All posts in Chapter 7

Can the Court Avoid a Judgment Lien under 522(f) When the Debtor Owns no Real Property?

I have seen this issue come up on numerous listserves.  Judge Mund explains why the answer is no.

In re Kenney,  1:10-bk-11635-GM (Bkrtcy, C. D. Cal. Nov, 2018)

Issue:   Is a 522(f) appropriate to avoid a prepetition judgment lien when the debtor owned no real property on the petition date?

Holding:   No.  There is no lien to avoid.

Judge Mund

The debtors filed chapter 7 and got their discharge in 2010.  At the time a creditor had a judgment against them and had recorded an abstract of judgment.  They had no real property at the time.  In 2018, they are trying to buy a house.  They reopened their case and filed a Motion to Avoid Judgment Lien under 522(f).

Judge Mund denied the motion on the basis that there is/was no lien to avoid.

Because there is no valid lien to be avoided, Debtor is not entitled to the protections of 522(f).  The Court recognizes that Debtor is trying to ensure that no encumbrance results from a pre-petition recorded abstract of judgment; such a result would have the absurd consequence of creating an unenforceable lien on property acquired post-petition, but only in the specific counties which the creditor recorded the abstract of judgment.

Suing Debtor for Specific Performance – Discharge Violation? Maybe not…

A discharge under 727 discharges a debtor from all prepetition debts (liability on a claim) and any liability on a claim (right to payment).   But what if the debtor is sued for something other than a “right to payment”.   Is that a discharge violation?  Hmmm….let’s take a look at an example.

Read more…

Subtle Difference Between “Deemed Exempt” versus “Claimed Exempt” — Just Because Schedule C Lists the $100 in Bank Account Does Not Mean Debtor Can Immediately Use It

I tried to make the title as concise as possible — Ockham’s Razor failed.

Client comes to see you and they have $5,000 in their checking account.  You list it on Schedule B then exempt it on Schedule C and file the case.  The 341(a) is in 30 days.  Client goes to the bank the next day and withdraws all of the funds to pay rent and spend it on gambling.  You don’t think it is a problem because the funds have been fully exempt.

But is it?

In Section 70a of the former Bankruptcy Act, there was an automatic exclusion of exempt property such that by simply listing the asset on Schedule C — then that asset was automatically and immediately exempt.  That is not how it works under the current Code — it is not automatic.  I was reading the Mwangi case from the Ninth Circuit that clarifies a subtle distinction between an asset that has been “claimed exempt” versus one that is actually “deemed exempt.“   In the hypo above, it is a “no harm, no foul” situation but it’s still worth thinking about.

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Receivership and Bankruptcy

Imagine this, prepetition, Debtor owns and operates 50-unit Apartment upon which Wells Fargo holds a note and deed of trust.  Debtor defaults on the note and WF commences foreclosure.  The state court appoints you Receiver to take possession of and operate the Apartments.  The Apartment is mismanaged and you begin improving the Apartments and collect $100,000 in new rent and the bank, WF, gives you additional funds also in your capacity as Receiver.   As you are running the Apartments and holding onto a substantial amount of funds — debtor files Chapter 11 bankruptcy and orders you, as the Receiver, to turnover the funds to him since it is property of the estate now. So someone is going to have to pull out their checking account to pay for the mess that was created.

Will the court grant Debtor’s Motion for Turnover such that the funds you hold as Receiver have to be turned over to the scumbag Debtor who will likely dissipate the funds?  

Read more…

New Median Income Amounts Effective After November 1, 2018

Census Bureau Median Family Income By Family Size

(Cases Filed On or After November 1, 2018) Read more…

Student Loan Guru Austin Smith Writes on Private Student Loans

Austin Smith is a force nationwide championing issues for student loan debtors.  You can get his excellent article, Why So Many Get It So Wrong That a Private Student Loan is Uniquely Protected in Bankruptcy, here. 

The common belief that all student loans are protected from discharge in bankruptcy is based on a misunderstanding of 11 U.S.C. § 523(a)(8).  Since 1990, bankruptcy courts have been misreading the statute to prevent any student debt that could be construed as providing educational benefits or advantages from discharge.  The flawed logic in student bankruptcy cases has thus become (1) all debts that confer educational benefits are protected from discharge; (2) the debt in question facilitated the debtor’s education and as such, conferred educational benefits; and (3) the debt is not dischargeable. Do you need a credit, follow and find payday loans.

First, subsection (A)(i) only protects federally insured or nonprofit student loans.  Second, subsection (A) (ii) only protects debts resulting from noncompliance in contractual service scholarships and grants.  Third, subsection (B) only protects private student loans that meet narrow Internal Revenue Code qualifications.  A sizeable portion of private student loan debt falls outside all three of these categories, and must be treated as non-qualified private student loans that have no protection from discharge.

Murder and Joint Tenancy

Holding property as joint tenants means there is a right to survivorship.  This means that when one joint tenant dies then the interest of that joint tenant passes automatically to the other joint tenant.  So if Amy and Fred own property as joint tenants then each has 50% joint tenant interest.  Also, the parties can also record a “mutual consent agreement” which says that the joint tenants have agreed among themselves that their JT can only be severed if everyone agrees.   This prevents Fred from transferring his interest without Amy’s consent.

Now let’s add a Halloween twist — what if Amy (knowing these rules) wants all of the 100% interest in the 200 acre property and at night murders Fred!?   That would be Amy would get all of Fred’s interest automatically.  Right?  Not so fast…..

Read more…

More Taggart Fallout

Bruce v. Fazilat (In re Bruce), —- B.R. —-,   8:15-ap-01028 (Bkrtcy, C. D. Cal. July, 2018, J. Wallace)

Issue:   Did the creditor here violate the automatic stay and/or the discharge injunction and if so, what are the appropriate damages?

Holding:   Yes as to both violation of the automatic stay and violation of the discharge injunction.  Actual damages of $15,000 for violation of the stay but no damages as to violation of the discharge injunction.

Judge Mark Wallace

The creditor here was the debtor’s landlord and was trying to evict him from the rental property where he lived.  The creditor, with knowledge of the bankruptcy petition, “turned off the electricity and then placed a new padlock on the electrical box,” and later sent someone to the property who “began banging on the door in an attempt to breach the door and enter the Property’s interior.”  That person told the debtor he owed them money.  The creditor contacted the debtor’s employer for the purpose of getting him fired – which worked.  Before the discharge was entered, the creditor filed a motion for relief seeking permission to proceed with the unlawful detainer.  That motion was granted but the “portion of the Lift Stay Motion requesting that the state court be permitted to award ‘[a]ll postpetition rents, attorney’s fees, and costs’” to creditor was specifically denied.  Nevertheless, the creditor sought and obtained a judgment for money against the debtor, after the discharge was entered.  At trial, the creditor’s attorney argued that the lease had terminated prepetition and that he had the right to holdover damages.

Judge Wallace ruled that the creditor violated the stay (obviously).  The state court judgment is void.  As to damages, the debtor’s “evidence of damages is somewhat thin.”  Judge Wallace ruled:

The Court concludes that Plaintiff is entitled to actual damages of $12,500.00 plus punitive damages of $2,500.00 (for a total of $15,000.00) in respect of the stay violations described above. Additionally, attorney’s fees and costs are awarded to Plaintiff.

With respect to monetary sanctions for a discharge injunction violation, the Court notes that the United States Court of Appeals for the Ninth Circuit has recently held that in the context of a discharge injunction violation, monetary sanctions can be imposed only if the movant shows that the creditor “knew the discharge injunction was applicable.” Lorenzen v. Taggart (In re Taggert), 888 F.3d 438, 443 (9th Cir. 2018). Additionally, “the creditor’s good faith belief that the discharge injunction does not apply to the creditor’s claim precludes a finding of contempt, even if the creditor’s belief is unreasonable.”

Here, there is no doubt that Mr. Sproul (Defendant’s attorney) had a good faith belief that he was properly bringing an action in state court for holdover damages and attorney’s fees.  The Court therefore declines to impose monetary sanctions for the discharge injunction violation that occurred. 11 U.S.C. § 524(a)(2).  However, this in no way disturbs the Court’s determination that the 2017 Judgment is void and of no effect pursuant to the plain language and meaning of 11 U.S.C. § 524(a)(1).

Getting Priority (and Other Headaches) at the 341(a) Meetings Downtown

Information from one of the chapter 7 trustee administrators:

The OUST informed us that a trustee should not grant or give priority requests to an attorney, unless the requesting attorney has a good reason.  For example, having hearings in multiple rooms, having to go to Roybal for another matter, client with young child(ren), etc.  Reasons such as “I want to finish early” or “I parked at the meter and my time is finishing” should not be given priority.  And yes, some attorneys have actually requested priority for those reasons.

There is a new rule in place where LA trustees need to stop conducting the 341 meetings at 12pm (even if they are not done with the 11am calendar) and resume at 1:30pm.  Based on this, some attorneys have been requesting priority at the 11am hour so they do not get stuck coming back in the afternoon.  The 12pm cutoff time has something to do with labor laws relating to lunch breaks for the security guard.

Also, the OUST has instructed trustees to use the interpreter service, even if someone from the audience volunteers to interpret.  If the debtor hires and pays an interpreter to attend the 341 with him/her, then that is acceptable. But no “volunteers”.

More Fallout from Taggart

In my Amicus Brief supporting the Debtor’s request for a rehearing en banc in In re Taggart, 888 F.3d 438, 443 (9th Cir. 2018), I said:

In its opinion, the [Taggart] panel held,

“the creditor’s good faith belief that the discharge injunction does not apply to the creditor’s claim precludes a finding of contempt, even if the creditor’s belief is unreasonable.” [emphasis added] 888 F.3d at 444

The statement is an incremental extension of a footnote in the Ninth Circuit case of ZiLog, Inc. v. Corning (In re ZiLog, Inc.), 450 F.3d 996 (9th Cir. 2006), a case easily distinguishable from Taggart on the facts. The statement disrupts the long-standing rule that a creditor who receives notice of the debtor’s discharge and still pursues the debtor for discharged debts may not plead ignorance of the discharge as a defense. The statement, if allowed to stand, will forever be treated by creditors as a blackletter rule which will quickly come to be known as the Taggart Rule. Creditors, using the above statement will respond to discharge violations by saying, “Taggart says we win!” “We weren’t sure about the discharge injunction and therefore we win because the Ninth Circuit said so!” There will be little reason to even have an evidentiary hearing regarding the creditor’s good faith belief because the Ninth Circuit said that even if the subjective good faith belief is unreasonable, there can be no consequences to violating the discharge.

My prediction is coming true.  The 9th Circuit BAP has even extended this to the automatic stay, reversing a ruling by Judge Sheri Bluebond who had awarded some $400,000 in fees for violating the automatic stay.  The BAP said in Ress Financial Corp v. Beaumont 1600, LLC (In re The Preserve, LLC), Adv. No. 2:13-ap-01406-BB, unpublished (9th BAP Sept 7, 2018), Read more…