Exception to Discharge -- attacking bankruptcy filings in Federal Court

Source: https://www.americanbar.org/publications/blt/2016/10/02_maurice.html

I was recently asked to discuss how the heck you could challenge a person filing for bankruptcy. The most obvious answer is by showing they are hiding money. Nail them with that, and it's "game over." However, often, that is not so easily proven, nor necessarily the case. There are so many warrens in bankruptcy court, that it is much easier to hide than most people think. Enter the 523 exceptions!

How does it work?

If you are passed the filing deadline for exceptions to discharge, you will need to show good cause as to why the date was missed. Discharge is covered under 11 USC 523. There are six of them that matter most in commercial context:

• 523(a)(1): Taxes and duties exception


• 523(a)(2): obtaining loans, credit, or money by (a) false pretense as to financial position, or (b) through writing (applications)


• 523(a)(3): Failure to list creditor in a timely fashion in bankruptcy proceedings, such that the creditor could not contest


• 523(a)(4): fraud or defalcation of a fiduciary (or fiduciary duty)


• 523(a)(5): support (child/alimony) obligations


• 523(a)(6): willful or malicious injury

There are additional ones, but they get really obscure (home owner associations dues, and government obligations).

Generally, for corporate battles (partnerships, etc.), it ends up being under 523(a)(4). For debts incurred through fraud – 523(a)(2). For punitive damages or exemplary damages mandated by a Court – 523(a)(6).

I’ve won on 523(a)(6), and lost on 523(a)(2) and reached a draw (Settlement) as to 523(a)(4).

Here, however, because the filing is untimely, you would have to show good-cause to re-open the window. Service is popular, as is failure to notify the creditor at all. Also, manifest unjustice would be a good argument, but I don’t see it in your case.

Hanover Law, PC
Offices in Fairfax (VA), Resiterstown (MD), and Washington (DC)
www.hanoverlawpc.com
Central Office: 2751 Prosperity Ave, Ste 150 Fairfax, VA 22031	Sean R. Hanover, Esq. Joey Tutone, Esq. Charlet Herr, Practice Manager Catherine Aguirre, Marketing and Bilingual Specialist
1-800-579-9864 admin@hanoverlawpc.com

VA Bankruptcy -- a warning to those filing for the Homestead Exemption

Just a quick post here -- remember that you must file your notice of homestead election (VA) with the circuit court in the County were the debtor resides. This must be done by the fifth day after the meeting of creditors. See VA Code §34-17. If you fail to do so, the trustee will file to disallow your exemptions, and you'll be stuck arguing about the applicability of farm tools (the only thing excluded from the mandatory filing requirement!).

Conversely, the exemption of wages from the debtor's bank account is not subject to a homestead filing. The maximum allowable deduction from a debtor's personal account, when the monies therein stem from payments for work done, is 25% (limit of max garnishment in VA). Be prepared to argue "source of funds." See VA Code §34-29.

The format to file with the circuit court is:

NOTE: There is a difference between personal property and real-property. Be sure to indicate the filing when making it -- or use both if combining different exemptions!

See VA Code §34-14 (Personal Property)

HOMESTEAD DEED FOR PERSONAL PROPERTY
Name of Householder ____________________________________________

Is the householder a disabled veteran entitled to claim the additional exemption under § 34-4.1?

Address of Householder _________________________________________

Name(s) and age(s) of dependent(s) _____________________________

County/city in which householder resides _______________________

Description of property claimed as exempt and its value
________________________________________________________________

Number of homestead deeds that have been filed by the Householder
________________________________________________________________

Exemption amount previously claimed on prior homestead deeds
________________________________________________________________

List the jurisdictions where previous homestead deeds were filed
________________________________________________________________

________________________________________ (Signature of Householder)

STATE: COUNTY: This document was acknowledged before me by _______________________ or _______________________.

Signature of Notary:
Printed Name of Notary:
My commission expires:
My commission ID:

See VA Code §34-6 (Personal Property)

HOMESTEAD DEED FOR REAL PROPERTY
Name of Householder _______________________________________________
Name of title holder of record (if different) _____________________
Is the householder a disabled veteran entitled to claim the additional exemption under § 34-4.1?
Address of Householder ____________________________________________
Name(s) and age(s) of dependent(s) ________________________________
County/city/state in which real property claimed as exempt is located
___________________________________________________________________

Description of property claimed as exempt _________________________
___________________________________________________________________

Value of property described above _________________________________

Number of homestead deeds that have been filed by the Householder
___________________________________________________________________

Exemption amount previously claimed on prior homestead deeds
___________________________________________________________________

List the jurisdictions where previous homestead deeds were filed
___________________________________________________________________

________________________________________ (Signature of Householder)



STATE: COUNTY: This document was acknowledged before me by _______________________ or _______________________.

Signature of Notary:
Printed Name of Notary:
My commission expires:
My commission ID:

Do you have a question about bankruptcy law? We practice in many different Federal jurisdictions -- we would be glad to chat with you about your questions and your case. 1-800-579-9864 or admin@hanoverlawpc.com.

Hanover Law, PC
Offices in Fairfax, VA and Washington, DC
www.hanoverlawpc.com
2751 Prosperity Ave, Ste 150 Fairfax, VA 22031	Sean R. Hanover, Esq. Stephen Salwierak, Esq.	Lili O'connell, Esq. Charles Hatley, Esq.
1-800-579-9864	admin@hanoverlawpc.com

Bankruptcy, Chapter 13, and getting your stuff back....

I am in month 41 of a 60 month chapter 13 plan. The trustee has just paid off my car. I want to sell it but I am informed by my lawyer that I won't get the title till the 60 months is complete. He says I just have to leave it sit and continue to pay expenses for it? Really?

Ah ha! The perennial problem of "It's mine, dammit....but not really! It actually belongs to the trusty trustee!" See, during a bankruptcy, your assets (say, for instance, that pesky car) are actually controlled by the trustee, who's job it is to ensure everyone get's paid under your plan, and that any "value" in you estate is properly allocated to the creditors that own you until the end of the 5 year period. To wit: the car, while paid off, is still an asset of your estate, which makes it controlled by ye olde trustee. What your lawyer didn't tell you was that he can file a request with the trustee to abandon the asset (i.e. drop it out of that part of the estate that belongs to you) and give it back to you. You'll need to argue that it has limited to no value that the trustee could use to pay other debts with, but if you can do that, you have a chance to convince the trustee to abandon the property. See Rule 6007 which reads:

Rule 6007. Abandonment or Disposition of Property

(a) Notice of Proposed Abandonment or Disposition; Objections; Hearing. Unless otherwise directed by the court, the trustee or debtor in possession shall give notice of a proposed abandonment or disposition of property to the United States trustee, all creditors, indenture trustees, and committees elected pursuant to §705 or appointed pursuant to §1102 of the Code. A party in interest may file and serve an objection within 14 days of the mailing of the notice, or within the time fixed by the court. If a timely objection is made, the court shall set a hearing on notice to the United States trustee and to other entities as the court may direct.

To be fair, it is not likely the trustee will go to the effort to do this...but you could ask your lawyer to file a request, and you are certainly entitled to do so.

If you have a questions about bankruptcy or civil cases, give us a ring! We'll be glad to review your case or discuss how you may move forward. 703-402-2723 or 1-800-579-9864.

Hanover Law, PC
Offices in Fairfax, VA and Washington, DC
www.hanoverlawpc.com
2751 Prosperity Ave, Ste 150 Fairfax, VA 22031	Sean R. Hanover, Esq. Stephen Salwierak, Esq.	Lili O'connell, Esq. Charles Hatley, Esq.
1-800-579-9864	admin@hanoverlawpc.com

How to fight for your investment in a small business

From time-to-time we answer questions related to business law -- and this one deals with lulling, equitable estoppel, breach of contract, and fraud. Right up our alley! The petitioner wrote:

I have an affidavit of trust signed with my employer for money that I gave him 100k cash. The Affidavit of trust states that I can ask for the money back only after 6 years after his business starts which would be in 2011. I have done that several times, but each time he comes up with the excuse that the business is not doing well etc... This time I am determined -- especially now that I heard he moved to Pennsylvania, sold his house in the area, and now he is not paying rent for the restaurant where I work (we received and eviction notice). Is he going to just declare bankruptcy? What are the ways for me to get my money back?

This is a great question! We just finished a multi-year LLC/corporate lawsuit covering just these questions last week -- a major jury victory in Washington, DC. There are actually three questions in what you wrote -- and so I'll cover each briefly.

First, you need address the problem of statute of limitations. You were a bit confusing in your time frames. Did you loan this fella money which was suppose to come due in 2011? If so, you need to move very quickly, as VA has stringent guidelines regarding statute of limitations. However, if you have been trying to collect from 2011, it is entirely likely you can win on a "lulling" -- a form of equitable estoppel that stops (or "tolls") the statute of limitation clock. You'll need to talk to us more about this, but the theory is alive and well, and we won a major law suit in 2014 based on lulling. This will also play-out in bankruptcy court (see below).

Second, you asked about the money. I'm not sure what you think you signed (an "affidavit of trust" sounds very squirrely), but if it was a contract of some kind, you can sue for breach. You may also be able to sue for material misrepresentation (fraud), and fraud in the inducement (also, well...fraud). We would need to see the contract, and determine how, if at all, you are constrained by the terms. This is a good time to kick yourself for not consulting with an attorney before entering a deal involving $100K. Always, always, always spend the couple of hundred it takes to make these deals work properly in the beginning. That's too much money to rely on the signer's "good faith."

Thirdly, as for bankruptcy, it depends on what type of experience he hires for a bankruptcy attorney (i.e. their understanding of the various form of exclusions/objections to discharge of debts). A mere breach of contract won't be excluded from discharge, however, equitable tolling and possibly fraud/misrepresentation certainly can, and should be argued (we've won those, too -- so I can assure you, it works!). Challenging his potential bankruptcy requires a fight in bankruptcy court - and that is different than a fight in state court (which you would also need to do for points 1 and 2 above). This are called "multi-dimensional cases" as they involve state law cases and strategies (state court) that then bleed into bankruptcy court (federal court).

A couple of important reminders here -- remember that you need to file -asap-. This is because (a) your time is running out under the statute of limitations (presumably), but more importantly, (b) your must have a state suit underway PRIOR to his filing bankruptcy or you are largely in trouble. Although you could technically do the entire state AND bankruptcy fight in bankruptcy court, this is not the preferred method, and you should not expect a very sympathetic bankruptcy judge.

If you need help with your state claim (breach of contract, and various forms of fraud), equitable estoppel (lulling), or the bankruptcy motions to object to this fellow's discharge, give us a ring at 703-402-2723 or email admin@hanoverlawpc.com. We'd be glad to help!

Hanover Law, PC
Offices in Fairfax, VA and Washington, DC
www.hanoverlawpc.com		Lili O'connell, Esq. Abby Archer, Esq.
888 16th St., NW Ste 800 Washington, DC 20006	2751 Prosperity Ave, Ste 150 Fairfax, VA 22031	Sean R. Hanover, Esq. Stephen Salwierak, Esq.
1-800-579-9864	admin@hanoverlawpc.com	Charles Hatley, Esq.

Bankruptcy -- sample Complaint Filing for 523(a)(2) and 523(a)(6) Adversarial Process

I have been meaning to post the link to this for a bit. We are representing a client who is attempting to avoid the discharge of his claim against the debtor. The following is an example (pdf) of a bankruptcy adversarial filing under 523(a)(2), fraud, and 523(a)(6), willful and malicious injury done by the debtor.




Click here to download the PDF file.

If you have a bankruptcy adversarial case, contact us! We can help develop both a defense and offensive strategy as required.

Hanover Law, PC
Offices in Fairfax, VA and Washington, DC
www.hanoverlawpc.com		Lili O'connell, Esq. Abby Archer, Esq.
888 16th St., NW Ste 800 Washington, DC 20006	2751 Prosperity Ave, Ste 580 Fairfax, VA 22031	Sean R. Hanover, Esq. Stephen Salwierak, Esq.
1-800-579-9864	admin@hanoverlawpc.com	Charles Hatley, Esq. Leigh Wells, Esq.

Bankruptcy -- Supporting a Motion to Remand to State Court (Relief from Stay).

Hanover Law recently won a hard-fought battle in DC Bankruptcy Court. The defedant/debtor sandbagged our client two weeks before a jury trail in Superior Court by filing bankruptcy. This is known as a tactical filing, and is not uncommon. However, fortunately for our clients, we also practice in bankruptcy court. Nice try -- but defendants actions were not successful. The Superior Court case will now go. Nevertheless, it is educational to see how the case proceeded in Bankruptcy.

I am including our response to the filing to prevent removal of the case back to State Court. I believe it is worth reviewing our strategy. When considering adversarial bankruptcy defense -- specifically remand or relief from stay, the key is to remember three critical points:

• The litigation in state court must be well advanced (usually, through mid-discovery or later). Also known as the "amount of time" the state case has been ongoing.
• The matter must be substantially regarding state law and NOT a federal or bankruptcy question (the resulting decision is always a bankruptcy question, obviously. Rather, the matter itself, about which the state litigation is concerning, cannot be a federal or bankruptcy issue.)
• It should involve a jury matter. Though not strictly required, the fact there can be no jury trial on state matters in bankruptcy court is a strong motivator for the Bankruptcy Court to send the matter back to state.

The controlling cases are: Barge v. Western Southern Life Ins. Co., 307 B.R. 541, 547 (N.D. W. Va. 2004), and Linkway Inv. Co. v. Olsen (In Re Casamont Investors), 196 B.R. 517 (B.A.P. 9th Cir. Cal. 1996).

If you are the defendant attempting to prevent removal/remand, remember -- never argue that due process was violated in the state court (say, for example, due to pre-trial irregularities in preparing the case, discovery, etc.) when the parties have had ample time to prepare and litigate. There is nothing wrong with the approach per se, rather, the Bankruptcy Court is just going to point out that deficiencies in state court trial procedures are best handled at the state court level, not at Bankruptcy. A filing in Bankruptcy Court is not a second bite at the litigation apple.




Click here to download the PDF file.

Do you have questions about bankruptcy or an adversarial process involving a debtor? Come talk to us! For the defense or the plaintiff, we are an experienced litigation firm, and we are accomplished at interweaving bankruptcy procedures with state court action.

Hanover Law, PC
Offices in Fairfax, VA and Washington, DC
www.hanoverlawpc.com		Lili O'connell, Esq. Abby Archer, Esq.
888 16th St., NW Ste 800 Washington, DC 20006	2751 Prosperity Ave, Ste 580 Fairfax, VA 22031	Sean R. Hanover, Esq. Stephen Salwierak, Esq.
1-800-579-9864	admin@hanoverlawpc.com	Charles Hatley, Esq. Leigh Wells, Esq.

A question of BANKRUPTCY -- can you hide an asset?

I was discussing bankruptcy on an Internet legal site, and was asked the following question:

Question:
If a family member is on the verge of bankruptcy, can I purchase their house for the small amount still owed to the bank and have the house exempt as an asset when they declare bankruptcy? Or, would this be considered conspiracy to commit bankruptcy fraud?

My answer:

There is no conspiracy here!

Interesting idea, though. Generally, when a person declares bankruptcy, any asset is fair game for creditors. If the house in question has a good amount of equity, and the person declaring bankruptcy sells it for "a song" just before declaring bankruptcy, the trustee will yank it back (generally, a sale within 2 years of bankruptcy will be scrutinized -- beyond that, only if one of creditors ask for an investigation).

He or she will void the sale and take possession of the property in the interest of the other creditors. Now this is just a general overview -- there are exemptions (called "homestead") at both the state and federal level (you must choose one, not both), and there are certain protected transactions.

The bottom line, however, is before someone declares bankruptcy, they should consult a qualified professional to make sure they don't step on a landmine. If you need help with your bankruptcy, or advice on how to proceed, feel free to give us a ring! We have considerable experience in tax, bankruptcy an maximizing exemptions for both!

http://www.hanoverlawpc.com
703-402-2723

Sean R. Hanover, Esq.
Principal Attorney
The Hanover Law Firm is located in Washington, DC and Fairfax, VA. We practice
in both state and federal courts in VA, MD, and DC.

IRS Regulations Concerning Short Sales and Debt Forgiveness - FORM 982

Tax season is once again upon us. As our firm considers different methods for helping folks, one common theme we often encounter is short sales. We're located in the Northern Virginia/DC Metropolitan area. The number of short sales and foreclosures in this area is, and has been, high. Short sales, and foreclosures, often result in a write-off for the bank that holds the mortgage. This means that the bank cannot collect all the money that you owe on the mortgage itself, and just writes the reamining balance off as a loss. They agree not to pursue you to collect the difference.

The problem, however, is that by writing that amount off, the bank is, in essence, giving you the balance of the loan as a gift. You are being told that you don't have to pay it any longer, and the bank will forgive the debt. Good news when your debt is forgiven. Bad news when it comes to taxes. A debt "forgiven" counts as income, and you should expect to get a tax form from the bank showing that you have been "paid" the amount that was written-off. Called a "cancellation of debt", it is provided on a 1099-C form.

Example of Deficiency "Income" Caused by Short Sale or Foreclosure

For example, if you sold a property with an outstanding mortgage of $500,000 for the approved short-sale amount of $350,000 -- there is a $150,000 deficiency. That amount with be credited as income to you at the end of the year -- and you should expect a 1099-C form from the holder of the mortgage. Imagine getting a notice in the mail that you earned an extra $150,000 this year? That's enough to make your stomach turn!

Fortunately, there is relief. The Mortgage Forgiveness Debt Relief Act of 2007 specifically allows short-sales and foreclosures deficiencies to be excluded from taxable income. In order for this be done, the tax payer must file an IRS Form 982. This form is designed to exclude canceled debt from taxable income, and much of the form does not apply to the residential home owner. However, up to $2 million (jointly filing) or $1 million (individually filing) may be excluded based on the sale, refinance, or foreclosure of your principal residence. Be careful with TurboTax! It won't automatically suggest this.

As an aside, there are many other forms of canceled debt that alsoo qualify for exclusion from your taxes. If you have received a 1099-C from your lender (any lender), be sure to consult with a tax attorney (that would be us!) to see if you can safely avoid paying taxes on the canceled amount. Examples of good reasons for this include insolvency, bankruptcy,and farm debt.

Need help with a tax matter? Give us a ring! We'll discuss your case for free on the phone. We have several VA, DC, and MD lawyers who have considerable experience in sorting out complex IRS matters.

http://www.hanoverlawpc.com
703-402-2723

Sean R. Hanover, Esq.
Principal Attorney
The Hanover Law Firm is located in Washington, DC and Fairfax, VA. We practice
in both state and federal courts in VA, MD, and DC.