Patrick S. Layng, the United States Trustee for Region 19 (the “UST”), filed a “Complaint Against Devon Michael Barclay and Devon Barclay, P.C.” (the “Complaint”) alleging that an attorney, Devon M. Barclay, and his solely owned law firm, Devon Barclay, P.C. (the “Defendants”) had engaged in a pattern of professional and ethical misconduct during their representation of the Debtors in their Chapter 7 bankruptcy case. The UST stated five causes of action against the Defendants as follows: (a) violations of Fed. R. Bank. P. 1008 and 9011; (b) violations of 11 U.S.C. § 526(a)(2); (c) violations of 11 U.S.C. §§ 526(a)(1) and (a)(3); (d) violations of 11 U.S.C. § 528; and (e) violations of professional duties. Following a trial, the Court held that the UST prevailed on all five causes of action and suspended the Defendants from practicing law before the United States Bankruptcy Court for the District of Colorado for a period of three years commencing on January 10, 2023.
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Unpublished Opinions
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Judge Thomas B. McNamara (TBM)
The Debtors filed their Chapter 7 case on March 31, 2022. They claimed a $75,000 homestead exemption in their residence, the amount of the homestead exemption under Colo. Rev. Stat. § 38-41-201(1)(a) which was in effect on their petition date. On April 7, 2022, Governor Jared S. Polis signed into law Senate Bill 22-086 which changed many Colorado exemptions. Among other things, Senate Bill 22-086 increased the homestead exemption to $250,000. The Debtors filed amended schedules to claim the new, more favorable, exemption amount in their homestead. The Chapter 7 Trustee objected. The Trustee argued that the Debtors are limited to the amount of the homestead exemption in place at the time they filed their case. The Court agreed with the Trustee and sustained the Trustee’s objection. The Debtors were limited to the $75,000 homestead exemption amount in effect under the prior Colo. Rev. Stat. § 38-41-201(1)(a).
Judge Joseph G. Rosania, Jr. (JGR)
The Debtors filed their Chapter 13 case, listing a 12.9% interest in a closely-held limited liability company. The LLC owned commercial real estate valued at $700,000, subject to a $178,000 lien. The value of the Debtors’ interest, $67,338, was discounted for marketability purposes.
Initially, the interest was valued at $6,000 and was later amended to reflect a discounted marketability value of $15,000. The valuation was disputed by the Chapter 13 Trustee. The Debtors obtained an opinion letter from a Chapter 7 Panel Trustee agreeing with the $15,000 valuation, which resulted in the withdrawal of the Chapter 13 Trustee’s objection and confirmation of the Debtors’ Chapter 13 plan. Approximately 3 years later, the LLC sold the commercial property and the Debtors received $76,405 in proceeds attributable to the 12.9% interest. Thereafter, the Trustee sought the entry of an order requiring the turnover of the proceeds and the modification of the plan to provide for the payment of the same.
The Court looked to the interplay of 11 U.S.C. §§ 1306(a)(1) and 1327(b) in addressing what constitutes post-confirmation property of the Chapter 13 bankruptcy estate. The Court applied the estate termination theory and held, under the facts and circumstances of the case, that the interest in the LLC was appropriately disclosed and reconciled in the best-interest-of-creditors test and revested with the Debtors upon confirmation. The Court allowed the Debtors to retain the proceeds from the post-confirmation sale and denied the Trustee’s motion for turnover and modification of the confirmed Chapter 13 plan.
In an individual chapter 7 case, an unsecured judgment creditor filed an adversary proceeding seeking to deny Debtor’s discharge pursuant to Sections 727(a)(2)(A) for fraudulent transfers and 727(a)(4)(A) for false oaths. After a trial on the merits, the Court found Debtor was entitled to a discharge.
Debtor was a physician who had owned and/or been employed by several medical practices. He scheduled over $4.4 million in unsecured, primarily business debts. Creditor held a $290,000 default judgment that arose out of construction work performed for a failed medical practice started by a group of physicians including Debtor.
In trying to prove fraudulent intent, Creditor generally relied on evidence of Debtor’s undisclosed $1 sale of a non-operating LLC to his significant other; bank transfers involving Debtor’s personal and business bank accounts, especially after the $1 sale; and over $50,000 in undisclosed alleged gifts from Debtor to his family members.
After a fact-intensive inquiry, the Court found that while Debtor acted suspiciously, he did not fraudulently transfer his property. First, he had a reasonable basis for his $1 valuation of a non-operable LLC that required conversion to a PLLC before it could operate as a medical practice. Second, his bank transfers showed that he was attempting to pay his personal obligations and business debts, not hide money from his creditors. Third, the alleged gifts to his family members were made in exchange for living expenses or services performed in the regular course of his medical practice. And although Debtor made false oaths in his bankruptcy paperwork, they were careless and inadvertent—not knowing and fraudulent.
Finally, in concluding that Debtor was entitled to a discharge, the Court relied on its discretion under Section 727(a) to balance the magnitude of Debtor’s debts against the severity of the alleged violation of the bankruptcy laws.
In March of 2021, Omar Dieyleh (“Dieyleh”), filed his Chapter 11 Subchapter V Bankruptcy case. The case was jointly administered with a Chapter 11 Subchapter V case filed by Donut House, Inc. (“House”). Dieyleh is the sole shareholder of House. The plan was confirmed in September of 2021. Additional Donut House locations were owned by Dieyleh and his family members. Dieyleh has been in the donut business since 2009 and opened more locations over the years.
In 2017, Dieyleh and his brother-in-law, Omar Tarawneh, decided to open a new donut store known as DH Alameda, LLC (“DH Alameda”). Tarawneh was an engineer by trade with no experience in the donut business. Tarawneh formed Donut Café, LLC (“Café”). Café and House each owned 50% of DH Alameda. Café contributed $179,259.54 in cash and $50,000.00-worth of equipment. House contributed a license agreement valued at $229,259.54.
DH Alameda operated a retail restaurant and donut production facility. Donuts were sold to other House restaurant locations through a formalized Supplier Agreement.
Disputes arose from the operation of DH Alameda, which led to the filing of an arbitration proceeding, raising various claims between the parties.
A five-day trial was conducted in the arbitration proceeding. The Arbiter issued Preliminary and Final Awards finding (1) in favor of Café and against House and Dieyleh on Café’s claim to pierce the corporate veil of House and to hold Dieyleh personally liable for the actions of House; (2) in favor of Café and against House on Café’s claims for breach of contract and breach of fiduciary duty, and awarding damages to Café, jointly and severally, against House and Dieyleh in the amount of $297,191.00; (3) in favor of House and Dieyleh and against Café on Café’s remaining claims; (4) in favor of House and against Café dissolving DH Alameda effective as of February 1, 2021; (5) in favor of Café and against House on House’s remaining cross and counterclaims; (6) awarding costs to Café in the amount of $81,557.21, jointly and severally, against House and Dieyleh; and (7) awarding attorney’s fees to Café in the amount of $190,344.00, jointly and severally against House and Dieyleh (total award $604,838.24). In addition, pre-judgment and post-judgment interest was awarded.
Café filed this adversary proceeding claiming that Dieyleh’s debt should not be dischargeable pursuant to 11 U.S.C. § 523(a)(2)(A), (a)(4), and (a)(6). Café filed a motion for summary judgment asserting the arbitration award contains sufficient findings to be preclusive with respect to the dischargeability claims. Dieyleh filed a cross-motion for summary judgment arguing the findings are not entitled to preclusive effect. The Court examined the findings and conclusions set forth in the arbitration awards, and other materials submitted by the parties, and determined that while the arbitration proceeding could be entitled to preclusive effect, the findings and conclusions made by the Arbiter were not identical to the findings necessary to establish that the debt was excepted from discharge. The Court also found the Complaint filed in the Adversary Proceeding was insufficient to state claims under 11 U.S.C. § 523(a) but granted leave to file an amended Complaint.
The Debtors, Happy Beavers, LLC; Armed Beavers, LLC; and Gunsmoke, LLC operate a business known as Front Range Gun Club. Happy Beavers, LLC holds title to the real property where the business is located. Gunsmoke, LLC operates the business, is a wholly owned subsidiary of Armed Beavers, LLC, and leases the business premises from Happy Beavers, LLC. All the business income is generated through Gunsmoke, LLC. Each of the Debtors filed Subchapter V Chapter 11 cases in July, 2020. The original 90-day deadline to file plans of reorganization under 11 U.S.C. § 1189 was extended and plans were timely filed. Objections to the plans were filed by the principal creditors in the cases. The parties entered into a standstill agreement to facilitate efforts to reach a global settlement. When those negotiations fell through, the Court required the filing of amended plans. The Debtors sought two additional extensions of time to file the amended plans through January 11, 2022.
On January 11, 2022, the Debtors and Great Western Bank filed motions to approve the sale of estate assets free and clear of liens but did not file amended Chapter 11 plans. The Court issued Orders to Show Cause why the cases should not be dismissed or converted for the failure to file amended plans. At the show cause hearing, the Debtors argued they acted in good faith throughout the Chapter 11 proceedings, and, after extensive negotiations with the Bank, determined the best interest of creditors of the estate would be served through a public auction sale of the ongoing business free and clear of liens, claims, interests, and encumbrances pursuant to 11 U.S.C. § 363(f). The Debtors did not directly reference circumstances for which they should not justly be held accountable for the failure to timely file plans of reorganization or liquidation. The Debtors argued the proposed sale was a prerequisite to the filing of amended plans.
The Court found the failure to file amended plans constituted cause for conversion or dismissal under 11 U.S.C. §§ 1112(b)(1) and (b)(4)(J). The Court found that conversion of the cases to Chapter 7 was in the best interest of creditors of the estate as the Debtors had accumulated cash during the Chapter 11 proceedings and conversion would allow a Chapter 7 Trustee to independently evaluate pending litigation and whether continued pursuit of the same was warranted.
In two nearly identical but separately administered, contentious individual Chapter 11 Subchapter V cases (which are only two of five total bankruptcy cases involving the same parties), three jointly-represented Creditors timely filed proofs of claim totaling nearly $1.8 million. Debtors timely objected to these claims. Before Creditors’ deadline to respond to the claim objections had passed, the Court held the cases in abeyance to allow for settlement negotiations. To begin the abeyance, the parties executed a standstill agreement that clearly set forth numerous pending deadlines, including Creditors’ response deadline. Creditors had approximately nine days left to respond to the claim objections.
The abeyance lasted approximately four months. The parties were unable to reach a settlement and the case timelines began running. Creditors failed to respond to Debtors’ claim objections within the remaining nine days before the deadline. Approximately 30 days after the deadline, Debtors filed certificates of non-contested matter. Two days later, Creditors sought leave to file tardy oppositions to the claim objections due to “excusable neglect” under Fed.R.Bankr.P. 9006(b)(1) and offered to file their responses within 24 hours of a Court order.
The Court granted Creditors’ request to file late responses to Debtors’ claim objections. The Court found that Creditors acted in good faith because the missed deadline was a result of counsel’s inadvertence, not a strategic litigation ploy, and because their proofs of claim were facially valid. However, Creditors bore the entire fault for the missed deadline. Ultimately, the minimal prejudice to Debtors and federal courts’ strong preference for deciding issues on their merits were the deciding factors in allowing Creditors’ late response. Although Debtors protested further delays in their cases, Debtors were complicit in the delays because they waited approximately 30 days before filing certificates of non-contested matter which could have been filed as early as 2 days after the deadline. Furthermore, Debtors could not claim surprise at Creditors’ responses. Creditors were not seeking to advance a new legal theory or claim but only seeking to defend their previously-filed proofs of claim. In the context of five contentious, highly-litigated bankruptcies involving the same parties, Debtors knew or should have known that Creditors intended to pursue their claims of nearly $1.8 million. The balance of equities favored allowing Creditors’ late responses.
In two nearly identical but separately administered, contentious individual Chapter 11 Subchapter V cases (which are only two of five total bankruptcy cases involving the same parties), three jointly-represented Creditors timely filed proofs of claim totaling nearly $1.8 million. Debtors timely objected to these claims. Before Creditors’ deadline to respond to the claim objections had passed, the Court held the cases in abeyance to allow for settlement negotiations. To begin the abeyance, the parties executed a standstill agreement that clearly set forth numerous pending deadlines, including Creditors’ response deadline. Creditors had approximately nine days left to respond to the claim objections.
The abeyance lasted approximately four months. The parties were unable to reach a settlement and the case timelines began running. Creditors failed to respond to Debtors’ claim objections within the remaining nine days before the deadline. Approximately 30 days after the deadline, Debtors filed certificates of non-contested matter. Two days later, Creditors sought leave to file tardy oppositions to the claim objections due to “excusable neglect” under Fed.R.Bankr.P. 9006(b)(1) and offered to file their responses within 24 hours of a Court order.
The Court granted Creditors’ request to file late responses to Debtors’ claim objections. The Court found that Creditors acted in good faith because the missed deadline was a result of counsel’s inadvertence, not a strategic litigation ploy, and because their proofs of claim were facially valid. However, Creditors bore the entire fault for the missed deadline. Ultimately, the minimal prejudice to Debtors and federal courts’ strong preference for deciding issues on their merits were the deciding factors in allowing Creditors’ late response. Although Debtors protested further delays in their cases, Debtors were complicit in the delays because they waited approximately 30 days before filing certificates of non-contested matter which could have been filed as early as 2 days after the deadline. Furthermore, Debtors could not claim surprise at Creditors’ responses. Creditors were not seeking to advance a new legal theory or claim but only seeking to defend their previously-filed proofs of claim. In the context of five contentious, highly-litigated bankruptcies involving the same parties, Debtors knew or should have known that Creditors intended to pursue their claims of nearly $1.8 million. The balance of equities favored allowing Creditors’ late responses.
The Douglas County Department of Human Services (“DHS”) sought a determination that Holli Ann Rioux (“Defendant”) obtained public assistance benefits fraudulently. Specifically, DHS alleged Defendant misrepresented her household size and household income in completing applications for benefits by not including her common-law marriage husband or his income.
The Court conducted a two-day trial in which DHS introduced evidence indicating that the Defendant and Eric Michael Rosen (“Rosen”) established a common-law marriage. Defendant and Rosen filed separate tax returns, maintained separate bank accounts, and denied that they held themselves out as married to third parties. The Court applied the recently revised test for proving common-law marriage set forth in the case of Hogsett v. Neale, 478 P.3d 713 (Colo. 2021) and determined that Defendant and Rosen had a mutual intent to be in a marital relationship. Accordingly, Defendant, by omitting Rosen’s income from the applications, obtained the public assistance benefits fraudulently.
The complaint filed by DHS was a one-count complaint under 11 U.S.C § 523(a)(2) for fraud. DHS did not specify whether it was proceeding under § 523(a)(2)(A) or (B). In closing argument, Defendant, for the first time, requested dismissal of the complaint for failure to plead a claim under § 523(a)(2)(B). The Court granted the oral motion of DHS to amend the complaint to conform to the evidence permitting the claim under § 523(a)(2)(B). The Court then provided Defendant the opportunity to present additional evidence in support of any defenses to the § 523(a)(2)(B) claim, which she declined. The Court found that the various food and Medicaid assistance applications were statements in writing respecting the Defendant’s financial condition and were materially false in many respects, including the failure to include her common-law husband and his income as part of her household composition. Therefore, the Court held that the debt was non-dischargeable.
The Debtor, Ralph Bonham, sought relief in the Bankruptcy Court under Chapter 11 after a judgment was entered against him in the approximate amount of $4.6 million and in favor of the Conservatorship of Robert D. Buchanan, the Debtor’s stepfather. The Debtor’s appeal of the judgment is currently pending.
The judgment arose from allegations including breach of fiduciary duty and undue influence in connection with certain business schemes the Debtor perpetrated upon Buchanan including the failure to pay appropriate interest on moneys borrowed, and the misappropriation of proceeds from the sale of a multi-family apartment complex.
The Court conducted a five-day evidentiary hearing on the Conservator’s Motion to Appoint a Chapter 11 Trustee or Convert Case to Chapter 7. The Court reviewed the lengths to which the Conservator went in attempting to derail the Debtor’s reorganization efforts. The Conservator objected to nearly every motion the Debtor filed. He objected to fee applications on behalf of estate professionals. He objected to the sale of stock in H.E. Whitlock, Inc., the Debtor’s closely held construction company. He attempted to intervene in what was claimed to be a sham divorce proceeding between the Debtor and his spouse. The Court found the Conservator’s attempts to exercise control over a legal malpractice action being pursued by the Debtor were subject to the automatic stay under 11 U.S.C. § 362(a)(3). The Court reviewed the numerous adversary proceedings related to the case and characterized the litigation as “a war.”
In considering whether the appointment of a Chapter 11 Trustee was appropriate, the Court applied a standard of proof of a preponderance of the evidence rather than a clear and convincing standard. The Conservator argued the appointment of a Chapter 11 Trustee would eliminate conflicts of interest arising from the Debtor preferring his spouse over other creditors as evidenced by the alleged sham divorce. The Conservator argued the Debtor demonstrated a lack of good faith, that the Debtor was squandering assets through the retention of multiple professionals, that there were issues with the accuracy of the Debtor’s operating reports, and that a neutral trustee was necessary to diffuse the acrimony in the two-party dispute. The Conservator alleged that the Debtor was not pursuing avoidance actions against insiders, that the Debtor had not timely filed a plan of reorganization, that the liquidation of assets and prosecution of the malpractice action would be protracted over several years, and that the Debtor is not trustworthy as evidenced by the pre-petition jury verdict resulting in the judgment. Each of the allegations was rebutted by the Debtor and the Court determined, in reviewing the totality of circumstances, that the Conservator did not meet his burden of proof warranting the appointment of a Chapter 11 Trustee. The Court considered the trustworthiness of the Debtor, the Debtor’s past and present performance in the bankruptcy case, prospects for reorganization, the confidence of the business community and of the creditors in the Debtor, and weighed the cost and benefits that would be derived by the appointment of a trustee. The Court found that the Debtor was trustworthy and properly managing the Chapter 11 estate, and found the case was not a two-party dispute as several bank claims were also involved. Importantly, the Court considered the Debtor’s testimony that if the appeal was unsuccessful, he was willing to sell all of his assets, if necessary, to satisfy his creditors. The Motion to Appoint a Chapter 11 Trustee or Convert Case to Chapter 7 was denied.