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In re Jennie Adelle Maes, Case No. 19-17160 TBM, Docket No. 71 (Bankr. D. Colo. May 20, 2020). 05/20/2020

The Debtor’s daughter filed a Chapter 13 case for her mother based upon a power of attorney. The Chapter 13 Trustee challenged the validity of the power of attorney and requested dismissal. Eventually, Debtor’s counsel conceded that the power of attorney was ineffective but invoked Fed. R. Bankr. P. 1004.1 to save the filing. Debtor’s attorney argued that the Debtor was incompetent and did not have a representative. Under these circumstances, the Debtor’s daughter allegedly qualified her “next friend” authorized to file the bankruptcy petition.

The Court concluded that the Debtor was incompetent by virtue of severe dementia and memory loss at the time the bankruptcy case was filed. Furthermore, the Debtor did not have a representative, such as a guardian ad litem or other fiduciary, before the bankruptcy. Instead, the Debtor’s daughter properly acted as her “next friend.” Thus, under Fed. R. Bankr. P. 1004.1, the bankruptcy filing was valid. The Court overruled the Chapter 13 Trustee’s objections and then appointed the Debtor’s daughter as the Debtor’s guardian ad litem for purposes of prosecuting the Chapter 13 case.

In re Jeffrey Alan Styerwalt, Bankr. Case No. 19-11247 TBM (Chapter 13). “Memorandum Opinion and Order Denying Confirmation of Chapter 13 Plan” dated December 16, 2019 (Docket Nos. 38 and 39) 12/16/2019
The Chapter 13 Trustee objected to confirmation of an above-median-income debtor’s proposed Chapter 13 plan for several reasons.  First, the Chapter 13 Trustee asserted that the Debtor did not meet the disposable income requirement of 11 U.S.C. § 1325(b)(1)(B) and (b)(2) because the Debtor failed to include as income bonuses earned during the term of the plan.  Second, the Chapter 13 Trustee asserted that the Debtor’s proposed charitable and religious contributions were not reasonable nor consistent with a prior documented history and thus could not be included as expenses for purposes of calculating projected disposable income.  Third, the Chapter 13 Trustee asserted that the Debtor did not satisfy the projected disposable income mandate because he failed to provide for an increase (or “step-up”) of his plan payments when he paid off loans from his 401(k) account.  Finally, the Chapter 13 Trustee objected that the Debtor had not proposed the plan in good faith under 11 U.S.C. § 1325(a)(3).  
 
Looking to the statutory formula for calculating disposable income for above-median-income debtors set forth in 11 U.S.C. § 1325(b)(2) and (b)(3), the Court concluded that the Debtor had properly calculated his disposable income on Form 122C-1 and Schedule I without including bonus income.  But  then, using the forward-looking approach to calculating projected disposable income set forth in Hamilton v. Lanning, 560 U.S. 505 (2010), the Court considered whether this was one of the “unusual cases” where information about the Debtor’s future bonus income was “known or virtually certain” such that such income should be included in the projected disposable income calculation.  
 
Based on the Debtor’s bonus history, which reflected receipt of bonuses of varying amounts in three of the five years prior to the bankruptcy filing; the parties’ agreement that the Debtor had only the “potential to receive bonus income” in the future; and the Debtor’s uncontroverted, credible testimony that he was highly unlikely to receive a bonus for 2019 because his company was not on track to meet its revenue targets, the Court, applying the Lanning standard, concluded that because the Debtor’s receipt of bonus income was not “known or virtually certain,” he was not required to include it in his projected disposable income calculation.  While overruling the Chapter 13 Trustee’s first objection, however, the Court noted that the Bankruptcy Code provided a number of avenues through which creditors and the Chapter 13 Trustee could investigate the Debtor’s future financial condition so that they could later seek modification of the plan, if appropriate.
 
The Chapter 13 Trustee also objected that the Debtor’s proposed charitable and religious contributions were not reasonable or consistent with the amounts historically claimed in the Debtor’s tax returns.  Examining case law regarding the allowance of charitable and religious contributions prior to and after the enactment of the “Religious Liberty and Charitable Donation Protection Act,” P.L. 05-183, 112 Stat. 517 (1998); the Bankruptcy Abuse Prevention and Consumer Protection Act,” P.L. 109-8, 119 Stat. 37 (2005); and the Religious Liberty and Charitable Donation Clarification Act, Pub. L. 109-439 120 Stat. 3285 (2006); and the language of 11 U.S.C. § 1325(b)(2) and (3), the Court held that it was required to determine both whether the Debtor’s charitable and religious contributions were in excess of 15 percent of the Debtor’s gross annual income and whether the debtor’s expenditure of such contributions was “reasonably necessary.” 
 
On the basis of the Debtor’s credible, uncontroverted testimony that he made regular cash contributions to his church and to Alcoholics Anonymous in addition to those charitable and religious contributions for which he had receipts and which he claimed on his tax returns, the Court determined that the Debtor’s proposed charitable contributions added up to only about 3 percent of his gross annual income.  The Court further determined that such expenses, which were about half of the amount the Debtor proposed to pay to his creditors through the plan, were “reasonably necessary” within the context of 11 U.S.C. § 1325(b)(2) and could be subtracted from his current monthly income as part of the projected disposable income calculation under 11 U.S.C. § 1325(b)(1)(B).  Thus, the Court overruled the Chapter 13 Trustee’s second objection.
 
Utilizing the Lanning standard, the Court sustained the Chapter 13 Trustee’s objection that the Debtor needed to “step up” his plan payments upon payoff of the loans on his 401(k) account, finding that the date of the payoff of the Debtor’s loans on his 401(k) account was both “known” and “virtually certain.”  Meanwhile, the Court rejected the Debtor’s argument that, because he would have to incur additional future expenses for car repairs, home maintenance and mortgage payments, and health care costs, such future expenses should operate as a sort of “offset” to the additional projected disposable income resulting from payoff of the loans.  The Court found that the Debtor’s additional future expenses were likely, but did not meet the “known or virtually certain” threshold.
 
The Court rejected the Chapter 13 Trustee’s contention that the Debtor had proposed the Plan in bad faith, noting that under the totality of the circumstances test set forth in Flygare v. Boulden, 709 F.2d 1344 (10th Cir. 1983) as refined in Anderson v. Cranmer (In re Cranmer), 697 F.3d 1314, 1318-19 (10th Cir. 2012), the Debtor had stated his material debts and expenses accurately, had not made any fraudulent misrepresentation to mislead the Court, and had not unfairly manipulated the Bankruptcy Code.  Since the Court had ruled in favor of the Debtor with respect to most of the objections related to his projected disposable income, assuming the Debtor would amend his plan to incorporate “step up” payments when his 401(k) loans were paid off, the Court would ascertain no lack of good faith under Section  11 U.S.C. § 1325(a)(3).
 
Finally, in light of its determination that the Debtor’s bonus income need not be included in his projected disposable income calculation, the Court considered the Trustee’s alternative request that the Debtor should be required to (1) provide his federal income tax returns to the Chapter 13 Trustee each year; and (2) report annually whether or not he received a bonus and, if so, how much (since bonus information is not identified separately on federal income tax returns).  
 
Noting that the Chapter 13 Trustee had a duty to investigate the Debtor’s financial circumstances to ensure that he was paying the maximum possible to his creditors, and noting that the Debtor had the duty to provide information related to his finances during the term of the plan, and under the particular circumstances of the case, the Court found that the Debtor should be required to provide his tax returns and to report annually about his income and expenses.  
 
The Court denied confirmation of the Debtor’s plan as unconfirmable in its present form, but allowed him to submit an amended plan that conformed with the terms of the Court’s Order.
 
Colorado Division of Finance & Procurement, Central Collection Services v. Martinez (In re Martinez), Adv. Case No. 19-1012 TBM (D. Colo. Nov. 1, 2019) 11/01/2019

The Colorado Department of Labor and Employment (the “State”) sued the Debtor seeking a determination that a debt for an overpayment of unemployment benefits, a 65% statutory penalty, and a 25% collection fee should be excepted from the Debtor’s discharge pursuant to 11 U.S.C. §§ 523(a)(2)(A) and 523(a)(7).  The Debtor used the State’s “CUBLine” automated phone system to apply for weekly benefits and to certify his eligibility for the unemployment benefits.  The State contended that the Debtor had lied during the telephone calls by misrepresenting his income and employment.
After a trial, the Court found that the State failed to prove its case under Section 523(a)(2)(A). The State was unable to prove that the Debtor made any specific representations during the telephone calls.  And, even if the Debtor had lied about his income and employment, such representations would have been statements “respecting the debtor’s financial condition”; and thus, not actionable under Section 523(a)(2)(A) pursuant to the recent decision of the United States Supreme Court in Lamar, Archer & Cofrin, LLP v. Appling, 138 S. Ct. 1752 (2018).  For that reason, the Court held that the debt for the overpayment of unemployment benefits was dischargeable.
With respect to the State’s Section 523(a)(7) claim, the Court determined that the 65% statutory penalty assessed by the State was nondischargeable.  However, the debt for the overpayment of unemployment benefits and the 25% collection fee was dischargeable because that part of the debt was not “a fine, penalty, or forfeiture” within the meaning of Section 523(a)(7).

In re Fidencio Melendez, Bankr. Case No. 18-12485-TBM (Chapter 13). Memorandum Order and Opinion dated February 20, 2019 (Docket Nos. 31 and 32). 02/20/2019

A 55-year-old Chapter 13 debtor with above-median income filed a plan in which he proposed to pay $142 per month for 60 months to the Chapter 13 Trustee.  The plan payments, totaling about $8,521, were just enough to pay for his attorneys’ fees, the Chapter 13 Trustee’s fees, and his priority tax debt.  The debtor also proposed to continue making voluntary retirement contributions in the approximate amount of  $59,700 over the life of the plan, while paying nothing to his unsecured creditors, to whom he owed over $66,000 for credit card debt.  The debtor wished to continue his retirement contributions for the term of his plan, he explained, because he wanted to be “done working” by age 60 and “just relax” for the rest of his years. 

The Chapter 13 Trustee objected on the ground that the debtor’s plan was not proposed in good faith, as required by 11 U.S.C. § 1325(a)(3).  Evaluating the plan under the totality of the circumstances standard, the Court found that the debtor had failed meet his burden under Section 1325(a)(3), concluding that the debtor’s plan to enlarge his already-substantial retirement account while paying his unsecured creditors nothing was an abuse of the purpose and spirit of Chapter 13 as well as a manipulation of the Bankruptcy Code.  The Court, therefore, denied confirmation of the plan.

In re Timothy J. Petersen and Katherine M. Petersen, Bankr. Case No. 18-11242 (Chapter 7). Order and opinion dated January 22, 2019 (Docket Nos. 40 and 44) 01/22/2019

The Chapter 7 Trustee filed a motion to seal in which he sought to be authorized to file under seal several motions, including (1) a motion to employ a law firm as counsel to the Trustee for investigating and collecting assets of the Debtors’ bankruptcy estate; (2) a secret motion to approve, on an interim basis, a funding agreement between the Trustee and certain creditors of the estate, pursuant to which one of the creditors agreed to guarantee payment of the Trustee’s legal costs; and (3) a motion seeking authorization for the Trustee to conduct covert discovery by issuing subpoenas to unidentified third-party banks in New York without notice.  The Trustee requested permission to file the motions under seal because he believed that the strategy of the creditor who had agreed to fund the Trustee’s legal costs would be compromised if the debtors learned of the law firm’s investigation and collection efforts before such efforts were officially executed. 

The Court denied the motion, finding that the proposed secret employment and discovery process was contrary with the concept of public access to judicial documents and not authorized by 11 U.S.C. § 107(b), Fed. R. Bankr. P. 9018, or 11 U.S.C.  § 105(a).  Further, the Court found that the secret discovery process proposed by the Trustee failed to comport with the procedural notice requirements of Fed. R. Bankr. P. 2004 and 9016, which incorporate Fed. R. Bankr. P. 45.  Accordingly, the Court denied the Trustee’s motion to seal.

Weinman v. Crowley (In re Peter H. Blair), Adv. Case No.17-1195 TBM Docket No. 212 (Bankr. D. Colo. Nov. 9, 2018), on appeal BAP Case No.18-98 11/09/2018

The Chapter 7 trustee commenced an adversary proceeding against the Debtor’s (non-debtor) widow to recover fraudulent transfers under the Colorado Uniform Fraudulent Transfer Act (“CUFTA”), Colo. Rev. Stat. §38-8-105(1)(a) and (1)(b), and 11 U.S.C. §544. In addition, the trustee brought an unjust enrichment claim to obtain a declaratory judgment that the bankruptcy estate held an interest in residential real property which was solely owned by the widow. After a three-day trial, the Court held that the trustee had not sustained his burden on any of his eight (8) claims for relief. The Court entered judgment in favor of the defendants and against the trustee.

The Court’s findings of fact and conclusions of law included legal analysis of the following: the elements of both actual and constructive fraud under CUFTA and the “badges of fraud”; CUFTA’s narrow definition of “insider” in contrast to the broader Bankruptcy Code definition of “insider” at 11 U.S.C. § 101(31); “reasonably equivalent value” under CUFTA and whether “love and affection” in exchange for a transfer constitutes reasonably equivalent value; the balance sheet insolvency test under CUFTA and its definition of “assets” which excludes property to the extent encumbered by a lien or property to the extent exempt before the time of the transfer; fair valuation of contingent liabilities; constructive fraud under CUFTA and the transferor’s “ability to pay debts as they become due”; analysis of CUFTA’s “ability to pay debts as they come due” does not exclude exempt assets as a source of repayment; 11 U.S.C. § 551 and preservation of avoided transfers requires that the transfer be avoided in fact, not merely alleged to be avoidable; 11 U.S.C. § 502(d) and disallowance of the claim of a target of avoidance action requires that the target be adjudged liable for a fraudulent transfer; 11 U.S.C. § 544(a) encompasses trustee’s claim for unjust enrichment and constructive trust and are subject to statute of limitations under 11 U.S.C. § 546(a); elements of unjust enrichment under Colorado law; 11 U.S.C. § 108(c) applies only to actions against the debtor and does not toll the time for the trustee to bring his claim for unjust enrichment claim against the widow of Debtor.

In re Touchstone Home Health, LLC, Bankr. Case No. 17-11134 TBM; Order entered August 21, 2017 (Docket Nos. 67 and 68) (relief from stay to permit arbitration to proceed pursuant to 11 U.S.C. § 362(d)) 08/21/2017

After the Debtor, Touchstone Home Health, LLC, terminated its pre-petition representation by the Santangelo Law Offices, P.C. (the “Law Firm”), the Law Firm continued to assert that it was owed substantial attorneys’ fees, costs, and interest for its work; but the Debtor contested such obligation.  In 2015, as a result of the parties’ impasse, the Law Firm initiated an arbitration proceeding under its fee agreement with the Debtor.   

Before the arbitration was scheduled to proceed to a final evidentiary hearing, and just one day prior to an important deadline in the arbitration, the Debtor filed for relief under Chapter 11 of the Bankruptcy Code.   The Law Firm moved for relief from the automatic stay pursuant to 11 U.S.C. § 362(d)(1) to proceed with liquidation of its claims against the Debtor through arbitration.

After a preliminary hearing at which the Court received oral offers of proof and exhibits and heard legal arguments from the parties, the Court determined that relief from stay “for cause” was warranted and the parties must be compelled to liquidate the Law Firm’s claim by arbitration.  Finding no inherent conflict between arbitration and bankruptcy law in the context of the case, the Court concluded that it was required to enforce the arbitration agreement.  The Court further concluded that, even if it had discretion to refuse to compel arbitration, it would exercise such discretion in favor of allowing the arbitration to proceed.  Under the circumstances, bankruptcy did not eclipse the right to continue the arbitration.

In re Escalera Resources Co., Case No. 15-22395 TBM (Bankr. D. Colo. Feb. 10, 2017) 02/10/2017

Public utility creditor, PacifiCorp d/b/a Rocky Mountain Power (“PacifiCorp”), supplied electrical energy to the Debtor, Escalera Resources Co. (“Escalera”), before and after the Debtor sought protection under Chapter 11 of the Bankruptcy Code.  PacifiCorp filed an Application under 11 U.S.C. § 503(b)(9) seeking approval of an administrative expense priority claim for the value of the electrical energy supplied by PacifiCorp to the Debtor during the 20-day period prior to the bankruptcy petition date.  The Debtor opposed the Application arguing that electrical energy does not constitute “goods” under Section 503(b)(9).  The issue is of first impression for federal courts within the geographical bounds of the U.S. Court of Appeals for the Tenth Circuit.

The Court focused on the plain meaning of the word “goods” within the statutory framework.  Since the term is not defined in the Bankruptcy Code, the Court analyzed the ordinary and legal meaning of the word “goods” in dictionaries and under a variety of legal regimes including the Uniform Commercial Code, federal antitrust law, federal labor law, federal energy regulatory law, state tort law, tax law, and international treaties.  Informed by those sources, the Court ultimately adopts the definition of “goods” in the UCC Section 2-105 for purposes of Section 503(b)(9) and determines that electrical energy constitutes “goods” within the ambit of Section 503(b)(9).  Accordingly, the Court granted administrative expense priority status for the value of electrical energy supplied by PacifiCorp to the Debtor during the 20-day period prior to the bankruptcy petition date.  

In re SBN Fog Gap II, LLC, Case No. 16-13815-TBM and In re Fog Cap Retail Investors, LLC, Case No. 16-13817-TBM (jointly administered); Order entered December 8, 2016 (Docket No. 443) (motion to quash under Fed. R. Civ. P. 45) 12/08/2016

The Unsecured Creditors’ Committee served subpoenas to produce documents (subpoenas duces tecum) on two non-parties pursuant to Fed. R. Bankr. P. 2004 and 9016, as well as Fed. R. Civ. P. 45. The subpoenas properly were issued by the United States Bankruptcy Court for the District of Colorado (and signed by counsel for the Committee) but required that the entities produce documents in New York, New York. The targets of the subpoenas contested the subpoenas by filing a motion to quash in the United States Bankruptcy Court for the District of Colorado. But, the new version of Fed. R. Civ. P. 45(d)(3) mandates that attacks on subpoenas initially must be prosecuted in “the court for the district where compliance is required.” Since the subpoenas unequivocally required compliance in New York, the Court held that it lacked authority to adjudicate the motion to quash and that the non-parties must seek relief in the United States District Court for the Southern District of New York (or possibly the United States Bankruptcy Court for the Southern District of New York).

State of Colorado v. Wine (In re Wine), Adv. Pro. No. 15-01366 TBM; Order entered September 27, 2016 (Docket No. 23)(nondischargeability of penalties arising from fraud under 11 U.S.C. § 523(a)(2)(A)) 09/27/2016

The State of Colorado filed a Complaint under 11 U.S.C. § 523(a)(2)(A) seeking to determine the nondischargeability of a debt owed to it by the Debtor/Defendant for overpayments of unemployment compensation, plus statutory penalties and collection fees, on the ground that the Debtor/Defendant had fraudulently and under false pretenses obtained overpayments of unemployment to which he was not entitled.   

The Defendant moved to dismiss the claim to the extent that the State sought to establish the nondischargeability of the statutory penalties and collection fees, arguing that pursuant to 11 U.S.C. § 1328(a), those components of the debt were not barred from a discharge entered in a Chapter 13 case.  Based on the plain reading of Section 523 and the Colorado Employment Security Act, the Court concluded that the State had adequately alleged a claim against the Defendant.  The Court further held that the Supreme Court’s decision in Cohen v. de la Cruz, 523 U.S. 213 (1998) dictates that penalties and collection fees arising from overpaid unemployment compensation obtained by “false pretenses, a fraudulent representation, or actual fraud” are nondischargeable under Section 523(a)(2)(A) to the same extent as the restitutionary debt for overpaid unemployment compensation.   Such penalties do not become dischargeable under Section 523(a)(7).

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