BANKRUPTCY LAW: Under Delaware Law, Company’s Discharge did not Extend to Alter Ego

BANKRUPTCY LAW: Under Delaware Law, Company’s Discharge did not Extend to Alter Ego

Bankruptcy Appellate Panel held that the discharge of a company in a Chapter 11, Subchapter V case did not release the person who owned the LLC from the same debt. Essentially, the owner (the only member of the LLC) was a co-debtor, and co-debtors do not receive the benefit of the bankruptcy debtor’s discharge. 11 USC Sec. 524 (e).
As a result, state-court litigation against the LLC owner by a creditor could continue for that same debt, because under the applicable state law (Delaware), “alter ego” liability was derivative. The owner was liable derivatively; the allegation in the complaint was not that the owner and the company were the same entity. The state court litigation did not violate the discharge injunction of 11 USC Sec. 524 (a).

In re RS Air (BAP No. NC-23-1008-FSG), filed June 2, 2023.

WARNING: THIS POST DOES NOT CONSTITUTE LEGAL ADVICE!! PLEASE CONSULT AN ATTORNEY!! 

 

BANKRUPTCY/REAL ESTATE LAW (Homestead Exemption)

BANKRUPTCY/REAL ESTATE LAW (Homestead Exemption)

Where debtors claimed “100% Fair Market Value” of their home as protected by the Homestead Exemption, and there was no timely objection by the US Trustee, then the claim of exemption protected the full amount of money generated by the sale of the home, after payment to the mortgage lender, even though the “FMV” number claimed was over the allowable limit.

In re Masingale (9th Circuit Bankruptcy Appellate Panel) 644 B.R. 530, Opinion of Farris J.

Filed November 2, 2022.

BANKRUPTCY/REAL ESTATE LAW (Homestead Exemption; “Snapshot” Rule)

BANKRUPTCY/REAL ESTATE LAW (Homestead Exemption; “Snapshot” Rule)

The Ninth Circuit Court of Appeal applied the  “snapshot rule,” and applied the Homestead Exemption that  applied to the debtor’s residence on the date the bankruptcy petition was filed ($600,000), and not the amount of the exemption in existence on the date the creditor’s $477,000 judgment was entered (which was 4 years before the bankruptcy petition was filed). Because the total of debtor’s 1) homestead exemption ($600K) + 2) the balance of 2 outstanding mortgages ($551K) + 3) the creditor’s judgment ($477K), was greater that the value of the debtor’s home ($1.1 million), the entire judgment was uncollectible (the debtor avoided the judgment).

The Court of Appeal cited to 11 USC Sec. 522(f) [debtor’s avoidance of liens]; Owen v. Owen, 500 U.S. 305, 308, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991) and White v. Stump, 266 U.S. 310, 313, 45 S.Ct. 103, 69 L.Ed. 301 (1924) (describing the “snapshot rule”).

 

Barclay v. Boskoski, 52 F.4th 1172, United States Court of Appeals, Ninth Circuit.

Argued and Submitted September 23, 2022 Pasadena, California.

Court’s Opinion Filed November 14, 2022.

A Pledge Of Funds

A Pledge Of Funds

BANKRUPTCY LAW: Where student debtor receives a pledge of funds from a lender (creditor) or otherwise never actually receives funds from the lender, then that debt is an exception to the general rule of non-dischargeability. In other words, if the student debtor never received actual funds from the creditor, the debt may be discharged (cancelled), without a trial on the burden that the debt causes to the student.

In this case, a “tuition credit” did not constitute “funds received” by the debtor, and therefore, the debt was dischargeable (cancelled in the bankruptcy).

In re Christoff, 527 B.R. 624, 632 (9th Cir. BAP 2015; issued by the Ninth Circuit Bankruptcy Appellate Panel in San Francisco), cited approvingly in In re Yolande E. Essangui, (Debtor), 573 B.R. 614 (Bankruptcy Court for the Maryland District, 2017)

The Right To Dismiss

The Right To Dismiss

BANKRUPTCY LAW: According to 11 USC Sec. 1307 (b), “[o]n request of the debtor at any time, if the case has not been converted under section 706, 1112, or 1208 of this title, the court shall dismiss a case under this chapter. Any waiver of the right to dismiss under this subsection is unenforceable.”

A Chapter 13 bankruptcy debtor has the absolute right to dismiss her bankruptcy petition; there is no test for “bad faith,” or any other consideration, as long as the case has not been previously converted, for example, from Chapter 7 or Chapter 11.

Tico Construction Co. v. Van Meter (In re Powell), Bankruptcy Appellate Panel, Ninth Circuit; Appeal from the Bankruptcy Court for the District of Nevada; issued Oct. 21, 2022. Ordered Published.

BANKRUPTCY LAW: Trustee May Recover Transferred Assets

BANKRUPTCY LAW: Trustee May Recover Transferred Assets

BANKRUPTCY LAW: Trustee May Recover Transferred Assets 
The filing of a voluntary bankruptcy petition by an individual, couple, or company (“the debtor” or “debtors”) triggers several important legal events. Among the most important are 1) the assignment of an assistant United States Trustee, who represents the Bankruptcy Court and who administers the bankruptcy; 2) the imposition of the automatic stay, which bars any litigation against the debtor and debtor’s estate; and 3) the U.S. Trustee’s control over the bankruptcy estate. This control ultimately allows the Trustee the ability to distribute the estate’s assets, if any, to unsecured creditors. (11 USC 541 (creation of estate); 11 USC §362 (automatic stay); 11 USC §§724, 726 (trustee distributes assets)).
 These legal effect also apply if the creditors of a debtor file an involuntary bankruptcy petition against a debtor.
 In protecting the potential assets of the bankruptcy estate, the Trustee has the power to claw back or seek the return of money or property transferred by the debtor. This power centers on, in particular, “preferential transfers,” which are transfers of assets by the debtor within the 90 days of the bankruptcy petition (11 USC 547), and “fraudulent transfers,” pursuant to 11 USC §548.
 A fraudulent transfer in bankruptcy is defined as an assignment, transfer or other conveyance of funds or property from the debtor to a third party, done for the purpose of preventing creditors from collecting on that asset.
 Title 11 US Code §548 (a) says the following:
 (1) The trustee may avoid any transfer (including any transfer to or for the benefit of an insider under an employment contract) of an interest of the debtor in property, or any obligation (including any obligation to or for the benefit of an insider under an employment contract) incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily—
 (A) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted; or
 (B) (i) received less than a reasonably equivalent value in exchange for such transfer or obligation . . .
 The statement that the Trustee may avoid any transfer means that the Trustee may demand that the recipient of the asset return it to the bankruptcy estate (i.e., send the property or the equivalent value back to the Trustee).
 The Trustee’s power to avoid the transfer, or “claw back” the asset is extensive. It extends beyond the 90 days of preferential transfers, and even beyond the 2 year period specified in 548(a)(1). For example, 11 USC §548 (e) states:
 (1) In addition to any transfer that the trustee may otherwise avoid, the trustee may avoid any transfer of an interest of the debtor in property that was made on or within 10 years before the date of the filing of the petition, if—
           (A) such transfer was made to a self-settled trust or similar device;
           (B) such transfer was by the debtor;
           (C) the debtor is a beneficiary of such trust or similar device; and
           (D) the debtor made such transfer with actual intent to hinder, delay, or defraud any       entity to which the debtor was or became, on or after the date that such transfer was made, indebted.
 The law of fraudulent transfer thus emphasizes the importance of protecting the integrity of the estate, 1) so that the Trustee can sort out if there are assets that can be distributed, and 2) so that a fair distribution of assets may take place, if assets are available.
 The bankruptcy of famous Los Angeles attorney Tom Girardi is an example of the power of the Trustee to claw back assets, under circumstances that triggered or could have triggered fraudulent transfer litigation.
 Mr. Girardi’s creditors filed an involuntary bankruptcy against him in December 2020, based on the fear that 1) he was fraudulently pocketing and spending client funds; and 2) the pending fraud litigation against Girardi would dissipate all of the assets in a manner that would favor some creditors over others, without the relatively “orderly” process of distribution of a bankruptcy proceeding. (The Recorder, December 18, 2020)
 The Trustee’s task became to locate and seek the recovery of money or assets transferred by Girardi or his associates, that would qualify as preferential transfers, as well as potentially fraudulent transfers, so that these assets could be brought back into the estate, and so that these assets or the cash value they represent can be distributed to the unsecured creditors who have filed claims.
 Two recent examples show how this process can work. In Mr. Girardi’s bankruptcy, the US Trustee sought and won an order that Mr. Girardi’s ex-wife, reality TV star Erika Jayne, turn over a pair of earrings worth $750,000, which the Trustee claims were purchased with stolen client funds. (Yahoo Finance, 1/31/2022; People, 6/30/2022; LA Times, 8/4/2022). If the earrings are indeed returned to the estate, they can be auctioned off to raise money that will later be part of the funds that will eventually paid out to unsecured creditors.
 Ms. Jayne apparently filed an appeal to defend her right to retain the earrings, so the fate of the jewelry has yet to be definitively determined. (People, 7/6/2022) However, there is no doubt that the Trustee’s legal authority for the order comes from 11 USC §548.
 Another example consists of gifts given by Mr. Girardi to former Appellate Justice Tricia A. Bigelow, with whom Girardi had an affair lasting several years. (LA Times, 8/19/2022). Published reports state that she returned “numerous gifts” from Mr. Girardi to the US Trustee. (NY Post, 12/23/2020; USTimes Post, 8/20/2022; LA Times Twitter, 8/19/2022). Published reports also say that the retired justice “does not want anything even potentially connected with monies Girardi took from his client victims,” according to Justice Bigelow’s attorney Alan Jackson. (LA Times, 8/19/2022). The LA Times story says that the gifts were returned in August 2022, despite the fact that the bankruptcy was filed in December 2020, with wide public notice.  
 Consequently, as the Girardi bankruptcy continues, the auctions of assets to raise funds for subsequent distribution to unsecured creditors will be part of the future proceedings.
 Bankruptcy counsel and the client must be aware that transactions entered into before the bankruptcy is filed will be scrutinized closely by the Trustee. This may be less important in the garden variety personal Chapter 7 where there are typically no assets to distribute. However, if the bankruptcy estate consists of millions of dollars, or large swaths of real or personal property, there is a danger that transactions that are considered out of the ordinary, or which look otherwise unusual, could be challenged and reversed. The Trustee possesses a great deal of discretion to claw back these assets.
THIS POST DOES NOT CONSTITUTE LEGAL ADVICE. PLEASE CONSULT AN ATTORNEY!!

 

 

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