Articles Posted in Chapter 11

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In In re: John Shart and Elke Gordon Shardt, an unpublished decision by the United States Bankruptcy Appellate Panel (BAP) for the Ninth Circuit, the BAP affirmed the bankruptcy court’s ruling that chapter 7 co-debtor’s spouse did not directly engage in fraudulent conduct, but remanded the action back to bankruptcy court for consideration and findings as to whether the co-debtor spouse had a partnership or agency relationship with her co-debtor husband such that his fraudulent behavior should be imputed to her for purposes of exception to discharge under §523(a)(2)(4).

Factual Background and Procedural History

Husband entered into various real and personal property transactions with creditors with whom the husband had a personal and business relationship. Creditors sued husband, his wife, and husband’s business in state court.

Husband and wife then filed a chapter 11 bankruptcy, which was converted to a chapter 7 bankruptcy. Creditors filed an adversary proceeding against the husband and wife debtors alleging the debtors: a) made misrepresentations to creditors with the intent to deceive them, b) had engaged in fraud or defalcations as fiduciaries, and c) willfully, maliciously and intentionally injured the creditors and converted their property. The creditors argued that the resulting debt should therefore be excepted from discharge under §523(a)(2)(A), §523(a)(4) and §523 (a)(6). Debtors filed an answer denying the allegations.

The bankruptcy court entered a judgment in favor of creditors against husband and declared that creditors’ claims against wife were discharged. A timely appeal was filed by creditors on September 27, 2012, challenging the part of the judgment holding that the claims against wife were not excepted from discharge.
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In In re: Castillo, the Bankruptcy Court for Central District of California held that “after making an 1111(b) election, an undersecured creditor may include in its 1111(b) secured claim post-petition attorneys’ fees, but not post-petition interest.”

Factual Background and Procedural History

Chapter 11 debtor Idalia Roxana Castillo (Debtor) owned six pieces of real property. One was a rental property against which creditor Deutsche Bank National Trust Company (Deutsche) held a first deed of trust to secure repayment of a promissory note with a principal balance of $1,031,330.56. The property’s appraised value for plan purposes was $500,000.

After Debtor filed bankruptcy, Deutsche asserted a secured claim for $1,072,498.94. Debtor then filed a plan of reorganization. Deutsche thereafter timely elected to have its entire claim treated as fully-secured pursuant to Bankruptcy Code Section 1111(b). After Debtor filed an amended plan and disclosure statement, Deutsche filed an amended proof of claim, increasing the total amount of its claim to $1,207,652.57. The increase reflected Deutsche’s post-petition attorneys’ fees and post-petition interest. Debtor objected, arguing, inter alia, that Deutsche’s amended proof of claim included post-petition interest and attorneys’ fees even though, according to Debtor, Deutsche was not eligible to recover such charges under Bankruptcy Code Section 506(b).

After dispensing with Debtor’s other objections to Deutsche’s amended proof of claim, Judge Bluebond held that the issue of “whether an undersecured creditor who elects the application of Section 1111(b) is entitled to include post-petition interest and attorneys’ fees in the amount of its secured Claim” was worthy of further consideration. After reviewing the parties’ supplemental briefing and hearing oral argument on the issue, Judge Bluebond issued a memorandum explaining her analysis and conclusions, which she noted were “novel and surprising.”
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