COMPANY FILES CHP 7 DUE $1.0M JUDGMENT; SENIOR WANTS CHP 7 DISCHARGE OF $35K CREDIT CARDS

Client is a corporation that has been in business since 2000. It had good times and bad over

the last two decades but always managed to land on its feet. It has an ever-growing list of

clients that need its products, which it sources from abroad. It has two kinds of clients: clients

with their own brands for the same product and clients that buy the product with client’s own

brand. In 2015, client appears to have had some kind of misunderstanding with one of its major

foreign suppliers regarding a large order that apparently was not produced by supplier to

conform to the correct specifications. This resulted in the delivery of the large order being

rejected by the ultimate buyer. Well, you can see why this rejection of the order shipped caused

a major disruption in the business relationship between client and foreign supplier.

Since the ultimate buyer rejected the shipment, client was not going to get paid the expected $1.3M from its customer. But foreign supplier demanded to get paid in full for the shipment, which had an FOB value of $1.0M. If client paid supplier $1.0M for a rejected order, client would have to immediately eat the loss of $1.0M. Client is does about $3.0M of yearly business, so an outright $1.0M loss is not sustainable. Client does not have $1.0M in cash or available credit lines, and does not see the wisdom of eating such a big loss. In addition, client believes that it was supplier’s fault that the shipment did not comply with the required specifications, which caused the rejection of the order.

On the other hand, foreign supplier believes it complied with the required specifications as far as they understood it. So, it’s a big mess. Client offered to give the shipment back to supplier but supplier does not want the merchandise back. Supplier wants cash of $1.0M. 

Eventually, supplier files a lawsuit her in Los Angeles against client for $1.0M breach of contract and fraud. A lot of breach of contract lawsuits adds a fraud cause of action, which basically works as follows. The element of fraud consists of a misrepresentation made by defendant to plaintiff. Plaintiff justifiably relied on the misrepresentation. Plaintiff suffered damages by relying on the misrepresentation, and the damages of plaintiff are proximately caused by the misrepresentation. More or less these are the essential elements of the fraud or deceit cause of action. If plaintiff fails to prove one element, there is no fraud. For instance, plaintiff alleges that he suffered damages because he relied on defendant’s misrepresentation that he doesn’t have to file income tax returns for 2017. However, plaintiff himself is a certified public accountant. There is no justifiable reliance on defendant’s representation because plaintiff himself is a CPA and therefore should know himself that he should or should not file income tax returns for 2017.

In any event, at trial, plaintiff was able to prove by a preponderance of evidence that client did indeed defraud plaintiff supplier of $1.0M. 

Well, so now the choice is pay the $1.0M or company files for Chapter 7 liquidation. What would you do if you owned this company? Of course, a fraud judgment for $1.0M is an intentional tort that is that dischargeable. But the fact that the judgment is not dischargeable does not prevent the company from filing Chapter 7 to handle the claim. So what happens? In Chapter 7, the trustee will literally attempt to liquidate the company. Plaintiff will have to file a proof of claim in the bankruptcy as a judgment creditor. If the liquidation results in cash, the trustee will pay creditors in the legal order of priority. The IRS has no. 1 priority for unpaid taxes. This judgment creditor will get paid after the IRS gets paid. The trustee will auction off the inventory, if any, and collect receivables. The trustee will administer cash in the bank. 

Second client is 70 years old and single. She never got married. She is still pretty and charming. But I guess she never met her prince charming so decided to stay single. She owes $35K of credit cards. She has been paying $12K a year for the last 20 years. She has paid $240K in the last 20 years, and yet she says she still owes $35K! Wonder of wonders indeed, sad but true. She says she is just tired of paying for the cards and now that she is retired, the $12K a year for interest payments on the cards is a big dent on her retirement income and prevents her from enjoying her retirement years. Not surprising. 

Her retirement income consists of $1200 of social security and $1800 of pension. So, she has $3K a month. The cards take a third of that every month. Ouch!! In addition, she has already paid $240K to her credit card masters, modern-day slavery, no doubt. She decides it’s high time for her to get rid of these cards with a discharge or wipe out in Chapter 7! I guess she got smarter as she got older, but could have saved $240K if she got rid of these cards when she was 52.

If you need debt relief, set an appointment to see me. I will analyze your case personally.

“THEN JESUS SPOKE TO THEM AGAIN, SAYING, “I AM THE LIGHT OF THE WORLD. HE WHO FOLLOWS ME SHALL NOT WALK IN DARKNESS, BUT HAVE THE LIGHT OF LIFE.” JOHN 8:12

Lawrence B. Yang is a graduate of Georgetown University with a Master’s Degree in Law and specializes in Bankruptcy, Business, Real Estate and Civil Litigation.  He speaks English, Mandarin and Fujian and has successfully represented thousands of clients in California, including companies overseas. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 20274 Carrey Road, Walnut, CA 91789 or1000 S. Fremont Ave., Mailstop 58, Building A-10 South Suite 10042, Alhambra, CA 91803.