Sunday, April 5, 2009

Objections to Discharge

Last Friday, I settled an adversary lawsuit in bankruptcy court about thirty minutes before our trial was supposed to start. My client is owed approximately $115,000 from a former commercial tenant. In February 2008, the tenant filed a Chapter 7 bankruptcy. In Chapter 7s, creditors are not able to file claims unless they are notified by the trustee that there are assets available for distribution. In this case, it appeared that there were no assets, but my client was aware of assets owned by the debtor that were not disclosed by him on his bankruptcy petition.

So, we needed to file an adversary complaint. There are two ways to object to a debtor's discharge in bankruptcy. The first one involves non-dischargeable debts. Section 523 of the bankruptcy code outlines nineteen types of debts that are not dischargeable, including taxes, student loans, and domestic support obligations. Also, included are debts incurred through "false pretenses, a false representation, or actual fraud." Based on the circumstances of this particular case, we could have alleged that the debt was incurred through fraud, but I didn't think that we would be able to prove it at trial.

The second type of objection is a general objection to the debtor's discharge under Section 727. That section outlines several circumstances under which a debtor's discharge will be completely barred. For instance, if the debtor made a "false oath" in connection with his bankruptcy filing.

After a careful review of the debtor's petition, we determined that there were at least nineteen different answers by the debtor that we thought were less than truthful. We filed a general objection to his discharge. Throughout the course of discovery, and right up to the final trial preparations, it was apparent that the debtor either outright lied on his petition, or at the minimum, he showed a "reckless indifference" to the veracity of his statements which should prevent him from obtaining his discharge.

At the last minute, the debtor wanted to settle. If he lost at trial, his entire bankruptcy case would be dismissed. He wanted to settle with my client so that he could discharge everyone else. My client had in interest settling as well so that we would be the only creditor left standing after the completion of the bankruptcy case. Thirty minutes before trial, the debtor consented to a non-dischargeable judgment in favor of my client for the full $115,000, plus $13,000 in attorney's fees.


Michael D. Wong said...

An interesting note on this is that depending on what type/under what section you bring your adversarial proceeding, the Bankruptcy Court may still be able to move forward with discharge of the debts claimed by the debtor as dischargeable.

Peter C. Bastianen said...

Perfectly handled. Now, how are you going to collect?

Brian D. Moore said...

Mike - did the deadbeat pay up?

Brian D. Moore said...
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Michael W. Huseman said...

He's paid a lot but not all. I'm still hasing this guy. We were actually in court on this last Wednesday.