Bankruptcy: The Fraud Exception

Bankruptcy: The Fraud Exception While the general rule is that a person who files for bankruptcy is relieved from all debts incurred by that person before the filing of the bankruptcy, as with all general rules, there are exceptions, and one of those exceptions has been the subject of some debate in recent years.  Specifically, the Bankruptcy Code does not allow a person to discharge a debt to the extent that debt was obtained by fraud.  Exactly how that provision of the Bankruptcy Code was to be enforced has been the subject of some disagreement, but the Supreme Court has now offered its opinion pursuant to a case arising out of Texas. In Husky International Electronics, Inc. v. Ritz, the United States Supreme Court has found that the term “actual fraud” found in §523(a)(2)(A) of the Bankruptcy Code encompasses forms of fraud, like fraudulent conveyance schemes, that can be effected without making a false representation. In Husky, a company controlled by Ritz incurred unsecured debt to Husky.  Rather than paying the debt, Ritz caused the assets of the debtor entity to be transferred to other entities owned and controlled by Ritz.  Husky then filed a lawsuit against Ritz seeking to hold him personally responsible for the company’s debt citing a Texas statute which made shareholders liable for their “actual fraud”.[1]  In response, Ritz filed for Chapter 7 bankruptcy relief. Husky contended that Ritz could not discharge his obligations to Husky in bankruptcy because the inter-company transfer scheme constituted “actual fraud” pursuant to 11 U.S.C. §523(a)(2)(A).  That section reads as follows: A discharge under [Chapter 7, 11, 12, or 13]...

When March Madness Goes to the “Courts”

When March Madness Goes to the “Courts” On February 7, 2015, an ugly fight broke out between two Indiana high school basketball teams.  As a result of the fight, the officials ended the game and the schools suspended the students who were involved the following Monday.  The Indiana State High School Athletic Association (“IHSAA”), of which both schools are members, then issued additional penalties, including suspending both schools from participating in the state tournament and cancelling each school’s remaining regular season games. Both schools and the individual players on those teams filed a lawsuit seeking an injunction against the IHSAA hoping to be able to participate in the state tournament.  The trial court granted that injunction, and both teams were allowed to participate in the tournament, with one of those teams actually reaching the state championship game. Despite the fact that season has long been over, the IHSAA appealed the trial court decision, and the Indiana Court of Appeals recently ruled in favor of the IHSAA and found that the trial court should not have issued the injunction that it did. So why keep fighting?  The IHSAA likely wanted to get a judicial ruling that the IHSAA had the authority to issue rulings similar to what it did in this instance, because the longstanding rule in Indiana is that courts will exercise very limited interference with the rules and internal affairs of voluntary membership associations such as the IHSAA. As has been discussed extensively through this blog in other contexts, Indiana courts are very reluctant to interfere with contractual relationships, particularly between sophisticated parties.  This same principle of non-interference...

Say What You Mean; Mean What You Say

When a person files bankruptcy, the law allows for certain “exemptions” so that the person can keep certain things that the legislature has determined are the bare necessities of life in order to make a fresh start.  Any property that is not “exempt”, and assuming it is of sufficient value, is to be gathered and then sold for the benefit of the creditors of the person filing bankruptcy. Different States have different laws about what exemptions are allowed.  While there are many similarities, each State is allowed to make its own laws concerning what is exempt and what is not or it can utilize the exemptions created by Congress.  In Illinois, one of those things that a person is allowed to keep is a bible.  In a recent case, we were again reminded that courts, when faced with unambiguous language in a law (similar to what courts will do with a contract) will enforce the exact terms of the law and not attempt to infer any intent from those words or give those words any different meaning other than their plain and ordinary meaning. In the recent case, the person who filed bankruptcy (“debtor”) had a bible.  But it was no ordinary bible.  It was a first edition Book of Mormon from 1830.  Everyone agreed that the bible was worth $10,000.  The bankruptcy trustee, and the bankruptcy court, said that the debtor should not be allowed to keep this very rare bible, but instead it should be sold for the benefit of her creditors.  It was also noted that she had several additional copies of the Book of Mormon...

Ag Lending: Could Selling Crops Be a Crime?

Ag Lending: Could Selling Crops Be a Crime? In an agriculture heavy state such as Indiana, lenders necessarily will have a certain portion of its lending dedicated to agricultural and farming operations.   There are certain protections for lenders under both Indiana law and federal law, which, while easy to follow, may not often be employed by lenders. The Uniform Commercial Code (“UCC”) was written to provide guidance concerning commercial transactions, and has been adopted in some fashion throughout the United States, including Indiana.  States are free, however, to adopt certain other provisions or deviations from the UCC.  As a general rule under the UCC, someone who buys a product in the “ordinary course” of the seller’s business buys that product free from any security interest or lien that a lender may have attached to that product.  This is true even if the lien is perfected and the buyer knows about the lien. Historically, there was an exception to this rule for “farm products”, which includes crops.  Therefore, under the UCC, a wholesale buyer of a farmer’s crops bought those crops subject to any lender’s lien. Congress, however, passed a federal law in 1985 to override this UCC exception, and stated that a buyer who in the ordinary course of business buys a farm product from a seller engaged in farming operations buys that farm product free of any lender’s lien. As with every rule, there are exceptions, and this one is no different.  This same federal law provides that the buyer of farm products will take the farm products subject to the lender’s lien if the buyer has been...

Priority of Purchase-Money Mortgage

Priority of Purchase-Money Mortgage Under Indiana law, a “purchase-money mortgage” is given as security for a loan used by the mortgagor (buyer) to acquire legal title to a property.  Indiana Code § 32-29-1-4 provides that “[a] mortgage granted by a purchaser to secure purchase-money has priority over a prior judgment against the purchaser.”  Therefore, if a mortgage is considered a purchase-money mortgage, it has priority over a previously recorded judgment lien. This issue was recently addressed by the Indiana Court of Appeals. In Amici Resources, LLC; et al. v. The Alan D. Nelson Living Trust; et al. (http://www.in.gov/judiciary/opinions/pdf/01191602cjb.pdf), Sabine Matthies (“Matthies”) obtained a judgment against Solid Foundation Investment Properties, Inc. (“SFIP”) in December 2012.  In April 2013, SFIP purchased real estate in Indianapolis.  SFIP financed the purchase of the property through a loan from The Alan D. Nelson Living Trust (the “Trust”), and SFIP executed a promissory note and mortgage in favor of the Trust to evidence and secure repayment of that loan.  At the time of the closing, SFIP also entered into an agreement with Amici Resources, LLC (“Amici”) whereby Amici agreed to finance renovations and improvements to the property with a loan to be secured by a second mortgage against the property. Matthies brought an action to enforce her judgment lien, and argued that her judgment lien should be deemed “senior”, or “first”, among all of the liens. Matthies argued that the Trust’s mortgage was not a purchase-money mortgage because it was signed the day before SFIP closed on the purchase of the real estate.  If the Court had agreed with Mattheis, her lien would have been...

Mediation? Arbitration? Same Thing, Right?

Mediation? Arbitration? Same Thing, Right? There is often some confusion on the part of business clients concerning the differences between mediation and arbitration.  Some people tend to use the terms interchangeably, but in actuality mediation and arbitration are quite different. In a mediation, typically the parties hire a third party “neutral” person who, while she may be a lawyer, does not need to be in order to help facilitate settlement discussions.  Sometimes the attorneys involved will suggest a mediation as a way to have their clients listen to a neutral third party describe the strengths of the opponent’s case and the weaknesses of their own client’s case so that the parties can try to reach a resolution before incurring significant costs.  As previously noted in this blog, you are not sacrificing anything legally by engaging in mediation or other forms of settlement negotiations.  That is because if the case does not settle at mediation, any judge or jury who ultimately tries the case in court will never hear what offers of compromise may have been made by the parties. It is important to remember that in a mediation, the mediator makes no decisions.  Rather, all of the ultimate decisions about whether to settle, and for how much, are left to the parties.  The mediator cannot force a settlement on anyone.  The mediator can make suggestions, and the parties can agree on different ways to mediate.  However, ultimately it is up to the parties to decide if the case will settle or not.  This is one of the big advantages of mediation, because the parties control their own destinies.  After...
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