Best way to handle adversary proceeding

[JackBondLove]

When you signed a personal guarantee, you removed your "limited liability" from that debt. The LLC, as a corporation, would have protected you as an individual. Unfortunately, day in and day out, owners (including myself as an S Corp owner), sign away their protection by affixing their signature on that "Personal Guarantor" line.

I have a friend that owns a local distributor company (he buys the items directly from the manufacturer, then sells to retailers), and he almost always gets his customers to sign a personal guarantee (or else they can only buy COD.) He is always showing up at creditor meetings (341?) for his customers that are declaring personal bankruptcy, irregardless of their LLC situation.

[HHM]

ohio, what is "pro se."

It means you filed BK on your own, without an attorney.

[jturk]

ohio, what is "pro se."

[HHM]

i would like to raise another question, should i just let them get a judgement against me & then wait it out & negotiate a lesser amount in the future?

Maybe, but not likely. Think aobut, AMEX now has a judgment against you that can NEVER be discharged in any bankruptcy. They can just garnish away to their hearts content.

Your best option is to negotiate a settlement BEFORE they win the adversary, just because they have a slam dunk, doesn't mean they actually want to take it to the hearing.

[OhioFiler]

hi all, i have a question about an adversary proceeding:

I filed my petition in july 09.

In september 08 i charged up about 10k on one credit card paid to someone else (not cash advance) over the course of 2 days. I never made 1 payment on the card.

I hope you filed pro se. Any attorney would have given you sound advice on this debt and the likelihood of AMEX filing the AP.

If there is anything good to come out of this situation it is that you created a thread that will hopefully save someone else from making the same mistake.

Good luck to you. I think a settlement offer is your best bet.

[banca rotta]

Why do you say it's definitely non-dischargeable just because it's a business debt?

I included my Amex Business in my petition...

I'm confused.

Because the OP never made any payments. This is a slam dunk for Amex.

[MSbklawyer]

msbklawyer; im in tampa fl

That means you're in the 11th Circuit -- one of the more conservative debtor unfriendly.

The statutory provision you're up against is 11 USC 523(a)(2).

But I agree with the majority here -- at least in the Fifth Circuit. In In Re Mercer, 246 F.3d 391 (5th Cir. 2001) the fact pattern was where a person had used their credit card for gambling at a casino. She maintained that she thought she would win. She made no payments and then filed for bk. The bankruptcy court and the district court found the debt to be dischargeable. The Fifth Circuit reversed:

The fact that Mercer reached her limit within the first billing cycle, before receiving her first statement, also does not detract from finding justifiable reliance. Obviously, if a cardholder has a history of payments with the issuer, justifiable reliance will be easier to prove.49 But, the absence of that history does not preclude such reliance.50 Because Mercer reached her limit so quickly, UCS had no opportunity to evaluate her creditworthiness based on a history with it. Until 11 December (only a month after issuance), the last day of card-use, when she exceeded her $3,000 credit limit by approximately $186, Mercer's card-use was within the terms of the card-agreement.

Requiring that a cardholder have a history of timely payments before the issuer can justifiably rely on the intent to pay representation would result in the discharge of all card-debt incurred within at least the first month of use. This would encourage dishonest debtors to reach their limits within the first billing cycle in order to preclude nondischargeability. It could also have the unintended consequence of

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spurring issuers to establish such low initial limits that cards would serve no useful purpose to many cardholders.

(7)

Likewise, the fact that, 19 days after card-issuance, UCS flagged Mercer's account for excessive transactions does not preclude justifiable reliance. UCS' representative testified: UCS reviewed the account, decided the transactions were not egregiously excessive, and cleared the account for further use; and, because the charges were within the terms of the card-agreement, UCS was obligated to honor it. Reliance on this factor could encourage issuers to cancel cards if used frequently within the first billing cycle, regardless of whether the limit had been exceeded.

5.

Finally, UCS was required to prove loss proximately caused by reliance on Mercer's representations. See Restatement (Second) of Torts 548A ("fraudulent misrepresentation is a legal cause of a pecuniary loss resulting from .... reliance upon it if ... the loss might reasonably be expected to result from the reliance"). On remand, if the bankruptcy court finds Mercer fraudulently misrepresented her intent to pay and UCS justifiably relied on that misrepresentation, then, as a matter of law, UCS' loss (unpaid loan) resulted from the reliance. Id.51

III.

For Mercer's 523(a)(2)(A) nondischargeability vel non, we hold, as a matter of law, for each card-use: she represented her intent to pay the loan; if her representation was knowingly false, she intended to deceive UCS; it actually relied on the representation by authorizing the requested loan; and its loss was proximately caused by such reliance. On remand, to be determined for each representation is whether: it was knowingly false; and UCS justifiably relied on it.

Accordingly, the judgment of the district court is REVERSED, and the case is REMANDED to the district court, with instructions to REMAND to the bankruptcy court for further proceedings consistent with this opinion.

I don't know off hand if the 11th Circuit follows Mercer or not.

[jturk]

msbklawyer; im in tampa fl

[MSbklawyer]

Which judicial circuit are you in? Different ones have developed different tests for the debts incurred in bad faith defense.

[whipster1]

One option is a conversion to a 13 for 3 years with a 1% payment to unsecureds.

[backtoschool]

i would like to raise another question, should i just let them get a judgement against me & then wait it out & negotiate a lesser amount in the future?

Any adverse item on your credit report post bankruptcy will really hurt your chances of rebuilding your credit score moving forward. Adverse items on credit reports post bankruptcy carry a LOT of negative weight when you want to buy a house or a car and could really hurt your chances of rebuilding your credit.

[jturk]

i would like to raise another question, should i just let them get a judgement against me & then wait it out & negotiate a lesser amount in the future?

[jturk]

thats correct they did mention fraud several times in the complaint letter. do i have anything to be concerned about as far as consequences go beyond a judgement or non discharge?

[justbroke]

justbroke, its an llc

You're the sole stockholder (single member), I assume? Or was this other person a member of the LLC?

I still think you have issues since you never paid a dime on it. They will claim fraud and you'll have to overcome that assertion. Even if you overcome the claim of fraud, they can still get you on insolvency. They will claim that you were insolvent at the time you made that purchase (or obtained that cash advance) and knew that you couldn't afford to repay it. Either way, their case it pretty cut and dry.

When you signed a personal guarantee, you removed your "limited liability" from that debt. The LLC, as a corporation, would have protected you as an individual. Unfortunately, day in and day out, owners (including myself as an S Corp owner), sign away their protection by affixing their signature on that "Personal Guarantor" line.

Why do you say it's definitely non-dischargeable just because it's a business debt? I included my Amex Business in my petition.

I included mine as well, but this case is different. The poster charged a significant amount of money to the account ($10K). The poster never paid a single dime towards it. The poster was probably insolvent or knew he didn't have the money (thinking he'd make it with this venture). The fact that the poster never attempted to make a payment, makes this non-dischargeable as this falls under fraud. If you obtain credit under false pretenses, or in any fraudulent manner, it's non-dischargeable (11 USC 523).

I'm pretty sure -- having not read the complaint or letter -- that the Creditor is claiming fraud under 11 USC 523.

[whipster1]

Business debt is dischargeable as to your guarantee of it. The LLC will still owe it unless you BK that entity also.