The court granted summary judgment to the debtors, ordering that a wholly unsecured junior lien on the debtors’ residential real estate may be avoided after the debtors complete Chapter 13 plan payments.
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This is an adversary proceeding seeking denial of discharge for transferring property with intent to hinder, delay or defraud a creditor. The plaintiffs alternatively ask the court to except the debt from discharge under § 523(a)(2)(A), (a)(4), or (a)(6).
The debtor intended to purchase a restaurant owned by the plaintiffs. They entered into an employer/employee relationship with an anticipated buyout agreement. The debtor operated the business for three months with oversight from the plaintiffs, who lived out of state. The restaurant closed permanently after suffering damage in a fire, the debtor filed a Chapter 7 proceeding, and the plaintiffs filed this adversary proceeding alleging they were owed $62,000.
After a careful and extensive review of the evidence at trial, the bankruptcy court concluded that all but $1,300 of the debt should be discharged. The plaintiffs did not establish the elements of § 727(a)(2)(A), and the evidence did not support the allegations of false representations made with the intent to deceive or the existence of a fiduciary relationship. At most, there was evidence that the debtor removed some property from the restaurant premises after the fire, and such conduct was intentional and with the knowledge that it would harm the plaintiffs. The $1,300 value of the items taken was excepted from discharge under § 523(a)(6).
The Chapter 7 debtor filed a post-discharge motion to revoke the discharge and allow her to file a reaffirmation agreement. The court denied the motion, citing § 524(c)’s strictly construed requirement that a reaffirmation agreement is enforceable only if filed prior to discharge. Because the debtor did not enter into the reaffirmation agreement before discharge, “any proposed agreement would be unenforceable” and granting the debtor’s motion to revoke the discharge in order to file the agreement “would, therefore, be futile.”
The debtor’s Chapter 7 means test showed monthly disposable income of $1,600, which exceeds the threshold for a presumption of abuse under the Bankruptcy Code. The debtor claimed special circumstances because he contributes $1,500 per month to the living expenses of his daughter’s and grandsons’ separate household.
The court ruled that the record did not sustain the debtor’s argument because there was no evidence the daughter’s alcoholism and ADHD were chronic or disabling conditions or that the debtor’s support was reasonable and necessary. In fact, the daughter was gainfully employed and lived independently with her two young sons. Even a small reduction in the debtor’s monthly contribution to his daughter would allow him to fund a Chapter 13 plan.
The court directed the debtor to convert the case to Chapter 13 or face dismissal.
The bankruptcy court recommends to the district court that it withdraw the reference of this adversary proceeding. The bankruptcy trustee is pursuing claims of trade secret misappropriation and copyright infringement against a former software developer for a company affiliated with the debtor and the former customer who subsequently hired her. A similar lawsuit is currently pending in federal district court. The causes of action in the adversary proceeding are non-core and do not arise under Title 11. Judicial economy dictates that the two cases should be processed and heard together, and the forum to do so is the United States District Court.
The debtor and the plaintiff used to be married to each other. As part of the dissolution of their marriage and the arrangements for child custody and support, the debtor was ordered to pay a certain amount of monthly child support. She also was ordered to pay attorney fees incurred by the plaintiff as part of the district court and appellate court litigation they engaged in.
In this adversary proceeding, the bankruptcy court determined that under 11 U.S.C. § 523(a)(5), only the child support was excepted from discharge. The attorney fee awards were not in the nature of support and could not be considered to be domestic support obligations. However, the attorney fees do fall within the scope of 11 U.S.C. § 523(a)(15), which excepts from discharge certain debts incurred in connection with a divorce that do not constitute domestic support obligations. Accordingly, the attorney fees are not dischargeable.
In a rare outcome, the court denied the debtor a discharge. The record showed that the debtor transferred property (residence, stock shares, boat, and two vehicles) to his wife shortly before judgments were entered against him in a state court lawsuit and within a few months before he filed a Chapter 7 petition. The debtor made these transfers to protect the assets from his creditors and prevent or discourage them in their collection efforts. A fresh start is a privilege, not a right, and debtors who transfer property for the purpose of keeping creditors from collecting valid debts forfeit that privilege.
After trial on whether the debtor was insolvent when it made transfers to three defendants, the court ruled the transfers were fraudulent because the debtor was not paying its debts as they became due. (The other elements of the fraudulent transfers had previously been established on summary judgment.) Transfers to a fourth defendant were found not to be fraudulent because the defendant was a “mere conduit” for the transfers and did not exercise dominion or control over the funds.
The court granted summary judgment to the lienholder in an adversary proceeding where the debtor challenged the assignment of the note and deed of trust on his residence, but produced no evidence to support his allegations.
A deficiency remained after a deed of trust sale, so the creditor sought to pursue that debt in bankruptcy court. The court ruled that the creditor lacked standing because it had not obtained a deficiency judgment under Nebraska law and therefore was barred from bringing “an action” to recover the balance due. However, the creditor is likely entitled to pursue its non-judicial remedies under the UCC, and the bankruptcy court would go forward with a trial on the creditor’s motion for relief from stay to do so.