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.
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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.
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.
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 the year prior to its bankruptcy, a corporate debtor made payments on a promissory note owed to an IRA. The debtor’s principal owned the IRA. The corporate debtor’s chapter 7 trustee sued the IRA and its custodian to recover the note payments as preferences. However, the IRA filed a motion to dismiss on the basis that the IRA was not the proper party because it is not a separate legal entity, claiming the Trustee should have sued the owner of the IRA. It also argued that, in this case, it would be futile for the Trustee to substitute the owner of the IRA as the defendant because the owner had filed his own individual bankruptcy and received a discharge, barring any pre-bankruptcy claims against him.
The Court first concluded that the IRA was not a separate legal entity. Instead it was an asset of the IRA Owner. The Court also rejected the Trustee’s argument that the IRA was a trust. As to the issue of whether the Trustee’s claims were barred by the owner’s discharge, the Trustee argued that his discharge did not encompass these preference claims because they were “in rem” claims. The Court analyzed decisions on the distinction between “in rem” and “in personam” issued by the Supreme Court and lower courts from other contexts, including cases on sovereign immunity and the constitutional limits of the bankruptcy courts’ jurisdiction. Lacking clear guidance from these cases, and absent a binding precedent to the contrary, the Court concluded that the recovery of preferentially transferred funds is an in personam claim. Accordingly, the Court dismissed the Trustee’s complaint.
The chapter 11 trustee (the “Trustee”) of Bearcat Energy LLC (the “Debtor”) sued the Defendant to recover payments the Defendant received for its services as a court-appointed special master in the divorce proceedings between Bearcat’s principal and his former spouse. The Trustee alleged the payments were preferential and/or fraudulent transfers. The Defendant moved to dismiss the complaint based on the Barton doctrine, a principle of federal common law that requires a litigant to obtain permission from the court that appointed a receiver before he may sue the receiver in a different court. If the Barton doctrine applies and the plaintiff has not obtained prior permission from the appointing court, the court where the suit is brought lacks subject matter jurisdiction and must dismiss the case.
Though some courts have extended the Barton doctrine to state court special masters, the Court held that doctrine did not apply to the types of claims asserted by the Trustee in this adversary proceeding. According to the Tenth Circuit, the Barton doctrine applies to “claims based on alleged misconduct in the discharge of a [court-appointed official’s] official duties,” Satterfield v. Molloy, 700 F.3d at 1234-35, or “claims based on acts that are related to the official duties of the trustee.” Id. at 1236. The Court analyzed the Trustee’s claims and found they were unrelated to the Defendant’s performance of its official duties as special master. Instead, the claims centered on the timing of the payments received, the Debtor’s financial condition, and whether the Debtor received consideration for the payments.
In addition, the Court determined that the purposes behind the Barton doctrine were not jeopardized by the Trustee’s action. Since the divorce case was closed, the doctrine’s concerns over forum shopping, interference with, and usurpation of the powers of the divorce court were not present. The Trustee’s suit would not affect the equitable division of marital property in the divorce case and it was not an attempt to obtain an advantage over the parties in the divorce case or an attempt to harass or extort the Defendant in the performance of its duties. The Court observed that if the Trustee succeeded in recovering recover the payments from the Defendant, the Defendant might pause when considering future special master appointments, but no more so than any supplier, service provider, or professional that provides services to an insolvent entity or who receives payment from one and later has to disgorge the payments. The Court reasoned that suits for the recovery of preferential or fraudulently transferred payments to a court-appointed official would not cause the officials to incur higher malpractice premiums or increase the costs of state court proceedings because the official would not be able to recoup its losses from either source. Because none of the purposes of the Barton doctrine were furthered by applying it to this case, the Court declined to do so and denied the Defendant’s motion to dismiss.
When the Debtors filed their chapter 13 case, the equity in their home was worth less than Colorado’s $75,000 homestead exemption. The Debtors claimed the equity exempt and the Court confirmed their chapter 13 plan. About two years later, the Debtors sold their home for $120,000 more than it was worth on the petition date. They then converted their case to chapter 7. The chapter 7 trustee moved to compel the Debtors to turnover the non-exempt portion of the proceeds they had in their possession on the conversion date. The Debtors argued that, under 11 U.S.C. § 348(f)(1)(A), the postpetition increase in the value of their home was not property of the estate upon conversion to chapter 7.
To decide the question, the Court considered the effect the 1994 amendment to
§ 348(f)(1)(A), which states that if a debtor converts his case in good faith, the property of the converted estate “shall consist of property of the estate, as of the date of filing of the petition, that remains in the possession of or is under the control of the debtor on the date of conversion.” The Court recognized that there are two schools of thought on the question of whether the postpetition increase in value of a prepetition asset becomes property of the estate when a debtor converts his or her case from chapter 13 to chapter 7. Because the language of § 384(f)(1)(A) is ambiguous as applied to this question, the Court considered the legislative history accompanying the 1994 amendment. The legislative history clearly indicates Congress’ intent to encourage debtors to attempt debt repayment under chapter 13 and, if that attempt is unsuccessful, to leave them in no worse position if they had filed a chapter 7 case at the outset. The Court adopted the view that best supports this legislative purpose and is in keeping with the distinction between the fundamental bargains of chapter 13 and chapter 7. It ruled that the value attributable to the postpetition increase in value of the Debtors’ home did not become property of the estate upon conversion of their case to chapter 7 and it denied the chapter 7 trustee’s motion for turnover of the non-exempt proceeds.
Individual and corporate debtors in two consolidated chapter 7 cases formerly provided accounting and payroll services to clients. Prior to filing, the debtors engaged in a fraudulent scheme pursuant to which they stole in excess of $11 million dollars from their clients by filing false payroll tax returns with the IRS and stealing client funds meant to pay payroll taxes. Some of the debtors’ clients, including the defendant, discovered the fraudulent scheme prepetition and forced the Debtors to pay funds to the IRS during the preference period. The chapter 7 trustee sought to recover the payments from defendant as a preference. The defendant moved for summary judgment, arguing the payments were not recoverable as preferences because they were not the debtors’ property but were instead either trust funds of the IRS under 26 U.S.C. § 7501 or stolen property. The Court granted summary judgment in part, holding that the defendant had only established a portion of the funds transferred were covered by the § 7501 statutory trust. The Court further held the defendant had failed to adequately trace those funds it alleged were its stolen property.
Debtor inadvertently omitted an unsecured creditor from his schedules and his creditor matrix and the creditor did not receive timely notice of the case. The creditor later filed a late proof of claim and motion to deem the proof of claim timely. The chapter 13 trustee objected, arguing that Fed. R. Bankr. P. 3002(c) lists the only circumstances in which a creditor may file a late proof of claim and that none of them applied to this case. The Court overruled the objection, concluding that Rule 3002(c)(6) applied. That subsection, by its express terms, permits a late filed proof of claim if notice was insufficient because the debtor failed to file the creditor matrix required by Rule 1007(a). Under a plain language interpretation, this Rule would not apply because the Debtor had timely filed a creditor matrix, albeit an incomplete one. However, the Court concluded that this interpretation would render the Rule superfluous because other requirements would dictate the dismissal of the bankruptcy case due to the untimely filing of a creditor matrix long before any creditor would face a bar against an untimely proof of claim. Thus, the Court held that Rule 3002(c)(6) should be read to apply where a debtor fails to list a particular creditor on the creditor matrix, thereby preventing adequate notice to that creditor.