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So you’re doing business as usual and notice that payments from your customer are getting later and later. Turns out that customer is struggling to navigate in the sputtering economy. Waiting for your money is bad enough; but what if you receive a demand to refund what you’ve been paid? And not because of anything you’ve done but because your customer has filed for Bankruptcy?

Sound like a nightmare? Actually, it happens everyday. So what do you do if you’re next? That was the question addressed in the recent New York case of Davis vs. Clark-Lift, in which a reorganizing Chapter 11 Debtor paid vendors later and later as it listed towards Bankruptcy. But even those lucky creditors who got paid could not escape the demand of the Trustee (Davis) to fork over what they had received.

As the Court in Davis explained, to set aside a payment as a “Preferential Transfer” under Section 547(b) of the Bankruptcy Code the moving Creditor or Trustee must established that the Debtor made it:

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Section 523(a)(4) of the Bankruptcy Code, 11 USC 523(a)(4) makes debts arising from “fraud or defalcation while acting in a fiduciary capacity” nondischargeable.  You know what that means, right? If you answered “Yes,” then you’ve overcome a gulf that several Federal Courts of Appeal could not.

In fact it was not until the decision in Bullock v. Bankchampaign (October term 2012 decided May 13, 2013 slip opinion 11-1518) that the Supreme Court addressed that Circuit split and determined once and for all that “defalcation” requires a showing that the actor had the requisite state of mind or scienter. In short, to have a debt excepted from discharge based on breach of a fiduciary duty, a Debtor must have known that what they were doing was wrong, or must have acted with a gross neglect of whether that was true.

So why did the Supreme Court rule on this relatively abstruse point? It turns out that the Courts of Appeal couldn’t even agree on whether there was a scienter component to defalcation, much less what defalcation should mean. The Supreme Court had to clarify the issue for good.

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Q: If a debtor files Bankruptcy after taxes are sold, the redemption period has expired, and the property is sold to a disinterested third party, can Bankruptcy still help them recover that property?

A: Kind of. The debtor is out of luck unless the redemption period expired within the 2 years prior to the filing. Then things get a lot more interesting. And that is exactly what happened in the Chapter 13 case of In re Smith.

Inheriting Property, Losing it to a Tax Sale

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Lopsided divorce settlement shortly before a husband’s bankruptcy filing did not amount to a “fraudulent transfer” of assets: ex-wife keeps it all!

Bankruptcy: In re Kimmell, 10 B 36039

Adversary: Trustee v. Kimmell, 10 A 2174

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“90% of the credit cards lawsuits are flawed”

As the economy continues to sputter and consumers gasp for air, credit card issuers have been developing a strategy to cope with the chaos. Will they be offering longer terms? Lower interest rates? Perhaps rebates to long-time, loyal customers?

What? Me Worry?

Why bother trying to meet your customers half-way? If you’re a credit card issuer you have no downside. Are you out of money? Grab a taxpayer bailout.Have unemployment and bad debts skewed your risk profile? Jack up interest rates. Who’s going to stop you, right?