The trustee sued the defendant to recover four cash transfers that he claimed were preferences. The defendant raised the ordinary course and contemporaneous exchange defenses. On the parties’ cross-motions for summary judgment, the Court ruled that three transfers were protected by the ordinary course defense. The fourth transfer was not, however, because the amount transferred was fifty times the amount of the other three transactions. The Court then analyzed the contemporaneous exchange defense as it applied to the larger transfer. It applied the usual test, which has three elements: (1) the transferee must provide new value to the debtor; (2) the parties must intend the transfer to be a contemporaneous exchange; and (3) the transfer must in fact be a substantially contemporaneous exchange. What is unusual about this case is that the Court applied the contemporaneous defense to what was essentially a credit transaction. Courts are split on whether this defense applies in this context.
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This case involves a preference action in which the defendant disputes two elements of preference liability and raises the ordinary course of business defense. The decision makes no new law nor does it apply the law to a unique fact pattern. The Court publishes this decision merely because it includes a lengthy explanation of the final element of preference liability, namely that the transfer enabled the defendant to receive more than it otherwise would have received in a hypothetical chapter 7 distribution. This is an element that it often misunderstood by non-bankruptcy attorneys representing defendants in preference litigation. This short opinion may prove useful to trustees and other preference plaintiffs who wish to educate their opponents as to this element.
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.
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.
Family farmers in a chapter 12 case filed a motion seeking permission to use the cash collateral of their primary secured lender, a Bank. The Bank objected, arguing that the Debtors’ offer of adequate protection in the form of replacement liens on future cash, crops, and livestock was too speculative. The Court rejected this argument, concluding that the Bank was only entitled to additional adequate protection if the metamorphosis of the Bank’s collateral from cattle to cash and from crops to cash, and then from cash back into cattle and crops, would result in erosion of its position. Because the Debtors established that the Bank’s position would be improved over time, the Court allowed the Debtors to use cash collateral on those items in their budget that would maintain the status quo or improve the Bank’s position. The Court emphasized that the Bank was not entitled to demand, through the guise of adequate protection, that its farm loan be turned into a more risk-free loan.
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.