Type: Amicus
Date: July 26, 2022
Description: Whether a bankruptcy debtor can be held liable for another person’s fraud, which cannot be discharged in bankruptcy, even when she was not aware of the fraud.
Result: Pending
Failure to Disclose Employment is not a Statement under 523(a)(2)(A)
Failure to report a change in employment status is not a “statement respecting financial condition” within the meaning of section 523(a)(2)(A) and, therefore, a debt based on overpayment of public assistance benefits made in reliance on the non-disclosure, is nondischargeable. State of Oregon v. Mcharo, No. 19-1010 (B.A.P. 9th Cir. Jan. 9, 2020).
When applying for public assistance benefits, Blake Mcharo and his wife signed DHS0415R averring that they would inform the DHS of any change in their eligibility status. After signing the application and receiving Temporary Assistance for Needy Families (TANF) benefits, Mr. Mcharo found employment. Neither he nor his wife informed the DHS of his employment.
In the Mcharo’s chapter 7 bankruptcy, the DHS filed a claim for the amount it had overpaid in TANF benefits after Mr. Mcharo was employed. The DHS also sought an order that the debt was non-dischargeable under 523(a)(2)(A). The bankruptcy court issued a default judgment against Ms. Mcharo but declined to do the same against Mr. Mcharo, finding that his failure to report his employment was an unwritten statement respecting financial condition falling outside the purview of either section 523(a)(2)(A) or (B). The State of Oregon appealed to the Ninth Circuit Bankruptcy Appellate Panel. [Read more…] about Failure to Disclose Employment is not a Statement under 523(a)(2)(A)
Payment of Pre-Petition Debt by Debtor’s Mother Is Preferential Transfer
In what the panel called a strained application of a legal fiction, the BAP for the Tenth Circuit found that money paid by the chapter 7 debtor’s mother directly to one of the debtor’s creditors was a preferential transfer where it preceded the bankruptcy by fewer than 90 days, was secured by a promissory note by the debtor, and favored one creditor over the debtor’s other creditors. Stevens, Littman, Biddison, Tharp and Weinberg, LLC. v. Walters (In re Wagenknecht), 2019 WL 2353534 (B.A.P. 10th Cir. June 4, 2019) (case no. 18-93).
[Read more…] about Payment of Pre-Petition Debt by Debtor’s Mother Is Preferential TransferState May Reasonably Rely on Public Assistance Application
When providing public assistance benefits, the State may reasonably rely upon the applicant’s assertions in the application form, despite access to an independent source of information concerning the applicant’s financial condition. Maxwell v. State of Oregon, No. 18-1286 (B.A.P. 9th Cir. March 27, 2019) (unpublished).
Antionette Maxwell was employed at Oregon Health and Science University, yet she was still entitled to various public assistance benefits, including SNAP benefits, Temporary Assistance for Needy Families, and Employment Related Day Care Program. At some point, the State investigated Ms. Maxwell’s income and found that she had failed to list the income she had earned as an occasional domestic worker and that she received in child support payments. The State sought to recover the resulting overpayment of benefits for over $16,000. Ms. Maxwell filed for Chapter 7 bankruptcy, and the bankruptcy court found the overpayment was nondischargeable under section 523(a)(2)(B) as having been acquired by fraud. [Read more…] about State May Reasonably Rely on Public Assistance Application
Denial of Discharge for Fraudulent Note
The chapter 7 debtor was denied discharge due to having presented a sham Note purporting to prove a debt taking priority over the debt owed to the creditor in this case. Sloan v. Allen (In re Allen), No. 16-23, Adv. Proc. No. 16-10027 (Bankr. D. D.C. Sept. 21, 2017).
In 2008, Carlos Allen borrowed $60,000 from his friend, Douglass Sloan, to apply toward improvements to real property that Allen anticipated selling for an amount that would bring him enough money to repay the loan within sixty days at $72,000. The agreement gave Mr. Sloan the option to convert the loan to an equity interest and take 14.5% of the proceeds when the property was sold. Mr. Sloan never exercised this option. Mr. Allen used the money as planned to renovate the property but, when the bottom fell out of the housing market, the house did not sell. The downturn in the housing market also diminished Mr. Allen’s mortgage business which he had hoped to use as an alternative source of income to repay the loan. While Mr. Allen made some payments on the loan over the years, those payments amounted to approximately $18,000.00, and, when he finally did sell the property five years later, he did not give Mr. Sloan 14.5% of the proceeds.
Mr. Sloan filed an adversary complaint seeking an order denying discharge of the loan under section 523, or, alternatively, denying Mr. Allen a discharge altogether under section 727.
Mr. Sloan first argued that Mr. Allen obtained the loan with no intention of repaying it and should, therefore, be denied discharge under section 523(a)(2)(A). The court disagreed finding that, had all gone according to plan, Mr. Allen would have sold the property and repaid the debt, or used his income from his mortgage business to repay it. It was the drop in the housing market rather than misrepresentation of intentions that caused Mr. Allen’s failure to repay the debt in full.
The court also found that section 523(a)(6) did not render the debt nondischargeable. Mr. Sloan argued that Mr. Allen’s conduct caused “willful and malicious injury . . . to another entity or to the property of another entity[.]” The court found there must be a tort claim to support a finding of nondischargeability under this section and concluded that, because Mr. Sloan did not establish that he successfully converted the debt to a security interest by opting for the 14.5% equity option, he could not sustain a claim for conversion due to Mr. Allen’s failure to pay him out of the sale proceeds.
The court then turned to Mr. Sloan’s argument that Mr. Allen should be denied discharge under sections 727(a)(2)(A) and (B) due to his failure to reveal certain bank accounts, a Pay Pal account, proceeds from sales of merchandize, and his interest in AMG, a company ostensibly owned by his wife, Karen Brooks. The court found that any inaccuracies in Mr. Allen’s schedules with respect to various bank accounts were both insignificant and inadvertent and did not demonstrate an intent to conceal as required by section 727(a)(2)(A). As to his position with respect to AMG, the court found that any evidence of concealment took place outside the time limit in section 727(a)(2)(A) and that at the time of the petition, the business essentially had no significant assets to conceal.
But that did not mark the end of the AMG controversy. The court turned to the evidence surrounding distribution of the funds from the ultimate sale of the property. After paying off a mortgage and the contractors who had renovated the property, Mr. Allen noted a $270,000 payment to AMG. Mr. Allen claimed that the payment was in repayment of a loan (Brooks Loan) secured by the property in the amount of $102,000 that Ms. Brooks made to him prior to the loan from Mr. Sloan. As evidence of this debt, Mr. Allen produced a Note. The court concluded the Note was a sham for the following reasons:
- Allen failed to list the debt in his schedules in a previous bankruptcy.
- Allen’s mother, who was a “co-obligor” on the Note, did not list Ms. Brooks as a creditor in her own bankruptcy.
- There was no indication that Mr. Allen ever made any payments on the debt and, if the Note were genuine, he would have owed substantially more on the debt than $270,000 by the time the property sold.
- Allen’s testimony about his discussions and agreements with Mr. Sloan was illogical and incredible, as was his testimony and other evidence concerning the nature and origin of the Brooks Loan.
- Allen first brought the “Note” to the attention of the court in this case six months after the adversary complaint was filed and after he had filed a motion to dismiss and a motion for summary judgment with no mention of the Brooks Loan.
Based on these findings, the court concluded that Mr. Allen created the “Note” as a means of depriving Mr. Sloan of the benefit of the lending agreement and redirecting the money to himself in an effort to return to financial success.
The court then turned to Mr. Allen’s interest in AMG. At various times, for various reasons, Mr. Allen had listed himself AMG’s president, owner, and/or board member. To the extent Ms. Brooks had an interest in AMG it was as a “straw” owner. This evidence led the court to conclude that AMG was merely a shelter from creditors for the proceeds from the sale of the property.
Based on these findings, the court concluded that Mr. Allen should be denied discharge under sections 727(a)(3) and (4).
Section 727(a)(3) provides in part that a debtor may be denied discharge if he, “concealed, . . . falsified, or failed to keep or preserve any recorded information, . . . from which the debtor’s financial condition or business transactions might be ascertained,” The court found that Mr. Allen’s falsification of the Brooks Note fit within the meaning of this section.
The court also found denial of discharge appropriate under section 727(a)(4), which provides that a debtor may be denied discharge for knowingly making a “false oath or account” in connection with his bankruptcy case. Mr. Allen’s false assertion of the existence of the Brooks Loan to explain the transfer of funds to AMG sufficed to satisfy the requirements of this section.
As a final matter, the court declined to fix an amount owed by Mr. Allen to Mr. Sloan citing the fact that there were no assets to distribute from the bankruptcy and that Mr. Sloan had a pending civil case against Mr. Allen in the D.C. Superior Court.
Deadline for Revocation of Discharge Not Jurisdictional
The one-year deadline for seeking revocation of a discharge order is not jurisdictional and may therefore be waived. Weil v. Elliott (In re Elliott), No. 16-55359 (9th Cir. June 14, 2017).
When Edward Elliott filed his Chapter 7 bankruptcy petition he failed to mention one important asset: his home. He received a discharge under section 727(a). Fifteen months later, when the trustee discovered the fraudulent nondisclosure, she filed an adversary complaint seeking an order vacating the discharge under section 727(d)(1). Section 727(e)(1) permits a trustee to seek revocation of discharge within one year of the discharge order. Mr. Elliott did not raise the issue of untimeliness in his response to the adversary complaint. The bankruptcy court revoked his discharge. The Bankruptcy Appellate Panel, however, found the one-year filing deadline to be jurisdictional and reversed. Elliott v. Weil (In re Elliott), 529 B.R. 747, 755 (B.A.P. 9th Cir. 2015). On remand, the bankruptcy court dismissed the adversary complaint for lack of jurisdiction. The trustee was permitted direct appeal to the Ninth Circuit. [Read more…] about Deadline for Revocation of Discharge Not Jurisdictional
Pernicious Scam Targets Bankruptcy Filers
A new scam targeting bankruptcy filers has emerged in several states under which con artists, posing as the intended victim’s bankruptcy attorney or a staff member, are calling and telling the consumer to wire money immediately to satisfy a debt. The callers may threaten the consumer with dismissal of their ongoing bankruptcy case, discharge revocation, or even arrest. Callers tend to be sophisticated and well-informed with knowledge of details about the case, perhaps through access to PACER, including the judge’s name and case status.
One bankruptcy attorney reported the following scenario. His client received a call during non-business hours using “spoofing” technology to make it appear on Caller ID that the call was coming from the bankruptcy attorney’s office. The caller identified himself as an associate of the intended victim’s attorney and explained that a creditor was opposing discharge and that, to prevent the unraveling of the case, the attorney had negotiated a settlement outside bankruptcy under which the debtor must immediately wire money directly to the creditor. Failure to do so was likely to result in dismissal or discharge revocation. Fortunately, the client suspected a scam and hung up.
In light of this and other scams, it would be wise for bankruptcy attorneys to explain to all clients the specific method of communication they employ when contacting clients. Clients should be warned that under no circumstances would a bankruptcy attorney or staff member telephone and ask for a wire transfer immediately to satisfy a debt. Nor would the bankruptcy attorney or staff member ever threaten arrest if a debt is not paid. Clients should be advised that the best thing to do upon receipt of one of these calls is to hang up without giving out any personal or account information and contact their bankruptcy attorney as soon as possible. Recipients of these calls should also contact their state Attorney General’s Consumer Assistance Program.