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Judge Thomas B. McNamara (TBM)

The State of Colorado filed a Complaint under 11 U.S.C. § 523(a)(2)(A) seeking to determine the nondischargeability of a debt owed to it by the Debtor/Defendant for overpayments of unemployment compensation, plus statutory penalties and collection fees, on the ground that the Debtor/Defendant had fraudulently and under false pretenses obtained overpayments of unemployment to which he was not entitled.   

The Defendant moved to dismiss the claim to the extent that the State sought to establish the nondischargeability of the statutory penalties and collection fees, arguing that pursuant to 11 U.S.C. § 1328(a), those components of the debt were not barred from a discharge entered in a Chapter 13 case.  Based on the plain reading of Section 523 and the Colorado Employment Security Act, the Court concluded that the State had adequately alleged a claim against the Defendant.  The Court further held that the Supreme Court’s decision in Cohen v. de la Cruz, 523 U.S. 213 (1998) dictates that penalties and collection fees arising from overpaid unemployment compensation obtained by “false pretenses, a fraudulent representation, or actual fraud” are nondischargeable under Section 523(a)(2)(A) to the same extent as the restitutionary debt for overpaid unemployment compensation.   Such penalties do not become dischargeable under Section 523(a)(7).

Prior to bankruptcy, Debtor bank holding company, United Western Bancorp, Inc. (the “Debtor”), filed consolidated federal income tax returns for itself and a group of 13 affiliated companies, including United Western Bank (the “Bank”), a failed bank now in a Federal Deposit Insurance Corporation (the “FDIC”) receivership.  Post-petition, the Internal Revenue Service issued a tax refund in excess of $4 million based upon the offset of net operating losses and past income from the operations of the Bank as reported on the consolidated federal income tax returns filed by the Debtor. 

Both the Chapter 7 Trustee (acting on behalf of the Debtor) and the FDIC (acting on behalf of the Bank) claimed entitlement to the tax refund.  The Chapter 7 Trustee brought an adversary proceeding asserting claims under Sections 541 and 542 of the Bankruptcy Code.  The FDIC counterclaimed.  The Chapter 7 Trustee and the FDIC presented cross-motions for summary judgment directed to ownership of the tax refund.  The facts were undisputed.  The parties agreed that ownership of the tax refund should be decided primarily based upon a Tax Allocation Agreement. 

The Court concluded that the Chapter 7 Trustee established a legal interest in the tax refund under the Tax Allocation Agreement, the Internal Revenue Code, and Internal Revenue Service regulations.  Further, the Court determined that the FDIC failed to establish a beneficial interest in the tax refund.  The Court analyzed the Tax Allocation Agreement and decided that it created a debtor-creditor relationship as between the Debtor and the Bank.  Accordingly, the Court ruled in favor of the Chapter 7 Trustee and against the FDIC.

Examining the interplay between the Chapter 13 statutory framework and Fed. R. Bankr. P. 1016, the Court determined that a debtor who died shortly after the filing of his joint petition under Chapter 13 and prior to confirmation of his Chapter 13 plan must be dismissed as a debtor from the case, and that the plan proposed on behalf of the joint debtors could not be confirmed.

Judge Howard R. Tallman (HRT)

Educational Credit Management Corporation (“ECMC”) filed a proof of claim in Debtor’s
Chapter 13 bankruptcy case for a student loan debt. Debtor filed an objection, which the Court
sustained after ECMC failed to respond. Debtor then brought an adversary proceeding against
ECMC, asking the Court to declare the loans unenforceable. While Debtor cited § 523(a)(8) in
his complaint, he made no arguments regarding undue hardship, other than the contention that
paying the loans would be an undue hardship because he never received the loan funds. ECMC
moved for summary judgment, and Debtor responded.
 
The Court first determined it had jurisdiction, because even though Debtor was asking for a
declaratory judgment, the underlying substance of the claim was a dischargeability
determination, which is a core matter under 28 U.S.C. § 157(b)(2). The Court found the two
essential issues were (1) whether the loans were of the type excepted from discharge under
§ 523(a)(8), and (2) whether Debtor owed the debt. Because the loans were Supplemental Loans
for Students (“SLS Loans”) insured by the federal government and made under a program
funded in part by the federal government, the Court found they were the types of loans excepted
from discharge under Section 523(a)(8)(A)(i).
 
As to the second issue, the Court gave collateral estoppel effect to the decision of an independent
hearing officer appointed under 20 U.S.C.§ 1095a. That section authorizes the Secretary of
Education, or a guaranty agency, to withhold wages to satisfy a debt for loans made under the
Higher Education Act. In the wage garnishment proceeding before the hearing officer, Debtor
made identical arguments presented in this adversary proceeding. The hearing officer rejected
those arguments, finding the Debtor failed to prove the loans were not enforceable. The Court
specifically found the hearing officer’s decision was a final agency decision, and the hearing
procedures afforded the Debtor with sufficient due process.
 
Finally, the court concluded Debtor had not raised a genuine issue of material fact in his
response to summary judgment, holding “Debtor’s self-serving statements lack support in the
evidentiary record, which clearly shows Debtor continued to sign applications and promissory
notes for SLS Loans, year after year, even though he allegedly did not receive loan funds from
any of the notes.” The Court granted ECMC’s motion for summary judgment.
 

Chapter 7 Trustee (“Trustee”) filed an adversary complaint against Alternative Revenue Systems, Inc. (“ARS”), alleging claims for avoidance, preservation, turnover, and disallowance under 11 U.S.C. §§ 547, 551, 542, 543, and 502. Trustee sought to avoid transfers made by Debtor’s employer to ARS in the 90 days pre-petition pursuant to a wage garnishment. Both parties moved for summary judgment. ARS argued the relevant transfer under § 547(b) occurred when the garnishment was served on Debtor’s employer, more than 90 days pre-petition. The Trustee argued the relevant transfers occurred each time Debtor’s paycheck was garnished in the 90 days pre-petition. The Court examined a split in case law on this issue, including Straight v. First Interstate Bank (In re Straight), 207 B.R. 217 (BAP 10th Cir. 1997), cited by ARS.

The Court ultimately sided with the majority rule, holding the relevant transfer occurred each time Debtor’s paycheck was garnished within the 90 days pre-petition, regardless of when the garnishment was served. The Court also observed that service of the garnishment created a lien under Colo. Rev. Stat. § 13-54.5-102 (Colorado’s garnishment statute), but did not, in and of itself, create a lien for purposes of § 101(54) (Bankruptcy Code’s definition of “transfer” post-BAPCPA). Rather, service of the garnishment created an inchoate lien in future earnings that did not ripen until the earnings came into existence. In this particular case, a factual dispute remained as to the date wages were earned, rather than paid; thus, the Court denied summary judgment to both parties.

The United States Trustee moved to dismiss Debtors' chapter 7 case pursuant to 11 U.S.C. §§ 707(b)(1) and 707(b)(2) or, in the alternative, § 707(b)(3). Debtors filed a response, arguing that a student loan debt, incurred to pay for a doctorate degree in business administration, was non-consumer debt. Before the hearing, the parties stipulated that the only issue before the Court was whether the student loan debt was a consumer debt, defined by § 101(8) as "debt incurred by an individual primarily for a personal, family or household purpose." If so, the parties agreed the granting of relief under chapter 7 would be an abuse of the provisions of chapter 7, and the Debtors would convert to a chapter 13 case within 14 days of the Court's order, failing which the case would be dismissed.

The Court examined In re Stewart, 175 F.3d 796 (10th Cir. 1999), where the Tenth Circuit affirmed a bankruptcy court's decision holding that student loan debts incurred by a debtor to attend medical school were consumer debts. In that case, the Tenth Circuit acknowledged that student loans are not per se consumer debts, and recognized the general principle that a credit transaction is not a consumer debt when it is incurred with a profit motive. The Court also analyzed several recent cases from other jurisdictions classifying student loan debt as consumer or non-consumer debt.

Ultimately, the Court found that the profit motive factor should be interpreted narrowly for purposes of the means test and eligibility to file for chapter 7 under § 707(b). The Court held that in order to show a student loan was incurred with a profit motive, the debtor must demonstrate a tangible benefit to an existing business, or show some requirement for advancement or greater compensation in a current job or organization. The goal must be more than a hope or an aspiration that the education funded, in whole or in part, by student loans will necessarily lead to a better life through more income or profit.

In this case, Debtors did not show the student loan debt was incurred with a motivation to benefit an existing business or in furtherance of an ongoing job or business requirement. Thus, the Court found the student loan debt was a consumer debt, making the provisions of § 701(b)(1) applicable. Pursuant to the parties' agreement, the Court ordered the Debtors to convert to chapter 13 or face dismissal of their case.

Judge Elizabeth E. Brown (EEB)

The Debtor’s case was converted from chapter 13 to chapter 7 prior to confirmation of a chapter 13 plan.  The Debtor’s attorney filed an application for payment of her fees from undistributed plan payments held by the chapter 13 trustee at the time of conversion.  The Court ruled that the Supreme Court’s decision in Harris v. Viegelahn, 135 S. Ct. 1829 (2015) (“Harris”), required that all undistributed plan payments be returned to the Debtor, without payment of the attorney’s fees.  The attorney argued that because the Debtor’s case was converted prior to confirmation of a plan, and Harris involved a post-confirmation conversion, the Harris case was distinguishable.  The Court acknowledged that when a chapter 13 case is dismissed prior to confirmation of a plan, the third sentence of § 1326(a)(2) requires that administrative expenses be paid prior to the return of plan payments to the debtor.  However, the Court could not ignore the Supreme Court’s ruling in Harris that the second sentence of § 1326(a)(2) and “no provision of chapter 13 holds sway” after a case is converted to chapter 7.  The Court found the language and reasoning of Harris broad enough to encompass the situation where a case is converted prior to confirmation.  It also found that payment of chapter 13 administrative expenses upon conversion could frustrate the statutory priority scheme of § 726(b).  The attorney also argued that Harris involved payments made to secured and unsecured creditors and did not address whether administrative claims could be paid from plan payments upon conversion.  The Court found, however, that the Supreme Court did not appear to use the term “creditor” in its technical sense, as it is defined by § 101(1) of the Code, or give any indication that it intended to distinguish between payments to “creditors” from payments to administrative expense claimants.  Rather, the Supreme Court appeared to use the term more broadly to refer to all those entitled to receive distributions of plan payments and was unequivocal that the trustee’s authority to make plan payments ended at conversion.  
 

This case is similar to several recent chapter 13 cases in this district in which the debtor failed to make her direct payments to the mortgage holder for a substantial period of the plan but sought to receive a discharge on the basis of having made all of the payments required to be paid to the trustee.  Judge Brown follows the holding of other divisions in this court that both trustee payments and direct mortgage payments are payments "under the plan," and that failure to make any of these payments prohibits the debtor from receiving a discharge. 

In determining that the direct mortgage payments were payments “under the plan,” the Court relied heavily on In re Foster, 670 F.2d 478 (5th Cir. 1982), which reviews the historical underpinnings of chapter 13.  It recognized that prior versions of the statute required the consent of every secured creditor as a condition of plan confirmation.  If the debtor could not secure the consent of a particular secured creditor, the debtor would simply leave this creditor out of the plan altogether.  Thus, if the plan made absolutely no provision for a secured creditor, then the debtor could make payments "outside the plan" under the contractual terms of their agreement.  But if the plan cures an arrearage or otherwise specifies any treatment for this claim in the plan, then all payments on the claim are deemed "under the plan" regardless of who disburses the payments to the mortgage holder.   Judge Brown then traces the Code sections that leave the question of who should act as the disbursing agent of mortgage payments to the court's discretion.  Thus, this decision may serve as a foundation for Judge Brown's analysis of upcoming issues in this district as to conduit mortgage payments and whether a debtor may truly make payments on secured debts "outside the plan." 

Judge Brown also ruled that the failure to make direct mortgage payments was a “material default by the debtor with respect to the term of a confirmed plan,” and was cause to dismiss or convert the case under § 1307(c).  Because the Debtor requested conversion of her case if she was not entitled to a chapter 13 discharge, neither the chapter 13 trustee nor the mortgage lender opposed conversion, and there was no suggestion of bad faith, the case was converted to chapter 7.

The Debtor initially filed a chapter 7 case, but immediately converted to chapter 13 when the chapter 7 trustee expressed interest in selling the Debtor's home due to the existence of non-exempt equity. The Debtor did not file a chapter 13 plan within fourteen days after the conversion date and, as a result, the Court entered an order dismissing the case. The chapter 7 trustee and the chapter 13 trustee moved to vacate the order dismissing the case and to re-convert the case to chapter 7. The trustees asserted that the Debtor could take advantage of a larger homestead exemption by allowing his case to be dismissed and then re-filing it under chapter 7 after the effective date of an amendment to the homestead exemption statute. The Court found that its local rules were ambiguous as to whether the failure to file a chapter 13 plan may result in the dismissal of a case pursuant to the United States Trustee's Standing Motion to Dismiss Deficient Cases and that its procedures governing dismissal for failure to timely file a plan failed to satisfy the due process requirements of notice and a hearing for dismissal under § 1307(c). The Court contrasted the Bankruptcy Code's provision for automatic dismissal for the failure to file certain case commencement documents, found in § 521(i), with § 1307(c), which requires "notice and a hearing" prior to dismissal for failure to timely file a chapter 13 plan. The purpose for requiring a notice and opportunity for hearing prior to the dismissal under § 1307(c) is to allow any party who wishes to provide the court with input as to whether dismissal or conversion is in the best interests of creditors to have the opportunity to do so. Here, the only notice regarding the potential dismissal of the case was certain language in the Court's 341 meeting notice. This language failed to satisfy the minimal due process requirements of § 1307(c), therefore the Court vacated the order of dismissal pursuant to Fed. R. Civ. P. 60(b)(4) and reinstated the case.

Chief Judge Michael E. Romero (MER)

In Harris v. Viegelahn, ––– U.S. –––, 135 S. Ct. 1829, 191 L. Ed. 2d 783 (2015), the United States Supreme Court concluded any undisbursed postpetition earnings must be returned to the debtor upon conversion from Chapter 13 to Chapter 7 under 11 U.S.C. § 1307(a), absent finding of bad faith under 11 U.S.C. § 348(f)(2). In Harris, the debtor had confirmed a Chapter 13 plan and then sought conversion to Chapter 7.

The issue before this Court was whether allowed administrative expense claims pursuant to 11 U.S.C. §§ 503(b) and 1326(a)(2) may be paid from undisbursed postpetition earnings upon the pre-confirmation conversion of a case from Chapter 13 to Chapter 7. Ultimately, this Court agreed with, joined and adopted the growing post-Harris majority position. In summary, the Court determined Harris applies equally to cases converted from Chapter 13 to Chapter 7 both after confirmation and prior to confirmation. The Court held absent bad faith conversion, allowed administrative expense claims may not be paid from undistributed postpetition earnings, rather those undisbursed earnings must be returned to the debtor upon conversion.

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