Florida Bankruptcy Law Blog

Bankruptcy Does Not Discharge Some Attorneys Fees

Bankruptcy does not solve all debt problems. This week I interviewed a client who wanted to file Chapter 7 bankruptcy to stop a lawsuit. The prospective client had been appointed trustee of a family member’s trust. After the family member died, he distributed over $100,000 of trust property to himself thinking he was entitled to the distribution. Subsequently, another heir filed a lawsuit against the client in state court alleging that he had breached his fiduciary duty as trustee by making the distribution, and that the money was actually intended to go to the other family member. The plaintiff was seeking damages plus about $50,000 in attorneys fees owed to his attorney. The prospective client thought he would lose the case in state court, and even though he was willing to give back the $100,000, he wanted to file bankruptcy in order to discharge the attorneys fees liability. I told him bankruptcy would not solve the problem.

A judgment for breach of fiduciary duty is not dischargeable in bankruptcy. If the defendant filed bankruptcy before the state court entered a civil judgment the plaintiff either could file the same claim in bankruptcy court or could ask the bankruptcy court judge to send the case back to state court in order complete the pending litigation there. Attorneys fee liability is not listed in the bankruptcy code as a non-dischargeable debt. But, when the fees are incurred in connection with a debt which itself is non-dischargeable the attorney fee liability attaches to the non-dischargeable debt and the fees too cannot be discharged. The same rule applies to punitive damages attached to a non-dischargeable claim. Filing bankruptcy would enrich a bankruptcy trustee who is paid a percentage of recovered assets but would not reduce the debt owed to this plaintiff.

The only benefit for filing bankruptcy in this instance may be to show the creditor that the prospective debtor has no non-exempt assets other than the money he is already willing to surrender. The better tactic would be to offer the money to the plaintiff as a settlement to avoid continuing litigation.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Second Mortgage Lender More Likely To Pursue Deficiency Judgment

I have often written about mortgage deficiency judgments pointing out that up to now few institutional mortgage lenders are pursuing deficiencies in Florida. Borrowers should distinguish between personal liability on first and second mortgages. When either the first or second mortgage holder forecloses the first mortgage will likely take back the property. The first mortgages gets land which eventually can be sold. The second mortgage holder gets nothing at the foreclosure sale. If the first mortgage holder pursues a deficiency judgment (and again, this is usually not the case), the borrow can defend the action in part by arguing that the mortgagee has been satisfied by its repossession of the property. The borrower does not have this defense against the second mortgage. The second mortgage, having received nothing of value in a foreclosure, can sue on the mortgage note. The second mortgage can simply demand repayment of the promissory note underlying the mortgage without going through a foreclosure proceeding. The property value is irrelevant when the lender sues to collect the note.

I have not seen any case to date where a first or a second mortgage lender has sued the homeowner personally. I think the risk of personal liability is significantly higher when there are more than one mortgage obligations. It is also more likely that a second mortgage lender who does not foreclose can wait up to five years to bring suit on the underlying note after the first mortgage lender’s foreclosure action is complete.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Is Unmarried Roomate Included in Household Size?

Here's an interesting article I found concerning the amount of people counted in determining size of a debtor's household.Link: Can I Include My Roommate in My Household Size? : Bankruptcy Law Network. The larger the size of the debtor's household the higher is the median income applicable to determining whether the debtor can automatically file Chapter 7 or if the proposed debtor is subject to means testing. Many unmarried debtors share a house or an apartment with roomates. The debtor's want to count the roomates in determining the size of their household. If the debtor counts his roomate for household size does the debtor also have to include the roomate's gross income in determining whether the "household income" is above or below the applicable median income. This article cited above discusses a bankruptcy court decision dealing with that question.

Court Denies Entireties Ownership Of Law Practice

An attorney formed a corporation to own his law practice. He formed the corporation under Florida’s general corporation statute instead of the professional corporation statute. He issued all the stock to himself and his wife jointly. The lawyer then filed Chapter 7 bankruptcy. He sought to exempt the jointly owned stock in his law business as tenants by entireties stock. The Chapter 7 Trustee argued that the stock could not be exempt as joint property because only individuals who are licensed attorneys can own in a law firm. The debtor responded that since he owned the stock with his wife jointly there was no "individual" stock owner and therefore his ownership was exempt from regulations that all "individual" owners be licensed attorneys.

The bankruptcy court rejected the attorney/debtor’s argument. The court denied the claimed exemption of the stock as a tenants by entireties asset. The judge cited the Florida statute that states only licensed attorneys can have any ownership interest in a law firm or law firm corporation. Unless both spouses are licensed Florida attorneys, a law business cannot be owned as tenants by the entireties in Florida. The same rule would apply to other licensed professionals. Case No. 05-29501 (Adams)

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Insuring Your Bank Deposits

In the past few days following the failure of IndyMac Bank in California I received a few email questions from people concerned about the safety of their bank accounts. Most people know that the FDIC incures bank accounts up to $100,000. However, a person can increase insurance coverage by dividing deposits at any one bank into different accounts opened under different names or owned by different entities. The FDIC has a webiste Link: FDIC: Insuring Your Deposits which clearly provides a full description of all available insurance. It is probably easier to open additional insured accounts at your existing bank than it is to spread deposits among different financial institutions.

Defending Mortgage Foreclosure

There are so many foreclosures and so few attorneys who know how to defend on behalf of the homeowner. I have referred many clients facing foreclosure to an Orlando real estate attorney named David Cohen. David has had good success delaying foreclosures and thereby giving his clients extra time to remain in their homes without paying any mortgages or taxes. David recently gave me an overview of his tactics and results fighting foreclosure suits on behalf of many people who were either unable to make payments or who decided to walk away from their homes with negative equity.

David Cohen explained that simply by filing an answer to a mortgage foreclosure complaint will give the homeowner at least five or six months in the home. Most homeowners do not answer foreclosure complaints, and foreclosure judgments are entered by default. Default foreclosure judgments are easy for the mortgage lender to process quickly. Filing an answer requires the lender to turn the file over to legal staff for more involved litigation. Creative defenses make the foreclosure more difficult. In some cases, a defense attorney can find technical defects in the foreclosure suit or the original loan documents which can substantially dely foreclosure and even defeat the lender’s lawsuit. David Cohen says that in most cases he is able to delay foreclosure suits more than six months and often as long a nine months after the complaint is filed and the homeowner is served with a summons.

Legal fees associated with foreclosure defense usually range between $1,500 and $3,500 over a four to nine month period. Complicated cases which delay foreclosure even longer may costs more for legal help. For most homeowners, the legal fees of foreclosure defense will be substantially less than their monthly housing expense so that it usually is a good business decision to hire an attorney to defend and delay foreclosure actions.