Chapter 26 BANKRUPTCY Practice Test 1. Mark Milbank built custom furniture in Port Chester, New York. His business was unsuccessful, and he repeatedly borrowed money from his wife and her father. He promised that the loans would enable him to spend more time with his family. Instead, he spent more time in bed with his next-door neighbor. After the divorce, his ex-wife and her father demanded repayment of the loans. When Milbank filed under Chapter 13, his ex-wife and her father asked the court not to discharge Milbank’s debts on the grounds that he had acted in bad faith toward them. Should the bankruptcy court discharge Milbank’s loans? No. The court refused to discharge the loans because the debtor had acted in bad faith. He pretended to his then wife and father-in-law that he was making an effort to stabilize his marriage, when in fact he was rending it asunder. IN RE Milbank, 1 Banker 150 (Bankr. S.D.N.Y. 1979). 3. James Hartley, the owner of an auto parts store, told an employee, Rickey D. Jones, to clean and paint some tires in the basement. Highly flammable gasoline fumes accumulated in the poorly ventilated space. Hartley threw a firecracker into the basement, as a joke, intending only to startle Jones. Sparks from the firecracker caused an explosion and fire that severely burned Jones. He filed a personal injury suit against Hartley for $1 million. Is this debt dischargeable under Chapter 7? The court agreed with Hartley that the $1 million debt is dischargeable because he did not intend to injure Jones when he threw the firecracker into the basement. IN RE Hartley, 869 F.2d 394, 1989 U.S. App. LEXIS 2711 (8th Cir. 1989). (This case was later vacated, 874 F.2d 1254.) 5. After filing for bankruptcy, Yvonne Brown sought permission of the court to reaffirm a $6,000 debt to her credit union. The debt was unsecured and she was under no obligation to pay it. The credit union had published the following notice in its newsletter: If you are thinking about filing bankruptcy THINK about the long-term implications. This action, filing bankruptcy, closes the door on TOMORROW. Having no credit means no ability to purchase cars, houses, credit cards. Look into the future—no loans for the education of your children. Should the court approve Brown’s reaffirmation? The court refused to approve the reaffirmation because the credit union's threats constituted duress. IN RE Brown, 95 Bankr. 35, 1989 Bankr. LEXIS 543 (Bankr. E.D. Va. 1989). 7. Robert Britton was an office manager at the Academy of Cosmetic Surgery Medical Group. Mary Price made an appointment for a consultation about a lipectomy (removal of abdominal fat). Britton wore a name tag that identified him as a doctor, and was addressed as “doctor” by the nurse. Britton and the nurse then examined Price. Britton touched the area of her stomach where there was excess fat and showed her where the incision would be made. A doctor who worked for the Academy actually performed the surgical procedure on Price at the Academy’s offices, with Britton present. After the procedure, Price went to a hospital suffering from severe pain. The hospital staff found that a tube had been left in her body at the site of the incision. The area of the incision became infected, and Price ultimately required corrective surgery. The jury awarded her $275,000 in damages in a fraud suit against Britton. He subsequently filed a Chapter 7 bankruptcy petition. Is this judgment dischargeable in bankruptcy court? No. Under Chapter 7, fraud claims are not dischargeable. IN RE Britton, 950 F.2d 602, 1991 U.S. App. LEXIS 28487 (9th Cir. 1991). 9. CPA QUESTION Unger owes a total of $50,000 to eight unsecured creditors and one fully secured creditor. Quincy is one of the unsecured creditors and is owed $6,000. Quincy has filed a petition against Unger under the liquidation provisions of Chapter 7 of the federal Bankruptcy Code. Unger has been unable to pay debts as they become due. Unger’s liabilities exceed Unger’s assets. Unger has filed papers opposing the bankruptcy petition. Which of the following statements regarding Quincy’s petition is correct? (a) It will be dismissed because the secured creditor failed to join in the filing of the petition. (b) It will be dismissed because three unsecured creditors must join in the filing of the petition. (c) It will be granted because Unger’s liabilities exceed Unger’s assets. (d) It will be granted because Unger is unable to pay Unger’s debts as they become due. (d).CPA Examination, May 1991, #29. 11. Dr. Ibrahim Khan caused an automobile accident in which a fellow physician, Dolly Yusufji, became a quadriplegic. Dr. Khan signed a contract for the lifetime support of Dr. Yusufji. When he refused to make payments under the contract, she sued him and obtained a judgment for $1,205,400. Dr. Khan filed a Chapter 11 petition. At the time of the bankruptcy hearing, five years after the accident, Dr. Khan had not paid Dr. Yusufji anything. She was dependent on a motorized wheelchair; he drove a Rolls-Royce. Is Dr. Khan’s debt dischargeable under Chapter 11? The court would not permit this debt to be discharged because Dr. Khan was not acting in good faith. IN RE M. Ibrahim Khan, P.S.C., 34 Bankr. 574 (Bankr. W.D. Ky. 1983).