Adversary Proceedings - creditor issue

[JanetW]

I am wondering if I need to file an adversary action in a BK7. I was defrauded by debtor who I loaned $30,000 to pay for a large piece of equipment for their business. Soon after entering into the agreement they refused to pay me back or give the the equipment. I sued and won in Superior Court, then perfected my judgement with Judgment liens filed against their real property and through the Secretary of the State of California.

When I politely asked that they pay the settlement, they ran to a Bk attorney and filed. I am the only creditor listed, and they list this obligation as unsecured. They valued the equipment at less than 1/3 of what I paid for it.

I sent a letter to the trustee indicating the status of what had occurred, including attachments (The complaint, the settlement, the liens, proof of claim, etc.) The meeting of creditors is tomorrow.

I know that I need to file the proof of claims with the Bankruptcy court within 60 days of the creditor's meeting. I have a few questions - Do I need to file all of the material that I sent to the Trustee (a letter summarizing the events and subsequent lawsuit, basis of fraud, and all of the attachments) with the Court or just the proof of claim? In addition, do I also need to file an adversary action?

I have no idea what to do now. I won the underlying lawsuit in pro per (with help from some consultants, but it cost me nearly $5000). Do I need an attorney to file the adversary action?

[HHM]

Did you actually get a judgement for "fraud", or are simply "feeling" defrauded.

Based on your description, it sounds like a simple breach of contract issue.

A debt is designated as secured or unsecured at its "inception". Unless you perfected a lien against the equipment by filing a UCC-1 shortly after the contract was signed, the debt is unsecured, (or more accurately, you have an unperfected security interest). The subsequent judgments only give you a security interest in property as a remedy, but does not make the underlying debt a "secured" debt for purposes of BK.

As for the subsequent judgments, if the judgment liens are perfected, then you really don't need to do anything in BK court because your liens will survive the BK. However, your remedy to recover the debt will be limited, about all you can do is wait for them to sell their house.

Side note: the trustee could care less about your situation, the trustee's sole job is to identify any non-exempt assets of the debtor that can be used to pay back at least something to the debtor's creditors.


Now, if your judgment was for actual fraud, then you may want to initiate an adversary proceeding to have the debt declared non-dischargeable, but if you are going to go that route, you better get a lawyer...if you lose, they can hit you up for attorney's fees.

[JanetW]

Adversity action

Thank you for your response. I did file a UCC-1 when the debtor used my money to purchase the piece of equiptment, and did notify the Trustee (at her request) about the situation.

I am not sure I understand why this debt would not be considered "secured" if the Judgment was perfected with a Judgment lien against both the house and the equiptment that was purchased at the time the debt was incurred?

Also - is there any guidance to file the adversity action per se? I see that the Nolo series has material to do-your-own bankrupcy - is there anything like this for creditors?

It certainly seems complicated.

[HHM]

Sorry to say Janet, you can't cheap-skate your way out of this one. You need to hire an attorney because and AP is a full fledged civil suit in Federal Court.

Ok...so, if you filed a UCC-1 and the underlying contract designates the debt as secured, then the Debt would be secured for BK purposes. However, odds are, your claim in bifurcated because you are probably owed more than the equity in the assets are worth. So a portion of you claim is secured (if any), and the rest is unsecured.

Also, you misunderstood the distinction, I did not say your Judgment Liens were not perfected, I said that If you DID NOT file a UCC-1, your original loan would not be considered secured because without the UCC-1, your security interest would be unperfected.

Keep in mind, there are two aspects to a Secured Liability.
1. the security interest in the asset...this is what gives you the right to retake the property for non-payment
2. the personal liability of the debtor who took out the note, i.e. their liability to make payments on the note.
If you do nothing, #2 gets discharged in the BK...which also includes the personal liability aspects of the judgments.

As for what you can do now
1. Do nothing, you have liens placed on the home, about all you can do is wait for the sale of the house, however long that takes. If they walk away from the home, your screwed, because the foreclosure will quash your lien because you are an inferior lien to the mortgages.
2. File an AP, assuming your underlying judgment includes a judgement for fraud and try to get the debt declared non-dischargeable.

In any event, you need to get a lawyer, because there are a lot of technical issues with the claim you are going to make that even lawyers screw up.

[justbroke]

I'll just concur with HHM's position on Adversarial Proceedings. Even I am prepared to hire an experienced lawyer for any AP that may creep up. I have no clue about the Federal Rules of Civil Procedure and this is what will rip apart any pro se debtor's case.

Moving on the the secured claim. Has the claim bar date passed yet? if not, I would amend the claim to show a secured portion and an unsecured portion. I would list the secured portion at the value of the debt less $1.00 and put that $1.00 as unsecured. There have been cases where the Claimant was not allowed to claim the unsecured portion by amended the claim after the claims bar-date! Just so that you know.

[JanetW]

That's just it - I am having a great deal of difficulty even finding an experienced attorney who will represent a creditor in this small a context. They are looking for the Fortune 500 corporations, and expecting fees that come from the large cases, not small fry like me.

I have about 50 days to file before I am barred from doing so, and another month before my proof of claim needs to be filed.

The initial trustee was handling both of deadbeat debtor's (DD) BK 7's (there were 2 corporations involved - one a non-profit, the other for-profit , minimal assets declared in both.) Right before the MOC was held the Trustee resigned from one BK and subbed in another Trustee, retaining the other one. Also, the DD signed his name "last, first" without a comma [both names could either be first or last names], and did not reference the Bks to each other. Is there something going on that I should know about?

I have not yet filed my proof of claim. I curious about the benefits of claiming part of the claim secured and the other part unsecured. Doesn't this mean that the unsecured part will not likely be paid?

Obviously, there is a lot that I don't know about BK law.

Should I be able to find an attorney who is both willing and capable of handing this AP how much is reasonable to pay to pursue this? My initial expenditure was $30,000. After DD refused to repay my money or hand over the equipment I sued and won in Superior Court in an action that dragged on for over a year and required half a dozen motions, sanctions for DD, then a successful MSJ. A lot of effort for a legal newby.

One thing I did learn from doing this pro se was that I was a lot better prepared than DD's attorney, and although the Judge's clerk treated him better than she treated me, the Judge found my arguments pursuasive, and I ultimately won the case.

Lawyers have not cornered the market on common sense, nor do they always win because it is an insider's game.

Just looking for a chance to even the playing field.

[HHM]

You still haven't answered the basic question, do you actually have a judgment for fraud against the debtor? I.e. in the judgment, did the judge making a finding of fraud. If not, than you are probably SOL as far as any AP goes in the BK court, and about all you have are the liens.

[Never_Again]

Janet,

It would seem to me that if you have a purchase money lien, with the proper UCC-1 filings, that you are secured up to the value of the asset.

Bankruptcy will not wipe out that lien. However, anything that you are owed over the value of the equipment will be cleared in a bankruptcy, unless the debtor has other assets that are going to be seized and sold.

It would seem that you could file a motion for relief from stay as a secured creditor, and once that was granted, you could repossess and sell the asset. Then, the bankruptcy court would wipe out the deficiency, including your judgment and lien against their home.

I am with HHM on this one... there is a difference between being defrauded, as in an act of fraud, and simply feeling defrauded because someone doesn't pay you. If there is a legal finding of fraud, or you feel fraud has been committed (the legal definition of fraud), then you certainly can file an adversarial proceeding seeking to have the debt declared non-dischargable.

A warning... the only way that the debt will be considered non-dischargable is if it IS fraudulent. If it was a very short time after they borrowed the money (typically less than three months) that they filed for bankruptcy, you may have something. Fraud MUST be proven in court by "clear and convincing" evidence, which is a pretty high evidenciary standard. If you fail to prove fraud by these standards, YOU could be held liable for their attorney's fees, therefore throwing good money after bad!

[JanetW]

In my opinion, this was actual fraud. Debtor induced me to pay $30,000 for a Hyperbaric Chamber with the agreement that they would house and set it up until which time I had a place for it locally. I was under contract with debtor to do work in their clinic at the time, and since I was hoping that this was an ongoing relationship, I complied. We had an agreement that I would have title to the chamber, and that I would own it, not the clinic.

Once Debtor took posession of the Hyperbaric Chamber, they terminated my contract and stated that the Chamber was now theirs. At this point I demanded that they return the chamber to me or return my money. They essentially told me to go stuff myself. We attempted to negotiate this over the next several months, during which I complained to the State of California about their conduct. When they got the grievance from the State they reaffirmed the debt.

Then they sent me a check for $200 attempting to use that as payment in full for the $30,000 that I had expended. This is when I filed suit against them.

They engaged in a bit of legal chicanery - attempting to change the venue, abuses of discovery, etc. I sought and got sanctions against them, then terminating sanctions. Their attorney deserted ship and I prevailed. I was awarded the original amount, interest plus fees and costs. However, I did not seek a finding of fraud, so my judgment did not address it.

Although I learned far more law than I wanted to during this process, I am still out $30,000 plus the costs of suit. [The MSJ was something that I will never undertake again pro se!]

How much should an AP cost? This will determine whether I proceed along this route. Of course, I would gladly just take posession of the chamber, but since it is now a listed asset in the bankruptcy, won't the Trustee sell it?

[JanetW]

oops! Forgot something very important - Corporations can't recieve a discharge of debt in Chapter 7.

So - what does this mean in terms of how I need to proceed? Just file my B10?

[HHM]

Is the corporation still running (not likely if "it" is in chapter 7). Basically, in this scenario, you simply get in line. However, you said you were able to get a judgment against them personally and file judgment liens against real estate.

Basically, file your proof of claim. As I mentioned, unless you have a finding of fraud from the judgment you received, the BK court will not entertain an AP to re-litigate the issue. If you have a security interest in the chamber (you mentioned the filing of a UCC-1), the trustee cannot simply take it an sell it, you need to file a proof of claim ASAP and establish your rights to the chamber, and file a Motion to Lift the Automatic Stay with a request to repossess the chamber.

As for how much one would cost, you are in a catch 22 as you already found out. Most attorney's that deal with creditors, do not take one-off cases like yours.

Live and learn.

[jdphillips73]

personally , i am glad to hear that creditors have a uphill battle when fighting a chapter 7 discharge, makes me all warm inside

[JanetW]

When I file my proof of claim do I need to file all of the paperwork with it? The original UCC-1, the Summons and complaint and Judgment from the lawsuit, the Judgment lien and the property lien?

Also - do I need to file a formal complaint to file a Motion to Life the Automatic Stay or do I already have standing since I am a named creditor?

[AngelinaCat]

personally , i am glad to hear that creditors have a uphill battle when fighting a chapter 7 discharge, makes me all warm inside

How I wish WE had that feeling!!!

'Hub and I have an Enemy that has a five year old lawsuit against us that has never been to trial. The last action in it was on their end 17 months BEFORE we filed BK Ch7. There is no judgment, no lein, no debt of any kind. Yet we have been hauled into an Adversary Proceeding against us discharging the open, stale case.

We are pro se. We have no choice. Defending against other legal procedures from this person and his business partners, along with other things, has bankrupted us.

The Enemy has successfully gotten this stale, open case moved into a Federal venue. They are claiming that their actions were stymied by the Automatic Stay when we filed. How so? The last action on the docket is July 28, 2006. We filed BK on Dec. 28, 2007. By my reckoning, 17 months have passed with no action.

Yet they claim fraud and malicious actions under BK code 11 USC 523(a)(6).

And so far, every single motion or pleading we have presented before this court--the same one that granted our Disgharge!--has been ignored, or denied thus far.

Tomorrow, we go meet with the Enemy's attorney as prescribed by the local rules of our BK Court, and share 'evidence' or make some kind of 'good-faith' effort to settle. Yeah, right!

[jdphillips73]

may i ask what kind of civil suit is it? that they would claim fraud on?

i have someone who will probably fight my bk for a ongoing civil suit for "breach of contract" for not completing 1 year of a employment contract.