Incorrect Forms Yield Incomplete Results

Incorrect Forms Yield Incomplete Results

Bankruptcy is a forms practice, and filling out boxes with correct information, while seemingly mundane, is an extremely important part of the client’s and the attorneys duty.

A recent case pointed out how failure to complete one of these tasks, even during the weeks and weeks after the bankruptcy was  initially filed, proved costly to the debtor.

In the recent Ninth Circuit opinion entitled In re Licup & Castro, No. 23-60017, submitted March 8, 2024, the debtors’ landlord filed a pre-petition lawsuit against them. The landlord obtained a default judgment for $31,780.29. Subsequently, when the debtors filed for bankruptcy, they listed the landlord’s debt, but incorrectly stated the landlord attorney’s address on their list of creditors, and sent the petition to that incorrect address. There was no separate copy of the petition sent to the landlord. 

Consequently, neither the landlord nor the landlord’s attorney received a copy of the bankruptcy petition. The debtors never maintained that they did not discover the error later on, nor that they could not have fixed the error in the attorney address with an amended creditor list.


Subsequently, when the debtors filed for bankruptcy, they failed to list the creditor at the attorney’s proper address, and did not mail a copy of the petition to the attorney. The debtors never maintained did not discover the error later on, nor that they could not have fixed the error. The debtors received a discharge.

The bankruptcy trustee determined that there were assets available to pay back some of the debt; the Licup/Castro bankruptcy was not a “no asset case.” When the landlord and his attorney did finally find out about the debtors’ bankruptcy, they filed an “adversary proceeding,” to declare that the full default judgment was still due and owing to the landlord. In other words, the landlord maintained that there was no “discharge” of the default judgment.

The bankruptcy court (aka the trial court, or Bankruptcy District Court), the Bankruptcy Appellate Panel, and ultimately, the Ninth Circuit, all sided with the landlord. The debtor has a duty to notify all creditors of the bankruptcy, and failing that, in a bankruptcy that is not a “no asset case,” the non-notified creditor’s entire debt is not discharged. 11 U.S.C. § 521(a)(1); Federal Rule of Bankruptcy Procedure 1007; also citing to In re Fauchier, 71 B.R. 212, 215 (B.A.P. 9th Cir. 1987) [“this rule is grounded in basic principles of due process: In the absence of such notice, a creditor may well be deprived of her right to have her day in court. Id. To ensure that a creditor has the opportunity to vindicate her property rights, the Bankruptcy Code generally makes a debt nondischargeable if the debt is “neither listed nor scheduled’ “].

The Ninth Circuit distinguished cases such as Beezley and Nielsen, which were “no asset” cases. In those cases, where there are no assets to distribute, the bankruptcy court is loathe to reopen a case where there is an omitted debt or a non-notified creditor (assuming the omission is not driven by fraud). The theory is that re-administering the bankruptcy estate will make no difference; there are no assets to distribute. In re Beezley, 994 F.2d 1433 (Ninth Circuit, 1993) (per curiam); In re Nielsen, 383 F.3d 922 (Ninth Circuit, 2004)

In re Castro & Licup thus stands for the proposition that great care must be taken to fill out bankruptcy forms properly. The decision does not include any explanation as to why the debtors did not properly serve the landlord’s attorney, or why they could not have filed amended papers with the correct address before they received their discharge. Apparently, there was no reasonable explanation.




The AG’s Verdict: No Escape from New York

The AG’s Verdict: No Escape from New York

Much is being made of whether or not a bankruptcy will be filed, with regard to the recent large judgment issued by the Supreme Court of New York, the Hon. Arthur Engoron, against the former president and his company.

Much has also been made as to whether this will cause a certain amount of delay in the collection of the judgment.

The Complaint filed by Attorney General Letitia James against Donald Trump, his children and associates, and various corporate organizations associated with him, consisted of various allegations of fraud: Count 1- persistent and repeated fraud; Count 2- falsifying business records; Count 3- conspiracy to falsify business records; Count 4 – illegally issuing false financial statements;  Count 5 – conspiracy to falsify false financial statements; Count 6 – insurance fraud; Count 7 – conspiracy to commit insurance fraud.

In other words, the Attorney General’s complaint, and the verdict rendered thereunder, are explicitly and overwhelmingly devoted to fraudulent actions against the defendants. Fraud is the gravamen of the case.

Furthermore, the Bankruptcy Code, 11 USC Section 523(a)(2)(A), explicitly states that there is no bankruptcy discharge for “money, property, services, or an extension, renewal, or refinancing credit, to the extent obtained by false pretenses, a false representation, or actual fraud . . . “

Because the New York Supreme Court has adjudicated the statements made by the defendants to be fraudulent, they would appear to be no question but that the discharge in bankruptcy would not apply to the attorney general’s judgment made against Trump and his co-defendants. The judgment would remain collectible after the bankruptcy proceedings conclude.

Therefore, a Chapter 7 or Chapter 11 bankruptcy filed by Trump or any of his co-defendants would appear doomed to ultimate failure: there would be no discharge for debts connected to fraud, and all of the debts in this case are connected to fraud.

Of course, the Bankruptcy Court is a federal court, and a separate jurisdiction. Theoretically, there could be a delay in enforcement of the judgment, while the Attorney General files and prosecutes what is known as an “adversary proceeding,” in the bankruptcy court, to seek a holding that the debts in question are based upon fraud, and non-dischargeable under the Bankruptcy Code.

The ultimate result would not appear in question, although no one can ever predict the outcome of litigation. However, given the factual and legal findings of the New York Supreme Court, it seems exceedingly unlikely that a bankruptcy court would find that the Attorney General’s judgment, and this collectible debt, is not connected to fraud.

Additionally, as Mr. Giuliani has found out in his bankruptcy proceedings, the debtor is required to submit truthful information regarding his/her/its holdings, and this has been something that Mr. Trump and his associates have found very difficult to do. Statements regarding assets are under penalty of perjury, and failure to make truthful statements could only further endanger the declarant with the Federal authorities.

Thus, even though there may be an upside for anyone filing bankruptcy related to this judgment, in causing a small amount of delay, the downside would be that any debtor who files bankruptcy with regard to debts that are already adjudicated as fraudulent will risk further prejudicing himself, herself, or itself, if any statements made to the bankruptcy court are anything but 100% true and accurate.




Social Security Can Recover “Overpayment” In Bankruptcy

Social Security Can Recover “Overpayment” In Bankruptcy

Public benefits are frequently a part of bankruptcy proceedings. A debtor may have received worker’s compensation payments, or unemployment benefits. In California, worker’s compensation or unemployment benefits paid before the bankruptcy can be discharged; they are not seen as a non-dischargeable tax. Notrica v. State Comp. Ins. Fund (1999) 70 Cal.App.4th 911, 924-925, 939-940

The recovery of other forms of public benefits, made before the debtor files the bankruptcy petition, is also barred by the bankruptcy discharge; even the US government, as a creditor, cannot seek repayment of the overpayment of such benefits after the debtor’s discharge. In re Madigan, 270 B.R. 749, 752-753 (B.A.P. 9th Cir. 2001); Cooper v. Soc. Sec. Admin. (In re Cooper), BAP WW-23-1098-CBS, 12 & fn. 6, 7, & 8 (B.A.P. 9th Cir. Jan. 16, 2024) [unpublished]

But sometimes, the situation is more complicated. For example, if the debtor is on Social Security Disability Income, without interruption, both before and after the filing of a chapter 7 bankruptcy, and if there is an overpayment, the government may be able to recover that overpayment through reducing benefits after the bankruptcy discharge, under the doctrine of equitable recoupment. All that is required is a “logical relationship” between the pre-petition benefits received by the debtor, and the post-petition payments to the debtor by the government. If there is such a logical relationship, the post-petition benefits may be reduced by the pre-petition overpaymnent, under the doctrine of “equitable recoupment.” This recoupment neither violates the automatic stay, nor the discharge injunction. In re Williamson, 795 Fed.Appx. at 538 (quoting In re TLC Hosps. Inc., 224 F.3d 1008, 1014 (9th Cir. 2000).

The logical relationship test States the following:

“[C]ourts have permitted a variety of obligations to be recouped against each other, requiring only that the obligations be sufficiently interconnected so that it would be unjust to insist that one party fulfill its obligation without requiring the same of the other party.” In re Madigan, 270 B.R. at 755; Cooper v. Soc. Sec. Admin. (In re Cooper), BAP WW-23-1098-CBS, 12 & fn. 6, 7, & 8 (B.A.P. 9th Cir. Jan. 16, 2024) [unpublished]

In Cooper, a former Boeing worker suffered an injury on the job and began receiving workers compensation. He was later determined to be totally disabled, and started to receive workers compensation benefits in addition to a pension. Eventually, he filed his Chapter 7 petition, while he continued to receive uninterrupted SSDI benefits. Through a paperwork glitch, the fact that he was receiving workers compensation was not communicated to the Social Security administration, and eventually SSDI came to the debtor with a $73,000 bill for payments that it would not have made, had it been aware of the workers’ compensation payments.

The court noted that the debtor was not responsible for the paperwork glitch; he had notified the Social Security Office in Washington State of the debtor’s workers compensation case, but that information was never communicated to the primary office in Richmond, California. Nevertheless, the court concluded that the disability both before and after the Chapter 7 petition was the same; that there was a “logical relationship” between the pre-petition overpayments and the post-petition paid benefits; and therefore, under that therefore, the doctrine of “logical recoupment,” the debtor’s post-petition could be reduced, to offset the pre-petition overpayments.

Cooper is an “unpublished” opinion, so it is not authority for the proposition that it cites, but it does cite to numerous published opinions that provide for “equitable recoupment.”



Federal Government Continues To Battle Redlining

Federal Government Continues To Battle Redlining

“Redlining” is a pernicious and notorious lending practice, in which banks and other lenders look at zip codes, street boundaries, and other physical or geographical limitations to decide whom they will lend to. Or perhaps better said, to decide whom the banks will not lend to.

Redlining, along with racially restrictive covenants, were legal in California and other parts of the US until at least the 1950’s. Shelley v. Kraemer, 334 U.S. 1 (1948) [striking down racially restrictive covenants]; Sei Fujii v. State of California(1952) 38 Cal.2d 718 [striking down real estate ownership restrictions of California’s Asian Land Law]. However, apparently redlining has never completely gone out of style. In 2023, the US Justice Department charged City National Bank with redlining in the Los Angeles area, to deprive home loans to Black and Latino borrowers.

In the government’s fall 2023 legal action against CNB, the two sides eventually agreed to a consent order, which was in the form of a complaint and agreement to pay out approximately $31 million.

Among other things, the DOJ complaint stated:

Pgh. 4. From 2017 through at least 2020 (“the relevant time”), City National Bank engaged in a pattern or practice of unlawful redlining. As alleged in detail herein, City National avoided providing home loans and other mortgage services in majority – Black and Hispanic neighborhoods in the Los Angeles Metropolitan Division (“Los Angeles MD” or  “Los Angeles County”).

. . .

Pgh. 20. Although 55% of the census tracts in the Los Angeles MD are majority – Black and Hispanic, throughout the relevant time, the bank maintained only three branches in majority Black and Hispanic areas.

Pgh. 21. Of the 11 branches that City National Bank opened or acquired in the Los Angeles MD in the last 20 years, only one branch, the Crenshaw branch, is located in the majority – Black and Hispanic neighborhood.

. . .

Pgh.42. (In) 2019 and 2020, City National’s peers generated between five and six times the number of mortgage loan applications from residents of majority – Black and Hispanic neighborhoods than did City national.

Pgh.43. The statistically significant disparities between applications City National generated for majority – Black and Hispanic neighborhoods and those that its peers generated show that there were residents in majority – Black and Hispanic areas in the Los Angeles area MD who were seeking and applying for home loans. City National had no legitimate, non-discriminatory reason to draw so few applications from these areas.

[Bold and italics added]

The critical aspect of the complaint and its analysis is that the Fair Housing Act and Equal Credit Opportunity Act rely upon statistical information, such as the percentage of loans made to whites versus those made to non-whites, or the income disparities of those who receive the loans, and the racial breakdown of those who earn particular amounts of income, and who thus “qualify” for loans. This fair lending analysis generally falls under the heading of “disparate treatment” or “disparate impact” in regulatory and legal literary circles. Office of the Comptroller of the Currency, Fair Lending: Revised Comptroller’s Handbook Booklet and Rescissions, January 12, 2023.

As part of the settlement, CNB was obliged to begin loan assistance program in minority areas, known as the Ladder-Up Program. The bank must invest at least $29.5 million in this program, intended to “help marginalized communities get into the homebuying market.” Mortgage Bankers Association, MBA Newslink, September 18, 2023.

For the moment, at least, the Justice Department is moving forward with its “Combating Redlining Initiative,” and the Equal Credit Opportunity Act and Fair Housing Act continue to be vital methods to afford relief to communities that are discriminated against.

The other crucial point is that the reason these tools are still necessary to combat discrimination is that discrimination has not gone away.

Going forward, it will be important to maintain the government’s and citizen’s abilities to resist redlining, and other forms of discrimination.




Rudy Is Not Free Of The Freemans

Rudy Is Not Free Of The Freemans

Not all unsecured (non-collateralized) debts can be discharged in bankruptcy. For example, debts related to alimony, child support, larceny, embezzlement, and fraud, among others, are typically “non-dischargeable.” Title 11 United States Code Section 523(a)(2).

For example, 11 USC Section 523(a)(2)(C)(6) (the Bankruptcy Code) provides that there is no cancellation (“discharge”) of a debt that results from “willful and malicious injury by the debtor to another entity or to the property of another entity.” [emphasis added] The term “entity” includes an individual or natural person. (Wex Legal Dictionary, Cornell University Law School’s Legal Information Institute).

In other words, where a debt to a person is the result of malicious conduct, that debt is not going to be discharged by the bankruptcy.

In the recent trial of Ruby Freeman and her daughter’s allegations of defamation against Dornald Trump attorney Rudy Giuliani, Judge Beryl Howel ruled that “It is further DECLARED that defendant’s conduct was intentional, malicious, wanton, and willful, such that plaintiffs are entitled to punitive damages.”

Final Judgment of December 18, 2023, Case No. Civil Action No. 21-3354 (BAH).

As a result, it appears that Giuliani will be stuck with the judgment of $148 million against him, even though he filed for bankruptcy on December 20, 2023.  Even assuming that the bankruptcy court approves a Giuliani Chapter 11 bankruptcy “Plan of Reorganization,” that plan only affects the timing of payment, and not the existence in full, of the Freemans’ $148MM judgment, because this debt is non-dischargeable. Footnote 1, “Chapter 11 – Bankruptcy Basics,” Administrative Office of the US Courts (2023).

The bankruptcy court has indicated that it will hold its proceedings partially in abeyance, while Giuliani appeals the Freemans’ verdict, but what is firm, at least for now, is that the federal trial court has held that Giuliani acted with malice against the Freemans. The Freemans’ judgment will not disappear in the Bankruptcy Court.



Former Mayor Rudy Giuliani of New York City speaking to supporters at an immigration policy speech hosted by Donald Trump at the Phoenix Convention Center in Phoenix, Arizona. Photo Credit: Gage Skidmore


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