Sacramento Bankruptcy and Divorce Attorneys Blog

October 29, 2023

California Court Discusses Review of Proposed Compromises in Bankruptcy Cases

In bankruptcy cases, it is not uncommon for the debtor and the trustee to propose a compromise to the bankruptcy court. The court will generally review a proposed compromise to determine if it is fair and equitable, in consideration of numerous factors, as discussed in a recent California case. If you need assistance with a bankruptcy matter, it is in your best interest to consult a California bankruptcy lawyer.

History of the Case

It is alleged that the bankruptcy court considered a proposed compromise between the debtor and the Chapter 7 trustee of a medical institute. The terms of the proposed compromise included the debtor subordinating his $1.35 million proof of claim in the medical institute’s bankruptcy to the allowed claims of all non-insiders.

Reportedly, his company would purchase the medical institute’s rights to pursue certain claims against two creditors for $200,000 in cash and a share of the potential net recovery on those claims. In return, the trustee agreed to settle all of the medical institute’s claims against the debtor and two of the debtor’s companies and withdraw the medical institute’s claim in the debtor’s bankruptcy with prejudice.

September 29, 2023

California Court Discusses Standing to Challenge Fee Awards in Bankruptcy Cases

by Matthew D. Roy

In Chapter 11 bankruptcy cases, trustees are typically entitled to receive compensation for their services, which is subject to approval by the bankruptcy court. These fees can vary but are typically determined based on the complexity of the case and the extent of the trustee’s responsibilities. To ensure fairness and transparency, the Bankruptcy Code sets certain guidelines and fee caps to prevent excessive compensation. If a party involved in the case feels the fees are excessive, however, they can object. Their objection will only be considered if they have standing, however, as demonstrated in a recent California case. If you cannot pay your debts and are considering filing for bankruptcy, it is smart to talk to a California bankruptcy lawyer.

Factual and Procedural Background

It is reported that the debtor, a renowned Los Angeles restaurant chain known for its historic menu and celebrity endorsements, filed for Chapter 11 bankruptcy in 2016 when faced with a $3.2 million judgment in a racial discrimination lawsuit. A committee of unsecured creditors, chaired by the Creditor, was appointed to oversee ECF’s activities. The bankruptcy court later appointed the Trustee for ECF. A Chapter 11 bankruptcy plan was approved, guaranteeing full payment to creditors, including the Creditor, with interest secured by ECF’s assets and contributions from its founder.

Allegedly, the Trustee filed a final fee application seeking the maximum allowable fee in excess of $1 million under the Bankruptcy Code’s fee cap. This amount included the lodestar plus a 65% enhancement for exceptional services. The Creditor objected to this fee request. The bankruptcy court awarded the trustee the statutory maximum fees, which the Creditor appealed. The district court upheld the bankruptcy court’s decision, and the Creditor appealed again.

August 29, 2023

California Court Discusses Reference of Claims in Bankruptcy Matters

by Matthew D. Roy

Generally, the bankruptcy courts have jurisdiction over bankruptcy matters and claims arising in bankruptcy actions. Certain bankruptcy-related actions and claims filed in bankruptcy courts are better handled by other courts, however; as such, in some instances, a bankruptcy court will refer a matter to a state or federal court. If a bankruptcy court refers a case to another court, the plaintiff has the option of moving to withdraw the reference, but proving the such motions should be granted can be challenging, as demonstrated in a recent California case. If you struggle to pay your debts and wonder if filing for bankruptcy is right for you, it is wise to talk to a California bankruptcy lawyer at your earliest opportunity.

Facts of the Case

It is alleged that the plaintiff filed a motion for sanctions in bankruptcy court against the defendants, including claims under federal non-bankruptcy statutes. The bankruptcy court automatically referred the case to the district court. The plaintiff moved to withdraw the reference, seeking both mandatory and permissive withdrawal to have the district court decide the sanctions motion.

Reference of Claims in Bankruptcy Matters

The district court denied the motion to withdraw the reference. In doing so, it explained that the mandatory withdrawal provision should be interpreted narrowly rather than as an escape hatch allowing most bankruptcy matters to be removed to the district court. Withdrawal is only required when materially considering non-bankruptcy federal law. Courts have found withdrawal mandatory when non- bankruptcy issues necessitate interpreting, not just applying, non-bankruptcy law or undertaking analysis of major unsettled non-bankruptcy law questions. Under this approach, the party seeking withdrawal must show more than the possibility novel non-bankruptcy law issues could arise in the bankruptcy case.

July 21, 2023

California Court Explains Bankruptcy Court’s Jurisdiction Over Related Claims

by Matthew D. Roy

Bankruptcy courts are courts of limited jurisdiction; generally, they only handle bankruptcy matters. While they can exercise jurisdiction over other claims, their authority is limited to claims that are related to or arise under or in bankruptcy. Thus, if a party attempts to bring a claim before a bankruptcy court and the court lacks jurisdiction, the claim will be dismissed, as demonstrated in a recent California case. If you have questions about what relief is available via bankruptcy, it is wise to talk to a California bankruptcy lawyer at your earliest opportunity.

Factual and Procedural Background

It is reported that in May 2016, the debtor filed for voluntary Chapter 11 bankruptcy. Almost a year later, the Bankruptcy Court converted the case to a Chapter 7 bankruptcy. Subsequently, the Bankruptcy Court approved the sale of most of the debtor’s assets to a second party for $78,000, along with a settlement and mutual releases. Before the asset sale, a third party raised various challenges to the sale and initiated an adversary proceeding against the second party in July 2020.

It is alleged that in July 2020, the third party began the adversary case. However, in December 2021, a bankruptcy judge ruled that even though the third party might have potential claims against the second party, the court lacked jurisdiction over the claims. The judge clarified that the claims did not fall under the categories of “arising under,” “arising in,” or “related to” the Bankruptcy Code. Consequently, the judge denied the third party’s request to amend the complaint and dismissed the adversary case due to lack of jurisdiction. The third party appealed.

June 30, 2023

California Court Discusses Estoppel in Bankruptcy Cases

by Matthew D. Roy

People seeking debt relief via bankruptcy actions must file legal pleadings with the court and verify that the information contained in those pleadings is accurate. If they take a certain position in a bankruptcy action, they cannot, at a later date, take a contrary position to suit their changed needs. This tenet, known as the doctrine of estoppel, was explained in a recent California bankruptcy action where a debtor who originally asserted he was an employee of a company later attempted to argue he was a sole proprietor in an adversary proceeding. If you are interested in learning how you may benefit from filing for bankruptcy, it is smart to meet with a California bankruptcy lawyer as soon as possible.

Background of the Case

It is reported that the debtor filed an adversary proceeding against the defendant, asking the court to reinstate an office lease and grant him damages for the defendant’s violation of the automatic stay, after the defendant took possession of property rented by a business. The defendant moved for judgment in its favor on the grounds of estoppel. The court, finding inconsistencies between the debtor’s bankruptcy filings and the allegations in his adversary complaint regarding the lease and other business-related property, granted the motion. The debtor appealed.

Estoppel in Bankruptcy Cases

On appeal, the court upheld the lower court ruling. The court explained that judicial estoppel prevents a debtor from asserting a claim in the current proceeding that is inconsistent with a claim they made in a previous proceeding. In the subject case, the position the debtor asserted in his adversary proceeding regarding ownership and operation of a business and its assets were clearly inconsistent with his bankruptcy schedules, amendments, and Chapter 13 plan.

May 30, 2023

California Court Discusses Claims Involving Partnership Interests in the Context of Bankruptcy Actions

by Matthew D. Roy

In bankruptcy actions, debtors are typically protected from claims from creditors. The bankruptcy code only protects debtors from personal liability, however, not claims to property interests in a partnership, as demonstrated in a recent California ruling issued in a bankruptcy case. If you need assistance managing your debts, it is in your best interest to talk to a California bankruptcy lawyer to determine what relief may be available.

Factual and Procedural History of the Case

It is reported that the subject claim arises out of a dispute regarding ownership rights to a commercial property in Oceanside, California. The owners did not have a written partnership agreement. The debtor asserts an 85% interest in the property, based on the recorded title in 1996. The claimant asserted that there was an oral agreement in 1995 to reduce Keenan’s partnership interest to 55%.

Allegedly, the debtor filed for Chapter 11 bankruptcy. During his bankruptcy proceedings, he consistently treated his interest as 55%. After his Chapter 11 plan was confirmed, however, he filed an amended property schedule asserting the larger interest. The bankruptcy court rejected the debtor’s post-confirmation assertions. Subsequently, the claimant filed a state court action seeking to amend the recorded deed to reflect the adjusted interest. The state court ruled in favor of the claimant in 2017, and the debtor’s appeal was dismissed.

April 27, 2023

Supreme Court Rules Debtors Are Liable for Partner’s Fraud in Bankruptcy Actions

by Matthew D. Roy

Generally, bankruptcy allows for the discharge of debts. There are some exceptions to the general rule, however. For example, any debt obtained via fraud or false representations is not dischargeable. While it is obvious that people could not discharge debts incurred due to their own fraud, it was not clear whether people could be deemed responsible for debts arising out of another party’s fraud if they were unaware of the fraudulent activity. The United States Supreme Court recently resolved the issue, though, holding that debtors cannot discharge debts brought about by fraud, regardless of whether it was their fraud or another individual’s deceitful acts. If you are interested in learning more about debt relief, it is wise to meet with a California bankruptcy lawyer to evaluate your options.

Facts of the Case

It is reported that the debtors, a married couple, renovated a house in San Francisco and sold it to a buyer who later sued them after discovering defects. The buyer won the case and was awarded damages. The couple then filed for bankruptcy. During the bankruptcy proceedings, the buyer argued that the debt from his judgment against the debtors was not dischargeable because it was obtained through fraud.

Allegedly, the bankruptcy court agreed. The court found that the husband had knowledge of the factual misrepresentations. Further, it held that his fraudulent conduct could be imputed onto his wife due to their partnership. The debtors appealed, and the appellate court remanded the imputed liability finding back to the bankruptcy court, instructing them to determine whether the wife “knew or should have known” of the fraud. The court held that the wife did not know of the fraud and thus was not liable for her husband’s fraudulent conduct. The appellate court affirmed, but the buyer appealed.

March 30, 2023

California Court Discusses Anti-SLAPP Law in the Context of Bankruptcy Claims

by Matthew D. Roy

Bankruptcy actions generally offer people relief from significant financial burdens, as most debts are discharged in bankruptcy. There are exceptions to the general discharge rule, however. For example, claims arising out of willful misconduct, such as fraud or intentional injury, will often be deemed non-dischargeable. Recently, a California court analyzed a debtor’s counterclaims to a creditor’s action to deem debts nondischargeable, in a case in which it was disputed whether California’s Anti-SLAPP law applied in bankruptcy matters. If you need help dealing with overwhelming debts, it is smart to confer with a California bankruptcy lawyer about your options.

Procedural History of the Case

It is alleged that the debtor filed a petition for Chapter 13 bankruptcy in February 2021; it was later converted into Chapter 7 petition. The creditor subsequently filed a complaint against the debtor in June 2021, asking the court to determine the creditor’s claims were nondischargeable because they arose out of the debtor’s willful and malicious conduct. The creditor then amended its complaint on July 1, 2021, to include an objection of discharge on the grounds the debtor made false oaths.

It is reported that, in response, the debtor filed an answer to the amended complaint and a cross-complaint that contained various claims for relief under California law. The creditor then filed a motion to strike the cross-complaint under California’s anti-SLAPP statute. The court granted the creditor’s motion to strike the debtor’s cross-complaint, and the debtor appealed.

February 28, 2023

Court Explains Subordination of Claims in California Bankruptcy Matters

by Matthew D. Roy

In bankruptcy actions, the courts aim not only to help debtors alleviate their overall debt load but also to protect the interests of the debtor’s creditors. Among other things, this means that creditor claims in bankruptcy actions are essentially ranked by priority, with some claims being subordinated to others. In a recent ruling, a California court rejected a creditor’s objection to the subordination of his claim and, in doing so, explained when subordinating claims is appropriate. If you need assistance with a bankruptcy matter, it is in your best interest to meet with a California bankruptcy lawyer as soon as possible.

Procedural Background of the Case

It is reported that the claimant obtained a judgment against the debtor in a state court action. The basis of the claimant’s case was the debtor’s failure to fully reimburse the claimant, who was an equity holder in the debtor’s company, for the value of his stake. The debtor subsequently filed a bankruptcy action. The claimant filed a creditor’s claim, which the bankruptcy court subsequently subordinated; the court subordinated the claimant’s judgment lien as well. The claimant appealed, and the Bankruptcy Appellate Panel affirmed the court’s decisions. He then appealed to the United States Court of Appeals, Ninth Circuit.

Subordination of Bankruptcy Claims

On appeal, the court affirmed the lower court rulings, finding that the Bankruptcy Appellate Panel did not err in finding that the claimant’s bankruptcy claim was properly subordinated. Specifically, the court explained that the applicable law stated that a bankruptcy claim for damages arising out of the sale or purchase of a security has to be subordinated to all interests or claims that are equal or senior to the interest or claim such security represents.

January 30, 2023

California Court Discusses Grounds for Granting a Petition to Extend a Bankruptcy Stay

by Matthew D. Roy

One of the many benefits of filing a bankruptcy action is that it automatically stays any parties from pursuing civil claims against the debtor. Generally, a stay will last for the duration of the bankruptcy case. In some instances, though, the stay will expire after a much shorter time period. In such instances, the debtor may petition the court to extend the stay. Recently, a California court explained the grounds for granting a request to extend a stay in a matter in which a creditor objected to the bankruptcy court’s decision. If you are unable to manage your debts, you may be eligible to file for bankruptcy, and you should speak to a California bankruptcy lawyer regarding your rights.

The Background of the Case

It is reported that the debtor filed a Chapter 11 bankruptcy petition in May 2019. Two months later, the court dismissed his case on the grounds that the debtor’s attorney did not sufficiently represent or counsel him. The debtor filed a second Chapter 11 bankruptcy petition in January 2020. In the second case, he was not represented by an attorney. The debtor subsequently filed a motion to extend the automatic stay; while the stay granted in a bankruptcy case usually endures for the duration of the case, if a debtor had a pending Chapter 11 case dismissed within the preceding year, the stay only lasts 30 days.

Allegedly, the debtor also filed a declaration stating the served notice of the motion on all known creditors. The court granted the motion, extending the stay until terminated by operation of law or an order of the court. The creditor then learned of the bankruptcy proceeding and filed a claim against the debtor in civil court. The bankruptcy court dismissed the debtor’s case, pursuant to a motion by the trustee, and the state court dismissed the creditor’s case. The creditor moved to reopen the bankruptcy case for the limited matter of determining whether the stay was terminated as to them. The court granted the motion but found that the stay applied to the creditor. The creditor then appealed.