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In re Lakeview, Case No. 14-16938 EEB, Chapter 7, September 23, 2021. 09/23/2021
The Debtor’s former CEO and president filed a chapter 11 administrative expense claim for his unpaid salary during the chapter 11 case.  He claimed the reasonable value of his services was the amount set forth in his prepetition employment contract. The chapter 7 trustee objected, arguing that the CEO’s services were of no benefit to the chapter 11 estate.  
 
Under 11 U.S.C. § 503(b)(1)(a), an administrative expense claimant must demonstrate that it provided services to a debtor-in-possession that were beneficial to the operation of the debtor’s business.  In re Amarex, 853 F.2d 1526 (10th Cir. 1988). If the claimant meets the Amarex test, he is entitled to a priority claim for the “reasonable value” of his services.  NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1984).  
 
The evidence demonstrated that the CEO’s services provided a benefit to the estate.  There was no dispute that the CEO managed the Debtor’s operations and assisted in the administration of its bankruptcy case and that the Debtor had no other employees who could do that work.  With respect to the value of the CEO’s services, the Court observed that many courts have ruled that there is a rebuttable presumption that the price under a pre-bankruptcy contract equals the reasonable value of services.  Regardless of whether a pre-bankruptcy contract is presumptive, however, it provides some evidence of the value of services.  Here the CEO supplemented that evidence with his detailed testimony about the work he performed during the 11 case and the expert testimony of an executive compensation consultant that his salary was reasonable compared to salaries of executives with similar duties and responsibilities in the CEO’s industry.  
 
The Trustee presented no direct evidence of the reasonableness of the CEO’s salary.  She relied only on prior rulings in the case that expressed the court’s concern over the CEO’s management style and the lack of progress in the case.  She failed to produce her own expert or put into evidence any other facts from which the Court could reach a different opinion as to how to value the CEO’s services.  
The Court concluded that, while it had wide discretion to reject the contract rate, the historical rate paid to the CEO prepetition, or the expert testimony offered, it could not make an arbitrary determination of value.  It must tie its determination of different value to something else in the record.  Finding nothing else in this record to support a differing value, the Court determined that any other valuation it might choose would be purely arbitrary.  As such, the Court allowed the administrative claim in the full amount of the unpaid salary under the CEO’s contract.
In re John Matthew Ikalowych, Bankruptcy Case No. 20-17547 TBM (Bankr. D. Colo. Apr. 15, 2021) (eligibility to be a Chapter 11, Subchapter V debtor pursuant to 11 U.S.C. § 1182). 04/15/2021

The Debtor, John Matthew Ikalowych (“the Debtor”), personally guaranteed most of the debts of Lyceum Hailco, LLC (“Hailco”), 30 percent of which was owned by the Debtor’s wholly-owned limited liability company, JMI Management, Inc. (“JMI”). When Hailco failed, the Debtor filed for bankruptcy relief under Subchapter V of Chapter 11. 

The United States Trustee, joined by Hailco’s lender, objected to the Debtor’s designation under Subchapter V, arguing that the Debtor was not eligible to be a small business debtor because the Debtor was not “engaged in commercial or business activities” when he filed for bankruptcy. The Debtor contested the UST’s objection, arguing that he was eligible to be a Subchapter V debtor by virtue of his full ownership of JMI, which remains in existence and operation, and his indirect ownership of Hailco, as well as his “wind down” work for Hailco.

After undertaking an analysis of the text of 11 U.S.C. § 1182(1)(A), the Court determined that the Debtor was a “person” within the meaning of 11 U.S.C. § 101(41); that the Debtor’s debts did not exceed the $7,500,000 debt cap of Section 1182(1)(A); that the Debtor was “engaged in commercial or business activities”; and that the Debtor’s debts “arose from” from such “commercial or business activities” within the meaning of Section 1182(1)(A).  Specifically, the Court examined the meaning of the term “commercial and business activities” and found that the phrase  is exceedingly broad.  The Court also examined the meaning of the term “engaged in” and found that such language required the Debtor to be “engaged in commercial or business activities as of the date the Debtor filed his bankruptcy petition (the “Petition Date”), deeming relevant the circumstances immediately preceding and subsequent to the Petition Date.  Applying those definitions, the Court found that the Debtor’s continued operation and management of JMI both before and after the filing date, his work to wind down Hailco both before and after the Petition Date, and his work as a wage-earner at an insurance brokerage company in which he held no ownership interest all constituted “commercial or business activities” which the Debtor was “engaged in” as of the Petition Date.  Undertaking further statutory analysis, the Court found that the Debtor’s debts, which were based primarily on his guarantees of Hailco’s debts, arose from such “commercial or business activities.”  Therefore, the Court determined, the Debtor was eligible to be a debtor in Subchapter V.

In re Sullivan, Case No. 20-11876 EEB 03/30/2021

Individual debtor who had elected to proceed under subchapter V of chapter 11 sought confirmation of his proposed plan over the objections of his ex-wife and the U.S. Trustee. The Court held that the Debtor did not qualify for subchapter V because he did not demonstrate that at least half of his debts were business debts, as required by the definition for a “small business debtor” in 11 U.S.C. § 101(51D). The Court rejected the Debtor’s argument that a property settlement debt he owed to his ex-wife constituted a business debt because it compensated the ex-wife for the value of his business. The Court further held that the plan could not be confirmed and that the ex-wife’s request for conversion should be granted because the Debtor was not current on all his postpetition domestic support obligations. Although the Court recognized that the Debtor’s financial situation had changed significantly due the COVID-19 pandemic and that the Debtor had sought a modification of his support obligations in state court, those facts did not alter the Code’s clear mandate that a Debtor be current on all postpetition support obligations to avail himself of the protections of chapter 11.

In re Grant Gosch and Tina Gosch, Bankruptcy Case No. 20-13871 TBM, Docket No. 79 (Bankr. D. Colo. March 26, 2021). 03/26/2021

Days before the Chapter 13 Debtors filed their case, they received funds compensating Mrs. Gosch for injuries related to an automobile accident (the “Funds”).   The Debtors deposited the Funds in a segregated bank account, filed their Chapter 13 case and claimed the Funds as exempt.  The Debtors did not include the Funds in their calculation of Current Monthly Income (“CMI”) and did not propose to contribute any of the Funds to pay creditors under their plan. The Debtors proposed to pay their unsecured creditors roughly 24% on their claims.

The Chapter 13 Trustee relied on Hamilton v. Lanning, 560 U.S. 505 (2010) and objected to confirmation of the Debtors’ plan contending that the Debtors had failed to commit all their “projected disposable income” to payment of creditors under their plan as required by 11 U.S.C. § 1325(b)(1)(B).   The Trustee also objected to confirmation pursuant to 11 U.S.C. § 1325(a)(3) on the grounds that the Debtors had failed to propose their plan in good faith.

Following an evidentiary hearing, the Court overruled the Trustee’s confirmation objections.  The Debtors had received the Funds after the end of the six-month lookback period for calculating CMI (11 U.S.C. 101(10A)) which ends on the “last day of the calendar month immediately preceding the date of the commencement of the case,” but before the case was filed in the early days of the next month.  Thus, the Debtors properly excluded the Funds from their CMI calculation.  In addition, they had claimed the Funds as fully exempt so the Funds did not affect the Debtors’ “best interest of creditors” test in Section 1325(a)(4).  The Trustee also argued under Section 1325(b)(1)(B) that because the Funds would be available to the Debtors to draw on in the future, Lanning would dictate that they should be included as “projected disposable income.”  The Court rejected the Trustee’s argument that the Funds were “future” income for purposes of calculating projected disposable income because the Funds had already been received pre-petition, albeit not during the Section 101(10A) period for calculating CMI.

The Trustee’s only evidence that the Debtors had not proposed their plan in good faith was that they had not included the funds in their calculation of CMI and did not commit any of the Funds to payment of creditors under their plan.  Relying on the instruction of the Tenth Circuit in Anderson v. Cranmer (In re Cranmer), 697 F.3d 1314, 1319 (10th Cir. 2012), the Court rejected the notion that the Debtors, who calculated their plan payments exactly as Congress had contemplated, could be held to have acted in bad faith.

In re Peak Serum, Inc., Case No. 19-19802 JGR Order entered December 8, 2020 (retroactive application of SBRA and CARES Act, and dismissal v. appointment of Chapter 11 trustee in jointly administered cases) 12/08/2020

Before the Court were jointly administered Chapter 11 cases, consisting of a corporate debtor and the principal of the same. First, in an issue of first impression, the Court considered whether the debtors, whose cases were filed prior to the enactment of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and the effective date of the Small Business Reorganization Act of 2019 (“SBRA”), could retroactively elect to proceed under Subchapter V when their respective debts on the petition date exceeded $2,725,625 but were less than $7.5 million.

The Court noted that there is no statutory prohibition to applying SBRA to cases that were pending prior to its effective date. Thus, citing In re Body Transit, Inc., 613 B.R. 400 (Bankr. E.D. Pa. 2020), the Court found that an eligible pre-SBRA debtor may generally amend its petition to elect to proceed under Subchapter V, subject to providing notice and an opportunity to object to all parties-in-interest under Fed. R. Bankr. P. 1009(a) and 1020(b) and, in the event of an objection to such election, a finding that the level of prejudice to the objecting party does not override the debtor’s right to amend its petition under Rule 1009(a). However, under the principles of statutory construction, the Court concluded that the increased debt limit provided for by the CARES Act to qualify as a debtor under SBRA unambiguously applied only to debtors whose cases were filed on or after the date the CARES Act was enacted. Accordingly, the Court held that because the debtors’ cases were filed prior to the enactment of the CARES Act, and their respective debts exceeded $2,725,625 on the petition date, the debtors were not eligible to proceed under Subchapter V.

Second, the Court weighed the debtors’ alternative request to dismiss both cases to refile under Subchapter V, against their largest creditor’s request to appoint a Chapter 11 trustee in both cases. Notably, the debtors and the creditor were embroiled in pre-petition district court litigation which culminated in a five-day bench trial and a fifty-six-page opinion and judgment in favor of the creditor and against the debtors for federal trademark infringement, Colorado common law trademark and trade name infringement, misappropriation of trade secrets, and breach of fiduciary duty. At the time of this Court’s ruling, the district court judgment was on appeal.

In the corporate case, the Court noted that the creditor advanced a multitude of arguments as to why the Court should order the appointment of a Chapter 11 trustee. In the interest of brevity, the Court focused its analysis on the five arguments which the Court found were most compelling and unrefuted by the debtors. First, the Court found that, pre-petition, the principal of the corporate debtor had admittedly undertaken a series of dishonest actions in the formation of the corporate debtor. Second, the Court found that, by virtue of the principal’s former role as employee and director of the creditor, the principal had admittedly breached his fiduciary duties to the creditor in the formation of the corporate debtor. Third, the Court found that the corporate debtor had mislabeled several lots of product pre-petition and sold the mislabeled, adulterated product to customers at the cost of unadulterated product. The Court further concluded that, post-petition, the corporate debtor failed to take any action to determine whether the mislabeled product was still in use by customers and, if so, to recall the mislabeled product. Fourth, the Court found that the corporate debtor’s monthly operating reports were perpetually inaccurate and untimely amended. Finally, the Court found that the corporate debtor’s monthly operating reports reflected continuing losses, and that certain projected future revenues which could render the corporate debtor profitable, were highly speculative.

For the above reasons, and due to the resulting mistrust, acrimony, and deadlock between the parties, the Court held that there was cause to appoint a Chapter 11 trustee under 11 U.S.C. § 1104(a)(1), and that such appointment was in the best interests of the estate and its creditors under 11 U.S.C. § 1104(a)(2).  

In the principal’s case, the Court noted that the same mistrust and acrimony that was present between the parties in the corporate case, was also present between the parties in the principal’s case. However, the Court found that the creditor presented little additional, unrefuted evidence to compel the appointment of a Chapter 11 trustee in the principal’s case. The Court noted that the principal exemplified the purest example of an individual Chapter 11 debtor in that he was not a sole proprietor, did not manage any significant amount of real property, and generated no income outside of his relationship with the corporate debtor. Thus, the Court concluded that, because there would be little for a Chapter 11 trustee to manage in the principal’s case, the costs associated with the appointment of such trustee would outweigh any benefit derived by the estate. In fact, the Court believed that many of the creditor’s concerns regarding the principal’s case were adequately addressed by the appointment of a Chapter 11 trustee in the corporate debtor’s case.

For the above reasons, the Court held that the creditor failed to establish cause for the appointment of a Chapter 11 trustee in principal’s case, or that such appointment was in the best interests of the estate and its creditors.  Instead, the Court found that the debtors had established cause to dismiss the principal’s case.

The Court noted that cause may exist to grant a debtor’s motion to voluntarily dismiss his Chapter 11 case when there has been a material change in circumstances post-petition. Here, the Court found that changes in the law ushered in by both SBRA and the CARES Act constituted such a material change in circumstances. Citing low success rates and obstacles frequently faced by individual Chapter 11 debtors, Court noted that Chapter 11 has historically been a poor fit for many individual debtors. The Court noted why Subchapter V may be a better fit for individual debtors but explained that Subchapter V also affords no shortage of protections for creditors.

The Court ultimately concluded that creditors would not be prejudiced by the dismissal of the principal’s case to refile under Subchapter V. Rather, in light of the streamlined provisions of Subchapter V, intended to achieve a timely and cost-effective reorganization, the Court held that dismissal of the principal’s case under 11 U.S.C. § 1112(b) was in the best interests of the estate and its creditors.

JK Transport v. McGill, 19-1162 EEB 12/07/2020

Creditor who supplied hauling services to debtor’s excavation company on a public works construction project brought action under 11 U.S.C. § 523(a)(4), alleging that debtor’s misapplication of construction trust funds under the Colorado Public Works Act amounted to defalcation.  The Court held that specific language in the construction contract signed by the debtor that set forth his company’s duties regarding subcontractor trust funds as well as the debtor’s submission of inaccurate forms regarding payment of subcontractors was sufficient to establish the required mens rea for defalcation.  The Court further held that the plaintiff’s receipt of a partial payment of its claim from a surety did not cause it to lose standing or its real-party-in-interest status.  The Court also awarded the plaintiff damages on its civil theft claim and determined that the plaintiff was entitled treble, but not quadruple damages, under that state statute.

In re Roper, Case No. 15-16638 EEB, Chapter 13, November 10, 2020 11/10/2020

Interpreting Rule 3002.1 and §§ 1322(b)(5) and 1328(a), the Court holds that non-payment of additional interest, escrow changes, or other charges assessed by mortgage lender post-confirmation will not prevent entry of chapter 13 discharge unless the plan expressly incorporated these additional obligations by subsequent amendment.

Trans-West, Inc. v. Mullins, Adv. Pro. No. 16-01282-JGR (In re Mullins, Case No. 16-13773-JGR). Order entered September 30, 2020 (exception to discharge under 11 U.S.C. §523(a)(2)(A), (a)(4) and (a)(6)) 09/30/2020

Plaintiff, Trans-West, Inc. (“Trans-West”) sells and repairs motor vehicles, including commercial trucks and recreational vehicles (“RVs”).  In September 2011, Trans-West hired Defendant Jeffrey Mullins (“Mullins”) to serve as the general manager of its RV division.  Mullins claimed to have extensive experience in RV sales through previously operating his own RV dealership in Texas.

Almost immediately after being hired, Mullins embarked on a kickback scheme with former contacts to purchase wholesale RV’s for Trans-West at inflated prices, and alternatively, sell Trans-West RV’s to other wholesalers at artificially low prices.

In exchange, the co-conspiring dealers made kickback payments directly to Mullins and, in some cases, to his wife, representing a portion of the profits realized through the scheme.

Over a four-year period, Mullins and his wife received approximately $1 million in kickback payments.

Trans-West filed its Adversary Proceeding in July 2016. The case was held in abeyance after criminal charges for theft and state law tax evasion were brought against Mullins for his failure to pay taxes on the kick-back payments.  Nearly two years later, Mullins entered a guilty plea on the tax evasion charges in exchange for the dismissal of the theft charges. 

The Adversary Proceeding advanced, and after a four-day trial, the Court determined damages in the amount of $1 million were excepted from discharge as debts incurred through actual fraud and false pretenses.  The damages were also excepted from discharge for willful and malicious injury, and constituted civil theft pursuant C.R.S. § 18-4-405, trebling the damages to $3 million and entitling Trans-West to an award of attorney’s fees and expenses.

Judgment was entered on behalf of Mullins and Mrs. Mullins dismissing the claim raised under 11 U.S.C. § 523(a)(4), as the fiduciary duty owed by Mullins as an employee, did not involve an express trust. 

John Alvin Kuykendall, Chapter 7 Case #20-14818 Order Regarding Certificate of Credit Counseling 09/30/2020

The Chapter 7 Trustee contacted the Clerk to advise the required credit counseling was obtained after Debtor’s voluntary petition under Chapter 7 was filed and inquired whether the case would be dismissed.  After accounting for the time zone in which the certificate was issued, the counseling requirement had been met less than one hour after Debtor’s voluntary bankruptcy petition was filed.

The Court issued an Order sua sponte, deciding 11 U.S.C. § 109(h)(1) as amended in 2010 is unambiguous.  Under the plain language of the statute, credit counseling may be obtained on the date of the bankruptcy filing at any time; a debtor is not required to receive the counseling prior to filing the petition.  

Note there is a split among bankruptcy courts on this issue.  In addition, Official Form 101, Voluntary Petition (Part V) and Bankruptcy Rule 1007 are consistent with the former version of Section 109(h)(1), prior to its amendment in 2010.

In re Baker, Case No. 17-14041 EEB, Chapter 13, September 29, 2020. 09/29/2020

This case deals with two competing motions to modify a chapter 13 plan.  The debtor sold his home post-confirmation and sought to modify to remove the mortgage payments.  The trustee moved to modify to restrict the debtor’s use of the homestead proceeds to only the  purchase of a new home before the exemption lapsed.  Any non-exempt funds, and those which lose their exemption, the trustee claimed, would have to be committed to repayment of creditors. 

To resolve the competing motions, the court had to choose a side in the present split in authority as to how to apply the best-interest-of-creditors test (the “BIC test”) to a post-confirmation modification.  In this case, the home had significantly increased in value post-confirmation.  Some courts require a reevaluation of the debtor’s asset values as of the time of the modification, which would require the debtor to pay more to his creditors if the property has increased in value.  Other courts have held that, while the test should be applied to the proposed modification, the valuation date continues to be the confirmed plan’s effective date, which is usually close in time to the confirmation date.  The purpose of the test’s reapplication at the time of modification is to ensure that creditors will still receive as much as they would have if the debtor had originally filed a chapter 7 case.  In this decision, the court sides with the latter camp and held that the post-confirmation increase in the home’s value was irrelevant under the BIC test because the proper measuring date for the home’s value was still the plan’s effective date.

Second, the court had to choose sides on a split in authority as to whether a post-confirmation increase in value belongs to the chapter 13 estate under § 1306(a) or whether it belongs to the debtor, whose property revested in him at confirmation in accordance with § 1327(b).  Once again, the court sided with the debtor and followed those courts who hold that “vesting” at confirmation terminates the chapter 13 estate and the creditor’s rights in the property, except to the extent specified in the plan.  Accordingly, the increased home value belonged to the debtor. 

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