Chapter 11 bankruptcies generally involve the debtors proposing a five-year repayment plan to creditors. Depending on the income and assets of the debtors, general unsecured creditors usually don't get paid in full and usually it's far from it. At the conclusion of the plan, claims against the debtors are discharged (unless the plan provides otherwise or in the event of secured claims where the debtors have agreed to pay in full for the remaining term of the contract, like a mortgage). Any creditor, however, can open an adversary proceeding to prevent their claim from being discharged. Bankruptcies, and Chapter 11 particularly, are difficult enough without having creditors attempting to prevent discharges of their claims. Andre Carman of our firm recently represented a couple in a Chapter 11 bankruptcy. The husband had been in a near-death accident, which caused him to lose his business.
As a consequence, bankruptcy protection was necessary. While in business, however, husband had entered into a real estate partnership to buy an office building with a medical doctor. He and the doctor did not do business together. As we all have experienced in way or another, the economic recession, coupled with our client's accident, caused him to lose the ability to make his share of payments on the office building mortgage. In addition, he and the doctor just did not get along. Our client and the doctor ended up suing each other regarding their partnership. The doctor also alleged that our client defrauded her by misrepresenting prior to office building purchase that he had various educational degrees and that she relied on those representations when making her decision to partner with him and buy the office building. In the middle of the lawsuit, our clients came to us to file a Chapter 11 bankruptcy. After the bankruptcy was filed, the doctor filed an adversary proceeding claiming that her $2,000,000 fraud claim against the debtors should not be discharged under Section 523 of the Bankruptcy Code. The adversary fraud trial proceeded to trial in the bankruptcy court in December 2012.
At the close of the doctor's case, Andre requested the court to award and find in our clients' favor as a matter of law (before presenting any defense) because the doctor had not met the Section 523 requirements to prove that any representations that the husband may have made concerning his degrees were material to a real estate transaction, that her claimed damages of over $2,000,000 were caused by reliance on those representations, and that she had in fact suffered any damages. After submitting written briefs to the Court, the Court ruled in our clients favor and dismissed the doctor's adversary. The doctor has appealed this decision, but in the interim Andre was able to get our clients' Chapter 11 plan confirmed. Our clients are now able to obtain the fresh start the Bankruptcy Code provides.