close again. Eventually the chapter 7 trustee filed a motion to compromise the claims or sell the claim free and clear. The Goldstein’s opposed arguing the claims did not become complete until their mortgage companies denied the permanent loan modification two weeks after the bankruptcy case was filed. Given that the claims should not be part of the bankruptcy estate. The bankruptcy court held the alleged breach by the mortgage companies was before the bankruptcy case was filed when they failed to grant a permanent loan modification. To determine when a cause of action accrues, and therefore whether it accrued pre-bankruptcy and is an estate asset, the Court looks to state law.” Boland v. Crum (In re Brown), 363 B.R. 591, 605 (Bankr. D. Mont. 2007) Under California law a cause of action accrues upon the occurrence of the last element essential to the cause of action.” Howard Jarvis Taxpayers Assn. v. City of La Habra, 25 Cal. 4th 809, 815 (2001) The Ninth Circuit Bankruptcy Appellate Panel upheld the bankruptcy court’s ruling that the claims are property of the estate. The panel noted that the third mortgage payment was made by the Goldstein’s prepetition and that is when they could have brought their lawsuit at that time.