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Ortega v. Cannady, Adv. Pro No. 19-1335 EEB (In re Cannady, Case No. 19-15400 EEB, Chapter 13), September 16, 2020 09/16/2020

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 re Steven W. Bloom, Case No. 17-11650 TBM, Docket No. 302 (Bankr. D. Colo. Sept. 10, 2020); Glencove Holdings, LLC v. Steven W. Bloom (In re Bloom), Adv. Pro. No. 17-1255 TBM, Docket No. (Bankr. D. Colo. Sept. 10, 2020). 09/10/2020

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. 

 

 

In re Denise Patricia Madrid-Baskin, Bankruptcy Case No. 20-10069 TBM, Docket No. 38 (Bankr. D. Colo. Aug. 25, 2020) 08/25/2020

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.

Harvey Sender v. Wendy Lea Dutton, Adv. Pro. No. 18-1297 EEB (In re Thomas Michael Clark, Case No. 16-19949 EEB, Chapter 7), July 21, 2020 07/20/2020
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.
 
Jared C. Walters v Kevin B. Lynch, et al., Adv. Pro. No. 15-1120 (In re 3PL4PL, LLC, Case No. 14-22402 MER, Chapter 7) 06/22/2020
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.
 
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 Leonard Edwin Adamson, Jr., Case No. 19-10304 JGR Order Denying Confirmation entered May 12, 2020 (proceeds of exempt property as disposable income under 11 U.S.C. § 1325(b)) 05/12/2020

In a case of first impression in the Tenth Circuit, the Court considered whether a Chapter 13 plan may be confirmed, notwithstanding that it fails to provide for payment of net proceeds from an exempt personal injury claim to creditors.

The debtor scheduled and claimed a 100% exemption in an unliquidated pre-petition personal injury claim. The debtor proposed a Chapter 13 plan which provided for payment of priority tax debt and the cure of arrearages on the debtor’s home mortgage over 5 years. The plan further provided for a 3.24% distribution to unsecured creditors but failed to provide for payment of any of the net proceeds of the personal injury claim to creditors. The Chapter 13 trustee objected to confirmation, arguing that under 11 U.S.C. § 1325(b)(2), the net proceeds of the personal injury claim should be included in the debtor’s disposable income for purposes of determining his payments under the plan. The Chapter 13 trustee also objected to the debtor’s claim of exemption in the personal injury claim, arguing that such claim should not re-vest in the debtor at confirmation because the net proceeds should be included in his disposable income calculation.

The parties submitted trial briefs, and the Court held an evidentiary hearing on the matter. The following facts were undisputed: the debtor was a below-median income debtor with a required plan commitment period of 3 years; the statute of limitations on the personal injury claim would run during the required 3-year plan commitment period; the debtor was injured during the automobile accident that gave rise to the personal injury claim; the debtor’s injuries required ongoing medical treatment; the debtor would be required to pay at least some of the costs of his ongoing medical treatment; and none of the debtor’s medical debts associated with the automobile accident were scheduled in his bankruptcy case because they had been paid by himself and/or his insurer as they came due.

The debtor made several legal and policy arguments against requiring debtors to include proceeds of exempt assets in the calculation of their disposable income under 11 U.S.C. § 1325(b)(2). The debtor’s primary arguments were threefold: (i) the plain language of 11 U.S.C. § 522(c) expressly shields exempt assets from pre-petition creditors; (ii) the “ability-to-pay test” in 11 U.S.C. § 1325(a)(4) compels a debtor to pay unsecured creditors the value of his non-exempt assets, therefore the debtor should not be required to pay the value of his exempt assets; and (iii) a personal injury recovery is not “disposable income” as that term is defined in 11 U.S.C. § 1325(b)(2), therefore it cannot be “projected disposable income” under 11 U.S.C. § 1325(b)(1).

The Chapter 13 trustee conceded that the personal injury claim was exempt but argued that courts generally hold that proceeds of exempt assets are disposable income under 11 U.S.C. § 1325(b)(2), regardless of a claimed exemption. The Chapter 13 trustee proposed to treat the net proceeds of the personal injury claim in this case in a manner consistent with his ordinary practice: (i) he would not object to the personal injury claim re-vesting in the debtor upon confirmation, so long as the plan provided that the net proceeds of such claim would be turned over to the Chapter 13 Trustee once received; and (ii) after the proceeds were turned over, the Chapter 13 Trustee would confer with the debtor to assess the debtor’s needs and reach an agreement as to what portion of the proceeds, if any, should be considered disposable income.

The Court noted that under 11 U.S.C. § 1325(b)(1), where a Chapter 13 plan does not provide for full repayment of unsecured claims and the Chapter 13 trustee or an allowed unsecured creditor objects to confirmation, the debtor must commit all of his projected disposable income to the plan. The Court observed that the Bankruptcy Code does not define “projected disposable income.” Post-BAPCPA, courts have determined that the starting point for calculating a debtor’s projected disposable income under 11 U.S.C. § 1325(b)(1) is the calculation of his disposable income under 11 U.S.C. § 1325(b)(2), which is calculated using his current monthly income under 11 U.S.C. § 101(10A). However, in cases where significant changes in a debtor’s financial circumstances are “known or virtually certain at the time of confirmation,” the Supreme Court concluded in Hamilton v. Lanning, 560 U.S. 505 (2010) that a forward-looking approach is the correct method of calculating a debtor’s projected disposable income.

The Court addressed each of the debtor’s arguments but focused the majority of its analysis on the interplay between 11 U.S.C. §§  522(c) and 1325(b)(2). The Court noted the pre-BAPCPA split of authority regarding whether exempt property must be included in the disposable income analysis. The majority of courts, relying on a distinction between the importance of exemptions in Chapter 7 and Chapter 13 cases and the plain language of 11 U.S.C. § 1325(b), held that exempt income must be included in the calculation. Whereas courts that adopted the minority view read 11 U.S.C. § 1325(b) in conjunction with 11 U.S.C. § 522(c) to protect exempt property from pre-petition debt and exclude exempt income from the calculation. The Court expounded upon the majority and minority views in the context of personal injury recoveries and ultimately agreed with the majority view.

The Court then analyzed the changes that BAPCPA made to 11 U.S.C. § 1325(b) and its addition of 11 U.S.C. § 101(10A) and determined that they did not warrant deviation from the pre-BAPCPA majority view. More specifically, 11 U.S.C. §§ 1325(b) and 101(10A) expressly exclude certain items from the respective definitions of “disposable income” and “current monthly income,” yet exempt personal injury recoveries are not among the enumerated exclusions. Thus, the Court found that a plain language reading of 11 U.S.C. §§ 1325(b) and 101(10A) generally requires that proceeds from an exempt personal injury claim be included in the calculation of a debtor’s projected disposable income. The Court noted that a plain language reading accords with the overarching policy behind BAPCPA of maximizing payments to creditors, and the Lanning Court’s forward-looking approach to calculating a debtor’s projected disposable income where changes in his financial circumstances are known or virtually certain at the time of confirmation.

However, the Court acknowledged that the debtor credibly testified at the evidentiary hearing regarding his need for ongoing medical treatment and the costs associated therewith. Thus, it was clear to the Court that at least some portion of the proceeds will be reasonably necessary for the maintenance or support of the debtor and, therefore, be carved out of his disposable income under 11 U.S.C. § 1325(b)(A)(i).  Accordingly, the Court denied confirmation of the debtor’s plan and ordered the debtor to file an amended plan which provided that all net proceeds of the personal injury claim, once received, shall be turned over to the Chapter 13 trustee, pending a determination of what portion of the proceeds are reasonably necessary for the maintenance and support of the debtor.

Joli Lofstedt v. UBS Financial Services, Inc.., Adv. Pro. No. 16-1179 EEB (In re Lakeview Development Corp., Case No. 14-16938 EEB, Chapter 7) 03/25/2020

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.

In re Malul, 11-21140 MER 03/24/2020

Sandra Malul filed a Chapter 7 Bankruptcy Case in 2011.  She received a discharge and her case was closed.  At the time, Malul did not disclose a previous $50,000 investment in Heartland Caregivers, LLC, an entity formed by John Fritzel to grow and sell medicinal marijuana.  Malul never received a return on her investment in Heartland Caregivers and thought it had been lost.  Years later, after reviewing a Denver Post article featuring Fritzel’s success in the marijuana industry, Malul brought litigation claims in Denver District Court arising from her interest in Heartland Caregivers.

Malul then moved to reopen her bankruptcy case to disclose the initial Heartland Caregivers investment.  The Court conditionally granted the Motion to Reopen, and a Chapter 7 Trustee was re-appointed. Shortly thereafter, Malul filed a motion to compel the trustee to abandon her interest in Heartland Caregivers, because any efforts by the Trustee to administer the asset would violate the Federal Controlled Substances Act (21 U.S.C. § 101, et seq.).  Meanwhile, the Trustee reached an agreement with Fritzel to settle Malul’s lawsuit for $100,000.  Later, the United States Trustee filed a motion to vacate the Order re-opening the bankruptcy case, arguing any administration of Malul’s interest in Heartland Caregivers would necessarily violate the Controlled Substances Act.

The Court concluded Malul’s ownership in Heartland Caregivers is an ongoing violation of the Controlled Substances Act.  Although Heartland Caregivers never produced or sold marijuana in violation of CSA § 841(a)(1), Malul’s stake in Heartland Caregivers was intended as an illegal investment in the proceeds of a criminal enterprise in violation of CSA ڊ 854.  Because Malul’s ownership of Heartland Caregivers is an ongoing criminal act, Malul is also engaged in an ongoing CSA violation by asserting rights arising from her Heartland Caregivers investment in the Denver District Court lawsuit.  Accordingly, the Court held any administration of Malul’s interest in Heartland Caregivers by the Trustee, whether by abandoning the interest or settling the ensuing litigation claims, would involve the Court and the Trustee with an ongoing violation of federal law.  The Court granted the US Trustee’s motion and vacated its Order re-opening this Bankruptcy Case.

Jeffrey Weinman v. Cordes & Co., Adv. Pro. No. 19-1083 EEB (In re Bearcat Energy LLC, Case No. 17-12011 EEB, Chapter 11), March 13, 2020 03/13/2020

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.

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