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Utnehmer v. Crull (In re Utnehmer)  12-1362  (Opinion released last week! 10/10/13)
Developer may erase debt to investors during bankruptcy proceedings because their loan agreement for luxury home project did not make them business partners.
In 2005, a real estate developer purchased a million dollar property in Venice California.  However, it was apparently a junk property.  The developer wanted to tear down the structure and build from scratch, resell it and make a healthy profit.  However, they did not have enough money.

Enter Patrick and Mary Crull.  The Crulls loaned the developer $100,000.  The goal was to rebuild the property in one year.  However, the Great Recession caused a change in plans.  In 2008, the project was completed and sold for $3,725,000. The real estate developer sold the property for about 2.5 million more than what he bought the property.  Unfortunately, the sale proceeds were used the money to pay back other creditors, but did not pay back the Crulls.

The Crulls were mad!  They filed a lawsuit.  The Developers never answered the complaint because they knew that they were going to be forced to file bankruptcy.  The Crulls were easily able to obtain a judgment of $213,645.17 for their $100,000 investment.

The Developers countered the judgment by filing a chapter 7 bankruptcy petition. They named the Crulls as debtors and sought to discharge the debt.  The Crulls were forced to file a complaint inside the bankruptcy proceedings and asked the court to rule that the Developers could not discharge the debt to them via this bankruptcy. At the trial, the bankruptcy court found that the loan agreement for bankruptcy created a partnership between the Developer/debtor and the Crulls, and because of that partnership, Developers'/Debtors' debt to them could not be discharged.

The Developers appealed the trial court and won!  The appellate court reversed the bankruptcy court. Bankruptcy Code Section 523(a)(4) provides that if a person filed for bankruptcy under a chapter 7, he cannot get rid of debts he owes, which occurred due to his fraud while acting in a fiduciary capacity. In California, business partners are fiduciaries within the meaning of Section 523(a)(4). Here, however, the loan agreement between the real estate developers and and the Crulls were not good enough to create a partnership relationship.

What is interesting to note is that the loan agreement made reference that the Developers and the Crulls were going to form a partnership in the future.  But because it was a mere idea to form a partnership in the future, it was not enough to form a partnership.  Thus, the appellate court concluded there was nothing in the loan agreement that established any intent to create a partnership at any point.

The court concluded that because there was no partnership agreement between the real estate developers the Crulls, they did not owe a fiduciary duty.  As a result, the debt is discharable.

This opinion by the court was published last week.  The Crulls are probably still kicking themselves for electing to be lenders instead of partners on this Venice beach property.   
Photo Credit: http://www.flickr.com/photos/huffstutterrobertl/
This article was written by California Attorney, Kenneth Jorgensen.
To find out more, or to contact Ken, please visit his websites at www.fresnolawgroup.com and
www.fresnobankruptcylawgroup.com

Groeb Farms, a major honey supplier in the United States since 1981, has filed for Chapter 11 bankruptcy in Detroit, Michigan.  The filing comes after the supplier was accused of buying Chinese honey illegally.  The supplier supposedly was making illegal honey purchases in order to avoid anti-dumping tariffs imposed in 2001 by U.S. trade regulators. [...]

There’s only so long that a creditor can sue you for a past due debt. In California, you can’t use bankruptcy to let that time run out.
One of the tactics student loan lawyers and debt collection defense attorneys use fairly regularly is to defend based on the expiration of a statute of limitations.
Sue too late, and you’re out of luck. It’s one of the reasons, I think, that we’re starting to see so many lawsuits for past due private student loan debt – the clock is ticking down, and creditors are jockeying for position.
Given the fact that private student loan debt is so large, my fellow student loan lawyers have been debating whether putting someone into a bankruptcy would give us a leg up over creditors such as National Collegiate Student Loan Trust.
The thinking among our little band of student loan advocates has been that if we could somehow cause the statute of limitations to run out, our clients could wipe out some of their student loan debt at the end of the bankruptcy.
In California, at least, that doesn’t work. Here’s why.
Effects Of Bankruptcy On The Statute Of Limitations
When you file for bankruptcy, an automatic stay goes into effect. With limited exceptions, nobody can sue you while you’re in bankruptcy.
At the same time, Section 108 of the U.S. Bankruptcy Code holds that if a lawsuit hasn’t been stated when the bankruptcy case has been filed, and if the statute of limitations for doing so hasn’t expired before the date of the filing of the petition, then such period does not expire until the later of—
(1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or
(2) 30 days after notice of the termination or expiration of the automatic stay.
Looking at that part of the U.S. Bankruptcy Code alone, it would seem as if the tactic of filing for bankruptcy would make sense as a way to get the statute of limitations to run out.
Let’s say you’ve got a 4-year statute of limitations to collect a debt (remember, the statute of limitations on a promissory note such as for private student loans is 6 years, not 4). You’re 3 years past due, so you file a Chapter 13 bankruptcy figuring that you can sit there until the time limit runs.
See also:

• Chapter 13 Bankruptcy Basics
• How Long Can You Be Sued On A Private Student Loan In California?

Once you’re out, you’ve got to wait 31 days before you’re home free.
But you’ve forgotten one piece of the puzzle.
Does Bankruptcy Toll The Statute of Limitations?
The issue of a statute of limitation is one of state law, not federal.
Under California law, a creditor has four years to file a lawsuit against you. For promissory notes such as private student loans, the time is extended to six years.
Other states have their own time limits.
Beyond that, many states have laws that stop the statute of limitations from running under certain circumstances.
Bankruptcy Stops The Clock
California Code of Procedure § 356, for example, states the following:

When the commencement of an action is stayed by injunction or statutory prohibition, the time of the continuance of the injunction or prohibition is not part of the time limited for the commencement of the action.

A line of California cases has interpreted CCP § 356 held that the automatic stay in bankruptcy stops the clock on the statute of limitations. Some of those cases are:

• Scuhmacher v. Worcester, 55 Cal.App.4th 376 (1997)
• Inco Development Corp. v. Superior Court of San Bernardino, Case No. E036800 (Cal. Ct. App. 2005)
• Lewow v. Surfside III Condominium Owners Assn., Inc., 203 Cal. App. 4th 128 (2012)

The Solution Of Bankruptcy May Create Problems
If you’ve got a debt – student loan or otherwise – and are watching the clock tick down, filing for bankruptcy may end up putting you in a worse situation.
If the debt’s dischargeable, you’ve got nothing to fear. But if you’re dealing with a private student loan debt that won’t be wiped out at the end of the bankruptcy case, you may be unwittingly extending the time for the creditor to sue you.
It’s just another reason why the analysis involved in resolving your bill problems is best left to an attorney who understands all the angles.

Miami Personal Bankruptcy Lawyer Jordan E. Bublick has over 25 years of experience in filing Chapter 13 and Chapter 7 bankruptcy cases. His office is centrally located in Miami at 1221 Brickell Avenue, 9th Fl., Miami and may be reached at (305) 891-4055.  www.bublicklaw.com

In December, 2007, Congress passed the "Mortgage Forgiveness Debt Relief Act of 2007" to alleviate tax consequence for some homeowners in foreclosure. The new Act excludes from gross income certain cancelled discharged "qualified principal residence indebtedness."

Existing law provides that discharged debt, whether after a foreclosure or short sale, is generally taxable income realized in the year the debt was forgiven, unless an exception applies. Generally only reductions in principal and not forgiveness of interest results in discharge of indebtedness income ("DOI"). Usually a lender is required to issue a Form 1099-C to report the DOI to the IRS. Taxpayers are required to disclose DOI to the IRS whether the lender issues a 1099-C or not. Taxpayers may be able to exclude the DOI from income if an exceptions to DOI applies.

Two existing exceptions to DOI are the insolvency and bankruptcy exceptions. 26 U.S.C. section 108(d). If the borrower is insolvent, DOI is not taxable. If the debt is discharged in bankruptcy, DOI is also not taxable. Another exception is the "purchase price infirmity doctrine". This allows DOI to be excluded from income where the lender agrees to write down the purchase money debt to the true value of the collateral as the purchase price was inflated in the original transaction due to fraud or misrepresentation. Another exception from DOI is when the liability was contested. Pursuant to Zarin v. Comm'r, 916 F.2d 110 (3d Cir.1990), DOI is not income where there is a legitimate basis for the borrower to claim that the debt was never owed or collectible because illegal.

The new Act adds to the existing exceptions from DOI a category of "qualified principal residence indebtedness." Up to $2 million of indebtedness may be excluded if the reason for the discharge is either a decline in the residence's value or the taxpayer's financial condition. It should be noted that debt excluded by the Act reduces the taxpayer's basis and a "short sale" could result in a taxable "gain" which may be taxable as a capital gains.

In order for this new exception to apply, the debt must be "qualified" which includes only acquisition and not home equity indebtedness. Acquisition indebtedness includes funds borrowed to buy, construct, or improve a home. Debt consolidation loans or cash out loans are generally not acquisition indebtedness. The Act only applies to debt discharged between January 1, 2007 and December 31, 2009. Pub.L.No. 110-142 Section 2(d). If acquisition debt is refinance, the refinanced principal amount retains its status as acquisition indebtedness. The excess of the total refinanced loan amount over the refinanced acquisition indebtedness is treated as home equity indebtedness and is not eligible for exclusion from income. Acquisition indebtedness included loans to "substantially improve" the principal residence.

This new exclusion only applies if the debt was discharged due to the borrower's financial condition or a decline in the home's value. A discharged based on the lender's acknowledgment of its wrongdoing or even rescission is not eligible for the qualified principal residence exclusion. Documentationj in any litigation or settlement that one of the required grounds is the basis for the discharge of the debt would be helpful.

The homeowner must apparently elect to take either the qualified principal residental exception or the insolvency exception. The insolvency exception, if elected, is "in lieu of" the qualified principal residence excetion.Jordan E. Bublick is a Miami Personal Bankruptcy Lawyer with over 25 years of experience in filing chapter 13 and chapter 7 bankruptcies. Miami Personal Bankruptcy Lawyer Jordan E. Bublick has filed over 8,000 chapter 13 and chapter 7 cases.