California Court Discusses Unjust Enrichment in the Context of Creditor Claims in Bankruptcy Cases

In most bankruptcy cases, creditors will submit proofs of claims. If parties object to such proofs, the courts will typically assess whether the objections are valid and, in some instances, may reduce a creditor’s claim. This was illustrated recently in a ruling issued in a California bankruptcy case in which the court reduced a claim by almost $30 million due to a finding that the debtor was not unjustly enriched in that amount as the creditor claimed. If you have questions about proofs of claims or unjust enrichment in a bankruptcy case, it is in your best interest to meet with a trusted California bankruptcy lawyer.

History of the Case

It is alleged that the debtor filed a Chapter 11 bankruptcy petition in 2016. The creditor filed four proofs of claim, one of which totaled close to $50 million. Other claimants moved to reduce the claim, and following a series of hearings, the court granted the motion, reducing the claim by close to $30 million on the grounds that the debtor was not unjustly enriched by that amount as claimed by the creditor. The creditor appealed, arguing that the bankruptcy court improperly applied the facts.

Unjust Enrichment and Proofs of Claims

The appellate court declined to adopt the creditor’s reasoning and affirmed the bankruptcy court’s ruling. The court explained that, under California law, if one party is unjustly enriched or receives a benefit at another party’s expense, they must make restitution. It noted, however, that simply because one person obtains benefits from another does not necessarily mean that restitution is required. Specifically, restitution is only necessary when the circumstances dictate that it would be unjust for the party to retain the benefit.

As such, when a party seeking restitution acts to protect or improve their own property, any incidental benefit conferred on another party does not constitute unjust enrichment. In other words, equity does not impose a duty to pay for a benefit that a party did not seek or have the opportunity to decline and over which they had no control. In sum, if a party acts out of self-interest, they cannot seek compensation from those that incidentally benefit from their acts. In the subject case, despite the creditor’s protestations, the appellate court stated that the evidence produced at the hearings supported the bankruptcy court’s finding that the $30 million in question constituted an incidental benefit. Thus, it affirmed the bankruptcy court’s ruling.

Speak to an Experienced California Bankruptcy Attorney

Creditors can submit proofs of claims based on a debtor’s unjust enrichment in bankruptcy cases, but if the courts find that the incidental benefit exception applies, they may reduce such claims. If you need assistance with debt relief, you may be eligible to file for bankruptcy, and you should speak to an attorney as soon as possible. Matthew D. Roy is an experienced California bankruptcy lawyer who can advise you of your options and help you to seek the best legal result available under the facts of your case. You can contact Mr. Roy through the form online or by calling (916) 361-6028 to set up a meeting.

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