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Unpublished Opinions

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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.

A Chapter 13 debtor and her non-filing spouse had jointly purchased a condominium property outright at a foreclosure sale in 2012. However, they had struggled to make HOA payments since 2013, amassing an arrearage in excess of $20,000, and to pay real property taxes on the property since 2018.

In 2019, the debtor’s husband filed a Chapter 13 case to halt a foreclosure action by the HOA. The husband was unable to obtain a confirmed plan due to his failure to file and pay state and federal income taxes, and his case was ultimately dismissed for failure to make plan payments. The husband later testified that his plan payments were “too expensive.”

Three days after the closure of her husband’s Chapter 13 case, the debtor filed this case to halt a second foreclosure action by the HOA. The debtor’s second amended Chapter 13 plan proposed to cure the arrearage owed to the HOA over 44 months, and to pay 100% of her nominal unsecured debt over 60 months. The debtor, who was a student, had long-suffered medical problems which prevented her from attending school or working during the COVID-19 pandemic. Accordingly, the sole source of income to fund the debtor’s plan was “income from husband.”

The HOA objected to confirmation of the debtor’s plan, arguing that the plan was not feasible, the plan was not proposed in good faith, and the HOA was not adequately protected by a plan which proposed to cure the HOA’s arrearage in 4 years. The HOA also moved for relief from the automatic stay and the co-debtor stay.

The Court held an evidentiary hearing on the matters wherein the evidence showed that property taxes were owed for 2019; property taxes for the second half of 2018 had been sold at tax sale and not yet redeemed; the debtor’s husband had shielded her from problems relating to the HOA and his Chapter 13 case to avoid upsetting her while she was ill; the couple’s finances were “beyond tight” due to the debtor’s ongoing medical bills; the couple had been experiencing martial problems and only lived together part time; and the couple had been unable to obtain homeowner’s insurance on the property for several years due to unrepaired flood damage to the interior walls.

The debtor’s husband testified that he owned his own business, and that his current income was from landscaping and labor work. He did not specify the amount of his income or provide any documentation of its source or amount. Nor did he provide evidence of his current expenses. The husband also did not provide any documentation to establish that he had filed his outstanding income tax returns or paid any of the outstanding federal and state income taxes.

The threshold issue was whether the plan was feasible. Relying, in part, on In re Khan, No. 14-13514 MER, 2015 WL 739854 (Bankr. D. Colo. Feb. 19, 2015), the Court found that the totality of the circumstances demonstrated that the plan was not feasible. Because the Court found that the plan was not feasible, it did not need to reach the issue of good faith.

The Court denied confirmation, dismissed the case, and granted both requests for stay relief, but the Court stayed the dismissal and stay relief orders for 30 days to allow the debtor and her husband time to file a motion to sell the property.

Atna Liquidating Trust, v. AFCO Premium Credit, LLC, Adversary Proceeding No. 17-01558-JGR (Avoidance of alleged fraudulent transfers under 11 U.S.C. § 544(b) and applicable state fraudulent transfer law; avoidance of constructive fraudulent transfers under 11 U.S.C.  § 548(a)(1)(b); and unjust enrichment.)

Atna Resources, Inc. and six related companies filed for relief under Chapter 11 of the Bankruptcy Code.  Before and at the time of the filings, only two of the related companies were operational and generated revenue, Briggs operating the Briggs mine, and Atna  operating the Pinson mine.  The affiliated Debtors utilized a centralized cash account (“CCA”) maintained by Canyon Resources Corporation (“Canyon”), headquartered in Golden, Colorado.

The Debtors’ Joint Chapter 11 Plan of Reorganization was confirmed on November 29, 2016. The Plan provided for the formation of a Liquidating Trust for the purposes of administering the assets transferred to the Liquidating Trust, resolving disputed claims, pursuing the retained causes of action, and making distributions to the beneficiaries provided for under the plan.  By its simplest terms, assets belonging to each respective Debtor estate were to be transferred to the Liquidating Trust, then disbursed to the creditors of the same respective Debtor estate.

The Trustee’s Amended Complaint seeks to avoid the payments made to AFCO Premium Credit, LLC (“AFCO”) by Canyon as constructively fraudulent.  AFCO entered into a series of insurance premium financing agreements with the affiliated Debtors’ Canadian parent company, Atna Resources, Ltd. (“Atna”) to finance insurance covering the related companies.

The theory being advanced was the comprehensive insurance covered all the affiliated companies, while only Pinson and Briggs were generating revenues to fund the CCA.  Funds in the CCA paid to AFCO that did not directly benefit Pinson or Briggs could be recovered as constructively fraudulent.

In a prior related Adversary Proceeding, Atna Liquidating Trust v. Elwood Staffing Services, Inc. (“ESS”), Adv. Proc. No. 17-01160-JGR, this Court entered proposed findings of fact and conclusions of law determining that similar fraudulent transfer claims asserted by the Trustee were barred by controlling Tenth Circuit precedent set forth in In re Slack-Horner Foundries Co., 971 F.2d 577 (10th Cir. 1992), which requires the Trustee to avoid an initial transfer before the Trustee can recover from a subsequent transferee, and that the fraudulent transfers were not adequately reserved by the terms of the Plan.

United States District Court Judge Robert E. Blackburn approved and adopted the analysis and conclusions of the bankruptcy court and remanded the matter for resolution of remaining preference claims asserted by the Trustee against ESS.

Prior to resolution of the remaining claims, the Trustee voluntarily dismissed the ESS Adversary Proceeding.

Based on the ESS ruling, AFCO moved for summary judgment.  The Trustee countered by arguing that because the ESS Adversary Proceeding was dismissed, it had no preclusive effect.

The Court entered an Order Dismissing Adversary Proceeding applying the law of the case doctrine.

The conclusion that the Trustee lacked standing to pursue the constructive fraudulent claims was reached by examining the Joint Chapter 11 Plan in the Chapter 11 bankruptcy cases and determining the avoidance claims premised on state and federal constructive fraudulent transfer laws arising out of the CCA were not adequately reserved.  That conclusion applies to all causes of action brought by the Trustee on behalf of the beneficiaries of the Liquidating Trust and prevents inconsistency and reconsideration of matters previously decided in the case.  The three alternate grounds to depart from the application of the doctrine do not apply here: (1) there is no new evidence that is substantially different; (2) controlling authority has not changed; and (3) the conclusions of law proposed by this Court and adopted by the District Court in ESS Adversary Proceeding are not clearly erroneous and do not work a manifest injustice. 

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