Creditors, Let’s Talk about Bankruptcy!

     Bankruptcy! This is not a topic that most creditors wish to discuss! However, with Judges still “reacting” to the economic downturn of the last few years, with bankruptcy filings on the rise, with the conversion of many Chapter 13 cases to Chapter 7, with the aggressive lawsuits filed by counsel for debtors for violations of consumer laws, with increasingly detrimental provisions in Chapter 13 plans, and, with the strict review of proofs of claim and the requirements for the same, we should talk! 

     In regard to proofs of claim, our local bankruptcy courts require that if you are alleging a security interest in the debtor’s principal residence, in addition to the proof of claim form, you must also file a completed form B 10 (Attachment A) setting out the principal due, interest due, late fees, returned check fees, attorney’s fees, escrow shortage, amount due to bring loan current, etc. In addition, each time the debtor becomes delinquent on their mortgage during the bankruptcy, you must file form B 10 (Supplement 2), setting out late charges and other expenses charged to the debt. In the event the debtor’s mortgage payment amount changes due to increase or decrease in interest rate, insurance premiums or real estate taxes, form B Supplement (1) will need to be filed. 

     Obviously, this is a more complex and detailed filing, and, certainly, will be closely scrutinized. While you can file your own proofs of claim, we can also do it for you. 

     Creditors must be very careful to fully redact ALL “identifying data” (this includes procedure codes and/or other identifying treatment references for healthcare providers) on court filings to help protect debtors’ vital information from identity theft. Failure to do so will result in a court award of sanctions and attorney’s fees. Several local bankruptcy attorneys are reviewing all proofs of claim in their cases to spot possible violations. I have already had clients who have filed their own proofs of claim and been sued for violations. This is a very expensive problem. 

     Accordingly, I am still offering a “flat rate” fee for filing your proofs of claim and ask that you consider taking advantage of the same. In the end, I think that this will be a less costly and better alternative for you. I will file your first proof of claim in a case for a charge of $250.00. Second and subsequent pleadings for the same case will be billed at one half hour, and one quarter hour respectively. 

     I invite you to please call me so that we can discuss your questions. 

Eddie

Bankruptcy: Marital Obligation Discharged in Bankruptcy

     The United States Bankruptcy Court in Richmond, in the case of Nelson v. Nelson, ruled that a wife’s obligation to husband was discharged. The Court found that although a Virginia Circuit Court held that the wife had to pay a husband $5,6535 for a car debt under a “hold harmless” clause in their divorce agreement, the Bankruptcy Court ruled that the State Circuit Court order was void. 

     The parties’ separation agreement, incorporated into their final divorce decree, provided that an auto was the wife’s exclusive property, that she would be responsible for debt, taxes, insurance and licensing fees on the vehicle, and that she would “indemnify and hold the Husband harmless for the same.” The wife, who received a Chapter 7 discharge in bankruptcy, contends the obligation was discharged. The husband brought a show cause proceeding in a Virginia Circuit Court seeking an order that wife remained liable for the debt secured by the auto and that she was in contempt for violating the separation agreement. The State Circuit Court entered an order stating that the wife was liable to the husband for the debt secured by the auto, or $5,635 with interest. Although the State Circuit Court found that the debtor still had an obligation to indemnify the husband, it lacked the jurisdiction to determine whether this debt had been discharged because the Bankruptcy Court has exclusive jurisdiction in discharging a pre-petition debt included in Bankruptcy Code §523 (c). In any event, the Circuit Court order was silent as to its findings on the dischargeability of the debt. The parties therefore could not argue that the Circuit Court order prevented the relitigation of the dischargeability issue based on the principle of collateral estoppel; nor could the parties argue that this matter was barred by res judicata.

     The Bankruptcy Court ruled that the debtor’s obligation to discharge the husband for the indebtedness secured by the auto was discharged by operation of Bankruptcy Code §523 (c)(1). Accordingly, Bankruptcy Code § 524(a)(1) voided the judgment the husband obtained in State Circuit Court and the discharge injunction in Bankruptcy Code §524(a)(2) further enjoined the husband from taking any action to collect this debt as a personal liability of the debtor.

Bankruptcy: Fraudulent Real Estate Conveyances in a Chapter 7 Case

     In the case of Gold v. Laines, the United States Bankruptcy Court in Alexandria ruled that a Chapter 7 Trustee may recover two properties – the debtor’s home and a rental townhouse – as voluntary and fraudulent conveyances under Virginia law and federal bankruptcy law. The Court further denied the debtor a discharge for having fraudulently transferred the property within one year of the filing of his case. 

     The Court found as facts in Laines that the debtor bought his home and took title solely in his name. Fifteen weeks later, he married his wife, and three days later, he transferred his home to his wife and himself as tenants by the entirety with the common law right of survivorship by “Deed of Gift”. Two years later the debtor and his wife conveyed the home to the wife and a third party by deed of gift. As a result of this, husband and wife owned the home as joint tenants with the common law right of survivorship. 

     The townhouse was also solely owned by the debtor prior to his marriage. Soon after marriage he conveyed it to himself and his wife as tenants by the entirety. A little over a year later the debtor and his wife conveyed the townhouse to themselves and a different third party as tenants in common. This deed also was captioned “Deed of Gift.” The debtor filed for bankruptcy two years later. 

     The Court noted that by law the Bankruptcy Trustee could avoid the last transfer of the house and the last transfer of the townhouse if he proved his case that the transfers were fraudulent conveyances under the Virginia fraudulent conveyance statute, Va. Code Section 55-80. The Bankruptcy Trustee pointed to multiple badges of fraud. He argued that the transfers were to the debtor’s wife and himself as tenants by the entirety. The Debtor retained an interest in the transferred properties and possession of them. There was no consideration. They were made when his start-up venture, a telecommunications company, was heavily in debt, on a debt he had guaranteed. 

     The Court stated that the burden shifted to the wife to come forward and show that the transactions were bona fides and not merely contrivances to place the debtor’s property beyond the reach of creditors. She did not testify. The Court held that the debtor’s actions, in absence of satisfactory evidence of the bona fide nature of the transactions, reflected that the transactions were not undertaken for stated reasons, but were undertaken with the intent to hinder, delay or defraud his creditors. The Court found that neither of the third parties took the property in good faith. They had sufficient knowledge of the debtor’s circumstances and the unusual nature of the transactions to put a reasonable person on notice and cause them to inquire further. The Court held that the Bankruptcy Trustee could recover the house and the townhouse from the two third parties under Virginia Code Section 550 (a).

     The Court also found that the debtor’s intent to hinder, delay or defraud his creditors by the last conveyance of the home was clear. That intent was sufficient even though the transfer itself was not necessary to protect the asset from his creditors.

     The tenants by the entireties transfers of the house and the townhouse were avoided under Virginia Code Section 55-80, as implemented by Bankruptcy Code Section 544(b), and both properties were recoverable by the Bankruptcy Trustee. The debtor was also denied a discharge under Bankruptcy Code Section 727(a)(2) as a result of his last fraudulent transfer of the home.

Bankruptcy: Punitive Damages - Failure to Return Vehicle

     Judge Tice of the United States Bankruptcy Court, in Richmond, in the case of Brown v. Town & Country Sales and Service, Inc., ruled that a creditor that repeatedly refused to give the debtors’ pickup truck back to the debtors, despite the debtors’ entitlement to the truck after they filed for bankruptcy, violated the automatic stay in bankruptcy and must pay debtors’ attorney’s fees and punitive damages. 

     The creditor’s registered agent testified at trial that, despite the fact that they had always returned repossessed property post-petition in the past, the creditor elected not to return debtors’ vehicle. Instead, she testified that this time the creditor decided it would not return debtors’ vehicle upon demand because the creditor was unhappy that a large number of its customers had declared bankruptcy in the past year. 

     The debtors provided the lender with proof of adequate insurance. The debtors were currently awaiting confirmation of their modified Chapter 13 plan in which the debtors proposed to pay the lender in full. The debtors owed the lender $1,689.02 for the initial truck loan, as well as $1,764.95 for the replacement motor, for a total of $3,453.97.

     The Court concluded that the creditor’s demand for full payment, coupled with its inaction and retention of the vehicle, amount to an exercise of control sufficient to find a violation of the automatic stay for failure to turn over the vehicle pursuant to Bankruptcy Code §542(a). The Bankruptcy Court ruled that the debtors were entitled to recover the truck upon filing bankruptcy. Thus, the creditor’s retention of the vehicle post-petition constituted an exercise of control in violation of the automatic stay and Bankruptcy Code §362(h), which permits a court to impose attorney’s fees, costs and punitive damages for a willful violation of the automatic stay. The Court awarded these.

     The Bankruptcy Court further awarded punitive damages against the creditor in the form of cancellation of both of the creditor’s security interests against debtors’ vehicle. Any balance which debtors owed the creditor was treated as an unsecured claim.

    The lesson in Brown - know the rules and always consult experienced counsel. 

Bankruptcy: Dischargeability of Debts - False Representation

     In Crestar Bank v. Green, Judge Tice, for the United State Bankruptcy Court, Eastern District of Virginia, at Newport News, ruled that a debt to the debtor's cousin and his assignee was non-dischargeable pursuant to Bankruptcy Code §523(a)(6). 

     Originally the Creditor had complained that the debtor had falsely attested to a notary public and to a real estate lawyer that his note secured by the real estate had been paid in full. The Creditor argued that discharge was precluded as a false representation under Bankruptcy Code §523(a)(2)(A). The evidence was that the debtor had conceded that he voluntarily and intentionally signed the certificate releasing the deed of trust. The debtor also admitted that at the time he signed the certificate he knew that the document represented that the note was "paid in full". The debtor also admitted that he knew that he was transferring title of the property to the buyer even though the property was the security for repayment of the note to his cousin.

     The Court, despite the Creditor's argument, held that the false representation was not made to either the note holder or to the successor bank, and neither creditor relied on the false representation. Therefore, Bankruptcy Code §523(a)(2)(A) did not preclude discharge. However, the Court held that the false representation was a willful and malicious injury to another person's property under Bankruptcy Code §523(a)(6). The Court found that the debtor effectively forged his cousin's signature and released the cousin's deed of trust. The debtor's intentional act of forging and recording the certificate of satisfaction constituted willful and malicious injury to the cousin's property rights. Therefore, the bank, as assignee, was entitled to the damages caused by the debtor's wrong. Accordingly, the Bankruptcy Court ruled that the debt to the cousin and his assignee was non-dischargeable pursuant to Bankruptcy Code §523(a)(6).

Bankruptcy: Punitive Damages - Failure to Return Vehicle

     Judge Tice of the United States Bankruptcy Court, in Richmond, in the case of Brown v. Town & Country Sales and Service, Inc., ruled that a creditor that repeatedly refused to give the debtors’ pickup truck back to the debtors, despite the debtors’ entitlement to the truck after they filed for bankruptcy, violated the automatic stay in bankruptcy and must pay debtors’ attorney’s fees and punitive damages. 

     The creditor’s registered agent testified at trial that, despite the fact that they had always returned repossessed property post-petition in the past, the creditor elected not to return debtors’ vehicle. Instead, she testified that this time the creditor decided it would not return debtors’ vehicle upon demand because the creditor was unhappy that a large number of its customers had declared bankruptcy in the past year. 

     The debtors provided the lender with proof of adequate insurance. The debtors were currently awaiting confirmation of their modified Chapter 13 plan in which the debtors proposed to pay the lender in full. The debtors owed the lender $1,689.02 for the initial truck loan, as well as $1,764.95 for the replacement motor, for a total of $3,453.97. 

     The Court concluded that the creditor’s demand for full payment, coupled with its inaction and retention of the vehicle, amount to an exercise of control sufficient to find a violation of the automatic stay for failure to turn over the vehicle pursuant to Bankruptcy Code §542(a). The Bankruptcy Court ruled that the debtors were entitled to recover the truck upon filing bankruptcy. Thus, the creditor’s retention of the vehicle post-petition constituted an exercise of control in violation of the automatic stay and Bankruptcy Code §362(h), which permits a court to impose attorney’s fees, costs and punitive damages for a willful violation of the automatic stay. The Court awarded these. 

   The Bankruptcy Court further awarded punitive damages against the creditor in the form of cancellation of both of the creditor’s security interests against debtors’ vehicle. Any balance which debtors owed the creditor was treated as an unsecured claim. 

   The lesson in Brown - know the rules and always consult experienced counsel.

Bankruptcy: Dischargeability of Debts - Reliance on Financial Statement

     In the case of Paterno Imports Ltd. v. McBee, Judge Tice of the United States Bankruptcy Court, Eastern District of Virginia, sitting in Richmond, held that a plaintiff/creditor, a wine import company who had obtained a judgment against the debtor and his business, failed to prove that it required or relied on the alleged material misrepresentations in a financial statement provided to the debtor company. Accordingly, the judgment the import company ultimately obtained against the debtor and his business was not exempt from discharge. 

     The Court ruled that the case hinged upon the events surrounding a meeting between the debtor, the debtor's counsel, the plaintiff and the bank official. Each party presented evidence in diametric opposition to the other party's claims. The oral testimony presented by the parties at trial was, in its most important aspect, conflicting and irreconcilable. 

     The Court pointed out that in a dischargeability case, the burden of proof is on the plaintiff. The Court found that the plaintiff failed in its burden. Despite the fact that the plaintiff's counsel prepared extensive documentation which the debtor was required to sign both personally and for his company, the debtor's guaranty did not mention a financial statement, and no other writing presented at trial suggested that the guaranty was conditioned upon the plaintiff's approval or acceptance of the debtor's financial statement. 

     In summary, the Court found that the plaintiff failed to establish (1) that the plaintiff and the debtor entered into an agreement under which the plaintiff would forbear from pursuing further collection efforts against the debtor's business and give it time to resolve its financial difficulties, in exchange for the debtor's personal guaranty of the company's debt to the plaintiff; (2) that any transaction between the plaintiff and the debtor was conditioned upon the plaintiff's acceptance or approval of the debtor's personal financial statement; or (3) that at the meeting of the parties the debtor produced a personal financial statement or that there was any discussion of such a statement. The Court stated that these findings required the Court to conclude that the plaintiff did not rely upon the debtor's personal financial statement or any other statement. Therefore, the debt was discharged.

Bankruptcy: Dischargeability of Debts - Company Funded & Controlled by Wife

     In the case of Old National Bank v. Reedy, Judge Tice of the United States Bankruptcy Court, Eastern District of Virginia, denied a complaint against dischargeability. In Reedy the debtor, a consultant on obtaining government contracts, had financial difficulties in his prior business operations. One year before he filed for bankruptcy, the debtor’s wife agreed to assist him from her own financial resources by capitalizing and operating a company in which she was the sole shareholder and through which husband could perform his consulting work. The creditor bank had argued that the establishment and operation of this business was a transfer with intent to defraud creditors. 

     The Court held that the case was devoid of any direct testimony by the debtor concerning specific intent to delay, hinder or defraud his creditors. Instead, there was credible evidence regarding the legitimate business purpose of setting up and operating the corporation in its present form. 

     In Reedy the debtor's wife completely capitalized the business and maintained the books and records while the debtor performed consulting services. Such control was a condition to the debtor's wife's capital contribution. Moreover, the debtor's wife initiated the incorporation of the business and had been the only stockholder since its inception. No transfer of stock ever occurred. 

     In summary, the Court denied the creditor's request for two reasons. First, there was no transfer of property by the debtor. Although the debtor had earned some consulting commissions, there was no evidence that he had an established business or that he transferred a business to the corporation. He merely went to work for and rendered services to a new employer. There was no basis in the trial record for the Court to ignore the business as a separate and independent entity. The business's receipts of consulting income did not constitute transfers by the debtor. Second, there was no intent by the debtor to hinder or delay his creditors. The formation of the business by the wife almost a full year before the debtor filed bankruptcy served a legitimate business purpose of enabling the debtor's wife to assist him in dealing with his financial problems. The Court found that the new arrangement removed the debtors' ability to make imprudent financial decisions and gave wife the reassurance she needed if she was to assist him from her own independent financial resources.

Bankruptcy: Dischargeability of Debts - Piercing the Corporate Veil

     In the case of Hodnett v. Loevner, Judge Tice of the United States Bankruptcy Court, Eastern District of Virginia held that a bankruptcy debtor is not insulated from the dischargeability issues raised under Bankruptcy Code §523 (a)(4) by virtue of the fact that the transactions were done in the name of a corporation. 

     The debtor had transferred the plaintiff/creditor's trust funds to a limited partnership of which the investment company, the debtor's alter ego, was a general partner, without any notice to the plaintiff. Further, the debtor failed to properly account for the location of the funds. The debtor was also an officer, director and 50 percent shareholder in the corporation, and most importantly, was the person who made the investment decisions concerning client funds. The debtor was the alter ego of the investment company, and the Court found that the company was used in conjunction with the limited partnership to obscure fraudulent conduct with respect to the plaintiff. Therefore, the Court invoked the doctrine of piercing the corporate veil to hold the debtor personally liable for acts of the corporation.

     The Court held that the judgment was also exempt from discharge under Bankruptcy Code §523(a)(2)(A) because of the debtor's actual fraud. The debtor's statements, reports and correspondence concerning the existence of certificates of deposits were misrepresentations of material facts which were made by the debtor in an effort to deceive the plaintiff, and upon which the plaintiff relied, permitting the debtor and the investment company to use the trust funds in violation of an express trust. As a result of those misrepresentations, the debtor lost $107,000 of the plaintiff's trust funds. The Court found that this conduct on the part of the debtor constituted fraud.

     The Court further found that even if it could be argued that the debtor intended to repay the funds, his lending the plaintiff's funds on an unsecured basis while lying to the plaintiff about the nature of the investment constituted reckless conduct tantamount to fraud.

Bankruptcy: Plan Confirmation - Value of Vehicle

     In the case of In re: Rodnok the United States Bankruptcy Court at Richmond, Virginia, sustained a creditor's objection to the debtors' second modified Chapter 13 plan based upon the valuation of collateral. 

     In Rodnok the creditor, who had a Ford Aerostar van as collateral, filed a proof of claim stating the value as $13,075, which the debtors had not objected to. The debtors argued that the value of the van was already decided in the approved first modified plan to be $9,300, and that a redetermination was barred by the doctrine or res judicata. The creditor argued that the Court was not bound by the value determined in the first modified plan when it was determining approval of the second modified plan. 

     The Court stated that in determining whether a secured creditor should be bound to the value of its collateral as provided for in a confirmed Chapter 13 plan, the Court had to look at Bankruptcy Code §506 (a). This code section states that a claim is a secured claim to the extent of the value of the creditor's collateral and is unsecured as to the extent that the debt owed to the creditor exceeds the value of the collateral. Value of the collateral can be determined in any hearing concerning the disposition or use of the collateral or the confirmation of a plan affecting the secured creditor's interest. Bankruptcy Rule 3012 requires that notice of the hearing be given to the holder of the secured claim before a court may determine the value of that creditor's collateral. 

     In Rodnok the Court determined that the creditor was not provided the appropriate notice that the debtors were going to modify their secured claim, and therefore the creditor cannot be bound by the value assigned in the debtors' first modified plan, which was book value. 

     The Court found that the value of the van was $12,000. The creditor based its determination that the van had a value of $13,075 on the N.A.D.A. As evidenced by the certificate of title, the van came with numerous extras, adding to the overall value of the vehicle. The debtors claimed a deduction for excessive mileage, but the Court noted that at the first meeting of the creditors the debtors stated that the van had only 25,000 miles on it. Overall, the Court found that the value of the van more closely resembled that proposed by the creditor. Accordingly, the Court sustained the creditor's objection to the debtors' second modified plan. 

     The lesson of Rodnok, as it is in so many cases, is that creditors should retain the serves of counsel who has extensive experience in creditor representation.

Bankruptcy: Garnished Wages - Execution of Lien - Recovery of Funds

     In the case of In Re Wilkinson, the United States Bankruptcy Court at Alexandria, Virginia denied the debtor's motion to avoid the creditor's execution lien; the debtor's wages had been garnished in execution of a judgment lien more than 90 days before the debtor filed his Chapter 7 petition. The Bankruptcy Court ruled that the debtor could not recover the garnished wages from the judgment creditor even though the order directing payment of the garnished wages to the creditor was entered within the 90-day period.

     The Bankruptcy Court stated that the issue was not whether a debtor could recover funds withheld from his wages more than 90 days before he filed his Chapter 7 petition, but whether the order of payment requiring the employer to pay those funds to the judgment creditor was entered within 90 days of the bankruptcy filing.

     The Bankruptcy Court concluded that the debtor could not succeed under the lien avoidance provisions of Bankruptcy Code §522 (f) because he no longer had an interest in the garnished funds as of the date he filed his petition. The Bankruptcy Court also concluded that the debtor could not succeed by stepping into the trustee's shoes under Bankruptcy Code §522 (h) and recovering the funds paid over to the judgment creditor as a preference because the judgment creditor's execution lien became fixed outside the 90-day preference period, and the payment within the preference period did not enable the creditor to obtain more than it would in a Chapter 7 liquidation.

     Accordingly, the Bankruptcy Court denied the debtor's motion to avoid the execution lien.

Bankruptcy: Payment of Debt Incurred in the Ordinary Course of Business is not a Voidable Preference

     The 6th Circuit Court of Appeals, in the case of In Re Finn, upheld a finding that an otherwise preferential transfer is not avoidable if it was payment of a debt incurred in the ordinary course of the debtor's business or financial affairs. The Court held that even the incurring of long-term consumer debt satisfies the Bankruptcy Code §547 (c) (2) (A) exception from avoidance rules, as long as it is a normal financial relationship. The Court held that a transfer can be in the ordinary course of financial affairs even if it is the first of such transactions undertaken by the debtor.

     It should be noted however, that a majority of courts hold that interest payments on long term debts are not covered by the ordinary course of business exception. See Wolas v. Union Bank and In Re ZZZZ Best Co., Inc.

Bankruptcy: Note Loan Bankruptcy Clauses

     The Fairfax County Circuit Court, in the case of Dominion Bank, NA. v. Koons, ruled that certain "bankruptcy acceleration clauses" in promissory notes are not over broad, and are, indeed, enforceable. 

     The provisions in controversy are standard to note loans. A clause in the promissory note stated: "the borrower shall be in default upon the happening of ... commencement of any proceeding in bankruptcy by or against a party." The guarantee agreement provided another common bankruptcy clause: "filing of any petition in bankruptcy or for the relief under the Bankruptcy Act by the borrower or the guarantor." 

     Creditors should utilize bankruptcy acceleration clauses to enforce cosigner obligations upon bankruptcy by the principal.

Creditors, Let’s Talk about Bankruptcy!

     Bankruptcy! This is not a topic that most creditors wish to discuss! However, with Judges still “reacting” to the economic downturn of the last few years, with bankruptcy filings on the rise, with the conversion of many Chapter 13 cases to Chapter 7, with the aggressive lawsuits filed by counsel for debtors for violations of consumer laws, with increasingly detrimental provisions in Chapter 13 plans, and, with the strict review of proofs of claim and the requirements for the same, we should talk! 

     In regard to proofs of claim, our local bankruptcy courts require that if you are alleging a security interest in the debtor’s principal residence, in addition to the proof of claim form, you must also file a completed form B 10 (Attachment A) setting out the principal due, interest due, late fees, returned check fees, attorney’s fees, escrow shortage, amount due to bring loan current, etc. In addition, each time the debtor becomes delinquent on their mortgage during the bankruptcy, you must file form B 10 (Supplement 2), setting out late charges and other expenses charged to the debt. In the event the debtor’s mortgage payment amount changes due to increase or decrease in interest rate, insurance premiums or real estate taxes, form B Supplement (1) will need to be filed.

     Obviously, this is a more complex and detailed filing, and, certainly, will be closely scrutinized. While you can file your own proofs of claim, we can also do it for you. 

     Creditors must be very careful to fully redact ALL “identifying data” (this includes procedure codes and/or other identifying treatment references for healthcare providers) on court filings to help protect debtors’ vital information from identity theft. Failure to do so will result in a court award of sanctions and attorney’s fees. Several local bankruptcy attorneys are reviewing all proofs of claim in their cases to spot possible violations. I have already had clients who have filed their own proofs of claim and been sued for violations. This is a very expensive problem. 

     Accordingly, I am still offering a “flat rate” fee for filing your proofs of claim and ask that you consider taking advantage of the same. In the end, I think that this will be a less costly and better alternative for you. I will file your first proof of claim in a case for a charge of $250.00. Second and subsequent pleadings for the same case will be billed at one half hour, and one quarter hour respectively. 

     I invite you to please call me so that we can discuss your questions. 

Eddie

Bankruptcy: Dischargeability of Debt - False Financial Statement

     In the case of Chopp & Co. v. Luria, the United States Bankruptcy Court at Alexandria, Virginia, concluded that a bankrupt builder's omission from a supplier's credit application of a bank's earlier consent judgment against the builder was not made with the "intent to deceive" and the builder's debt to the supplier was not exempt from discharge pursuant to Bankruptcy Code §523 (a)(2)(B). 

     The Court found as fact that the debtor signed a credit application which he knew was being submitted to the creditor. The Court further found as fact that the credit application incorrectly represented that the debtor had no judgments entered against him within the last five years when, in fact, there had been a substantial judgment docketed against the debtor within one year of the credit application. The Court also found as fact that the consent order was entered under a workout agreement on a separate loan. The Court further found as fact that the debt had been fully paid off, the judgment did not show up on the builder's credit report, and there was no evidence that the builder knew that the consent order had ever been entered. The Court noted that the judgment at issue arose from a financial workout agreement between the bank, the debtor and other related parties on a large mortgage loan. As part of the agreement, under which the bank was to be paid in full, the debtor and his related entities executed the judgment order by consent. Under the agreement the loan was to be paid by new financing and by sales of property. The consent judgment essentially served as backup protection to the bank if its loan was not fully paid by a set date. This deadline passed without full payment because of delays in settlement under contracts for sale of realty by the debtor's business entities. The contemplated settlement eventually took place, and the bank's judgment had been paid in full six months before the debtor made the credit application at issue.

     Considering all of these facts in light of the applicable law, the Court had to determine, in order to find that the debt was nondischargeable, that the debtor's statement was materially false, that the creditor reasonably relied on the statement, and that the debtor had the intent to deceive the creditor.

     In regard to the "materially false requirement", the Court ruled that "..the omission of such a substantial judgment from debtor's credit application was plainly a materially false statement..".

     Upon considering reasonable reliance, the Court ruled that "...the evidence demonstrates that plaintiff had a very conservative policy on extending credit and that its policy has resulted in lower than average bad debts. Based upon plaintiff's unrefuted evidence, it seems likely that plaintiff would have denied open account credit to debtor's corporation if the judgment had been disclosed...". "..plaintiff's reliance on debtor's credit application was objectively reasonable and was actually relied upon by plaintiff in extending credit...".

     In regard to the "intent to deceive" requirement, however, the Court found that the evidence failed to establish that debtor actually knew that the judgment had been docketed. The Court then looked to see if the intent could be imputed through reckless indifference. Given the workout arrangements, given the fact that the judgment was paid within three months of entry, given the fact that no adverse information appeared on the debtor's credit report, and given the fact that there was no evidence that the debtor had been informed of the bank's entry of the judgment, the Court stated that it was unwilling to infer from the circumstantial evidence that the debtor recklessly failed to disclose the judgment. Accordingly the Court concluded that the debtor did not publish the financial statement with intent to deceive plaintiff.

Bankruptcy: Prior Bankruptcy Petition - Dismissal "With Prejudice"

     In the case of Colonial Auto Ctr. Inc. v. Tomlin, the United States District Court at Charlottesville, Virginia, reviewed a Bankruptcy Court's decision denying a creditor summary judgment against the debtor in a motion to determine if the creditor's debtor was nondischargeable due to the debtor's prior bankruptcy case being dismissed "with prejudice". 

     In Tomlin the Bankruptcy Court had ruled that the words "dismissed with prejudice" meant only that the debtor could not file another bankruptcy petition for 180 days. The creditor, however, argued that the language meant that the debtor could not discharge pending debts in a later bankruptcy petition; the creditor asserted that dischargeability had a res judicata effect. 

     The District Court ascertained that the question before it was does an order stating only that a case is "dismissed with prejudice," which in the general legal context, the effect of precluding the subsequent litigation based upon the same claim, have, in the bankruptcy context, the effect of precluding the subsequent discharge of pending debts? 

     The District Court ruled that there was no reason to depart from the traditional effect of an order dismissing a case "with prejudice", and that the Bankruptcy Court erred in determining that the prior order as effecting something less than res judicata. The District Court further ruled that the debtor failed to identify any portion of the Bankruptcy Code in which Congress indicated an intention that a dismissal "with prejudice," once ordered, does not effect claim preclusion in relation to a pending debt. Accordingly, the District Court vacated the Bankruptcy Court's order denying the creditor summary judgment. 

Bankruptcy: Liquidating Secured Property

     In the case of Mann v. CCB Financial Planning Ltd., the United States Bankruptcy Court in Alexandria, Virginia, ruled that a creditor could not amend its complaint objecting to dischargeability in a case to defeat a timely filing requirement, and that the improperly filed complaint should be dismissed. 

     In Mann the debtor had filed bankruptcy, both individual and corporate petitions. The creditor filed its complaint in the corporate petition but not in the individual petition. The creditor later filed a motion to amend its complaint alleging an exception to dischargeability against the corporation to alleging an exception to dischargeability against the individual. The motion to amend was filed after a time that a complaint objecting to dischargeability against the individual would be timely filed. The creditors and their counsel conceded that they had notice of both bankruptcy filings, and that they mistakenly filed their complaint in the wrong case. They contended, however, that they were confused by the designations "AKA" and "DBA".

     The Bankruptcy Court reviewed the provisions of Bankruptcy Rule 4007(c) and determined that the Court had no discretion to allow a late-filed motion objecting to dischargeability or to grant a late-filed motion for enlargement of time to file such a complaint, even in cases of excusable neglect. Accordingly, upon reflection of the facts and the rules, the Bankruptcy Court determined that the time limits were not met, that they had no discretion to allow for the amendment, and that the debtor's motion to dismiss should be granted.

     The lesson of Mann, as it is in so many cases, is that creditors should retain the services of counsel who has extensive experience in creditor representation.

Bankruptcy: Bank's Security Interest - Stocks pledged as Security

     In the case of Winters v. George Mason Bank the United States District Court, reviewing a case from the United States Bankruptcy Court at Alexandria, Virginia, affirmed a ruling for the creditor bank which enforced the bank's security interest against stocks held jointly by a mother and daughter and pledged as collateral for the bank's loan (actually a series of loans) to the daughter and her husband (which were in default), even though the daughter and her husband had declared bankruptcy. 

     The District Court found that from over the course of three years the plaintiff signed a total of three commercial pledge agreements pledging as collateral her interest in the stocks. In the second of three years the daughter and her husband filed a bankruptcy petition. The plaintiff argued that because she and her daughter jointly owned the stocks, those stocks were part of the bankruptcy estate. The plaintiff also argued that the second pledge agreement was an act to create or perfect a lien against that property, and thus violated the automatic stay provision of the Bankruptcy Code. The District Court ruled, however, that the automatic stay did not apply to non-bankrupt codebtors, nor did the automatic stay prevent actions against guarantors of loans. The District Court further stated that even if the agreement violated the stay as to the debtors, the agreement did not violate the stay as to the plaintiff. The District Court found that the plaintiff's attempt to use the automatic stay to her own benefit contradicted the purpose behind the stay provision. The plaintiff sought to use the automatic stay to avoid an agreement that was beneficial to the bankruptcy estate, and an agreement that she and the debtors had voluntarily entered into. Accordingly, the District Court upheld the bank's lien.

Bankruptcy: Denial of Discharge/Failure to Maintain Records

     The United States Bankruptcy Court at Richmond, in Lubman v. Hall, refused to grant a discharge because the debtors refused to keep records required by the trustee and failed to cooperate with the trustee as required by Bankruptcy Code §521(3) and Rule 4005 of the Federal Rules of Civil Procedure. 

     The Court found that the debtors, a U.S. Postal Service computer programmer and a secretary, refused to comply with the trustee's request that they file income tax returns for the previous years, claiming that they were not required to file such returns. The Court ruled, however, that the debtors had a duty to preserve those records which others in like circumstances would ordinarily keep. The basis for the duty was the necessity for the trustee to be able to fully determine the debtors' financial condition. 

     This decision can be used by creditors in all cases - check the debtor's bankruptcy petition for important missing information and bring this to the trustee's attention. 

Bankruptcy: Absolute Priority Rule

             Two bankruptcy cases well explain the rights of parties to contribute new value upon bankruptcy reorganization. 

     In In Re Woodscape Limited Partnership the United States Bankruptcy Court for the District of Maryland at Rockville held that the owners of the debtor corporation have an independent right to contribute new value to the reorganization, and in exchange may receive an interest in the reorganized debtor, which is equivalent to the new contribution. This decision was contrary to In Re Greyston III Joint Venture. 

     In Travelers Ins. Co. v. Bryson a Bankruptcy Court in North Carolina ruled that a provision in a debtor reorganization plan which limited the right to contribute new capital to the debtor's partners, as well as the right to the return of their new capital prior to recovery by an unsecured creditor, is not fair and equitable to the unsecured creditor. 

     Commercial creditors should carefully consider contributing new capital to debtor business. In some instances, the investment may be wise.