Failure to notify the FTB that the IRS “adjusted” your taxes, makes the tax debt non-dischargeable

Berkovich v. State of California Franchise Tax Board (In re Berkovich), — B.R. —, 2020 WL 5910033 (9th Cir. BAP  Oct, 2020)

Issue:   Is the required “report” which must be filed with the FTB after the IRS adjusts a taxpayer’s return a “return” such that failing to file it renders the tax debt non-dischargeable?

Holding:   Yes.

Judge Maureen Tighe, Central District of California

Standard of review.  “We review de novo the bankruptcy court’s decision to grant or deny summary judgment.”

Faris, Lafferty, Spraker

Opinion by Robert Faris

The debtor here filed his personal tax returns with the FTB but failed to notify the FTB of adjustments made by the IRS.  The debtor argued “that the reports required under RTC section 18622(a) are not ‘returns,’ so his failure to file them did not render his tax debts nondischargeable.  He is wrong.”  The bankruptcy court ruled that the taxes for those years were not discharged.

The BAP affirmed.  “The only question on appeal is whether the report required by RTC section 18622(a) that Mr. Berkovich failed to file is a ‘a return, or equivalent report or notice’ within the meaning of § 523(a)(1)(B).”  The BAP said it was based on the language of the RTC code section.

Note:  This was a chapter 13.  The debt was treated in the plan as unsecured i.e., dischargeable.  The plan was confirmed, completed five years later and after that the FTB filed an adversary asking the court to rule that the tax was not discharged.

Payment of an antecedent debt cannot be a fraudulent transfer per Civil Code section 3432

Universal Home Improvement v. Robertson, 51 Cal. App. 5th 116 (July 2020)

Issue:   Can a transfer of property with actual intent to delay, hinder or defraud creditors be avoided when the transfer is in satisfaction of a bona fide debt?

Holding:   No, Civil Code section 3432 specifically permits a person to “pay one creditor in preference to another.”

In the middle of certain litigation, Robertson transferred her interests in certain property to her sister.  Plaintiff filed this complaint later seeking to avoid the transfer as a fraudulent transfer arguing that the transfer was with actual intent to delay, hinder or defraud creditors.  Robertson’s defense was that even if done with actual fraud, the transfer to her sister was in payment of a bona fide debt which is permitted under Civil Code section 3432, which provides as follows: “A debtor may pay one creditor in preference to another, or may give to one creditor security for the payment of his demand in preference to another.”  The court heard significant evidence and concluded that the debt was actually owed to the sister and that the value of the property transferred was less than the debt.  Plaintiff argued that the debt was barred by the statute of limitations.  The court ruled that the statute had not run because of previous transfers and that even if it did, the statute of limitations is a defense that can be waived.  Plaintiff also argued that it established 7 of the 12 “badges of fraud” in section 3439.04(b) and that should be given precedence over the argument that the transfer was in payment of an antecedent debt.  The court ruled that “[T]he existence of one or more badges of fraud is not a mathematical formula and does not compel a finding one way or another.”  “Put simply, this court believes and therefore finds that the transfer that is the subject of this litigation was a good faith satisfaction of a legitimate debt.”

The court of appeals affirmed.  Recognizing that such transfers should be given strict scrutiny, it said, “Judge Swope’s conclusions are spot on. And plaintiffs’ arguments to the contrary are easily rejected.”

The lower court also awarded costs to defendant based on the cost of proving up facts at trial that were denied in a previous Requests for Admissions.  The court of appeals reversed that noting that the requests were made “within 30 days of the filing of the complaint”  It stated:

Frankly, we are troubled that a defendant can at the very inception of litigation, at a time when, as best we can tell, no discovery had taken place, and certainly no deposition, serve RFAs essentially seeking responses admitting that plaintiff had no case, and then, if plaintiff ultimately proves unsuccessful, recover costs of proof attorney fees, as here. This, it could be said, is tantamount to a form of strict liability: make a claim; deny an early-served RFA that the claim has no merit; vigorously pursue the claim; lose the claim; and pay. That cannot be the law. And we will not affirm the award here, for several reasons.

Is a transfer of an overencumbered asset with actual intent to defraud creditors an avoidable transfer?

Working away on my 9th Circuit Case Summaries (before the Lakers game starts).  Stadtmueller v. Sarkisian (In re Medina), — B.R. —, 2020 WL 4742491 (9th Cir. BAP  Aug, 2020) caught my eye.  The transferor relied on and the BAP discussed a California case Mehrtash v. Mehrtash, 93 Cal. App. 4th 75, 80 (2001).  There the debtor transferred a home which was over-encumbered.  The BAP noted that CCC section 3439.01(m) defines asset as “Asset’ means property of a debtor, but the term does not include the following: (1) Property to the extent it is encumbered by a valid lien.”  The California court ruled in Mehrtash (according to the BAP) that the transfer could not be unwound even if made with actual fraud because the home is not an “asset” under the UVTA.  That does not mean that unwinding an actual fraud transfer requires a showing of damages.

September filings flat again

September bankruptcy filings in the Central District of California were slightly less than last month, but 26% less than last year.   Third lowest total this year.

2020 2019 2018 2017 2016 2015 2014
Jan 2,828 2,745 2,741 2,839 2,872 3,364 4,704
Feb 2,781 2,754 2,708 2,795 3,299 3,829 4,574
March 2,736 3,481 3,363 3,782 3,923 4,496 5,430
April 1,669 3,631 3,277 3,209 3,584 4,486 5,364
May 2,080 3,347 3,226 3,384 3,484 3,971 5,500
June 2,257 2,967 2,981 3,252 3,545 3,966 4,386
July 2,415 3,270 3,057 2,953 3,239 3,731 4,701
Aug 2,355 3,274 3,337 3,387 3,543 3,544 4,540
Sept 2,169 2,934 2,772 3,071 3,168 3,493 4,317
Oct 3,355 3,259 3,170 3,235 3,751 4,554
Nov 2,636 2,821 3,004 3,025 3,531 3,642
Dec 2,723 2,419 2,416 2,902 2,718 3,733
Total 21,290 37,117 35,961 37,262 39,819 44,880 55,445

Filings by chapter for the full year 2020:

Non-Comm’l Commercial Chapter 7 Chapter 13 Chapter 11
19,377 1,917 18,017 3,029 244
91% 9% 85% 14% 1%

City of Chicago, Illinois v. Fulton, oral argument at the Supreme Court is next week

Oral argument at the Supreme Court in the case of City of Chicago, Illinois v. Fulton is set for next Tuesday, October 13, 2020.  The audio of the oral argument will be on the SCOTUS website on Friday Oct 16.  You can access it here.

This case deals with the automatic stay.  The City of Chicago seems to fund itself largely on parking tickets.  When the tickets aren’t paid, the vehicle is seized until the ticket is paid (which amount by then has gone up many times the original amount).  When the owner files a chapter 13, does the City have to return the vehicle?  The 7th Circuit said yes.  Of course if you ask me.

You can get all the briefs here.

SFVB Program this Friday Oct 9, 2020

Email from Steve Fox,

Dear All:

This Friday’s meeting is a perennial meeting.  We look at selected tentative opinions of the judges who hear cases in Woodland Hills (and adding a bit of the Northern District), discuss the tentative opinions, dig in deeply into many of them to try to understand the thought process and the legal process the judges used.  We have a wide variety of opinions, some consumer, some business, some litigation, some trustee issues, so there is something for everyone.   There is a lot of meat in this program.   Also, as a lot of different topics are covered, it is more likely than not that an issue you are working on now in one of your cases will be discussed by one of the panelists.   Crucially, this is not a program where we review as many tentative opinions as possible.  We cover a limited number of tentative opinions per judge so that you can listen to a somewhat in depth analysis.

The panelists are well experienced.  Nicholas Gebelt heads up the panel.  Robert Aronson and Sloan Youkstetter fill out the panel.  They have been researching and finding a lot of good tentative opinions. Read more…

News you might need! The new California homestead exemption is limited a little by the bankruptcy code.

I posted a comment on Facebook a few days ago about people using the new California Homestead Exemption of $300,000 (minimum) up to $600,000 (maximum) depending on the county you live in.  The new exemption takes effect January 1, 2021.  As I said in the post, don’t try to file your bankruptcy yourself.  Get a bankruptcy attorney to make sure there are no unknown “exceptions” as there tends to be to everything.  Generally speaking you can’t change your mind after you have filed chapter 7.

Anyway, my friend Richard Marshack commented on my Facebook post:

Do not forget about 522(o) and 522(p).  11 U.S.C. 522(o), provides that a debtor may not claim as exempt his or her homestead, or any portion of the homestead, that was acquired with non-exempt assets and actual fraudulent intent to defraud a creditor.  The argument usually comes down to a simple question: What was the intent of the debtor at the time of the purchase or pay down of the homestead.  Did they have an intention to defraud their creditors? 522(p) provides that the debtor may not exempt any amount of interest that was acquired by the debtor during the 1215 period preceding the filing of the petition that exceeds $170,350.  If it is a transfer within the same state then this cap does not apply. If there is a transfer from another state to another state then the cap applies. Read more…

My interview with Judge Maureen Tighe

Some good articles in the Central District Consumer Bankruptcy Attorneys Association (cdcbaa) latest newsletter.  You can get it here.

Invitation to join the James T. King Inn of the Court

The James T. King Bankruptcy Inn of Court

sponsored by the American Inns of Court

Our President Lucy Mavyan


Program Moderator, Honorable Sheri Bluebond

invite you to join the 2020-2021 Year

of the James T. King Bankruptcy Inn of Court

The Bankruptcy Inn of Court board has planned an exciting new year!  The board has compiled interesting and informative topics for our members to present.  Our six meetings this year will be through Zoom beginning at 6:00 p.m. for meet and greet time.

Our first meeting will be on Tuesday, October 13, 2020 at 6:00 p.m with a presentation beginning at 6:30 p.m.  Each of our meetings offers 1.5 hours of MCLE credit.

For your convenience, our membership form is here.  Inn of the Court 2020-2021 Inn Invitation.doc (2)   Should you have any questions or concerns, you may email us at Read more…

Brace & Beyond: Joint Tenancy & Transmutation, by Cathy Moran

Brace & Beyond: Joint Tenancy & Transmutation, by Cathy Moran

For Californians, the CA Supreme Court’s decision in Brace this summer upended our understanding of joint tenancy and community property.

For decades, we “knew” that a property couldn’t be both joint tenancy and community property. Siberell.  And for those of us in the 9th Circuit, we “knew” that when married folks acquired property with title taken as joint tenants, the property was characterized as the separate property of each spouse when either spouse filed bankruptcy. Summers.

Then, Brace tells us that a married couple taking title to real property as joint tenants is not sufficient, without something more, to transmute the property into the separate property of each spouse despite the clear expression of joint tenancy in the deed. Take a closer look at Brace from my colleague Wayne Silver.

So, where does that leave the hundreds of thousands of married couples who, to the extent they thought about it at close of escrow, believed they each held a separate property joint tenancy interest in the property.

The consequences of community property

While it’s easy to think about community property as an issue only in the dissolution of a marriage, the characterization of property drives issues of tax, probate, and, the focus here, debtor-creditor rights in and out of bankruptcy. Read more…