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November 25, 2008

9th Circuit Rules that Payment to Trustee of a Preference Resurrects the Debt for Non-Dischargeability Purposes

Busseto Foods v. Laizure (In re Laizure), ---- F. 3d ----, 2008 WL ------ (9th Cir. November 2008)

Issue:   When the debtor pays an otherwise non-dischargeable debt to the creditor during the prepetition preference period and the creditor is forced to return the payment later to the trustee, is the debt resurrected to the extent that the creditor can obtain a non-dischargeability judgment?

Holding:   Yes   
appeal from BAP

Judge Hug
The debtor admitted prepetition to embezzling from his employer, the plaintiff here.  The debtor settled with the employer and made 3 payments based on the settlement.  When the debtor filed chapter 7, the trustee sued the employer to return the last the payments, $38,000, as a preference.  The employer paid the trustee and then filed a non-dischargeability action against the debtor.  The debtor defended saying that there was no debt when the chapter 7 was filed and repaying the payment to the trustee did not resurrect the debt so it could not be non-dischargeable.  The bankruptcy court ruled for the debtor and the BAP affirmed.

The 9th Circuit reversed.  “According to the language of § 502(h), the trustee, through using this § 550 recovery ability, revived Busseto’s claim to prepetition status.  Consequently, Busseto has a claim against Laizure ‘the same as if . . . [it] had arisen before the date of the filing of the petition.’ 11 U.S.C. § 502(h).”   Section 502(h) states that a “claim arising from the recovery of property
under section . . . 550 . . . of this title shall be determined, and shall be allowed . . . or disallowed . . ., the same as if such claim had arisen before the date of the filing of the petition.”  “The BAP’s conclusion . . . conflicts with our precedent as well as the relevant statutory language.  In In re Verco we stated: [T]he import of Section 502(h) is that where a claim is allowable as provided in that section, its status is as a claim in existence on the date of the filing of the petition regardless of when, after the petition, the trustee has taken the necessary action and recovered.”

November 25, 2008 in 9th Circuit Briefs | Permalink

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