SCOTUS: Violating Bankruptcy Discharge Serves Up Creditor for Contempt

SCOTUS: Violating Bankruptcy Discharge Serves Up Creditor for Contempt

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!!


Disclosure and the Pacific Ocean

Disclosure and the Pacific Ocean

Where the seller’s real estate broker failed to inform the seller that the next door neighbor had disclosed to the broker plans to build on the neighboring property, and therefore obstruct the seller’s Pacific Ocean view, and where after the sale, the buyer moved to rescind the transaction based on the loss of the ocean view, the Court of Appeal ruled that there was a question of fact regarding the broker’s failure to disclose the neighbor’s intent to build. There was a question of fact as to whether the broker breached his fiduciary duty to the seller. Summary judgment for the broker was reversed. Ryan v. Real Estate of the Pacific (2019) 32 Cal.App.5th 637, California Court of Appeal.

Community Property And Bankruptcy

Community Property And Bankruptcy

The Property received by one spouse from a third party during the marriage is presumed to be community property, unless there is a written document that shows that the community property interest of the other spouse was waived, making the item the separate property of the receiving spouse. The “title presumption” of Evidence Code Sec. 662 does not outweigh the “community property” presumption of Family Code Sec. 760, unless there is a written document showing that the community property presumption has been renounced or waived. In re Brace (2020) 9 Cal.5th 903 (2020), Supreme Court of California.

BANKRUPTCY LAW (Discharge Order)

BANKRUPTCY LAW (Discharge Order)

An order entered by the court at the conclusion of a bankruptcy proceeding, releasing the debtor from liability for most prebankruptcy debts. The order bars creditors from attempting to collect any debt covered by the order. 11 U.S.C. § 524(a)(2), cited in Taggart v. Lorenzen, 139 S.Ct. 1795 (Issued June 3, 2019)

Bankruptcy  Definitions: Bankruptcy  Trustee

Bankruptcy Definitions: Bankruptcy Trustee

BANKRUPTCY TRUSTEE: A private individual or corporation appointed in all chapter 7, chapter 12, and chapter 13 cases to represent the interests of the bankruptcy estate and the debtor’s creditors. [Source: Bankruptcy Court, District of New Jersey; printed here as “Fair Use” under the US Code]

BANKRUPTCY LAW: “Actual Fraud”​ that Denies Debtor a Discharge of the Debt Does Not Require False Statements to the Creditor

BANKRUPTCY LAW: “Actual Fraud”​ that Denies Debtor a Discharge of the Debt Does Not Require False Statements to the Creditor

The purpose of the Bankruptcy Code is to relieve borrowers who are in over their heads to terminate (discharge) unsecured debt [Chapter 7 Bankruptcy], or to restructure debt, including, in some cases, mortgages (Chapter 11 and Chapter 13 Bankruptcy).

Chapter 7, for example, offers the debtor with only unsecured debt, such as credit cards, “a fresh start.”

However, to get a discharge, the debtor must truthfully disclose all assets, and must not have debts that appear to have originated with fraud, or which show some type of “moral turpitude.” A debtor will not be able to terminate, or get relief, from debts connected to fraud.

For example, the US Supreme Court, in a 7-1 opinion authored by Associate Justice Sotomayor, held that under 11 USC 523(a)(2)(A), a debtor who transferred assets to a close associate was ineligible for discharge of the debt, because that transfer constituted “actual fraud.” The apparent purpose of the transfer was to make them unavailable to creditors.

In the opinion of the Court. this apparent intent was enough to deny the discharge of the debt. It did not matter that neither the debtor nor the recipient had claimed to the creditor that the transfer was legitimate. No “representation” to the creditor was required to show that moral turpitude was present, thus barring bankruptcy relief to the debtor.

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“The Bankruptcy Code prohibits debtors from discharging debts “obtained by . . . false pretenses, a false representation, or actual fraud.” 11 U. S. C. §523(a)(2)(A). The Fifth Circuit held that a debt is “obtained by . . . actual fraud” only if the debtor’s fraud involves a false represen-tation to a creditor. That ruling deepened an existing split among the Circuits over whether “actual fraud” requires a false representation or whether it encompasses other traditional forms of fraud that can be accomplished without a false representation, such as a fraudulent convey-ance of property made to evade payment to creditors. We granted certiorari to resolve that split and now reverse.

. . .

“This Court has historically construed the terms in [11USC] §523(a)(2)(A) to contain the “elements that the common law has defined them to include.” Field v. Mans, 516 U. S. 59, 69 (1995). “Actual fraud” has two parts: actual and fraud. The word “actual” has a simple meaning in the context of common-law fraud: It denotes any fraud that “involv[es] moral turpitude or intentional wrong.” Neal v. Clark, 95 U. S. 704, 709 (1878). “Actual” fraud stands in contrast to “implied” fraud or fraud “in law,” which describe acts of deception that “may exist without the imputation of bad faith or immorality.” Ibid. Thus, anything that counts as “fraud” and is done with wrongful intent is “actual fraud.

. . . 

“Equally important, the common law also indicates that fraudulent conveyances, although a “fraud,” do not require a misrepresentation from a debtor to a creditor. As a basic point, fraudulent conveyances are not an inducement based fraud. Fraudulent conveyances typically involve “a transfer to a close relative, a secret transfer, a transfer of title without transfer of possession, or grossly inadequate consideration.” BFP, 511 U. S., at 540–541 (citing Twyne’s Case, 3 Co. Rep. 80b, 76 Eng. Rep. 809 (K. B. 1601)); O.Bump, Fraudulent Conveyances: A Treatise Upon Conveyances Made by Debtors To Defraud Creditors 31–60 (3d ed. 1882)). In such cases, the fraudulent conduct is not in dishonestly inducing a creditor to extend a debt. It is in the acts of concealment and hindrance. In the fraudulent-conveyance context, therefore, the opportunities for a false representation from the debtor to the creditor are limited. The debtor may have the opportunity to put forward a false representation if the creditor inquires into the whereabouts of the debtor’s assets, but that could hardly be considered a defining feature of this kind of fraud. Relatedly, under the Statute of 13 Elizabeth and the laws that followed, both the debtor and the recipient of the conveyed assets were liable for fraud even though the recipient of a fraudulent conveyance of course made no representation, true or false, to the debtor’s creditor. The famous Twyne’s Case, which this Court relied upon in BFP, illustrates this point. See Twyne’s Case, 76 Eng.Rep., at 823 (convicting Twyne of fraud under the Statute of 13 Elizabeth, even though he was the recipient of a debtor’s conveyance). That principle underlies the now-common understanding that a “conveyance which hinders, delays or defrauds creditors shall be void as against [the recipient] unless . . . th[at] party . . . received it in good faith and for consideration.” Glenn, Law of Fraudulent Conveyances §233, at 312. That principle also underscores the point that a false representation has never been a required element of “actual fraud,” and we decline to adopt it as one today.“




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