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Cadle Co. v. Moore – Impact of Bankruptcy on Civil Lawsuit

There are many reasons why a person may choose to file for bankruptcy in Louisville – not the least of which may be to escape liability in pending civil litigation that might result in significant financial liability.boxingglove

For example, if you or your small business is  being sued by a creditor for nonpayment, a Chapter 7 bankruptcy filing would halt that case as part of the automatic stay that occurs in every bankruptcy. The case will be stopped until such time that the bankruptcy is either dismissed or discharged. In the latter case, the civil suit will only move forward in the event that the debt owed has somehow survived the discharge.

But usually, the creditor’s claim will instead be moved to bankruptcy court via an adversary proceeding, in which the creditor formally objects to the discharge of the debt.

In these cases, the first thing that will happen is that the creditor who objects to the discharge will  be given a “341” hearing, per Section 341 of the Federal Bankruptcy Law. During this phase, creditors are allowed to ask a lot of questions of the debtor, who is under oath. It’s an intense process, and the creditor is trying to elicit information that would indicate intentional fraud or misconduct that would render the debt not dischargeable.

It is critical during this (and all) phases of the bankruptcy that the debtor be represented by a well-established legal firm with significant bankruptcy experience.

These proceedings can be extremely complex. Such was the case in Cadle Co. v. Moore IIIrecently reviewed by the U.S. Court of Appeals for the Fifth Circuit.

Here, Cadle Co. was the largest creditor in the bankruptcy estate of the debtor (Moore). Prior to the bankruptcy filing, Cadle had filed a civil lawsuit against Moore, his company and his wife, alleging the defendants had used the company to shield certain assets and avoid payment of debts.

When Moore filed for bankruptcy, the automatic stay meant that the civil case was halted. Cadle removed the action to bankruptcy court, where he then agreed to allow the state’s trustee to assert its claims. Subsequently, the trustee was replaced as the plaintiff in the adversary proceeding.

This is not uncommon. This particular case got complicated when the trustee tapped Cadle’s counsel to serve as special counsel in the proceeding. That attorney had agreed to work for the trustee on a contingency basis, but continued to accept payments from Cadle. This raised questions as to whether the legal firm’s loyalties were with the trustee or to the creditor (who are not necessarily “on the same side” in these proceedings).

When Cadle then stopped paying the bill for the attorney, there was an allegation that the firm threw the company under the bus by sending a first-year graduate to make an oral argument in the case, in which tens of thousands of dollars were at stake. The trustee reportedly was unaware the creditor had continued to make payments to the law firm. When the trustee moved to settle the claim, Cadle voiced its objections. However, the bankruptcy court, finding the creditor had acted in bad faith, approved the settlement, which was upheld upon appeal.

However, the Fifth District Court of Appeals determined that the bankruptcy court had erred in invoking its inherent sanction power by failing to find clear and convincing evidence that the creditor had acted in bad faith, and further, it was determined that the creditor gained no benefit as a result of the payment arrangement.

For this reason, the case was remanded back to the bankruptcy court for further consideration.

As this case illustrates, while a bankruptcy can alter the course of pending civil litigation, it doesn’t necessarily get rid of it altogether.

To determine whether a bankruptcy filing makes sense for your situation, contact an experienced legal team for more information.

Contact the Schwartz Bankruptcy Law Center at 866.366.3328 for a free and confidential consultation to discuss your rights.

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