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).

What Could Go Wrong?

What Could Go Wrong?

“STAYING” AWAY FROM CONTEMPT SANCTIONS

 

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.

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.

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