IN TRUSTS WE TRUST: Comments Protect the Loan

IN TRUSTS WE TRUST: Comments Protect the Loan

When representing clients, attorneys rely on the words of the law (a “statute”) and ask the court to implement the plain, obvious meaning of its words.
When it comes to federal statutes, however, it is easy to overlook the “comments” by Congressional committees that draft the statutes, or the agencies which implement them. Such comments can be critical in court.
For example, a recent unanimous Court of Appeal used a statute’s agency staff comments to protect a consumer from a deceitful lender.
In Gilliam v. Levine, Case No. 18-56373 (9th Circuit, 2020), the court recounts that the borrower obtained a loan as trustee for a family trust. The purpose of the loan was to make home repairs. The home itself was the sole asset of the trust. Another family member, who occupied the home, was the trust beneficiary.
The borrower later discovered that the due date for the final loan payment was 1 year earlier than she had been led to believe. The borrower was alarmed, and sued to cancel (rescind) the loan under federal law, Truth in Lending Act (TILA), 15 U.S.C. § 1601, et seq., and the Real Estate Settlement Practices Act (RESPA), 12 U.S.C. § 2601. The borrower also asserted a claim under California’s Fair Lending Law [Rosenthal Act], 1788.1(b) of California’s Rosenthal Act, California Civil Code §§ 1788.1(b).  
The trial judge dismissed the lawsuit, because, according to that judge, the loan went to the trust, not to a person, and hence was not a consumer loan.
The 9th Circuit Court of Appeal reversed the trial court, noting the federal Consumer Financial Protection Bureau’s Official Staff Commentary to Regulation Z (mortgage loans), which states that “[c]redit extended for consumer purposes to certain trusts is considered to be credit extended to a natural person rather than credit extended to an organization.” 12 C.F.R. pt.1026, Supp. 1, § 1026.3 Comment 3(a)-10. (And under California law, the trustee, not the trust, holds title to trust property – – Author)
The “certain trusts,” which fall under the rubric of “natural persons,” included the trust in this case, which was formed for tax or estate planning purposes [which benefit people]. The trust in question was “primarily for personal, family, or household purposes.” 15 U.S.C. § 1602(i). The borrower was the aunt (as Trustee); the niece was the beneficiary; and the trust property was a private home. As a result, the loan was a “consumer credit transaction,” which was subject to the Fair Lending Laws.
And the Comment makes the point: Look to the substance of the transaction. Here it was to benefit a consumer, not a company. 12 C.F.R. pt. 1026, Supp. 1, and § 1026.3 Comment 3(a)-10.i. Because this was a consumer loan, the Trustee had the right to rescind this deceptive loan.
WARNING: THIS POST DOES NOT CONSTITUTE LEGAL ADVICE; PLEASE CONSULT AN ATTORNEY

BANKRUPTCY LAW (Procedure for Adversary Proceeding)

BANKRUPTCY LAW (Procedure for Adversary Proceeding)

Where trustee failed to file the adversary proceeding within the time required by law, he could not undo the error by claiming that he had timely filed an adversary complaint in the wrong case. The facts of the InterWorks bankruptcy had nothing to do with the improper file, and thus there was no “relation back” effect based on the late-filed adversary proceeding in the Interworks case. Additionally, the fact that the trustee dismissed the adversary proceedings that he started in the improper case nullified any application of the relation back doctrine; when he dismissed the improper case, there was nothing for the new pleading to “relate back” to.

Furthermore, there was no equitable tolling, so the adversary action was barred. FRCP 15(c)(1)(B); 11 USC 108(a) & 546 (a).

In re Interworks (Chapter 7) CC-22-1027-STL [Unpublished decision of the Bankruptcy Appellate Panel for the 9th Circuit, filed 8/19/2022]

BANKRUPTCY LAW: Where Action is Filed

BANKRUPTCY LAW: Where Action is Filed

A debtor may file a bankruptcy case where the debtor resides, is domiciled, or has its principal place of business or principal assets. But a debtor can claim exemptions only under the law of the debtor’s domiciliary state. 28 U.S.C. § 1408; In re Larsen, Case No. BAP No. NV-20-1133-FBG (Unpublished) Bankruptcy Appellate Panel, 9th Circuit, filed November 3, 2020.

BANKRUPTCY LAW: Denial of Discharge for Failure to Maintain Books and Records

BANKRUPTCY LAW: Denial of Discharge for Failure to Maintain Books and Records

A debtor who seeks discharge, for himself or for a business, must maintain adequate financial books records to allow the bankruptcy Court to determine the debtor’s true financial condition. For example, pursuant to 11 USC §727(a)(3), the  debtor is not entitled to a chapter 7 discharge if that debtor “has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor’s financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case[.]” The statute has the consequence of making the discharge dependent on the debtor’s true presentation of his or her financial affairs, and complete disclosure is a condition precedent to the granting of the discharge.

 

Caneva v. Sun Cmtys. Operating Ltd. P’ship (In re Caneva), 550 F.3d 755, 761-62 (9th Cir. 2008), cited in In re: Frank Daniel Kresock, Appeal from the United States Bankruptcy Court for the District of Arizona, BAP No. AZ-20-1270-BSL  (Filed December 22, 2021; Unpublished)

BANKRUPTCY LAW: Finding of Fraud in State Court Prevented Discharge of the Associated Debt

BANKRUPTCY LAW: Finding of Fraud in State Court Prevented Discharge of the Associated Debt

Where Debtor had a judgment entered against him by California state court for fraud and elder abuse, this judgment was not discharged (cancelled) by his Chapter 7 bankruptcy discharge. Debtor’s and Debtor’s counsel’s strategic absence from court at the time of the trials did not eliminate the legal effect of the judgment. The debt was non-dischargeable, pursuant to 11 USC §523(a)(2)(A).
In re: Robert Edward Zuckerman,
UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT; BAP No. CC-19-1200-TaFS
Argued and Submitted on February 27, 2020, Pasadena, California [Published Opinion]

BANKRUPTCY LAW: The Curious Case of Alex Jones & InfoWars

BANKRUPTCY LAW: The Curious Case of Alex Jones & InfoWars

Bankruptcy is a legal proceeding that liquidates (eliminates) the unsecured debts of the debtor (debts not backed by collateral). It is important to note, however, that the debtor may have a particular legal status, and that legal status is what determines which bankruptcy is used, or which entity is able to cancel its debt.

For example, if a corporation files for bankruptcy, and is properly formed and documented, then it may file for bankruptcy without the necessity of its owners also filing for bankruptcy. And the corporation’s unsecured debts may be eliminated or re-structured, depending on the particular type of relief applied for.

However, if both the corporation and the individual are equally liable on the debt, such as through a personal guarantee by the owner, then the filing of a bankruptcy petition for the corporation will not insulate the individual. The individual would also need to separately file for bankruptcy protection, if that is the type of relief sought.

The case of Alex Jones is a illustrative. Mr. Jones, through his media outlet, InfoWars, has become infamous for making the false claim that the mass shooting at the Sandy Hook Elementary School was some type of staged or phony incident. Several parents of children killed at Sandy Hook Elementary sued Mr. Jones and InfoWars for defamation, on the theory that by maintaining such a claim, Mr. Jones apparently implied that the grieving parents were lying about the deaths of their children.

For whatever reason, Mr. Jones did not contest the lawsuit, choosing instead to allow the court to take a default against him. Such an action, however, did not prevent the court from continuing its proceedings against Mr. Jones and his company or companies.

The court would eventually enter judgments for large sums of money in favor of the parents, both against Mr. Jones, and against some or all of his companies, including Infowars.

See, for example, cases collected by the First Amendment Watch at NYU: https://firstamendmentwatch.org/deep-dive/alex-jones-infowars-and-the-sandy-hook-defamation-suits/

Mr. Jones responded to being hit with these large judgments by filing a bankruptcy petition for Infowars. Bankruptcy of course means that no further action collection against the debtor’s personal unsecured debts, unless the debts (in Jones’s case, the judgments) relates to fraud, moral turpitude, or is otherwise considered non-dischargeable.

Setting aside the question of whether the judgments for defamation are connected to moral turpitude, where these false statements relate to the deaths of the plaintiff’s children, there appears to be a disconnect between the judgments and the bankruptcy filing by Mr. Jones. He declared bankruptcy for Infowars, but apparently not for himself personally. The judgments were against him personally, as well as against Infowars and other entities. In other words, if there is a judgment against Infowars, bankruptcy might have the effect of making the judgment uncollectible against Infowars, but the judgment against Jones himself would be unaffected.

A bankruptcy petition for Infowars is not the same as a bankruptcy for Alex Jones, because the individual and the company are separate, assuming that the company is created in a proper, recognized corporate form, such as a Corporation, LLC, or other distinct legal entity.

Mr. Jones cannot protect himself personally by filing a bankruptcy for Infowars. He would have to file bankruptcy for himself as well. It may be that he did not want to file bankruptcy for himself, and believed that somehow corporate bankruptcy would protect his personal fortune.This is not the case.

Thus, when an individual and corporation are both fully liable on the debt, corporate bankruptcy will not protect the individual. This occurs, for example, where an individual personally guarantees the debt of a company, or the corporation and the individual are jointly liable.

So apparently here in the case of Infowars, Infowars can be pursued for the Judgment, but in the absence of Infowars, Mr. Jones may also be pursued, unless he files for personal bankruptcy, and the bankruptcy court accepts the filing as appropriate, and not involving moral turpitude, or affected by some other disqualifying factor.

THIS POST DOES NOT CONSTITUTE LEGAL ADVICE, AND READING IT DOES NOT CREATE AN ATTORNEY CLIENT RELATIONSHIP. PLEASE CONSULT DIRECTLY WITH AN ATTORNEY FOR ANY LEGAL ADVICE!!

 

 

This image was originally posted to Flickr by Tyler Merbler at https://flickr.com/photos/37527185@N05/9072625782 (archive). It was reviewed on by FlickreviewR 2 and was confirmed to be licensed under the terms of the cc-by-2.0.

Pin It on Pinterest

Call Now ButtonCall Now