Stopping Eviction and Curing Rent Default in Bankruptcy

Prior to the amendments of the Bankruptcy Code in 2005, the filing of a bankruptcy proceeding automatically stayed a residential eviction proceeding unless and until the landlord obtained relief from the automatic stay.

However, in 2005, subdivision (b) of Section 362 of the Bankruptcy Code was added and now provides the following “exception” to the automatic stay with respect to a judgment for possession “obtained before the date of the filing of the bankruptcy petition”:

“(b) The filing of a petition under section 301, 302, or 303 of this title, or of an application under section 5(a)(3) of the Securities Investor Protection Act of 1970, does not operate as a stay –…

(22) subject to subsection (l), under subsection (a)(3), of the continuation of any eviction, unlawful detainer action, or similar proceeding by a lessor against a debtor involving residential property in which the debtor resides as a tenant under a lease or rental agreement and with respect to which the lessor has obtained before the date of the filing of the bankruptcy petition, a judgment for possession of such property against the debtor;”

If the landlord has not obtained a judgment for possession against the debtor prior to the bankruptcy filing, the automatic stay goes into effect as usual and stays the eviction.

However, if the landlord has already obtained a judgment for possession against the debtor before the bankruptcy filing, the automatic stay does not stay the eviction unless the debtor completes item # 11 on page 3 of the Voluntary Petition entitled “Do you rent your residence?” and Official Form 101A entitled “Initial Judgment About an Eviction Judgment Against You”, makes the required certifications on that form, and deposits with the bankruptcy court any rent that would become due within 30 days after the bankruptcy filing date. Thereafter, the debtor must also cure the entire rent default that gave rise to the judgment for possession within 30 days.

Filing bankruptcy prior to entry of a judgment for possession against the debtor provides two very significant benefits to the debtor: (1) the automatic stay stops the eviction without the need to deposit rent with the bankruptcy court; and (2) an unexpired residential lease that has been terminated under state law due to non-payment of rent can be “cured” and “assumed” in a chapter 13 bankruptcy proceeding; the past due rent arrearage can be paid over time in a chapter 13 plan and the lease can essentially be reinstated.

Be sure to check bankruptcy case law applicable in your local jurisdiction regarding the curing of a terminated residential lease. Also, be aware that the Bankruptcy Code treats defaults involving non-residential leases differently than residential leases.

Discharging Income Taxes in Chapter 7 Bankruptcy

State or federal income taxes can be discharged (forgiven) in a Chapter 7 bankruptcy if:

● The tax debt is at least 3 years old. The tax return for such taxes must have been due at least 3 years before you file bankruptcy. For example, the tax return for 2013 federal income taxes was originally due on April 15, 2014, so you start counting the 3 years from April 15, 2014, which means 2013 taxes can be discharged if you file Chapter 7 bankruptcy after April 15, 2017 – assuming that you meet all of the other requirements below. If you got an extension to file your return, then the 3 years starts after the extended due date.

● You filed a tax return. You must have filed a return for the taxes you seek to discharge at least 2 years before your bankruptcy filing date. According to most federal circuit courts, if you filed a late return and the I.R.S. filed a “substitute” return, you cannot discharge the taxes. However, in some districts, you can still discharge the taxes even if you filed a late return under certain conditions as specified in the circuit court opinions in those districts. See generally In re Justice, 817 F.3d 738 (11th Cir. 2016)

● The taxes were assessed at least 240 days before filing bankruptcy. The taxes must have been “assessed” by the taxing authority at least 240 days before you file bankruptcy, or must not have been assessed yet. This 240-day time limit may be extended if the taxing authority suspended collection of the taxes based on a pending offer in compromise or a previous bankruptcy filing.

● You did not commit fraud or willful evasion of the taxes. If you filed a fraudulent tax return or otherwise willfully attempted to evade paying the taxes, the taxing authority may object to the discharge of the taxes in your bankruptcy proceeding.

The bottom line is that if you filed a timely tax return over 2 years ago for income taxes that are over 3 years old, you can probably discharge the taxes in a Chapter 7 bankruptcy. This happens every day in bankruptcy courts all over the country.

If you need to file a Chapter 7 bankruptcy to eliminate taxes or other debts, go to www.pardonmydebt.com. It costs only $149.

Knowing The Rules Of Evidence Can Make You A Better Lawyer

I see a lot of attorneys that routinely file motions in federal court that are based on declaration testimony and documentary evidence which is clearly inadmissible under the Federal Rules of Evidence. Fortunately for them, opposing counsel routinely does not object to the admission of this evidence — probably because they don’t know any better themselves.

For example, I see a lot of motions that have an appraisal report attached, but there is no declaration from the appraiser to authenticate the report. In an actual trial, attorneys cannot just submit an appraisal report into evidence. The report first has to be properly authenticated by the testimony of the appraiser who prepared the report, or at least by a “custodian of records” or other “qualified witness” under Rule 803(6)(D) of the Federal Rules of Evidence.

Even if the report contains a certification from the appraiser under penalty of perjury that it is a true and correct copy of an appraisal report that he or she prepared, a “certification” from an appraiser does not satisfy the specific legal requirements for declaration or affidavit testimony. Without a proper declaration, the report cannot be authenticated as required by Rule 901 of the Federal Rules of Evidence. Without authentication, the report is inadmissible as a matter of law. Moreover, without a declaration from the appraiser, there is no evidence that he or she is qualified to testify as an expert witness as to the opinions of value stated in the report.

I also see a lot of declarations by employees of institutional lenders that simply state that “I am a Vice-President of XXX Bank and make this declaration in that capacity.” However, the declarations typically fail to state any facts to sustain a finding that any of the pertinent factual matters set forth in them are based on the declarant’s personal knowledge. Just because the declarant is a Vice-President of the lender (perhaps one of many) does not mean that he or she has personal knowledge of the factual matters set forth in the declaration.

Absent an exception to the hearsay rule, all matters set forth in declarations must be based on personal knowledge, and statements in a declaration are inadmissible unless the declaration itself affirmatively demonstrates that the declarant has personal knowledge of those facts. Love v. Commerce Bank of St. Louis, N.A., 37 F.3d 1295, 1296 (8th Cir. 1994); Gagne v. Northwestern Nat’l Ins. Co., 881 F.2d 309, 315-16 (6th Cir. 1989).

The declarations and affidavits of many officers and employees attempt to throw in the basic required statements to support an “alternative” finding that they are a “custodian of records” or other “qualified witness” under Rule 803(6)(D), so as to make their testimony admissible under the “business records” exception to the hearsay rule. Rule 803(6)(D) generally requires a declaration or affidavit to contain very specific statements before documentary evidence can be admissible as an exception to the hearsay rule. Many declarations are missing one or more of the required statements, which makes the proffered hearsay evidence inadmissible as a “business record”.

Rule 1002 of the Federal Rules of Evidence (sometimes referred to as the “Best Evidence Rule”) generally requires the original of a document to prove its contents. Therefore, testimony to prove the contents of a document is generally not admissible. Copies of the original, and testimony as to the contents of a document, are admissible under certain situations as specified in Rules 1003 through 1007.

Motions are no different than a trial — they require admissible evidence to support the factual matters upon which they are based. Knowing the applicable state and federal rules of evidence will make you a much better lawyer and serve you well throughout your legal career.

Many years ago, I was sued in the Riverside County Municipal Court by the seller of a home I had purchased in Palm Springs, California. I represented myself pro se. I filed a demurrer and the case was dismissed without prejudice. The seller refiled, I demurred, the case was again dismissed without prejudice. The seller hired a third law firm and refiled a third time. When we appeared for trial, the plaintiff’s trial attorney asked for a continuance. I objected on the ground that his request failed to comply with California statutory requirements for a continuance of trial. The judge denied the continuance, but gave the attorney until 1 pm to appear with evidence. Each time the attorney attempted to introduce documentary evidence, such as an appraisal report, etc., I successfully objected based on grounds of lack of authentication, hearsay rules, best evidence rule, etc. After representing myself in a 2-day trial against an experienced civil attorney and winning a judgment of nonsuit, the presiding judge told me that I was the smartest person that has ever appeared in his courtroom. Representing myself in the trial was the funnest thing I’ve ever done. Knowing the rules of evidence can make you look smart — even if you’re not.

California Supreme Court Rules Judgment on Demurrer No Bar

When did the California Supreme Court make this ruling? In 1952. Nevertheless, most attorneys in California either pack up and quit after a judgment on demurrer or file a lengthy and expensive appeal which can take up to two years. Most attorneys have no idea they can simply file a new action regarding the same incident or involving the same “primary right” if they can overcome the substantive defect in the former action by alleging new or additional facts. There may be no need to appeal the judgment of dismissal. Just file a new action and add new or additional facts which state a cause of action if you can.

In California, after a full trial on the merits, a judgment is res judicata not only as to issues actually raised, but also as to issues and legal theories which could have been raised. However, it has been the settled rule in California since 1952 that a judgment entered after the sustaining of a general demurrer does not have such broad res judicata effect. Keidatz v. Albany (1952) 39 Cal. 2d. 826, 830.

The procedural effect of a judgment on demurrer appears to be sui generis. It is a judgment on the merits to the extent that it adjudicates that the facts alleged do not constitute a cause of action, and will, accordingly, be a bar to a subsequent action alleging the same facts. (See v. Joughin, 18 Cal. 2d 603, 606-609 [116 P.2d 777]; Goddard v. Security Title Ins. & Guar. Co., 14 Cal. 2d 47, 52 [92 P.2d 804]; Fay v. Crags Land Co., 62 Cal. App. 2d 445, 448 [145 P.2d 46]. Moreover, even though different facts may be alleged in the second action, if the demurrer was sustained in the first action on a ground equally applicable to the second, the former judgment will also be a bar. (Robinson v. Howard, 5 Cal. 428, 429; Goddard v. Security Title Ins. & Guar. Co., supra.) If, on the other hand, new or additional facts are alleged which cure the defects in the original pleading, it is settled that the former judgment is not a bar to the subsequent action whether or not the plaintiff had an opportunity to amend his complaint.

The rule respecting such judgments is illustrative of the line that has been drawn beyond which a plaintiff may not go if he hopes thereafter to start again. It is analogous to the rule that was applicable to nonsuits before section 581c was added to the Code of Civil Procedure in 1947. A judgment of nonsuit was not on the merits, and a plaintiff could start anew and recover judgment if he could prove sufficient facts in the second action. (Herdan v. Hanson, 182 Cal. 538, 542 [189 P 440]; Estate of Sharon, 179 Cal. 447, 461 [177 P. 283]; City & County of San Francisco v. Brown, 153 Cal. 644, 648 [96 P. 281].)

In 1994, I prepared an appeal in the U.S. Court of Appeals for the Ninth Circuit seeking reversal of a case that had been dismissed based on the alleged res judicata effect of a prior judgment after the sustaining of a general demurrer. Although the case was reversed on other grounds (different primary right), at oral argument all three justices on the panel agreed that Keidatz v. Albany was still the controlling law in California.

Avoiding Preferential Transfers When The Bankruptcy Trustee Doesn’t

With few exceptions, when an unsecured creditor has received one or more payments or other transfers totaling at least $600 from an individual consumer debtor within 90 days prior to a bankruptcy filing, the creditor has received what is known as a “preferential transfer”.

Section 547 of the U.S. Bankruptcy Code authorizes the bankruptcy trustee to file an “adversary complaint” against the creditor to “avoid” the preferential transfer and recover the funds for the benefit of the debtor’s bankruptcy estate. Interest at the maximum legal rate from the date of the transfer can also be recovered in many jurisdictions.

At least 2 or 3 times a month, I encounter a case where a debtor has had their wages or bank account garnished within 90 days prior to filing bankruptcy. Sometimes the debtor’s wages have been garnished for several months before they finally decide, or can afford, to file bankruptcy.

In my experience, most chapter 7 trustees don’t file a complaint to avoid and recover a preferential transfer against a garnishing creditor where the aggregate amount of the transfer is less than a few thousand dollars. Some trustees might. However, if the debtor has sufficient exemptions available to exempt the garnished funds, and claims the funds as exempt in their bankruptcy schedules, you can rest assured that the trustee is not going to lift a finger to go after the transfers.

Bankruptcy Code Section 522(h) provides that the debtor can avoid a preferential transfer or setoff if the trustee doesn’t. However, unlike the trustee, the debtor cannot avoid a “voluntary” preferential transfer — only an “involuntary” transfer which was the result of a wage or bank garnishment, etc.

I’ve filed quite a few complaints to avoid and recover preferential transfers against garnishing creditors in chapter 7 cases and, so far, every creditor has settled immediately without even filing a response to the complaint. Each “settlement” resulted in the creditor returning 100% of the garnished funds during the 90-day preference period. Not one creditor put up a fight, an argument, or even filed a response to the complaint. Most thought they were getting a bargain by not having to pay interest or court costs, although debtors don’t have to pay a filing fee or incur any service of process fees to file an adversary complaint. An attorney for one creditor actually thanked me for educating her on preferential transfers before she sent out the check.

I’m surprised that I don’t see more bankruptcy attorneys filing preferential transfer complaints against garnishing creditors. It’s as simple as claiming the garnished funds as exempt, uploading a standard preferential transfer complaint via the CM/ECF, then serving a copy of the summons and complaint on the garnishing creditor by mail. Wait a week, get a check, file a dismissal.

Attorneys can amend their existing retainer agreement, include an addendum, or have a separate retainer agreement, that gives them up to a 40% contingency fee on a preferential transfer recovery (possibly more, depending on state bar or other rules in their jurisdiction). The average recovery has been around $1,800 to $2,200 per case. It’s an easy $700 to $1,000 in extra fees for not much work. Debtors are happy to pay it, since this is lost money to them anyway.

Unlike in some business cases, garnishing creditors in consumer cases have no defense to a preferential transfer claim — none that I can think of anyway (and apparently none that they have thought of so far). It’s just money there for the taking. File the complaint – get the money.

Bankruptcy case law also states that preferential transfers to federal agencies, such as the IRS, SBA, etc. are also subject to recovery, although you should check the case law in your jurisdiction.

Anyone that wants an editable copy of the preferential transfer complaint that I use, feel free to contact me and I’ll email it to you. It can be used in any jurisdiction, although some minor edits might be necessary to comply with your local rules of practice and procedure.