May 2004 Case Update

Bankruptcy Court May Hear Dispute Between 3rd Parties
In re Mulder (Bankr. N.D. Ill.)

A dispute between 3rd parties is related to a Bankruptcy case only if it affects the amount of property available for distribution or the allocation of property among creditors. Mere overlap between the dispute and the affairs of the Debtor is not enough to give the Bankruptcy Court jurisdiction.
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Trustee May Reopen Case to Pursue Debtor’s Lawsuit
In re Rochester (N.D.Ga. 2004)

Court finds that Debtor’s conduct does not warrant the application of judicial estoppel to bar a Chapter 7 Trustee from pursuing the State Court Action and that cause exists to reopen the Bankruptcy Estate.
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Chapter 7 Debtor Embezzlement is Bad Faith: Case Dismissed
In re Bogan (W.D.Pa. 2003)

Debtor voluntarily filed Petition. While under the protection of the Court, Debtor embezzled over $400,000 from her employer. Following conversion of the case to Chapter 7, Debtor filed amended schedules. Debtor has never disclosed in the Amended Schedules or otherwise provided an explanation of where the stolen funds went or where they are. Actions of the Debtor and the activities undertaken during the
pendency of the case are exceptional circumstances in which the bad faith of the Debtor is clearly demonstrated. The allowance of any exemption in the known property of the Estate would constitute a further abuse of the Bankruptcy process. Trustee’s Amended Objections to Exemptions sustained and Debtor denied any and all exemptions.
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Discharge Denied and Exempt Assets Seized on Account of Debtor’s Undisclosed Funds
Latman v. Burdette (9th Cir. 2004)

Surcharge of the Debtors’ Bankruptcy exemptions by Trustee to account for funds not properly disclosed was a permissible equitable remedy under the Code and not barred by election of remedies or res judicata.

On January 12, 2000 Richard and Bettina Latman filed for Chapter 13 protection. On April 14, 2000 the Latmans dismissed their Petition, and on April 18, 2000 re-filed for protection under Chapter 7. During the four-day interval the Latmans sold a 1991 Ford Explorer and 1996 Sea Ray boat, for which they received a total of $8,500 cash. The Latmans did not list all proceeds of these vehicle sales on Schedule B of their Chapter 7 Petition and instead listed only $1,500 “cash on hand.”

Noting this discrepancy, the Trustee requested that the Latmans account for the proceeds from the sales. In response to the Trustee’s request and a subsequent Order compelling an accounting the Latmans gave inaccurate information. The Trustee commenced an adversary proceeding against the Latmans under §727 to deny discharge. On April 27, 2001 the Court granted the Trustee’s motion for summary judgment, finding as a matter of law that the Latmans had failed to explain the loss of the proceeds from the sales of their car and boat, had made materially false statements on their Schedules, had not kept adequate records of their assets and expenditures, and had fraudulently concealed an option to purchase real estate. Ruling affirmed by the District Court on March 6, 2002.

Trustee subsequently filed a Motion to Charge Debtors’ Exemptions for Failure to Make Accounting and for Turnover of Property in June 2001. That Motion contended that the $7,000 in unaccounted proceeds from the sale of the car and boat should be surcharged against the §522(d)(5) “catch-all” or “wild card” exemption, thereby rendering non-exempt a Chrysler Town & Country minivan and engagement ring (or $7,000 of the value of these items) that the Latmans had previously exempted under §522(d)(5). The ruling on that Motion was challenged on appeal.

HELD: The surcharge remedy fashioned by the Bankruptcy Court prevented what would otherwise have been a fraud on the Court and creditors caused by the Latmans’ nondisclosure of monies that should have been listed on the schedules.
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Sears Must Pay Debtor’s Attorneys Fees for Bringing Unjustified Fraud Suit
In re Dayton (N.D.Cal. 2004)

In November 1997 Sears National Bank, a corporate subsidiary of Sears, issued Debtor a MasterCard. On October 10, 2002 Debtor used her Sears MasterCard to pay $1,127 to the San Francisco Department of Parking and Traffic for parking fees and fines. In the same month Debtor incurred about $700 of additional charges on the account. On December 20, 2002 Debtor filed a Chapter 7 Petition.

On March 21, 2003 Sears commenced an Adversary Proceeding based on the presumption of fraud under §523(a)(2)(C).

FOUND: Sears failed to provide any evidence that its actions were reasonably based in law or fact. Sears argued that it “had substantial justification for filing a complaint” without providing the Court with any support for its position. Sears based its case on the premise that the payment of parking fees and fines with a credit card was a cash advance under §523(a)(2)(C), yet did not attempt to prove liability under §523(a)(2)(A).

HELD: Sears was not substantially justified in bringing the non-dischargeability action against Debtor.

AWARDED: Debtor’s Attorney’s Fees in the amount of $4,585.00.

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