Suppose you find yourself in this situation. You’ve been involved in litigation for months against a party you believe defrauded you out of thousands of dollars. After protracted legal proceedings, your judge finally sets a trial date. You are finally going to have your day in court against this person.
But shortly before you go to trial, you receive a tip that your defendant has filed for bankruptcy. And not only that, but you also find out that this person filed for bankruptcy a couple of years ago, in the middle of your case, and did not tell you or your judge. And not only that, but you also find out that the person received a discharge (cancellation of all pre-bankruptcy unsecured debt), and that the trustee determined that the person had no assets. The bankruptcy case is CLOSED.
No problem. You think that, because you have a trial date, all you have to do is go before your state court judge and plead your case for fraud. Surely, your state court judge can grant you relief, and force this fraudulent, thieving defendant to pay you your damages.
What could possibly go wrong? Unfortunately, a lot.
Because the case has closed, there is no more “automatic stay” of 11 USC Sec. 362. There is, however, a “discharge injunction” 11 USC Sec. 524(a), which means that creditors are barred from attempting to collect discharged debts.
Furthermore, the Bankruptcy Court has exclusive jurisdiction over the question of whether these discharged debts are related to fraud. 11 USC Sec. 524 (a)(2), (4) & (6); Grogan v. Garner, 498 U.S. 279, 284 n. 10, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); Aldrich v. Imbrogno (In re Aldrich), 34 B.R. 776, 779 (9th Cir. B.A.P.1983), cited in Ackerman v. Eber (In re Eber) 687 F.3d 1123 (9th Cir. 2012).
Based on these authorities, you will likely seek to file a dischargeability complaint under 11 USC Sec. 524 (a)(2), (4) or (6), in the Bankruptcy Court; or an action to revoke the discharge under 11 USC Sec. 727 (d), for example, if there are multiple false statements or multiple examples of deception in the defendant/debtor’s bankruptcy papers, such that it appears that the discharge itself was obtained through fraud.
Additionally, the US Supreme Court has ruled that if the Plaintiff or Plaintiff’s attorney is well-versed in bankruptcy law, the failure to observe the discharge injunction (in this case, failure to seek a ruling on fraud in the bankruptcy court) is considered much more knowing and culpable. Taggart v. Lorenzen, 139 S. Ct. 1795 (2019) [Slip Opinion, p. 7]. In other words, to paraphrase a line from Michael Mann’s film, The Insider, “The more you know, the worse (the contempt sanction) gets.”
The point is that you want your client to have the maximum ability to seek a ruling on the defendant’s alleged fraud in State Court. This, however, must await a ruling from the Bankruptcy Court in this regard, and any attempt to circumvent the Bankruptcy Court could easily backfire and be very costly.
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!!
AUTOMATIC STAY: The Bank froze the debtor’s accounts after the filing of the bankruptcy, and notified the trustee and the debtor. The bank did not use the funds as a set off for any debt. This is sometimes referred to as an administrative hold upon the debtor’s account. The court held that this action, all by itself, did not constitute a violation of the automatic stay; the bank requested information from the trustee, after making the trustee aware of the freeze on the account. The trustee did not respond. The actions of the bank constituted no violation of law. Mwangi v. Wells Fargo Bank 764 F.3d 1168 (CA9, 2014)
As of January 2021, California’s Homestead Exemption increases from a minimum of $300,000, to a maximum of $600,000. This means that many more homeowners in liquidation, Chapter 7 bankruptcy proceedings can keep their homes. The California Civil Code will be amended as follows: Sec. 704.730. (a) The amount of the homestead exemption is the greater of the following: (1) The countywide median sale price for a single-family home in the calendar year prior to the calendar year in which the judgment debtor claims the exemption, not to exceed six hundred thousand dollars ($600,000). (2) Three hundred thousand dollars ($300,000). (b) The amounts specified in this section shall adjust annually for inflation, beginning on January 1, 2022, based on the change in the annual California Consumer Price Index for All Urban Consumers for the prior fiscal year, published by the Department of Industrial Relations. The statute does not say whether this will apply in bankruptcy as the “automatic homestead,” or whether the debtor must file a Declaration of Homestead. Based thereon, the debtor should strongly consider filing the Declaration with the County Recorder.
The primary purpose of the bankruptcy stay [11 USC Sec. 362] is to protect the debtor. (In re Fuel Oil Supply and Terminaling, Inc., 30 BR 360, 362 (Bankr.N.D.Tex.1983), cited in In re Globe Investment & Loan Co., Inc., 867 F.2d 556 (1989)). By stopping all collection actions against the debtor, the bankruptcy stay acts 1) as an injunction to preserve the estate, and 2) to prevent the creditors from trying to go around the bankruptcy process to collect. Once the debtor receive the discharge (11 USC Sec. 727), creditors are no longer able to collect the discharged debts. A creditor who, despite the discharge, seeks to collect a pre-bankruptcy debt, runs the risk of a contempt citation and punishment by the federal court. And so it was held recently by the US Supreme Court which held that a business dispute with the debtor, that had begun prior to the debtor’s filing for bankruptcy, was discharged by the bankruptcy, and no further collection activity would be allowed. Writing for a unanimous US Supreme Court, Associate Justice Breyer opined that the business creditors, who had initiated the lawsuit against the debtor (Mr. Taggart) had no reasonable basis to believe that the bankruptcy stay, and the subsequent discharge would not act to bar the continued litigation against the debtor. The debt was considered wiped away, and the creditors actions, seen objectively, were not only impermissible, but gave rise to contempt sanctions: “Under the fair ground of doubt standard, civil contempt therefore may be appropriate when the creditor violates a discharge order based on an objectively unreasonable understanding of the discharge order or the statutes that govern its scope.” Taggart v. Lorenzen, ___ U.S. ___, 139 S.Ct. 1795, 1801, 204 L.Ed.2d 129 (2019). The facts showed that the creditors had a working knowledge of the effects of bankruptcy law, and objectively should have realized that the pre-bankruptcy debt was no longer collectible. Therefore, the Supreme Court remanded the matter back to the 9th Circuit, to impose appropriate sanctions: “We conclude that the Court of Appeals erred in applying a subjective standard for civil contempt. Based on the traditional principles that govern civil contempt, the proper standard is an objective one. A court may hold a creditor in civil contempt for violating a discharge order where there is not a “fair ground of doubt” as to whether the creditor’s conduct might be lawful under the discharge order.” The Takeaway: Creditors Who Know that a Debtor has Filed for Bankruptcy Should Take No Action Against the Discharged Debtor, without First Having a Very Detailed, Careful Conversation with an Attorney, Lest Those Creditors End Up Held in Contempt!!
BANKRUPTCY LAW (Importance of Automatic Stay); When a debtor files for bankruptcy, 11 USC Section 362(a)(1) automatically stays any other judicial proceeding involving the debtor. The automatic stay “plays a vital role in bankruptcy. The automatic stay aids the debtor in getting a financial fresh start. The automatic stay is “one of the fundamental debtor protections provided by the bankruptcy laws.” The stay promotes stability of the bankruptcy estate for both the debtor and creditors. In re Schwartz, 954 F.2d 569, 571 (9th Cir.1992), cited in FAR OUT PRODUCTIONS, INC. v. OSKAR, 247 F.3d 986, 994-995 (2001)