Articles Posted in Bankruptcy Caselaw

Generally, the bankruptcy courts have jurisdiction over bankruptcy matters and claims arising in bankruptcy actions. Certain bankruptcy-related actions and claims filed in bankruptcy courts are better handled by other courts, however; as such, in some instances, a bankruptcy court will refer a matter to a state or federal court. If a bankruptcy court refers a case to another court, the plaintiff has the option of moving to withdraw the reference, but proving the such motions should be granted can be challenging, as demonstrated in a recent California case. If you struggle to pay your debts and wonder if filing for bankruptcy is right for you, it is wise to talk to a California bankruptcy lawyer at your earliest opportunity.

Facts of the Case

It is alleged that the plaintiff filed a motion for sanctions in bankruptcy court against the defendants, including claims under federal non-bankruptcy statutes. The bankruptcy court automatically referred the case to the district court. The plaintiff moved to withdraw the reference, seeking both mandatory and permissive withdrawal to have the district court decide the sanctions motion.

Reference of Claims in Bankruptcy Matters

The district court denied the motion to withdraw the reference. In doing so, it explained that the mandatory withdrawal provision should be interpreted narrowly rather than as an escape hatch allowing most bankruptcy matters to be removed to the district court. Withdrawal is only required when materially considering non-bankruptcy federal law. Courts have found withdrawal mandatory when non- bankruptcy issues necessitate interpreting, not just applying, non-bankruptcy law or undertaking analysis of major unsettled non-bankruptcy law questions. Under this approach, the party seeking withdrawal must show more than the possibility novel non-bankruptcy law issues could arise in the bankruptcy case.

Generally, bankruptcy allows for the discharge of debts. There are some exceptions to the general rule, however. For example, any debt obtained via fraud or false representations is not dischargeable. While it is obvious that people could not discharge debts incurred due to their own fraud, it was not clear whether people could be deemed responsible for debts arising out of another party’s fraud if they were unaware of the fraudulent activity. The United States Supreme Court recently resolved the issue, though, holding that debtors cannot discharge debts brought about by fraud, regardless of whether it was their fraud or another individual’s deceitful acts. If you are interested in learning more about debt relief, it is wise to meet with a California bankruptcy lawyer to evaluate your options.

Facts of the Case

It is reported that the debtors, a married couple, renovated a house in San Francisco and sold it to a buyer who later sued them after discovering defects. The buyer won the case and was awarded damages. The couple then filed for bankruptcy. During the bankruptcy proceedings, the buyer argued that the debt from his judgment against the debtors was not dischargeable because it was obtained through fraud.

Allegedly, the bankruptcy court agreed. The court found that the husband had knowledge of the factual misrepresentations. Further, it held that his fraudulent conduct could be imputed onto his wife due to their partnership. The debtors appealed, and the appellate court remanded the imputed liability finding back to the bankruptcy court, instructing them to determine whether the wife “knew or should have known” of the fraud. The court held that the wife did not know of the fraud and thus was not liable for her husband’s fraudulent conduct. The appellate court affirmed, but the buyer appealed.

In bankruptcy actions, the courts aim not only to help debtors alleviate their overall debt load but also to protect the interests of the debtor’s creditors. Among other things, this means that creditor claims in bankruptcy actions are essentially ranked by priority, with some claims being subordinated to others. In a recent ruling, a California court rejected a creditor’s objection to the subordination of his claim and, in doing so, explained when subordinating claims is appropriate. If you need assistance with a bankruptcy matter, it is in your best interest to meet with a California bankruptcy lawyer as soon as possible.

Procedural Background of the Case

It is reported that the claimant obtained a judgment against the debtor in a state court action. The basis of the claimant’s case was the debtor’s failure to fully reimburse the claimant, who was an equity holder in the debtor’s company, for the value of his stake. The debtor subsequently filed a bankruptcy action. The claimant filed a creditor’s claim, which the bankruptcy court subsequently subordinated; the court subordinated the claimant’s judgment lien as well. The claimant appealed, and the Bankruptcy Appellate Panel affirmed the court’s decisions. He then appealed to the United States Court of Appeals, Ninth Circuit.

Subordination of Bankruptcy Claims

On appeal, the court affirmed the lower court rulings, finding that the Bankruptcy Appellate Panel did not err in finding that the claimant’s bankruptcy claim was properly subordinated. Specifically, the court explained that the applicable law stated that a bankruptcy claim for damages arising out of the sale or purchase of a security has to be subordinated to all interests or claims that are equal or senior to the interest or claim such security represents.

In bankruptcy matters, the debtor must set forth schedules that include all of their property, assets, income, sources of money, and debts. Among other things, this includes any pending or potential claims or lawsuits. If they fail to properly disclose such information, they may be barred from pursuing such claims after they obtain a discharge from the bankruptcy courts. Recently, a California court discussed the measures available for a party that failed to disclose a potential lawsuit in a bankruptcy proceeding. If you have questions regarding the intersection of bankruptcy and civil claims, it is smart to speak to a skilled California bankruptcy lawyer as soon as possible.

Procedural History of the Case

It is reported that the debtor filed a civil lawsuit in the United States District Court for the Central District of California. After pleadings closed, the defendant moved for judgment on the pleadings arguing that the debtor could not proceed with his claims because he failed to disclose them in a recent bankruptcy proceeding. The debtor filed a response in opposition to the motion.

The Intersection of Bankruptcy and Civil Claims

The court ultimately denied the defendant’s motion without prejudice, granting it the right to renew its motion after the facts had been further developed. The court explained that, in the context of bankruptcy, the federal courts adhere to a basic default rule: if a debtor omits a lawsuit or potential claim from its bankruptcy schedules and obtains a plan confirmation or discharge, they will be barred from pursuing their lawsuit or claim via judicial estoppel.

In bankruptcy cases, creditors have the right to file appeals. If the court finds that they failed to adequately preserve their rights, though, it may dismiss the appeal as equitably moot. Specifically, if a creditor neglected to seek a stay of bankruptcy proceedings before filing an appeal, their appeal will most likely be dismissed. The grounds for dismissal due to equitable mootness were the topic of a recent ruling issued in a California bankruptcy case. If you have questions or concerns regarding creditor and debtor rights in bankruptcy proceedings, it is advisable to speak to a knowledgeable California bankruptcy lawyer as soon as possible.

History of the Case

It is reported that a number of creditors filed an appeal in a bankruptcy case. The district court dismissed their appeal as equitably moot. They subsequently filed an appeal from the dismissal of their appeal. After reviewing the evidence of record, the court of appeals found that the district court properly dismissed the underlying appeal as moot. Thus, it affirmed the trial court ruling.

Equitable Mootness in Bankruptcy Proceedings

The appellate courts will weigh four factors in assessing whether a bankruptcy appeal is moot. Specifically, the courts will look at whether the appealing party sought and received a stay, whether the plan in question has been substantially consummated, what impact, if any, a remedy could have on innocent third parties, and whether the bankruptcy court could devise equitable relief without totally undermining the plan.