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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).

Debtor filed for Chapter 13 and made multiple misrepresentations in her petitions and proposed plans during the subsequent nine-month period. Several creditors moved to convert Debtor’s case to Chapter 7, citing 11 U.S.C. § 1307(c), on the grounds of bad faith. Debtor then moved to voluntarily dismiss her case under § 1307(b), arguing she had an absolute right to dismissal, despite the pending motions to convert.

Noting the lack of Tenth Circuit authority on this issue, the Court ordered briefing and held an evidentiary hearing on the pending motions. Two creditors cited cases holding a bad faith exception to the absolute right to dismiss should allow the Court to determine whether dismissal or conversion was in the best interests of creditors. Another creditor, and the Trustee, sided with Debtor, citing cases holding the plain language of § 1307(b) mandated the Court to dismiss, rather than convert, the case notwithstanding Debtor’s bad faith conduct.

The Court examined the split of authority on this issue, as well as the implications of Marrama v. Citizens Bank of Mass., 549 U.S. 365 (2007) and Law v. Siegel, 134 S.Ct. 1188 (2014). The Court ultimately determined the statutory language of the Code, and the conflicting case law addressing the issue, compelled dismissal, rather than conversion, of Debtor’s case. Importantly, the Court agreed with cases determining the right to dismissal was not “self executing”; that is, after a debtor’s motion under § 1307(b) is filed, a court can hold a hearing on the motion to determine whether conditions should be placed on dismissal if it finds them appropriate.

Therefore, the Court dismissed the case with sanctions for Debtor’s bad faith conduct, pursuant to § 109(g) (180-day filing bar) and § 349(a) (barring discharge of debts in future bankruptcy cases). Additionally, the Court held that, should Debtor file a bankruptcy case after 180 days, but within three years, Debtor was required to provide notice to all creditors, including those in the current case, giving them an opportunity to object. Finally, the Court noted that nothing in its Order prohibited the filing of an involuntary bankruptcy case against Debtor under § 303.

The issue before the Court was whether an innocent mistake by a grandmother in titling property in her name and the names of her daughter and son-in-law is reached by the law of constructively fraudulent transfers when the son-in-law transferred his interest in the property back to the grandmother immediately upon her request almost two years before the son-in-law filed bankruptcy.
Trustee filed a complaint against Debtor’s mother-in-law, Mrs. Nelabovige (“Nelabovige”), for recovery of a constructive fraudulent transfer under 11 U.S.C. §§ 548(a)(1)(B) and 550(a)(1). Trustee alleged that when Nelabovige purchased property in Fairplay, and titled the property in her name and the names of Debtor and his wife, Nelabovige gifted a one-third interest in the property to Debtor. Trustee further contended that when Debtor quit-claimed his interest in the property to Nelabovige, he made a transfer of his property to her and received less than a reasonably equivalent value in exchange for the transfer, and was either insolvent on the date of the transfer or rendered insolvent by the transfer. The Trustee requested a judgment against Nelabovige for one-third of the amount the property sold for in December 2014. The Court held a full-day evidentiary hearing on the complaint and Nelabovige’s answer, and took the matter under advisement.
In its written opinion, the Court cited Davis v. Pham (In re Nguyen) 783 F.3d 769, 776 (10th Cir. 2015), for the proposition that an interest in property consisting of bare legal title holds no tangible economic value; accordingly, the transfer of bare legal title does not constitute a fraudulent transfer. Therefore, the question before the Court was whether under Colorado law, Nelabovige made a gift of a one-third interest in the property to Debtor. If there was no gift, since she paid for the property and did not receive any consideration from Debtor, a resulting trust would arise in Nelabovige’s favor, making the transfers to and from Debtor of bare legal title only.
The Court found by strong and convincing evidence that Nelabovige did not intend to make a gift to Debtor. Thus, Debtor only had bare legal title subject to a resulting trust in favor of Nelabovige, who held equitable title. Accordingly, the reconveyance of Debtor’s bare legal title was not a fraudulent transfer. The Court entered judgment in favor of Nelabovige and against the Trustee, and dismissed the complaint with prejudice.

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.

Educational Credit Management Corporation (“ECMC”) filed a proof of claim in Debtor’s
Chapter 13 bankruptcy case for a student loan debt. Debtor filed an objection, which the Court
sustained after ECMC failed to respond. Debtor then brought an adversary proceeding against
ECMC, asking the Court to declare the loans unenforceable. While Debtor cited § 523(a)(8) in
his complaint, he made no arguments regarding undue hardship, other than the contention that
paying the loans would be an undue hardship because he never received the loan funds. ECMC
moved for summary judgment, and Debtor responded.
The Court first determined it had jurisdiction, because even though Debtor was asking for a
declaratory judgment, the underlying substance of the claim was a dischargeability
determination, which is a core matter under 28 U.S.C. § 157(b)(2). The Court found the two
essential issues were (1) whether the loans were of the type excepted from discharge under
§ 523(a)(8), and (2) whether Debtor owed the debt. Because the loans were Supplemental Loans
for Students (“SLS Loans”) insured by the federal government and made under a program
funded in part by the federal government, the Court found they were the types of loans excepted
from discharge under Section 523(a)(8)(A)(i).
As to the second issue, the Court gave collateral estoppel effect to the decision of an independent
hearing officer appointed under 20 U.S.C.§ 1095a. That section authorizes the Secretary of
Education, or a guaranty agency, to withhold wages to satisfy a debt for loans made under the
Higher Education Act. In the wage garnishment proceeding before the hearing officer, Debtor
made identical arguments presented in this adversary proceeding. The hearing officer rejected
those arguments, finding the Debtor failed to prove the loans were not enforceable. The Court
specifically found the hearing officer’s decision was a final agency decision, and the hearing
procedures afforded the Debtor with sufficient due process.
Finally, the court concluded Debtor had not raised a genuine issue of material fact in his
response to summary judgment, holding “Debtor’s self-serving statements lack support in the
evidentiary record, which clearly shows Debtor continued to sign applications and promissory
notes for SLS Loans, year after year, even though he allegedly did not receive loan funds from
any of the notes.” The Court granted ECMC’s motion for summary judgment.

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.

The Debtor’s case was converted from chapter 13 to chapter 7 prior to confirmation of a chapter 13 plan.  The Debtor’s attorney filed an application for payment of her fees from undistributed plan payments held by the chapter 13 trustee at the time of conversion.  The Court ruled that the Supreme Court’s decision in Harris v. Viegelahn, 135 S. Ct. 1829 (2015) (“Harris”), required that all undistributed plan payments be returned to the Debtor, without payment of the attorney’s fees.  The attorney argued that because the Debtor’s case was converted prior to confirmation of a plan, and Harris involved a post-confirmation conversion, the Harris case was distinguishable.  The Court acknowledged that when a chapter 13 case is dismissed prior to confirmation of a plan, the third sentence of § 1326(a)(2) requires that administrative expenses be paid prior to the return of plan payments to the debtor.  However, the Court could not ignore the Supreme Court’s ruling in Harris that the second sentence of § 1326(a)(2) and “no provision of chapter 13 holds sway” after a case is converted to chapter 7.  The Court found the language and reasoning of Harris broad enough to encompass the situation where a case is converted prior to confirmation.  It also found that payment of chapter 13 administrative expenses upon conversion could frustrate the statutory priority scheme of § 726(b).  The attorney also argued that Harris involved payments made to secured and unsecured creditors and did not address whether administrative claims could be paid from plan payments upon conversion.  The Court found, however, that the Supreme Court did not appear to use the term “creditor” in its technical sense, as it is defined by § 101(1) of the Code, or give any indication that it intended to distinguish between payments to “creditors” from payments to administrative expense claimants.  Rather, the Supreme Court appeared to use the term more broadly to refer to all those entitled to receive distributions of plan payments and was unequivocal that the trustee’s authority to make plan payments ended at conversion.  

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.