All posts in Chapter 7

Short explanation of bankruptcy alternatives

This is an email I sent to a prospective client a few months ago.  A succinct explanation of bankruptcy alternatives.

Dear Joe,

Your choices for bankruptcy are chapter 7 and chapter 11.  Neither you nor any of the corps qualify for chapter 13.  

Chapter 7 is a liquidation.  A trustee is appointed.  He/she sells everything you own that has equity and is not exempt.  You have no choice in it.  The trustee owns everything you own instantaneously and sells it – if of course he can find a buyer.  If he can’t find a buyer or there is no equity or it is exempt, he will “abandon” it back to you.  

In a personal case, i.e., you as an individual, “everything you own” includes all community property.  The trustee will sell it irrespective of your wife’s interests.  The trustee cannot sell your wife’s separate property.  

In chapter 7, all your debts are discharged – wiped out – with a few exceptions like child and spousal support, most taxes, fraud.  Your wife’s debts will not be wiped out in your bankruptcy but that does not mean she is liable for your debts.  She is only liable for debts she promised the creditor she would pay.  For example, I saw that she signed for some the [bank debt].  Her obligation to pay that would not go away in your bankruptcy (unless you stay married and then it sort of goes away).  Likewise any deal you make with your wife in family court to pay the debts she owes is not binding on the creditor.  

So in chapter 7, the trustee would sell your home – and give you the $600,000 exemption.  He would sell your interest in [your corp].     

corporate chapter 7 works the same way with one big exception – the corporation/LLC does not get a discharge.  When the case is over, the corp still owes whatever it owed when the case started.  Corps don’t file chapter 7 very often.  There may be other reasons to file – other than getting a discharge. 

If [your corp] files chapter 7, the trustee would control the litigation against [the bank].  The trustee might actually litigate it, i.e., hire a lawyer on a contingency – even your lawyer if he will do it on a contingency.  It is more likely though that the trustee will try to settle it with [the bank].  The trustee might think it’s too much hassle and just close the chapter 7 case which would mean it is your asset again to proceed with.  That would only happen if [the bank] refused to pay even $10-15-20,000 to settle.   

Chapter 11 is a reorganization.  There is no trustee.  You personally function as the trustee.  You keep all of your property, you continue to operate your business with bankruptcy court oversight.  

You file a plan of reorganization.  The creditors get to vote on the plan, i.e., accept or reject it.  The court can approve the plan, even if almost everyone rejects it.  That is called the cram down powers of the court.  

The most fundamental part of the plan is that you have to pay your creditors at least as much as they would get in a liquidation.  So you would have to value [your corp] at some amount, and the litigation against [xyz] and the equity in your home after the homestead exemption, and then pay that amount to your creditors over five years – up to 100% of the total debts.    

A corporate chapter 11 works basically the same way.  You propose a plan to pay creditors what they would get in a liquidation.  If [your corp] files chapter 11, you would remain in control of the litigation with [the bank] but the plan would probably say you will pay the proceeds of the litigation to [your corp’s] creditors, up to payment of all creditors in full.  

Let me know what you think.  Jon   

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.

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…

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…

Important new exemption for debtor’s “deposit account.”

These new exemptions became effective January 1, 2020.

CCP 704.220. (a) Money in the judgment debtor’s deposit account in an amount equal to or less than the minimum basic standard of adequate care for a family of four for Region 1, established by Section 11452 of the Welfare and Institutions Code and as annually adjusted by the State Department of Social Services pursuant to Section 11453 of the Welfare and Institutions Code, is exempt without making a claim.

Well that’s a hand full.  Translation, money in the debtor’s bank account is automatically exempt up to a “basic standard amount.”  I should say automatically as long as the debtor does not use the 703 exemptions.  It appears that right now that the basic amount is $1,724.  It also appears that that amount is fixed whether the debtor is single or has a family of four.  I am looking into that now.

But the big one is, is 704.225 which says:

§ 704.225.  Money in a judgment debtor’s deposit account that is not otherwise exempt under this chapter is exempt to the extent necessary for the support of the judgment debtor and the spouse and dependents of the judgment debtor.

I haven’t found anything helpful in figuring out what is “necessary for the support,” in the new legislation at least  If the debtor has $25,000 in a savings account, it is exempt if that amount is necessary for the debtor’s support.  I guess if the debtor has a job and can support himself from his current income, no amount would be necessary. Read more…

You know Legal and Equitable Rights, but have you heard of a Reversionary Right?

What happens when two spouses file two separate bankruptcy cases?  I will use Spouse 1 and Spouse 2 both to distinguish the spouses but also to establish the order of filing — first and second.  Spouse 1 files first followed by Spouse 2 later.

Do the community assets of Spouse 1 get included in Spouse 2’s bankruptcy case?  Not so says the Court in this published decision but Spouse 2 does have a “Reversionary Right” to those assets.

Here’s what happened in this published Chapter 13 Moreno case from Riverside.

Read more…

Good points from the cdcbaa program “Meet the chapter 7 Trustees.”

These programs are absolutely fascinating!  I can’t comprehend that any attorney doing any appreciable amount of chapter 7 cases is not a member of this group and attending these meetings.  The program consisted of two hours of debtor’s counsel asking questions and each of the trustees responding (although the most common answer by far was “it depends.”

Points that jumped out at me:

1.  The trustees unanimously agreed that doing the 341(a) meeting by Zoom is great and will continue, certainly for now, and for some of them, hopefully forever.  One benefit is that attendance by the debtors has increased since there are fewer excuses for not attending.  More creditors are attending because it’s so easy to attend, trustees like creditors being involved (most of the time). Read more…

Do Cares Act payments count towards the means test? No.

A post from the consumer bankruptcy listserve.

I seem to recall something somewhere that Cares Act payments would not be considered in the bankruptcy means test, does anyone have a reference?

Response from my friend Mark Marcus:

See 11 USC 101(10A)(B)(ii)(V)

So I thought I would check it out.  It’s actually pretty clear.

Section 101(10A)(B)(ii)(V) says that Current Monthly Income excludes:

(V)Payments made under Federal law relating to the national emergency declared by the President under the National Emergencies Act (50 U.S.C. 1601 et seq.) with respect to the coronavirus disease 2019 (COVID–19).

Tentative from Judge Kaufman re exemption for Covid-19 stimulus checks

June 25, 2020  2:00 PM
1:11-11603  Chapter 7
#3.00 Judgment Creditors Motion Assignment Order and Restraining Order

Docket 735
At the last hearing, the Court requested that Tammy Phillips and Tammy Phillips, a Prof. Law Corp. (“Creditors”), file a supplemental brief regarding whether Kevan Harry Gilman (“Debtor”) waived his right to claim an exemption in any “Covid-19 economic stimulus checks/payments from the federal government to Debtor,”including the stimulus check that Debtor may qualify for under the Coronavirus Aid, Relief, and Economic Security Act (the “Stimulus Check”) .

On May 28, 2020, Creditors filed a supplemental brief (the “Brief”) [doc. 746].  In the Brief, Creditors assert that Debtor waived his right to an exemption by failing to claim one within three days of the hearing on their motion pursuant to California Code of Civil Procedure (“CCP”) § 708.550.  Creditors also argue that Debtor has waived his right to claim an exemption in any future Covid-19 related federal stimulus payments.  Finally, if Debtor is provided with a Stimulus Check, Creditors expressed opposition to the Court’s proposed procedure for Creditors to receive the Stimulus Check. [FN1].  Debtor did not file a response to the Brief. Read more…