Tag Archives: Bankruptcy

Benefit Overpayments Are Dischargeable In Bankruptcy

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Time and time again I hear various government overpayments are not dischargeable when filing for bankruptcy protection. This is wrong. Government overpayments and overpayments are general unsecured debts that are eligible to be discharged when filing bankruptcy. I dedicated an entire section of a bankruptcy attorney website to hopefully dispel this myth over seven years ago. Overpayments from various government entities such as the California EDD (Employment Development Department), welfare overpayments, food stamp overpayments, social security overpayments and even retirement benefit overpayments are eligible to be discharged when filing for bankruptcy protection given they are general unsecured debts.

Do Not Forget About Recoupment Though

What is even more unknown is what equitable recoupment is. This article discusses the difference between a setoff and equitable recoupment. Equitable recoupment is not a violation of the automatic stay or order of discharge resulting from filing for bankruptcy and that is what is at issue in the case described and listed below.

Ninth Circuit Bankruptcy Appellate Panel No. CC-17-1375-LSF

The Ninth Circuit Bankruptcy Appellate Panel recently had an appeal that dealt with these issues as it pertained to a former city council member who also served on the planning commission for a city for around 17 years, a long time. Upon retirement she applied to supplement her retirement income by obtaining retirement income from the State of California via CalPers (she was apparently a State of California employee) and the also applied in her city for their Retirement Enhancement Plan benefits given her “:public service” as a member of the city council and planning commission. The 9th Circuit BAP memorandum of decision specifically added a footnote to the memorandum of decision to highlight that this person was on the city council at the time this Retirement Enhancement Plan was approved and that she voted in favor of the Retirement Enhancement Plan.

The Retirement Enhancement Plan is supposed to provide a small supplement to the California Public Employees’ Retirement System (CalPers) benefits for only certain eligible city employees. Public Agency Retirement System (PARS) is a private corporation that manages this Retirement Enhancement Plan. When there is an overpayment of some sort of benefit the question is always why was the person overpaid? In this case there seemingly are mistakes by all parties involved. The Retirement Enhancement Plan enrollee and bankruptcy filer in this case provided PARS with her income correctly as $14,938.04 annually or a year, which should have resulted in a monthly plan benefit of only $99.87 from the Retirement Enhancement Plan. Then PARS sent her an enrollment packet that mistakenly had the income listed as $14,938.04 per month, not annually, and resulted in a monthly benefit payment of $1,198.84 or a 1,100% increase……. The enrollee just signed the enrollment documents and returned them to PARS with the mistake. The overpayment of $1,098.97 continued for about 19 months before PARS realized the mistake and requested the $21,972.20 in overpayments be immediately returned.

Four months later in December 2014 the enrollee and overpayment receiver filed for bankruptcy protection under Chapter 13 of the Bankruptcy Code. Again, the PARS overpayment is a general unsecured debt that is eligible be discharged when filing for protection under the Bankruptcy Code. In Chapter 13 it becomes a little more complicated given a bankruptcy filer may have an obligation to pay all or part of their unsecured debt back and have the unpaid portion discharged upon completion of the Chapter 13 Plan. Almost three years after filing the Chapter 13 bankruptcy case the bankruptcy filer and overpayment receiver filed a motion for sanctions against PARS for violating the automatic stay in the chapter 13 case for withholding benefits to recoup the overpayment she received before the chapter 13 bankruptcy case was filed.

As I have told potential clients and clients for years that the underlying overpayment is eligible to be discharged, but the entity that the overpayment is owed the money has the right to recoup from any future benefits you made receive. This is what PARS is doing in this case. PARS reduced the bankruptcy filers/overpayment receivers’ current benefit to recoup the overpayment or funds the bankruptcy filer should not have received. The bankruptcy filer and her bankruptcy attorneys filed a motion for sanctions saying PARS is violating the automatic stay in the bankruptcy case by continuing to collect on a debt that is part of the bankruptcy filing and eligible to be discharged. This is called equitable recoupment.

PARS filed an opposition to the motion for sanctions providing the bankruptcy filer or overpayment receiver should have known she was receiving too much each month given she had approved the Retirement Enhancement Plan when she was on the city council and she knew the Retirement Enhancement Plan was intended only to provide a minimal supplement to CalPers retirement payments. She actually received $1,198.84 each month and that is a lot higher than the intent of the Retirement Enhancement Plan. Also PARS argued that she had signed the forms that included the calculation error and should have noticed the calculation error at that point too. If the cashier is supposed to give you a dollar in change and gives you $1,000 19 times in a row instead you will notice right? The bankruptcy court held PARS had the right to equitable recoupment and the bankruptcy filer and overpayment receiver appealed the order denying her motion for sanctions to the 9th Cir. BAP. So here we are now.

Equitable Recoupment

Equitable recoupment is not a violation of the automatic stay when filing for bankruptcy protection. Equitable recoupment is also not provided for in the Bankruptcy Code, but is a common law equitable doctrine, a fairness doctrine, that provides the setting up of a demand arising from the same transaction as a plaintiff’s claim or cause of action for the purposes of abatement or reduction. See Newbery Corp. v. Fireman’s Fund Ins. Co., 95 F.3d 1392, 1399 (9th Cir. 1996). Recoupment is not subject to or limited to claims that exist before a bankruptcy case is filed and can be recovered after the bankruptcy case is filed. This is what is going on in this case by PARS. PARS setup a demand for return of the overpayment for the purpose of abatement or reduction of the bankruptcy filer’s current and future benefits under the Retirement Enhancement Plan. If the bankruptcy filer was no longer receiving benefits under the Retirement Enhancement Plan from PARS, then there is no way for the abatement or reduction to take place on current and future received benefits.

Here comes the more complicated part and a detailed analysis of if a party has the right to recoupment. There is a two part test used by the Ninth Circuit….. the events need to be part of the same transaction and must be sufficiently interconnected so that it would be unjust to insist that one party fulfills its obligation without requiring the same of the other party. The Ninth Circuit uses a logical relationship test regarding if the events are part of the same transaction. See Aetna U.S. Healthcare, Inc. v. Madigan (In re Madigan), 270 B.R. 749, 753 (9th Cir. BAP 2001). Transaction is defined liberally and in a flexible construction or broadly.
The original Bankruptcy Court found that the logical relationship test was satisfied given the debt owed to PARS and future benefits owed to the bankruptcy filer/overpayment receiver were from the same facts. The Ninth Circuit Bankruptcy Appellate Panel did not have too much to add to the analysis and agreed that the overpayment owed to PARS and the current benefits received by the bankruptcy filer/overpayment receiver are from the identical transaction and retirement plan.

The bankruptcy filer/overpayment receiver in the appeal attempts to argue that equitable recoupment is not part of the Bankruptcy Code, if Congress intended for equitable recoupment to be an exception to the automatic stay Congress would have included it in Section 362(b) of the Bankruptcy Code and California law prohibits the offset of retirement benefits. The Ninth Circuit Bankruptcy Appellate Panel explained that it is bound by Ninth Circuit precedent unless overturned by the Supreme Court and equitable recoupment is a doctrine in the Ninth Circuit. The Ninth Circuit Bankruptcy Appellate Panel further noted that the bankruptcy filer/overpayment receiver did not make these arguments in her opening brief so the panel does not have to consider them regardless. Ouch. Regarding California law prohibiting the recoupment of retirement benefits the appellate court equally slams the door and provides multiples cases in which California courts treat pension benefits the same as wages for purposes of recoupment. See Krolikowski v. San Diego City Emps.’ Ret. Sys., 24 Cal. App. 5th 537, 557 (2018) (holding that recoupment of state pension benefit overpayment was not barred by statutes of limitations; exemptions for levy and attachment of public retirement benefits; equitable estoppel; or laches).

What Happens Most of The Time Regarding Overpayments When Filing Bankruptcy

What happens with overpayments most of the time when filing bankruptcy is after receiving a discharge that is the end. Someone receives an overpayment for whatever reason and they do not need future benefits from the program or entity they received the overpayment from. There is no way for the discharged overpayment to be collected on given there are no current or future benefits paid out that can be reduced for recoupment purposes.

Do Not Mistake Setoff With Equitable Recoupment

Unlike equitable recoupment setoff is codified in Section 553 of the Bankruptcy Code. Setoff allows a creditor to deduct amounts owed to it by the bankruptcy filer from amounts the creditor owes to the person or entity filing for bankruptcy protection. A creditor must request and receive relief from the automatic stay before doing any sort of setoff. Also a distinguishing difference is setoff does not allow claims from before the bankruptcy case was filed to be setoff with claims after the bankruptcy case was filed.

What Fake News Is There About Filing Bankruptcy?

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There is way too much fake news out there about bankruptcy. Look, I know bankruptcy is not looked at in the best light for many reasons. I am not going to try and convince anyone that believes bankruptcy is wrong. Most people will never understand until something happens that is completely out of their control and now they are looking at filing for bankruptcy protection. Bankruptcy is the law and absolutely necessary in our economic system.

So, what is the single most misunderstood part of bankruptcy? What is the most common “Fake News” I hear out there about filing bankruptcy? A little information about me first so you give my opinion some weight. I have been involved in the bankruptcy industry before I graduated law school. I did not jump on this band wagon during the mortgage meltdown like many other attorneys. I intended to be a bankruptcy attorney during law school and I have not been employed in any other area of law. I worked for a creditor’s right law firm. I worked for a debtor’s rights law firm. I worked for a Chapter 13 Trustee, David Burchard, for the San Francisco and Santa Rosa Divisions of the Bankruptcy Court for the Northern District of California. I then started my own practice to even better serve those in need of debt relief. I have touched easily over 5,000 bankruptcy cases. I have talked to thousands of potential clients and those that chose to file bankruptcy. The single most misunderstood part of bankruptcy is the relationship between assets and exemptions that protect the bankruptcy filers stuff and/or assets.

The Most Disturbing Fake News Is: You Will Not Lose All Of Your Stuff When Filing Bankruptcy

THIS IS NOT TRUE AT ALL. This is probably the most troubling part of being a bankruptcy attorney. I have to explain over and over again that you will not be left penniless and barefoot in the middle of the street after filing for bankruptcy under any chapter of the Bankruptcy Code. We all need a certain minimum stuff to survive in this world. Bankruptcy is designed to give you a fresh start, but not a head start either.

While bankruptcy is governed by Federal Law and created by Congress, each state can create their own exemptions to protect peoples stuff from those they owe money to. A bankruptcy filer in certain states can choose the state law exemptions or federal exemptions to protect their stuff. In California you must use the state law exemptions pursuant to California Civil Code 703.14 or 704. The theory behind protecting a certain amount of someone’s assets is it does no human on Earth any good if another human is stripped of all of their worldly possessions when filing bankruptcy. At the same time common sense should tell you that if you own a paid in full $60,000 Tesla you cannot get rid of $30,000 in credit card debt while still keeping the paid in full $60,000 Tesla. You would be right. Under California exemptions we get either (CCP703.14) $5,350 or (CCP704) $3,050 to protect your vehicles. I am not going to go into the differences between California’s two set of exemptions, the 703 or 704’s. Just know that there are two choices and one is probably more beneficial to you than the other. It all depends upon your assets.

So what are the problem assets? As the example provides above vehicles can have high values sometimes or if multiple vehicles are owned it can be difficult to protect all of them depending upon the vehicles value of course. Home equity in the Bay Area is now a huge issue again given how much home values have increased over the last 8 years. We can only protect so much equity in a home. For more information about how much California exemptions protect in home equity look up the homestead exemptions for California. During your consultation with a bankruptcy attorney you will discuss exemptions in much detail.

Filing Bankruptcy Is Not Financially Devastating Like The Media Or Your Friends Think

The other most common “Fake News” I hear is how financially devastating filing for bankruptcy protection is. This is simply not true at all. Most of the financial devastation already took place before I ever speak to someone. All the missed payments, late payments or repossession/foreclosure has already happened or will soon happen regardless of filing for bankruptcy protection or not. Four or five months of missed or late payments can tank a credit score. The damage is done. SO FILING FOR BANKRUPTCY DOES NOT LOWER YOUR CREDIT SCORE. THE NEGATIVE EVENTS LEADING UP TO THE BANKRUPTCY CASE BEING FILED LOWERS YOUR CREDIT SCORE.

What the bankruptcy does is eliminate the debts you are struggling to pay each month so that you can make regular on-time payments for the necessities of life. Then once you make regular on-time payments on everything your credit score will increase. How can you rebuild your credit while still making late payments or missing a payment on one card and not another? It really does no good to rob Peter to pay Paul. That is a vicious cycle of debt and increased interest payments that will never end.

You can buy a house. You can buy a car. You can continue to live life like you are now. It is just without all of the debt that keeps you from getting ahead in this very short life we have. You do not have to struggle each month. That is no way to live and you do not have to. Educate yourself about bankruptcy and other tools to help you get ahead in life.

California Law and Record Title Presumption Versus Community Property Presumption and Bankruptcy

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Update as of November 14, 2018

On November 8, 2018, the Ninth Circuit Court of Appeals entered an order certifying question to the Supreme Court of California as follows:

“Does the form of title presumption set forth in section 662 of the California Evidence Code overcome the community property presumption set forth in section 760 of the California Family Code in Chapter 7 bankruptcy cases where: (1) the debtor husband and non-debtor wife acquire property from a third party as joint tenants; (2) the deed to that property conveys the property at issue to the debtor husband and non-debtor wife as joint tenants; and (3) the interests of the debtor and non-debtor spouse are aligned against the trustee of the bankruptcy estate?”

This is the question the following cases and discussion of various cases are trying the answer and it is far from simple. The outcome of the decision by the Supreme Court of California will not have much of an impact on bankruptcy filings if they side on the community property presumption since that is what is taking place now. If the record title presumption is determined to overcome the community property presumption us bankruptcy attorneys will again be able to file cases for one spouse or the other that recognizes real property held as a joint tenancy and only include the value of the filing spouses separate property interest. We shall see.
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Prior to November 8, 2018

What? I thought the Ninth Circuit Court of Appeals in the Summers case already held that the taking of title as joint tenants under California law is not subject to California community property transmutation laws? Then the California Supreme Court held the seemingly opposite result in the Valli case. Yes, that Frankie Valli. The law that counts is California State law. The issue here develops when real property is acquired during marriage and title is taken by a married couple as joint tenants. The title is taken as joint tenants and therefore the property is legally under California State law the married couple’s separate property. The taking of title in this form provides their intent. We also have California’s transmutation law and certain presumptions saying something else apparently. Now we have the Brace case decided by the Ninth Circuit Bankruptcy Appellate Panel publishing a decision that discusses the interplay between the Summers and Valli cases.

Bankruptcy law is federal, which relies on applicable nonbankruptcy law, state law, to provide for many substantive and procedural rights under the bankruptcy code. If you did not know this please take a moment and do some research on this issue. Then you throw in that California is a community property state and we have a complicated interplay of law and who gets to decide who is right when applying these laws. There are also only 8 community property states with Alaska being an opt-in community property state. So I would say there are 8.5 community property states if being technical.

I believe the difficulties in interpreting this intersection of law is for good reasons and good intentions. The result has been far from good for a very long time. The issue really just comes down to trying to prevent litigation regarding what is community property versus separate property at the time of divorce in California.
Sadly when things go bad opinions change as to who owns what. When filing for bankruptcy protection what is community property of a married couple and separate property is also extremely important.

The 9th Cir. Bankruptcy Appellate Panel Says The California Supreme Court Wins

The Ninth Circuit Bankruptcy Appellate Panel could have chose to not considered the California Supreme Court case and vice a versa. See Miller v. Gammie, 335 F.3d 889 (9th Cir. 2003). The 9th Circuit Bankruptcy Appellate Panel cited a 9th Circuit decision that held when there is a irreconcilable issue between courts then any future three-judge panel of the court of appeals and district courts should consider themselves bound by the [California Supreme Court Valli Case] intervening higher authority and reject the prior opinion of this court as having been effectively overruled. This is some rare air right here. How many people can tell you exactly how intersections of law such as this are decided? Very few, but here is it and a case to read about it. Extremely interesting reading and the requirement of a three-judge panel is excellent.

Presumptions Under California Law Regarding Community Property and Taking Title During Marriage

Before moving forward there are certain presumptions under California community property law that need to be defined and understood.

CA Family Code Section 750

A husband and wife may hold property as joint tenants or tenants in common, or as community property, or as community property with a right of survivorship.

California law clearly provides a married couple can hold property as joint tenants. It issues is the title or evidence of this intent to overcome the presumption that all property acquired during marriage is community property. See CFC 760 below.

CA Family Code Section 760

Community Property: Except as otherwise provided by statute, all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in this state is community property.

Okay, so when real property is acquired during marriage the presumption is the real property is community property. What could possibly rebut that presumption? Is it possible a recorded title signed at the time purchase providing title is as joint tenants can rebut this presumption?

CA Family Code Section 2581

Presumption Concerning Property Held In Joint Form: For the purpose of division of property on dissolution of marriage or legal separation of the parties, property acquired by the parties during marriage in joint form, including property held in tenancy in common, joint tenancy, or tenancy by the entirety, or as community property, is presumed to be community property. This presumption is a presumption affecting the burden of proof and may be rebutted by either of the following: (a) A clear statement in the deed or other documentary evidence of title by which the property is acquired that the property is separate property and not community property; (b) Proof that the parties have made a written agreement that the property is separate property.

Again, a recorded title is the legal document that provides how and who owns a piece of property. Again, is title taken as joints tenants during marriage then recorded with the county recorder’s office fulfills the requirements of CFC 2581? What other interpretation of a joint tenant title could be inferred? As with all questions of statutory interpretation we begin with the plain language of the statute. See Lamie v. U.S. Trustee, 540 U.S. 526, 534 (2004); Ariz. Health Care Cost Containment Sys. v. McClellan, 508 F.3d 1243, 1249 (9th Cir. 2007). But a recorded deed is not a statute. By the plan language of a recorded title without knowing anything else what conclusion would or could the recorded title result in? This is open to human interpretation? It says the married couple is married and bought the property as joint tenants regarding the property they acquired during marriage. The entire point of CFC 2581 is to provide guidance on a recorded title. What more does a title need say? It is difficult to balance what CFC 2581 actually says with with the recent decisions in Valli and now the Brace case.

Let us now bring this back to the Bankruptcy Code and why I am writing about this. Section 2581 applies “for the purposes of division of property on dissolution of marriage or legal separation of the parties,” and when filing for bankruptcy protection? The various decisions on this issue do discuss this issue in some detail and conclude there is nothing limiting the application of Section 2581. Section 2581 does not say for all purposes. It clearly provides for the purposes of division of property on dissolution of marriage or legal separation. Generally when the word “purpose” is used it is because it is possible for other “purposes” such as filing for bankruptcy protection Section 2581 is not applicable. This is not how California law has been interpreted though. “We give the language its usual and ordinary meaning, and ‘[i]f there is no ambiguity, then we presume the lawmakers meant what they said.’” See People v. Gutierrez, 58 Cal. 4th 1354, 1369 (2014) (alterations in original) (quoting Mays v. City of Los Angeles, 43 Cal. 4th 313, 321 (2008). When a married couple does file bankruptcy in a community property state, and only one spouse files for bankruptcy, only community property and filing spouses separate property become part of the bankruptcy estate pursuant to Section 541 of the Bankruptcy Code. So for purposes of filing for bankruptcy protection what is community property and separate property must be taken into account depending upon the circumstances. I now say depending upon the circumstances given many times there is no reason to even go down the road of should only one spouse file for bankruptcy protection and the other not. Many times one spouse just does not want to file at all. Or a couple has some misguided myth about bankruptcy that prevents them from even considering filing at all under any circumstance while the other spouse is all for it. Attorneys practicing bankruptcy law get a very bad wrap from the real world. This topic is a perfect example of the difficulties.

So the Ninth Circuit Court of Appeals in Summers said the California transmutation laws are not applicable to the purchase of property during marriage as joint tenants. Even if the California transmutation laws are applicable the signed, notarized and recorded title meets the requirements of Section 852, right?

CA Family Code Section 852

Transmutation of Property: (a) A transmutation of real or personal property is not valid unless made in writing by an express declaration that is made, joined in, consented to, or accepted by the spouse whose interest in the property is adversely affected; (b) A transmutation of real property is not effective as to third parties without notice thereof unless recorded.

Third parties do receive notice given the title is recorded with the county. So simple.

The Ninth Circuit Court of Appeals held in Summers that California transmutation laws do not apply to the acquiring of real property during marriage under California law. CFC 2581 provides there should be an express declaration of the parties’ intent. Yes, that is the title record as joint tenants. But no, you have to go beyond what the letter of the title says and now comply with California transmutation laws as well? CFC 2581 is not good enough apparently.

California Evidence Code Section 662

Record title presumption: which provides generally that “[t]he owner of the legal title to property is presumed to be the owner of the full beneficial title. This presumption may be rebutted only by clear and convincing proof.”
Wait a second here. California Evidence Code Section 662 says there is a presumption about how title is taken. What clear and convincing evidence has the Court discussed that the married couple in Valli or Brace did not want the property to be held as joint tenants? The title says that. So we now apparently have to ignore CFC 2581 and Cal. Evid. Code 662.

The Summers Ninth Circuit Court of Appeals Case – Hanf v. Summers (In re Summers), 332 F.3d 1240, 1242 (9th Cir. 2003)

In Summers, the Ninth Circuit held that under California law, the community property presumption is rebutted when a married couple acquires property from a third party as joint tenants. In Summers the husband, wife and daughter took title to a piece of real property as joint tenants and each of the three parties eventually filed for bankruptcy protection. Citing several California Courts of Appeal decisions, the Ninth Circuit held that under California law the transmutation requirements applied only to interspousal transactions. The wrinkle here that threw everything sideways was the daughter, a third party, was also on titled in addition to the married parents. To get a result that was fair there had to be a way for the three to be joint tenants. The Summers court relied on the California courts’ definition of “transmutation” as “an interspousal transaction or agreement that works a change in the character of the property.” In re Summers, 332 F.3d at 1244 (citing In re Marriage of Cross, 94 Cal. App. 4th 1143, 1147 (2001) (emphasis added)).

As a result of Brace we arguably have to ignore the actual definition of a transmutation under California law. When a house is purchased there is no “interspousal transaction or agreement that works to change the character of the property.” Someone please explain to me how a purchase of a house, an agreement between a married couple during marriage, changes the character of property a married couple is purchasing? You have to own the property first to change the character of the ownership. Right? Some human being please explain to me how I can change the character of property I do not yet own? This bankruptcy attorney finds this confusing.

The purchase of a house is also NOT an “interspousal transaction.” The transaction is between the spouses and the seller. Now we have to ignore the California transmutation definition too. The California Supreme Court case Valli v. Valli (In re Marriage of Valli), 58 Cal. 4th 1396, 1400 (2014). The California Supreme Court did not agree with the Ninth Circuit Court of Appeals interpretation of California transmutation law in Summers. In Valli, the California Supreme Court held that California’s transmutation statutes are also applicable to transactions in which spouses acquired property from a third party. 58 Cal. 4th at 1405-06. The California Supreme Court noted that prior to California’s transmutation laws the alleged transfer of property by oral or implied agreement caused expensive litigation in divorces. This led to just a passing comment being interpreted or argued to be an agreement to transmute property. That is why we now must have a writing to transmute property. Okay, so there is plenty of merit to reducing litigation in divorces and not having one spouse upon divorce or dissolution say an asset is not a community asset. I get that. The problem is that I still have read nothing to lead me to believe a title saying a house purchased during marriage with title take as joint tenants does not meet the transmutation requirements anyway even though I do not believe the transmutation requirements are applicable to begin with. Nope. That is not the case according to Valli and Brace. This is a legislation issue and what various California laws say about this issue and the interplay with the Bankruptcy Code in a community property state.

Another wrinkle is: The California community property presumption applies to property acquired during marriage unless it is: (1) traceable to a separate property source; (2) acquired by gift or bequest; or (3) earned or accumulated while the spouses are living separate and apart. Valli, 58 Cal. 4th at 1400.

Ninth Circuit Bankruptcy Appellate Panel Brace Case

The Ninth Circuit Bankruptcy Appellate Panel declined to agree with the Summers case and followed the Valli case interpretation of California law. It is important to note that the 9th Circuit BAP provided that the presumption of community property was not overcome by the facts of the Brace case. Under other circumstances they may have held otherwise with more facts to overcome the community property presumption. It begs the question what evidence or recorded document or non-recorded document is clear and convincing evidence of the married couples intent to be joint tenants when purchasing property California? The 9th Cir. BAP instructs us that a specific statutory provision does prevail over a general one relating to the same subject. Pac. Lumber Co. v. State Water Res. Control Bd., 37 Cal. 4th 921, 942 (2006). This principle of statutory construction actually supports the conclusion that the community property presumption prevails over the title presumption. See Valli, 58 Cal. 4th at 1412-13. The community property presumption is a specific statutory presumption found within California’s community property law, not the more general presumption found in Section 662 of the California Evidence Code. Another piece of rare air regarding how the intersection of law is interpreted. They are saying that the transmutation laws are specific and the record title presumption is just a general statutory provision of the general transmutation laws that can be ignored if there is more specific law. That is interesting. Does a big umbrella stop the rain from every getting to the small umbrella under the big umbrella? In some circumstances yes and some circumstances no. It is open to interpretation on a issue by issue analysis and there is nothing uncomplicated about it.

What We Can Take Away From This?

There is no such thing as joint tenancy between a married couple under California law unless there is an additional writing in which you say something like, “WE TOOK TITLE TO OUR HOUSE AS JOINT TENANTS DURING MARRIAGE, SO THE PROPERTY IS EACH SPOUSES SEPARATE PROPERTY. IF THERE IS ANY QUESTION ABOUT OUR INTENT IN THE EVENT OF DEATH, DIVORCE DISSOLUTION OR BANKRUPTCY WE ARE MAKING THE EXPRESS DECLARATION REGARDING THIS PROPERTY WE NEVER OWNED BEFORE MARRIAGE AND ARE IN FACT INTENDING TO OWN THIS REAL PROPERTY AS OUR SEPARATE PROPERTY AND JOINT TENANTS AS THE RECORDED TITLE PROVIDES.” Then take that writing and record it with the county recorder’s office or have it notarized and tucked away with hope it is never needed. But then when you go to record this document after ten years an employee at a county recording office may say that the document was not notarized properly if the notary left out one word from the certificate notarizing the additional writing you created to make your intent clear. So do you now we need two writings or a writing about the writing witnessed by two disinterested parties? In today’s world possibly a video uploaded to the “cloud” of both spouses actually saying what there intent is regarding a property purchased during marriage? The point is where does it end? So how do you hold property as joint tenants if you are married when the actual recorded title is not enough to show the intent of the parties is the question?

Why Do Bankruptcy Filers We Care?

This issue arises when one spouse files for bankruptcy and the other does not. The issue for bankruptcy attorneys is whether only half the value of our client’s real property becomes property of the bankruptcy state when the title is taken as joint tenants. Half of the house is supposed to be the separate property of each spouse or half is the non-filing spouses separate property. This is a huge issue for bankruptcy filers in California and applying exemptions to protect client’s real property and obtain a discharge of their eligible debts. Community debts may only seek satisfaction from community assets.

What If A Creditor In A Bankruptcy Case Is An Infant or Incompetent Person?

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I really do not know the utility of this article given I know this set of circumstances rarely will ever come up. I have literally had a hand in four or five thousands cases over the years and this issue has not come up so far. I also administered countless Chapter 13 cases as the staff attorney for David Burchard, the Chapter 13 Trustee for the San Francisco and Santa Rosa Divisions of the United States Bankruptcy Court for the Northern District of California. The set of circumstances that this could be an issue are very narrow. The bankruptcy filer would at some point injured or damaged a minor somehow or the person with a claim against the bankruptcy filer became incompetent over time. Also, if the person with a claim is an adult, how would the bankruptcy filer or their Bankruptcy Attorney ever know the person is incompetent? They probably would not.

Nonetheless if this issue does come here you go. It is rare for an adult, someone over the age of 18, to be indebted to or someone under the age of 18 has a “claim” against an adult. It is also rare for someone to owe an incompetent person money. If someone is incompetent they cannot enter into a contract legally. It is possible that the debt or claim arose prior to the person becoming incompetent. So there are a some reasonable hypothetical facts to help discuss this issue. In the real world you will probably look long and hard to find this was every an issue in a bankruptcy case.

The issue is how can you provide notice of a bankruptcy filing to an infant or someone who is incompetent? An infant is defined as a person who has not attained legal majority; or under-age or under 18 or 21 years of age depending upon state law. A person that is under the age of minority cannot be served legally even if they are a creditor of the person who is filing for bankruptcy protection. Also, a person that is incompetent cannot be or accept service given they are incompetent. Incompetency is generally defined as an adult who can no longer take care of their own financial and personal affairs because of mental problems or potentially a physical problem too.

The most important parts of filing for bankruptcy protection is giving all creditors notice of the bankruptcy case. Once the bankruptcy attorney files the bankruptcy petition any and all collection activity must stop and the Bankruptcy Court is the sole place to seek remedy. So if all creditors do not receive notice or do not understand the notice that is a problem. Every bankruptcy filer wants their creditors to receive notice and stop the phone calls or harassing letters. You will also want the creditor to get the order of discharge in the mail so that they know once and for all the debt is no longer legally enforceable by federal court order.

How Do You Serve An Infant Or Incompetent Person?

First look to Federal Rule of Bankruptcy Procedure 1007(m). In 2001 FRBP was amended to add section “m.” FRBP 1007(m) provides: If the bankruptcy filer knows that a person on the list of creditors or schedules is an infant or incompetent person, the bankruptcy filer also shall include the name, address, and legal relationship of any person upon whom process would be served in an adversary proceeding against the infant or incompetent person in accordance with Rule 7004(b)(2). The point is to serve someone that knows the infant or incompetent person that can accept service on their behalf. Federal Rule of Bankruptcy Procedure 7004(b)(2) provides: (b) Service by First Class Mail. Except as provided in subdivision (h), in addition to the methods of service authorized by Rule 4(e)–(j) F.R.Civ.P., service may be made within the United States by first class mail postage prepaid as follows: (2) Upon an infant or an incompetent person, by mailing a copy of the summons and complaint to the person upon whom process is prescribed to be served by the law of the state in which service is made when an action is brought against such a defendant in the courts of general jurisdiction of that state. The summons and complaint in that case shall be addressed to the person required to be served at that person’s dwelling house or usual place of abode or at the place where the person regularly conducts a business or profession.

Basically for an infant you need to also include the name and address of the infant’s parents or legal guardian. The same is true for an incompetent person. Someone has to be taking care of or appointed as a conservator or guardian of the incompetent person. Whoever is taking care of them is the person upon whom process is prescribed to be served by the law of the state in which service is made when an action is brought against a defendant in the courts of general jurisdiction of that state.

Should I File Bankruptcy Jointly With My Spouse?

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I will give you my opinion right now and say yes, if possible. If your spouse and you do not own any separate property then please file bankruptcy jointly and receive an order of discharge with both of your names and social security numbers listed. Doing this makes it black and white to your creditors. All debts are discharged as to both spouses. If only one spouse files for bankruptcy and receives a discharge you have entered the gray as to the non-filing spouse. While bankruptcy is governed by Federal Law to determine certain asset issues the Bankruptcy Court has to look to state property marital law to determine separate property and community property.

The Community Discharge

So in a community property state only the community assets are liable for community debts. If there are no separate property assets brought into the marriage by the spouses then there is nothing other than community assets at the time of filing and then post-discharge. 11 U.S.C. § 524(a)(3). “[Section] 524(a)(3) treats the effect on the nondebtor spouse of a discharge of a debtor in a community property state when the nondebtor spouse is liable on the community claim, but has not filed a bankruptcy petition.” In re Karber, 25 B.R. 9, 12 (Bankr. N.D. Tex. 1982). In summary, all actions to collect a “community claim” from section 541(a)(2) property acquired after the petition date is permanently enjoined unless timely objected to. A creditor is still free to seek collection against the non-filing spouse’s separate assets.

So What Is The Problem?

So you the issue is some of the debts are under one spouses name and social security number while some debts were incurred by the other spouse. Who files for bankruptcy then? All of the debts were incurred during their marriage too. If one spouse files for bankruptcy and receives a discharge will that discharge protect the spouse that did not file? Yes and no. This is the gray of only one spouse filing. What can a creditor do or not do to collect their debt against the non-filing spouse’s separate property? What is property of the bankruptcy estate or community assets after the spouse received a discharge? Can a judgment creditor suspend the non-filing spouses driver’s license? Is a driver’s license a community asset?

File Jointly If Possible To Avoid Confusion

As bankruptcy attorneys that have filed and been involved in thousands of b bankruptcy cases, if it is possible, we recommend spouses file jointly so that it is black and white post-discharge. Each spouse receives a discharge of all debts whether in their name and social security number or not. A creditor with a judgment can renew the judgment and then wait to collect. The entire time the judgment is also accruing interest. Also, once the judgment is renewed the total amount of the renewal will accrue interest. This accrual of interest will make the judgment increase significantly plus the cost of collection added in also. What is the judgment creditor waiting for? They are waiting for some separate property assets to be obtained by the non-filing spouse. If the non-filing spouse inherits assets from someone the inherited assets are arguably separate property of that spouse and now there are separate assets to collect from. Or the judgment creditor is waiting for the community to end via divorce or death. Once the community is terminated then the protection of the discharge of the filing spouse is also terminated.

We had a judgment creditor write us a letter once to explain their position and right to collect from the non-filing spouse. The judgment creditor argued that the community discharge pursuant to Section 524 is a “phantom discharge” since it only bars collection from community assets. Again, if there are no separate assets then how is the discharge merely a phantom discharge? If there are no separate assets then all assets are community assets and therefore protected. What procedure is there to make the determination that there are no separate assets? There really is none. If a creditor allegedly violates the order of discharge the only recourse is to seek sanctions from the bankruptcy court that signed the order of discharge. Litigating this issue will most likely cost more than what it cost to file the initial Chapter 7 bankruptcy case. No one really wants to have to deal with this after receiving a discharge and moving on. If you are married and do not file jointly this is a potential issue you will be creating by filing alone.

Prevent Possible Litigation

Again, the theme of this article is if you can file jointly then file jointly and eliminate the possibility of litigating whether a creditor is violating the order of discharge or not. It may not be possible though depending upon the circumstances. Bankruptcy attorneys have to look at all of the assets of clients and make a determination as to the best course of action. There are also circumstances in which a spouse refused to file for bankruptcy protection no matter what. The point of filing for bankruptcy is to discharge eligible debts or reorganize debts without causing additional stress or problems for the bankruptcy filer. Most bankruptcy filers do not have the means to litigate issues that sometimes arise. Like a creditor going after a non-filing spouse post-discharge. If you filed for bankruptcy protection you probably do not have thousands of dollars to litigate anything. In the event a creditor goes after a non-filing spouse and we are successful in obtaining sanctions there is no guarantee that the bankruptcy court will award attorneys’ fees and costs for seeking sanctions. It is usually a tough position to be in after the bankruptcy is long over and then a creditor decides to do some sort of collection activity against the non-filing spouse. So what then? To take this issue off the table completely and just file jointly.

Bankruptcy and Service of Motion To Avoid Judicial Lien

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The issue here is who must be served when filing a motion to avoid a judicial lien under Section 522 or 506 of the Bankruptcy Code. There could be a number of parties involved or a number of attorneys involved in obtaining and enforcing the judicial lien before a bankruptcy case is filed. So who has to be served with the motion to value or avoid the lien? Is service required on the state court attorney that obtained the judgment, the original creditor or the potential attorney now representing the creditor in the bankruptcy case?

FRBP 9014 and 7004

Once the bankruptcy case is filed the Federal Rules of Bankruptcy Procedure, Federal Rules of Procedure and local bankruptcy rules take over. All states have laws governing the enforcement and collection of lien rights and judicial lien rights. Procedures for contested matters in bankruptcy cases are governed by Federal Rule of Bankruptcy Procedure 9014, which requires service of a motion “in the manner provided for service of a summons and complaint by Rule 7004 . . . .” Rule 9014(a). So we have to look to FRBP 7004. Service of a summons and complaint varies depending upon the type of entity the creditor is. Whether the creditor is a sole proprietorship, limited liability company, corporation or is insured depository institution. If FDIC insured service shall be made by certified mail addressed to an officer of the institution unless— (1) the institution has appeared by its attorney, in which case the attorney shall be served by first-class mail; (2) the court orders otherwise after service upon the institution of notice of an application to permit service on the institution by first-class mail sent to an officer of the institution designated by the institution; or (3) the institution has waived in writing its entitlement to service by certified mail by designating an officer to receive service.

Ninth Circuit Bankruptcy Appellate Panel Case

In a recent 9th Cir. BAP case; Teresa Bryant, Appellant, vs. The Bank of New York Mellon; Select Portfolio Servicing, BAP No. CC-16-1009-DKuF, discussed the proper service of a motion to avoid a judicial lien. In this case Ms. Bryant’s bankruptcy attorney served the motion by certified mail on a bank officer of Mellon pursuant to FRBP 7004 and served each attorney that appeared on behalf of Mellon in the bankruptcy case. In the Northern District of California we have a local rule that says if a claim was filed for the lien, then the address provided on the claim has to be served in addition to the requirements of FRBP 7004 be met. Mellon tried to argue that since their state court attorney was not served the motion to value service was defective. This issue was addressed in Frates v. Wells Fargo Bank, N.A. (In re Frates), 507 B.R. 298, 301 (9th Cir. BAP 2014). The appellee bank in Frates argued their state court attorney should have been served with the motion to value or avoid. The Ninth Circuit BAP said no.

The Ninth Circuit Bankruptcy Appellate Panel previously concluded that compliance with Rule 7004(h) was all that was required. The court recognized that California law would have required service of post-judgment motions on the state court attorney, but the court did not “perceive any reason why compliance with California law should be compelled in light of the procedural due process safeguards provided by the rules themselves. This means that when enforcing the judicial lien under California law post-judgment motions must be served on the state court attorney for the judgment creditor. That is not the case after a bankruptcy case is filed.

You Do Not Have To Serve The State Court Attorney

Bankruptcy case rules make no mention of serving a motion to avoid a judicial lien on any state court attorney involved in the matter previously. In the Bryant appeal the debtor’s bankruptcy attorney served the attorney that made an appearance for Mellon and filed a motion for relief from stay filed in the bankruptcy case and still served an officer of Mellon by certified mail. The Ninth Circuit Bankruptcy Appellate Panel held nothing more was required. The lower bankruptcy court unfortunately evaluated the circumstances of not serving the state court attorney as a possible fraud on the bankruptcy court for not serving Mellon’s state court attorney with the motion to value. The 9th Circuit Bankruptcy Appellate Panel decidedly said no. There was no fraud on the bankruptcy court.

What Creditors Attorneys Should Do

If a state court attorney wants to be noticed or a creditor wants their state court attorney that obtained the judgment to be served then the state court attorney should file a request for special notice in the bankruptcy case. Then they have to be provided notice. In Chapter 7 bankruptcy cases judicial liens can be avoided in no assets cases. In a no asset case there is no call for creditors to file claims or even make an appearance in the case at all. Under these circumstances no attorney will make an appearance for a creditor in the Chapter 7 no asset bankruptcy case. The only viable service is pursuant to FRBP 9014 and 7004. In Chapter 13 bankruptcy cases claims are called to be filed on behalf of creditors. So in theory in a Chapter 13 case there could be an attorney or other party to provide notice to and meet the requirements of FRBP 7004.

How to Properly Request a Temporary Waiver or Exemption From the Credit Counseling Course Requirement

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If you are considering filing for bankruptcy protection and are researching how to request an exemption or waiver of the credit counseling course requirement for some exigent circumstance, just stop now. Making this request is a huge red flag on your bankruptcy case. Stop wasting your time and go on the internet and just do yourself a favor and complete the Credit Counseling course right now. Then come back and read the rest of this article. You will thank me later. 11 U.S.C. Section 521(b) requires debtors file with the court a certificate from the approved nonprofit budget and credit counseling agency that provided the debtor services under Section 109(h) describing the services provided to the debtor; a Credit Counseling Certificate of completion.

If you retained a bankruptcy attorney that is recommending that you not complete the credit counseling course and request an exemption or waiver please run away from that attorney as fast as you can. Our job is not to complicate the circumstances you are already dealing with. Not completing the credit counseling course is just asking for trouble. Look, yes, there are exceptions or circumstances where an exemption or waiver can be granted, but generally requesting an exemption or waiver of the credit counseling course requirement is not normal and rare. If I see a case that involves requesting any sort of exemption or waiver, without knowing any more information than that case, I already know the case has problems and the likelihood that the bankruptcy case will go smoothly is very little.

Incapacity or Disability Pursuant to Section 109(h)(4)

Please do not confuse Exigent Circumstances with actual Incapacity or Disability. 11 U.S.C. Section 109(h) waives the credit counseling course requirement for someone who is incapacitated due to incapacity, disability, or active military duty in a military combat zone. The credit counseling course can then be waived only after notice and a hearing though. You must file and serve a motion, declaration in support and notice of the hearing date and time. You are talking about anywhere from $500.00 to $1,200.00 in additional attorneys’ fees and costs. Incapacity means that the bankruptcy filer is impaired by reason of mental illness or mental deficiency so that he is incapable of realizing and making rational decisions with respect to his financial responsibilities. Disability means that the bankruptcy filer is so physically impaired as to be unable, after reasonable effort, to participate in an in person, telephone or internet briefing required under Section 109(h)(1).

Exigent Circumstances Pursuant to Section 109(h)(3)

So, for those of you who are not incapacitated, disabled or in an active military combat zone and do not follow my advice above, the following is how to actually request an exemption or temporary waiver regarding the credit counseling course requirement due to some exigent circumstance. I am not going to get into details about what an exigent circumstance is though. I truthfully do not know of any. Ms. Lin and I have filed over a thousand bankruptcy cases and every single one of our clients was able to fulfill the requirement to complete the credit counseling course prior to the case being filed.

The Three Part Test

All three parts of the test must be completed given the language of Section 109(h)(3) provides the three parts are conjunctive, not disjunctive.

1. The bankruptcy filer’s certification must describe the exigent circumstances meriting a waiver of the credit counseling requirement. 11 U.S.C. §109(h)(3)(A)(i)

2. The certification must provide the bankruptcy filer requested credit counseling services from an approved nonprofit budget and credit counseling agency, but was unable to obtain the service referred to in Section 109(h)(1) during the 7-day period beginning on the date on which the bankruptcy filer made that request. 11 U.S.C. §109(h)(3)(A)(ii)

3. Then the request must be satisfactory to the court. 11 U.S.C. §109(h)(3)(A)(iii)
Part 1 and 2 will be the most difficult parts of the test to satisfy. First you have to actually have some sort of exigent circumstance that prevents you from being able to complete the credit counseling course requirement. Then the court gets to evaluate whether the exigent circumstance and request for temporary exemption or waiver is satisfactory to the court.

Your home being subject to foreclosure sale should not usually be an exigent circumstance. Some other civil court lawsuit pending in another court should not usually be an exigent circumstance. Your vehicle about to be repossessed should not usually be an exigent circumstance. Facing eviction due to an unlawful detainer suit filed against you should not usually be an exigent circumstance. Again, I cannot really say what is an exigent circumstance warranting a temporary waiver of the credit counseling course requirement. I know the following list has been denied an exemption or temporary waiver in actual cases filed.

In re Davenport, 335 B.R. 218, 221 (Bankr.M.D.Fla.2005)
In re Watson, 332 B.R. 740, 745 (Bankr.E.D.Va.2005)
In re Hubbard, 332 B.R. 285, 289 (Bankr.S.D.Tex.2005)
In re Gee, 332 B.R. 602, 604 (Bankr.W.D.Mo.2005)
In re Wallert, 332 B.R. 884, 891 (
In re LaPorta, 332 B.R. 879, 883 (Bankr.N.D.Minn.2005)

The long and the short of it is just complete the credit counseling course requirement as soon as you start considering bankruptcy as an option. It does not take that long and you may learn something that is helpful. That was the entire point of the two required courses being created to begin with. You are provided information before you can file bankruptcy in the first course then additional information in the second course to obtain a discharge in your bankruptcy case.

What Should I Do If I Have Unfiled Tax Returns?

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You must file the late or unfiled tax return as soon as possible no matter how difficult and unpleasant going through that process is for you. I will be providing a number of reasons below for why it is so important to file tax returns on time, or as soon as humanly possible if you miss the deadline to file the tax return. Filing for an extension kicks the can down the road, but at least you will not miss the deadline or be considered to have an unfiled tax return.

As a bankruptcy attorney I have been part of thousands of bankruptcy cases in one shape or form at this point I am of the opinion that most people do not timely file returns because they will owe a significant amount of taxes. A little known fact is that most of our bankruptcy cases whether Chapter 7, Chapter 13 or Chapter 11 involve taxes that are owed to either the Internal Revenue Service or here in California the Franchise Tax Board. TAXES CAN BE DISCHARGED IN BANKRUPTCY. Almost every celebrity bankruptcy involves unpaid taxes. Read some of my other articles about celebrity bankruptcy cases like actress Teri Polo or actor Gary Busey and on and on. Just Google celebrity bankruptcy and Ryan C. Wood. Not filing a tax return for a year you owe taxes is the single worst thing you can do even if you know you are going to owe taxes that you cannot pay immediately. Even if you are going to owe so much you cannot possibly pay the taxes you still need to file your tax returns on time every time to get the best treatment for repayment. When you do not file a tax return on time it starts a chain of events that are designed to make it extremely difficult to get rid of the taxes owed. Please note there is a statute of limitations for taxes owed to the IRS, but that statute of limitations can be suspended or altered depending upon your circumstances and this article is not addressing issues related to the statute of limitations.

Do not wait to for the IRS to take action.  File your unfiled returns.

Do not wait to for the IRS to take action. File your unfiled returns.

Do Not Ignore Notices From The IRS

First off, yes, life is not easy and for whatever reason you did not file your tax return on time. The IRS will give you notice after notice to file your return on your own. If you ignore these notices this will be a big factor in what I will be wrapping this article up with about Substitute File Returns or an SFR. You will be given all kinds of chances to file a tax return even after the deadline to file the return and pay any taxes owed has long passed. Do not ignore the notices you receive in the mail. You will not get a phone call. You will get notices in the mail that you must read and respond to. I tell client after client that you do not want to be in the pile of files that is for people who are not communicating with the IRS. You want to be in the pile of files for people who are communicating with the IRS and working the problem. I know it is not easy. You have to address the problem sooner than later for someone like me to someday make it all go away forever.

So, Have You Ever Heard of a Substitute Filed Return?

I hope for your sake this is the first time you have heard of this. You do not want this period. A Substitute Filed Return (SFR) is what the IRS puts together as best they can with the information they have to file a tax return on your behalf for a tax year you did not file a tax return for. The IRS will only file a SFR when you have ignored them over and over again. The IRS even knows the numbers they use are not completely accurate. The IRS knows certain deductions will not be made and potentially income not counted. The result is a SFR filed by the IRS on your behalf that everyone knows is not completely accurate, but nonetheless you get assessed the amount of taxes they say you owe in the SFR. Once the taxes on the SFR have been assessed you will then be given more notices about your rights to object to the assessed taxes and correct any errors. Again, do not ignore notices in the mail you receive from the IRS. If you again do nothing you have more or less sealed your fate

Why Substitute Filed Returns Are So Dangerous

In my bankruptcy attorney world SFR’s are very dangerous given the current interpretation of the law and whether the taxes owed and assessed from a SFR are ever dischargeable when filing for bankruptcy protection. You have to understand that when all else fails, us bankruptcy attorneys ultimately clean up the mess once and for all, if the law allows. Long story short you should file a tax return for a year the IRS already filed a SFR on your behalf. You must correct their numbers, add income, add deductions and more or less make the return accurate and the amount of taxes you owe accurate. This could lead to the amount of taxes owed to decrease or increase. But what happens to the taxes owed and assessed from a SFR if you file bankruptcy? As mentioned before taxes absolutely can be discharged when filing bankruptcy if the taxes meet certain requirements. The problem right now is that the Ninth Circuit Court of Appeals agreed with the Internal Revenue Service’s interpretation of what the definition of a “return” is when you file your own return after the IRS files a SFR on your behalf. Let me back up a little. The Bankruptcy Code addresses late filed returns and this is part of the issue I am discussing. Taxes owed for a late filed return can in theory be discharged under the Bankruptcy Code, but the requirements are even more narrow or stringent than when a return is filed on time and there are taxes owed. That is the short of it. So, the definition of what constitutes a “return” under the Bankruptcy Code is the issue. The Ninth Circuit Court of Appeals held that the tax return you file with the correct income, correct deductions and therefore correct amount of taxes actually owed may not be a “return” for bankruptcy purposes given this filed return is not an honest and reasonable attempt to comply with the tax laws since the return was late filed . . . . . . Well, that is unfortunately one way to interpret the law and right now that is it. Let me back up again. So you did not file a return, the IRS filed a SFR on your behalf and assessed you some made up amount of taxes, then you file an accurate return to correct the numbers in the SFR and if and when you seek to discharge these taxes owed according to the accurate return you just filed you may not be able to because the fact that the return was late filed and filed after the SFR has been interpreted that your accurate filed return is not an honest and reasonable attempt to comply with applicable tax laws and therefore not a “return” under the bankruptcy code so the taxes owed for that year cannot be discharged. Did that make sense to you? Let me try again. To allow taxes owed for a late filed return to be discharged when filing bankruptcy there has to be a “return” filed. See Bankruptcy Code §523(a)(1)(B)(i).
All this mess of analysis will take place because you did not timely file your tax return. If you had timely filed that tax return the taxes could easily be discharged when filing for bankruptcy protection, assuming the taxes owed meet the normal requirements to be discharged. The IRS will argue that the SFR assessed taxes will not be part of the “return” you later file that actually has the accurate information. You will forever be in the category of a SFR was filed and now there is an issue as to whether your return filed after the SFR is an honest and reasonable attempt to comply with the applicable tax laws. So far convincing the appellate courts that the later filed return is a “return” under the bankruptcy code has not been very successful. It is truly a fact based analysis on a case by case basis. So, again, file your tax returns on time even if you will owe a lot of taxes and if you miss the deadline to file the return or extended deadline to file the return file your return as soon as you can. Do not let the IRS file a Substitute Filed Return on your behalf.

Did A Creditor Violate The Bankruptcy Discharge By Suing The Debtors After Discharge?

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Apparently it depends upon the terminology used in the lawsuit and a demand for attorney fees and costs. A recent Ninth Circuit Bankruptcy Appellate Panel published opinion discusses this issue. Desert Pine Villas Homeowners vs. Gil Kabiling; Linda Kabiling (BAP No. NV-15-1380-BDF) Discrimination happens for all kinds of reasons unfortunately. One reason discrimination is not supposed to happen is when you seek bankruptcy protection and obtain a discharge of eligible debts. There are a number of issues in this case, but the outcome of the case is creditors should not use language in lawsuits or other documents post-discharge that disparage a debtor or do not accurately communicate the legal relationship post-discharge. A creditor cannot try and obtain attorneys’ fees and costs post-discharge for a claim that arose before the bankruptcy petition was filed. In this case it all started when the Kabiling’s defaulted on paying their homeowner association assessments for a property located in Las Vegas, Nevada. The Kabilings’ obtained a discharge of their debts in Chapter 7 after the defaults and therefore their personal liability no longer exists for the defaulted homeowner association dues. Generally in most states a homeowner association can attach a lien for the unpaid homeowner association dues and then enforce that lien post-discharge since the lien is not discharged, just the personal liability for paying the pre-petition unpaid homeowner association dues. A homeowner association can also foreclose on the home under state law for unpaid homeowner association dues. Each state has different laws about homeowner association dues and the legal rights involved with collecting unpaid dues. The is not a huge issue in this case, but you need to know your state law in this area as it relates to Section 523(a)(16) of the Bankruptcy Code. Section 513(a)(16) makes post-discharge unpaid homeowner association dues not dischargeable.

The Desert Pine Villas Lawsuit Against Kabiling

On February 1, 2011, the Kabilings’ bankruptcy attorney filed a voluntary chapter 7 petition on their behalf along with a statement of intention asserting that they would abandon the Property. Notice of the Kabilings discharge was mailed to creditors on June 30, 2011. Desert Pines nonjudicially foreclosed on its homeowner association liens in 2013 and thereby acquired title to the Kabilings property. On December 15, 2014, in the District Court for Clark County Nevada, Desert Pines, through its counsel, Alessi & Koenig, filed a complaint against the Kabilings and three additional named defendants seeking to quiet title to the foreclosed property and confirm that Desert Pines held good title to the Kabiling property based on its nonjudicial foreclosure in 2013. Just to be clear, Desert Pine Villas already foreclosed on the Kabiling property under Nevada state law, so why did they need to file an additional lawsuit to quiet title to the already foreclosed property? There could be facts regarding the other named parties in the lawsuit that are not included in the record of this case.

The Kabilings were served with the lawsuit and then retained counsel to inform Desert Pine Villas they violated the discharge injunction by filing the lawsuit against them. Attorneys for Desert Pine Villas of course denied violating the discharge injunction so the Kabilings attorney reopened their Chapter 7 bankruptcy case and filed a motion for contempt against Desert Pine Villas. The bankruptcy court agreed with the Kabilings and found Desert Pine Villas in contempt of court and held Desert Pine Villas liable for the Kabilings’ compensatory damages in the amount of $8,928.00.

The Law In Desert Pine Villas Appeal

A violation of the discharge injunction is enforced through the court’s civil contempt authority under section 105(a). Renwick v. Bennett (In re Bennett), 298 F.3d 1059, 1069 (9th Cir. 2002). The debtor has the burden of proving, by clear and convincing evidence, that the offending creditor knowingly and willfully violated the discharge injunction. The offending creditor acts knowingly and willfully if (1) it knew the discharge injunction was applicable and (2) it intended the actions which violated the injunction. ZiLOG, Inc. v. Corning (In re ZiLOG, Inc.), 450 F.3d 996, 1007 (9th Cir. 2006). Actual knowledge of the discharge injunction does not end the inquiry, however, as the creditor also must be aware that its claim against the debtor was subject to the discharge injunction. Emmert v. Taggart (In re Taggart), 548 B.R. 275, 288 (9th Cir. BAP 2016). The focus is on whether the creditor’s conduct violated the injunction and whether that conduct was intentional; it does not require a specific intent to violate the injunction. Knupfer v. Lindblade (In re Dyer), 322 F.3d 1178, 1191 (9th Cir. 2003) (citing Hardy v. United States (In re Hardy), 97 F.3d 1384, 1390 (11th Cir.1996); and Havelock v. Taxel (In re Pace), 67 F.3d 187, 191 (9th Cir. 1995)).

A chapter 7 discharge releases the debtor from personal liability for debts arising “before the date of the order for relief under this chapter.” § 727(b). A “debt” means a liability on a claim. § 101(12). Federal law determines whether such claim arose prepetition or postpetition. SNTL Corp. v. Centre Ins. Co. (In re SNTL Corp.), 571 F.3d 826, 839 (9th Cir. 2009); ZiLOG, 450 F.3d at 1000. The general rule in the Ninth Circuit is that “a claim arises, for purposes of discharge in bankruptcy, at the time of the events giving rise to the claim, not at the time the plaintiff is first able to file suit on the claim.” O’Loghlin v. Cty. of Orange, 229 F.3d 871, 874 (9th Cir. 2000).

9th Circuit Bankruptcy Appellant Panels Analysis

The Ninth Circuit BAP found the bankruptcy court applied and then held an evidentiary hearing to allow for testimony on the contempt motion properly. the bankruptcy court’s conclusion that The 9th Circuit BAP also found that Desert Pine Villas knew that the discharge order applied to its prepetition claims against the Kabilings is supported by the record and is neither illogical nor implausible. The Ninth Circuit BAP also found that during oral argument at the June 30, 2015 hearing on the motion for contempt, counsel for Desert Pines specifically admitted that Desert Pines filed the Complaint in the Quiet Title Action, that it named the Debtors as defendants, and that it sought recovery of attorneys’ fees and costs. Thus, the record supports the bankruptcy court’s conclusion that Desert Pine Villas intended to file the quiet title action and the only remaining question is whether the filing of the complaint violated the discharge order.

The mere filing of a complaint against a debtor by a prepetition creditor does not necessarily violate the discharge injunction. For example, pursuing a post-discharge lawsuit in which the debtor is named as a putative party to collect from a collateral source, such as an insurance policy or an uninsured employers’ fund, does not violate section 524 provided “the plaintiff makes it clear that it is not naming the debtor as a party for anything other than formal reasons.” Ruvacalba v. Munoz (In re Munoz), 287 B.R. 546, 550 (9th Cir. BAP 2002) (citing Patronite v. Beeney (In re Beeney), 142 B.R. 360, 363 (9th Cir. BAP 1992)).

Ninth Circuit Bankruptcy Appellate Panels Findings

The complaint filed by Desert Pines Villas did not provide anything about how the Kabilings failed to pay pre-petition HOA dues and that this default was discharged in their chapter 7 bankruptcy case. The 9th Circuit BAP also noted the Kabilings were not listed as just putative parties in the lawsuit and that the Kabilings were not being looked to for amounts listed in the complaint, such as attorneys’ fees and costs for bringing the lawsuit to quite title. The Ninth Circuit BAP continues to lambast Desert Pines Villas, “To the contrary, the Complaint alleges that Desert Pines was required to incur attorneys’ fees to file the action and prays for a fee award against each of the named defendants, including the Debtors.”

Desert Pine Villas tried to argue that there is no bar to seeking attorneys’ fees and costs in a post-discharge lawsuit. While potentially true see the above law regarding claims and when a claim arises under 9th Circuit law. The Ninth Cir. BAP clearly held that Desert Pine Villas made no distinction in their complaint between prepetition or post-petition claims they have or had against the Kabilings. The complaint reads like Desert Pine Villas is seeking redress for prepetition events or prepetition claims. The Desert Pine Villas complaint also did not identify any post-petition conduct by the Kabilings, a post-petition default by the Kabilings or any post-petition contract between Desert Villa Pines and the Kabilings in Desert Pine Villas quite title complaint.

Exception to Creditors Right to Post-Petition Attorneys’ Fees and Costs On a Pre-Petition Claim

There are a number of cases on this issue. The argument goes if a debtor starts the fight post-petition and returns to the fray, then a creditor has a right to seek attorneys’ fees and costs defending itself of dealing with the issue even though the issue arose about a pre-petition claim. Boeing N. Am., Inc., v. Ybarra (In re Ybarra), 424 F.3d 1018, 1026 (9th Cir. 2005).

Conclusion

Bankruptcy attorneys beware. If a creditor files some sort of post-petition or post-discharge complaint against your client and the facts of the complaint only include facts that are from pre-petition events and claims there could be a violation of Section 524. More time spent in drafting the complaint to quiet title could have solved this problem. It sounds like from the provided correspondence the attorney for the Kabilings did reach out to the Desert Pine Villas attorney about this issue to no avail. Desert Pine Villas could have just amended the complaint and changed the prayer or facts listed in the complaint and did not.

Why Did 50 Cent File Bankruptcy When He Is Rich and Famous Still?

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For the record many successful and rich people make the decision to file for bankruptcy protection under various chapters of the Bankruptcy Code. Curtis James Jackson, III, aka 50 Cent, is no different. Like many things in our society ignorance of the law rules the day. Hopefully this article and future articles about 50 Cent’s Chapter 11 bankruptcy case will help you understand bankruptcy law and why 50 Cent filed. That said, on July 13, 2015, 50 Cent filed a personal bankruptcy petition for protection under Chapter 11 of the Bankruptcy Code, Bankruptcy Case No. 15-21233, in the District of Connecticut, Hartford Division, to reorganize his debts.

Why Did 50 Cent File Bankruptcy?

The Merriam-Webster dictionary defines being insolvent as: (1) unable to pay debts as they fall due in the usual course of business; (2) having liabilities in excess of a reasonable market value of assets held. 50 Cent became unable to pay his debts as they came due in the usual course of business resulting from judgments entered against him and the cost of litigating with Sleek Audio and Lastonia Leviston lawsuits.

Sleek Audio, LLC Litigation

According to court documents back in 2011n 50 Cent entered into business with Sleek Audio, LLC to develop headphones and market the headphones under 50 Cent’s professional name. Sleek entered into a licensing brand agreement with G-Unit Brands, 50 Cent’s brand licensing company and allowed Sleek to use 50 Cent’s trademarks in the marketing of the headphones. For whatever reason Sleek did not follow through on making the headphone commercially viable by the February 15, 2011, deadline. As a result G-Unit Brands terminated the licensing agreement with Sleek and 50 Cent then created SMS Audio to develop his headphones on his own instead. Like most divorces Sleek did not go away quietly. Sometime in August 2011 Sleek filed an arbitration case against 50 Cent alleging he stole their designs for his new headphones and owed Sleek some money. Long story short Sleek won. Eventually a judgment was entered in Sleek’s favor totaling $17,247,426.11 plus post-judgment interest rate of 4.75%. 50 Cent’s list of 20 largest unsecured creditors provides the judgment has grown to $18,428,257.00 as of July 13, 2015.

Lastonia Leviston Sex Tape Litigation

Another reason for the personal Chapter 11 bankruptcy filing is a sex tape 50 Cent allegedly released of Lastonia Leviston without her consent. 50 Cent was in a rap war with William Leonard Roberts, aka Rick Ross. Ms. Leviston used to date Rick Ross and they have a child together. In 2008 Ms. Leviston was in a relationship with Maurice Murray. Leviston and Murray made a sex tape and Murray retained possession of the sex tape. At some point Murray gave the sex tape to 50 Cent and allegedly told 50 Cent he could do whatever he wanted with the sex tape. 50 Cent allegedly created a copy of the sex tape and then narrated the sex tape saying negative things about Ms. Leviston and mocking Rick Ross. 50 Cent alleged the edited version of the sex tape was leaked by someone other than himself and that he never released the edited sex tape on any of his websites. Ms. Leviston sued 50 Cent in state court and eventually she won a judgment for about $5 million (Leviston v Jackson, Index No. 102449-2010, pending before New York State Supreme Court, New York County).

July 13, 2015 Chapter 11 Bankruptcy Filing and Leviston Lawsuit

The jury in the Leviston lawsuit was then tasked with determining how much the punitive damages to punish 50 Cent for the alleged release of the edited sex tape should be. Before the punishment faze began 50 Cent filed for personal bankruptcy under Chapter 11 of the Bankruptcy Code. As soon as a bankruptcy petition is filed the automatic stay takes effect stopping any and all collection activity including lawsuits. So the day the punishment part of the state court lawsuit was supposed to start 50 Cent’s attorneys walked in with the notice of the bankruptcy filing and that ended the punishment faze for the time being. But, a creditor or party-in-interest, like Ms. Leviston, can request the bankruptcy court to allow a state court lawsuit to continue despite the filing of a bankruptcy case. This is what happened in 50 Cent’s bankruptcy case. Ms. Leviston’s Bankruptcy Attorneys filed what is called a motion for relief from the automatic stay on July 13, 2015, the exact same day 50 Cent filed for bankruptcy protection. Ms. Leviston asked the bankruptcy court to allow the state court punishment faze to continue despite the filing of the bankruptcy case. Ms. Leviston’s attorneys also requested and received an expedited hearing date to speed up the process.

Of course 50 Cent’s Bankruptcy Lawyers filed an opposition to the motion for relief from stay advocating why the stay should not be lifted. In my opinion the two most compelling reasons to not lift the automatic stay is that punitive or punishment damages are normally calculated based upon the wealth of the allegedly guilty party and that punitive damages claims are/can be subordinated or disallowed in bankruptcy pursuant to Section 510(c). When a person files for bankruptcy protection what the bankruptcy filer’s assets are worth is often a litigated issue because it matters a lot in the outcome of what creditors should receive through the Chapter 11 plan of reorganization. So how can a jury in the state court case determine the amount of punitive damages to award against 50 Cent if a determination of the value of his assets has not been made in the now pending bankruptcy case? Arguably punitive damages cannot be determined so why proceed? The other compelling argument in my opinion is how punitive damages are treated in bankruptcy. Generally punitive damages are disallowed or subordinated to other claims so that the other people who are owed money get paid more. The goal of bankruptcy is distribute the assets of the debtor to creditors fairly according to the Bankruptcy Code. The goal is not to punish the debtor like punitive damages seek to do. Therefore punitive damages are generally disallowed or paid after other types of claims are paid first. I will have more to day about this issue in future articles.

July 17, 2015, a hearing was held before the Honorable Ann M. Nevins regarding the motion for relief from stay and the motion was granted. As a result the punitive damages part of the Leviston lawsuit could continue. On July 20, 2015, the jury in the New York State Court lawsuit regarding the alleged release of the sex tape awarded an additional $2 million in punitive damages to Ms. Leviston for a total judgment against 50 Cent of $7 million. I am sure 50 Cent was not banking on the filing of his bankruptcy case to stop the punishment part of the lawsuit by Ms. Leviston. Nevertheless, there are still benefits to seeking bankruptcy protection and reorganizing his debts in Chapter 11.

So, 50 Cent found himself with a $17 million judgment against him owed to Sleek and then another judgment of $5 million owed to Ms. Leviston prior to filing for bankruptcy protection. Even if someone has significant assets and significant income can they write a $22 million check to satisfy their debts? That is why 50 Cent filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code. What will result in 50 Cent’s Chapter 11 reorganization case is still to be determined. Additional articles will be posted to discuss 50 Cent’s current financial circumstances and current status of the case in the future.