California Court Discusses Demonstrating a Legal Error in a Bankruptcy Case

The filing of a bankruptcy action triggers an automatic stay in litigation against the debtor, which, in many instances, helps them protect their assets. If a bankruptcy action is dismissed, the stay will be lifted, though, leaving property vulnerable to credits. A debtor can argue that an action was dismissed in error, but they must do so in a timely manner; otherwise, they may waive their right appeal, as demonstrated in a recent California bankruptcy case. If you have unmanageable debts and are interested in learning more about what relief you may be able to obtain by filing for bankruptcy, it is prudent to speak to a California bankruptcy lawyer as soon as possible.

Case Setting

It is reported that the plaintiff deemed a vexatious litigant, filed multiple bankruptcy cases between 2011 and 2020. The focal point of the cases was a property co-owned by the plaintiff’s business partner. The defendant held a deed of trust on the property. Fractional interests in the property were granted to the plaintiff and his wife, who then participated in the aforementioned filing scheme to trigger the automatic stay and prevent foreclosure.

Allegedly, despite an in rem order favoring the defendant until July 2021, the plaintiff’s Chapter 11 case was dismissed in February 2021. Subsequently, the defendant foreclosed on the property, obtained an unlawful detainer judgment, and evicted the plaintiff. The plaintiff filed an adversary complaint alleging a violation of the automatic stay and fraudulent transfer, seeking damages and a restraining order. The bankruptcy court issued an order to show cause and later dismissed the plaintiff’s complaint, citing insufficient service, lack of jurisdiction, and untimeliness. The plaintiff moved to vacate the dismissal order under Civil Rule 60(b), asserting hospitalization during the order to show cause hearing. The court denied the motion, prompting the plaintiff’s appeal.

Demonstrating a Legal Error in a Bankruptcy Case

The court reviewed the denial, applying the abuse of discretion standard. The plaintiff primarily sought relief under Rule 60(b)(1) for legal error and (b)(2) for newly discovered evidence. The court, aligning with recent Supreme Court decisions, emphasized timeliness in addressing legal errors and noted that the plaintiff failed to assert his appeal in the time prescribed by law.

The court clarified, however, that delays in filing an appeal on legal error grounds could be excused upon a showing of extraordinary circumstances. The plaintiff’s hospitalization claim lacked detail or evidence and, therefore, did not support the plaintiff’s assertion that extraordinary circumstances prevented him from filing a timely appeal. The court also dismissed the alleged new evidence, highlighting its irrelevance and lack of timely presentation. Consequently, the court upheld the bankruptcy court’s denial of the plaintiff’s motion.

Meet with a Seasoned California Bankruptcy Attorney

If you need assistance dealing with unmanageable debt, you may be eligible for bankruptcy relief, and you should meet with an attorney to evaluate your options.  Matthew D. Roy is a seasoned California bankruptcy lawyer who can assess your case and aid you in seeking a favorable outcome. To set up a conference with Mr. Roy, you can reach out by using our form online or calling us at (916) 361-6028.