The AG’s Verdict: No Escape from New York

The AG’s Verdict: No Escape from New York

Much is being made of whether or not a bankruptcy will be filed, with regard to the recent large judgment issued by the Supreme Court of New York, the Hon. Arthur Engoron, against the former president and his company.

Much has also been made as to whether this will cause a certain amount of delay in the collection of the judgment.

The Complaint filed by Attorney General Letitia James against Donald Trump, his children and associates, and various corporate organizations associated with him, consisted of various allegations of fraud: Count 1- persistent and repeated fraud; Count 2- falsifying business records; Count 3- conspiracy to falsify business records; Count 4 – illegally issuing false financial statements;  Count 5 – conspiracy to falsify false financial statements; Count 6 – insurance fraud; Count 7 – conspiracy to commit insurance fraud.

In other words, the Attorney General’s complaint, and the verdict rendered thereunder, are explicitly and overwhelmingly devoted to fraudulent actions against the defendants. Fraud is the gravamen of the case.

Furthermore, the Bankruptcy Code, 11 USC Section 523(a)(2)(A), explicitly states that there is no bankruptcy discharge for “money, property, services, or an extension, renewal, or refinancing credit, to the extent obtained by false pretenses, a false representation, or actual fraud . . . “

Because the New York Supreme Court has adjudicated the statements made by the defendants to be fraudulent, they would appear to be no question but that the discharge in bankruptcy would not apply to the attorney general’s judgment made against Trump and his co-defendants. The judgment would remain collectible after the bankruptcy proceedings conclude.

Therefore, a Chapter 7 or Chapter 11 bankruptcy filed by Trump or any of his co-defendants would appear doomed to ultimate failure: there would be no discharge for debts connected to fraud, and all of the debts in this case are connected to fraud.

Of course, the Bankruptcy Court is a federal court, and a separate jurisdiction. Theoretically, there could be a delay in enforcement of the judgment, while the Attorney General files and prosecutes what is known as an “adversary proceeding,” in the bankruptcy court, to seek a holding that the debts in question are based upon fraud, and non-dischargeable under the Bankruptcy Code.

The ultimate result would not appear in question, although no one can ever predict the outcome of litigation. However, given the factual and legal findings of the New York Supreme Court, it seems exceedingly unlikely that a bankruptcy court would find that the Attorney General’s judgment, and this collectible debt, is not connected to fraud.

Additionally, as Mr. Giuliani has found out in his bankruptcy proceedings, the debtor is required to submit truthful information regarding his/her/its holdings, and this has been something that Mr. Trump and his associates have found very difficult to do. Statements regarding assets are under penalty of perjury, and failure to make truthful statements could only further endanger the declarant with the Federal authorities.

Thus, even though there may be an upside for anyone filing bankruptcy related to this judgment, in causing a small amount of delay, the downside would be that any debtor who files bankruptcy with regard to debts that are already adjudicated as fraudulent will risk further prejudicing himself, herself, or itself, if any statements made to the bankruptcy court are anything but 100% true and accurate.

 

THIS ANALYSIS IS A COMMENTARY AND NOT LEGAL ADVICE

 

Social Security Can Recover “Overpayment” In Bankruptcy

Social Security Can Recover “Overpayment” In Bankruptcy

Public benefits are frequently a part of bankruptcy proceedings. A debtor may have received worker’s compensation payments, or unemployment benefits. In California, worker’s compensation or unemployment benefits paid before the bankruptcy can be discharged; they are not seen as a non-dischargeable tax. Notrica v. State Comp. Ins. Fund (1999) 70 Cal.App.4th 911, 924-925, 939-940

The recovery of other forms of public benefits, made before the debtor files the bankruptcy petition, is also barred by the bankruptcy discharge; even the US government, as a creditor, cannot seek repayment of the overpayment of such benefits after the debtor’s discharge. In re Madigan, 270 B.R. 749, 752-753 (B.A.P. 9th Cir. 2001); Cooper v. Soc. Sec. Admin. (In re Cooper), BAP WW-23-1098-CBS, 12 & fn. 6, 7, & 8 (B.A.P. 9th Cir. Jan. 16, 2024) [unpublished]

But sometimes, the situation is more complicated. For example, if the debtor is on Social Security Disability Income, without interruption, both before and after the filing of a chapter 7 bankruptcy, and if there is an overpayment, the government may be able to recover that overpayment through reducing benefits after the bankruptcy discharge, under the doctrine of equitable recoupment. All that is required is a “logical relationship” between the pre-petition benefits received by the debtor, and the post-petition payments to the debtor by the government. If there is such a logical relationship, the post-petition benefits may be reduced by the pre-petition overpaymnent, under the doctrine of “equitable recoupment.” This recoupment neither violates the automatic stay, nor the discharge injunction. In re Williamson, 795 Fed.Appx. at 538 (quoting In re TLC Hosps. Inc., 224 F.3d 1008, 1014 (9th Cir. 2000).

The logical relationship test States the following:

“[C]ourts have permitted a variety of obligations to be recouped against each other, requiring only that the obligations be sufficiently interconnected so that it would be unjust to insist that one party fulfill its obligation without requiring the same of the other party.” In re Madigan, 270 B.R. at 755; Cooper v. Soc. Sec. Admin. (In re Cooper), BAP WW-23-1098-CBS, 12 & fn. 6, 7, & 8 (B.A.P. 9th Cir. Jan. 16, 2024) [unpublished]

In Cooper, a former Boeing worker suffered an injury on the job and began receiving workers compensation. He was later determined to be totally disabled, and started to receive workers compensation benefits in addition to a pension. Eventually, he filed his Chapter 7 petition, while he continued to receive uninterrupted SSDI benefits. Through a paperwork glitch, the fact that he was receiving workers compensation was not communicated to the Social Security administration, and eventually SSDI came to the debtor with a $73,000 bill for payments that it would not have made, had it been aware of the workers’ compensation payments.

The court noted that the debtor was not responsible for the paperwork glitch; he had notified the Social Security Office in Washington State of the debtor’s workers compensation case, but that information was never communicated to the primary office in Richmond, California. Nevertheless, the court concluded that the disability both before and after the Chapter 7 petition was the same; that there was a “logical relationship” between the pre-petition overpayments and the post-petition paid benefits; and therefore, under that therefore, the doctrine of “logical recoupment,” the debtor’s post-petition could be reduced, to offset the pre-petition overpayments.

Cooper is an “unpublished” opinion, so it is not authority for the proposition that it cites, but it does cite to numerous published opinions that provide for “equitable recoupment.”

 

THIS ARTICLE DOES NOT CONSTITUTE LEGAL ADVICE; PLEASE CONSULT WITH AN ATTORNEY

THE LIMITS OF CALIFORNIA LAW IN THE MORTGAGE REFINANCE CONTEXT

THE LIMITS OF CALIFORNIA LAW IN THE MORTGAGE REFINANCE CONTEXT

A recent decision by no less than the California Supreme Court points once again to the difficulty of trying to sue National Banks under California law.

In Sheen v. Wells Fargo Bank (2002) 12 Cal.5th 905, 290 Cal. Rptr. 3d 834, Plaintiff Borrower refinanced his home, using the equity to acquire 2 loans from Wells Fargo. A few years later, borrower experienced financial problems, and sought to refinance. He asked the bank to renegotiate the loan.

Borrower sent in an application, to which Wells Fargo responded, without specifically addressing the modification question. Plaintiff understood the response to mean that Wells Fargo would not foreclose. Eventually, Wells Fargo sold the loan to a secondary lender, who foreclosed.

The California Supreme Court framed the basic question as follows:

“In this case, we address the issue dividing the lower courts: Does a lender owe the borrower a tort duty sounding in general negligence principles to (in plaintiff’s words) “process, review and respond carefully and completely to [a borrower’s] loan  modification application,” such that upon a breach of this duty the lender may be liable for the borrower’s economic losses — i.e., pecuniary losses unaccompanied by property damage or personal injury? (See, e.g., Southern California Gas Leak Cases (2019) 7 Cal.5th 391, 398, 247 Cal.Rptr.3d 632, 441 P.3d 881 (Gas Leak Cases).) We conclude that there is no such duty, and thus Wells Fargo’s demurrer to plaintiff’s negligence claim was properly sustained.” 12 Cal.5th at 915.

The California Supreme Court, by Chief Justice Cantil-Sakauye, pointed out that there was no contract to renegotiate, and thus no breach of contract. Wells Fargo had no duty, either under contract  or under common law, to grant the loan modification. Because there was no duty, failure to modify the loan meant that there was no negligence.

Furthermore, the Court held that plaintiff could only recover “economic damages,” i.e., no pain and suffering. Because there was no breach of a common law duty, Plaintiff’s damages would appear limited to the value of the home at the time of foreclosure.

The California Supreme Court did suggest that other causes of action, such as promissory estoppel or negligent misrepresentation, might proceed past demurrer, given sufficient allegations. But those causes of action were not part of Sheen’s complaint. 12 Cal.5th at 916.

Plaintiffs might consider looking to federal law, such as the Equal Credit Opportunity Act (“ECOA”), or the Truth in Lending laws, for greater protection with a national bank. Of course, the facts alleged must be adequate for such a complaint, which could also include state law claims. See, for example, 15 USC Sec. 1691; Taylor v. Accredited Home Lenders, Inc., 580 F.Supp.2d 1062, (D.C.S.D.CA, 2008) [each monthly mortgage payment constituted a continuing violation of Plaintiff’s rights under ECOA]; Schlegel v. Wells Fargo Bank, N.A., 720 F.3d 1204 (2013) [ECOA applies to mortgage loans]; Office of the Comptroller of the Currency, Examiner’s Handbook: Fair Lending, (2010); Schwemm & Taren, “Discretionary Pricing, Mortgage Discrimination, and the Fair Housing Act,” 45 Harvard Civil Rights-Civil Liberties Law Review 375, 417 (2010); Peterson, “Predatory Structured Finance,” 28 Cardozo Law Review 2185; Totten, “The Enforcers and the Great Recession,” 36 Cardozo Law Review 1611 (2015).

MORTGAGE LAW/FAIR CREDIT REPORTING ACT (Applying Arizona Anti-Deficiency Law)

MORTGAGE LAW/FAIR CREDIT REPORTING ACT (Applying Arizona Anti-Deficiency Law)

Where homeowner lost property to non-judicial foreclosure, Arizona’s “anti-deficiency law” meant that the junior mortgage, which was unsecured following the foreclosure, had been “abolished,” pursuant to previous Arizona Supreme Court ruling. Therefore, the lender’s reporting of the junior mortgage as a “charge off,” rather than an abolished loan, was inaccurate and misleading. The former homeowner/borrower had a colorable claim against the junior lender, pursuant to the Fair Credit Reporting Act, 15 U.S.C. §§1681, 1681a–1681x. The trial court’s erroneous decision to dismiss borrower’s lawsuit was reversed.
Gross v. Citimortgage, Inc., Citibank, NA, Equifax Information Services LLC, Experian Information Solutions, Inc., & Trans Union LLC (9th Circuit, 2022), 33 F.4th 1246
United States Court of Appeals, Ninth Circuit.
Argued and Submitted 11/17/2021 at San Francisco, California.
Opinion Issued 5/16/2022.

STUDENT LOANS: The Shifting Grounds for Relief

STUDENT LOANS: The Shifting Grounds for Relief

In Lujan v. Defenders of Wildlife (1992) 504 US 555, 575-578, a very conservative jurist, Associate Justice Antonin Scalia, wrote the following:

   “To permit Congress to convert the undifferentiated public interest in executive officers’ compliance with the law into an “individual right” vindicable in the courts is to permit Congress to transfer from the President to the courts the Chief Executive’s most important constitutional duty, to “take Care that the Laws be faithfully executed,” Art. II, § 3. It would enable the courts, with the permission of Congress, “to assume a position of authority over the governmental acts of another and co-equal department,” Massachusetts v. Mellon, 262 U. S., at 489, and to become” ‘virtually continuing monitors of the wisdom and soundness of Executive action.’ “

This was another way of saying that there are cases in which the court should not get involved, such as those involving the specific statutory actions of a co-equal branch of government (i.e., “non-justiciable” cases).

Consequently, even when Congress passes a law that has a public benefit, it does not automatically grant citizens a “private right of action” to block that law. Any citizen who disliked any law could ask the courts to prevent it from going into effect, which would lead to chaos.

The student loan forgiveness program announced by President Biden is on hold. And it may be an example of what Justice Scalia warned of in Lujan. The Supreme Court will be hearing arguments regarding the loan forgiveness program in a few weeks. (“Supreme Court Agrees to Decide on Biden’s Stalled Student Loan Forgiveness Plan, “Los Angeles Times, December 1, 2022). The arguments against the program, based on the 8th Circuit Court of Appeal decision, and another decision in Texas, raise the specter of placing the Supreme Court in the position of deciding on the appropriateness of day to day, or administrative actions by both Congress and the President.

In other words, the current student loan case invites the courts to get involved in non-justiciable cases. Albert, Lee A., “Justiciability and Theories of Judicial Review: A Remote Relationship,” 50 So. Cal. Law Review 1139, 1165-1166 (1977)

Pres. Biden and Education Sec’y Cardona base the program on the 2003 HEROES Act, which authorizes the Secretary to “waive or modify any statutory or regulatory provision applicable to the student financial assistance programs” if the Secretary “deems” such waivers or modifications “necessary to ensure” at least one of several enumerated purposes, including that borrowers are “not placed in a worse position financially” because of a national emergency. 20 U.S.C. § 1098bb(a)(1), (2)(A).”

The “national emergency” cited by Pres. Biden and Sec’y Cardona was the COVID pandemic, which began in 2020, and is far from over. “Tripledemic Update: RSV, Covid And Flu,” Forbes, December 13, 2022.

In the 8th circuit case, the state of Missouri claimed that it would be harmed by receiving less repayment revenue, should be loan forgiveness program go into effect. State of Nebraska, et al. v. Joseph R. Biden, Jr., et al., Case No. Case No. 22-3179.

This reasoning is problematic because: 1) No loans have been forgiven, so no money has been lost; 2) research shows that when borrowers are released from paycheck to paycheck jobs as a result of debt relief, those borrowers find better paying jobs, which would cause them to pay more in taxes to the state (Harvard Business School/Working Knowledge, “Forgiving Student Loan Debt Leads to Better Jobs, Stronger Consumers,” May 22, 2019); 3) the government has several different laws upon which they can rely for student loan relief [e.g., Higher Education Act (“HEA”), beginning at 20 US Code Sec. 1082; the Federal Family Education Loan Program, beginning at 20 USC 1071; the Federal Claims Collection Act, found beginning at 31 USC Sec. 3701, the Direct Loan Program of Title IV of the HEA, and federal regulations, such as 31 CFR 30.70 and 31 CFR 902.1 (a); see Open Letter to Sen. Elizabeth Warren, Legal Services Center of Harvard Law School, September 14, 2020]. For example, the HEA states that the Secretary of Education has the power “enforce, pay, compromise, waive, or release any right, title, claim, lien, or demand, however acquired, including any equity or any right of redemption.” 20 U.S.C. § 1082(a)(6) p. 3 (emphasis added);

And 4) striking down the program is exactly the type of mischief that Justice Scalia warned against in Lujan, as stated above.

Finally, if the quibble is with the HEROES Act as a basis for the program, shouldn’t the Supreme Court defer to the Executive, based on this undisputed alternative authority? Or, simply require the President to resubmit the program, citing to his alternative statutory authority rather than the HEROES Act, instead of gutting the program?

We may have an answer in June 2023.

 

THIS POST DOES NOT CONSTITUTE LEGAL ADVICE; PLEASE CONSULT AN ATTORNEY

 

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