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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.

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.

The Chapter 7 Trustee contacted the Clerk to advise the required credit counseling was obtained after Debtor’s voluntary petition under Chapter 7 was filed and inquired whether the case would be dismissed.  After accounting for the time zone in which the certificate was issued, the counseling requirement had been met less than one hour after Debtor’s voluntary bankruptcy petition was filed.

The Court issued an Order sua sponte, deciding 11 U.S.C. § 109(h)(1) as amended in 2010 is unambiguous.  Under the plain language of the statute, credit counseling may be obtained on the date of the bankruptcy filing at any time; a debtor is not required to receive the counseling prior to filing the petition.  

Note there is a split among bankruptcy courts on this issue.  In addition, Official Form 101, Voluntary Petition (Part V) and Bankruptcy Rule 1007 are consistent with the former version of Section 109(h)(1), prior to its amendment in 2010.

Plaintiff, Trans-West, Inc. (“Trans-West”) sells and repairs motor vehicles, including commercial trucks and recreational vehicles (“RVs”).  In September 2011, Trans-West hired Defendant Jeffrey Mullins (“Mullins”) to serve as the general manager of its RV division.  Mullins claimed to have extensive experience in RV sales through previously operating his own RV dealership in Texas.

Almost immediately after being hired, Mullins embarked on a kickback scheme with former contacts to purchase wholesale RV’s for Trans-West at inflated prices, and alternatively, sell Trans-West RV’s to other wholesalers at artificially low prices.

In exchange, the co-conspiring dealers made kickback payments directly to Mullins and, in some cases, to his wife, representing a portion of the profits realized through the scheme.

Over a four-year period, Mullins and his wife received approximately $1 million in kickback payments.

Trans-West filed its Adversary Proceeding in July 2016. The case was held in abeyance after criminal charges for theft and state law tax evasion were brought against Mullins for his failure to pay taxes on the kick-back payments.  Nearly two years later, Mullins entered a guilty plea on the tax evasion charges in exchange for the dismissal of the theft charges. 

The Adversary Proceeding advanced, and after a four-day trial, the Court determined damages in the amount of $1 million were excepted from discharge as debts incurred through actual fraud and false pretenses.  The damages were also excepted from discharge for willful and malicious injury, and constituted civil theft pursuant C.R.S. § 18-4-405, trebling the damages to $3 million and entitling Trans-West to an award of attorney’s fees and expenses.

Judgment was entered on behalf of Mullins and Mrs. Mullins dismissing the claim raised under 11 U.S.C. § 523(a)(4), as the fiduciary duty owed by Mullins as an employee, did not involve an express trust. 

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.

Creditor Glencove Holdings, LLC (“Glencove”) filed a Proof of Claim against Debtor Steven W. Bloom (the “Debtor”).  The Debtor objected.  Contemporaneously, Glencove initiated an Adversary Proceeding against the Debtor for nondischargeability of debt under 11 U.S.C. §§ 523(a)(2)(A) and (a)(6).  The Debtor contested nondischargeability.  The claim objection and nondischargeability issues were joined for trial.

The dispute between the Debtor and Glencove stemmed from the purchase of a private jet.  The Debtor is an experienced aircraft broker.  Glencove met the Debtor and retained one of the Debtor’s wholly-owned companies to act as its agent in buying an airplane.  Glencove agreed to pay $120,000 as an “agent’s fee.”  The Debtor found a jet for Glencove and helped Glencove make an initial multi-million dollar offer.  The seller came back with a favorable counteroffer.  At that point, the Debtor saw an opportunity to buy the airplane himself (through another wholly-owned company) at a lower price and then simultaneously resell it to Glencove at a higher price, all without disclosing the facts to Glencove.  By engaging in a hidden back-to-back transaction, the Debtor orchestrated a complex scheme to take advantage of Glencove and effectively rob Glencove of the price differential.

In its Proof of Claim, Glencove asserted that the Debtor was liable for fraud by false representation and fraudulent concealment under Colorado state law.  The Court engaged in extensive fact-finding and analysis of all of the elements of the underlying state law claims.  The Debtor asserted a myriad of defenses.  The Court ultimately concluded Glencove met its burden of establishing both fraud by false representation and fraudulent concealment.  Thus, the Court allowed Glencove’s Proof of Claim in the amount of $458,470, plus post-judgment interest.  In doing so, the Court decided that the Debtor was Glencove’s agent.  The Court also rejected all of the Debtor’s many affirmative defenses including under the economic loss doctrine.  The Court decided that the Colorado economic loss doctrine does not apply to intentional torts such as fraud by false representation and fraudulent concealment.    

Having determined that the Debtor was indebted to Glencove, the Court considered nondischargeability.  The Court concluded that no word other than “fraud” was more apt for what the Debtor did.  Thus, the Court found that the debt was nondischargeable under 11 U.S.C. § 523(a)(2)(A) for false pretenses, false representation and actual fraud.  The Court also decided that the Debtor’s fraudulent conduct amounted to willful and malicious injury under 11 U.S.C. § 523(a)(6) too. 

 

 

The Chapter 13 Debtor proposed a Chapter 13 Plan which would cram down a car lender even though the claim was subject to the hanging paragraph of 11 U.S.C. § 1325(a) (the “hanging paragraph”). The Debtor had purchased a vehicle for her personal use within 910 days before she filed her Chapter 13 case, financed both the purchase price and some miscellaneous other expenses and granted the car lender a security interest in the car. The Debtor contended that because the car lender had also financed the Debtor’s purchase of GAP insurance (insurance to cover the “gap” between the balance owed on the car loan and the value of the vehicle if it is totaled in an accident or stolen), the purchase money security interest that the lender held for the balance of the purchase price was destroyed, or “transformed,” into a non-purchase money security interest. Thus, the Debtor asserted that she was not prohibited by the hanging paragraph from cramming the car loan down to the value of the car at confirmation, an amount below the loan balance.

The Chapter 13 Trustee objected to confirmation of the Debtor’s plan stating that the proposed cram-down of the car lender to the value of the car at confirmation violated the hanging paragraph. The Trustee advocated for the application of the “dual-status” rule: for purposes of the hanging paragraph, any part of a 910 day car loan which is non-purchase money may be treated as an unsecured debt and the remainder of the debt which is directly attributed to the car purchase may not be crammed down. The parties had stipulated to the essential elements of the hanging paragraph and disputed only whether the loan lost its purchase money character because the lien secured, in part, a non-purchase money obligation. The Court held, based upon the stipulated facts and both Tenth Circuit precedent and intra-Tenth Circuit authority, that the “dual-status” rule should be applied, preventing the Debtor from cramming down the amount of the debt for the purchase of the car, and denied confirmation of the Debtor’s plan. The Court also addressed the methodology for calculating the amount of the debt which is subject to the purchase money security interest and could not be crammed down in the Plan.

More than two years before he filed bankruptcy, the Debtor entered into a separation agreement that required him to transfer his interest in the marital residence to his former wife five years after the date of the agreement.  The Debtor’s former wife agreed to assume sole responsibility for the mortgage on the home.  At the time of the separation agreement, the home was worth less than the mortgage balance.  Less than two years prior to his bankruptcy, the Debtor quit-claimed his interest in the home to his ex-wife.  His chapter 7 trustee sued the former wife to avoid the quit-claim deed as a constructive fraudulent transfer under 11 U.S.C. § 548(a)(1)(B).  
 
The Court granted the former wife’s motion for summary judgment because the trustee could not prove the Debtor received less than reasonably equivalent value in exchange for transferring his interest in the home.  Under § 548(d)(2), the Code defines “value” as the satisfaction of an antecedent debt.  As such, the Debtor received reasonably equivalent value for the quit-claim deed because it fully satisfied his obligation under the separation agreement.  Applying the Tenth Circuit’s decision in Weinman v. Walker (In re Adam Aircraft, Industries, Inc.), 805 F.3d 888 (10th Cir. 2015), the Court also considered whether the Debtor received reasonably equivalent value at the time he agreed to transfer his interest in the home.  Because the property had no equity in it on the date of the separation agreement, the ex-wife’s agreement to assume the mortgage had greater value than the value of the interest the Debtor agreed to transfer, and the trustee could not show that the Debtor received less than reasonably equivalent value when he incurred the obligation to transfer the home.
 
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.
 

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