Some time ago, I wrote about John Gellene, the silk-stocking lawyer who went to prison for failure to disclose his connections in a high dollar case.   (The article has received 2,423 page views making one of the most read postings from this blog).    I described his situation as what it must feel like to be struck by lightning, that is, a random and thoroughly unexpected reversal of fortune.   Now it looks like Texas attorney Calvin Braun is in the path of the lightning bolt, although in a much smaller case.   The case is an object lesson in the importance of disclosures in bankruptcy and the virtually limitless discretion of the prosecutor.Attorney Braun made news when he was the subject of a four count indictment on February 12, 2014 in Case No. 14-0066, United States of America v. Calvin C. Braun in the United States District Court for the Southern District of Texas.    However, the case goes back to February or March 2010, when Mr. Braun received a referral from a former client, a common occurrence for most lawyers.   In this case, Karl Stomberg referred his ex-wife, Tammy, to Mr. Braun.   Calvin Braun had previously represented Karl in buying businesses and had represented one of his companies as a party in interest in a chapter 11 case.Proceedings in Bankruptcy Court--Pt. 1 Tammy's BankruptcyCalvin filed a chapter 7 proceeding for Tammy on May 31, 2010.   Calvin said that he disclosed his ongoing representation of Karl to Tammy and produced a detailed waiver of conflict letter.   However, Tammy’s signature did not appear on the waiver and she denied any knowledge of it.   In his disclosure of compensation, he said that he had been promised payment of $2,500.00 and had received that payment.   The Statement of Financial Affairs showed the same payment.   This was his first false statement, but it was a pretty small one.   Calvin apparently failed to timely file Tammy’s financial management course certificate with the result that the case was closed without a discharge on November 5, 2010.  Calvin claimed that he delayed filing the certificate because Tammy was wavering over a reaffirmation agreement, while Tammy said that he simply failed to do it.  On December 7, 2010, Calvin promised to reopen the case within the week.    Calvin charged Tammy a fee of $300 to reopen the case and ultimately collected an additional $1,258.91 from her.   However, he did not reopen the case and according to Tammy, he stopped returning her phone calls.  Proceedings in Bankruptcy Court--Pt. 2  Karl's Bankruptcy Meanwhile, Karl was experiencing his own financial difficulties.   He came to see Calvin for a chapter 11 filing.   On December 23, 2010, he filed a Chapter 11 petition for Karl.   The schedules listed Tammy as a priority creditor with a claim of $20,000.   When Calvin filed his application to be employed, he failed to disclose his representation of Tammy.   Tammy was not pleased with this.   She hired another lawyer to object to the application.  The new attorney also filed the motion to reopen her personal case and she obtained her discharge on January 31, 2011.   Shortly thereafter, Calvin amended his disclosure to show that his partner had represented Karl in his divorce from Tammy while employed by another firm, that he had previously represented Tammy and that he had previously represented one of Karl’s companies.Notwithstanding the objection, Calvin proceeded with the application to employ.   Curiously, the U.S. Trustee did not object to the employment, telling the Court: This is a potential conflict. It's not an actual conflict.   Ms. Stomberg's course of action lies in seeking disgorgement of fees from Mr. Braun based on the way he handled her Chapter 7 case. That's the remedy that needs to be perceived in this matter. Transcript, pp. 89-90.     However, Judge Bohm based his ruling on the failure to disclose rather than the conflict issue.   He stated:The fact of the matter is that she's a creditor in this case, and I don't know how on God's green earth one attorney can represent an ex-spouse and an ex-spouse without having a fair amount of ill feeling in the pit of his stomach, but obviously Mr. Braun concluded he could.There's no question that 11 U.S.C. Section 327 says: "In a case under Chapter 7, 12, or 11, a person is not disqualified from employment ... solely because of such person's employment by or representation of a creditor, unless there is objection by another creditor ... in which case the Court shall disprove such employment if there is an actual conflict of interest."And there's no question here that Ms. Stomberg is a creditor of this Chapter 11 estate.  So she has objected, which means I should not employ unless there is -- I should not employ if there is an  actual conflict. So the question is, is there an actual conflict?Mr. Stomberg's counsel has argued that there is not. Mr. Burger has argued that there is, and that their conflict exists just because of breach of confidences.My view of the world is this: I don't have to approve. It doesn't say I shall approve. It says Trustee may employ with my approval. What bothers me here is Mr. Braun filed that original 2016 affidavit and did not disclose to me that he was representing Ms. Stomberg. He also didn't  disclose to me that it was prior representation of Mr. Stomberg's company and that Ms. Orlando had represented in the divorce.   But what really bothers me is that he didn't disclose to me that he was representing Ms. Stomberg in her Chapter 7, even though he listed her as a creditor.This is yet another example of Mr. Braun's continued sloppiness at best, deviousness at worst.*** I'm not putting up with it anymore. Every time I see something  from Mr. Braun now, I'm going to flyspeck it not once, not twice, but three times.And here, if I can analogize to the 523 action, debtors who file false statements and then it's  brought to the attention by a creditor and then they amend can't stand up and say, "Oh, well, we really didn't mean it the first time around."There's no excuse for Mr. Braun filing the original 2016 and not making this disclosure. And then he amends only after Mr. Burger brings it to my attention. I cannot tell you how bad of a taste that leaves in my mouth.And, Mr. Braun, all I can tell you is, I'm not putting up with any more shenanigans, I'm not tolerating any more of your old, "Your Honor, I just missed it, I'm too busy, I've got too many cases."You're lucky I don't sanction you for this because you filed a statement that was false, dead false. You're representing Ms. Stomberg and you don't even have the guts to tell me that. And if you're stupid enough to forget it, then I'm not sure you should be practicing law.But, in any event, I'm not approving the application, not because of any kind of actual conflict, but because I've been lied to. And it's not good for the integrity of the system for me to approve an application of an attorney who has lied to me.  So this application is being denied because Mr. Braun filed a false statement under oath on January 10, 2011.Transcript, pp. 92-95 (emphasis added).Proceedings in Bankruptcy--Pt. 3  The Show Cause Orders Notwithstanding Judge Bohm’s comment that Calvin was lucky that the Court didn’t sanction him, the court issued an order to show cause.  The Court stated:This Court is concerned that Braun’s conduct was an attempt to deceive the Court and interfere with the administration of justice. Therefore, he must appear before this Court and show cause why he should not be sanctioned for his actions in this case.Order to Show Cause, Case No. 10-41603, p. 1.Calvin took the Court’s order to heart and engaged a respected bankruptcy attorney to represent him in the sanctions hearing.   He took responsibility for his inaccurate disclosures and apologized to the Court. The Court entered an order in which it accepted his apology and ordered him to pay sanctions to Tammy and her attorney.   He also ordered him to receive mentoring from his attorney, Leonard Simon, at a cost of $1,000.00 per month.This might have been the end of the matter.   However, Tammy subsequently wrote a letter to the Court stating that Karl’s financial disclosures filed with the Bankruptcy Court conflicted with what he was telling the divorce court.   Judge Bohm convened a show cause hearing at which Karl, who was now represented by Barbara Rogers, testified that he did not see the petition, schedules or statement of financial affairs until three weeks after the case was filed and that he did not sign these documents or the declaration of electronic filing.Concerned about these revelations, Judge Bohm issued his third order to show cause in the case and the second one directed to Calvin.   On January 10, 2013, Judge Bohm issued an order imposing sanctions on Calvin for the second time.   He imposed eight separate sanctions of $500.00 payable to the Clerk’s Office for his conduct involved in forging the Debtor’s signature to various documents. He also ordered that various parties be reimbursed for their expenses.  Among other amounts ordered was reimbursement to Karl’s new attorney, Barbara Rogers, for having to engage an attorney to represent her and reimbursement for her time spent testifying.   The IndictmentOn February 12, 2014, approximately one year after the second sanctions order, the Grand Jury returned its four count indictment against Calvin.The First Count alleged Bankruptcy Fraud under 18 U.S.C. §157(3).    The indictment describes the alleged scheme to defraud as follows.   I am going to quote it at length to show just how mundane the allegations are. 12. The scheme and artifice consisted of the defendant concealing and omitting material facts of a potential conflict of interest from the Bankruptcy Court and his client, TM.S, whom he represented in a Chapter 7 bankruptcy case, by failing to disclose Braun's representation of her ex-husband, K.C.S in a Chapter 11 bankruptcy case. Moreover, the defendant falsely represented and promised to perform additional legal work for T.M.S., obtained additional money from her, and never performed the legal work.13. It was part of the scheme and artifice to defraud that the defendant on July 2, 2010, filed a Disclosure of Compensation Certification with the court indicating that T.M.S. had paid him $2,500 on said date, to represent her in the Chapter 7 case, when in truth and in fact, T.M.S. had not paid the full amount owed. The defendant did file a Chapter 7 bankruptcy petition on her behalf on May 31,2010.14. It was further part of the scheme and artifice to defraud that on August 22,2010, T.M.S. completed a financial management course that was a requirement of the Bankruptcy Code and Rules, and she provided a Certificate of Debtor Education to the defendant who was to file the Certificate with the Bankruptcy Clerk's Office to insure that T.M.S. would receive her discharge; however, the defendant did not file the Certificate.15. It was further part of the scheme and artifice to defraud that as a result of the defendant's failure to file the Certificate in T.M.S. 's behalf, the Chapter 7 case was administratively closed without T.M.S. receiving her discharge.16. It was further part of the scheme and artifice to defraud that the defendant agreed to reopen the case and file the Certificate if T.M.S. would pay him an additional $259. On November 30, 2010, T.M.S. paid the defendant $300.00 to reopen the case.17. It was further part of the scheme and artifice to defraud that on December 7, 2010, the defendant told T.M.S. he would reopen her case and file the Certificate by the end of the week, but defendant did not file the Certificate.18. It was further part of the scheme and artifice to defraud that in or about December 22 or 23,2010, the defendant was retained by K.C.S to file a Chapter 11 bankruptcy petition in his behalf. On December 23, 2010, defendant did file the Chapter 11 petition for K.C.S.19. It was further part of the scheme and artifice to defraud that on December 28,2010, T.M.S. paid the defendant $1,258.91, but he failed to reopen her case, and he did not file the Certificate so that she could obtain her discharge.20. It was further part of the scheme and artifice to defraud that on January 7, 2011, the defendant filed Schedules and a Statement of Financial Affairs in K.C.S.'s Chapter 11 case. In Schedule E the defendant listed T.M.S. as a Priority Creditor holding an unsecured claim for $20,000.00.21. It was further part of the scheme and artifice to defraud that the defendant filed in the Bankruptcy Court, the Debtor's (K.C.S.) Application to Employ Orlando & Braun LLP as counsel for Debtor.22. It was further part of the scheme and artifice to defraud that the defendant stated in the Application to Employ and an attached Affidavit that "the firm of Braun nor any of its members, represented Debtor (K.C.S.) prior to the filing of Debtor's Chapter 11 case. To the best of Debtor's knowledge and except as otherwise disclosed in the attorney's affidavit, neither Braun nor any of its members has any other connection with Debtor, Debtor's creditors, equity security holders, or any other parties in interest. .." The defendant did not, in fact, disclose to the Bankruptcy Court that his firm had previously represented Debtor on numerous occasions. Further, defendant well knew that T.M.S. was a creditor of the Debtor and he did not disclose this fact to the Bankruptcy Court.23. It was further part of the scheme and artifice to defraud that the defendant stated in the Affidavit to the Application to Employ "neither Braun nor any of its members holds or represents any interest adverse to the Debtor [sic] estate in the matter on which Braun is to be engaged by Debtor and Braun [sic] its members are "disinterested persons" within the meaning of Section 101(3) of the Bankruptcy Code." Defendant did not disclose to the Bankruptcy Court the fact that he currently represented T.M.S. in a Chapter 7 case for which he had been paid and that he had a potential conflict of interest in representing both parties.  Moreover, defendant did not disclose to the Bankruptcy Court that T.M.S. was a creditor in K.C.S.'s Chapter 11 case when he well knew that she was and that he represented her in a Chapter 7 case.24. It was further part of the scheme and artifice to defraud that the defendant, after T.M.S. filed an Objection to the Application to Employ, filed a 1st Amended Affidavit he filed with the Bankruptcy Court. However, defendant still represented that he did not represent any creditors of the Debtor (K.C.S.), when in truth and in fact, and he well knew because he represented T.M.S. in her Chapter 7 case, that she was a creditor in K.C.S.'s Chapter 11 case.This is a scheme to defraud?   I can see malpractice writ large, but hardly a fraudulent scheme.The indictment also included three counts for making a false bankruptcy declaration under 18 U.S.C. §152(3).   These included the initial Affidavit of Proposed Attorney and Rule 2014(b) Disclosure and the Amended Affidavit of Proposed Attorney and Rule 2014(b) filed in Karl’s Chapter 11 case and the Disclosure of Compensation filed in Tammy’s Chapter 7 case.    Specifically, Count IV alleged that Calvin “did knowingly and intentionally make a material false declaration, certificate and verification under penalty of perjury” when he stated that he had already been paid $2,500.00 by Tammy when in fact he had not received this much money and later sought to collect the balance of his fee from her. What It MeansThis is a disturbing case.   In Count I of the indictment, the Grand Jury takes every mistake that Calvin made in representing Karl and Tammy and strings them together as a scheme to defraud.   To me, this looks like the criminalization of negligence.   If you assume that the scheme to defraud must include additional elements beyond the false declarations  (I will address those more below), there must be something more.    As I read the indictment, the additional elements consisted of failing to get Tammy her discharge and filing Karl’s case even though he had a conflict of interest.   These items constitute malpractice and violations of the disciplinary rules, but a criminal scheme to defraud?   That seems to stretch credibility beyond the breaking point.   (I actually had stronger language in mind, but decided to tone it down).   I also have trouble seeing how the erroneous disclosure that Calvin had already been paid his fee in full was a knowing and intentional false statement.   If he said that he had not been paid when he had, this would have been material because it would have meant that he had received an undisclosed transfer, but saying that he had been paid in full when he hadn’t?   That strikes me as sloppy but not criminal.The sworn statements submitted with the application to employ are another matter. Failing to disclose connections to parties in the case is what sent John Gellene to jail.   Here, the connections to Tammy were open and obvious since Calvin scheduled Tammy as a priority creditor and his previous representation of Tammy was a matter of public record.   Perhaps this conflict could have been overcome with disclosure and consent.  However, Calvin continued to proceed with the application to employ even after Tammy had objected.  On the other hand, the U.S. Trustee did not believe that the omission was serious enough to warrant denial of employment and the Court accepted Calvin’s apology at the show cause hearing.  It seems clear that Judge Bohm was trying to get Calvin’s attention and that he believed that he had succeeded.   The bottom line is that disclosures matter.   As Judge Bohm correctly stated, full disclosure is essential to the integrity of the system.   While all attorneys (myself included) make mistakes, the number of mistakes and the speed with which they are corrected say a lot about the attorney.  In this case, Judge Bohm was sending a clear message that there had been too many mistakes that were not corrected in a timely manner.   The other take-away is that once the U.S. Attorney gets involved, every small mistake may be blown out of proportion.    I feel badly for Calvin Braun because I do not think he belongs in the criminal justice system.   However, I can sure understand why Judge Bohm was unhappy.  It is a bad situation all around.  In the words of the Sergeant in Hill Street Blues, “Hey, let’s be careful out there.”     Note on Sources:  I have relied exclusively on public records for this post.   I do not have personal knowledge of any of the facts myself and have not spoken with any of the participants.   Where matters stated appear to be reasonably certain, such as that a document was filed on a certain date, I have stated them as facts. Where a statement is an allegation of a party, I have tried to indicate that.  A Grand Jury Indictment is an allegation.   The Defendant Calvin Braun, is presumed to be innocent.

This is an article that I did for this year's Advanced Consumer Bankruptcy Course.   I have attempted to summarize all of the published decisions on dischargeability from the Supreme Court, Fifth Circuit, Texas District Courts and Texas Bankruptcy Courts (since 2009 for the Bankruptcy Courts).   Hopefully you will find this helpful.   I have placed an (*) by the cases that I have previously blogged about.   You can click on the title of the case to get to the prior blog post. Supreme Court Cases: *Bullock v.BankChampaign, N.A., 133 S. Ct. 1754; 185 L. Ed. 2d 922; 2013 U.S. LEXIS 3521 (2013)  Intent required for defalcation in a fiduciary capacity was recklessness.*United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260 (2010) Chapter 13 plan which provided for discharge of student loan debt was entitled to res judicata effect.Tenn. Student Assistance Corp. v. Hood, 541 U.S. 440 (2004) Eleventh Amendment did not preclude suit to determine dischargeability of student loan debt.Kontrick v. Ryan, 540 U.S. 443 (2004) Failure to file a timely objection to discharge could be waived.Archer v. Warner, 538 U.S. 314 (2003)  Where creditors and debtors settled a fraud suit and the debtors defaulted on the resulting promissory note, the settlement did not bar the creditors from alleging that the debt was nondischargeable because it was for money obtained by fraud.Young v. United States, 535 U.S. 43 (2002) Three year look-back period under 11 U.S.C. §507(a)(8) could be tolled by intervening bankruptcy case.Cohen v. De La Cruz, 523 U.S. 213 (1998) Where claim arose from fraud, entire amount was non-dischargeable.Kawaahau v. Geiger, 523 U.S. 57 (1998)  In order for a debt to be non-dischargeable under 11 U.S.C. §523(a)(6), debtor must have intended the injury.   Negligent and reckless debts do not fall under the exception.Field v. Mans, 516 U.S. 59 (1995)  Standard for non-dischargeability for fraud was “justifiable reliance,” not reasonable reliance.Grogan v. Garner, 498 U.S. (1991)  Burden of proof under 11 U.S.C. §523(a) is preponderance of the evidence.Davis v. Aetna Acceptance Co., 293 U.S. 328, 55 S. Ct. 151, 153, 79 L. Ed. 393 (1934)  A willful and malicious injury does not follow as of course from every act of conversion without reference to the circumstances.Neal v. Clark, 95 U.S. 704 (1877)  In order to establish non-dischargeable debt for fraud, it is necessary to establish moral turpitude as opposed to constructive fraud.Fifth Circuit CasesUnited States v. Coney, 689 F.3d 365 (5th Cir. 2012)  Tax debt owed to IRS was non-dischargeable where debtor sought to evade or defeat collection of taxes.Bandi v. Becnel (In re Bandi), 683 F.3d 671 (5th Cir. 2012), cert. den., 2013 U.S. LEXIS 436 (2013)  False representation that debtors owned real property was not a statement of financial condition and therefore fell under 11 U.S.C. §523(a)(2)(A).    Oral representations of financial condition fall under 11 U.S.C. §523(a)(2)(B) and are dischargeable.*Shcolnik v.Rapid Settlements Ltd. (In re Shcolnik), 670 F.3d 624 (5th Cir. 2012)  Person who falsely claimed an ownership interest in certain corporations was not a fiduciary under 11 U.S.C. §523(a)(4).  Debtor created an objective substantial certainty of harm leading to non-dischargeability when he made claims to ownership of a company in bad faith as a pretense to extort money.   See persuasive dissent from Judge Haynes.*McCoy v. Miss.State Tax Comm'n (In re McCoy), 666 F.3d 924 (5th Cir. 2012), cert. den., 2012 U.S. LEXIS 6632 (2012).  Returns which were not timely filed did not qualify as “returns” under 11 U.S.C. §523(a)(1).   Tax debts for which returns were not filed could not be discharged.FNFS, Ltd. v. Harwood (In re Harwood), 637 F.3d 615 (5th Cir. 2011).  It was defalcation for a debtor to neglect to file deeds of trust on loans from partnership to himself where he owed fiduciary duty to partnership.United States v. Martinez (In re Martinez), 564 F.3d 719 (5th Cir. 2009).  Where tax matters partner contested assessments, time for assessments was tolled and taxes were non-dischargeable.*Morrison v.Western Builders of Amarillo, Inc. (In re Morrison), 555 F.3d 473 (5th Cir. 2009).  Where debtor was aware of error in company’s financial statement but did not disclose it, he was liable for a non-dischargeable debt under 11 U.S.C. §523(a)(2)(B) for a false financial statement.Bankruptcy Court could enter a money judgment on non-dischargeable claim.Aguiluz v. Bayhi (In re Bayhi), 528 F.3d 393 (5th Cir. 2008).  Wife’s obligation to reimburse ex-husband for one-half of non-dischargeable student loan was itself a non-dischargeable debt under 11 U.S.C. §507(a)(8).Schaffer v. La. State Bd. of Dentistry (In re Schaffer), 515 F.3d 424 (5th Cir. 2008).  Costs assessed against a dentist in a license revocation proceeding were for actual pecuniary loss and were not non-dischargeable fines or penalties under 11 U.S.C. §523(a)(7).Texas v. Soileau (In re Soileau), 488 F.3d 302 (5th Cir. 2007)  Bail bondsman’s liability for forfeited bonds was for actual pecuniary loss and was not non-dischargeable fines or penalties under 11 U.S.C. §523(a)(7).Egleston v. Egleston (In re Egleston), 448 F.3d 803 (5th Cir. 2006).  Attorney’s fees incurred in enforcing non-dischargeable alimony award were themselves non-dischargeable.Tummel & Carroll v. Quinlivan (In re Quinlivan), 434 F.3d 314 (5th Cir. 2005).  Debt for fraud of agent was non-dischargeable even where principal was unaware of fraud.General Electric Capital Corp. v. Acosta (In re Acosta), 406 F.3d 367 (5th Cir. 2005).  Dumb but honest debtor did not meet intent standard for non-dischargeability of debt.Raspanti v. Keaty (In re Keaty), 397 F.3d 264 (5th Cir. 2005) State court sanctions award was non-dischargeable as a willful and malicious injury under 11 U.S.C. §523(a)(6).Gupta v. Eastern Idaho Tumor Institute, Inc. (In re Gupta), 394 F.3d 347 (5thCir. 2004).  Relationship of trust and confidence will not give rise to a fiduciary relationship under 11 U.S.C. §523(a)(4).  Collateral estoppel will not attach to a non-existent finding.United States Department of Education v. Gerhardt (In re Gerhardt), 348 F.3d 89 (5thCir. 2003).  Undue hardship standard under 11 U.S.C. §523(a)(8) was defined by Brunnerstandard.   (i) Current inability to maintain living standards are pay debt; (ii) likely to persist due to additional circumstances; and (iii) a good faith effort was made to pay the debt.Williams v. IBEW Local 520 (In re Williams), 337 F.3d 504 (5th Cir. 2003).  A contempt judgment against a debtor in bankruptcy is immune from discharge under 11 U.S.C.S. § 523(a)(6). Failure to obey a court order constitutes willful and malicious conduct, and a judgment against a defiant debtor is excepted from discharge.Murphy v. Pa. Higher Educ. Assistance Agency (In re Murphy), 282 F.3d 868 (5thCir. 2002).  Loans for room and board facilitate an education and constitute non-dischargeable student loans under 11 U.S.C. §523(a)(8).Hickman v. Texas (In re Hickman), 260 F.3d 400 (5th Cir. 2001).  Debt for bail bond forfeitures is not excluded from discharge as a penalty or forfeiture under 11 U.S.C. §523(a)(7).Office of Thrift Supervision v. Felt (In re Felt), 255 F.3d 220 (5th Cir. 2001).  Savings & Loan President who sold stock pursuant to unapproved offering memorandum was guilty of a willful breach of fiduciary duty and debt was non-dischargeable under 11 U.S.C. §523(a)(4).AT&T Universal Card Servs. v. Mercer (In re Mercer), 246 F.3d 391 (5th Cir. 2001)(en banc).  Use of credit card constitutes a representation of intent to pay.   Debt could be non-dischargeable if debtor has no present intent to pay at time card is used under 11 U.S.C. §523(a)(2)(A).  En banc court reversed panel holding that creditor could not prove reliance on a preapproved credit card.Deodati v. M.M. Winkler & Assocs. (In re M.M. Winkler & Assocs.), 239 F.3d 746 (5th Cir. 2001).  Liability for the fraud of a general partner is not discharged under 11 U.S.C. §523(a)(2)(A) under principles of agency.Woods v. United Student Aid Funds, Inc. (In re Woods), 233 F.3d 324 (5th Cir. 2000).  General discharge in chapter 13 case does not discharge student loan claim.Louisiana Dep't of Revenue & Taxation v. Lewis (In re Lewis), 199 F.3d 249 (5th Cir. 2000).  Debt for state income tax assessed 156 days before bankruptcy was non-dischargeable.Caton v. Trudeau (In re Caton), 157 F.3d 1026 (5th Cir. 1998), cert. den. 1999 U.S. LEXIS 2633 (1999).  Default judgment for libel per se under Illinois law was non-dischargeable under 11 U.S.C. §523(a)(6).  Note:  case relies upon Illinois law which differs from Texas law.Miller v. J.D. Abrams Inc. (In re Miller), 156 F.3d 598 (5th Cir. 1998).  In order to be non-dischargeable under 11 U.S.C. §523(a)(6), act must be taken with subjective intent to harm or objective substantial certainty of harm.    Summary judgment based on collateral estoppel was reversed where state court did not determine intent.Texas Lottery Comm'n v. Tran (In re Tran), 151 F.3d 339 (5th Cir. 1998).  Whether a person is a fiduciary under 11 U.S.C. §523(a)(4) is determined by federal law.   Seller of lottery tickets was not a federal fiduciary despite state statute defining seller as a fiduciary.Johnson v. IRS (In re Johnson), 146 F.3d 252 (5th Cir. 1998).  Interest on non-dischargeable taxes was also non-dischargeable.Texas by & Through Board of Regents of the Univ. of Tex. Sys. v. Walker, 142 F.3d 813 (5th Cir. 1998).  Neither a claim for breach of contract nor conversion necessarily involves an intentional injury under 11 U.S.C. §523(a)(6).    Where professor retained fees earned from outside employment in violation of university by-laws, there was a fact issue precluding summary judgment.Hardee v. IRS (In re Hardee), 137 F.3d 337 (5th Cir. 1998).  Interest on non-dischargeable taxes was also non-dischargeable.Schwager v. Fallas (In re Schwager), 121 F.3d 177 (5th Cir. 1997).  Collateral estoppel did not apply where judgment was supported by two alternate findings, only one of which supported non-dischargeability.Hudson v. Raggio & Raggio, Inc. (In re Hudson), 107 F.3d 355 (5th Cir. 1997).  Court ordered attorney’s fees incurred during child-support suit were non-dischargeable as support.Pancake v. Reliance Insurance Co. (In re Pancake), 106 F.3d 1242 (5th Cir. 1997).  Res judicata is inapplicable to dischargeability but collateral estoppel may apply.Fielder v. King (In re King), 103 F.3d 17 (5th Cir. 1997), cert. den., 117 S.Ct. 2754.  Res judicata does not apply in dischargeability proceedings but collateral estoppel may apply if findings are identical.Gober v. Terra & Co. (In re Gober), 100 F.3d 1195 (5th Cir. 1996).   Post-answer default entered as a sanction could give rise to collateral estoppel.Corley v. Delaney (In re Delaney), 97 F.3d 800 (5th Cir. 1996).  Debtor who tapped shotgun on window but did not intend for it to go off was not subject to non-dischargeable debt under 11 U.S.C. §523(a)(6).Faden v. Insurance Co. of N. Am. (In re Faden), 96 F.3d 792 (5th Cir. 1996).  Debt was non-dischargeable under 11 U.S.C. §523(a)(3) where debtor gave notice to bad address and could not show absence of fraud.   A court should not discharge a debt under Bankruptcy Code § 523(a)(3), 11 U.S.C.S. § 523(a)(3), if the debtor's failure to schedule that debt was due to intentional design, fraud, or improper motive. If the failure is attributable solely to negligence or inadvertence, however, equity points toward discharge of the debt. The burden is on the debtor to demonstrate absence of fraud or intentional design.Perdue v. Cantrell (In re Cantrell), 88 F.3d 344 (5th Cir. 1996).  Debt which was barred by limitations could not be excepted from discharge.Norris v. First Nat'l Bank (In re Norris), 70 F.3d 27 (5th Cir. 1995).  Debt was non-dischargeable where financial statements contained material discrepancies, bank relied upon statement and reliance was objectively reasonable.Garner v. Lehrer (In re Garner), 56 F.3d 677 (5th Cir. 1995).  Post-answer default could give rise to collateral estoppel.Bruner v. United States (In re Bruner), 55 F.3d 195 (5th Cir. 1995).  Debtor who attempted to hide assets and income and failed to file returns or pay taxes was subject to non-dischargeable debt for willfully evading a tax under 11 U.S.C. §523(a)(1)(C).Recoveredge, L.P. v. Pentecost, 44 F.3d 1284 (5th Cir. 1995).  Where jury found that doctor did not engage in a conspiracy to defraud, creditor was barred from pursuing non-dischargeable debt due to collateral estoppel.Dennis v. Dennis (In re Dennis), 25 F.3d 274 (5th Cir. 1994).  Federal law governed whether debt constituted alimony for purposes of dischargeability.Omni Mfg., Inc. v. Smith (In re Smith), 21 F.3d 660 (5th Cir. 1994).  In order to determine whether debt omitted from schedules is non-dischargeable under 11 U.S.C. §523(a)(3), court must look to reason for omission and prejudice to creditors. Joseph v. J. Huey O'Toole, P.C. (In re Joseph), 16 F.3d 86 (5th Cir. 1994).  Obligation to pay wife’s attorneys’ fees constituted non-dischargeable support.Stone v. Caplan (In re Stone), 10 F.3d 285 (5th Cir. 1994).  Failure to schedule debt will not render it non-dischargeable if there is not a deadline to file claims in the case.Quenzer v. United States (In re Quenzer), 19 F.3d 163 (5th Cir. 1993).  Penalties and interest on dischargeable taxes were dischargeable.Coston v. Bank of Malvern (In re Coston), 991 F.2d 257 (5th Cir. 1993).  Factual finding of reasonable reliance was not clearly erroneous.Bennett v. Bennett (In re Bennett), 98 F.2d 779 (5th Cir. 1993).  Debts owed as a result of managing partner’s willful neglect of fiduciary duty to limited partners was non-dischargeable under 11 U.S.C. §523(a)(4).In re Dvorak, 986 F.2d 940 (5th Cir. 1993).  Attorney’s fees incurred as a result of child custody litigation were non-dischargeable support obligations.In re Martin, 963 F.2d 809 (5th Cir. 1992).  Where debtor credibly explained financial statements and other representations, debt was dischargeable.In re Allison, 960 F.2d 481 (5th Cir. 1992).   Debt was not dischargeable where it was obtained through misrepresentations that were knowing and fraudulent, described past or current facts, and were actually relied upon by the creditor.In re Luce, 960 F.2d 1277 (5th Cir. 1992).  Partner’s fraud could be imputed to innocent partner for purposes of non-dischargeability.In re Nicholas, 956 F.2d 110 (5th Cir. 1992).  Affirmative defense to liability for trust funds misapplication applied since appellant subcontractor did not prove that debtor paid funds to non-beneficiaries for items other than actual expenses directly related to projects.   Case applied earlier version of Texas Construction Trust Fund Act.In re Davidson, 947 F.2d 1294 (5th Cir. 1991).  Debtor was estopped to deny that payments were alimony because he had claimed them as such on his tax return.In re Lacy, 947 F.2d 1276 (5th Cir. 1991).  State court consent judgment was entitled to collateral estoppel effect.In re Pierce, 935 F.2d 709 (5th Cir. 1991).  Debt for unemployment taxes was non-dischargeable where return was required to be filed within three years of date of bankruptcy.In re Bercier, 934 F.2d 689 (5th Cir. 1991).  Debt was dischargeable where representations regarding collateral were true at the time they were made. In re Fields, 926 F.2d 501 (5th Cir. 1991).  Surety that paid taxes was subrogated to non-dischargeable claim of governmental entity.In re Modicue, 926 F.2d 452 (5th Cir. 1991).  Non-dischargeable debt for willful and malicious injury was measured by amount of injury caused by debtors rather than amount of debt.FDIC v. Mmahat, 907 F.2d 546 (5thCir. 1990).  Judgment against attorney who breached fiduciary duty was non-dischargeable under 11 U.S.C. §523(a)(4).In re Biggs, 907 F.2d 503 (5th Cir. 1990).  Whether debt was alimony was determined by federal law rather than state law.Grossie v. Sam (In re Sam), 894 F.2d 778 (5th Cir. 1990).  Untimely dischargeability complaint dismissed where creditor had actual knowledge of bar date eighteen days before deadline.Moreno v. Ashworth (In re Moreno), 892 F.2d 417 (5th Cir. 1990).  Corporate officer who transferred assets to himself without proper documentation was subject to non-dischargeable debt under 11 U.S.C. §523(a)(4).In re Compton, 891 F.2d 1180 (5th Cir. 1990).  Sending notice to bad address was not sufficient to give creditor notice, but actual notice was sufficient for debt to be discharged.In re Allman, 735 F.2d 863 (5th Cir. 1984).   Court did not err in refusing to apply collateral estoppel where nothing in the judgments suggested that debtors obtained funds by false pretenses.In re Poston, 735 F.2d 866 (5th Cir. 1984).  Collateral estoppel did not apply where state court did not make specific factual findings of fraud to support its default judgment.In re Quezada, 718 F.2d 121 (5th Cir. 1983).  Negligently allowing pit bull to escape was not willful and malicious injury.Carey Lumber Co. v. Bell, 615 F.2d 370 (5th Cir. 1980).  Debt under Oklahoma lien trust statute was non-dischargeable as a defalcation in a fiduciary capacity.Fifth Circuit Cases That Are No Longer Good Law:Gamble v. Gamble (In re Gamble), 143 F.3d 223 (5th Cir. 1998).  Debt was non-dischargeable under balancing test of 11 U.S.C. §523(a)(15).   Balancing test was deleted by BAPCPA.    Now, property settlement debts are non-dischargeable without an additional showing.Boyce v. Greenway (In re Greenway), 71 F.3d 1177 (5th Cir. 1996), cert. den., 116 S.Ct. 2499. Drunk boating debt was not excluded from discharge under 11 U.S.C. §523(a)(9).    BAPCPA added aircraft and vessels to exception.In re Foreman, 906 F.2d 123 (5th Cir. 1990).  Burden of proof for dischargeability cases is clear and convincing evidence.  Overruled by Grogan v. Garner.In re Boyle, 819 F.2d 583 (5th Cir. 1987).  Non-fraudulent diversions of construction trust funds are dischargeable.   Case was decided under prior version of Texas Construction Trust Fund Act.Seven Elves, Inc. v. Eskenazi, 704 F.2d 241 (5th Cir. 1983).   Willful and malicious meant an intentional act done without just cause or excuse.  Overruled by Kawaahua and Miller.In re Angelle, 610 F.2d 1335 (5th Cir. 1980).  Contractor’s debt for misapplication of construction trust funds was dischargeable.   Case was decided under prior version of Texas Construction Trust Fund Act.Selected District Court Opinions:Carroll v. Farooqi, 486 B.R. 718 (N.D. 2013).  Bankruptcy court could constitutionally determine dischargeability and liquidate amount of debt under Stern v. Marshall.Turbo Aleae Invs., Inc. v. Borschow (In re Borschow), 467 B.R. 410 (W.D. Tex. 2012).  Bankruptcy Court did not err in finding that assignee of debt stepped into shoes of original creditor for purposes of determining reliance and other fraud issues.Madison v. Williamson, 410 B.R. 481 (S.D. Tex. 2008).  Debt for injury to a child was non-dischargeable as willful and malicious injury.T.D. Farrell Construction, Inc. v. Schreiber, 2008 U.S. Dist. LEXIS 89438 (S.D. Tex. 2008).  Collateral estoppel did not render debt nondischargeable under 11 U.S.C. §523(a)(4) or (a)(6) where it was unclear whether debt misapplied funds or intended harm.Wissen v. Aguado Stone, Inc., 2008 U.S. Dist. LEXIS 12453 (W.D. Tex. 2008).  Knowing misapplication of construction trust funds rendered debt non-dischargeable.   Fraudulent intent was not required.Educ. Credit Mgmt. Corp. v. Young, 376 B.R. 795 (E.D. Tex. 2008).  Because debtor was making payments to a retirement fund and did not increase payments on student loan when his income increased, bankruptcy court’s partial discharge of student loan debt was reversed.Holder v. Tex. Dep't of Pub. Safety (In re Holder), 376 B.R. 802 (S.D. Tex. 2007).  License surcharges for driving while intoxicated and driving without a license were non-dischargeable fines, penalties or forfeitures.Jones v. Bank One Texas, N.A., 376 B.R. 130 (W.D. Tex. 2007).  Student loan debt was nondischargeable where debtor’s financial condition was not likely to continue into future and she had not made good faith effort to repay loans.Educ. Credit Mgmnt. v. Pratt, 375 B.R. 753 (S.D. Tex. 2007).  Stay at home mom who cared for six children was not entitled to hardship discharge since “this was a voluntary decision made by the Pratts with full knowledge of their financial obligations and the additional financial responsibilities that accompany having more children.” Range v. United States, 245 B.R. 266 (S.D. Tex. 1999).  Bankruptcy court was within its discretion in accepting oral testimony that contradicted the transcripts and certificates of assessment offered by the IRS.Hardie v. United States, 204 B.R. 944 (S.D. Tex. 1996).  Taxes assessed within 240 days of bankruptcy were non-dischargeable.   Definition of “assess” contained in Internal Revenue Code controlled.Stokes v. Ferris, 150 B.R. 388 (W.D. Tex. 1992).  Where debt was found to be willful and malicious, entire debt including punitive damages and attorneys’ fees was non-dischargeable.A Few Bankruptcy Court Opinions:Lowry v. Croft (In re Croft), 500 B.R. 823 (Bankr. W.D. Tex. 2013).  Debtor who posted credit report on website for purposes of discrediting plaintiff was subject to nondischargeable debt under 11 U.S.C. §523(a)(6).Countrywide Home Loans, Inc. v. Cowin (In re Cowin), 492 B.R. 858 (Bankr. S.D. Tex. 2013).  Debtor who engaged in scheme to acquire condominium assessments and foreclose out prior liens was subject to nondischargeable debt for larceny.Bui v. Do (In re Do), 2013 Bankr. LEXIS 1463 (Bankr. W.D. Tex. 2013).  Defamation damages for alleging that creditor was a mole or spy for Communist Party in Vietnam were nondischargeable.Hutton v. Ferguson (In re Hutton), 463 B.R. 819 (Bankr. W.D. Tex. 2011).   Attorneys’ fees awarded as a sanction in child custody proceedings were nondischargeable support.Smart Fin. Credit Union v. Williams (In re Williams), 466 B.R. 95 (Bankr. S.D. Tex. 2011).   Where creditor failed to close $3,000 line of credit and instead allowed debtors unlimited credit, debtors did not make a false representation that could lead to a nondischargeable debt.   Debtors’ conduct in borrowing $133,000 was not willful and malicious. Fire Safe Prot. Servs., LP v. Jamal Abdalla Ayesh (In re Jamal Abdalla Ayesh), 465 B.R. 443 (Bankr. S.D. Tex. 2011).   Where state court found that debtor signed contract under false name, elements of false representation and intent to deceive were established.   Creditor established remaining issues on motion for summary judgment.Randall v. Atkins (In re Atkins), 458 B.R. 858 (Bankr. W.D. Tex. 2011).    Debtor breached fiduciary duty when he used loan proceeds for non-business purposes.   Misuse of loan proceeds also constituted willful and malicious injury.   Note:   This case relies on the special trust or confidence definition of fiduciary duty which was rejected by the Fifth Circuit in Matter of Gupta.Wise v. Peterson (In re Peterson), 452 B.R. 203 (Bankr. S.D. Tex. 2011).   Punching other person in the mouth was a willful and malicious injury.Ward Family Found. v. Arnette (In re Arnette), 454 B.R. 663 (Bankr. N.D. Tex. 2011).   Where debtor misrepresented his experience and expertise in the real estate business and made false promises about how he would use investor money, debt was nondischargeable for fraud.Posey v. Kinkaid (In re Kinkaid), 445 B.R. 731 (Bankr. N.D. Tex. 2011). Sum of $78,400 owed under divorce decree was nondischargeable under 11 U.S.C. §523(a)(15).Mullen v. Jones (In re Jones), 445 B.R. 677 (Bankr. N.D. Tex. 2011).   Debtor who controlled corporation that was general partner of partnership was found to have used partnership funds for personal expenses.   Debt was nondischargeable as defalcation in a fiduciary capacity under 11 U.S.C. §523(a)(4).           Smith v. Wells Fargo Educ. Fin. Servs. (In re Smith), 442 B.R. 550 (Bankr. S.D. Tex. 2010), aff’d, Educ. Credit Mgmt. Corp. v. Smith, 2011 U.S. Dist. LEXIS 113592 (S.D. Tex., Sept. 30, 2011).   Debtor was allowed to re-open bankruptcy to seek determination of undue hardship on student loans.   Fact that loans were consolidated post-bankruptcy did not constitute a new post-bankruptcy debt.   Where each of pre-consolidation loans was dischargeable, consolidated loan was dischargeable.Schubert Osterrieder & Nickelson PLLC v. Bain (In re Bain), 436 B.R. 918 (Bankr. S.D. Tex. 2010).   In order for debt to be non-dischargeable for fraud, someone must have received something through fraud.   Where debtor ordered magazine subscriptions in attorneys’ name, there was not a non-dischargeable debt for fraud because neither debtor nor anyone acting on his behalf received any money, property, services or credit.Bale v. Ryan (In re Ryan), 443 B.R. 395 (Bankr. N.D. Tex. 2010).   Where corporation failed to complete house, president (who was a chapter 13 debtor) was allowed discharge where creditors failed to establish grounds for piercing corporate veil or fraud.*Material Prods.,Int'l, Ltd. v. Ortiz (In re Ortiz), 441 B.R. 73 (Bankr. W.D. Tex. 2010).   Debtor was not entitled to judgment on the pleadings where complaint did not allege a verbal statement of financial condition.Berger v. Jacobson (In re Jacobson), 433 B.R. 183 (Bankr. S.D. Tex. 2010).   Wife’s claim for defalcation in a fiduciary capacity failed because trust created by Texas Family Code was a constructive trust and did not establish a fiduciary relationship under federal law.Szostek v. Tex. Comptroller of Pub. Accounts (In re Szostek), 433 B.R. 611 (Bankr. W.D. Tex. 2010).   Sales taxes which the debtors were required to collect but did not were nondischargeable under 11 U.S.C. §523(a)(1).Eric D. Fein, P.C. v. Young (In re Young), 425 B.R. 811 (Bankr. E.D. Tex. 2010).   Attorneys’ fees owed to debtor’s own divorce attorney were not excluded from discharge as support obligations.*Wallace v. Perry(In re Perry), 423 B.R. 215 (Bankr. S.D. Tex. 2010).   Damages for breach of contract and defamation were found to be non-dischargeable under 11 U.S.C. §523(a)(6).   Among other claims found non-dischargeable was a claim that debtor forwarded anonymous blog postings which were defamatory.   Case contains an excellent discussion of credibility of witnesses.Am. Bank of Commerce v. Powell (In re Powell), 423 B.R. 201 (Bankr. N.D. Tex. 2010).   Bank’s claim against debtor who was found to be short 5,000 head of cattle was dischargeable.   Bank did not prove that debtor ever diverted cattle or sold them out of trust.   Bank could not establish fraud where it had right to inspect cattle but instead chose to rely on debtor’s log books which it knew were not based on actual inspections.Mann Bracken, LLP v. Powers (In re Powers), 421 B.R. 326 (Bankr. W.D. Tex. 2009).   Attorney who had never successfully obtained class certification had Rule 11 sanctions awarded against him.   Bankruptcy court denied summary judgment under 11 U.S.C. §523(a)(6) because District Court’s Rule 11 order did not contain required findings for willful and malicious injury.  (Note:  Debt was found non-dischargeable after trial on the merits).  Gamble-Ledbetter v. Andra Group, L.P. (In re Gamble-Ledbetter), 419 B.R. 682 (Bankr. E.D. Tex. 2009).   Bookkeeper who embezzled from creditor was entitled to nondischargeable judgment under 11 U.S.C. §523(a)(4).Rucker v. Kercheval (In re Kercheval), 416 B.R. 293 (Bankr. N.D. Tex. 2009).   Transfer of accounts was not intended to harm creditor.   Therefore debt was dischargeable.Woo, Inc. v. Donelson (In re Donelson), 410 B.R. 495 (Bankr. S.D.Tex. 2009).   Where debtor purchased business with three post-dated checks but business did not earn sufficient funds to cover the checks, debtor did not commit fraud.   Delivery of checks was not a fraudulent representation.PNK (Lake Charles), LLC v. Guevara (In re Guevara), 409 B.R. 442 (Bankr. S.D. Tex. 2009).   Where gambling debt was unenforceable in Texas, lack of a valid debt precluded non-dischargeable debt.Levine v. Blake (In re Blake), 401 B.R. 839 (Bankr. S.D. Tex. 2009).   Debt was non-dischargeable where debtor misrepresented his qualifications to perform work.Universal Card Servs. Corp. v. Akins (In re Akins), 235 B.R. 866 (Bankr. W.D. Tex. 1999).  Creditor’s position was not substantially justified when it issued a pre-approved credit card to debtor, did not conduct discovery or attend the 341 meeting and did not plead fraud with particularity.   As a result, debtor was entitled to recover his attorneys’ fees.Ragupathi v. Bairrington (In re Bairrington), 183 B.R. 754 (Bankr.W.D. Tex. 1995).  Summary judgment based on collateral estoppel was denied where jury charge in DTPA action could be answered without finding fraud.Wright v. Moffitt (In re Moffitt), 1992 Bankr. LEXIS 2581 (Bankr. S.D. Tex. 1992).  Former chapter 11 trustee was fiduciary to estate and was found liable for non-dischargeable debt when he could not pay amounts which court ordered him to repay.

One of the great things that chapter 13 bankruptcy can accomplish is the return of a vehicle that was repossessed. Your vehicle remains your property until such time that it is sold at auction. Thus, until such time that vehicle is actually sold, you still own it and you have the ability to propose a+ Read MoreThe post Can Bankruptcy Stop My Car From Being Repossessed? appeared first on David M. Siegel.

Judge Tony Davis has authored an opinion which should be recommended reading for anyone litigating preference issues.   The opinion encompasses the court’s rulings on both summary judgment and trial on the merits and touches on both procedural and substantive issues.   Ciesla v. Harney Management Partners (In re KLN Steel Products Co.), No. 13-1013 (Bankr. W.D. Tex. 2/18/14).   The opinion can be found here.What HappenedKLN Steel Products made and sold furniture.   In February 2011, it hired Harney Partners to provide business consulting and restructuring services.   Then initial agreement provided for weekly invoices to be paid by wire transfer within three business days.    KLN was never quite able to meet Harney’s terms and the agreement was modified several times.  Nevertheless, Nevertheless, KLN paid its bills on a regular basis by wire transfer through most of the engagement.   However, this changed in September and October 2011 when KLN made one payment entirely by check and one partially by check and partially by wire transfer.Things got interesting during the month prior to bankruptcy.   Harney abruptly resigned the engagement on November 1, citing recent discoveries and potential improprieties.   The parties made up and signed a new engagement agreement a week later.    However, KLN apparently decided not to retain Harney for its bankruptcy proceeding and the parties proceeded to negotiate terms of final payment.   KLN’s attorney contended that Harney refused to release its papers without payment, while Harney denied this and asserted that the parties reached an arms-length agreement.   Regardless of the cause, Harney was paid $50,000.00 on the day of bankruptcy.   The Debtor filed a liquidating plan.   The Plan and Disclosure Statement proposed to retain “any and all” chapter 5 causes of action but also referred to a list of payments on a schedule.   Adding to the confusion, the disclosure statement referred to an exhibit that was not attached. When the liquidating trustee filed suit against Harney, he filed a bare bones complaint asserting that he wished to recover “at least $168,594.85” in transfers.   This was the amount of 90 payments received by Harney without counting the day of bankruptcy transfer.   The complaint did not contain a list of the transfers to be avoided.Harney filed a motion for summary judgment.   The Court ruled that about half the transfers received during the preference period were subject to the ordinary course defense.   At the hearing, Harney pointed out that the trustee had not specifically pled for recovery of the $50,000 day of bankruptcy payment.    Nevertheless, the trustee did not seek to amend his complaint.   However, both parties listed the payment as an issue to be decided in their pre-trial orders.The case proceeded to trial with regard to four specific transfers:A transfer of $23,351.26 by check on October 4, 2011A transfer of $12,142.93 by check on October 18, 2011A wire transfer of $7,500.00 on October 18, 2011A transfer of $50,000.00 on November 22, 2011.How the Court RuledThe Court ultimately ruled that all of the disputed payments were not made in the ordinary course of business but that Harney was entitled to a new value defense for $2,280.00 for a net recovery of $90,714.19.   However, to get there, the Court had to wade through a procedural maze, including Stern v. Marshall, standing and proper pleadings.    Stern v. MarshallThe Court should be commended for its candid approach to Stern v. Marshall.   Judge Davis noted that Harney had not filed a proof of claim and that the Fifth Circuit had negated consent as a solution to the authority question.    As a result, two easy avenues for resolution were not available to the court.   Instead, the Court simply noted that in the face of compelling arguments for both sides that it would follow its statutory authority to enter a final judgment and that the District Court could treat its ruling as proposed findings of fact and conclusions of law if it was wrong.Judge Davis wrote:So then: The creditor not having filed a proof of claim, and the parties’ consent being unavailing, can the Court issue a final judgment in this avoidance action? Since Stern, courts have been divided on whether bankruptcy courts can enter final decisions in preference actions under such conditions. (citation omitted). The arguments for and against are sound.   (citation omitted).   The issue appears finely balanced. It is not decisively resolvable without further guidance from the Fifth Circuit or the Supreme Court. Because there is no clear precedent altering the status quo in this respect, the Court will adhere to the pre-Stern practice of issuing its ruling on this core matter as a final judgment, as Congress permitted under 28 U.S.C. § 157(b)(2)(F). If the District Court concludes that this course of action was in error, and that this Court lacks constitutional authority, the “final judgment” can be construed as “proposed findings of fact and conclusions of law,” with a final judgment to be entered by the district court. See Order of Reference of Bankruptcy Cases and Proceedings at 1-2 (W.D. Tex. Oct. 4, 2013).  Opinion, pp. 3-4.   I give Judge Davis credit for judicial humility.   Rather than engaging in legal gymnastics, he simply acknowledged that there was not a clear answer and ruled as best he could.StandingUnder Matter of Texas Wyoming Drilling, Inc., 647 F.3d 547 (5th Cir. 2011), a plan must contain “specific and unequivocal” language reserving claims in order for the post-confirmation debtor to have standing to pursue them.   Here, the plan proposed to retain any and all chapter 5 causes of action, which should have been good enough.   However, the plan went on to refer to the payments listed on an attached schedule.   The attached schedule did not include the day of bankruptcy payment.    The Disclosure Statement stated that the payments to be recovered included those on the attached list but failed to attach the list.So, which controlled:  the general statement or the specific listing?   Judge Davis held that the purpose of the specific and unequivocal requirement was to place creditors on notice.   Harney knew that they were subject to being sued for some payments.   As sophisticated restructuring consultants, they should have known that receipt of a payment on the day of bankruptcy would paint a target on them.   As a result, the requirement was met.   The Court stated:On this close issue, however, in the Court’s judgment, the best reading of the Plan and Disclosure Statement and their attachments is that KLN wished to preserve avoidance actions very generally. By listing some—even if not all—payments to Harney, KLN gave ample notice that payments to Harney might be the subjects of attempted recovery. What was included was sufficient to put Harney (and any other party in interest) on notice that Plaintiff might pursue not only the specific listed payments but also the $50,000 day-of-bankruptcy payment—a payment that Harney was well aware of, even if KLN omitted it. Also, a sophisticated restructuring consultant such as Harney would be well aware that this day-of-bankruptcy payment was certain to be a likely contestant for avoidance, more so than many of the payments that were listed. In fact, it is the unusual, last-second nature of this payment that likely caused it to be omitted from the list of the more typical payments made in the Preference Period. The opposite ruling here would have the effect of discouraging the filing of such lists in favor of the more general retention language approved of in Texas Wyoming. It seems preferable to encourage more rather than less disclosure, even if the more detailed disclosure includes the occasional, relatively minor error.Opinion, p. 22.    Judge Davis’s analysis is instructive.   Rather than taking a formalistic approach, he looked at the practical realities.   This is in keeping with the spirit of the Federal Rules of Civil Procedure which focus on notice more than the use of magic words.PleadingsThe Court reached the same result on adequacy of pleadings but for much different reasons.   The Complaint said that Plaintiff sought to recover all payments within 90 days, including “the total of at least $168,594.85.”   Mathematically, the total of $168,594.85 did not include the $50,000 day of bankruptcy payment.  As a result, the Defendant contended that this payment was not included within the Complaint.   The Court found that the pleading was “so bare-bones and open-ended that it hardly can be said to omit or include the $50,000.”   Opinion, p. 24.  The Court noted that the Complaint could have been subject to a valid motion under Rule 12(b)(6) but that one was not filed. Although Harney never filed a motion to dismiss the complaint, there might have been a basis for such a dismissal. Courts have required more detail from preference complaints than contained in Plaintiff’s Complaint. In most cases, it appears at a minimum that complaints should include basic details of the alleged preference payments, an explanation of the relationship between the parties, and basic facts to support the other required elements—in other words, at least “sufficient factual matter, accepted as true, to ‘state a claim that is plausible on its face.’”   (citation omitted).   The Complaint here can hardly be said to have met that basic standard.Opinion, p. 24.   Even though the complaint was clearly inadequate, the Court found that it did not bar recovery of the disputed payment.    The Court found that trial by consent was present where both parties briefed the day of bankruptcy payment in their summary judgment papers and included it within their pre-trial orders.    The Court explained that the pre-trial order “supersedes all pleadings and governs the issue and evidence to be presented at trial.”     Opinion, p. 25. Additionally, the Court found that “the Trial record shows that Harney put on extensive and well-prepared evidence concerning the day-of-bankruptcy payments, and hotly contested the story Plaintiff sought to tell about those payments.  In other words, Harney’s trial conduct supports the position in Harney’s Pre-Trial Order, to the effect that Harney consented to trying the day-of-bankruptcy payment alongside the other challenged payments.”  Opinion, p. 26.  This is probably one of the few times in litigation when a party lost an argument due to being too well-prepared.   Once again, the Court took a functional approach despite the Plaintiff’s sloppiness.  Ordinary Course DefenseThe Court spent a lot of time on the ordinary course defense.   This is good because preference issues are not often litigated which makes it hard to find current precedents.    The defense has two parts.   First, the debt must be incurred in the ordinary course of business of the debtor and the transferee.   Second, the payment must be made either in the ordinary course of business between the parties (the “subjective test”) or “made according to ordinary business terms” (the “objective test”).   Prior to BAPCPA, there was an “and” between the subjective test and the objective test.   Now there is an “or” meaning that either one will suffice.The Trustee challenged the incurred in the ordinary course of business element on the basis that the Debtor was in the business of making furniture rather than hiring restructuring consultants.   The Court noted that this is not quite what Congress meant.   It wrote that:To meet the “debt incurred” element of this affirmative defense, all that is required is that a debt be incurred in a “subjectively” ordinary course of business, just as a transfer is protected if it is made in the “subjectively” ordinary course of business. In both instances, the test is whether there is a discernable pattern in the parties’ “subjective” relationship, within which pattern the challenged debts and transfers are “ordinary.” (citations omitted).    Plaintiff attempts to shoehorn a different, more stringent standard into this phrase in the “debt incurred” context than the meaning it holds in the “payment made” context. That effort must fail, as a plain matter of textual interpretation. Thus, applying that legal conclusion to the facts of this case, if the Preference Period debts were incurred consistently with how the pre-Preference Period debts were incurred, they pass the “debt incurred” portion of the test.Opinion, pp. 12-13.  The Court also noted the practical concerns raised by the Plaintiff’s argument, noting that if restricting consultants were punished for doing business with a debtor prior to bankruptcy, they would not do business and the chances of the debtor avoiding bankruptcy would plunge to close to zero.    The Defendant did not present evidence on the Objective Test.   The Court noted in a footnote that getting paid on the day of bankruptcy could be in the ordinary course of business for those in the restructuring industry but that the evidence was not presented.In evaluating the Subjective Test, the Court identified several factors as helpful.The “subjective prong” centers upon “whether the transactions between the debtor and the creditor before and during the ninety-day period are consistent.’”   (citation omitted). In analyzing this prong, “courts have come to a rough consensus as to what factors are most important. Typically, courts look to the length of time the parties were engaged in the transaction in issue, whether the amount or form of tender differed from past practices, whether the creditor engaged in any unusual collection activity, and the circumstances under which the payment was made (i.e. whether the creditor took advantage of the debtor’s weak financial condition).” (citation omitted).  Opinion, p. 9.  The Court found that it was significant that no payments were made by check, either before or during the preference period, other than the ones on October 4 and October 18.   Judge Davis explained that while the difference in payment was not enough to render the payments outside the ordinary course, the reason for the difference, namely that the Debtor was short on cash, was important.  The Court received conflicting testimony with regard to the day of bankruptcy payment.   Greg Milligan, testifying for Harney Partners, stated that the firm did not require payment as a condition of turning over its reports, while Patricia Tomasco, testifying for the trustee, insisted upon this condition.   The Court found that “The emails were more consistent with Mr. Milligan’s story, but Ms. Tomasco, counsel for KLN, gave specific and credible testimony to the contrary.”   Opinion, pp. 29-30.   The Court ultimately decided that it need not resolve the conflict in testimony because it could rest its ruling on other grounds.   The Court found that the day of bankruptcy payment was not subjectively in the ordinary course of business.(I)t bears mentioning that there is nothing improper about a professional seeking payment for services, including on the eve of bankruptcy (although of course the professional may risk avoidance under some conditions), and what appears to have happened here (as far as can be drawn out of the limited available evidence) does not rise to the level of impropriety or coercion, even if it might be sufficient to depart from an “ordinary course.”Nonetheless, Harney’s defense is unsuccesful. Clearly, the timing of this last payment was dictated by the fact that KLN was filing bankruptcy the next day. Unlike most or all of the prior payments, the payment was made quite soon after the latest invoice (which was dated November 19), was made in payment of two separate invoices, and was significantly higher than any other single payment, whether before or during the Preference Period.  Each of these facts weighs against ordinariness. Moreover, there is no pattern of payments established under the renewed retention of November 8 against which to measure the ordinariness of this payment.  The November 8 retention letter could have provided for an eve-of-bankruptcy pay arrangement, but did not. While the terms of the governing engagement letter do not necessarily delineate the exact bounds of ordinariness, they are probative, particularly when there was not yet a pattern of payments under this renewed engagement letter, against which the eve-of-bankruptcy payment could be assessed. Finally, it again bears emphasizing that Harney had the burden. The Court finds that it failed to carry that burden.Opinion, p. 30.Final ThoughtsSeveral points come to mind from reading this opinion.  The first is that the opinion is a portrait of a judge trying to make the statutory scheme work notwithstanding the foibles of the Supreme Court or the lawyers.   Although the written opinion indicates that Harney Partners tried a good case, this was not sufficient to meet its burden of proof.    While we would like to think that cases depend upon superior advocacy, sometimes the facts just don’t cut your way.   Second, preference litigation is very fact-specific.   Several of the issues in this case turned on the fact that Harney Partners was a sophisticated restructuring consultant.    These issues might have turned out differently for a run of the mill trade creditor.   When trying your preference case, look for the facts that make your case different from the other hundred cases.   Finally, procedure matters. Defendants have the ability to require that Plaintiffs plead more than just a bare-bones complaint.   While failure to file a Rule 12(b)(6) motion probably did not change the result of this case, it was a tool that the Defendant could have used.   Additionally, parties should keep in mind that the pre-trial order supersedes the pleadings.   When there is a question over whether an issue has been properly raised, this dispute should be stated in the pre-trial order to avoid trial by consent.     Disclosure:  Greg Milligan of Harney Partners is a business friend who used to live in the same neighborhood as me.   I am also well acquainted with both of the attorneys who tried the case.   My goal in discussing the case is to look for the practice points and not to critique attorneys who I work with.   However, if anyone wants to discuss a case where I represented the non-prevailing side or just didn’t have time to get around to, I would be happy to accept a guest post.   My only condition is that it needs to come from a Texas bankruptcy lawyer.  I also welcome substantive comments on anything I have written.

   A debtor was unhappy with the Court's rulings that the mortgage was valid, and appealed the denial of his Rule 60 requests for reconsideration in Schmid v. Bank of Am., N.A., 13-CV-784-BBC, 2014 WL 670995 (W.D. Wis. Feb. 21, 2014).  The debtor alleged Bank of America did not hold the mortgage.  The lower court initially found that the objection to claim was withdrawn, and entered an order denying the objection without prejudice. When the Debtor filed an adversary asserting the same claims, the Court found that it was barred by the Rooker-Feldman doctrine.     The Debtor/Plaintiff has requested reconsideration of the ruling in favor of Bank of America based on Rule 60(b)(2), newly discovered evidence.  This was based on an allegation that she (the Debtor) did not discover that Freddie Mac had acquired her mortgage, and instructed the servicers of its collateral to conceal its identity until after the initial order of the Bankruptcy Court.   Rule 60(b)(2) allows a motion for relief from judgment on the grounds of “newly discovered evidence that, with reasonable diligence, could not have been discovered in time to move for a new trial [or amended judgment] under Rule 59(b).  The District Court ruled that ”[a] successful Rule 60(b)(2) motion has five prerequisites: (1) the evidence must have been discovered after the entry of judgment; (2) due diligence on the part of the movant to discover the new evidence has been shown or may be inferred; (3) the evidence is not merely cumulative or impeaching; (4) the evidence is material; and (5) the evidence is such that a new trial would probably produce a new result. Jones v. Lincoln Electric Co., 188 F.3d 709, 732 (7th Cir.1999).    The Bankruptcy Court found that the Debtor did not show she could not have discovered this evidence before the initial order was entered, and her failure to find it constituted a lack of due diligence.  Further, the fact that the state court had entered a judgment prior to the filing of the bankruptcy would preclude the Debtor's argument.  The District Court affirmed, finding that a reasonable person could agree that the Debtor did not perform due diligence and that the evidence was not material. The Debtor also requested reconsideration under Rule 60(b)(3). Rule 60(b)(3) permits relief from a judgment for “fraud ... misrepresentation, or misconduct by an opposing party.  In order to qualify for this relief, the party  is required to prove that (1) she had a meritorious claim; and (2) because of fraud, misrepresentation, or misconduct of the adverse party, she was prevented from fully and fairly presenting her case. Lonsdorf v. Seefeldt, 47 F.3d 893, 897 (7th Cir.1995).  The Bankruptcy Court found that the Debtor did not rebut the prima facie evidence of the validity of the Bank of America claim, or dispute that she signed the note and mortgage, and lacked standing the challenge the endorsement.  She also had not made a plausible showing of fraud by Bank of America, or that any fraud prevented her from presenting her case.  The District Court found that the lower court has not abused its discretion in denying the Rule 60(b)(3) motion.  Finally, the appellate court denied the request for reconsideration based on alleged lack of due process, allegedly in denying the Debtor an evidentiary hearing.    “Due process requires notice ‘reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.’ “ Espinosa, 559 U.S. at 272 (citing Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950)). Actual notice is not required. Dusenbery v. United States, 534 U.S. 161, 170 (2002).  The Bankruptcy Court found that Debtor's attorney had appeared at numerous hearings, the Debtor had been granted a number of extensions, and that the Debtor did not object at a telephone conference where the Court ruled an evidentiary hearing would be held only if the adversary were not dismissed.  Again, the District Court found that the ruling was not an abuse of discretion.  

The ultimate goal of your chapter 7 or 13 bankruptcy is receiving a discharge from the court. In a chapter 7 bankruptcy this occurs after your paperwork is filed, the meeting of creditors is held, the time period has passed for any creditors to object to a discharge, and you have completed your required financial education course. The post Bankrupcty Discharge appeared first on Tucson Bankruptcy Attorney.

When considering filing for bankruptcy there are a number of factors to evaluate. Many of our clients are facing serious financial and emotional losses, perhaps even including foreclosure of a home or repossession of a vehicle. We can help with these issues and many others. When you file a bankruptcy petition creditors are not permitted to keep contacting you for payment. Now, there are some exceptions; for example, if you want to keep your house you may find it easiest to discuss small matters (like a payment address or a change in escrow accounts) directly with your lender. If you would like to do this we can discuss this and fill out the proper paperwork to allow that type of communication.Though there are exceptions, the general rule is that your creditors cannot continue to contact you after you file for bankruptcy. This protection is called the "automatic stay". However, you should know that this protection has limitations. While the creditor cannot try to obtain payment from you or contact you regarding payment, the creditor does not have to continue to do business with you in the future. In most cases credit card companies will close accounts of cardholders that file for bankruptcy.Where this can be particularly troublesome is when your doctor or hospital is listed as a creditor. We have many clients, both with and without medical insurance, that owe their doctor or hospital money. This can range from a small copay to thousands of dollars for medical care. Once you file bankruptcy your doctor or hospital does not have to continue to provide you with services. Of course, there are exceptions if you require emergency care as medical professionals are required to provide anyone needing emergency care with services, regardless of ability to pay or other considerations. However, the provider would only have to stabilize you and then could refer you to another provider.We know this sounds a bit scary, but there are various options available. If the amount owed is very small, and you can afford it, you may be able to pay the amount prior to filing for bankruptcy and not be required to list your doctor or provider as a creditor. Please note, that it is absolutely imperative that you speak with us before doing this, as certain types and amounts of payments prior to a bankruptcy can be considered fraudulent and will complicate your bankruptcy. If payment is not an option you may be able to contact your provider and explain the situation to find out their policy in advance. You may also choose to voluntarily repay the debt. The doctor cannot ask for that, or require it, but in some cases doctors have accepted the payments and continued treatment. Finally, if these solutions will not work, we can talk about different bankruptcy options that involve repayment of creditors.If you have questions about this, or any other matter, please contact your St. Louis Bankruptcy Attorney today!

What You Should Know About Bankruptcy FraudBankruptcy fraud is a serious federal offense that can cost you more than just your personal possessions – it can cost your freedom. There are various ways debtors try to deceive the court from learning more about personal finances. Many consumers may not realize that doing one act alone, such as concealing an asset, can have you facing charges for fraud.Consider the following points:There are 4 forms of bankruptcy fraud. These include concealment of assets, false or incomplete filed documents, multiple filings under false names, and bribing court appointed trustees.Roughly 70 percent of fraud cases involve concealing assets. This can be done in different ways but a common form includes transferring titles to family members or friends.Filing bankruptcy in multiple states is also fraud, but debtors that do this may use real or false personal information when filing forms. Some do this to buy more time to conceal assets.Another form of bankruptcy fraud commonly involves unauthorized agencies or petition mills. These agencies act as a consulting service to help cash-strapped consumers from being foreclosed, evicted, or have further legal action taken against them. Such agencies claim to file bankruptcy for you and then they pull out and disappear from the case; leaving debtors out of money while charging exorbitant fees.As a federal offense, bankruptcy fraud is punishable by up to 5 years in prison with a $250,000 fine in some cases. Probation is another option depending on the outcome, but you may end up being responsible for debt obligations that were intended for discharge or elimination. -->

Divorce is complicated. Bankruptcy is complicated.  Divorce and bankruptcy together are really complicated. The Bankruptcy Code is a series of trade-offs. The interests of creditors are balanced with those of the Debtors who need relief.  Some debts can’t be wiped out in bankruptcy.  Rights arising from divorce are treated with great respect in bankruptcy. Here are some debts which can’t be3 discharged in bankruptcy. recent tax debt debts where the debtor lied or committed fraud student loans debts arising from divorce – domestic support obligations in particular debts arising from intentional wrongful acts – like assault and battery debts arising from justifiable reliance on a false financial statement debts arising from embezzlement or defalcation. The Bankruptcy Code is sometimes much more complicated in practice than it is as written. An example of this is found at sections 523(a)(5) and (a)(15) both of which deal with debts arising from dissolution of marriage or divorce.. Bankruptcy Code section 523(a)(5) is straightforward: Not dischargeable is any debt for a “domestic support obligation.” So child support, alimony, and so forth are not dischargeable in bankruptcy. 523(a)(15) specifies that not dischargeable is any debt “to a spouse, former spouse, or child of the debtor” that isn’t child support, but that is made “in the course of a divorce or separation or in connection with a separation agreement, divorce decree, or other order of a court of record…” When representing a debtor in bankruptcy, an attorney needs to review the divorce decree. But the analysis doesn’t stop there. Because 523(a)(15) has been interpreted more broadly than it reads. What if, for example, a divorce decree specifies that one spouse will be 100% responsible for a joint credit card? That wouldn’t be a debt to the (ex-)spouse. It’s a debt to the credit card issuer. It seems like it shouldn’t be 523(a)(15) debt – but it is. Imagine: A family court Judge has already found one partner responsible for payment of the debt. If that partner doesn’t pay – if that partner is discharged in bankruptcy – the debt doesn’t just evaporate. The other partner retains the obligation to pay. For that reason, even though this hypothetical obligation to pay is not a debt “for a domestic support obligation,” and it’s not “to” the spouse, former spouse, or child, it’s still a 523(a)(15) debt. But it’s not, interestingly enough, 523(a)(5) debt. Not that it makes sense; It’s complicated. There are options. A chapter 13 discharge may, in fact, discharge 523(a)(15) debt, just like it can discharge parking tickets (523(a)(7)) that a chapter 7 can’t discharge. A lawyer needs to be both sophisticated and ready for a swashbuckling argument with the other partner’s attorney. Settlement is possible. The point is, in this and so many other ways, the Code has nuances and a client filing for bankruptcy needs a lawyer who can explain them, and can make them work best for the client’s needs.

If you are filing for bankruptcy, either under chapter 7 or chapter 13, your income matters.  Why?  People who make more than the median income – the income more than 1/2 of the people make – are presumed to be abusing the system if they file a bankruptcy under chapter 7.  For an individual, that’s around $40,000 and for a family of 4 that’s around $80,000. It’s better for most people to file chapter 7 than chapter 13 because in chapter 7, you are done with your bankruptcy in 4 months.  In chapter 13, you pay more fees and you make monthly payments to a chapter 13 trustee toward payment of your debts for 5 years.  This can be a good deal if you are trying to save property or catch up with mortgage arrears. It’s not such a good deal if you have a very little non-exempt property which you might lose in a chapter 7. When you make more than the median income, we have to figure out if you overcome the presumption of abuse. We do that by analyzing your income and expenses under the government’s Means Test as adopted by the Bankruptcy Code. Many of our clients are married.  Frequently, one person in a marriage has debt and needs to file for bankruptcy but the other does not. Then what happens? It’s not all that simple. We have to figure out your projected disposable income.  To figure this out, we need to know not only what you make and what your expenses are, we also need to know what your spouse makes and what your spouse’s expenses are. That’s because anything your spouse makes beyond your spouse’s own separate expenses are deemed to be available to you as disposable income to allow you to pay some of your debts.  This additional disposable income might make a difference in determining (a) whether you are eligible to file a case under chapter 7 or (b) how much you’ll have to pay as a monthly payment if you have to file a case under chapter 13. It might seem unfair that your spouse’s income must be considered if you are filing a bankruptcy case and your spouse is not.  But Congress has spoken  and we must help you obey the rules. The good news is that if you file a bankruptcy case and your spouse does not, your bankruptcy case has no adverse impact on your spouse’s personal credit. It’s complicated when one spouse files for bankruptcy and the other does not.  Lakelaw’s board certified bankruptcy attorneys have great experience with complex cases like yours.  Count on us to help you when you have tricky bankruptcy questions.   Call Lakelaw in Chicago or Waukegan at 847 249 9100 or in Milwaukee or Kenosha at 262 694 7300.