All posts tagged bankruptcy discharge

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]

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Raise Fraud in State Court Or Else “Waived” Later for 523?

Are you barred from re-litigating fraud in bk court just because you did not do so in your state court matter even though the facts were there and you could have done so?  In Brown v. Felsen, 442 U.S. 127 (1979), the plaintiff sued defendant for breach of contract in state court (which was based on fraud).  Plaintiff obtained a quick default judgment but did not seek a finding of fraud even though he could have “easily” done so based on the facts and time permitted.  Defendant filed bankruptcy and when plaintiff filed his 523 complaint the debtor screamed “motion to dismiss for res judicata — you should have done that in state court!”  Will the court grant the motion to dismiss?  No.

Res judicata holds that a party is barred from re-litigating grounds for a cause of action that was available to that party in a prior lawsuit.  The motion will be denied because in Brown the Supreme Court said that it would be wrong to force plaintiffs to litigate all of the issues that might later bear on nondischargeability in the future just in case defendant files bankruptcy.  See 422 U.S. 138 (1969).

But does collateral estoppel apply?  Yes, see Grogan v. Garner.