You are here

Opinions

The District of Colorado offers a database of opinions listed by year and judge. For a more detailed search, enter the keyword or case number in the search box above.

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. 

Ortega v. Cannady, Adv. Pro No. 19-1335 EEB (In re Cannady, Case No. 19-15400 EEB, Chapter 13), September 16, 2020 09/16/2020

Many years prior to filing her bankruptcy case, the Debtor and her husband owned a residence.  After they divorced, the second mortgage holder foreclosed and obtained a public trustee’s deed to the property.  The mortgage lender later sold the property to the Plaintiff.  The Debtor remained in possession of the home and refused to vacate it.  She filed a chapter 13 bankruptcy to stop Plaintiff’s state court eviction proceedings.  Plaintiff then brought an adversary proceeding to obtain a declaration of his rights in the property. 

On Plaintiff’s motion for summary judgment, the Court determined that the second mortgage holder’s foreclosure extinguished the Debtor’s and her ex-husband’s legal interest in the property.  Under Colorado law, a purchaser of property is deemed to have inquiry notice of the claims of persons in possession of the property.  However, the Court ruled that the Debtor’s claims of an equitable interest in the property had no merit.  The Court determined: (1) the Debtor failed to present any evidence of fraud or collusion in the foreclosure sale; (2) her claims of misconduct by the first mortgage holder or errors in the divorce case were irrelevant to Plaintiff’s title; (3) an immaterial defect in the assignment of the deed of trust to the second mortgage holder did not invalidate the foreclosure sale, (4) the Debtor presented no evidence that the second mortgage holder was her ex-husband’s IRA, and even if it was, her ex-husband’s violation of the tax code did not “void” the IRA or the foreclosure sale; (5) the Debtor failed to identify any transfers related to the foreclosure or Plaintiff’s purchase of the property that were avoidable; and (6) the Debtor lacked standing to assert any claims she did not list in a prior chapter 7 case that she filed after the foreclosure sale.  The Court also ruled that, because of her repeat chapter 13 filings in 2019, the automatic stay of actions against the Debtor and the Debtor’s property terminated thirty days after she filed her current case.  As such, the automatic stay did not prevent Plaintiff from bringing an eviction proceeding against the Debtor in state court.

In re Steven W. Bloom, Case No. 17-11650 TBM, Docket No. 302 (Bankr. D. Colo. Sept. 10, 2020); Glencove Holdings, LLC v. Steven W. Bloom (In re Bloom), Adv. Pro. No. 17-1255 TBM, Docket No. (Bankr. D. Colo. Sept. 10, 2020). 09/10/2020

Creditor Glencove Holdings, LLC (“Glencove”) filed a Proof of Claim against Debtor Steven W. Bloom (the “Debtor”).  The Debtor objected.  Contemporaneously, Glencove initiated an Adversary Proceeding against the Debtor for nondischargeability of debt under 11 U.S.C. §§ 523(a)(2)(A) and (a)(6).  The Debtor contested nondischargeability.  The claim objection and nondischargeability issues were joined for trial.

The dispute between the Debtor and Glencove stemmed from the purchase of a private jet.  The Debtor is an experienced aircraft broker.  Glencove met the Debtor and retained one of the Debtor’s wholly-owned companies to act as its agent in buying an airplane.  Glencove agreed to pay $120,000 as an “agent’s fee.”  The Debtor found a jet for Glencove and helped Glencove make an initial multi-million dollar offer.  The seller came back with a favorable counteroffer.  At that point, the Debtor saw an opportunity to buy the airplane himself (through another wholly-owned company) at a lower price and then simultaneously resell it to Glencove at a higher price, all without disclosing the facts to Glencove.  By engaging in a hidden back-to-back transaction, the Debtor orchestrated a complex scheme to take advantage of Glencove and effectively rob Glencove of the price differential.

In its Proof of Claim, Glencove asserted that the Debtor was liable for fraud by false representation and fraudulent concealment under Colorado state law.  The Court engaged in extensive fact-finding and analysis of all of the elements of the underlying state law claims.  The Debtor asserted a myriad of defenses.  The Court ultimately concluded Glencove met its burden of establishing both fraud by false representation and fraudulent concealment.  Thus, the Court allowed Glencove’s Proof of Claim in the amount of $458,470, plus post-judgment interest.  In doing so, the Court decided that the Debtor was Glencove’s agent.  The Court also rejected all of the Debtor’s many affirmative defenses including under the economic loss doctrine.  The Court decided that the Colorado economic loss doctrine does not apply to intentional torts such as fraud by false representation and fraudulent concealment.    

Having determined that the Debtor was indebted to Glencove, the Court considered nondischargeability.  The Court concluded that no word other than “fraud” was more apt for what the Debtor did.  Thus, the Court found that the debt was nondischargeable under 11 U.S.C. § 523(a)(2)(A) for false pretenses, false representation and actual fraud.  The Court also decided that the Debtor’s fraudulent conduct amounted to willful and malicious injury under 11 U.S.C. § 523(a)(6) too. 

 

 

In re Denise Patricia Madrid-Baskin, Bankruptcy Case No. 20-10069 TBM, Docket No. 38 (Bankr. D. Colo. Aug. 25, 2020) 08/25/2020

The Chapter 13 Debtor proposed a Chapter 13 Plan which would cram down a car lender even though the claim was subject to the hanging paragraph of 11 U.S.C. § 1325(a) (the “hanging paragraph”). The Debtor had purchased a vehicle for her personal use within 910 days before she filed her Chapter 13 case, financed both the purchase price and some miscellaneous other expenses and granted the car lender a security interest in the car. The Debtor contended that because the car lender had also financed the Debtor’s purchase of GAP insurance (insurance to cover the “gap” between the balance owed on the car loan and the value of the vehicle if it is totaled in an accident or stolen), the purchase money security interest that the lender held for the balance of the purchase price was destroyed, or “transformed,” into a non-purchase money security interest. Thus, the Debtor asserted that she was not prohibited by the hanging paragraph from cramming the car loan down to the value of the car at confirmation, an amount below the loan balance.

The Chapter 13 Trustee objected to confirmation of the Debtor’s plan stating that the proposed cram-down of the car lender to the value of the car at confirmation violated the hanging paragraph. The Trustee advocated for the application of the “dual-status” rule: for purposes of the hanging paragraph, any part of a 910 day car loan which is non-purchase money may be treated as an unsecured debt and the remainder of the debt which is directly attributed to the car purchase may not be crammed down. The parties had stipulated to the essential elements of the hanging paragraph and disputed only whether the loan lost its purchase money character because the lien secured, in part, a non-purchase money obligation. The Court held, based upon the stipulated facts and both Tenth Circuit precedent and intra-Tenth Circuit authority, that the “dual-status” rule should be applied, preventing the Debtor from cramming down the amount of the debt for the purchase of the car, and denied confirmation of the Debtor’s plan. The Court also addressed the methodology for calculating the amount of the debt which is subject to the purchase money security interest and could not be crammed down in the Plan.

Harvey Sender v. Wendy Lea Dutton, Adv. Pro. No. 18-1297 EEB (In re Thomas Michael Clark, Case No. 16-19949 EEB, Chapter 7), July 21, 2020 07/20/2020
More than two years before he filed bankruptcy, the Debtor entered into a separation agreement that required him to transfer his interest in the marital residence to his former wife five years after the date of the agreement.  The Debtor’s former wife agreed to assume sole responsibility for the mortgage on the home.  At the time of the separation agreement, the home was worth less than the mortgage balance.  Less than two years prior to his bankruptcy, the Debtor quit-claimed his interest in the home to his ex-wife.  His chapter 7 trustee sued the former wife to avoid the quit-claim deed as a constructive fraudulent transfer under 11 U.S.C. § 548(a)(1)(B).  
 
The Court granted the former wife’s motion for summary judgment because the trustee could not prove the Debtor received less than reasonably equivalent value in exchange for transferring his interest in the home.  Under § 548(d)(2), the Code defines “value” as the satisfaction of an antecedent debt.  As such, the Debtor received reasonably equivalent value for the quit-claim deed because it fully satisfied his obligation under the separation agreement.  Applying the Tenth Circuit’s decision in Weinman v. Walker (In re Adam Aircraft, Industries, Inc.), 805 F.3d 888 (10th Cir. 2015), the Court also considered whether the Debtor received reasonably equivalent value at the time he agreed to transfer his interest in the home.  Because the property had no equity in it on the date of the separation agreement, the ex-wife’s agreement to assume the mortgage had greater value than the value of the interest the Debtor agreed to transfer, and the trustee could not show that the Debtor received less than reasonably equivalent value when he incurred the obligation to transfer the home.
 

Pages