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.




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




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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