Kentucky Bankruptcy Law

Counsel with Care

Concurrent Jurisdiction of State and Bankruptcy Courts

There is a nice little Kentucky Supreme Court opinion called Howard v Howard, 336 S.W.3d 433 (Ky. 2011) every Kentucky family lawyer and consumer bankruptcy lawyer should read. The first part of the opinion addresses child support and contempt sanctions, which to be sure are fun things to know about, but the meat of the opinion spells out the concurrent jurisdiction of Kentucky Courts with the Federal Bankruptcy Courts and how that effects discharge of certain kinds of debt.

Under 28 U.S.C. Sect. 1334(b), a state court has the same and concurrent jurisdiction as a bankruptcy court to make a determination as to whether a particular debt is discharged by a bankruptcy. In the Howard case, the ex-husband had agreed to be responsible for certain debts the ex-wife had also co-signed. However, he went into a Chapter 7 and received a discharge of that debt. Even though the ex-wife had notice of the bankruptcy and did NOT file any objection in the Chapter 7, she was still able to go to the Kentucky Circuit Court where the divorce had occurred and get a ruling that ex-husband still owed the obligation to her.

You see, the divorce decree created an obligation between the ex-husband and ex-wife even though a third party was the direct creditor. This obligation was found to be an 11 U.S.C. Sect. 523(a)(15) obligation as a result of a divorce. Therefore, by operation of that law, that obligation to the ex-wife was not touched by the bankruptcy. When the original creditor came back to collect from the ex-wife, she was able to pursue contempt against the ex-husband and win. This saved ex-wife from having to pay for a lawyer in the bankruptcy in addition to paying for a lawyer in the Circuit Court case.

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February 7, 2015 Posted by | attorney fees, Bankruptcy, Chapter 7, child support, Civil Procedure | , , , , , , , , , , | Leave a comment

Expanding Services

I am glad to announce that Matthew D. Henderson will be joining Troutman & Napier, PLLC as an associate attorney. Matthew comes to us from the Fayette County Attorney’s office. Prior to that, he served as Judge Philpot’s judicial intern in Fayette Family Court. He will be bringing tremendous skills and knowledge in areas of criminal law and family law as well as estate planning and general litigation. With the addition of Matthew, Troutman & Napier, PLLC offers a full range of services and practice areas for our clients.

July 7, 2014 Posted by | Bankruptcy, child custody, child support, Civil Procedure, Divorce, Estate Planning, Family Law, Guardianship, Life & Law, Negotaion & conflict resolution, Paternity, Politics, Solo & Small Firm | , , , , , , , , | Leave a comment

Violation of the Discharge Order: What to do

When a bankruptcy results in a discharge of debt, whether it be a Chapter 7, 12, 13 or otherwise, creditors are precluded from taking action to collect on that debt down the road. In Kentucky and many other jurisdictions, there is no private right of action (no right to file a separate lawsuit) for the violation of a discharge order, so the matter has to be taken up as a contempt action within the bankruptcy. The first step is for the bankruptcy to be re-opened. Once reopened, the Debtor can file their motion to impose contempt sanctions against the creditor.

The bankruptcy court must make a determination if contempt of the order occurred and the first step in that is finding that the actions of the creditor were “willful”.  A willful action, in this context, does not mean that the creditor deliberately decided to go against the court’s order. Rather, willful means that the creditor intended to do the thing that was the violation even if they did not intend the result. So, if the creditor files a lawsuit seeking to collect on the discharged debt personally from the Debtor, this is intentional; they did not accidentally file a lawsuit. They intended to file the lawsuit and intended to name the debtor personally even if they did so without any awareness that they were violating the order. In other words, the “Oops, my bad” defense would not suffice.

Along with this willful element, there must be evidence that the creditor actually knew about the discharge order. This comes down to showing that the creditor was served with notice of the discharge occurring. Just because they failed to communicate this knowledge to their attorney would not get them off of the hook. However, this has to be shown by a heightened standard of “clear and convincing” evidence. So, evidence that the Debtor verbally told the creditor that the debt was discharged is likely not good enough. One would want a paper trail on this element.

If the action that was a violation was intended and the creditor had actual knowledge of the discharge then the court can find that contempt occurred. Once a finding of contempt is made, the court then decides what sanctions are to be imposed.  Sanctions typically involve awarding monetary damages. Monetary damages can include attorney fees, but check back for my next post on this issue.

November 16, 2012 Posted by | Bankruptcy, Chapter 13, Chapter 7, Civil Procedure, Discharge, Violation | , , , , , , , , , | 1 Comment

Foreclosure Defense and Standing

So much has been written about the dilemma of massive numbers of foreclosure actions that I am hesitant to dive into the fray. However, even though many would like us to perceive the economy issues as having resolved, I think the foreclose crisis will continue with us for some time.  Ordinarily, if someone has fallen behind on payments on their residence, a Chapter 13 works because payments on those arrears are stretched over five years with zero interest. Sometimes a Chapter 13 just is not a great idea because the non-exempt assets are so high that the plan payments cannot be met due to the monthly budget limitations of the debtor.

When a Chapter 13 is not the best approach and you really are determined to keep the home, then the drop back and punt position is to fight the foreclosure action. Step one in fighting back is to make sure the party bringing the foreclosure action actually has the right to prosecute it. This “right” is referred to as standing. Under Kentucky Revised Statutes (KRS 355.3-301) only certain parties have the right to enforce the promissory note; the right to pursue a lawsuit.

I need to go on a slight tangent here to make sure we are on the same page. Most people focus on the mortgage (real estate lien) in their defense efforts because often the mortgage does not have the name of the company filing the foreclosure on its face. However, the document most pertinent to the issue of standing is the promissory note (loan agreement). The promissory note is a negotiable instrument which means that it usually can be transferred. However, the way it gets transferred is very important (KRS 355.3-201).

Let’s think about a common, ordinary check. A check is a negotiable instrument. You can transfer a check written to you by indorsing your signature on the back of it. If all you do is sign your name, then whoever has that check in their possession can cash it. If you sign your name followed by “to John Quincy Adams”, then only John Quincy Adams can cash it. The former indorsement is “payable to bearer”, but whether it is a payable to bearer or to John Q., they can only cash the original check; they would go to jail for trying to cash a photocopy of a check.

A promissory note for a home loan is exactly the same as a check: 1) to transfer it then it must be endorsed (some spell this indorsed), and 2) it can only be “cashed” or enforced by the party who has physical possession of the original note (see the caveat below). So, if the party bringing the lawsuit cannot produce a properly indorsed original promissory note, then they cannot show they have standing. Challenging standing is the first crucial defense to a foreclosure. At best, the suit will go away because they discover they actually do not bear (hold) the promissory note. But, at least it will slow down the case while they dig through tons of documents to locate the original promissory note.

CAVEAT: There are some responses to this defense as described in the Uniform Commercial Code, but they are beyond the scope of this particular article and it is the burden of the party pursuing the bankruptcy to assert them.

July 18, 2012 Posted by | Civil Procedure, Pre-filing planning | , , , , , , , , , | 1 Comment

“Can I leave my car debt out of the bankruptcy?”

This is the second most common question people ask me when considering a bankruptcy. It is not always a car debt, but they often ask if they can leave some specific debt out of the schedules. Sometimes they ask because they want to preserve some asset and they are concerned that reporting the debt in the bankruptcy jeopardizes their goal. Other times, it is because they want to make sure they can keep one credit card. They fear having some emergency that they must use credit to resolve or they get really good discounts at Kohl’s or Macy’s. Finally, sometimes people just want to repay a friend or family member who has helped them out.

The answer invariably is “no”. One cannot pick or choose what debts are “bankrupted”. All debts, even to poor Aunt Sally must be listed on the schedules included in the bankruptcy filing. What is required to be scheduled is found in Federal Rules of Bankruptcy Procedure 1007(b)(1) and there is no list of exceptions to liabilities (debts). Similarly, all assets have to be listed.

The way to address the concern of keeping an asset that is secured by a lien (such as a car debt) is to look at any arrears on the debt and consider a Chapter 13. The way to address the concern over having a credit card to deal with emergencies (or even discounts) is to assure debtors that they will likely be inundated with credit card offers even before the bankruptcy is closed out (note: in a Chapter 13, one must get court approval to incur new debt!). I encourage people to live without any credit, though. The way to deal with the concern about not leaving poor Aunt Sally high and dry is to note that a debtor can voluntarily repay any creditor they wish AFTER the bankruptcy is closed out. Doing so before filing creates a preference or fraudulent conveyance – both are bad. Doing so afterward has no restrictions at all. The debtor simply is not under any legal obligation to repay the debt and should not sign anything re-obligating themselves on the debt.

July 11, 2012 Posted by | Bankruptcy, Chapter 13, Chapter 7, Civil Procedure, Pre-filing planning, Property (exempt, reaffirm or surrender) | , , , , , , , , | Leave a comment

“I do not want my neighbors to see my name in the paper – can I file out of district?”

I have had a number of folks ask if they could file in a different district than where they live because of embarrassment they expect to feel over their names appearing in the local newspaper. Many newspapers obtain each weeks court case filings, including bankruptcies, and publish them in the newspaper. There is no way to avoid this happening because a bankruptcy is a public legal proceeding and there is freedom of the press. So, the only possibility is to file in a completely different district than where you live. You name would still appear in the paper, but it would be in a city where far fewer people know you. However, this is not something that can be done routinely.

The place where a bankruptcy, whether Chapter 7 or Chapter 13, is filed is governed by the federal venue statute 28 U.S.C. Section 1408. Essentially, a bankruptcy should be filed either where the Debtor has resided for at least 180 days immediately preceding the filing or where the principal assets are located. If the Debtor has not resided in one district for a total of 180 days immediately before filing, then it is the district where they resided the longest. This means it will be a rare circumstance where one can file a bankruptcy somewhere other than where they live.

I recently came across one of these rare exceptions. The Debtor had moved out of the district where I primarily practice, the Eastern District of Kentucky, to the Western District. She had resided in the Western District nearly 180 days prior to filing and so the Debtor could have filed in Louisville. However, the Debtor wanted to proceed in Lexington. Because the Debtor’s home was in foreclosure here in Fayette County, they were able to file in Lexington even though they now resided in Louisville.

Unfortunately, most people will have to file in the District where they live. However, I urge my clients to give little or no thought to their name appearing in the paper. Few people ever read that section of the paper and those that do will either be understanding of falling on tough times or they will be the type of person prone to gossip. If the latter, they are likely to be gossiping about you anyway and so it might as well be gossip that is based on something true. I have never yet had a client report that filing bankruptcy stirred up such a public controversy as to make them regret the decision.

July 9, 2012 Posted by | Bankruptcy, Civil Procedure, Pre-filing planning | , , , , , , , , , | 1 Comment

Hanging out at the intersection of divorce and business

The Supreme Court of Kentucky recently issues it decision in Medical Vision Group, PSC v Philpot, 2008-SC-000017-MR (Aug. 21, 2008)(to be published) which technically creates no case law, but is instructional regardless. The appeal was dismissed because at the time it came before the Supreme Court, the receivership issue was resolved and so the matter was moot.

The short version is that the Judge Philpot, Fayette Family Court Judge, put two companies under receivership because the sole owner of the companies, Dr. Dudee, abandoned the businesses. Dr. Dudee had refused to pay court ordered maintenance and other property distribution from his divorce and so he was jailed for contempt. While in jail, he refused to participate in work release, so his businesses were not generating revenue. Bottom line, Dr. Dudee refused to honor his obligations ordered in the divorce from his wife. Whether he was a conscientious objector or a had just been hijacked by a really bad attitude, I will let the public decide based on the facts in the case should you choose to read it.

The Kentucky Court of Appeals ruled in favor of the trial court by asserting that the judge did the right thing because the two companies were essentially “alter egos” of Dr. Dudee. However, since the trial court judge entered no findings of fact or conclusions of law in his decision regarding “alter ego” doctrine that would allow for the piercing of the corporate veil, the Supreme Court said that could not be the basis of upholding Judge Philpot’s decision. They did opine, though, that Judge Philpot was well within his discretion to enjoin the two companies in the divorce action pursuant to KRS 403.150(6) as proper parties to allow the court to exercise its judicial authority. The Court went on to point out that no third party was harmed by enjoining the businesses because Dr. Dudee was the sole owner. They also elaborated on the obligations that Dr. Dudee was refusing to honor and then added that he initially agreed to the receiver while stating he did not believe the court had jurisdiction to do so (kind of a half-hearted objection meant to move things along, but hoping to preserve an appeal – not terribly effective).

A few lessons emerge. First, if you want to preserve an appeal, be clear on the record rather than ambivalent. Second, if you are the sole owner of a company, it is ineffective to hide or divert assets into that company to keep them out of a divorce situation. Third, other parties can be brought into an action for a dissolution of marriage action, including a company that one of the parties has ownership interest in even if they are not the only owner. Lastly, no one emerges from a divorce unscathed emotionally, spiritually, or financially, but the extent of the injury can be mitigated or worsened by the attitude one adopts in the proceedings.

September 3, 2008 Posted by | Civil Procedure, Divorce, Family Law, property allocation | , , , , , , , | 1 Comment

Voluntary versus Involuntary Termination of Parental Rights

There is an interesting post at Elusive Justice about a practice by the Cabinet for Health and Family Services involving parents who think they are voluntarily terminating their parental rights, but then have an involuntary termination entered against them. This may seem like an immaterial difference, but E.J. walks us through a hypothetical that shows the important ramifications of the practice.

May 15, 2008 Posted by | Civil Procedure, Family Law, Parenting | , , , , , | 52 Comments

Paternity Pandemonium III

After reflecting on the recent decision in J.N.R. v. O’Reilly that I posted on here and here, I recognized a troubling conundrum in the law. I will expound with a hypothetical situation beginning where the JNR case leaves off. Absolutely no offense is intended towards the real parties in the real JNR case; this is purely hypothetical:

    Where the real case leaves off is with biological father (“BioDad”) unable to get any relief because the trial court has no jurisdiction to proceed. In the hypothetical, the legal father (“LawDad”) has to work two jobs to pay the legal fees that accrued defending against BioDad’s petition and the ensuing appeals. Because of the stress of this, he develops a drinking problem and becomes estranged from his wife. A divorce occurs and biologcial mother (“BioMom”) gets sole custody. BioMom becomes depressed and, as a result of deep depression, neglects the child (“Child”). Child is removed by the Cabinet for Health and Family Services after being found wandering along a busy highway after sneaking out of the house while mom was in a depressed stupor. The Cabinet dutifully seeks out a relative to care for Child, but the only known relative is LawDad whom they find passed out on his front porch after a night of drunken debauchery. Because of LawDad’s double D dysfunction, he cannot have the child placed with him or gain custody.

    Now, the stage is set and Child goes into foster care. Because BioDad was denied the opportunity to assert paternity, he has not been judicially found to be a parent. KRS 610.020 requires the Petition to name “parents”, but BioMom and LawDad are still sore about the whole lawsuit thing and never bring BioDad up. Furthermore, KRS 610.040 does not require that he be notified. So, Child is in foster care for the next 15 months because BioMom and LawDad are more focused on sniping at each other than regaining custody of Child.

    Next, the Cabinet files a petition for the involuntary termination of parental rights of BioMom and LawDad on behalf of Child. Still, the Cabinet has no idea about BioDad because they never read this blawg and are unfamiliar with this case. Interestingly, KRS 625.060 requires that “biological parents” are made parties to the action, but only “if known”. Here is where the hypothetical has different possible outcomes.

    Outcome 1: Parental rights are terminated to BioMom and LawDad and Child spends the rest of his childhood going from foster home to foster home, or perhaps is adopted and lives happily ever after, but always dreams of being with his “real” parents. BioDad sees him years later with the adoptive family and finally learns of all those events, but he can do nothing. In the worst case scenario, adoptive parents are actually sadists bent on mentally torturing Child. Best case scenario is that they are great parents and is relatively unharmed by all these events.

    Outcome 2: BioDad finds out and moves to intervene in the termination of parental rights. Now, we are back at the starting point and the court has to determine whether he has standing to intervene under this separate set of statutes. Arguably he would have standing because the statute specifically mentions “biological parents”. This, then, is a huge inconsistency in the paternity laws of kentucky. Regardless, he still has a huge hurdle to overcome because the termination of parental rights statute, KRS 625.090 has no safe harbour provision that would protect BioDad due to his lack of knowledge of the events. In other words, neglect or abuse never has to of been alleged against BioDad. The statute is a list of events, sometimes totally out of the control of the parent, and if one and only one of these events are checked off, then termination can occur. BioDad could be the best dad in the world, but if Child was found to be neglected by clear and convincing evidence, has been in foster care 15 out of the last 22 months (even if it is the Cabinet’s fault for not having enough workers to move the case along), and the judge believes it is in the child’s best interest (purely subjective), then his parental rights could be terminated without him ever getting to exercise them.

Give the above scenario, as unlikely as it is, I have had to reflect on the JNR decision because of the far reaching consequences. I hope that the General Assembly will take up this issue to rectify this legal inconsistency.

May 14, 2008 Posted by | Civil Procedure, Divorce, Family Law, Parenting, Paternity | , , , | 1 Comment

Lessons in family law: appeals, bankruptcy & garnishment

There are a number of lessons to be learned from the recently released Kentucky Court of Appeals case Mickler v. Mickler, 2006-CA-001313-MR (Jan. 25, 2008)(to be published). A few of the lessons come from the procedure and facts of the underlying case rather than the appeal itself.

In Mickler, some affluent folks, Andrew and Terry got divorced. Andrew was an otolaryngologist who made in excess of $200,000.00 per year. The first lesson is that the harder it is to pronounce what you do, the more you will likely be paid. At the time of the divorce, Terry was 53 years old and had not worked outside the home for the duration of the twenty-two year marriage. The trial court awarded Terry $111,809.03 for her share in Andrew’s medical practice, half the proceeds from the sale of the marital residence and another piece of property, her car, and over $400,000.00 in retirement funds. In addition, Terry was awarded $7,000.00 in monthly maintenance for 12 years (that’s $1,008,000.00 for my fellow coupon clippers).

The second lesson is that if you are married to a highly paid professional, it pays to not pursue your own career. Actually, this is not a hard and fast rule because the majority of Kentucky appellate cases where long-term maintenance is awarded involves some form of disability on the part of the receiving spouse. I would consider this situation a gray area regarding maintenance for two reasons. First, being 53 is not really a disability although it can be more difficult to obtain gainful employment at that age without relevant experience. Second, Terry received considerable assets in the divorce. To receive maintenance, you must show that you cannot meet your reasonable living expenses and your standard of living only comes into play after crossing that initial hurdle.

Arguably, Terry could meet those reasonable living expenses (and even some unreasonable ones) with the assets distributed to her. Here though, the trial court seemed to define Terry’s reasonable living expenses by her prior lifestyle which is a bit of circular logic. If the legislature had meant for all divorced folks to maintain their prior standard of living, then they would have made the initial hurdle “lacks sufficient property . . . to provide for his standard of living established during the marriage” instead of “reasonable needs“. KRS 403.200.

I suspect these apparent errors by the trial court encouraged the filing of the appeal. Here is where the third lesson came into play. Because Andrew (actually his attorney) failed to file a supersedeas bond to stay the execution of the trial court’s orders pending the appeal. The lesson is that if you think the court messed up, be sure to do all you can to put those orders on hold while you appeal. Because Andrew did not do this, but also did not pay up, Terry filed a motion to hold him in contempt. Andrew responded with filing bankruptcy to get the stay on collection proceedings offered there.

Here is where Andrew made yet another mistake. He withdrew $64,000.00 from his checking account (I would never have another overdraft!) without disclosing this fact. That tends to be a no-no regardless of whether you are in Family or Bankruptcy court. Fortunately, Andrew was able to make a deal with Terry for temporarily reduced maintenance during that first appeal.

The Court of Appeals upheld the trial courts original order (well, I said it was a gray area – not clearly erroneous) and Terry came back with a second contempt motion. Andrew responded with yet another bankruptcy petition. This was the next mistake (sorry, I’ve lost track of how many) because this petition was quickly dismissed because (can you guess it?) the petition was filed for the purpose of avoiding compliance with the Family Court’s orders. The Supreme Court of Kentucky also turned down discretionary review of the divorce decree. Things just were not going well for Andy at this point.

Sensing that Andrew was on the ropes, Terry filed garnishments on various insurance carriers thought to owe funds to Andrew’s medical practice. That is where this particular appeal finally comes into play: click here for the rest of the story!

January 27, 2008 Posted by | Bankruptcy, Civil Procedure, Family Law | , , , , | 1 Comment