Trustee going after preferential payment; any recourse against debtor?

[justbroke]

How would a debt get discharged if it was not included in the petition? For example, say I take $5000 cash and pay a contractor in full 30 days before filing BK? There is no debt, therefore as a debtor I would not include the contractor on the creditor matrix. After my case is filed the Trustee decides to try and recover those funds from the contractor and succeeds. Exactly how is the personal responsibilty extinguished if the "debt" is not included in the petition?

I shouldn't have used strong words, but in most Districts, they read 11 USC 727 literally as "a discharge under subsection (a) of this section discharges the debtor from all debts that arose before the date of the order for relief under this chapter"... emphasis on the word all. Yes, the minority of Courts require you to schedule everything. An "asset" case does change this, in that the creditor needed to have sufficient notice. I would say that the Trustee seeking to "avoid" a preference is constructive notice! Therefore, that creditor had received constructive but sufficient notice and should file a claim.

If the contractor were smart, they'd file a claim against the estate, if the Trustee makes it an asset case, and especially if the Trustee is pursuing the avoidance of a preference."

I disagree. I think a smart contractor would wait for the debtor to have his debts discharged and then file suit within the statute of limitations. Why would a contractor want to get invloved in BK court if he didn't have to? Especially if he was only going to get paid pennies on the dollar by being lumped in with everyone else in an asset case.

Huh? They would be in violation of the automatic stay. I would not advise anyone to file a suit on a discharged debt. That is definite way to have sanctions on a contempt violation.

You have to realize, that once the Trustee seeks to avoid or recover a preferential payment of an "unscheduled" Contractor... they become a creditor and also have constructive notice. I would instruct any contractor who has a Trustee gunning for recovery of money paid by a debtor to a.) retain counsel, b.) file a claim, and c.) respect the stay and discharge injunction!

(Justbroke's study guide: see also 11 USC 523 on exceptions to discharge. In 11 USC 523(3)(A), it reads that an unscheduled debt is not discharged "unless such creditor had notice or actual knowledge of the case in time for such timely filing". I would say that a Trustee sending a lawsuit notice regarding the case... is such "notice" or "actual" knowledge. The debt would be subject to discharge, regardless of whether it was scheduled!)

[creditguy]

Thanks for the reply.

First, I would lik to say thanks to this forum! There is a lot of good information here.
Second, I think this thread is just mental exercise at this point....I agree with everyone else that the Trustee is fishing and there is no preferential payment in this case.

"I shouldn't have used strong words, but in most Districts, they read 11 USC 727 literally as "a discharge under subsection (a) of this section discharges the debtor from all debts that arose before the date of the order for relief under this chapter"... emphasis on the word all. Yes, the minority of Courts require you to schedule everything."

I must be in one of those minority Courts. This quote makes me wonder why anyone in the majority court jurisdiction would even need to list their debts if everything before "X" date is discharged. In my court if it is not on the schedule it is not getting discharged. I had a pest control company try to bill me for $100 for services they did not perform just days after I filed. The only way I could get that "debt" included in the petition was to file an ameneded petition which the attorney charges extra for. The debt was less than the attorney fees so I will have to deal with it later if it comes up again.

"An "asset" case does change this, in that the creditor needed to have sufficient notice. I would say that the Trustee seeking to "avoid" a preference is constructive notice! Therefore, that creditor had received constructive but sufficient notice and should file a claim. "
I agree....but in my example the contractor was not a "creditor" and would not get the notice of bankruptcy.

"You have to realize, that once the Trustee seeks to avoid or recover a preferential payment of an "unscheduled" Contractor... they become a creditor and also have constructive notice. I would instruct any contractor who has a Trustee gunning for recovery of money paid by a debtor to a.) retain counsel, b.) file a claim, and c.) respect the stay and discharge injunction!"

Doesn't this normally happen after the discharge has been granted? In this case did the contractor turned "creditor" get an opportunity to object to the discharge?

"(Justbroke's study guide: see also 11 USC 523 on exceptions to discharge. In 11 USC 523(3)(A), it reads that an unscheduled debt is not discharged "unless such creditor had notice or actual knowledge of the case in time for such timely filing".[/B][/B] I would say that a Trustee sending a lawsuit notice regarding the case... is such "notice" or "actual" knowledge. The debt would be subject to discharge, regardless of whether it was scheduled!)"

In my prior example (and I believe the original author's also) the contractor "creditor" would not have had notice of the case in time for such timely filing and the unscheduled debt would not be discharged.

[justbroke]

In my prior example (and I believe the original author's also) the contractor "creditor" would not have had notice of the case in time for such timely filing and the unscheduled debt would not be discharged.

Yes, they would need to have been contacted by the Trustee prior to the claim bar date. However, the claim bar date is not set until the Trustee has made it an asset case.

First, the claims bar date is generally set 90 days after the first schedule meeting of creditors. This is why Trustees quickly determine whether it's an asset case or not, so that they can notify the creditors. Also, by definition, this is beyond the bar date to determine dischargeability which is set at 60 days after the first scheduled 341 Meeting. A "creditor" who is having the payments which they received from the debtor avoided/recovered, would know before then. In some circumstances, a late filed claim may still be accepted, given circumstances... and sufficient notice would probably be one of them. So long as the Trustee hadn't disbursed the proceeds of the liquidation.

I'm sorry that you're in a District which requires everything in a no asset case, to be scheduled. It just doesn't make any sense as the code reads "all debts" and doesn't qualify it. Congress could have easily made it read "all scheduled debts", but chose not to.

[creditguy]

"I'm sorry that you're in a District which requires everything in a no asset case, to be scheduled. It just doesn't make any sense as the code reads "all debts" and doesn't qualify it. Congress could have easily made it read "all scheduled debts", but chose not to."

Which Districts do not require everything to be scheduled?
If you file as no asset (which all chapter 7s start out as) than are found to be an asset case does that change whether everything has to be on the schedule?

[justbroke]

Which Districts do not require everything to be scheduled?

I can't tell you, since there are over 90 Districts. You'd need to check relevant caselaw for your specific District.

If you file as no asset (which all chapter 7s start out as) than are found to be an asset case does that change whether everything has to be on the schedule?

As I wrote... yes. This is because an unsecured creditor needs sufficient notice in order to file a claim and be paid, pro rata, from the proceeds of the liquidated estate.

[creditguy]

"I can't tell you, since there are over 90 Districts. You'd need to check relevant caselaw for your specific District."

As far as I know, ALL THE DISTRICTS REQUIRE EVERYTHING TO BE LISTED otherwise there is the potential that the debt will not be discharged.

Look at your study guide 523(a)(3) again....

A discharge of this title does not discharge an individual debtor from any debt-
neither LISTED nor SCHEDULED under section 521(1)

which states:

The debtor shall file a list of creditors, and unless the court orders otherwise, a schedule of assets and liabilities, a schedule of current income and current expenditures, and a statement of the debtors financial affairs.


Now...we were talking about a contractor who would have not been listed on the schedule of assets and liabilities(because they were paid cash and paid in full) and would not be listed on a schedule of income/expenditures and most likely would not show up on statement of financial affairs since the debtor did not think he did anything out of the ordinary.

So I still stand by my original opinion....this would not be dischargable under these circumstances.

[music12]

creditguy, in addition to reading the statutes themselves, which is always where one should start, you also need to read prior court decisions to see how judges interpret the words. you'd be surprised how a statute can seem to say one thing but gets interpreted in so many different ways that it's hard to believe it's the same statute. that's why different districts have different rules - they interpret the law differently.

the way you read the statute may be valid, but it's not officially valid unless a judge wrote an opinion saying so. it's just how the system is set up. it clearly does not work because the same statute should not have different meanings inn different places! but it's the way it is.

[justbroke]

Look at your study guide 523(a)(3) again....

A discharge of this title does not discharge an individual debtor from any debt-neither LISTED nor SCHEDULED under section 521(1)

Yes, but statutory construction and a plain reading show that it does not need to be scheduled.

So, read 11 USC 523(a)(3) again and you'll see that it reads "unless such creditor had notice or actual knowledge". This changes (or further qualifies) the requirement in the preceding paragraph. In other words, it must be scheduled, unless, the creditor had notice or actual knowledge.

[creditguy]

I agree with everything you wrote. Believe me when I say this.....I have read thousands of opinions. If someone has a court opinion on this subject I sure would love to see it.

[creditguy]

"So, read 11 USC 523(a)(3) again and you'll see that it reads "unless such creditor had notice or actual knowledge". This changes (or further qualifies) the requirement in the preceding paragraph. In other words, it must be scheduled, unless, the creditor had notice or actual knowledge"

So how does Joe Blow Contractor who just did work and has been paid cash for it get notice or have actual knowledge?
Do you expect the homeowner to write a check and say "hurry up and cash this I am filing BK soon"?
Actual knowledge requires PROOF. Notice is required per BK law already mentioned before.... in this case it would not have been given.

[justbroke]

So, read 11 USC 523(a)(3) again and you'll see that it reads "unless such creditor had notice or actual knowledge". This changes (or further qualifies) the requirement in the preceding paragraph. In other words, it must be scheduled, unless, the creditor had notice or actual knowledge"

So how does Joe Blow Contractor who just did work and has been paid cash for it get notice or have actual knowledge? Do you expect the homeowner to write a check and say "hurry up and cash this I am filing BK soon"? Actual knowledge requires PROOF. Notice is required per BK law already mentioned before.... in this case it would not have been given.

In this scenario, the Trustee is going after Joe Blow as a preference action. That is constructive notice that there is a Bankruptcy. The so-called proof is in the service of the lawsuit by the Trustee naming Joe Bloe as defendant. That's why I highly suggest that a contractor who is contacted by the UST/Trustee, should retain counsel and prepare to file a claim!

Justbroke's Study Guide follows:

If the creditor has notice or knowledge of the bankruptcy, even though unscheduled and unlist, the creditor bears the burden of finding out the bar dates and filing a proof of claim. In re Price, 79 B.R. 888 (Bankr. 9th Cir. 1987), aff'd, 871 F.2d 97 (9th Cir. 1989). I would also have you read the Committee Notes on 11 USC 523 around unscheduled debts and why they added the "notice" portion.

11 USC 523: Notes
senate report no. 95–989

Unscheduled debts are excepted from discharge under paragraph (3). The provision, derived from section 17a(3) [section 35(a)(3) of former title 11], follows current law, but clarifies some uncertainties generated by the case law construing 17a(3). The debt is excepted from discharge if it was not scheduled in time to permit timely action by the creditor to protect his rights, unless the creditor had notice or actual knowledge of the case. Paragraph (4) excepts debts for fraud incurred by the debtor while acting in a fiduciary capacity or for defalcation, embezzlement, or misappropriation.

Here are a few places to look where an "unscheduled debt" may be discharged...

• The U.S. Bankruptcy Court's definition of "unscheduled debt"

[creditguy]

JustBroke...I have read your posts here for quite a while before I finally joined this forum. I appreciate the time you take to respond to the numerous posts here and mine also. With that said, I hope you don't mind me saying that I feel like we are questioning whether the chicken or egg came first....

"Unscheduled debts are excepted from discharge under paragraph (3). The provision, derived from section 17a(3) [section 35(a)(3) of former title 11], follows current law, but clarifies some uncertainties generated by the case law construing 17a(3). The debt is excepted from discharge if it was not scheduled in time to permit timely action by the creditor to protect his rights, unless the creditor had notice or actual knowledge of the case. Paragraph (4) excepts debts for fraud incurred by the debtor while acting in a fiduciary capacity or for defalcation, embezzlement, or misappropriation."

You seem to keep highlighting the "unless the creditor had notice or actual knowledge of the case" but exclude another important part which is "the debt is excepted from discharge if it was not scheduled in time to permit timely action by the creditor to protect his rights..."

The contractor would not have been listed as a creditor. The contractor would not have had time to object to the discharge.

Thanks for those case headings...I have only seen one of those before...I will look at the others.

[justbroke]

You seem to keep highlighting the "unless the creditor had notice or actual knowledge of the case" but exclude another important part which is "the debt is excepted from discharge if it was not scheduled in time to permit timely action by the creditor to protect his rights..."

That's the part you don't get with statutory construction. First, 11 USC 523(a)(3) reads...

"neither listed nor scheduled under section 521 (1) of this title, with the name, if known to the debtor, of the creditor to whom such debt is owed, in time to permit --"

Yes, by that definition alone, and if 11 USC 523(a)(3) had no "qualifiers" below it... would mean exactly what you're stating. However, 11 USC 523(a)(3) is further modified or qualified by subsection (A) and (B) which both add "unless such creditor had notice or actual knowledge of the case" which modifies the first paragraph. You're stopping the reading point to where it satisfies you, but you must keep reading the entire paragraph and its sub-paragraphs. By the way, while I'm highlighting it by putting underlines, Congress is who went so far as to add those specific words to the Code and then (the paragraph that you quote) is from the committee notes. Congress wanted it to be obvious what they meant and the committee notes go further to explain the "unless" part. Notice is always a requirement. Scheduling is not.

The contractor would not have been listed as a creditor. The contractor would not have had time to object to the discharge.

Now, questioning the "timing" is one thing, but questioning "notice" is another. The fact that a Trustee sends the case information to the Contractor because the Trustee is looking to avoid the payments... is in fact notice under every definition of the word, meaning, committee meaning, caselaw, precedence, etc. You can't say you never had constructive notice if you are served a notice from the Trustee stating the case, venue and other details. That's like saying... "yes I got the suit from the Trustee from the Bankruptcy Court, but I didn't know my client was in Bankruptcy!" Just doesn't work.

Thanks for those case headings...I have only seen one of those before...I will look at the others.

I think you're overthinking this. The is abundant caselaw out there and precedence has been established in the big Circuits (1st, 3rd, 11th, 9th).

Now, as for whether the noticing was sufficient for the "contractor" (Joe Blow) to file a claim within the claims bar date could be questioned. However, with claims due 90 days after the first scheduled 341 Meeting (or about 120-135 days after filing)... the Trustee would certainly have contacted them if they are avoiding the payments. Thus the actual notice and knowledge has been gained.

[creditguy]

I think we have beat this horse just about all we can... I never had a disagreement with you about Notice just the timing of it.

"Now, as for whether the noticing was sufficient for the "contractor" (Joe Blow) to file a claim within the claims bar date could be questioned. However, with claims due 90 days after the first scheduled 341 Meeting (or about 120-135 days after filing)... the Trustee would certainly have contacted them if they are avoiding the payments. Thus the actual notice and knowledge has been gained."

I thought unsecured creditors in a no-asset case did not have to file claims until it became an asset case.
Let me ask you this...

My case has already been discharged a couple of weeks ago. I understand the Trustee could still make my case an asset case even though I filed in August. From what I can gather he is waiting for my 2009 tax return to see if there is a refund. I repaid a 45K loan to my wifes 401K plan and still have a $10K refund from last year sitting in the bank account along with a Harley waiting disposition. My questions are...

Does the Trustee usually wait over 120 to determine if I will be an asset case?
Does the Trusteeusually wait over 120 days to determine if repayment to my wifes 401K loan was preferential?

Besides offering your opinion on these questions do you see where I am going with this? It has been 120 days since I filed and I still do not know if I am a asset case or not. Imagine the Joe Blow Contractor situation we have been discussing.

[justbroke]

I thought unsecured creditors in a no-asset case did not have to file claims until it became an asset case.

For the original poster's question, and what I continue to be posting about, the case became an asset case upon the Trustee's desire/intent to go after the contractor payments as preferences. As such, the Trustee sends out notices to all parties in interest, including the contractor, that it's now an asset case and informing the creditors to submit claims!

Actually, a Trustee would need to file a Complaint (Adversary Proceeding) to recover preferences or avoid fraudulent conveyances, within the bar date to file a complaint to determine dischargeability. In other words, 60 days after the first schedule 341 Meeting, unless they extend it for cause.

Does the Trustee usually wait over 120 to determine if I will be an asset case?

No, not usually. This is because the Trustee must provide notice to the unsecured creditors to file claims. The only way to do this and for the unsecured creditors to file their claims before the claims bar date (see my prior discussion on the claims bar date), the Trustee must send a notice of potential distribution informing the unsecured creditors that they should file claims if they want part of the proceeds.

Does the Trusteeusually wait over 120 days to determine if repayment to my wifes 401K loan was preferential?

See what I wrote about the asset case designation.

Besides offering your opinion on these questions do you see where I am going with this? It has been 120 days since I filed and I still do not know if I am a asset case or not. Imagine the Joe Blow Contractor situation we have been discussing.

Unfortunately some Trustees play games and don't tell debtors the status. However, you just look at PACER and check the "Asset" flag on the top of the screen. If it's "N", then you're a no asset case, pure and simple. Should the Trustee choose to play games later and make it an asset case after the claims bar date has passed... they really just messed it up for everyone. Of course, variances in local Districts and local rules apply, but I just don't know how any Trustee could get away with a delay that long, because they prejudice the unsecured creditors!