Author Archives: Ryan C. Wood

About Ryan C. Wood

Ryan C. Wood is a California attorney practicing primarily in the areas of Bankruptcy Law, Business Law and generally seeking justice for under represented clients in the Bay Area.

What Mental State is Required for Defalcation While Acting in a Fiduciary Capacity?

By Ryan C. Wood

It has long been understood that under 11 U.S.C. §523(a)(4), you would not be able to receive a discharge of your debts in bankruptcy if those debts were incurred due to a fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny. On May 13, 2013, the Supreme Court described the scienter (state of mind) necessary to be considered “defalcation” in the case of Bullock v. BankChampaign, N.A., 569 U.S. _____ (2013).

In Bullock, Bullock’s dad made him the trustee in a trust that was established for Bullock and his four other siblings. Bullock borrowed money from the trust but he made sure the trust was repaid with interest every time he borrowed money. Bullock’s siblings sued him for a breach of fiduciary duty in state court and won. The state court imposed constructive trusts for the judgment and BankChampaign served as the trustee for the trusts. Bullock had to file bankruptcy because he was not able to liquidate his assets to pay for the judgment. BankChampaign opposed the discharge of the debt because it claimed the debt was for defalcation while acting in a fiduciary duty. After the bankruptcy court, federal court, and court of appeals all affirmed that the debt was not dischargeable, Bullock sought certiorari to decide whether defalcation applied even if there was no ill intent.

The Supreme Court concluded that defalcation requires an intentional wrong. “We include as intentional not only conduct that the fiduciary knows is improper but also reckless conduct of the kind that the criminal law often treats as equivalent…Where actual knowledge of wrongdoing is lacking, we consider conduct as equivalent if the fiduciary ‘consciously disregards’ (or is willfully blind to) ‘a substantial and unjustifiable risk’ that his conduct will turn out to violate a fiduciary duty.” Bullock v. BankChampaign, N.A., 569 U.S. _____ (2013).

The Supreme Court decided to hear this case because there were different rulings throughout the country on whether a mental state was necessary to determine if there was defalcation. In the Ninth Circuit a bankruptcy lawyer only had to prove an innocent mistake took place by a fiduciary. Some circuits considered an act to be defalcation if the person did or fail to do something they were required to do in their fiduciary capacity. Whether the person knew the act or failure to act was wrong or not did not matter. Then there were some circuits that required a showing of extreme recklessness. The Supreme Court wanted to be sure that all the circuits applied the same standards and their ruling are more consistent. This also means that creditors objecting to the discharge of certain debts due to defalcation have more to prove. Their bankruptcy attorney cannot just claim that there was a wrongdoing, but now must prove actual intent to harm or recklessness. Did the debtor act in a way that a law abiding person would in the same circumstances? There are many questions that remain to be answered regarding this new defalcation requirement.

Should I Have Bank Accounts At the Same Bank I Owe Money To?

By Ryan C. Wood

Most people have at least one bank they are loyal to and have multiple types of accounts with that bank. I am sure that whatever bank you currently do business with (such as Bank of America, Wells Fargo, Chase, Citibank, San Mateo Credit Union, Fremont Bank, credit unions, or any other bank) offers you incentives and seemingly great deals to open another type of account with them. The new account could be a credit card, car loan, a mortgage or home equity loan, or home equity line of credit. This is a great opportunity for the banks to easily obtain more business from you since you are already a customer. Unless you hate your bank you would most likely take the bank up on the offer if you need that additional service. You are probably thinking that you need that service anyway so why not with a bank that you already know and trust? You can see all your accounts on one screen and take care of the payments easier and more efficiently. That is exactly what the banks want you to think and feel.

If everything in your life is going great there would be no issues with having multiple bank accounts, a credit card, car loan or a mortgage and line of credit with the same bank. What happens once you have a financial setback though? What happens if you are unable to continue paying on one or more of the debts owed to the bank? At this point you should highly consider speaking with a bankruptcy lawyer to assess your situation. Think of it this way: your accounts are a one-stop-shop for the banks as well. Are your credit cards cross collateralized with your vehicle loan? If so then you will not get the pink slip to the vehicle unless you pay all the credit card debt too. If you are unable to make your credit card payments for a period of time, guess what? Under certain circumstances banks can take the money you owe them from your bank accounts. How can the banks do this, you ask? This process is called a “setoff” and you gave them permission to do this when you signed up for the extra credit card, car loan or home mortgage. You don’t remember giving them permission? It is probably part of the small print under the terms and conditions of the loan or credit card that you probably never read and never knew that you would be giving the banks permission to do this.

If you have a credit card with a bank that you do not have a bank account with, the bank would need to sue you first and obtain a judgment against you before they can levy your bank account. This is not necessary if you have a bank account with the bank you owe money to. They can just take it from your bank account. It will get worse if you wrote a check to pay a bill not knowing that the bank already took some money out of the bank account and then the check bounces. You would then be hit with an NSF and be charged multiple fees by the bank. Most of my clients have the same response when I advise them of this practice. They say, “Oh, the bank will never do that to me! I’ve been a loyal customer for 20 years!” As a bankruptcy attorney that has filed hundreds and hundreds of bankruptcy cases I can tell you that banks are not people; they do not have feelings. They do not care if you have been a customer for 1 year or 10 years. Banks are in the business to make money. Bottom line: do not have bank accounts at the same bank where you owe money.

Legislation May Allow Private Student Loans to be Discharged in Bankruptcy

By Ryan C. Wood

Student loans are currently non-dischargeable in bankruptcy. What this means is that even if you file for bankruptcy you will still have to pay for your student loans after receiving a discharge in the bankruptcy case. They do not get wiped out along with all your other discharged unsecured debts. This rule applies to both federal subsidized and private student loans. See 11 U.S.C. §523(a)(8).

One form of limited relief from this strict rule is what is called the Brunner Test adopted by some of the circuit courts. This test was taken from Brunner v. New York State Higher Education Services, 831 F.2d 395 (2nd Circuit, 1987). The Brunner Test states that student loans will be dischargeable if (1) you cannot maintain, based on your current income and expenses, a minimal standard of living if you are forced to repay the student loans, (2) these circumstances are likely to continue for a significant portion of the repayment period for the student loans, and (3) you have made good faith efforts to repay the loans. The courts have taken a very strict approach when determining whether the student loans are discharged. This three prong Brunner Test is very hard to pass for most people. It is very frustrating as a bankruptcy lawyer to not be able to provide complete relief for people who really need it. That is includes the burden of educational loan debt they cannot afford.

On February 6, 2013, Tennessee Democratic Representative Steve Cohen introduced H.R. 532 in the House of Representatives. There are currently 29 other Democratic cosponsors for the bill. The bill is called the Private Student Loan Bankruptcy Fairness Act of 2013. This bill will essentially render private student loans dischargeable with all the other unsecured debts such as credit card debt, medical bills, personal loans, and payday loans. There is no need to prove undue hardship. This bill says nothing about the federal student loans though, so they will still be non-dischargeable in bankruptcy even if this bill passes. H.R. 532 will undo the changes that the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 brought. Prior to BAPCPA, private student loans were dischargeable in bankruptcy along with all other general unsecured debts. Only federally subsidized student loans were non-dischargeable at that time.

The Private Student Loan Bankruptcy Fairness Act of 2013 could provide needed debt relief for people with huge student loan debts. Student loan debts are currently out of control and are a burden for many recent graduates that have a lot of debt and cannot find a job. H.R. 532 has currently been referred to the Subcommittee on Regulatory Reform, Commercial and Antitrust Law. If the bill makes it past the committee it will be presented for a vote in the House of Representatives. The House has more Republicans than Democrats so we would need some of these Republicans to vote for the bill in order to pass. If you support this bill I would highly recommend you contact your representatives to vote for the bill. Public pressure goes a long way.

If the Private Student Loan Bankruptcy Fairness Act of 2013 becomes the law of the land and you have a lot of private student loans to discharge, you should immediately contact an experienced bankruptcy attorney to help you discharge those student loans in your area.

Lien Stripping

By Ryan C. Wood

One of the most valuable tools of filing a Chapter 13 bankruptcy case is the ability to strip off a wholly unsecured junior lien from your real property. It does not matter whether it is for your primary residence or an investment property. The relevant factor is the value of the property. If the value of your property is worth less than your first mortgage, then junior mortgages and liens are unsecured and the liens may be stripped off in your Chapter 13 bankruptcy case. The liens have to be completely unsecured in order to be stripped off. If even a small portion of the lien is secured by some value it will not be stripped. Here is an example: First mortgage is $300,000, second mortgage is $100,000, judgment lien of $20,000. If the house is worth $250,000, the second mortgage and judgment lien may be stripped. If the house is worth $401,000, none of the liens may be stripped.

Obviously the ability to strip off unsecured junior liens from the property would help a lot of homeowners if this is available to them. The fair market value of the house is the biggest element in determining whether you can strip off the junior liens from the property. Your bankruptcy attorney may require you to obtain an appraisal of your home before filing the bankruptcy case. In order to strip off the junior liens from the property you need to file a motion (or adversary proceeding depending on the jurisdiction in which you filed your bankruptcy case) with the court to value the property. If the property valued is less than the first mortgage then you will be able to strip off the junior liens. So how does the court value the property? The valuation of the property is determined on a case by case basis.

If there is a huge difference between the home value and the first mortgage (for example, if the house is worth $200,000 and the first mortgage is $300,000) there will most likely not be a debate. However, if the value of the property is fairly close to the amount owed on the first mortgage there may be a debate on both sides as to the value of the property. The junior lien holders will of course allege that the value of the property is higher than the first mortgage and you and your bankruptcy attorney will argue that the value of the property is lower than the first mortgage. The judge will take a look at both sides and base his decision on what evidence is in front of him to determine the value (for example, is the valuation of the property coming from an appraiser. If there was an appraiser, how many years experience does he have in the field, and what area is he most familiar with).

One very important issue when looking at the value of the property is the date of the valuation. The judge would most likely place more weight on an appraisal that was more recent in time than another appraisal. But what exactly is the date that the judges look at to determine the value of the property? This is especially important because the value of property can fluctuate significantly in a short amount of time. Is it the date the petition was filed? The date the motion to value hearing is held? The date that the Chapter 13 plan is confirmed? The date may impact the ability to strip the junior liens especially if property values are on the rise. If the property increased in value to an amount that is higher than the first mortgage after the date the petition was filed and the judge believes that the value of the property should be taken at the time of the motion to value hearing, then the lien strip could be dead in the water. Unfortunately, the Ninth Circuit does not shed any light on what date should be used. Each case is looked at on a case by case basis with the judges look at what the purpose of the valuation is.

What is a Hardship Discharge in a Chapter 13 Bankruptcy and How Do I Qualify?

By Ryan C. Wood

What happens if you are in a Chapter 13 bankruptcy plan and something unexpectedly happens? You are no longer able to pay your Chapter 13 plan payment each month. Does this mean that your case will be dismissed and you will not receive a discharge of your debts? Not necessarily. There are several options for you if this happens. One option is to convert your case to a Chapter 7 (if you qualify) and receive a Chapter 7 discharge of your debts. This will mean paying a conversion fee to the courts and appearing for another meeting of creditors with the Chapter 7 trustee assigned to your case. Another option is to file a motion with the court to obtain a hardship discharge in your current Chapter 13 case. You need to continue to communicate with your bankruptcy lawyers after the Chapter 13 plan is approved/confirmed.

So what is a hardship discharge? Pursuant to 11 U.S.C. §1328(b), your debts may still be discharged if you are unable to continue making payments in your current Chapter 13 plan. You can only obtain a hardship discharge if you meet the following requirements:

(1) Your inability to complete the Chapter 13 plan is due to circumstances that are beyond your control. This may be due to unexpected illness, disability, medical condition, death, loss of job, or other circumstances.
(2) If your Chapter 13 plan payments have already paid your creditors at least what they would have received if you had filed a Chapter 7 bankruptcy. This may be an issue for people that have filed a Chapter 13 bankruptcy because they own assets that are too valuable to protect the full value. If you convert your Chapter 13 to a Chapter 7 bankruptcy the Chapter 7 trustee will want to liquidate unprotected assets and give the proceeds to your creditors. Therefore, if you had a house that had a lot of equity, then you may not meet this requirement.
(3) If a motion to modify your Chapter 13 plan is not practicable or possible. Normally, if you have a temporary illness or decrease in income, your bankruptcy attorney may help you modify your plan to reflect the circumstances. However, if the plan payments are already as low as legally possible in your Chapter 13 plan and you still are not able to modify your plan further, then it may be possible to seek a hardship discharge in your Chapter 13 case.

The hardship discharge will discharge all eligible debts. There are certain debts that will not be dischargeable, including: curing defaults on any secured or unsecured claims, priority tax debt (taxes that were due less than 3 years prior to the filing of your bankruptcy case, filed less than 2 years, or assessed less than 240 days), debts incurred due to misrepresentation or fraud, domestic support obligations, student loans, homeowner association dues that are due after the filing of your bankruptcy case if you are retaining ownership in the property, or for death or personal injury caused by operating a motor vehicle, boat, or aircraft while intoxicated. This is only a partial list of all the exceptions to discharge. For a more complete list, see 11 U.S.C. §523(a).

Chapter 13 cases can be very complicated. It is advisable that you seek the services of an experienced bankruptcy attorney to help you through the process.