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




A recent decision by no less than the California Supreme Court points once again to the difficulty of trying to sue National Banks under California law.

In Sheen v. Wells Fargo Bank (2002) 12 Cal.5th 905, 290 Cal. Rptr. 3d 834, Plaintiff Borrower refinanced his home, using the equity to acquire 2 loans from Wells Fargo. A few years later, borrower experienced financial problems, and sought to refinance. He asked the bank to renegotiate the loan.

Borrower sent in an application, to which Wells Fargo responded, without specifically addressing the modification question. Plaintiff understood the response to mean that Wells Fargo would not foreclose. Eventually, Wells Fargo sold the loan to a secondary lender, who foreclosed.

The California Supreme Court framed the basic question as follows:

“In this case, we address the issue dividing the lower courts: Does a lender owe the borrower a tort duty sounding in general negligence principles to (in plaintiff’s words) “process, review and respond carefully and completely to [a borrower’s] loan  modification application,” such that upon a breach of this duty the lender may be liable for the borrower’s economic losses — i.e., pecuniary losses unaccompanied by property damage or personal injury? (See, e.g., Southern California Gas Leak Cases (2019) 7 Cal.5th 391, 398, 247 Cal.Rptr.3d 632, 441 P.3d 881 (Gas Leak Cases).) We conclude that there is no such duty, and thus Wells Fargo’s demurrer to plaintiff’s negligence claim was properly sustained.” 12 Cal.5th at 915.

The California Supreme Court, by Chief Justice Cantil-Sakauye, pointed out that there was no contract to renegotiate, and thus no breach of contract. Wells Fargo had no duty, either under contract  or under common law, to grant the loan modification. Because there was no duty, failure to modify the loan meant that there was no negligence.

Furthermore, the Court held that plaintiff could only recover “economic damages,” i.e., no pain and suffering. Because there was no breach of a common law duty, Plaintiff’s damages would appear limited to the value of the home at the time of foreclosure.

The California Supreme Court did suggest that other causes of action, such as promissory estoppel or negligent misrepresentation, might proceed past demurrer, given sufficient allegations. But those causes of action were not part of Sheen’s complaint. 12 Cal.5th at 916.

Plaintiffs might consider looking to federal law, such as the Equal Credit Opportunity Act (“ECOA”), or the Truth in Lending laws, for greater protection with a national bank. Of course, the facts alleged must be adequate for such a complaint, which could also include state law claims. See, for example, 15 USC Sec. 1691; Taylor v. Accredited Home Lenders, Inc., 580 F.Supp.2d 1062, (D.C.S.D.CA, 2008) [each monthly mortgage payment constituted a continuing violation of Plaintiff’s rights under ECOA]; Schlegel v. Wells Fargo Bank, N.A., 720 F.3d 1204 (2013) [ECOA applies to mortgage loans]; Office of the Comptroller of the Currency, Examiner’s Handbook: Fair Lending, (2010); Schwemm & Taren, “Discretionary Pricing, Mortgage Discrimination, and the Fair Housing Act,” 45 Harvard Civil Rights-Civil Liberties Law Review 375, 417 (2010); Peterson, “Predatory Structured Finance,” 28 Cardozo Law Review 2185; Totten, “The Enforcers and the Great Recession,” 36 Cardozo Law Review 1611 (2015).



A recent case shows the potential for interplay between the law of mortgages and bankruptcy.

In that case, Piedmont Capital Mgmt. v. McElfish, No. B316372 (Cal. Ct. App. Aug. 24, 2023), the borrower purchased a home in 2006, acquiring a first deed of trust from one lender, and a home equity line of credit (HELOC) from a second. For convenience, in mortgage parlance, the first loan constitutes the first (or senior) mortgage, while the HELOC constitutes a second mortgage. The HELOC had a 30-year maturity (2036). It also gave the lender the option to accelerate the loan and ask for all past due amounts, which was renewed as each successive month’s payment became due.

The buyer began to experience financial difficulty a few years later, and in or around 2011 and 2012, he stopped paying on the first mortgage and the HELOC, respectively. The holder of the first mortgage foreclosed in 2012, apparently by trustee’s sale. The HELOC was unsatisfied by the sale.

Had the homeowner chosen to file Chapter 7 bankruptcy after the first lender foreclosed, the debt owed to the HELOC lender likely could have been discharged. Again, this is because the collateral was gone. The HELOC was a classic unsecured debt. The homeowner could still likely do so, even after the Court of Appeal’s intervention, because bankruptcy is federal law, and is a different statutory scheme which answers to a different sovereign, i.e., the Federal government.

Instead, the homeowner embarked on four years of litigation, which included the Court of Appeal. The trial court held that 1) the four-year statute of limitations for written contracts applied, 2) that the homeowner had made his last payment in or about 2012, and that therefore, 3) the 2019 lawsuit was time-barred.

Enter the Court of Appeal, which reviewed the HELOC agreement. That Court decided that each monthly payment that came due constituted not only an opportunity to pay the regular monthly amount, but each successive monthly failure to pay gave the HELOC lender the option to accelerate the loan (the “acceleration clause”) and ask for all past due amounts. Because the contract called for monthly payments until 2036, and each successive month gave the HELOC lender the option to invoke the acceleration clause, the lender’s time to seek all past due payment was not even close to running out. There was no bar of the statute of limitations, for amounts that could be demanded up until 2036.

Consumer bankruptcy (“Chapter 7”) has as its goal the liquidation of unsecured debt. The moment that the borrower’s home was foreclosed and taken by the holder of the first mortgage, the security (collateral) for the HELOC was gone. The HELOC  became an unsecured debt. A Chapter 7 could have discharged (cancelled) the debt.

As of the time of the Court of Appeal’s decision, the homeowner still owed the HELOC payments. Effective bankruptcy counsel could, however, show him another option that could protect his remaining estate.



Under Recent Law, Even Debts Based on Alleged Malicious Conduct Can be Discharged.

Under Recent Law, Even Debts Based on Alleged Malicious Conduct Can be Discharged.

In 2019, Congress passed the Small Business Reorganization Act of 2019 (“SBRA”), whose Subchapter V specifically allowed small businesses to reorganize, discharge certain debts, and pay back a portion of other debts over a 3- or 5-year period. This latter aspect is similar to the standard Chapter 11 employed for large organizations, such as General Motors, the Los Angeles Dodgers baseball club, or the recent reorganizations of cryptocurrency firms Voyager, Celsius, and FTX.
In the Subchapter V bankruptcy, the debtor proposes the plan of reorganization, and the court has the option to cram it down the creditors’ throats (assuming that the Court believes that the plan is objectively fair). This is called a “non-consensual plan of reorganization” in Subchapter V.
In an interesting twist, however, where the court approves the small business’s nonconsensual plan of reorganization, the SBRA allows small enterprises to discharge their debts, even where the creditor alleges debts that stem from fraud, breach of fiduciary duty, tax fraud, malicious conduct, or any other exception to discharge stated under 11 USC Sec. 523(a).
In other words, the exceptions to discharge (debts that cannot be cancelled) stated in 11 USC Sec. 523 (a) do not apply to small business, where the court approves the nonconsensual plan of reorganization.
This may lead to harsh results. For example, in a recent case, the creditor who claimed she was injured by the company’s malicious conduct found her claim to barred, or “discharged.” As a result of the explicit language of the SBRA, her claim was effectively cancelled. The court explained that, if Congress had intended a different result in such a case, it would have said so in the law.

In re Off-Spec Solutions, LLC (Kristina Jayn Lafferty v. Off-Spec Solutions LLC, et al)
BAP ID-23-1020-GCB; Adv. No. 22-06020-NGH (Ninth Circuit Court of Appeals, Bankruptcy Appellate Panel; Appeal from the Bankruptcy Court for the District of Idaho; Filed July 6, 2023)


Fraudulent Transfer: Bankruptcy Court Combines California and Federal Statutes, and Allows Trustee to Undo a Fraudulent Sale

Fraudulent Transfer: Bankruptcy Court Combines California and Federal Statutes, and Allows Trustee to Undo a Fraudulent Sale

In 2010, a California property developer, Momentum, signed a contract to have an oil well drilled on its real estate. About 2 years into the drilling, in 2012, Momentum, transferred the property to a related but separate entity, Pyramid, for 55¢, without notifying the drilling company. The drilling company apparently did not strike oil, because Momentum sued for breach of contract in 2014, even though it no longer owned the land (an obvious legal contradiction).

Momentum lost at trial (possibly for lack of standing, i.e., it no longer owned the land, and hence, the contract), and a judgment for the drilling company was entered in May 2018 (less than seven years after the 55¢ transfer).

Momentum promptly (June 2018) filed for Chapter 7 (liquidation) bankruptcy, saying that it had no assets.

The bankruptcy put the 55¢ sale in the spotlight. A “fraudulent transfer” is defined as a conveyance intentionally done to deprive creditors of the asset, or a transfer for less than reasonable value, which is made when the debtor is insolvent, or which transfer renders the debtor insolvent. 11 US Code Sec. 548 (a)(1)(A)-(B); Uniform Voidable Transactions Act, § 4(a), at 19.

The bankruptcy Trustee (Diane Weil) discovered the relationship between Momentum and Pyramid, and sued to undo the land deal, as a transfer intended to frustrate creditors. This is an interesting argument, because Momentum sued the drilling company, and not the other way around. The Trustee could have reasoned that the common ownership and management of Pyramid and Momentum was suspicious, and the 2012 transfer could render a countersuit against Momentum meaningless.  

The bankruptcy court allowed the Trustee’s suit. California’s Universal Voidable Transactions Act (Civil Code Sec. 3439.09) has a 7-year statute of repose (the maximum time to sue for a wrongful act, even where the other party has not been harmed), and Bankruptcy Code Sec. 546 extends for 2 years the Trustee’s ability to sue on any fraud claim that exists at the time the bankruptcy is filed.  

In this case,

1) Momentum in 2012 sold the property to its sister entity, Pyramid, for 55 cents without notifying the oil driller;

2) Momentum became liable for the fraudulent transfer in May 2018, when it lost the Superior Court case against the driller;

3) Momentum filed for Chapter 7 bankruptcy in June 2018;

4) Because California’s 7-year statute of repose for the fraudulent transfer had not expired when Momentum filed for bankruptcy in 2018, the bankruptcy Trustee had an additional 2 years (a maximum of 7 + 2 years) to begin fraud proceedings in the bankruptcy court, with intent to undo the sale and take control of the property, under 11 USC Sec. 546.

The Trustee began her fraudulent transfer proceedings against Momentum and Pyramid in 2019, pursuant to California law. The bankruptcy court held that the Trustee’s action was timely, and the Bankruptcy Appellate Panel affirmed.


WEIL v. PYRAMID CENTER, INC. (IN RE MOMENTUM DEV. LLC), 649 B.R. 33 (9th Circuit Bankruptcy Appellate Panel; Filed March 2, 2023)  



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