by Hearthstone Legal Group | Mar 17, 2026 | creditors, Uncategorized
According to Pew Research, litigation by credit card companies and debt collectors against delinquent borrowers (debtors) has reached volume of 25% of civil cases filed in California. Indeed, in the most populous counties of California there were over 2 million such lawsuits between 2009 and 2020. (Raba, One-Sided Litigation: Lessons from Civil Docket Data in California Debt Collection Lawsuits (U. of Chicago Law School, 2023).
The largest 5 creditor lenders or debt collectors filed 533,307 such lawsuits from 2009 to 2020, and cases likely have increased as a result of the Pandemic, inflation, and economic stagnation since 2020.
Not only are such lawsuits of burden on the courts, but they have direct impact upon the debtors lives. Consumer credit suffers. The debtor’s ability to pay other bills or get other loans suffers or disappears. Unsurprisingly, most debtors cannot afford to hire attorneys and file a response to the creditor’s lawsuit. Statewide, debtors filed responses to only 14% of such lawsuits.
Other factors leading to a debtor’s lack of response to a lawsuit are that many of the debts may be several years old; debtors may have forgotten about them; debtors may have moved away from the prior billing address (and thus not received the lawsuit); or the debtor may have changed last name based on marriage (the lawsuit may be against “Mary Smith,” who now married and known as “Mary Jone,” and “Mary Jones” was not served with the lawsuit).
For those who did not respond to such lawsuits, over The end result is that over 130,000 default judgments were taken against debtors. This means that there is a final judgment, which then begins to accrue interest, generally at 10% per year. For example, a judgment that may have started at under $10,000 in 2010, by 2025 could be well over $30,000.
Those defaults, and judgments after trial, can lead to wage garnishments, freezing of bank account, or repossession of cars, and indirectly could lead to eviction or foreclosure on a home (such as where the individual cannot qualify for a loan or re-finance). The impact can be devastating.
The moral of the story is that debtors who are delinquent and credit cards need to carefully monitor their credit, and can reasonably assume that if the debt is over a few years old, there is a collection agency out there trying to get that money. On the other hand, if a debtor can find a lawyer, he or she can attempt to fight the matter, because there are fortunately occasional fraudulent proof of service, which can cause a default to be withdrawn; mistaken calculation of debt; or valid statute of limitations defenses.
Having a lawyer also greatly aids the debtor in negotiating a settlement. Once there is a default and default judgment, the creditor will likely be much less inclined to negotiate.
Keeping up with your credit, opening your mail, and investigating any strange or suspicious claims of delinquent loans, are three effective ways that debtors can protect themselves. And having a lawyer definitely helps.
THIS POST DOES NOT CONSTITUTE LEGAL ADVICE, AND DOES NOT CREATE AN ATTORNEY-CLIENT RELATIONSHIP.
PLEASE CONSULT YOUR OWN ATTORNEY!!
by Hearthstone Legal Group | Oct 7, 2025 | Uncategorized
This is a Commentary on a Recent Published Opinion of the 9th Circuit Bankruptcy Appellate Panel
Around 2001, attorney Pamela Lacher contracted with a vendor, ECI, for services, which resulted in about $3,000 charge to the attorney. For reasons that are unstated in the appellate opinion, Lacher refused to pay.
Later, attorney Lacher and her mother sued the vendor, and placed a lis pendens on the home of the owner of ECI. ECI sued to have the Lis Pendens removed, and this removal was upheld against multiple appeals by Lacher.
By the time this activity was over, the debt was around $50,000.
Years went by, and the judgment increased with interest. By around 2020, Ms. Lacher owed over $200,000.
Additionally, by this time the California State Bar got involved. It began disbarment proceedings. Ms. Lacher filed for Ch.7 bankruptcy, and argued that the Chapter 7 should end the disbarment proceedings, and cancel the debt.
ECI filed an adversary proceeding, arguing that the debt was the result of fraud or malice, and thus not amenable to cancellation (“discharge”) in the bankruptcy court.
But the BAP opinion focused on 3 issues:
1) Did the 11th Amendment, which leaves the states sovereign over items that are not reserved to federal government power, preclude any ruling by the bankruptcy court that related to the State Bar’s disciplinary procedures? No, the bankruptcy court is not infringing on the State Bar’s power by issuing rulings that may incidentally affect Ms. Lacher’s professional status. By going through bankruptcy, the bankruptcy court did not effect any coerciver power over the State;
2) Did the judicial abstention doctrine require the bankruptcy court to abstain from ruling on the issue of whether bankruptcy proceedings are pre-empted by federal law? No, the judge had full authority to rule on whether the State Bar action was stayed by the bankruptcy case. The BAP relied on previous cases to rule that “Bankruptcy courts simply cannot provide a fresh start without interfering to some degree with state court proceedings.”
3) Did the bankruptcy case bar (as in, discharge) any disciplinary action against the attorney? No, because 1) the disciplinary action was not strictly based on monetary debt; and 2) the vendor’s action (“adversary proceeding”) based on fraud or malice was pending, and could eventually hold that the debt based on Ms. Lacher’s refusals to pay, and appeals, going back to 2001, were non-dischargeable. It would make little sense to hold that the debt was dischargeable, before the court could rule on whether the debt resulted from fraud or malice.
In re: PAMELA LACHER, Debtor. BAP No. SC-25-1020-FLC Bk. No. 24-03882-CL7 PAMELA LACHER, Appellant, v. STATE BAR OF CALIFORNIA, Appellee.
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by Hearthstone Legal Group | Aug 19, 2025 | Uncategorized
Read this blog to learn how bankruptcy law protects retirement for Lakewood residents based on a SCOTUS ruling. Although many bankruptcy practitioners would prefer not to see the words “bankruptcy” and “Supreme Court” in the same sentence, the Supreme Court recently made an important decision by simply staying out of a dispute that came from the Ninth Circuit Court of Appeals, which Ninth Circuit decision benefited Chapter 13 debtors.
Martha G. Bronitsky, Chapter 13 Trustee v. Jorden Marie Saldana, Case No. 23-15860.
The issue in Saldana was “whether voluntary contributions to employer-managed retirement plans constitute disposable income in a Chapter 13 bankruptcy.” In other words, is a debtor in Chapter 13 bankruptcy prevented from contributing to her employer-managed retirement plan during the 5 years of the Chapter 13 repayment period, and thus required to make every single penny of possible retirement contribution available to the Trustee, to pay back debts?
The bankruptcy court and US District Court had held that the contributions were part of Ms. Saldana’s bankruptcy estate, and thus available for debt repayment, as part of the debtor’s Chapter 13 plan.
However, the Ninth Circuit’s decision reversed this holding, and this reversal is consistent with most of the Circuit Courts in the US.
In June 2025, the US Supreme Court decided not to disturb this decision.
As part of the Court of Appeals decision, the US Trustee and the Ninth Circuit analyzed 11 USC Sec. 541(b), which states that contributions to an employer-managed retirement plan are not part of the bankruptcy estate. 541(b) specifically excludes from the bankruptcy estate earnings withheld by the debtor’s employer for 1) contributions to employer-managed retirement plans under Internal Revenue Sec. 414(d); or 2) part of a deferred compensation plan under IRC Sec. 457; and/or 3) a tax-deferred annuity under IRC Sec. 403(b).
The Ninth Circuit noted that there were at least four different formulae available to determine whether or not the contributions to the employer-managed retirement plan should instead be turned over to the Trustee for payment to creditors. The Ninth Circuit ruled that the contributions to Ms. Saldana’s employer-sponsored retirement plan did not qualify as “disposable income,” within the reach of the Trustee, under any of these formulae.
Moreover, in addition to the plain language of the 11 USC 541(b)(7), which explicitly excludes wages withheld for the employer-sponsored retirement plan, the Ninth Circuit could have based its holding on the basic theory of bankruptcy relief:
“The Bankruptcy Code is a public scheme for restructuring debtor-creditor relations, necessarily including “the exercise of exclusive jurisdiction over all of the debtor’s property, the equitable distribution of that property among the debtor’s creditors, and the ultimate discharge that gives the debtor a ‘fresh start’ by releasing him, her, or it from further liability for old debts.”
Cent. Va. Cmty. Coll. v. Katz, 546 U.S. 356, 363–64 (2006); N. Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 71 (1982), cited in Grissel, “Stern v. Marshall – Digging for Gold and Shaking the Foundation of Bankruptcy Courts (or Not),” 72 Louisiana Law Rev. (2012), at 670.
Given the cuts to social services, and the ever-shrinking American social safety net, it would be inconsistent with the “fresh start” justification for bankruptcy, to further restrict the amount of funds that a debtor could save for retirement. Given the twin justification, that a bankrupt debtor should not become a “ward of the state,” it is completely reasonable for a bankruptcy court to vindicate the plain language of 11 USC Sec. 541(b)(7), and allow the debtor to continue to fund her retirement, during the 60 months of her Chapter 13 repayment plan.
THIS POST DOES NOT CONSTITUTE LEGAL ADVICE, NOR CREATE AN ATTORNEY/CLIENT RELATIONSHIP. PLEASE CONSULT AN ATTORNEY!!
by Hearthstone Legal Group | Jun 17, 2025 | Uncategorized
It is apparently the rare case where a fraudster not only admits to the fraud, but seeks to get court relief, based upon the timing of the fraud.
However, when the object is to protect a residence, anything goes.
In the recent case involving debtor Diane Ida Uriostegui, BAP No. CC-24-1174-GFS, Defendant/debtor was sued in California Superior Court, for financial elder abuse among other things, for causing her patron to disinherit his family, and bequeath to her hundreds of thousands of dollars. Prior to Ms Uriostegui’s intervention, the money should have been distributed into a trust previously established by the deceased trustor and his late wife.
The heirs of the creator the trust (the trustor) successfully sued Ms. Uriostegui for financial elder abuse, and apparently won a verdict in the neighborhood of $1MM. Defendant subsequently filed for bankruptcy, and claimed an exemption for her home of $687,000.
The obvious purpose of Uriostegui’s exemption claim was to protect the home from sale, because if the sum of the mortgages and homestead exemption are greater than the value of the home, the home will not be sold in bankruptcy.
The heirs sought to force the sale of the home, claiming that 11 USC 522 (q) limited defendant/debtor to a homestead of $189,000. The heirs claimed that Defendant should have been limited in her a homestead exemption, because she had committed the elder abuse in her fiduciary capacity (as a trustee of fraudulently the manipulated trust). 11 USC 522 (q).
In the ironic twist, defendant claimed that her fraud occurred before she had any interest in the trust, and therefore prior to any fiduciary relationship attaching. The California court had not specifically found that she committed fraud while Defendant was a fiduciary. In fact, federal law is clear that there can be no fiduciary relationship prior to the establishment of a trust, in which the alleged wrongdoer is a trustee.
Because there was no fiduciary relationship between the defendant/debtor and the deceased at the time of his death, defendant/debtor’s actions were not committed in the capacity of a fiduciary, and therefore her homestead was not limited by 11 USC 522 (q).
If all of this a little odd in context, it is; the court does not discuss whether the debt to the heirs is dischargeable. That was not her argument. Apparently, the Superior Court judgment would still be collectible, as a non-dischargeable debt based on fraud, pursuant to 11 USC Sec. 523 and 524. All the underlying case was deciding was whether Debtor’s admitted fraud limited her homestead exemption.
Thus, the heirs could record the judgment, and enforce it to the lawful extent against any non-exempt asset. They simply could not force the sale of the home at this time (and the case does not say it, but query if the home was purchased by Defendant with the pilfered funds).
There is likewise no discussion of any criminal prosecution of the Defendant. That should have been a possibility, given her admission of the fraud; the fact that she took advantage of an elderly person; and the fact that she apparently took a very large sum of money.
READING THIS POST DOES NOT CREATE AN ATTORNEY CLIENT RELATIONSHIP
THIS POST DOES NOT CONSTITUTE LEGAL ADVICE; PLEASE CONSULT AN ATTORNEY!!
by Hearthstone Legal Group | May 4, 2025 | Uncategorized
With the discussion in the press about the Social Security system and Ponzi schemes, it is relevant to ask the question, “What is a Ponzi scheme?” Our Lakewood based law team discusses what a Ponzi scheme is and whether or not social security is an example.
In a recent case before the Ninth Circuit Court of Appeal, a business that appeared to pay off its previous investors with the investments of new investors, began to seriously fail in 2009. When the company filed for bankruptcy, the US Trustee sued, arguing that funds were paid out pursuant to a classic Ponzi scheme framework, and thus, significant payments were made to defraud creditors.
The Court of Appeal, by Judge Sanchez, upheld the trial court’s instruction to the jury, regarding the definition of a Ponzi scheme:
A Ponzi scheme is a financial fraud that induces investment – often by promising high, risk-free returns within a relatively brief time period. In a Ponzi scheme, payments are made to investors or lenders from later investments or loans rather than from profits of the underlying business
venture. The fraud consists of transferring proceeds received from the new investors to previous investors, thereby giving other investors the impression that a legitimate profit-making business opportunity exists, where in fact no such opportunity exists. Distributing funds to earlier investors from the receipt of monies from later investors or lenders is the hallmark of Ponzi schemes.
The mere fact that a company has negative cash flows for several years is not alone sufficient to conclude that a company is a Ponzi scheme.
The district court’s jury instruction tracks, almost verbatim, how the Ninth Circuit has defined a Ponzi scheme for over thirty years. See, e.g., In re United Energy Corp., 944 F.2d at 590; In re AgriTech, 916 F.2d at 536; Donell, 533 F.3d at 767 n.2.The Court of Appeal pointed to the basic structure of the organization in question, and stated that there is an irrebuttable presumption that an organization that meets these criteria is a Ponzi scheme (i.e., a fraudulent business), and therefore, fraudulent. Hence, no proof of the perpetrator’s intent (mens rea) is necessary. Kirkland v. Rund (In re EPD Inv. Co., LLC), No. 22-55944, 2024 U.S. App. LEXIS 21363 at *1 (9th Cir. 2024).
The dissent, by Judge Clifton, argued that there should have been a mens rea instruction, because the fact that an investment business fails does not render it a Ponzi scheme. Moreover, 2009 fell in the middle of the Great Recession, which saw the failure of thousands of businesses, most of which were presumably not fraudulent.
Judge Clifton did not, however, analyze the specific facts of how the business operated. This shortcoming takes a lot of force out of his argument.
When it comes to the case of Social Security, high, risk-free returns are not part of the equation. Social Security is not a profit engine, and is not represented to be. Payments to each individual are relatively small. Payments to individuals are made based on the individual’s previous contributions, and Congressional enactments.
A Ponzi scheme is very strictly defined, and this definition has stuck for decades. It describes a particular type of business, but not the national retirement-assistance program of the Federal Government.
THIS POST DOES NOT CONSTITUTE LEGAL ADVICE
THIS POST DOES NOT CREATE AN ATTORNEY-CLIENT RELATIONSHIP!
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Photo from Jesus Eca @ Unsplash.
by Hearthstone Legal Group | Jan 27, 2025 | Uncategorized
FAIR LENDING/MORTGAGES/BANKRUPTCY/TECHNOLOGY
January 24, 2025
The federal Fair Debt Collection Practices Act, codified at 15 United States Code Section 1692, was signed into law by President Nixon, and broadly seeks to protect consumers from improper, immoral, cruel, or deceptive practices by debt collectors.
The FDCPA broadly applies to debt collection companies and debt collection attorneys, but has many exceptions, ambles, and preambles, that protect various types of individuals and companies involved in collecting debts.
In 2019, the US Supreme Court decided Obduskey v. McCarthy & Hothus LLP, 139 S.Ct. 1029, in which the Court held that a company that exercises a non-judicial foreclosure, which is a form of collection on a secure debt, is not a debt collector for purposes of the FDCPA, and theoretically such a company does not have to follow the strictures against unfair treatment, harassment, deception, etc.
The Court recognized that foreclosing on a mortgage is a form of debt collection; however, this specific procedure (non-judicial foreclosure) did not fall under the specific language of the FDCPA.
By contrast, California courts had previously taken the position that non-judicial foreclosure could be regulated under the Rosenthal Act, California’s version of fair debt collection practices laws. Best v. Ocwen Loan Servicing LLC (2021) 64 Cal.App. 5th 568, 576.
Additionally, in the fall of 2024, California sought to further plug this hole in the FDCPA. As of July 1, 2025, Senate Bill 1286 goes into effect; it included a number of revisions to the Rosenthal Act, including granting the Commissioner of California’s Department of Financial Protection and Innovation authority to regulate non-judicial foreclosure under the Rosenthal Act. (Civil Code section 1788.1 and following)
Additionally, changes to the California Homeowner’s Bill of Rights also added additional requirements for non-judicial foreclosures. Civil Code Sections 2923.5 and 2924f.
For those who do run afoul of California’s Rosenthal Act, the penalties can be severe. Damages are $1000 per violation, and potentially punitive damages. The Plaintiff can also seek costs and attorney’s fees from the offending party. Additionally, such behavior can be fined and enjoined under the Unfair Competition Law, Business & Professions Code §17200.
In light of California’s recent experience with wildfires and other disasters, it may be that, beginning in July 2025, debt collectors will have to much more carefully navigate how they seek to collect on mortgages, auto loans, auto leases, and other debts that impacted individuals owe as of that date.
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