THE client is a corporation that has been in business since 2000. It had good times and bad over the last two decades but always managed to land on its feet. It has an ever-growing list of clients that need its products, which it sources from abroad.
It has two kinds of clients: clients with their own brands for the same product and clients that buy the product with client’s own brand. In 2015, the client appears to have had some kind of misunderstanding with one of its major foreign suppliers regarding a large order that apparently was not produced by the supplier to conform to the correct specifications. This resulted in the delivery of the large order being rejected by the ultimate buyer. Well, you can see why this rejection of the order shipped caused a major disruption in the business relationship between client and foreign supplier.
Since the ultimate buyer rejected the shipment, the client was not going to get paid the expected $1.3M from its customer. But the foreign supplier demanded to get paid in full for the shipment, which had an FOB value of $1.0M. If the client paid the supplier $1.0M for a rejected order, the client would have to immediately eat the loss of $1.0M. The client does about $3.0M of yearly business, so an outright $1.0M loss is not sustainable. The client does not have $1.0M in cash or available credit lines, and does not see the wisdom of eating such a big loss. In addition, the client believes that it was supplier’s fault that the shipment did not comply with the required specifications, which caused the rejection of the order.
On the other hand, the foreign supplier believes it complied with the required specifications as far as they understood it. So, it’s a big mess. The client offered to give the shipment back to the supplier but the supplier does not want the merchandise back. The supplier wants cash of $1.0M.
Eventually, the supplier files a lawsuit her in Los Angeles against the client for $1.0M breach of contract and fraud. Many breach of contract lawsuits add a fraud cause of action, which basically works as follows. The element of fraud consists of a misrepresentation made by the defendant to the plaintiff. The plaintiff justifiably relied on the misrepresentation. The plaintiff suffered damages by relying on the misrepresentation, and the damages of the plaintiff are proximately caused by the misrepresentation. More or less these are the essential elements of the fraud or deceit cause of action. If the plaintiff fails to prove one element, there is no fraud. For instance, the plaintiff alleges that he suffered damages because he relied on defendant’s misrepresentation that he doesn’t have to file income tax returns for 2017. However, the plaintiff himself is a certified public accountant. There is no justifiable reliance on defendant’s representation because the plaintiff himself is a CPA and therefore should know himself that he should or should not file income tax returns for 2017.
In any event, at trial, the plaintiff was able to prove by a preponderance of evidence that the client did indeed defraud the plaintiff supplier of $1.0M.
Well, so now the choice is to pay the $1.0M or the company files for Chapter 7 liquidation. What would you do if you owned this company? Of course, a fraud judgment for $1.0M is an intentional tort that is that dischargeable. But the fact that the judgment is not dischargeable does not prevent the company from filing Chapter 7 to handle the claim. So what happens? In Chapter 7, the trustee will literally attempt to liquidate the company. The plaintiff will have to file a proof of claim in the bankruptcy as a judgment creditor. If the liquidation results in cash, the trustee will pay creditors in the legal order of priority. The IRS has no. 1 priority for unpaid taxes. This judgment creditor will get paid after the IRS gets paid. The trustee will auction off the inventory, if any, and collect receivables. The trustee will administer cash in the bank.
Senior wants Chapter 7 discharge of $35K credit cards
The second client is 70 years old and single. She never got married. She is still pretty and charming. But I guess she never met her prince charming so she decided to stay single. She owes $35,000 of credit cards. She has been paying $12,000 a year for the last 20 years. She has paid $240,000 in the last 20 years, and yet she says she still owes $35,000! Wonder of wonders indeed, sad but true. She says she is just tired of paying for the cards and now that she is retired, the $12,000 a year for interest payments on the cards is a big dent on her retirement income and prevents her from enjoying her retirement years. Not surprising.
Her retirement income consists of $1,200 of social security and $1,800 of pension. So, she has $3,000 a month. The cards take a third of that every month. Ouch! In addition, she has already paid $240,000 to her credit card masters, modern-day slavery, no doubt. She decides it’s high time for her to get rid of these cards with a discharge or wipe out in Chapter 7! I guess she got smarter as she got older, but could have saved $240,000 if she got rid of these cards when she was 52.
If you need debt relief, set an appointment to see me. I will analyze your case personally.
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Disclaimer: The foregoing is an expression of opinion and is not meant to be legal advice to any reader. There is no attorney-client relationship established by this article with the reader. If you want to discuss your situation, you have to set an appointment to consult with the attorney. The first general consultation is free.
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S. Fremont Ave, Mailstop 58, Building A-1 Suite 1125, Alhambra, CA 91803 or at 20274 Carrey Road, Walnut, CA 91789.
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