Client files adversary against debtor for $370K

THE client is a foreign company that has been doing business with a California company since 2012. The client is one of the world’s largest manufacturers of a certain kind of equipment, which the CA company sells and distributes in the United States. Business was good reaching low million dollar figures until the CA company was sued by a person, whose relationship to the California company I am not clear on. 

But this plaintiff was able to get a judgment against the CA company for $1.0-M and proceeded to levy the bank accounts of the CA company. The company appealed the judgment saying that the state court judgment was based on fake documents then filed a Chapter 11 case to shield itself from the judgment levy on its bank accounts so that it could continue operating. The client’s interest in the case is that the client gave the CA company a credit line of $3.0-M for trade financing of its shipments to the CA company. 

When the CA company filed for Chapter 11, it owed the client about $400,000 unpaid. The client continued to do business with the CA company despite it being on Chapter 11 and continued shipping its merchandise. The CA company continued paying the client until the trustee forced the conversion of the Chapter 11 case to Chapter 7. When the case was converted to Chapter 7, the client was still owed $250,000, and the CA company had not yet executed the transfer documents for a trademark that the client had bought and paid for in the amount of $120,000. 

So, we filed two claims against the Chapter 7 trustee. One claim was for $250,000 of unpaid merchandise, which we claimed was secured because there was a title retention agreement for unpaid merchandise, and a claim for ownership of the trademark, or $120,000. A lot of litigation ensued between the client and the Chapter 7 trustee, and the plaintiff who had a $1.0-M judgment against the debtor.

The court eventually ruled in favor of client on the issue of the trademark ruling that since the client had bought and paid for it, the client owned the trademark. The trustee agreed to not challenge this and considered it as a final disposition of that matter. So, the trustee transferred the trademark to the client. However, the unpaid inventory is still an issue and the trial is next month. There are specific steps that a creditor can take to protect itself in bankruptcy. The first is to make sure that your claim is secured because secured creditors are treated differently from unsecured creditors. Secured creditors have priority over unsecured creditors in bankruptcy. If there is money left in the bankruptcy estate, secured creditors get paid in full first; then, if there is money left, unsecured creditors share equally proportionately. 

The legal problem that normally surfaces a secured creditor is whether or not its claim is actually secured in the legal sense of the word. For instance, a mortgage that is signed by both parties but not recorded is not a secured debt. It is an unsecured debt. But if the mortgage is recorded, the mortgage becomes a secured debt. Even if there is a bankruptcy, the mortgage holder can ask permission from the Court to proceed with foreclosure on the property if the post-petition mortgage payments are not being made. So, in Chapter 13 if the post-petition mortgage payment has not been made, the creditor can file a motion for relief from the automatic stay. This motion is normally heard in 30 days. If the debtor does not pay the post-petition default on or before the hearing date with certified funds, the court will grant the relief motion and allow the creditor with State law foreclosure remedies.

Senior files Chapter 7 to discharge $40K credit cards 

The next client is a 62. He still works as a radiology technician and makes about $70,000 a year. He is single and doesn’t own a house. He has several dependents; his sister and two nieces. He also sends money abroad to another sister who has a large family because his brother in law does not work. In other words, the client has a good heart and all his income is spent to care for his family. The choice now is there is a conflict between money that has to be sent to his sister abroad or to pay for minimum payments on his $40K credit cards. He sends $1,200 a month to his sister abroad, while he also needs $1,200 a month to keep his $40K credit cards current. It’s hardly a choice, is it? The right choice is to continue sending $1,200 a month to his sister with the large family because they have to continue having a roof over their heads and food to eat. Some of the money sent goes to the college education of his nieces and nephews, which is also good. On the other hand, $1,200 a month to keep $40,000 credit cards current is a luxury that the client can no longer afford. He has paid it for at least ten years, which is a grand total of $144,000. $144,000 is more than enough to pay off $40,000 of credit cards, isn’t it? But that’s not how it works. After paying $144,000 for 10 years, clients still owe the very same $40,000 of credit cards! It’s totally unfair. But whoever said that the world has to be fair? Instead of paying for credit cards, the client could have bought a house instead, here or abroad so that the house can be used as a family home for his relatives. The client wants to continue working until forever. I can understand that. As long as one is healthy, one will feel the same even in the sixties, one still feels young. It’s all in the mind. I started counting backward a long time ago. Truth be told, I don’t feel a day over 28 but that was a long time ago, yet it feels like that was only yesterday. So this is life. We are only here temporarily and only for a short period of time. 

The client decides to get a Chapter 7 discharge, then buy a house here after two years when his credit score is about 650. He’s still paying for a new car, so as long as he pays the car loan on time, his credit score should be over 600 by the second year.

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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California.  Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S. Fremont Ave, Mailstop 58, Building A-1 Suite 1125, Alhambra, CA 91803.

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