Metropolitan News-Enterprise


Tuesday, November 18, 2008


Page 1


Court Expands Creditors’ Rights Against Fraudulent Debtors


By STEVEN M. ELLIS, Staff Writer


Victims of fraud who are forced to surrender restitution payments because the perpetrator files for bankruptcy protection can still maintain a claim against the debtor personally, the Ninth U.S. Circuit Court of Appeals ruled yesterday.

Reversing a decision by the Ninth Circuit Bankruptcy Appellate Panel, the court held that a bankruptcy trustee’s recovery of almost $39,000 a debtor had paid his former employer as restitution for embezzlement less than 90 days before entering bankruptcy did not prevent the employer from seeking to prevent the debtor from discharging a debt in that amount.

Busseto Foods Inc. employed Charles Laizure as its controller and chief financial officer for six years until Laizure left in 2004, at which point Busseto allegedly discovered Laizure had embezzled more than $85,000.

Laizure agreed to repay the funds in installments, paying $10,000 later that year, $30,000 in February 2005, and a final payment of almost $39,000 in June of that year from escrow upon the closing of a sale of his house. However, within three months he filed a chapter 7 bankruptcy petition, and the bankruptcy trustee sent a letter to Busseto demanding return of the final payment as one preferring one of Laizure’s creditors over others.

Busseto and the trustee negotiated to settle the matter, but Busseto, fearing the issue would not be resolved before the deadline to object to the discharge of Laizure’s personal liability, filed a complaint to hold the amount nondischargeable under Sec. 523(a)(4) due to Laizure’s embezzlement and other conduct.

The trustee later agreed to accept $34,000 to resolve the preference matter, and Busseto filed a claim against the estate for that amount, but the company did not share in any distribution by the trustee because the balance of the estate went to pay tax claims against Laizure, a debt given higher priority under bankruptcy law.

Laizure then moved to strike Busseto’s nondischargeability complaint, and U.S. Bankruptcy Judge Brett J. Dorian of the Eastern District of California granted the request, reasoning that no debt existed on the day the bankruptcy was filed because Busseto was fully repaid and had not yet turned over the money.

Dorian also ruled that Sec. 502(h)—which allows creditors who have surrendered preference payments to trustees to assert a claim—did not revive individual liability by Laizure.

The Bankruptcy Appellate Panel—in an opinion by Judge Philip H. Brandt, who was joined by Judges Dennis Montali and Erithe A. Smith—subsequently affirmed the decision, emphasizing that Busseto could bring a claim against the estate, but not against Laizure himself.

However, on appeal to the Ninth Circuit, Judge Procter Hug Jr. wrote that the text of Sec. 502(h) indicated Congress’ intent that any debt “determined” to be nondischargeable under the section could be reinstated personally against the debtor under Sec. 523.

“By avoiding Laizure’s repayment to Busseto, the trustee put Busseto in a position where it was still not fully repaid the total amount of Laizure’s embezzled funds…[and] Busseto therefore returned to the same position it was in before Laizure made the final repayment,” he wrote.

“Without recourse through Sec. 502(h), Busseto would never recoup the embezzled funds. To read Sec. 502(h) otherwise would negate the impact and role Sec. 502(h) plays in the overall statutory scheme.”

Hug added that the result was necessary to advance the policy behind bankruptcy laws, writing:

“[A]llowing Laizure to avoid repaying the funds he embezzled…would only encourage debtors to pay outstanding debts that are nondischargeable and later file for bankruptcy protection, thus avoiding the nondischargeability of their debt under the veil of our bankruptcy laws.”

Judge N. Randy Smith and U.S. District Judge Richard Mills of the Central District of Illinois, sitting by designation, joined Hug in his opinion.

The case is In re Laizure, 06-16857.


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