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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.

Jared C. Walters v Kevin B. Lynch, et al., Adv. Pro. No. 15-1120 (In re 3PL4PL, LLC, Case No. 14-22402 MER, Chapter 7) 06/22/2020
3PL4PL, LLC was formed by its parent company, LogisticsFinance, LLC as a special purpose entity to conduct lending programs with other entities.  3PL4PL funded its lending program by borrowing from multiple Lenders.  After lending the borrowed capital to its customers, 3PL4PL created separate accounts at Union Bank into which each of its borrowers deposited their loan payments.  3PL4PL’s relationships with its Lenders turned sour when 3PL4PL diverted $1,873,000 from its borrowers’ Union Bank accounts through 17 transfers to LogisticsFinance and its principal, Kevin Lynch.  A portion of the transferred funds were ultimately paid into the trust account of two law firms as retainers for the resulting pre-petition litigation, and to a third law firm’s trust account for preparing 3PL4PL’s bankruptcy filing.  After 3PL4PL commenced this bankruptcy proceeding, its primary Lenders, joined by the Chapter 7 Trustee, brought adversary proceedings to claw-back the payments to the law firms.
 
The Court’s analysis followed the Lenders’ collateral through each component step of 3PL4PL’s transactions.  Ultimately, the Court found the fact pattern squarely within Example 2 to Colorado’s version of the Uniform Commercial Code, § 9-332(b).  The Lenders had a security interest in the Union Bank deposit accounts, as to which the Law Firms never had an interest.  Conversely, the Law Firms had a possessory security interest in the funds in its trust account, as to which the Lenders never had a security interest.  The retention agreements gave the Law Firms power to take money from the trust accounts, without consideration of 3PL4PL’s general intangibles.  Thus, the Court applied UCC. § 9 332(b) to conclude the Law Firms were transferees of funds from a deposit account and therefore received those funds free of the Lenders’ lien, provided the law firms did not collude with 3PL4PL in defeating the Lenders’ rights.
 
Although the factual record was incomplete on the issue of collusion, the Court held proof of collusion under 9-332(b) requires evidence the transferee was a bad actor by affirmatively engaging in the wrongful conduct, akin to aiding and abetting an intentional tort.  Mere knowledge of the Lenders’ rights would be insufficient.
 
In re Malul, 11-21140 MER 03/24/2020

Sandra Malul filed a Chapter 7 Bankruptcy Case in 2011.  She received a discharge and her case was closed.  At the time, Malul did not disclose a previous $50,000 investment in Heartland Caregivers, LLC, an entity formed by John Fritzel to grow and sell medicinal marijuana.  Malul never received a return on her investment in Heartland Caregivers and thought it had been lost.  Years later, after reviewing a Denver Post article featuring Fritzel’s success in the marijuana industry, Malul brought litigation claims in Denver District Court arising from her interest in Heartland Caregivers.

Malul then moved to reopen her bankruptcy case to disclose the initial Heartland Caregivers investment.  The Court conditionally granted the Motion to Reopen, and a Chapter 7 Trustee was re-appointed. Shortly thereafter, Malul filed a motion to compel the trustee to abandon her interest in Heartland Caregivers, because any efforts by the Trustee to administer the asset would violate the Federal Controlled Substances Act (21 U.S.C. § 101, et seq.).  Meanwhile, the Trustee reached an agreement with Fritzel to settle Malul’s lawsuit for $100,000.  Later, the United States Trustee filed a motion to vacate the Order re-opening the bankruptcy case, arguing any administration of Malul’s interest in Heartland Caregivers would necessarily violate the Controlled Substances Act.

The Court concluded Malul’s ownership in Heartland Caregivers is an ongoing violation of the Controlled Substances Act.  Although Heartland Caregivers never produced or sold marijuana in violation of CSA § 841(a)(1), Malul’s stake in Heartland Caregivers was intended as an illegal investment in the proceeds of a criminal enterprise in violation of CSA ڊ 854.  Because Malul’s ownership of Heartland Caregivers is an ongoing criminal act, Malul is also engaged in an ongoing CSA violation by asserting rights arising from her Heartland Caregivers investment in the Denver District Court lawsuit.  Accordingly, the Court held any administration of Malul’s interest in Heartland Caregivers by the Trustee, whether by abandoning the interest or settling the ensuing litigation claims, would involve the Court and the Trustee with an ongoing violation of federal law.  The Court granted the US Trustee’s motion and vacated its Order re-opening this Bankruptcy Case.

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 VonKreuter, Ch. 13 Case No. 15-13258-MER (Bankr. D. Colo. Feb. 12, 2016) (absent bad faith conversion, any undisbursed postpetition earnings must be returned to the debtor upon conversion to Chapter 7) 02/12/2016

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.

In re U.S. Bentonite, Inc., Ch. 11 Case No. 13 20211-MER (Bankr. D. Wyo. Sept. 3, 2015) (Violation of supplemental disclosure requirement of FED. R. BANKR. P. 2014(a)) 09/03/2015

The issues before the Court were whether an attorney representing the debtor who accepts a position with a creditors' firm during the pendency of the bankruptcy case creates a connection that must be disclosed; whether total or partial denial of compensation is warranted for the non-disclosure; and whether the settlement agreement reached in this case during the time of the alleged conflict was fair and equitable and in the best interests of the estate. To resolve these issues, the bankruptcy court first examined the employment standards of 11 U.S.C. § 327(a). In furtherance of the disinterestedness prong of § 327(a) and the fiduciary duties counsel for the debtor owes the estate, FED. R. BANKR. P. 2014(a) requires counsel for debtors to disclose any connections that have the potential of creating a conflict of interest. These disclosure requirements under Rule 2014(a) continue after the initial application to employ is approved. The bankruptcy court agreed with the broad construction of Rule 2014(a), and the conclusion that Rule 2014(a) creates a continuing obligation for counsel to advise the court when such a connection arises during the representation of a debtor-in-possession. The required supplemental disclosure allows the court, not counsel, to determine whether a conflict exists and counsel remains disinterested under § 327(a). Failing to make a supplemental disclosure robs the court the power to make such a determination.

In this case, the court determined the attorney's acceptance of a position with creditors' counsel in the midst of settlement negotiations involving the same creditors should have been disclosed and counsel failed to do so. The Court held counsel for a debtor-in-possession has an ongoing fiduciary duty to supplement initial employment disclosures with any connections that arise that create potential conflicts. After determining there was a violation of Rule 2014(a), the court turned to the available remedies for such a non-disclosure. In the Tenth Circuit, the failure to supplement initial disclosures when a connection with the potential to create a conflict arises warrants total denial and/or disgorgement of compensation. However, the bankruptcy court has the discretion to determine whether total or partial denial of fees is appropriate based on the facts of a case. Here, the court determined only partial denial of fees from the date the connection (when the associate accepted a position with the creditor's firm) arose was proper. Finally, with respect to the settlement agreement, the bankruptcy court found the agreement was not tainted. Based largely on the evidence from the other creditors, the court determined the settlement agreement resulted in a fair and equitable allocation of the remaining assets, and debtors had no real stake in the outcome. Thus, the court concluded the settlement agreement was in the best interests of the estates under the Rule 9019 standard, with one amendment. The court reduced the administrative claim for debtors' counsel under the settlement agreement consistent with the denial of part of the firm's fees.