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Creditors Not Entitled to Prejudgment Interest on Nondischargeable Debt, Court Rules - In re Bakay

December 29, 2011

One job of our Riverside County personal bankruptcy attorneys, led by experienced lawyer Vincent Howard, is to help our clients get the maximum benefit from bankruptcy. Of course, this means minimizing the amount of debt clients are required to pay back, within the confines of the law. And that means ensuring that better-funded creditors will not use the legal process to squeeze unwarranted extra payment out of them. In In re Bakay, a debtor won a minor victory in this area when the Tenth U.S. Circuit Court of Appeals denied prejudgment interest to creditors who had already gotten the debt in question declared non-dischargeable. Debtor Scott Bakay of Colorado borrowed money from neighbors George and Georgia Diamond under false pretenses, giving rise to a determination of nondischargeability after Bakay filed for Chapter 7 bankruptcy. But the Tenth Circuit agreed with the bankruptcy court that the Diamonds had waited too long.

Bakay operated a Denver mortgage company and had helped the Diamonds refinance their home. He also, fraudulently, told them in 2004 that he was developing condominiums in CancĂșn and offered to give them $200,000 in repayment on a $100,000 loan within six months, personally guaranteed by Bakay. In reality, the money was put toward the mortgage company and the Diamonds never saw a cent of it again. In 2009, Bakay filed for Chapter 7 bankruptcy, and the Diamonds filed an adversary proceeding seeking to have their $100,000 loan declared nondischargeable. They were successful, and the court ordered Bakay to pay interest from the date of the nondischargeability judgment. The Diamonds then moved to amend, seeking prejudgment interest at Colorado's 8 percent rate. The court found Colorado's statutory rate inapplicable, so they re-filed for the federal interest rate, starting at the time they made the loan. That motion was also denied. The court found that because the Diamonds had failed to pursue their money for more than four years, they could not pursue interest now. It also found the proposed interest rate of 200% "criminally usurious."

The Tenth Circuit's Bankruptcy Appellate Panel upheld the decision on appeal, and the Diamonds appealed to the Tenth Circuit itself. That court also affirmed. Under federal law, prejudgment interest may be awarded if the interest is equitable, a legal concept "governed by fundamental considerations of fairness." The bankruptcy court found that the Diamonds had unreasonably delayed a lawsuit to recover the money Bakay owed them. They argued at trial that this was in part due to Bakay's repeated promises and occasionally leaving the country, but the Tenth agreed with the BAP that this does not necessarily justify continuing to delay. The Tenth Circuit agreed with the BAP that the phrase "criminally usurious" was troubling, but agreed that the agreed-upon rate of return for the loan was far too high, more than 4.5 times the highest interest rate allowed by Colorado law. Thus, it agreed with the BAP that the bankruptcy court had not abused its discretion when it denied the prejudgment interest.

The Newport Beach individual bankruptcy lawyers at Howard Law, P.C., rarely face this kind of challenge. If Bakay had told the Diamonds the truth about where their money was going, or even genuinely believed someone else's lie, the debt would probably remain dischargeable. In this respect, the Diamonds are already victorious in their case; they will get their original $100,000, though perhaps not quickly. For a debtor like Bakay, who did intend to defraud (and apparently did not oppose their adversary proceeding) an outcome that denies the creditor any further payment may be the best possible outcome. When a debt is declared nondischargeable, it yokes the debtor to that debt for the foreseeable future, which is why the bar is and should be high for such a declaration. Our Whittier consumer bankruptcy attorneys work hard to minimize or eliminate nondischargeable debts for debtor clients.

Howard Law, P.C., represents clients across California who are seeking relief from debt collectors and other debt problems through bankruptcy. To learn more or set up a consultation, call us toll-free at 1-800-872-5925 or send us a message through our website.

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