CREDITOR MUST CLEARLY ESTABLISH LEGAL LIABILITY OF BK DEBTOR

A creditor who claims that debt owed by bankruptcy debtor is not dischargeable must establish clearly that debtor legally owes the debt. The circumstances we are talking about involve a debtor who has filed for bankruptcy and a creditor who has filed an adversarial complaint in the bankruptcy objecting to the discharge of an alleged debt owed by the debtor to creditor. A simple example of this principle is A lends $50,000 to B’s 21 year old son who says that he borrowed the money to invest in the construction business of B’s father. Because of the recession, B’s father’s business fails forcing his father to file for Chapter 7 bankruptcy. A then files an adversarial complaint in B’s father’s bankruptcy objecting to discharge of the $50,000 lent to B. As you can see, there is a problem with respect to the legal liability of father to A because the money was lent to son not to father. Son owes A $50,000. It is son who has the legal liability to repay A. Father has no legal liability to repay A even though the $50,000 went into father’s construction business. At best the legal liability of father to A is ambiguous and cannot be clearly established. As a result, A’s adversarial complaint will fail because A will not be able to clearly establish that father owes him $50,000 for money that A lent to B.

 In Maloney v. Harte, the plaintiff and the debtor husband were shareholders in a closely-held Honduran corporation. They decided to build an ocean front condominium complex in 1999. Plaintiff agreed to provide the financing for the project. Debtor was to act as the building contractor. In other words, plaintiff was going to finance the purchase of materials and provide financing for the entire project. The project was not completed. Debtor alleged that plaintiff failed to provide adequate financing preventing the completion of the project. Plaintiff alleged that debtor misappropriated property. Debtor countered that plaintiff set fire to his car, stole valuable papers out of his safe, and held him and his wife at knifepoint while brandishing a semi-automatic weapon. Was plaintiff arrested in the last round up of mafia personnel in New York and New Jersey or was plaintiff the son of a Columbian drug lord?

After the debtor and his wife filed for bankruptcy protection, the plaintiff filed an adversary proceeding challenging the dischargeability of his claim against the debtor. Although the parties had a contract, the court did not find that it established a trust, so the plaintiff could not prove that the debtor committed fraud or a defalcation while acting in a fiduciary capacity. In addition, the plaintiff could not prove that the debtor received money from him because the plaintiff gave the money to the Honduran corporation which both parties were shareholders of, not to debtor. Indeed, the corporation received the money from plaintiff then invested the money into the project. Hence, if debtor did in fact misappropriate funds, he misappropriated funds that belonged to the corporation, not to plaintiff. It would be the corporation that would have a misappropriation claim against debtor, not plaintiff. If plaintiff was seeking a claim for other property, then he failed to make clear the exact nature of the claim he had against the debtor. “A plaintiff who seeks recovery of a non dischargeable debt should not leave the court to speculate about the debt,” the court said. “The court has no doubt that the plaintiff feels the defendant wronged him in connection with the resort development, and the various items shipped to Honduras. The plaintiff certainly succeeded in communicating that conviction to the court. Nevertheless, the record developed at trial does not support his theory of the case.”

Hence, the court ruled that the plaintiff’s claim was NOT EXCEPTED from discharge because plaintiff did not clearly establish that debtor owed plaintiff money. Plaintiff gave the money to the corporation, not to debtor. It was the corporation that invested in the project, not plaintiff.

Lawrence Bautista Yang is a graduate of Georgetown University Law Center and has been in law practice for thirty years. He specializes in bankruptcy, business and civil litigation and has handled more than four thousand successful bankruptcy cases in California. He speaks Mandarin and Fujien and looks forward to discussing your case with you personally. Please call (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.