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: 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.

Real Estate: Using Deeds of Trust to Secure Your First, Second, Equity Line or Refinance Home Loans

     In a previous blog we began a discussion of the benefits of using real estate to improve creditors’ positions. As I have emphasized, properly securing debts through real estate could make the difference between collecting the funds and incurring a loss. In this blog, we will review the benefits of securing your first, second, equity line or refinance home loans with a deed of trust. 

     Real estate liens provide important security for your debt. Since real estate is the largest investment and asset for most individuals, they will usually make every effort to pay debts secured by their real estate first. However, you need to know the chain of title in order to make an informed decision about your loan. Specifically, in what position will your lien be? Are there any “clouds” on the title? You will not know the answer to these questions without a proper title search and review. 

     Once you know your position you will need to examine the available equity to cover your loan. What is the value? What are the balances due on the liens ahead of your anticipated position? Beyond the business decision of determining when the equity is sufficient for your risk tolerance, in order to take advantage of the “$1.00 rule” in the bankruptcy code for chapter 13 cases (should your debtor decide to later file bankruptcy), you need to ensure that there is at least $1.00 in equity to cover the loan. You should take into consideration that property values may go down (e.g., 2008 to present). 

     If the deal is made and the real estate closing occurs, immediate and proper recording of your deed of trust is essential to preserve your position. If the debtor defaults, foreclosure on the property can occur. If the debtor seeks reorganization of his debt in Chapter 13, you can seek full payment of the debt. 

     We have experienced attorneys and staff who can examine title and properly represent your interests in real estate closings. 

Bankruptcy: IRA Accounts and Exemptions

     The United States Bankruptcy Court, in Smith v. Bryant, ruled that the debtor’s IRA funds were not excluded from the bankruptcy estate. In doing so, the Court examined and explained that there are significant differences between IRA's and ERISA-qualified retirement plans, the provision in Bankruptcy Code §541(c)(2) exempting qualified funds from the bankruptcy estate does not apply to the IRA funds in this case.

     In Smith the debtor, after her termination of employment from a bank, rolled over her interest in a stock and thrift plan at the bank into her own individual retirement account. The debtor argued that the IRA should have been excluded from her bankruptcy estate because the assets used to fund the IRA had been accumulated in an ERISA-qualified retirement plan.
     In reviewing the differences between ERISA-qualified retirement plans and IRAs, the Court noted that IRAs are subject to almost complete control by its owner and do not contain the same anti-assignation and non-alienation provisions required under ERISA-qualified plans. The Court stated that if the debtor had an interest in a trust that contained an anti-alienation provision that was created under Virginia law, such an interest would also be excluded from her bankruptcy estate under Bankruptcy Code §541(c)(2). Nevertheless, because the debtor created her IRA and had complete control over the funds in it, the funds were not exempt from the bankruptcy estate, and the debtor was ordered to turn the funds over to the trustee.
     The Court's ruling in Smith clarifies the issue regarding IRA accounts and exemptions, and with debtors frequently changing jobs, the issue is likely to resurface in many instances.

Bankruptcy: IRA Funds are not disposable income in Chapter 13

       The case of Solomon v. Cosby, decided by the United States District Court in Baltimore, Maryland, served as a good review (although bad outcome) of how Individual Retirement Account funds are treated in a Chapter 13 bankruptcy.

     The Appeals Court reversed the Bankruptcy Court's decision that IRA funds are disposable income, and that the debtor's Chapter 13 plan should be rejected as not paying "all of the debtor's projected disposable income".
     In Solomon, the debtor, a retired physician, had proposed a Chapter 13 plan excluding approximately $1.4 million invested in an IRA. The debtor was facing tort claims of sexual misconduct from several former medical patients who sought damages of $160 million at the time he filed his Chapter 13. The plan provided for only $45,000.00 over five years.
     The Appeals Court held that under the clear terms of Bankruptcy Code §1325(b)(2), the debtor's IRA funds are not "income". Both the statutory definition of "disposable income" as income that is received by the debtor, as well as the requirement that projected income must be calculated over the life of the plan, contemplate income that a debtor is actually receiving at the time of the confirmation hearing, the debtor was not actually receiving any disbursements from his IRAs. The debtor also insisted that he had no intentions of withdrawing funds from the IRAs during the life of the plan.

Collections: Construction Case Garnishments

     The United States District Court in Alexandria has reviewed a matter important to many supplier and contractor creditors: the garnishment of funds due their debtors from another party. The case was U.S. v. Harkins Builders Inc. In Harkins a material supplier was pursuing a garnishment proceeding against a builder who owed money to the judgment debtor, a drywall subcontractor. The Court ruled that the supplier was not bound by a mandatory arbitration clause in a separate contract between the builder and the drywall sub.
     In Harkins a materials company supplied drywall materials to drywall subcontractors. When the drywall subs failed to pay for the materials, the supplier obtained a federal court judgment for $278,520. The supplier then initiated a garnishment proceeding against a builder to attach monies owed by the builder to the drywall sub under a contract between them. As garnishee, the sub confessed assets but argued that the amount it owed to the drywall sub should be reduced by setoffs totaling $50,853 allegedly owed by the sub to the builder under their contract. The garnishee also argued that any dispute about these setoffs must be resolved through arbitration, as provided in the contract between the drywall sub and the builder.
     The Court rejected the contention that the resolution of the amount of money owed by the builder to the drywall sub and subjected to garnishment must be accomplished through arbitration. As a judgment creditor of the drywall sub, the supplier was not a party to the contract between the sub and the builder, and its interest was limited to the drywall sub's property interest in the builder's hands. The parties to the drywall builder contract agreed to arbitration as an efficient procedural mechanism for resolving contractual disputes, including disputes over amounts owed. The agreement to arbitrate, however, does not add or subtract value in the calculus for determining the value of the contract right. The Court ruled that since the judgment creditor was afforded court procedures for determining the value, the fact that the property before the court was created by a contract containing an arbitration clause did not require a non-party to the contract to follow the contract's procedural mechanisms for dispute resolution. Accordingly, the federal courts assumed jurisdiction to make the decision.

Bankruptcy: Voluntary Conveyance - Debtor's Inheritance

     In the case of Shaia v. Meyer, the United States Bankruptcy Court, Eastern District of Virginia, Richmond Division, Judge Tice ruled that a bankruptcy trustee may recover funds a debtor inherited from his father and used to pay off two mortgages on property the debtor owned with his wife in a tenancy by the entirety. Essentially, the Court ruled that the debtor's payments constituted a voluntary or fraudulent conveyance that could be recovered by the bankruptcy estate.

Real Estate: Using Homeowner Association Liens to Secure an Interest in Real Estate

         In recent blogs we have been discussing the benefits of using real estate to improve creditors’ positions. As I have emphasized, properly securing debts through real estate could make the difference between collecting the funds and incurring a loss. In this blog, we will review the benefits of using homeowner association liens to aid in the collection of your debt.

     Virginia Code §55-516 provides for special procedures for the collection of homeowners association dues. This code section allows associations to place a lien on the land for unpaid assessments, as well as give associations a priority over certain other debts. To perfect the lien, however, it must be filed before the expiration of twelve months from the time the first such assessment became due and payable. This filing must be by a memorandum filed in the circuit court of the county or city where the development is located. The memorandum must contain the information specified in the statute. Before filing the lien, written notice must be sent to the property owner by certified mail giving at least ten days prior notice that a lien will be filed. Suit to foreclose on the lien must be brought within thirty six months of filing. We will review foreclosure suit procedures in a future blog.
     We have experienced attorneys and staff who can examine title, file homeowner association liens, and litigate to enforce the same.

Real Estate: Criminal Liability for Misuse of Construction Funds

     Virginia Code §43-13 provides that funds paid to a general contractor or subcontractor must be used to pay persons performing labor or furnishing material. Any contractor or subcontractor or any officer, director or employee of such contractor or subcontractor who, with intent to defraud, retain or use the funds, or any part thereof, paid by the owner or his agent, shall be guilty of larceny in appropriating such funds for any other use while any amount for which the contractor or subcontractor may be liable or become liable under his contract for such labor or materials remains unpaid, and may be prosecuted upon complaint of any person or persons who have not been fully paid any amount due them.
     The use by any such contractor or subcontractor or any officer, director or employee of such contractor or subcontractor of any moneys paid under the contract, before paying all amounts due or to become due for labor performed or material furnished for such building or structure, for any other purpose than paying such amounts, shall be prima facie evidence of intent to defraud.

Bankruptcy: Dischargeability of Debt - False Financial Statement in Chapter 7 Case

     Judge Tice, United States Bankruptcy Court in Richmond, denied discharge of a debt in a Chapter 7 case. The case was Global Express Money Orders, Inc. v. Davis. In Davis, the debtor previously had a convenience store that sold the creditor’s money orders through the store. The debtor still owed the creditor ($71,168.55) for some of these money orders. At issue was the debtor’s financial statement provided to the creditor at the commencement of the business between them. 

     The Court found that the debtor’s financial statement was materially false. In fact, at trial the debtor did not seriously question the inaccuracy of the statement. Rather, he tried to distance himself from its preparation and delivery to the creditor. In the financial statement the debtor provided false information as to cash in a checking account, the value of his personal residence and a beach condominium, the value of his equity in certain investments, value of mutual funds and an expected federal tax refund.
     The Court further found that the creditor required the personal financial statement of debtors as a condition precedent of the business arrangement; that the debtor, with intent to deceive, published the materially false financial statement and caused it to be delivered to the creditor; and that in contracting with the creditor and allowing the entity to incur substantial indebtedness, the creditor reasonably relied upon materially false asset entries in the financial statement, which debt was indemnified by the debtor personally.
     The Court rejected the debtor’s argument that the creditor failed to prove that he prepared the financial statement and authorized its delivery, i.e., publication with intent to deceive, to the creditor. The Court determined that the evidence showed that in the debtor’s presence and with his knowledge, the financial statement was delivered to the creditor by an (unknown) employee of the debtor’s business. The Court ruled that this evidence was sufficient to require some better explanation from the debtor than he provided. The Court stated that it did not believe the debtor’s evasive testimony that he was too busy to be bothered, and knew nothing about the contents of the financial statement or the circumstances surrounding its delivery to the creditor. The Court determined that at the very least, the debtor recklessly allowed his financial statement to be used by the creditor for its consideration of the business transaction, and his reckless indifference was sufficient to satisfy the publication with intent to deceive element of Bankruptcy Code §523(a)(2)(B).
     As to damages, the debtor argued that the loss of payment of the trust balance due was not damage or loss resulting from his publication of the false financial statement, as required by the statute. Rather, the debtor stated that the loss resulted from the failure of store employees to separate money order sales. Moreover, according to the debtor, his stores were not generating enough revenue to pay the current liabilities, and there was no evidence that he personally took funds or caused the shortage. However, the Court found it ironic that the debtor could argue that it was his employees who failed to comply with the trust agreement requirement for segregating trust fund receipts of the creditor. The debtor agreed to indemnify the creditor for his business’s indebtedness under the trust agreement, and his inability to make good on the indemnity was a direct result of his financial problems and ensuing bankruptcy. Although the Court stated that causation was not a necessary or proper element of the false financial statement issue, the Court simply found that the debtor’s false financial statement was a proximate cause of the loss.

Real Estate: Docketing Judgments to Secure an Interest in Real Estate

     In previous editions of Creditor News (which you can find at www.lawplc.com) we have been discussing the benefits of using real estate to improve creditors’ positions. As I have emphasized, properly securing debts through real estate could make the difference between collecting the funds and incurring a loss. In this blog, we will review the benefits of docketing judgments to aid in the collection of your debt.
     Docketed judgments create a lien against the debtor’s real estate in the county or city in which the lien is docketed. Accordingly, make sure that you know where your debtor owns, or may own (e.g., through future purchase or inheritance), real estate. Once recorded, the lien will take priority in line with the date of recording (with some limited exceptions). Depending upon your debtor’s problems, you may have equity to cover your lien. Obviously you will want to “get in line” sooner rather than later to give you the best chance of collection.
     Once a lien is in place, it must be addressed at any sale or refinance of the real estate. The lien must also be addressed in bankruptcy -- if the debtor does not file a motion to strip the lien, the lien will survive a bankruptcy discharge.
     If all other collection measures are unsuccessful, you can consider bringing a creditor’s bill, which is an action to force the sale of real estate to satisfy a judgment under Virginia Code §8.01-462:
     Jurisdiction to enforce the lien of a judgment shall be in equity. If it appears to the court that the rents and profits of all real estate subject to the lien will not satisfy the judgment in five years, the court may decree such real estate, any part thereof, to be sold, and the proceeds applied to the discharge of the judgment.
     Although creditor’s bills may be costly, given the right judgment it is an effective collection tool. Determining what judgments are "right" requires experience and good judgment.
    We have experienced attorneys and staff who can seek judgment and then docket and enforce the same.
    

Real Estate: Using Deeds of Trust to Secure Your First, Second, Equity Line or Refinance Home Loans

      Properly securing debts through real estate could make the difference between collecting the funds and incurring a loss. In this blog, we will review the benefits of securing your first, second, equity line or refinance home loans with a deed of trust.
      Real estate liens provide important security for your debt. Since real estate is the largest investment and asset for most individuals, they will usually make every effort to pay debts secured by their real estate first. However, you need to know the chain of title in order to make an informed decision about your loan. Specifically, in what position will your lien be? Are there any “clouds” on the title? You will not know the answer to these questions without a proper title search and review.
      Once you know your position you will need to examine the available equity to cover your loan. What is the value? What are the balances due on the liens ahead of your anticipated position? Beyond the business decision of determining when the equity is sufficient for your risk tolerance, in order to take advantage of the “$1.00 rule” in the bankruptcy code for chapter 13 cases (should your debtor decide to later file bankruptcy), you need to ensure that there is at least $1.00 in equity to cover the loan. You should take into consideration that property values may go down (e.g., 2008 to present).
      If the deal is made and the real estate closing occurs, immediate and proper recording of your deed of trust is essential to preserve your position. If the debtor defaults, foreclosure on the property can occur. If the debtor seeks reorganization of his debt in chapter 13, you can seek full payment of the debt.
      We have experienced attorneys and staff who can examine title and properly represent your interests in real estate closings.

Real Estate: Criminal Liability for Misuse of Construction Funds

     Virginia Code §43-13 provides that funds paid to a general contractor or subcontractor must be used to pay persons performing labor or furnishing material. Any contractor or subcontractor (or any officer, director or employee of such contractor or subcontractor) who, with intent to defraud, retains or uses funds, or any part thereof, paid by the owner or his agent, shall be guilty of larceny in appropriating such funds for any other use while any amount for which the contractor or subcontractor may be liable or become liable under his contract for such labor or materials remains unpaid.  Such person or persons may be prosecuted upon complaint of any person or persons who have not been fully paid any amount due them.
     The use by any such contractor or subcontractor (or any officer, director or employee of such contractor or subcontractor) of any funds paid under the contract, before paying all amounts due or to become due for labor performed or material furnished for such building or structure, for any other purpose than paying such amounts, shall be prima facie evidence of intent to defraud.

Foreclosure: Right to Cure a Default

     Question: Once a borrower is in default, can he “reinstate the loan”, or, “cure the default” and stop the foreclosure sale? Answer: yes. In general, most deeds of trust contain language that allows a borrower the opportunity to reinstate, or cure, the loan after the due date set out in the note. If the deed of trust contains this language, the note cannot be placed into default and accelerated until the cure period has expired. Government loans such as Fannie Mae and Freddie Mac have very specific requirements. In fact, a borrower can always cure a monetary default and stop a foreclosure up to the time of sale by paying in full, in good funds, the deficient amount, including all costs of the sale.