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Angry Creditors Coming to 341?

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  • Angry Creditors Coming to 341?

    So, my husband and I have our 341 meeting coming up in a couple of weeks. I returned all my documents to the trustee and all my papers are in order. I looked at the list of typical questions a trustee would ask and I don't think I will have any problems answering it.

    But here's my concern. My husband and I run a private college guidance counseling business. Our clients (generally parents of HS sophomores) pay us in advance for what is supposed to be a 2 year service. We were drowning in debt, and couldn't keep our office open, so we had to abruptly close doors in March. However, there are about 4 clients who paid us $4k between January and March. Needless to say, they're pissed out of their mind. I found out a few days ago that our clients created their own FB group and more than a few are planning to attend the 341 meeting. I suspect they are going to argue we tried to defraud them by taking full payments when we knew we were going to close doors.

    I guess my question is two fold. 1) Do they have a claim for fraud? 2) Will the trustee let them argue this in length during the 341 meeting?

    Basically what I want to know is what's the worst that can happen here. Thanks.

  • #2
    If you accepted payments in March, then surely you knew your business was insolvent, and had no realistic chance of providing the services which those customers paid for. It would not be difficult for such a customer to make that case, and your debt to them would not be discharged. They could then pursue a judgment and attempt to enforce said judgment under your state's laws. If you accepted payments in January or February, then you knew you were insolvent, however it would be much more difficult for a customer to prove fraud. You would likely be able to discharge your debt to such customers.

    Comment


    • #3
      It won't matter what they "say" at the 341 Meeting as that's just a place to get information under oath. They would need to file a complaint to determine dischargeability (a/k/a a dischargeability complaint or AP) which cost as much as they paid you. Maybe they could pool together and get an attorney to do it on contingency, but that's still a high bar.

      There really are no "arguments" at the 341 Meeting and the Trustee should keep that in check and inform them that this is a meeting to obtain information under oath, not a trial.
      Chapter 7 (No Asset/Non-Consumer) Filed (Pro Se) 7/08 (converted from Chapter 13 - 2/10)
      Status: (Auto) Discharged and Closed! 5/10
      Visit My BKForum Blog: justbroke's Blog


      I am not an attorney. Any advice provided is not legal advice.

      Comment


      • #4
        Interesting. I had no idea it would cost that much to file a complaint. So it sounds like the only consequence I would suffer is maybe having to scramble to pay the $4000 I was paid in March?

        Comment


        • #5
          Is there anything the creditors can do that I should be worried about or prepare for? Thanks.

          Comment


          • #6
            The cost to file the complaint itself is $350, but you need to add attorney time to prepare the complaint, file, and then issue and serve the summons, attend case management conference(s) and at least one hearing, as well as respond to any motions for summary judgement or dismissals. The average attorney time to prepare an adversary proceeding (including issuance of the complaint and summons) can be 10-15 hours. Average attorney rate in bankruptcy is about $250/hr (for a-la-carte) items. Expect to spend $2,500 + $350 ($2,850) to $3,750 + $350 ($4,100) to just start an adversary proceeding (AP) with an attorney. The attorney will typically want a retainer for $4,000 or more.

            Of course, they could do it Pro Se and save money, but probably lose. Just because you accepted work up until 2-3 months before filing doesn't make it a presumed fraud. They would have to prove fraud. Even GM was selling cars up to and on the day they filed Chapter 11. Businesses, and individuals, will still take on work to try to perform and hope that everything changes up until the day they determine that it is over. That doesn't make it automatically fraud nor does that carry any presumption unless it's for, in the code, luxury goods or services.

            In fact, I think -- my personal opinion -- is these are contracts and may be executory in nature. Bankruptcy specifically allows you to reject executory contracts (11 USC 365). You should ask your attorney about this specifically, but I don't think it's a big deal other than you'll have to specifically reject these contracts on Schedule G. (State non-bankruptcy law may also play a part so it's a real legal question.).

            Worse case is that you reject these contracts and they team up, hire an attorney, and argue that you should not be able to discharge the debt. It already reads as if they're going to drag your name through the mud but they should know there's a fine line between complaining about performance and defamation. I digress.

            As for you paying, you would only pay to have an attorney represent you in such a scenario. I personally don't think it will rise to that unless the parents really want to risk $4K to get $4K (unless they pool and it's $4K+ risk to get back $16K). It's a gamble.

            Originally posted by Loireweekend View Post
            Is there anything the creditors can do that I should be worried about or prepare for? Thanks.
            No. Once you file they re bound under the Automatic Stay. If they are trying to defame you or pressuring you to pay then that could be a violation.

            Chapter 7 (No Asset/Non-Consumer) Filed (Pro Se) 7/08 (converted from Chapter 13 - 2/10)
            Status: (Auto) Discharged and Closed! 5/10
            Visit My BKForum Blog: justbroke's Blog


            I am not an attorney. Any advice provided is not legal advice.

            Comment


            • #7
              It may be a good chance that those creditors can file an AP for false representation 523 (a) (2) (a). It really depends on how you marketed your services to obtain those payments. Also, depending on your state, contracts are no longer executory if they have been abandoned or if the prepaid service never began. I would definitely discuss this with your attorney before any listing on the Schedule G.. Pre petition status towards those creditors is at stake.

              If was a creditor during your 341 meeting, I would ask you how many people that you have accepted a payments in the last 6 months and will never provide services. I would also ask you what payment amounts have you received and how much of that went to your debtors in the last 6 months and last but not least, has there been a change in how you market your services during the last year.

              If I was in that creditor group and decided to go with an AP, I would file separately Pro Se and suggest to the others to file an AP too. Make you defend as many complaints instead of 1.

              Remember a 341 is sort of a fishing expedition. I didn't go to my debtors 341 because I already had what I needed for my complaint and my further subsequent Motion for Summary Judgment in my favor.

              Comment


              • #8
                Loireweeken, Eternal4 presents the exact nightmare situation that you could face. You first need to determine whether those are executory contracts and whether that will hold. The questions that Eternal4 asks are good questions and you may be faced with those questions in a 341 Meeting or in defending a complaint (AP).
                Chapter 7 (No Asset/Non-Consumer) Filed (Pro Se) 7/08 (converted from Chapter 13 - 2/10)
                Status: (Auto) Discharged and Closed! 5/10
                Visit My BKForum Blog: justbroke's Blog


                I am not an attorney. Any advice provided is not legal advice.

                Comment


                • #9
                  Woa. Eternal4, those are some tough questions! I hope my creditors don't think to ask them. Some follow-up questions:

                  1) I read up on "executory contracts" but am having a hard time understanding. So if I charged upfront in full, and all that my clients needed to do was to receive counseling services from me with no obligation to perform, that makes our contract non-executory? And if it's non-executory, it could be rejected? Am I understanding this right? And if my clients can prove they were abandoned and that they never really started services (this applies to a number of cases since I usually start counseling after summer), depending on WA law, it's not executory?

                  2) You're certainly right about them dragging my name through the mud. The first FB page they made was an open group. They advertised it on community social media, so educators, my competitors, lots of parents in the area who were generally curious about college counseling services joined it. They also used a photo of our website and posted pics of my family on it. When our personal friends tried to defend us on the page, they called them moles and made the group private. Wondering at what point do I have grounds for defamation. Sorry this is something directly unrelated to 341 meetings.

                  3) I am thinking most of my clients won't be happy with the idea of dishing out even an additional $350 to file an AP pro se. In that case, is there a possibility the trustee will object to a discharge on his own, based on the questions my creditors throw at me?

                  Comment


                  • #10
                    Originally posted by Loireweekend View Post
                    1) I read up on "executory contracts" but am having a hard time understanding. So if I charged upfront in full, and all that my clients needed to do was to receive counseling services from me with no obligation to perform, that makes our contract non-executory? And if it's non-executory, it could be rejected? Am I understanding this right? And if my clients can prove they were abandoned and that they never really started services (this applies to a number of cases since I usually start counseling after summer), depending on WA law, it's not executory?
                    QUote opposite in that you can't reject a non-executory contract as there is no "performance" left. It may be executory because you still need to deliver the counseling services and they must show up to receive it. But again, whether that's executory in nature is a legal question. You are certainly right that if you abandoned them before the services tarted (you actually didn't perform any service) then that could also be just an abandoned contract.

                    Originally posted by Loireweekend View Post
                    2) You're certainly right about them dragging my name through the mud. The first FB page they made was an open group. They advertised it on community social media, so educators, my competitors, lots of parents in the area who were generally curious about college counseling services joined it. They also used a photo of our website and posted pics of my family on it. When our personal friends tried to defend us on the page, they called them moles and made the group private. Wondering at what point do I have grounds for defamation. Sorry this is something directly unrelated to 341 meetings.
                    It could be a counterclaim if they sue you. I probably wouldn't pursue it unless it got nasty.

                    Originally posted by Loireweekend View Post
                    3) I am thinking most of my clients won't be happy with the idea of dishing out even an additional $350 to file an AP pro se. In that case, is there a possibility the trustee will object to a discharge on his own, based on the questions my creditors throw at me?
                    The panel Trustee would not object to a discharge for a creditor or creditors that can't afford anything. There's no upside for the panel Trustee in that scenario. The panel Trustee is trying to recover money for all the creditors, not just a few.

                    In the end if the contract is non-executory then it would be discharged anyhow. Executory contracts are special in that either the Trustee can assume the contract her/himself and perform under the contract. I think your issue will squarely be whether there was a fraud committed. One law firm opined that fraud is lying about an existing fact and not simply breaking a promise. A breech of a contract is not willful or malicious simply because it was breached.

                    Chapter 7 (No Asset/Non-Consumer) Filed (Pro Se) 7/08 (converted from Chapter 13 - 2/10)
                    Status: (Auto) Discharged and Closed! 5/10
                    Visit My BKForum Blog: justbroke's Blog


                    I am not an attorney. Any advice provided is not legal advice.

                    Comment


                    • #11
                      I agree with most of Justbroke's comments with the exception that a non-executory contract will be discharged anyhow. When I first read your post, I assumed that you informed those parents that you and your husband terminated your services because of your financial difficulties BEFORE you filed for bankruptcy. I would then be hesitate to later claim those contracts as executory.

                      When a contract is declared executory and rejected. Then the rejection automatically makes the creditors pre petition and the contract considered "breached" pre petition. When it is considered non-executory and you never officially terminated the contract, then the breach doesn't occur until the day the kid shows up for counseling and you don'tt perform. They can sue you then as a post petition debt.

                      Again, it really depends on how your state laws construe when is a contract executory.

                      As far as the Trustee, those parents can certainly tell them that they are not pre petition debtors and that you made a false claim to that fact. The Trustee would be obligated to look into it. The court might make you amend your schedules and so on.

                      A little more info on how you dealt with those parents would be helpful....

                      Comment


                      • #12
                        I meant pre petition creditors and that you made a false claim to that fact.

                        Comment


                        • #13
                          How I dealt with the parents:

                          I couldn't pay the rent for the office, so I closed it one day, and posted a note on the door. Basically it said: "To the valued clients of XX Counseling Services... For personal reasons, it is necessary for us to take an immediate leave of absence. Our office will be closed until further notice. We apologize for the inconvenience".

                          I also sent a letter stating basically the same thing to all my clients. Other than that, I've basically be in hiding. They found out where I live, but it's a gated community so no one has been able to come in and harass me.

                          Half a dozen of my clients filed a notice of small claims. They had the sheriff serve it to me. Those court dates are after my 341 meeting, so I am hoping they will all be put on hold. I haven't contacted them back to mediate or anything.

                          Comment


                          • #14
                            Are any of those clients the 4 you mentioned before that filed notice in small claims? The Automatic Stay puts everything on hold. In fact, if you look at the status of those cases, it will say chapter ?? Bankruptcy....

                            Comment


                            • #15
                              Originally posted by Eternal4 View Post
                              I agree with most of Justbroke's comments with the exception that a non-executory contract will be discharged anyhow.
                              It's basic bankruptcy law. A bankruptcy discharges a debtor from all debts that arose prior to the filing of the petition (with few exceptions). The exceptions are in 11 USC 523. Not everything in 523 is "automatically" not discharged and most require an adversary proceeding.

                              I absolutely agree that Loireweekend needs to seek counsel rather than depend on anything written about here or elsewhere on the Internet. The question will always arise as to this contract, if there is performance remaining under the contract, how the contract was breached, whether there is a fiduciary component, and whether there was any fraud. I am not the expert on service contracts although I had such automatically discharged in my bankruptcy. So long as the creditors are noticed the creditor will need to take steps to have the debt non-dischargeable (especially when the debt doesn't fit special exceptions such as priority taxes). I'm assuming that Loireweekend did name them in the petition as creditors, but I don't know whether they were listed on Schedule G.

                              Now the United States Trustee (UST) can certainly intervene, but what I wrote is regarding the panel Trustee who is simply liquidating and/ administering the Estate. I have never read of a panel Trustee dealing with dischargeability issues. The panel Trustee can refer any matter to the UST (to whom they report).

                              As for small claims cases, those are stayed pending the bankruptcy. They can't take any. action during the pendancy of the bankruptcy and they need to postpone any hearing unless they file a Motion for Relief From the Automatic Stay (RFS) and it is granted. You (Loireweekend) may want to file a Suggestion of Bankruptcy, or the similar notice for your locale, in those cases.

                              Loireweekend, did you file Pro Se?
                              Chapter 7 (No Asset/Non-Consumer) Filed (Pro Se) 7/08 (converted from Chapter 13 - 2/10)
                              Status: (Auto) Discharged and Closed! 5/10
                              Visit My BKForum Blog: justbroke's Blog


                              I am not an attorney. Any advice provided is not legal advice.

                              Comment

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