I have been asked by clients if they can avoid having to list all of their credit cards on their bankruptcy schedules. The answer is simple: “no.” However, they must list all of their debts. And if you owe the credit card company money, you must list it on your bankruptcy schedules (open lines of credit are not debts, although no debtor should expect that an inactive line of credit will survive a bankruptcy filing). Not doing so is – legally speaking – stupid. And recently, a debtor in Massachusetts learned just how stupid it really was.

The debtor filed a chapter 7 case. In an Adversary Proceeding, a creditor alleged that the debtor made a false oath when she failed to list five separate credit card debtors on her petition. She also did not bother to amend her schedules at any time…even after the Adversary Proceeding was filed. When asked about it, the debtor replied:

I didn’t list [the credit cards] because I didn’t want to totally destroy my credit. That’s basically – I didn’t think I had to, you know, divulge these small little credit cards that didn’t mean anything. They weren’t huge.

Continue reading "Not Huge and Very Stupid: A Discharge is Denied" »

Posted by Bill McLeod at 6:29 PM | Permalink | Comments (2) | TrackBacks (0)

When is a “friend” an insider and when is an “insider” a friend? That was a question that a Kansas Bankruptcy Court had to struggle with in the case of In re Tankersley.

The chapter 7 debtor’s friend (Anne) paid about $21,000 on the debtor’s mortgage. A little less than a year prior to filing the case, the debtor paid her back $5,000. About 6 months later, she paid her $4,000 and as of the date of the petition, she still owed her about $12,000. The debtor identified the payments to Anne on her statement of financial affairs, and identified her as an “insider.”

The chapter 7 trustee sued the friend (Anne) to avoid the preferential transfer and to recover the value of the property. The trustee alleged that he was entitled to a one-year look back period because Anne was an insider, and was disclosed as such on the debtor's statement of financial affairs.

The court found that they did not appear to be especially close friends. The debtor had never been to Anne’s home, and they spoke on the phone every few weeks, and saw each other sporadically.

Annie also did not fall under the definition of per se insider, such as a family member, a business partner, or a corporation that the debtor has an interest in or controls. While the court acknowledged that the debtor identified Anne as an insider, that disclosure was not dispositive but was done “for the debtor’s own protection.” The trustee did not prove that Anne was an insider: Anne “did not cross the threshold from friend to insider….just as [the debtor] never crossed the threshold into [Anne’s] home.” Since Annie was not an insider, she does not need to turn over the payments she received from the debtor.

In re Tankersley, 382 BR 522 (Bankr.D.Kan February 13, 2008).

Related:
Preferences: What are they?

Posted by Bill McLeod at 8:46 AM | Permalink | Comments (1) | TrackBacks (0)

The US Bankruptcy Court in Worcester was recently called upon to answer this question: may a landlord who discriminated against a prospective tenant because of the tenant’s Section 8 status discharge the judgment in bankruptcy? In a February 11, 2008 decision, the answer was a resounding “no.”

The landlord was sued in the Worcester County Housing Court for violations of Massachusetts Anti-Housing Discrimination laws. Under Massachusetts Law, a landlord may not discriminate against a prospective tenant on the basis that the tenant receives federal, state or local housing subsidies. The court found that the landlord violated the law, and awarded $1.00 in compensatory damages, and $5,000 in punitive damages in addition to attorneys fees and costs. Rather than simply pay the judgment for violating the tenant’s civil rights, the debtor filed bankruptcy.

The tenant brought an Adversary Proceeding claiming that the judgment was not dischargeable under Section 523(a)(6) of the Bankruptcy Code, which precludes dischargeability of debts that arise from a willful or malicious injury.

The debtor-landlord contended that the verdict slip did not reference the compensatory damages (which were a buck), that punitive damages were not allowed under Massachusetts law, and that the tenant was represented by Legal Assistance Corp. of Central Massachusetts, which did not charge the tenant for services. For reasons that were not clear from the decision, the landlord never appealed the decision of the housing court. Since the failure to appeal gives finality to the Housing Court judgment, the Bankruptcy Court was bound by the Housing Court’s judgment of punitive damages.

The Bankruptcy Court then turned to the issue of whether the discrimination itself was a willful or malicious injury as contemplated by Section 523(a)(6). The court pointed out that “a willful injury is one that is inflicted ‘either with the intent to cause the harm complained of, or in circumstances in which the harm was certain or almost certain to result from the debtor’s act. Non-dischargeability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.” Since discrimination itself contemplates a discriminatory intent, motive or state of mind under Massachusetts law, that was sufficient to constitute the willfulness component of 523(a)(6). “The discrimination per se constituted an intent to injure because the conduct could serve no other purpose.”

A malicious act is one that is committed “without just cause or excuse [and] in conscious disregard of one’s duty.” Punitive damages are justifiable in cases where the conduct is “outrageous because of the defendant’s evil motives or his reckless indifference to the rights of others.” Finding that the awarding of punitive damages sufficient for a finding of maliciousness, the debt was deemed nondischargeable.

The landlord-debtor’s final arguments that the attorney’s fees award were dischargeable was, in a word, wrong. The Anti-Housing Discrimination laws provide for attorneys fees to successful claimants, and if the underlying judgment is non-dischargeable, the attorneys fees incurred in obtaining that judgment is similarly non-dischargeable. The discriminating landlord will have to pay.

Posted by Bill McLeod at 6:31 PM | Permalink | Comments (0) | TrackBacks (0)

If you think you can get away with not being honest with your bankruptcy lawyer, think again. In a January 31 decision out of the Southern District of Mississippi, a bankruptcy attorney has been required to turn over his complete file to his client’s adversary and testify.

The case involved a Chapter 7 debtor who was a defendant in an Adversary Proceeding brought by Liberty Mutual. During his deposition, the debtor was asked questions about his schedules and about his decision to convert his case from Chapter 13 to Chapter 7. The debtor effectively stated that he relied on the advice of his attorney.

Liberty Mutual sought to compel the debtor’s counsel to produce the documents used to prepare the petition and schedules, and to testify concerning information given to him by the debtors that was used to prepare the petition and schedules (such as income, expenses, assets and liabilities). The attorney and the debtors argued that the information and testimony was protected by the attorney-client privilege. But the insurer countered, reminding the court that it was the debtor who claimed reliance on his attorney’s advice as a defense. It argued that the debtor could not use the shield of the attorney-client privilege if he has already used it as a sword.

The bankruptcy court agreed. Relying on the Federal Rules of Evidence and the Massachusetts case of In re Eddy, 304 B.R. 591 (Bankr.D.Mass.2004) the court noted that “[t]he privilege serves the purpose of promoting full and frank communications.” The court stressed:

Open and honest communication is the foundation of the relationship between attorneys and their clients. Without the privilege, clients would not divulge important confidential information to their attorneys, and therefore, their attorneys would not be able to provide adequate advice or representation.

But the court noted that the ruling in In re Eddy was that the debtor has no reasonable expectation that information will be kept confidential if it must be disclosed in documents that are filed in a bankruptcy.

The Mississippi court also pointed out an exception to the attorney-client privilege: there is no exception to the privilege if the lawyer’s services were sought or obtained to further a crime or fraud. If this debtor used his attorney to commit bankruptcy fraud, there is no privilege.

The lesson here should be obvious: be honest in the process and be honest with your bankruptcy lawyer.

Posted by Bill McLeod at 6:14 PM | Permalink | Comments (0) | TrackBacks (0)

The Bankruptcy Appellate Panel in the 6th Circuit affirmed an Ohio Bankruptcy Court order requiring the debtors to turn over their tax refunds to the chapter 7 trustee. The debtors filed their chapter 7 case in March 2005 and their meeting of creditors was approximately two months later. By the time of the meeting, the debtors had not yet filed their 2004 tax returns. The trustee advised the debtors that any refunds were to be turned over to the trustee upon receipt, and the debtors signed an acknowledgment of the instruction.

The tax returns were filed in July and the debtors received approximately $4,000 in refunds. The debtors claimed that their bankruptcy attorney advised them that they could exempt approximately $1,600 of the refund, and the debtors sent their counsel a check for the difference. Debtors also provided bankruptcy statements and tax returns to their attorney. Debtors were under the belief that their attorney would forward the check to the chapter 7 trustee.

Continue reading "6th Circuit Orders Turnover of Tax Refund" »

Posted by Bill McLeod at 2:42 AM | Permalink | Comments (0) | TrackBacks (0)

In January, the 8th Circuit Bankruptcy Appellate Panel affirmed a bankruptcy court ruling that revoked the discharge of a debtor who kept his tax refund. The debtor filed his petition on October 10, 2005 and his meeting of creditors took place about one month later. At that meeting, the chapter 7 trustee advised the debtor not to spend any tax refund without contacting the trustee. The trustee gave the debtor a handout which read in part:

Warning: Do not spend any of your tax refunds until you have received approval from my office, even if you have received notice from the Bankruptcy Court that a bankruptcy discharge has been entered. The bankruptcy discharge does not close your bankruptcy case or eliminate your need to turn over non-exemption assets.

Failure to comply with the terms of this letter or to cooperate with me in the administration of your bankruptcy estate may constitute cause to revoke your bankruptcy discharge. You will receive only one notice from my office of non-exempt monies due your bankruptcy estate and upon non-compliance, I will seek to revoke your discharge.

The debtor received his discharge in January of 2006, and in February he filed his tax returns. His refunds totaled approximately $3,500, which was spent on living expenses.

In June of 2006, the trustee filed a motion to seek a Rule 2004 examination (which is similar to but not the same as a deposition) of the debtor. The trustee also requested that the debtor produce the 2005 tax returns. Debtor produced the returns, but did not appear for the examination. Later in June, the trustee made demand for $1,556.11 of the tax refunds: the amount of non-exempt assets that belonged to the bankruptcy estate. The debtor failed to do so.

In July, the trustee sought an order from the bankruptcy court seeking again to examine the debtor under Rule 2004 and requesting that the debtor bring the $1,556.11 to the examination. Debtor did not attend nor did he pay the amount.

The US Trustee filed a complaint seeking a revocation of the discharge for knowingly and fraudulently failing to deliver the refunds to the chapter 7 trustee. Debtor offered many reasons for why he spent the refunds, but those excuses were not believed. The debtor was warned, and in spite of the warning, spent the money. The discharge was revoked….all for $1,556.11. The case is Fokkena v. Klages, 8th Cir. BAP, 07-6051 SI.

Posted by Bill McLeod at 8:37 AM | Permalink | Comments (0) | TrackBacks (0)

Thinking about filing bankruptcy? Do you have a paper shredder or know a friend with a dumpster? You should know that a US Bankruptcy Court judge in Boston recently ruled that a Chapter 7 debtor was not entitled to a discharge because documents had been destroyed.

The case involved a carpenter and homebuilding contractor who operated under a corporate entity. The corporation had employees and handled large projects involving hundreds of thousands of dollars. While perhaps a good contractor, the debtor was not a savvy business person but that did not stop him from being the record keeper for the company.

The business records were kept in a large plastic bin which included canceled checks, copies of contracts and even some personal records. He did not maintain a cash flow ledger for the company.

In 2004, the company started to face cash flow problems which eventually snowballed. He and his company were forced to abandon projects they had been paid on and he expected to be sued. The debtor consulted a bankruptcy attorney. By 2005, the debtor became seriously depressed about the company’s financial problems so much so that the mere site of the plastic bin made him sick. The Court noted that “sometime between December 2004 and February 2005, he relieved himself of this immediate problem by driving the bin to, and depositing it in, a dumpster belonging to a roofing contractor friend.”

Continue reading "Destroyed Documents leads to Denial of Discharge" »

Posted by Bill McLeod at 2:40 PM | Permalink | Comments (0) | TrackBacks (0)

Last week, the US Bankruptcy Court in the Western District of Kentucky ruled that a Chapter 7 debtor’s credit card debt was not dischargeable because the debtor used a card that should have been closed. The debtor and the plaintiff divorced in 2003 and as a part of the divorce, the parties agreed to pay their own credit card debt as well as hold each other harmless in the event of default.

The husband and wife had a joint Fleet Visa which was to be paid by the husband. He paid it in April of 2003. The debtor/wife remarried in December of that year and she changed her name. That marriage only lasted a year, but the wife again married and again changed her name.

In 2004, Fleet was bought by Bank of America and issued a new credit card on what was formerly the Fleet Visa account. The debtor used the card, and when the bills arrived, the bills were addressed to her former ex-husband and the debtor using the name she had while married to him. She never notified the bank she was divorced or that her ex-husband’s name should not be on the card.

In 2006, after some business problems and an illness, the debtor filed bankruptcy. The husband sued claiming that the debt was not dischargeable on the basis of fraud. He argued that the debtor knew that she was using a card that was in both their names.

Debtor claimed that she did not know that the husband’s name was still on the account – and that because she had so many other bills at the time, she had no idea it was a joint account. However, this explanation did not make sense since the husband’s name was on the card, and on the bill, and the bills were in a name she used two marriages ago. She also had to reactivate the account, and thus had to have known at that time it was a joint account – as well as in her former name. Even “[i]t was not done knowingly,” the court wrote, “it certainly was done with gross recklessness.”

Because debtor did not take some very simple steps to change the holder of the account, the debt is non-dischargeable, and because of the hold-harmless language of the settlement agreement, she must pay it. Based on these facts, shouldn’t the debtor have known better?

Posted by Bill McLeod at 4:50 PM | Permalink | Comments (0) | TrackBacks (0)

An interesting case out of the 9th Circuit last week should serve as a reminder to Bankruptcy Attorneys to check and double check documents. It should also serve as a warning to debtors who may be inclined to avoid doing the same thing.

The case involved an $18,000 tax debt that the debtor owed to the Franchise Tax Board in California. The debtor filed a Chapter 13 bankruptcy in 1994 and completed the plan in two years. He received a discharge. The FTB did not file a proof of claim – and because they did not file a proof of claim, they did not get paid through the Chapter 13 plan. When the FTB tried to collect the debt after the bankruptcy discharge entered, the debtor brought an Adversary Proceeding arguing that FTB was violating the discharge injunction.

The debtor argued that FTB received notice of the bankruptcy. FTB did not deny that, but FTB argued that the debtor’s social security number on the notice of creditors meeting (which is sent to creditors notifying them of the meeting held under Section 341 of the Bankruptcy Code) was incorrect. In fact, the last number of the social security number was not correct.

Continue reading "Costly Bankruptcy Preparation Mistakes" »

Posted by Bill McLeod at 6:41 PM | Permalink | Comments (0) | TrackBacks (0)

Just because you have an arbitration award, doesn’t mean you’re going to win in the end according to a recent ruling by the US Bankruptcy Court in Boston. The case involved a party (the plaintiff) who obtained an arbitration award in the state of California. The plaintiff then took their arbitration award to the California state court where a judgment in the amount awarded in the arbitration was then obtained. After that, the respondent in the arbitration (the debtor) filed for bankruptcy protection.

The plaintiff brought an Adversary Proceeding seeking a determination that the judgment was non-dischargeable on the basis that it was incurred through fraud as well as by a willful and malicious injury. Under the Bankruptcy Code, debts incurred through fraud as well as those caused by willful and malicious injuries are not dischargeable. The plaintiff relied on the doctrine of collateral estoppel: arguing that the judgment in the California court precluded the relitigation of the same factual issues in the Bankruptcy court.

For collateral estoppel to apply, the plaintiff had to prove that “(a) the issues sought to be precluded in [the Bankruptcy Court] are identical to those decided in the Arbitration Proceeding; (b) those issues were actually litigated there; (c) those issues were necessarily decided there; (d) the decision there was final and on the merits; and (e) the party against whom preclusion is sought was the same as or in privity with the party there.” The plaintiff’s complaint alleged fraud and deceit as well as conversion (an intentional tort). The complaint also alleged negligent misrepresentation and breach of contract. The plaintiff argued that it raised the issues in its complaint and the issues were determined by the arbitrator.

Continue reading "Woulda, Shoulda, Coulda: A Creditor Loses Big in the Bankruptcy Court" »

Posted by Bill McLeod at 6:07 PM | Permalink | Comments (0) | TrackBacks (0)

In a May 10, 2007 ruling, the Bankruptcy Court for the Central District of Illinois found that a Debtor did not commit fraud when she borrowed money from her employer. In this interesting case, the Debtor asked her employer (the owner of the McDonald’s franchise she worked for) to borrow money. The Debtor was going through a divorce and needed some financial assistance to make ends meet.

The employer considered the Debtor to be a valued employee and personally made a number of loans to the Debtor. A promissory note was signed by the Debtor wherein she agreed to make payments every two weeks until the balance was paid, or until she received funds in her divorce to pay the balance. Payments on the loan were automatically deducted from the Debtor’s paycheck. Six months after obtaining the last loan, the Debtor quit her job. About two years later, the Debtor filed a Chapter 7 petition.

Continue reading "Loan to Employer: Dischargeable in Chapter 7" »

Posted by Bill McLeod at 1:53 PM | Permalink | Comments (0) | TrackBacks (0)