Williams, et al. v. King – Determining Post-Petition Debts in Chapter 7 Bankruptcy
On the day you file for a Los Angeles Chapter 7 bankruptcy‚ you provide to the court a snapshot of your finances.
Any debts that you owe at that point are considered “pre-petition debts‚” also sometimes referred to as “pre-conversion debts.” Any debts that you incur after that point are referred to as “post-petition debts” or “post-conversion debts.” As a general rule in a Chapter 7‚ those debts that you incur pre-petition are dischargeable‚ and those debts that you incur post-petition are not dischargeable.
In the recent case of Williams‚ et al. v. King‚ reviewed by the U.S. Court of Appeals for the Eighth Circuit‚ the question was whether the plaintiff in an adversary proceeding to a Chapter 7 bankruptcy had adequately proven that certain debts were post-petition‚ and therefore still owed.
This case got off to a bad start‚ as both parties attempted to circumvent the bankruptcy laws soon after the petition was filed.
According to court records‚ the debtor began borrowing from the plaintiff back in 2008. There were several loan agreements drawn up over the years‚ and the two apparently had a good business relationship.
However‚ in the spring of 2010‚ the debtor still owed money to the plaintiff when he filed for a Chapter 13 bankruptcy. Prior to him filing for bankruptcy‚ the debtor reportedly notified the plaintiff of his intentions. However‚ he promised he would not list him as a creditor and would not seek discharge of the debt through the bankruptcy. The case was later converted to a Chapter 7. Nowhere in the documents did the debtor list his debts to the plaintiff.
Such concealment from the court is considered a form of fraud. It’s a very serious offense that can result in a debtor’s case being dismissed and even possibly criminal charges. No creditor can be given preferential treatment‚ except where it is statutorily mandated (i.e.‚ child support) or where the court gives express approval.
In this case‚ the debtor and the plaintiff entered into another agreement after the bankruptcy was filed. This new agreement rolled the old principal balance into a new loan. The total for the new loan was to be $81‚000‚ though it wasn’t clear from the documentation how much was owed prior to the bankruptcy filing. Unbeknownst to both parties at the time‚ this agreement was unenforceable‚ as neither had the power to reaffirm the debtor’s pre-conversion debt or prevent it from being discharged in the bankruptcy. An agreement to re-affirm pre-petition debt would have had to meet a number of requirements‚ including the approval of the bankruptcy court. But the bankruptcy court was not even aware of this debt‚ and the new agreement was never submitted to the court.
The bankruptcy case closed in November 2010. For several months thereafter‚ the debtor continued to make payments to the plaintiff‚ per their earlier agreement. However‚ the following spring‚ the debtor moved the bankruptcy court to re-open the earlier bankruptcy case to add several creditors – including this one. He also included in the debts he requested discharged the $76‚000 he still owed on the principal debt from their earlier agreement.
The plaintiff filed a motion with the court objecting to the inclusion. He cited the contract between the two. At a hearing‚ the court informed the plaintiff that the agreement was ineffective because it had not been approved by the court. Subsequently‚ the court approved the debtor’s request to add the plaintiff as a creditor. The bank then re-closed the bankruptcy‚ discharging the $76‚000 worth of debt associated with the unenforceable agreement.
The plaintiff’s attorney then filed a motion in state court‚ seeking to recover the balance that had been discharged.
The debtor then filed a motion in bankruptcy court‚ asking that the state court action be dismissed and that the plaintiff be ordered to cover the cost of his legal fees‚ about $1‚500. The plaintiff failed to appear for the bankruptcy court hearing. The court granted a motion in favor of the debtor‚ dismissing the state court action and ordering him to pay the debtor’s legal fees.
The plaintiff then filed a motion for reconsideration‚ claiming that the debts sought were post-petition debts. The court granted the hearing‚ but found that the plaintiff had only shown that “some unknown portion” of the $76‚000 was post-petition debt. Without evidence showing how much of it was post-petition‚ the court could not grant him any of it. The bankruptcy court then denied them a subsequent hearing.
The appellate court affirmed the bankruptcy court’s orders.
If you are contemplating bankruptcy in San Fernando Valley‚ contact Nader‚ Naraghi & Woodcock‚ APLC to schedule your free consultation. Call (800) 568-0707.
Williams‚ et al. v. King‚ March 5‚ 2014‚ U.S. Court of Appeals for the Eighth Circuit