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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).
Prior to bankruptcy, Debtor bank holding company, United Western Bancorp, Inc. (the “Debtor”), filed consolidated federal income tax returns for itself and a group of 13 affiliated companies, including United Western Bank (the “Bank”), a failed bank now in a Federal Deposit Insurance Corporation (the “FDIC”) receivership. Post-petition, the Internal Revenue Service issued a tax refund in excess of $4 million based upon the offset of net operating losses and past income from the operations of the Bank as reported on the consolidated federal income tax returns filed by the Debtor.
Both the Chapter 7 Trustee (acting on behalf of the Debtor) and the FDIC (acting on behalf of the Bank) claimed entitlement to the tax refund. The Chapter 7 Trustee brought an adversary proceeding asserting claims under Sections 541 and 542 of the Bankruptcy Code. The FDIC counterclaimed. The Chapter 7 Trustee and the FDIC presented cross-motions for summary judgment directed to ownership of the tax refund. The facts were undisputed. The parties agreed that ownership of the tax refund should be decided primarily based upon a Tax Allocation Agreement.
The Court concluded that the Chapter 7 Trustee established a legal interest in the tax refund under the Tax Allocation Agreement, the Internal Revenue Code, and Internal Revenue Service regulations. Further, the Court determined that the FDIC failed to establish a beneficial interest in the tax refund. The Court analyzed the Tax Allocation Agreement and decided that it created a debtor-creditor relationship as between the Debtor and the Bank. Accordingly, the Court ruled in favor of the Chapter 7 Trustee and against the FDIC.
Examining the interplay between the Chapter 13 statutory framework and Fed. R. Bankr. P. 1016, the Court determined that a debtor who died shortly after the filing of his joint petition under Chapter 13 and prior to confirmation of his Chapter 13 plan must be dismissed as a debtor from the case, and that the plan proposed on behalf of the joint debtors could not be confirmed.
Chapter 7 Trustee (“Trustee”) filed an adversary complaint against Alternative Revenue Systems, Inc. (“ARS”), alleging claims for avoidance, preservation, turnover, and disallowance under 11 U.S.C. §§ 547, 551, 542, 543, and 502. Trustee sought to avoid transfers made by Debtor’s employer to ARS in the 90 days pre-petition pursuant to a wage garnishment. Both parties moved for summary judgment. ARS argued the relevant transfer under § 547(b) occurred when the garnishment was served on Debtor’s employer, more than 90 days pre-petition. The Trustee argued the relevant transfers occurred each time Debtor’s paycheck was garnished in the 90 days pre-petition. The Court examined a split in case law on this issue, including Straight v. First Interstate Bank (In re Straight), 207 B.R. 217 (BAP 10th Cir. 1997), cited by ARS.
The Court ultimately sided with the majority rule, holding the relevant transfer occurred each time Debtor’s paycheck was garnished within the 90 days pre-petition, regardless of when the garnishment was served. The Court also observed that service of the garnishment created a lien under Colo. Rev. Stat. § 13-54.5-102 (Colorado’s garnishment statute), but did not, in and of itself, create a lien for purposes of § 101(54) (Bankruptcy Code’s definition of “transfer” post-BAPCPA). Rather, service of the garnishment created an inchoate lien in future earnings that did not ripen until the earnings came into existence. In this particular case, a factual dispute remained as to the date wages were earned, rather than paid; thus, the Court denied summary judgment to both parties.
This case is similar to several recent chapter 13 cases in this district in which the debtor failed to make her direct payments to the mortgage holder for a substantial period of the plan but sought to receive a discharge on the basis of having made all of the payments required to be paid to the trustee. Judge Brown follows the holding of other divisions in this court that both trustee payments and direct mortgage payments are payments "under the plan," and that failure to make any of these payments prohibits the debtor from receiving a discharge.
In determining that the direct mortgage payments were payments “under the plan,” the Court relied heavily on In re Foster, 670 F.2d 478 (5th Cir. 1982), which reviews the historical underpinnings of chapter 13. It recognized that prior versions of the statute required the consent of every secured creditor as a condition of plan confirmation. If the debtor could not secure the consent of a particular secured creditor, the debtor would simply leave this creditor out of the plan altogether. Thus, if the plan made absolutely no provision for a secured creditor, then the debtor could make payments "outside the plan" under the contractual terms of their agreement. But if the plan cures an arrearage or otherwise specifies any treatment for this claim in the plan, then all payments on the claim are deemed "under the plan" regardless of who disburses the payments to the mortgage holder. Judge Brown then traces the Code sections that leave the question of who should act as the disbursing agent of mortgage payments to the court's discretion. Thus, this decision may serve as a foundation for Judge Brown's analysis of upcoming issues in this district as to conduit mortgage payments and whether a debtor may truly make payments on secured debts "outside the plan."
Judge Brown also ruled that the failure to make direct mortgage payments was a “material default by the debtor with respect to the term of a confirmed plan,” and was cause to dismiss or convert the case under § 1307(c). Because the Debtor requested conversion of her case if she was not entitled to a chapter 13 discharge, neither the chapter 13 trustee nor the mortgage lender opposed conversion, and there was no suggestion of bad faith, the case was converted to chapter 7.
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.
The United States Trustee moved to dismiss Debtors' chapter 7 case pursuant to 11 U.S.C. §§ 707(b)(1) and 707(b)(2) or, in the alternative, § 707(b)(3). Debtors filed a response, arguing that a student loan debt, incurred to pay for a doctorate degree in business administration, was non-consumer debt. Before the hearing, the parties stipulated that the only issue before the Court was whether the student loan debt was a consumer debt, defined by § 101(8) as "debt incurred by an individual primarily for a personal, family or household purpose." If so, the parties agreed the granting of relief under chapter 7 would be an abuse of the provisions of chapter 7, and the Debtors would convert to a chapter 13 case within 14 days of the Court's order, failing which the case would be dismissed.
The Court examined In re Stewart, 175 F.3d 796 (10th Cir. 1999), where the Tenth Circuit affirmed a bankruptcy court's decision holding that student loan debts incurred by a debtor to attend medical school were consumer debts. In that case, the Tenth Circuit acknowledged that student loans are not per se consumer debts, and recognized the general principle that a credit transaction is not a consumer debt when it is incurred with a profit motive. The Court also analyzed several recent cases from other jurisdictions classifying student loan debt as consumer or non-consumer debt.
Ultimately, the Court found that the profit motive factor should be interpreted narrowly for purposes of the means test and eligibility to file for chapter 7 under § 707(b). The Court held that in order to show a student loan was incurred with a profit motive, the debtor must demonstrate a tangible benefit to an existing business, or show some requirement for advancement or greater compensation in a current job or organization. The goal must be more than a hope or an aspiration that the education funded, in whole or in part, by student loans will necessarily lead to a better life through more income or profit.
In this case, Debtors did not show the student loan debt was incurred with a motivation to benefit an existing business or in furtherance of an ongoing job or business requirement. Thus, the Court found the student loan debt was a consumer debt, making the provisions of § 701(b)(1) applicable. Pursuant to the parties' agreement, the Court ordered the Debtors to convert to chapter 13 or face dismissal of their case.