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In an individual Chapter 11 Subchapter V case, a group of creditors (“Creditors”) filed a motion to convert the case to Chapter 7. Finding cause for conversion under 11 U.S.C. § 1112(b) because Debtor filed the case in bad faith, the Court converted the case to Chapter 7.

Debtor filed his bankruptcy petition while he was incarcerated for civil contempt of the state trial court. The state court had adjudicated Debtor as having breached his fiduciary duties through a fraudulent scheme by which he took Mexican beachfront property from a Colorado LLC (of which he was a member and manager) for himself. During the state court litigation, Debtor lied under oath, hid his assets, and disobeyed orders of the court. His actions prompted the state court to sanction him on multiple occasions, including by granting Creditors a writ of attachment on Debtor’s assets. Debtor filed his bankruptcy petition on the eve of a state court damages hearing that had been continued twice. Debtor’s bankruptcy petition secured his release from jail without purging his contempt and further delayed the damages hearing against him for several months.

Postpetition, after the Court granted relief from stay, the state court held the damages hearing and liquidated over $21 million in damages against Debtor and in favor of Creditors. Due to the comparatively small amounts of his other debts (which were largely legal fees incurred from state court litigation), Debtor’s bankruptcy case was essentially a two-party case between himself and Creditors. Despite his dishonest prepetition conduct, Debtor filed a proposed Subchapter V plan that relied on him reinvesting funds and making $2 million in payments over five years, followed by a $22 million balloon payment at the conclusion of the plan. The Court questioned whether the proposed plan was feasible and proposed by means not forbidden by law.

Significantly, throughout the pendency of his Subchapter V case, Debtor knowingly held investments in cannabis companies. Because of these investments, Debtor argued that the Court must dismiss his case rather than have a Chapter 7 trustee administer illegal cannabis assets. The Court disagreed with Debtor, finding that based on the scant facts in the record—and because United States Trustee took no position on whether the case must be dismissed—Debtor’s seemingly attenuated connections to cannabis did not require dismissal instead of conversion.

 

In this opinion, the Court is grappling with motions to modify in several cases that seek to extend the chapter 13 plan’s term beyond five years.  The motions were filed before § 1329(d)’s sunset on March 27, 2022, but they were not yet approved before its repeal.  The Court analyzes § 1329(b)(2), which provides “[t]he plan as modified becomes the plan unless, after notice and a hearing, such modification is disapproved.”  This provision means that, upon filing the motion to modify, it is immediately effective subject only to later disapproval.  But when Congress required in § 1329(d) that the modification be “approved,” it was signaling that (d) modifications are only effective upon approval.  Thus, the failure to obtain approval of the proposed modifications before the law’s sunset is fatal to the debtors’ cause.   Nevertheless, in one of these cases where the debtors had obtained approval of a seven-year term before the sunset and then later sought to change another term of the plan (the payment amount), the subsequent modification, which had been proposed but not yet approved before March 27, 2022, did not cause the debtors to lose their seven-year term. 

The Court determined that counsel’s use of bifurcated fee agreements was improper because the agreements contained misrepresentations, were misleading, and did not accurately disclose counsel’s obligations under the Bankruptcy Code and the Local Rules. 

Shortly after the debtors had completed all plan payments as scheduled under their plan, the chapter 13 trustee discovered that they had failed to disclose a prepetition personal injury claim and their postpetition receipt of a substantial settlement payment.  Before the entry of discharge, the trustee filed a motion to dismiss for bad faith conduct under § 1307(c).  This raised the question of whether the existence of grounds for dismissal under § 1307 trumps the mandatory requirement of entry of discharge upon completion of the plan set forth in § 1328(a).  The court acknowledged that the debtors’ nondisclosure constituted cause for dismissal and that the trustee had acted diligently upon learning of it, but nevertheless § 1328(a) mandated the entry of the discharge on completion of plan payments.  It held that § 1307 is a more general chapter 13 statute that must give way to more specific chapter 13 statutes, namely § § 1328(a), 1328(e), 1329(a), and 1330(a).  Both §§ 1328(a) and 1329(a) make explicit that the final plan payment cuts off any further plan modifications and mandates the entry of discharge, with only a few express exceptions not applicable here.  And we have two more specific chapter 13 statutes that deal with debtor fraud.  Section 1330 revokes the confirmation order if the fraud is discovered within six months after the confirmation order.  And § 1328(e) revokes the discharge order but only if the fraud is discovered within a window of time that begins with the entry of discharge and ends by the one-year anniversary of the discharge.  The combination of these two revocation statutes leaves a wide loophole.  If the chapter 13 trustee or other interested party learns of a debtor’s fraud during the gap that is more than six months after the confirmation order but before the entry of the discharge order, which may not occur for many months or even years later, then neither form of revocation is possible.  Whether or not this gap was intentional, these two statutes signal that Congress has determined that, after a certain period of time, the principle of finality must outweigh the policy of rooting out abusers of the bankruptcy system.  

Contractor who provided services on Debtor’s oil and gas wells separately itemized in its invoices the chemicals it used and then sought a § 503(b)(9) administrative priority claim for these chemicals as “goods” sold in the twenty-day-prepetition window.  The Court applied the U.C.C.’s definition of “goods” and held the chemicals fell within this definition.  But it declined to apply the U.C.C.’s “predominate purpose” test, which would otherwise have held that the predominate purpose of the contract was a service contract, not a sale of goods.  While the predominate purpose test is utilized in contract disputes to determine whether U.C.C. law applies to a transaction, this Court held that there was nothing in § 503(b)(9) to limit its application to only those transactions that involved predominately a sale of goods.  Thus, although the claimant’s contract was predominately a service contract, it could nevertheless obtain a § 503(b)(9) claim for the cost of the chemicals sold.  

This case involved a determination of whether the debtor’s obligation to sell or refinance the marital home and distribute one half of the equity to his ex-spouse constituted a nondischargeable domestic support obligation or merely a property settlement debt, dischargeable upon completion of the debtor’s chapter 13 plan.  In the Tenth Circuit, the test for this determination is well settled.  But the court traced several Tenth Circuit precedents that demonstrate that a spouse’s obvious need for support at the time of the divorce is enough to presume that the obligation was intended as support even when it is otherwise identified in an agreement between the parties as a property settlement, even when the parties contemplated a delay in its payment, even though the ex-spouse would receive an additional amount labeled as maintenance, and even though the home equity would be paid in a lump sum.   Here the ex-spouse was unable to support herself and their three minor children without governmental assistance at the time of the divorce.  Her desperate need for everything the separation agreement provided to her overrode all other considerations.  Thus, the court found the equity payment was also in the nature of support and it further awarded the ex-spouse her attorney fees and costs incurred in bringing the nondischargeability action.

Individual husband and wife farmers and their related corporate entity filed jointly administered chapter 12 cases.  A creditor holding an unsecured claim against all the debtors filed a proof of claim in only the individual debtors’ case.  Following plan confirmation, the creditor filed a motion asking the Court to deem its timely filed proof of claim in the individual debtors’ case to also be an allowed proof of claim in the corporate debtor’s case by treating it as either a claim amendment or an informal proof of claim.  The Court denied the motion, noting that the creditor’s failure to file any written document seeking repayment in the corporate debtor’s case prevented the creditor from having an informal proof of claim or a claim amendment.  The Court concluded that it lacked discretion to consider the equities and noted the historical reasons for why the current rules favor a strict adherence to the time deadline for filing claims in chapters 7, 12, and 13.  

The Debtor, Saratoga and North Creek Railway, LLC (the “Debtor”), is a “common carrier” that filed for protection under Chapter 11 of the Bankruptcy Code.  In the Debtor’s Chapter 11 plan of liquidation, the Debtor proposed to sell through auction its largest non-cash asset:  a real property easement created by virtue of a federal stipulated judgment.  The State of New York, the New York State Department of Environmental Conservation, and the New York State Olympic Regional Development Authority (together, “New York”) contested confirmation on the basis of 11 U.S.C. §§ 1129(a)(1), (3), and (7).

The Court determined that requiring bidders to assume the common carrier obligation was a valid exercise of the Debtor’s business judgment and did not violate Section 1129(a)(1), as the Debtor had reason to believe that sale to a party willing to assume the common carrier obligation would be more readily approved by the Surface Transportation Board (“STB”).  The Court further found that the plan satisfied the good-faith requirement of Section 1129(a)(3) in that the Debtor was engaged in an honest, sincere, and non-abusive effort to promptly confirm its plan, sell the easement, pay creditors, and exit bankruptcy.  The Court further found that the plan was feasible, dismissing the argument that a prior denial, on procedural grounds, of the stalking-horse bidder’s pre-sale application to the STB, demonstrated that the plan was not feasible. 

The Court dismissed the notion that determining feasibility under Section 1129(a)(3) was impossible because the plan did not provide for sale until after confirmation, noting that such procedure was common in Chapter 11 and is contemplated in Section 1123(a)(5)(D).  While STB approval of the sale was not guaranteed, the Debtor had offered evidence that it had structured the sale with the intention of maximizing the odds that the sale would be approved, and had demonstrated that there is at least a “reasonable prospect” that the stalking horse or another bidder would be able to secure STB approval.  The Court also rejected the argument that the plan was not proposed in good faith, citing the Debtor’s extensive efforts to market and sell the easement, including its establishment of a data room for potential purchasers and its entry into nondisclosure agreements with multiple potential buyers, and its securing of a stalking-horse bidder as evidence of its good faith effort. 

The Court next rejected New York’s contention that the plan did not satisfy the best interests of creditors test of Section 1129(a)(7).  The Court found the plan did not prohibit a bid in excess of the stalking horse’s bid; it merely established the requirement, deemed necessary in the Debtor’s business judgment, that a potential purchaser assume the Debtor’s common carrier obligation.  And the plan did not propose to involve a Chapter 11 trustee in the management of the debtor’s assets, but rather an unpaid plan administrator.  Since the manager would not be compensated, the proposed plan would be less expensive than liquidation by a Chapter 7 Trustee.

Having rejected New York’s objections, the Court confirmed the Debtor’s Chapter 11 plan.

 

The Debtors filed for bankruptcy protection under Chapter 7.  Their case started out uneventfully.  However, after the Debtors received their discharge, the Chapter 7 Trustee moved to employ a broker to sell the Debtors’ residence.  The Trustee contended that there was sufficient equity in the house to pay the mortgage, closing costs and the Debtors’ homestead exemption as well as to pay some dividend to the unsecured creditors in the case.  In response, the Debtors moved to convert their case to Chapter 13 to save their home.

The Chapter 7 Trustee objected that the Debtors were not eligible for Chapter 13 relief and that their case would be dismissed promptly upon conversion because the Debtors requested conversion in bad faith.  The Trustee relied on Marrama v. Citizens Bank of Mass., 549 U.S. 365 (2007).  

After considering the facts and law, the Court held that the Debtors were eligible for Chapter 13 relief based upon their financial circumstances at the time of conversion; and that they had not engaged in bad faith in their effort to convert to Chapter 13.  The Court analyzed the facts using a totality of the circumstances test and the seven factors endorsed by the Tenth Circuit in In re Gier, 986 F.2d 1326, 1329 (10th Cir. 1993).  When analyzing one of the Gier factors, the Debtors’ motivation for converting to Chapter 13, the Court found that the Debtors’ sole motivation was to save their home and such was a permissible motivation contemplated by Congress in enacting the provisions of Chapter 13.  The Court granted the Debtors’ motion to convert to Chapter 13.

In an adversary proceeding in an individual Chapter 7 case, Plaintiffs objected to Debtor’s discharge and sought a determination of non-dischargeable debt, asserting several fraud-based legal theories. Plaintiffs properly served process on Debtor and obtained a clerk’s entry of default when Debtor failed to respond to the complaint. Plaintiffs never sought default judgment. Approximately 11 months after the clerk’s entry of default, Debtor filed a motion to set it aside.

The Court was tasked with reconciling Debtor’s failure to respond to the complaint with Plaintiffs’ failure to pursue a default judgment. The Court considered the motion to set aside under the good cause standard of Fed.R.Civ.P. 55(c) and the three accompanying factors from Pinson v. Equifax Credit Info. Serv., Inc., 316 Fed Appx. 744, 750 (10th Cir. 2009): (1) whether the default was willful, (2) whether setting it aside would prejudice the other party, and (3) whether there is a meritorious defense. Ultimately, even though Debtor’s default was willful, the Court set aside the clerk’s entry of default because Debtor had now raised a potentially meritorious defense; setting aside the clerk’s entry of default would not cause concrete prejudice to Plaintiffs who had failed to pursue default judgment for 11 months; and federal courts have a strong preference for resolving cases on their merits.

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