My client was a landlady who rented her three-unit house not far from the beach in Ventura. The county came by one day and put yellow tags on two of the units, calling them “substandard” and evicting the tenants that day. Why “substandard?” Mostly because the area was zoned for one unit only: there was no way to have three units on the lot legally. But there were other, fixable, health and safety issues; the building was not the Ritz-Carlton.
Three months later, the landlady had demolished the units, short-sold the remaining house, and filed for bankruptcy protection.
The tenant in the middle unit didn’t want her to get off so easy. She filed an adversary proceeding, a lawsuit, in the bankruptcy asserting a nondischargeable debt: she claimed she was entitled to a refund of all the rent she had paid, since the unit was illegal the entire time and California law says you can’t collect rent on an illegal or uninhabitable unit. She claimed that the debt was nondischargeable, that is, the landlord should still owe it despite getting bankruptcy protection, because the landlord had collected each rent check by fraud, or because the act of renting the unit was a “willful and malicious” tort.
My client refused to settle: she didn’t see any reason she should refund rent for a period of time (three and a half years) when the tenant actually occupied the apartment without an express complaint. The tenant demanded a five-figure lump-sum payment to drop the case.
So we went to trial. Trials in bankruptcy court are blessedly short: no juries, just the judge, the parties, and the testifying witness. Not much chance to argue: the judge knew the law, and we had submitted briefs beforehand.
The tenant testified that she developed some questions about the legality of the units, and visited the city’s planning department. She discovered that the units were indeed illegal. “You didn’t bring this to the landlady’s attention then, did you?” “No,” the tenant admitted. “I was scared of her, and besides, I didn’t want to jeopardize the place where I was living, the benefit of my tenancy.”
The tenant also testified that she knew, from her first phone conversation with the landlady, that the unit she would rent had some issues. She took it anyway because she was desperate.
At the end of the trial, right after we finished our [short] closing arguments, the judge made findings of fact from the bench. No fraud, no willful and malicious tort, judgment for defendant. My landlady client was able to walk away from her debts, including this frivolous one.
Facts win cases; bad lawyering can lose them. Here, the facts spoke for themselves. Without a lawyer, however, the landlady would have been lost in the morass of procedures and evidence objections (who but a lawyer really knows what “hearsay” is?).
Even more so than other clients, bankruptcy clients need to make a cost-benefit analysis. Had the landlady not fought the case, she would have left her bankruptcy with a nondischargeable judgment of around $50,000. Her defense cost around $15,000. She might have settled for $15,000 before trial, but negotiations broke off. It’s up to the client to determine when to settle or go forward; the landlady went forward because of principle, but later regretted not just writing a check to settle. But who knows? Had she settled early on, she might have regretted that course of action too.
If you face a similar situation, a bankruptcy in Ventura or Los Angeles counties where someone wants to make sure you don’t get your discharge, we can help you at Faucher & Associates.