Category Archives: Bankruptcy and Lawsuits

What Happens When A Cotenant In A Tenant In Common Ownership Agreement Does Not Pay

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In many large cities like San Francisco the only way to afford purchasing a home is to purchase a property in which you are tenants in common with other owners of the property. Sadly some of the same issues described here can occur with condominium associations also. In San Francisco there many multi-floor homes that have been separated into individual beautiful homes for purchase. The circumstances I will be discussing in this article arise when there is a single mortgage for the entire property and the tenants in common are all responsible for paying the entire mortgage.

Unfortunately this is a long one given how much took place and the litigation is still ongoing. This will last for over a decade most likely.

Hopefully your tenant in common property has separate mortgages for each separate livable part of the property and there are a few small shared expenses. Yes, all tenants in common are usually responsible for the entire mortgage payment each month regardless of who is paying or not by agreement upon purchase if there is only one mortgage for the entire building. That means your agreement to purchase your portion or percentage of the property will include language that the other owners and you are responsible for paying the entire mortgage each month even if one of the other tenant in common does not pay their portion. The following is how thousands of dollars in mortgage payments and attorneys’ fees and costs will result from one tenant in common not paying their percentage of the monthly mortgage payment then arguably following the law to protect their rights. This case is still actually ongoing and the attorneys’ fees and costs are still piling up. At this point the attorneys’ fees and costs are around three times the real world actual damages …… Something you should think about before retaining an attorney.

Tenants In Common Agreements

A tenant in common agreement is like owning a unit in a condominium building and is a great way to get into a real estate market for less than purchasing a free standing single-family home. You must consider that you will never have complete control over your property though and the other owners or tenants in common can always affect your property and mess with your life. Under California law, co-owners of real property holding undivided interests, such as tenants in common, are considered “cotenants.” In re Fazzio, 180 B.R. 263, 268 (Bankr. E.D. Cal. 1995); Harry D. Miller & Marvin B. Starr, California Real Estate § 11.1 (4th ed. 2017) (“Miller & Starr”). While tenants in common generally each have an equal right to occupy the property, tenants in common in multi-unit residential buildings may agree to give each owner an exclusive right of occupancy in particular dwelling units pursuant to which each may respectively exclude the others from their private residential unit. Tom v. City & Cty. of S.F., 120 Cal. App. 4th 674, 676 (2004). The issue is when there is a single mortgage for the entire property and not each undivided interest.

The tenants in common agreement I will be discussing provided that the three tenants in common agreed to pay a certain percentage of the mortgage for the entire property depending upon their portion of the building occupied. The three original cotenants entered into this agreement in 2003. The property was split up into not equal square footage so the mortgage payments were apportioned by percentage occupied. Fair enough. The original tenant in common agreement of 2003 also provided that if one cotenant did not pay their share of the mortgage the other cotenants were required to pay the non-paying cotenant’s share in addition to their own share. In the case I am discussing one of the original three co-tenants sold their share in 2004 and an amended tenant in common agreement was entered into by the two remaining original cotenants and the new 2004 purchasing cotenant with the same terms as the original three cotenants had. Begs the question why one of the original 2003 cotenants decided to sell in a year or less after original purchase and entering into the 2003 tenants in common agreement? Did the original cotenants all know each other? Was there problems brewing already? Did the value increase that much that selling resulted in walking away with a lot of money? Now an unknown third party purchased one of the original cotenants’ interest a year later. That is life though and how it works. To muddy the waters a little more another of the remaining two original cotenants sold their interest in 2007 for cash. Luckily the purchaser paid with cash, so this resulted in the other two cotenants receiving cash distributions from the sale proceeds and that eliminated the new purchaser’s obligation to pay any part of the remaining mortgage. No doubt the value of this San Francisco property increased significantly allowing the selling cotenant to make this happen and walk away with a great profit. What about the remaining two cotenants still responsible for the mortgage? This left one cotenant, the 2004 purchaser responsible for 25.765% of the monthly mortgage payment and the other cotenant, the last remaining original cotenant responsible for 74.23% of the monthly mortgage payment.

A Cotenant Does Not Pay Their Share As Agreed

So finally we get to the problems. The cotenant discussed with the obligation to pay 25.765% of the mortgage stopped making their share payment of the mortgage in 2011, or four years after the other cotenant sold their interest for cash and 7 years after their original purchase.

In 2011 the 2004 purchaser that ended up with the percentage of 25.765% ($1,215.15 a month) after the cash buyout stopped making their monthly payment. The 74.23% ($3,489.50 a month) cotenant was forced to pay the nonpaying cotenants share pursuant to the amended tenants in common agreement and more importantly to avoid potential foreclosure proceedings. It is unclear whether the total monthly mortgage payment of approximately $4,704.65 includes property tax and insurance. It most likely does include property tax and insurance given there is no additional litigation over direct payment of property tax and insurance in the various court filings.

What Do If A Cotenant Stops Paying?

In the case I am discussing the 74.23% cotenant decided to seek arbitration first. By the way, the 25.765% cotenant’s portion of the mortgage payment is $1,215.15 each month if that was not clear above and the 74.23% cotenant has to pay $3,489.50 each month. It is not clear what happened in this case before the paying cotenant took the not paying cotenant to arbitration. It is possible, since they live in the same building; the cotenants spoke directly to resolve this. Maybe a letter was sent first? It is unclear the steps taken in this case leading up to the “lawyering up,” but ultimately arbitration was chosen as the means to enforce the breached amended tenant in common agreement. It is possible the amended tenant in common agreement required arbitration to resolve disputes.

The arbitrator found in favor of the paying 74.23% interest cotenant. What defense did the 25.765% not paying cotenant have? Did you sign the amended tenant in common agreement upon purchase? Yes. Did you stop making your percentage payment as required by the amended tenants in common agreement? Yes. The arbitrator awarded and ordered the nonpaying cotenant to pay the paying 74.23% cotenant $9,136.26 for the payments they made on the mortgage on behalf of the not paying 25.765% cotenant, that the 25.765% cotenant start paying their portion of the mortgage again and awarded the paying 74.23% cotenant attorneys’ fees and costs of $58,369.29. So we have an amended tenant in common agreement and proof of payments made by the 74.23% cotenant to prove there is a problem here and this resulted in $58,369.29 attorneys’ fees and costs to get to, “you are right and have been wronged in the principal sum of $9,136.26.” The point here is that when things go wrong it gets expensive quickly to arbitrate or litigate the problem. As this issue continues it only gets more expensive also.

What Happened After The Arbitration Award?

After an arbitration award the arbitration award can be entered as a judgment by order. The 74.23% now with their arbitration award did in fact request the Superior Court for the State of California to enter judgment. The judgment entered against the not paying 25.765% cotenant was $68,656.07 ($9,136.26 + $58,369.29 + interest) plus the attorneys’ fees and costs totaling $4,214.50 for having the Superior Court for the State of California enter the judgment on the arbitration award. The proper procedure under the law to enforce a judgment when the defendant owns real property is to record the abstract of judgment with the county the defendant owns real property so the judgment attaches as a judgment lien to the property. The 74.23% owner did just that and recorded an “Abstract of Judgment” totaling $72,870.57 with San Francisco County. After the cost of arbitration, entering of the arbitration award as a judgment and then recording the abstract of judgment nothing become simple as you will read below….

The 25.765% Cotenant Fought the Judgment and Sale of the Property in State Court

The not paying 25.765% cotenant spent the next two years fighting the 74.23% cotenants attempts to enforce the judgment and avoid paying the share of the monthly mortgage payment. The 74.23% continued to follow the law and procedure to enforce their rights and eventually obtained a California Superior Court order to sell the nonpaying 25.765% cotenant’s share of the property to satisfy the judgment lien. Of course the continued litigation costs money and the 74.23% cotenant’s attorneys added more missed payments by the not paying 25.765% cotenant and requested the Superior Court of California add an additional $35,074.40 in attorneys’ fees and costs to the judgment. The Superior Court of California said no, the arbitration award and the judgment you drafted and provided the Court to enter does not include a provision for post-judgment attorneys’ fees and costs. The paying 74.23% cotenant’s attorneys now have to amend the judgment to include post-judgment attorneys’ fees and costs…… In the meantime the 74.23% cotenant is still enforcing their rights and a sheriff’s sale of the 25.765% cotenant’s interest was scheduled. The 25.765% owner filed a motion to quash the sale and then appealed the Superior Court for the State of California’s denial of the motion to quash or stop the sale. The California Court of Appeals denied the not paying cotenant’s 25.765% appeal.

In the meantime on June 9, 2014, a day before the June 10, 2014, sheriff’s sale the not paying 25.765% cotenant filed for bankruptcy protection under Chapter 7 of the Bankruptcy Code.

The 25.765% Cotenant’s Bankruptcy Case Under Chapter 7 of the Bankruptcy Code

So at some point the not paying 25.765% cotenant consulted a bankruptcy attorney. To keep the story as short as possible I will summarize the events of the Chapter 7 bankruptcy case as best I can without leaving out important information. The not paying 25.765% cotenant filed their own bankruptcy case, then hired one bankruptcy attorney, then substituted in another bankruptcy attorney and then ended up representing themselves in the Chapter 7 bankruptcy case. The Chapter 7 case progressed and eventually the Chapter 7 Trustee filed the notice of no distribution which provides the trustee does not believe there are any assets to be disbursed to creditors. The not paying 25.765% chapter 7 bankruptcy is therefore progressing as a no asset chapter 7 bankruptcy case. At some point the 74.23% cotenant decided to file a motion for relief from stay to continue to enforce their state court law rights to sell the 25.765% interest in the building to satisfy their judgment/arbitration award. An order was entered by the Bankruptcy Court confirming the automatic stay was terminated was entered on June 5, 2015. More attorneys’ fees and costs are added to the 74.23% cotenant’s enforcement of their rights.

After the Chapter 7 bankruptcy case was discharged and closed on October 3, 2016, the 25.765% cotenant/debtor requested the Chapter 7 case be reopened to seek sanctions against the 74.23% cotenant under Section 524 of the Bankruptcy Code for violating the order of discharge they received. The 25.765% cotenant/debtor also filed an adversary proceeding lawsuit, a bankruptcy court lawsuit, against the 74.23% cotenant alleging the abstract of judgment for their arbitration award/judgment from the California Superior State Court is deficient and therefore the 74.23% cotenant has no secured debt or valid lien that passes through the Chapter 7 bankruptcy case. Now this is extremely interesting given valid liens recorded against real property will survive the order of discharge in a Chapter 7 case. The 25.765% cotenant/debtor is trying to discharge all that took place previously by the 74.23% cotenant to enforce their rights. In the bankruptcy adversary proceeding lawsuit the Bankruptcy Court held that the abstract of judgment did not comply with the requirements of California Civil Procedure Section 674(a) and therefore there is no valid judgment lien securing the arbitration award regarding the unpaid mortgage payments or attorneys’ fees and costs. This is a huge development and could have enormous implications to the 74.23% cotenant’s ability to collect for all that took place previously leading up to the filing of the Chapter 7 bankruptcy case. The 74.23% paying cotenant appealed this decision by the Bankruptcy Court and the appeal is still pending.

So after 7 plus years, over $80,000 is attorneys’ fees and costs incurred by the paying 74.23% cotenant the not paying 25.675% cotenant may erase all that took place previously by obtaining the Chapter 7 bankruptcy discharge. It will be interesting to see what takes place moving forward in this case. What is fascinating if the vigorous enforcement of rights by both sides in this case. Arguably both are merely following the law as it exists under the circumstances. What is unfortunate is how much time and money has been spent as a result of a tenant in common agreement going bad for whatever reason.

This is what can happen when you put your lot it with others and you can never completely control their choices. It is something to consider long and hard before purchasing a condominium or entering into a tenant in common agreement.

If You Are Having A Problem With Your Home Loan Payment Call a Bankruptcy Attorney

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One of the most frustrating parts of my job is over and over again talking to people that file Chapter 13 bankruptcy cases to stop a foreclosure or eviction without proper legal advice from an actual bankruptcy attorney. By the time they speak to me there is usually too much water under the bridge for me to get involved and actually obtain them relief under the Bankruptcy Code they are entitled to. I say entitled to because the Bankruptcy Code is the law. You just have to follow it and get relief. Most skeleton Chapter 13 bankruptcy petitions should never have been filed to begin with.

Five Steps To Help Prevent Getting Scammed

These five steps cannot guarantee you will not get scammed, but they will limit your risk to getting scammed, losing your house and paying too much for the services provided to you.

1. Never ever wait until the last minute to start getting information; the problem did not come up overnight, so the solution will not come overnight either….
2. Make sure the person helping you signs the documents filed with the court; not you;
3. Only do business with someone that is local in your area and not hundreds of miles away;
4. Only do business with someone you have actually met in person and they have an office you can walk into if you want;
5. Google the phone number, fax number, email address, name of person or business name you are dealing with … basically Google each and every bit of identifying information you are given . . . most likely someone has already complained about them and Google will find it for you.

The Automatic Stay is a Jewel to be Coveted, Not Abused

The automatic stay is the backbone of the bankruptcy process and is the single most important and precious jewel to be coveted, not abused. Section 362 of the Bankruptcy Code provides the very lengthy law of how the automatic stay is implemented. A general description is the automatic stay stops almost all collection activity by creditors to give the bankruptcy filer breathing room to figure things out and reorganize or discharge their debts according to the Bankruptcy Code. That includes lawsuits, repossession, foreclosure, wage garnishment, levies, phone calls, letter and on and on. The automatic stay is the most powerful tool for a Bankruptcy Attorney to help people or businesses in financial distress. There are many limits in the automatic stay and for purposes of this article I will focus on the people filing their own cases with advice from the wrong people. What I find is multiple bankruptcy petitions filed by people trying to save a house more often than not. The first petition filed for relief they receive an unlimited automatic stay. There are no timing restrictions as long as the case remains open and not dismissed. This is what everyone should want, the bankruptcy case, whether Chapter 13, Chapter 7 or some other chapter of the Bankruptcy Code, to progress properly and the bankruptcy filer is not in jeopardy of the automatic stay not being in place. The single best way to ensure this is retaining an experienced bankruptcy attorney to file your case. If your home is in jeopardy do not trust a realtor or some other non-bankruptcy professional to help you.

Danger of Multiple Bankruptcy Filings

What I see over and over again with bankruptcy filers getting bad information is there case is just dismissed for not filing the proper documents in the beginning or not timely filing the proper documents after the case is filed. What the unscrupulous realtor, attorney or company will do is tell you or give you the basic forms to file a skeleton bankruptcy petition to obtain the automatic stay. That includes the voluntary petition, statement of social security number, creditor matrix and most likely an application to pay the $310 court filing fee in payments. The really horrible people will not even tell you about the application to pay the court filing fee in payments and make you waste the entire $310 even though they know the case will just be dismissed. They know the case will be dismissed because the forms described above are all they are going to help you with. That is it. You will have 14 days from when the court enters an order for you to file the rest of the documents to actually complete the petition. So the bankruptcy filer is now representing themselves and has only filed the basic forms to get the case started and does not know what to do next…… The bankruptcy filer will have paid whatever the unscrupulous person charge, usually well over a thousand dollars or more, plus the court filing fee of $310 and the Chapter 13 bankruptcy case is dismissed usually within three weeks.

If your first case is dismissed for some reason and you file a second case within a year you only get a 30 days automatic stay unless the stay is extended within that 30 days. There is no guarantee the court will extend the automatic stay and if a creditor objects to the extension it is even less likely the automatic stay will be extended. The third case filed within a year gets absolutely no automatic stay unless the automatic stay is imposed. Again, there is no guarantee the court will impose the automatic stay.

Required Credit Counseling Course Completion Prior to Filing a Bankruptcy Case

Another trap that realtors and unscrupulous people do not tell the bankruptcy filer is that they must complete the credit counseling course prior to filing for bankruptcy. The credit counseling only takes a few hours to complete and should cost less than $10.00 to complete. Skeleton Chapter 13 bankruptcy petition after skeleton bankruptcy petition is filed without the bankruptcy filer completing the credit counseling course prior to the filing of the case. I am a Bankruptcy Attorney that has either filed or been involved in literally thousands of bankruptcy cases and I only know of one or two circumstances in which the court allowed someone to take the credit counseling course after the bankruptcy case was filed or waived the requirement entirely. Since 2005 BACPA changes to the Bankruptcy Code, Section 109(h)(1) requires the completion of credit counseling within the 180-day period prior to the filing of the petition. Section 109(h)(3) provides a temporary exemption from that requirement if the bankruptcy filer submits a certification that: (i) describes exigent circumstances that merit a waiver of the requirements of [section 109(h)(1)]; (ii) states that the bankruptcy filer requested credit counseling services from an approved nonprofit budget and credit counseling agency, but was unable to obtain the services referred to in [section 109(h)(1)] during the 7-day period beginning on the date on which the debtor made that request; and (iii) is satisfactory to the court. Section 109(h)(4) provides a total waiver if the Court determined, upon notice and hearing, that the debtor is unable to complete the credit counseling requirement due to incapacity, disability, or active military duty in a military combat zone. If you have in jeopardy of losing your home just complete the credit counseling course before filing the bankruptcy case and do not play around with attempting have the court give you more time or waive the requirement. It is just not worth it.

Do Not Fall For the Mortgage Litigation Scam

The mortgage litigation scam is only a ploy for criminals to get around the laws making it a criminal act to take money upfront to do a loan modification and a ploy to get around only charging you $150 as a bankruptcy petition preparer. I keep writing about this and it keeps happening. I do not know what the solution is. I try and educate people to enforce their rights and apparently they do not take my advice. Or there are just more and more of these unscrupulous people replacing the ones that go away. If you missed mortgage payments and owe thousands and thousands of dollars because you did not make the mortgage payments rarely are there issues for you to litigate. Especially if you are a consumer and this is regarding your home. We keep finding people in the Bay Area doing business with businesses in Southern California to litigate mortgage issues that appear to be purely scams. If you are litigating a mortgage problem that is legitimate you should not be directed to file a skeleton bankruptcy petition that you sign and file yourself. That makes no sense. When an attorney takes your money to do something they are supposed to sign and file the documents on your behalf because they are representing you and take on the liability for their work. That is how it is supposed to work. Also, why do business with someone that is hundreds of miles away that will most likely never give you your money back when you figure out it was a scam? Are you going to sue them for the $1,000 – $4,000 you gave them already? I seriously doubt it and I have yet to see it.

Was The Chapter 13 Petition and Plan Filed in Good Faith?

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In a Chapter 13 reorganization case there are a number of requirements that a Chapter 13 Plan must meet to be confirmed or approved by the bankruptcy court. Section 1325, Confirmation of Plan, of the Bankruptcy Code provides the requirements that must be met. Section 1325(a)(3) and 1325(a)(7) provide the bankruptcy petition and chapter 13 plan must be proposed in good faith. This issue has been framed as a petition or plan is in bad faith. What you are trying to prove though is lack of “good faith.” Prove that the petition or plan were not filed in good faith. The word bad faith does not appear anywhere. The term “good faith” is not defined by the Bankruptcy Code so case law is all we have to go on.

Good Faith Pursuant to Section 1325 of the Bankruptcy Code

Again, the debtor will argue the petition and plan were filed in good faith. Lack of good faith can be shown by considering: (1) whether the debtor misrepresented facts in his/her petition or plan, unfairly manipulated the Bankruptcy Code, or otherwise filed his/her chapter 13 petition or plan in an inequitable manner; (2) the debtor’s history of filings and dismissals; (3) whether the debtor only intended to defeat state court litigation; and (4) whether egregious behavior is present. See Leavitt v. Soto (In re Leavitt), 171 F.3d 1219, 1224 (9th Cir. 1999) (internal quotation marks and citations omitted); see also Drummond v. Welsh (In re Welsh), 711 F.3d 1120, 1132 (9th Cir. 2013).

Mendez, Appellant v. Harwood, Appellee

In a recent decision by the Ninth Circuit Bankruptcy Appellate Panel the issue of good faith based upon an objection to confirmation filed by judgment creditor Ronald Mendez. According the court records, Mr. Mendez was a former client of the bankruptcy filer Sterling V. Harwood. Mr. Mendez paid Mr. Harwood a total of $18,000. At some point Mr. Mendez was dissatisfied with Mr. Harwood’s services and requested his money back. Mr. Harwood refused and from prison Mr. Mendez sued Mr. Harwood in Santa Clara Superior Court for breach of contract and fraud. Mr. Harwood did not respond to the lawsuit and a default judgment was entered against him for approximately $26,000. After five months Harwood tried to have the default judgment vacated for improper service of the summons and complaint. The Superior Court of California ruled Harwood’s motion to vacate the default judgment was not timely and that personal service of Harwood was proper. The default judgment stood.

Harwood’s Chapter 13 Bankruptcy Cases

Mr. Harwood filed a skeleton Chapter 13 bankruptcy petition to stop garnishment of his wages to satisfy the state court judgment of Mr. Mendez. A skeleton petition describes the filing of the basic documents to start a Chapter 13 bankruptcy case. The rest of the petition must be filed within 14 days or the case will be dismissed. There are almost no successful Chapter 13 reorganizations without the assistance of bankruptcy lawyers. Mr. Harwood’s first case was dismissed.

Harwood’s Second Chapter 13 Bankruptcy Filing

This first case was dismissed for failing to complete the credit counseling course or complete the bankruptcy petition. After retaining a bankruptcy attorney Mr. Harwood filed a second Chapter 13 bankruptcy case. To be fair Mr. Harwood has plenty of reasons to reorganize his debts. In addition to the Mendez judgment for $29,000, Mr. Harwood was behind on this mortgage payments and needs to obtain a loan modification to keep the his home, he is also behind on his property taxes, he has another judgment entered against him in San Mateo Superior Court totaling $5,837.90 owed to another attorney, Donald S. Tasto, Esq. Attorney Tasto unfortunately passed away while Mr. Harwood’s second bankruptcy filing was pending. Mr. Harwood also has $112,219.87 in general unsecured debts. Mr. Harwood listed his income from employment as a professor as $3,336 a month and business income of $25,362 a month in Schedule I (total monthly gross income after deductions is $26,452.84) and monthly expenses of $26,286 in Schedule J. With a gross income of over $26,000 a month there is only $166 to make the Chapter 13 Plan payment. Most of Mr. Harwood’s expenses are business related. Mr. Harwood’s wife does not work or have income.

The first filed Chapter 13 Plan proposed to pay $165 a month for 60 months. The only debt being paid through the Chapter 13 Plan are attorneys’ fees of $7,400 and the trustee fee to administer the plan. No actual creditors received any distribution through the first chapter 13 plan filed. There is authority to support an argument that filing a Chapter 13 Plan that pays nothing to creditors was not filed in good faith. This is a litigated issue though. An argument is how can someone reorganize their debts when they are not paying any of their debts back? What debts are reorganized? A Chapter 13 plan that pays nothing to creditors is more or less a Chapter 7 then, a complete discharge of eligible general unsecured debts. So the argument goes the actual reason a Chapter 13 plan like this is filed must be for some improper purpose or unfair manipulation of the Bankruptcy Code.

The First Amended Chapter 13 Plan proposed to pay $165 for 24 months then $365 for the remaining 36 months of the 60 month plan. Total plan payments would equal approximately $17,100 over the life of the plan. Mr. Harwood’s attorneys also increased their attorney fees to $8,800 or about half of the proposed plan payments. The second filed Chapter 13 Plan also proposed to reject an advertising contract with a radio station, avoid the judgment lien of deceased attorney Donald Tasto, Esq., and provide language about seeking modification of their first mortgage on his primary residence. Mr. Mendez objected to confirmation of this plan arguing it was not filed in good faith.

The Third Amended Chapter 13 Plan filed by Mr. Harwood proposed to reduce the plan payments to $165 for 24 months then $360 for the remaining 36 months. The Second Amended Chapter 13 Plan also included the following special provisions: “By April 30th of each year during the pendency of the case, the debtor shall provide the Trustee with a copy of all Federal income tax returns required to be filed; or, if an extension has been obtained, a copy of the extension and the tax return within ten (10) days of filing the return but no later than ten (10) days after the expiration of the extension date The debtor shall file a declaration on January fifteenth and July fifteenth of each calendar year, beginning July 15, 2014, which states what the status is of his law office in Vietnam and outlines the average monthly income and expenses for the business. The debtor shall file a declaration on January fifteenth and July fifteenth of each calendar year, beginning July 15, 2014, which states what the status is of the malpractice case against his spouse’s former bankruptcy attorney.”

Mr. Mendez’s Argument For Lack of Good Faith

Mr. Mendez argues the petition was not filed in good faith given Harwood misrepresented the nature of the debt owed to Mr. Mendez. Harwoods’s Amended Schedule F describes Mr. Mendez’s judgment claim as: “Incurred: 2013 Consideration: Alleged breach of contract Debtor disputes any liability to this individual. A default was taken based on improper service.” Mr. Mendez argues that the Santa Clara Superior Court ruled that service was proper and there is no alleged debt, Mr. Mendez obtained a valid judgment against Mr. Harwood. Whether true of not the description of the nature of a debt is a minor issue in the big scheme of things and does not really change the treatment of Mr. Mendez’s claim under the Bankruptcy Code. Minor discrepancies in the petition will not rise to the level of not having good faith. While the description of the claim owed to Mr. Mendez in Schedule F is arguably not correct, the bankruptcy court found that the description was adequate under the circumstances and the description is not evidence of trying to mislead the court or manipulate the Bankruptcy Code.

Mr. Mendez next argues the first filed case and Chapter 13 Plan were not filed in good faith given it was filed for the stated purpose of avoiding wage garnishment and frustrate the enforcement of the state court judgment of Mr. Mendez. This argument is not a good one absent some additional facts. A very high percentage of bankruptcy cases filed involve some sort of state court lawsuit. Filing bankruptcy to stop a wage garnishment, bank levy or foreclosure of a home is perfectly normal. If the state court case was at the eve of trial or some other additional circumstance this argument could work.

The bankruptcy court agreed and held that Mr. Harwood was well within his rights to file for bankruptcy protection under Chapter 13.

Mr. Mendez next argues that Mr. Harwood is seeking to discharge in Chapter 13 his judgment that would not be discharged in Chapter 7 and therefore Mr. Harwood has unclean hands. This is a tough argument given that Mr. Mendez’s judgment for fraud against Mr. Harwood is arguably not dischargeable in both Chapter 7 and Chapter 13 if proven pursuant to Section 523(a) of the Bankruptcy Code. The exceptions to discharge set forth in §523(a)(2), (4) and (6) of the Bankruptcy Code are not self-executing. See Mohsen v. Wu (In re Mohsen), 2010 WL 6259979 at *6 (9th Cir. BAP Dec. 21, 2010). Rather, § 523(c)(1) provides, with exceptions not applicable here, that a creditor must request and receive a judgment that the debt owed is not dischargeable. To have certain types of debts deemed not discharged pursuant to Sections 523(a)(2),(4) and (6) an adversary lawsuit must be filed and a judgment received. Then the debt can be enforced again under state law.

9th Circuit BAP Agrees With Bankruptcy Court

Mr. Mendez lost the appeal given the Ninth Circuit Bankruptcy Appellate Panel could not find error in the bankruptcy courts overruling of Mr. Mendez’s objection to confirmation of Harwood’s Chapter 13 Plan. Based upon these facts anyway the petition and plan were found to be filed in good faith.

Does Filing Bankruptcy Stop My Pending Lawsuit Against Another Entity?

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People file bankruptcy to stop all collection activity against them, including lawsuits filed by creditors in an attempt to recover funds from the borrowers. That is the power of the automatic stay. What about if the person filing for bankruptcy has filed a lawsuit (or intends to file a lawsuit soon) against another person or entity? What happens to this lawsuit? Can the bankruptcy filer continue with this lawsuit? The short answer is yes, but you need to notify the bankruptcy court that you are currently in a lawsuit or you have the right to sue someone in a lawsuit. You must list the pending lawsuit in your bankruptcy schedules (Schedule B to list the potential asset in your bankruptcy case and Statement of Financial Affairs to indicate that you are currently involved in a lawsuit).

What happens if you do not list the pending lawsuit in your bankruptcy petition? First you should inform your bankruptcy lawyer about the lawsuit. If the lawsuit was not listed in your bankruptcy petition and you have received a discharge of your debts, the general rule is that you are stopped from continuing on with the lawsuit. This is the principle of “judicial estoppel.” You are stopped from continuing with the lawsuit because your bankruptcy petition indicated you do not have any claims against anyone and you do not have the right to sue anyone at the time your bankruptcy petition was filed. If you did have any rights you would have listed them as a potential asset in your case. You cannot say that you do not have any claims in your case and proceed to discharge all your debts and then try to go after someone in court to receive money.

In the Supreme Court case New Hanpshire v. Maine, 532 U.S. 742 (2001), judicial estoppel bars the continuing lawsuit if: (1) the positions are clearly inconsistent; (2) the bankruptcy filer and plaintiff in the lawsuit succeeded in getting the first court to accept the first position; and (3) the bankruptcy-filer and plaintiff in the lawsuit obtained an unfair advantage. The Supreme Court indicated that “it may be appropriate to resist application of judicial estoppel when a party’s position was based on inadvertence or mistake.” New Hampshire v. Main, 532 U.S. 742, 753. The 9th Circuit Appellate Court applied that rule in their case Quin v. County of Kauai Department of Transportation, No. 10-16000 (9th Cir, July 24, 2013). In Quin, the bankruptcy filer did not originally list her discrimination lawsuit in her bankruptcy petition. She received her discharge and was continuing with the discrimination lawsuit when her lawyer for the discrimination suit realized she filed for bankruptcy. Her lawyer then reopened her bankruptcy case to list the lawsuit in her schedules. She indicated she did not list the lawsuit as an asset because she misunderstood what she was required to do. The Quin court indicated that there was factual support for a conclusion of either mistake and inadvertence and remanded to lower courts to determine whether the omission of the lawsuit was mistaken or inadvertent.

If you are involved in a lawsuit against another party you need to be sure to notify your bankruptcy attorney so they can help you list the lawsuit in your schedules. Failure to do so may result in your lawsuit being stopped in its tracks and the person or company you are suing would be able to walk away.