Human Error: Bank Submits Wrong Escrow Demand in Debtor’s Post-Discharge Sale and Seeks Unjust Enrichment Claim Against Debtor. Was This Postpetition Unjust Enrichment Claim Discharged? Eh, not really said the BAP.

Debtor owned a home encumbered by 3 liens and filed Chapter 7 bankruptcy and gets a discharge.  We know liens survive (“ride through”) a bankruptcy.  Eight years passed and debtor markets and sells her home.  The Bank makes a demand into escrow to get paid on its claim but due to human clerical error, the Bank submits a demand for  $3,000 when it should have been $230,000Whoops!!  Escrow relied on the demand, pays the Bank $3,000 and closes.  Debtor got $230,000 from sale proceeds that should have gone to the Bank but for that clerical error.  Windfall!  Under California law, once escrow closes — then the Bank’s rights and interests under the deed of trusts were instantly and automatically extinguished.  So, the Bank’s only Hail Marry pass is to argue the catchall – unjust enrichment!

Bank files a motion to reopen debtor’s case after 8 years to file a complaint to allege a claim for “unjust enrichment” in order to argue that it would be simply wrong (“inequitable” as lawyers say) for debtor to get to keep the all that sale proceeds.  Question is — was that “unjust enrichment” cause of action also discharged in debtor’s bankruptcy 8 years ago?  [cue suspense music]

No, said the Ninth Circuit BAP in this interesting unpublished opinion, which I am surprised is not a published one. The BAP said the “unjust enrichment” cause of action was not ripe nor did it exist at the time of debtor’s bankruptcy 8 years ago.  Instead, the BAP said the unjust enrichment cause of action arose at the time of the escrow snafu and was not fairly contemplated either prepetition.   The panel makes an interesting argument that it is unforeseeable and wrong to assume that the discharge eliminates all postpetition causes of action.  The panel says in a footnote addressing the dissent — “did the bankruptcy discharge insulate debtor from a claim of fraud if she stole the sale proceeds, falsified a reconveyance or engaged in other types of postpetition fraudulent activity? Did the discharge shield debtor if she laid waste to the property and substantially decreased its value to the Bank’s detriment?”  No one would suggest that such tortious activity was fairly contemplated before the discharge.”   To put the icing on the cake — the panel says “while the bankruptcy system assumes a fresh start (the discharge as a shield), the discharge should not be used as a sword that clears a pathway to nefarious conduct.”

See case link above.

Sevan Gorginian
Law Office of Sevan Gorginian


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