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Clark v. Zwanziger – Bankruptcy and Civil Judgments

Blogs from February, 2014

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Sizable case judgments and even pending liability cases are sometimes the primary reason individuals are interested in filing for Chapter 7 bankruptcy in Woodland Hills.

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The benefit of bankruptcy is that if you can’t pay what you owe‚ you can receive a reprieve on that debt. Still‚ you may not be absolved of the entire amount‚ particularly if the creditor in question (i.e.‚ the plaintiff in the civil case) files an adversary proceeding against you in bankruptcy court. The creditor can use this opportunity to argue before the court why your debt to them should not be discharged.

There are 19 categories of debt exempted from discharge‚ which include tax debts‚ student loans and family support payments. These exemptions also include debts owed for personal injury to another caused by drunk driving.

Beyond that‚ however‚ it’s up to the court to weigh the creditor’s challenge to the discharge.

That was the situation in Clark v. Zwanziger‚ reviewed recently by the U.S. Court of Appeals for the 10th Circuit. This was a complex case in that the debtor filed for bankruptcy after a judgment had been rendered against him in civil court‚ but prior to a final determination of damages in that case. Therefore‚ the bankruptcy court took up the issue of damages not to be discharged‚ a ruling that was later affirmed by the appellate court.

According to court records‚ the civil case began several years ago when two men sued their former boss for fraud and violations of state wage law. Those claims were consolidated into a single case‚ and the jury found the employer liable‚ awarding the two plaintiffs a total sum of about $575‚000 in damages.

The employer appealed the verdict. While the appellate court affirmed the decision on the issue of liability‚ it reversed on the issue of damages‚ finding that the two plaintiffs had failed to include damages for emotional distress in their pretrial order (even though it had been listed in their original complaint). Despite this‚ the trial court instructed the jury to consider emotional damages. The appellate court found this to have been an error.

So the case was remanded back to the lower court to reconsider the issue of damages.

However‚ before that could happen‚ the employer filed for Chapter 7 bankruptcy. When this happened‚ any civil proceedings against him – including the damages recalculation – were halted as part of the automatic stay protection.

This did not stop the two plaintiffs in the civil case from then filing a complaint with the bankruptcy court‚ asking the judge to determine that a certain portion of the debtor’s liability was not dischargeable.

In turn‚ the bankruptcy court found that the issue of liability was not in question‚ but as the appellate court had not yet determined damages‚ that amount remained unresolved. The bankruptcy court further reasoned that it was not bound by the earlier remand instructions because it was only being asked to determine what percentage of the award was non-dischargeable – not what the pre-bankruptcy amount should be.

In the end‚ the court determined that $182‚000 of the employer’s debt would not be dischargeable – $50‚000 of which would be for emotional distress.

The debtor appealed this ruling‚ in particular arguing that the bankruptcy court was precluded from deciding the issue of damages for emotional distress.

In the end‚ however‚ the appellate court upheld the ruling‚ finding that while the two employees had waived emotional damages‚ the other courts hadn’t weighed the merits of the claim. Because there had not been a final determination on the damages issue‚ the bankruptcy court was not re-deciding an issue that had already been decided.

The appellate court noted the debtor had several options here‚ had he wished to try to avoid paying emotional damages. He could have waited to file bankruptcy only after the district court had recalculated damages upon remand. Or‚ after declaring bankruptcy‚ he could have requested that the bankruptcy court modify the stay so that the district court was able to finish its case per remand instructions. Or‚ finally‚ when the plaintiffs filed the adversary complaint in bankruptcy court‚ he could have requested that the district court withdraw the portion of the adversary proceedings relative to the unfinished district court case.

However‚ he did none of these things‚ and the appellate court, therefore, determined that the fact that the damages issue was determined in bankruptcy court “was no one’s fault but (the debtor’s).”

This case is a good example of why timing can be everything. If part of the reason you are seeking bankruptcy relief is due to civil judgments‚ it is imperative that you secure experienced legal counsel at the first opportunity.

If you are contemplating bankruptcy in Woodland Hills‚ contact Cal West Law to schedule your free consultation. Call (818) 446-1334

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