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Postovit v. Bolling, Adv. Pro. No. 17-01501 JGR Findings of Fact and Conclusions of Law entered May 29, 2019 (objection to dischargeability under 11 U.S.C. § 523(a)(2)(A), imputed fraudulent intent, justifiable reliance) 05/29/2019
Several years pre-petition, the plaintiff obtained a default judgment against the defendant and her then-husband in state court.  After the defendant filed for bankruptcy relief, the plaintiff commenced an adversary proceeding against her under 11 U.S.C. § 523(a)(2)(A), seeking a determination that the state court judgment was excepted from discharge.
 
The plaintiff was a small business owner who previously worked in the financial services industry and was either employed as, or receiving training to be, a licensed investment advisor when he entered into two transactions to provide funds for real estate development projects undertaken by the debtor, her then-husband, and companies they controlled.
 
The loans were documented by two promissory notes; one executed by the defendant, and the other executed by the defendant’s former husband.  Both promissory notes provided that the loans would be secured by trust indentures on certain lots of real property, but no trust indentures were ever executed for the subject lots.  The plaintiff received no payment under either promissory note.  
 
The evidence presented to the Court was complicated and at times contradictory.  Nevertheless, the testimony established that the terms of the transactions were exclusively negotiated by and between the plaintiff and the defendant’s former husband; the defendant’s former husband falsely represented to the plaintiff which lots would be pledged as security for the promissory notes; and the defendant was not present when the false representations were made.
 
The issues before the Court were whether the defendant, who was not directly involved in the negotiations, possessed deceptive or fraudulent intent, and whether the plaintiff’s reliance on the false representations was justifiable.
 
The Court analyzed law pertaining to imputed fraudulent intent in the marital context.  With respect to the promissory note executed by the former husband, the Court found that under the facts the former husband’s fraudulent intent could not be imputed to the defendant.  However, given her direct involvement with the other promissory note, the Court found that the former husband’s fraudulent intent could be imputed to the defendant with respect to that transaction.
 
The Court then addressed whether the plaintiff justifiably relied on the false representations in the promissory note and related negotiations.  The Court concluded that because the plaintiff, a small business owner and licensed investment advisor, was not an unsophisticated lender, and because he ignored red flags regarding the nature of the transaction and the promissory note itself, his reliance as to the defendant was not justified.  Accordingly, the Court found that the plaintiff failed to carry his burden under 11 U.S.C. § 523(a)(2)(A) and awarded judgment in favor of the defendant.
Kellogg v. First Land Development, LLC, et al., Adv. No. 19-1029 EEB 05/08/2019

Judgment creditor with a prepetition judgment lien against the debtor’s home allowed the lien to expire following entry of discharge in the debtor’s chapter 7 bankruptcy case. The creditor then sought to obtain a new judgment lien by renewing its judgment and filing it with the county clerk and recorder. The debtor filed an adversary proceeding against the creditor, alleging violation of the discharge injunction. The creditor moved for summary judgment, arguing its actions did not violate the discharge injunction because liens ride through bankruptcy, thereby allowing the creditor to initiate in rem actions against the debtor’s property. The Court held that, although liens do ride through bankruptcy, that principle only protects liens in existence on the petition date. When the creditor allowed its prepetition judgment lien to expire under Colorado law, it became merely an unsecured creditor of a discharged debt and lost its ability to execute against the debtor’s property. Because creation of a new lien necessarily involved establishing the in personam liability of the debtor for a discharged debt, the creditor’s actions violated the discharge injunction.

In re Fidencio Melendez, Bankr. Case No. 18-12485-TBM (Chapter 13). Memorandum Order and Opinion dated February 20, 2019 (Docket Nos. 31 and 32). 02/20/2019

A 55-year-old Chapter 13 debtor with above-median income filed a plan in which he proposed to pay $142 per month for 60 months to the Chapter 13 Trustee.  The plan payments, totaling about $8,521, were just enough to pay for his attorneys’ fees, the Chapter 13 Trustee’s fees, and his priority tax debt.  The debtor also proposed to continue making voluntary retirement contributions in the approximate amount of  $59,700 over the life of the plan, while paying nothing to his unsecured creditors, to whom he owed over $66,000 for credit card debt.  The debtor wished to continue his retirement contributions for the term of his plan, he explained, because he wanted to be “done working” by age 60 and “just relax” for the rest of his years. 

The Chapter 13 Trustee objected on the ground that the debtor’s plan was not proposed in good faith, as required by 11 U.S.C. § 1325(a)(3).  Evaluating the plan under the totality of the circumstances standard, the Court found that the debtor had failed meet his burden under Section 1325(a)(3), concluding that the debtor’s plan to enlarge his already-substantial retirement account while paying his unsecured creditors nothing was an abuse of the purpose and spirit of Chapter 13 as well as a manipulation of the Bankruptcy Code.  The Court, therefore, denied confirmation of the plan.

In re Timothy J. Petersen and Katherine M. Petersen, Bankr. Case No. 18-11242 (Chapter 7). Order and opinion dated January 22, 2019 (Docket Nos. 40 and 44) 01/22/2019

The Chapter 7 Trustee filed a motion to seal in which he sought to be authorized to file under seal several motions, including (1) a motion to employ a law firm as counsel to the Trustee for investigating and collecting assets of the Debtors’ bankruptcy estate; (2) a secret motion to approve, on an interim basis, a funding agreement between the Trustee and certain creditors of the estate, pursuant to which one of the creditors agreed to guarantee payment of the Trustee’s legal costs; and (3) a motion seeking authorization for the Trustee to conduct covert discovery by issuing subpoenas to unidentified third-party banks in New York without notice.  The Trustee requested permission to file the motions under seal because he believed that the strategy of the creditor who had agreed to fund the Trustee’s legal costs would be compromised if the debtors learned of the law firm’s investigation and collection efforts before such efforts were officially executed. 

The Court denied the motion, finding that the proposed secret employment and discovery process was contrary with the concept of public access to judicial documents and not authorized by 11 U.S.C. § 107(b), Fed. R. Bankr. P. 9018, or 11 U.S.C.  § 105(a).  Further, the Court found that the secret discovery process proposed by the Trustee failed to comport with the procedural notice requirements of Fed. R. Bankr. P. 2004 and 9016, which incorporate Fed. R. Bankr. P. 45.  Accordingly, the Court denied the Trustee’s motion to seal.

Weinman v. Crowley (In re Peter H. Blair), Adv. Case No.17-1195 TBM Docket No. 212 (Bankr. D. Colo. Nov. 9, 2018), on appeal BAP Case No.18-98 11/09/2018

The Chapter 7 trustee commenced an adversary proceeding against the Debtor’s (non-debtor) widow to recover fraudulent transfers under the Colorado Uniform Fraudulent Transfer Act (“CUFTA”), Colo. Rev. Stat. §38-8-105(1)(a) and (1)(b), and 11 U.S.C. §544. In addition, the trustee brought an unjust enrichment claim to obtain a declaratory judgment that the bankruptcy estate held an interest in residential real property which was solely owned by the widow. After a three-day trial, the Court held that the trustee had not sustained his burden on any of his eight (8) claims for relief. The Court entered judgment in favor of the defendants and against the trustee.

The Court’s findings of fact and conclusions of law included legal analysis of the following: the elements of both actual and constructive fraud under CUFTA and the “badges of fraud”; CUFTA’s narrow definition of “insider” in contrast to the broader Bankruptcy Code definition of “insider” at 11 U.S.C. § 101(31); “reasonably equivalent value” under CUFTA and whether “love and affection” in exchange for a transfer constitutes reasonably equivalent value; the balance sheet insolvency test under CUFTA and its definition of “assets” which excludes property to the extent encumbered by a lien or property to the extent exempt before the time of the transfer; fair valuation of contingent liabilities; constructive fraud under CUFTA and the transferor’s “ability to pay debts as they become due”; analysis of CUFTA’s “ability to pay debts as they come due” does not exclude exempt assets as a source of repayment; 11 U.S.C. § 551 and preservation of avoided transfers requires that the transfer be avoided in fact, not merely alleged to be avoidable; 11 U.S.C. § 502(d) and disallowance of the claim of a target of avoidance action requires that the target be adjudged liable for a fraudulent transfer; 11 U.S.C. § 544(a) encompasses trustee’s claim for unjust enrichment and constructive trust and are subject to statute of limitations under 11 U.S.C. § 546(a); elements of unjust enrichment under Colorado law; 11 U.S.C. § 108(c) applies only to actions against the debtor and does not toll the time for the trustee to bring his claim for unjust enrichment claim against the widow of Debtor.

In re Gonzalez, Case No. 18-10156 EEB 09/27/2018

Chapter 13 debtor who owned a small business sought confirmation of a three-year plan, asserting that he and his wife were below-median income debtors.  The debtors calculated their current monthly by including the husband’s net business income, as instructed on Official Bankruptcy Form 122C-1.  The chapter 13 trustee objected, arguing that, regardless of the Form, the debtors had to include the husband-debtor’s gross business income when calculating their current monthly income.  The Court reviewed the minority and majority views on this issue and concluded that neither approach could fully resolve what appears to be a mistake in drafting by Congress.  Nevertheless, the Court adopted the majority view, which includes gross business income in the debtors’ current monthly income, and then deducts business expenses later when calculating disposable income.  Applying the majority view meant that the debtors had above-median income and, thus, had to propose a five-year plan.

In re Robert and Shelly Withington, Case No. 17-14318 EEB, Chapter 7, September 18, 2018 09/18/2018

The Debtors in this case moved from Colorado to Illinois shortly before filing bankruptcy.  They initially claimed a homestead exemption for their Illinois home under Colorado law because the domiciliary provision of § 522(b)(3)(A) required them to apply Colorado exemption law since they had not lived in Illinois for two years prior to filing their bankruptcy case. The chapter 7 trustee objected to the Debtors’ use of a Colorado homestead exemption because Colorado’s homestead exemption does not have extraterritorial effect.  It only applies to real property located within the state. The Debtors then amended to claim the federal homestead exemption under § 522(d)(1).  The Court had to determine whether the “safety net” that BAPCPA added at the end of § 522(b) allowed the Debtors to claim the bankruptcy homestead exemption instead. The “safety net” provides that, if the effect of the domiciliary requirement in § 522(b)(3)(A) “is to render the debtor ineligible for any exemption,” the debtor may elect the bankruptcy exemptions.  The trustee argued that, since the Debtors could still utilize Colorado’s personal property exemptions, the safety net did not apply.  The Court discussed four approaches that courts and commentators have used to analyze the interplay of the § 522 domiciliary requirement and the opt-out clause.  Ultimately, the Court adopted a flexible reading of “any exemption” in the safety net, listing several reasons for its interpretation, and allowed the Debtors to exempt their homestead under § 522.

In re 1075 S. Yukon LLC, Case No. 18-14781 07/30/2018

Chapter 11 debtor-in-possession filed for relief hours prior to the expiration of a pre-petition contractual option to purchase real property. Invoking the 60-day extension of time periods granted by 11 U.S.C. § 108(b), the debtor filed a motion seeking authority to exercise the purchase option, an order compelling the option counterparty to sell the real property to the debtor, and approval of post-petition borrowing to accomplish the purchase of the real property. The issue of whether § 108(b) applies to the exercise of purchase options was a matter of first impression within this District and the Court found no clear guidance on this specific question from the United States Court of Appeals for the Tenth Circuit. The Court held the “any other similar act” catch-all provision should not be read so broadly as to include acts having no similarity or commonality with those listed within § 108(b). Whether an action qualifies as “any other similar act” under § 108(b) must be determined in light of the more specifically enumerated actions preceding that phrase. The Court determined the exercise of the purchase option did not constitute filing any pleading, demand, notice, or proof of claim or loss, or curing a default. The Court also found it a strain to say the exercise of a purchase option was “similar,” under the ordinary usage of that term, to these specifically enumerated actions. Therefore, the debtor could not invoke § 108(b) to extend the time to exercise its purchase option. Because the purchase option expired by its own terms and § 108(b) was of no use to the debtor, the Court denied the debtor’s motion.

In re Wolfson, Case No. 17-14388 EEB 06/26/2018

Individual chapter 11 debtor-in-possession who had recently converted her case from chapter 7, filed application to employ an attorney who had also represented her during her chapter 7 case. A creditor objected, arguing that the attorney failed to meet the requirements of 11 U.S.C. § 327(a) because, during his pre-conversion representation of the Debtor, he effectively represented interests “adverse to the estate.” The Court held that the attorney’s pre-conversion representation of the Debtor did not create a conflict or disqualifying bias under § 327(a) because the Debtor’s duties to creditors were distinctly different during the chapter 7 case than in the chapter 11 case. In addition, 11 U.S.C. § 1107(b) instructs that an attorney’s prior representation of a debtor, standing alone, should not disqualify that professional from representing the debtor-in-possession. To hold otherwise would require every debtor who converts from chapter 7 to chapter 11 to obtain brand new counsel upon conversion.

In re James Joseph Anthony Alonzo and Cynthia Anne Alonzo, Case No. 17-20589 JGR Order entered June 12, 2018 (11 U.S.C. § 109(e) and student loan debt) 06/12/2018

The Chapter 13 trustee objected to the debtors’ plan on the basis that their unsecured debts exceeded the debt limitations in 11 U.S.C. § 109(e). The debtors argued that the majority of their unsecured debt was student loan debt, and such debt was not cause for dismissal. Specifically, the debtors asserted that the standard is the best interest of the creditors and bankruptcy estate; the decision to convert or dismiss is uniquely within the discretion of the bankruptcy court; and the Court should exercise such discretion and allow them to continue in Chapter 13 because the creditors and debtors would fare better in a Chapter 13 case with a repayment plan than the alternatives. The debtors also contended that because § 1307 uses the words “may” dismiss and not “shall,” and because exceeding the debt limitations is not one of the eleven enumerated reasons for cause for dismissal, the Court should examine the legislative history and public policy behind the Bankruptcy Code to find in their favor.   

The Court acknowledged the split of authority on the issue and analyzed the opposing views and policy arguments. Ultimately, the Court found that § 109(e) is clear on its face that a debtor is not eligible for Chapter 13 if such debtor exceeds the unsecured debt limitations. The Court also concluded that if the debtor is not eligible, the debtor cannot proceed in a Chapter 13 case, reasoning that although ineligibility is not expressly identified as cause under § 1307, simple logic indicates that ineligibility is cause for dismissal.

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