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Unpublished Opinions

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Judge Joseph G. Rosania, Jr. (JGR)

Karen S. Bordner and her husband Donald H. Ellis, sought bankruptcy relief in a Chapter 11 case.  Prior to the bankruptcy filing, Together Real Estate Holdings, LLC was involved in various real estate renovation projects with companies owned by Bordner.  TRE filed a Proof of Claim in Bordner’s personal bankruptcy case and filed an adversary proceeding raising claims for relief under 11 U.S.C. § 523(a)(2)(A) for false representations, false pretenses, and actual fraud to except two loans from discharge.  The Court combined the trial on the Complaint with Bordner’s Objection to TRE’s Proof of Claim.  The Court entered an order finding in favor of Bordner and against TRE on the dischargeability claims and granted Bordner’s Objection to the Proof of Claim.

The dispute centered around two loans made by TRE to Bordner, her business partner, Victoria Roberts, and their company, Artemis Realty Investments.  The first loan was made in the amount of $20,000.  A promissory note for the loan was executed after the fact, which was personally guaranteed by Bordner and Roberts.  The second $260,000 loan was also made without the execution of a promissory note and without signed personal guarantees by Bordner and Roberts.

The loans were made for the proposed purchase of a property located on Race Street in Denver.  When the purchase fell through, Artemis located a substitute property on Emerson Street and the parties agreed that the TRE loan proceeds could be used for its purchase.

The renovation project experienced complications and delays as a result of the worldwide pandemic and was eventually foreclosed upon by the first mortgage lender.  Interest payments on the TRE loans were made for a period of time, but the balance of the loans remain unpaid.

In its Complaint, TRE claimed that Bordner represented that she would repay the loans, that she and Roberts were going to contribute personal funds to the project, that the loans would be secured by Deeds of Trust, and that both promissory notes would be personally guaranteed.

The Court held that the $20,000 note (and the $260,000 loan) were dischargeable as TRE failed to establish that they were obtained through false representations, false pretenses, or actual fraud.  The Court further held that the $260,000 loan was not personally guaranteed in a writing as required by the Colorado Statute of Frauds and was not enforceable against Bordner.  The Court granted the Debtors’ Objection to the Proof of Claim filed by TRE and allowed the claim in the reduced principal amount of $20,000 to be treated as a general unsecured claim in the Debtors’ Chapter 11 Plan.

Overall, the Court denied cross-motions for attorney’s fees sanctions that arose out of an involuntary bankruptcy case from which the Court abstained under Section 305.

In the beginning, the Court granted an uncontested involuntary petition against the debtor who was in a pre-petition state court receivership. Then one of the debtor’s co-owners moved the Court to abstain from the case under Section 305. The state court receiver joined in seeking abstention, largely because the petition had been filed one hour after the receiver had closed the bidding on a sale of the debtor’s assets, but before the sale was finalized. The debtor’s co-owner submitted the only bid in the receiver’s sale and was the presumptive new owner. A group of three creditors, including the debtor’s other co-owner, opposed abstention and moved for the appointment of a Chapter 11 trustee. The Court held a multi-day evidentiary hearing and decided to abstain from the bankruptcy case.

Following the Court’s abstention ruling, the co-owner who sought abstention filed a motion for attorney’s fees sanctions against the three creditors (including the other co-owner) and their attorneys. The motion explicitly eschewed Section 303(i) as a source of sanctions, instead proceeding under Rule 9011 and Section 105(a). However, the motion did not comply with Rule 9011’s 21-day safe harbor provision. The motion sought fees because (1) the involuntary petition was allegedly filed in bad faith and (2) the creditors and their attorneys allegedly presented false allegations to the Court. 

For the filing of involuntary petition itself, the Court found that Rule 9011 sanctions were available because the rule’s 21-day safe harbor requirement does not apply to petitions. However, the Court denied sanctions. The Court based its decision on a lack of evidence of sanctionable conduct (which the Court distinguished from simply advancing losing arguments), an involuntary petition that met the statutory requirements, and the petitioning creditor’s legitimate purposes for seeking bankruptcy. 

For the alleged false representations made to the Court, the Court found that Rule 9011 sanctions were not available due to the movant’s noncompliance with Rule 9011’s 21-day safe harbor. The Court found that sanctions under Section 105(a) were available but denied sanctions on this basis as well. Vital to the Court’s decision was an expert opinion provided to the creditors mere days before state court bidding for the business closed and the involuntary petition was filed. Such an opinion, although the Court found it largely unjustified, provided a reasonable basis for the factual allegations advanced by the three creditors and their attorneys—especially under the expedited schedule imposed by the Court.

Finally, two of the creditors cross-moved for sanctions under Rule 9011(c)(1)(A) for their fees incurred in defending against the sanctions motion. The Court denied these sanctions, concluding that the original sanctions motion was a close call and not deserving of the rare and drastic remedy of sanctions.

The Court entered an Order Granting Summary Judgment against both Debtor-Defendants and in favor of the Plaintiff on claims for relief for a non-dischargeable debt under 11 U.S.C. § 523(a)(2)(A) for fraud and fraud by use of a writing, and for a non-dischargeable debt under 11 U.S.C. § 523(a)(6) for willful and malicious injury.

The Debtors established Hall Brewing Company (“HBC”) and opened a taproom in Parker, Colorado to sell Colorado brewed craft beer.  In 2016, the Plaintiff loaned $477,000 to HBC and the Debtors for use in the business.  HBC significantly misrepresented its assets and liabilities and the loaned funds were used to pay other creditors and personal debts.  In 2017, after the brewery failed, Plaintiff sued the Debtors and HBC in state court for breach of contract, fraud, breach of fiduciary duty, civil theft, and an accounting, and demanded a jury trial on all claims.

Relief from stay was granted to allow the state court proceeding to continue to its conclusion.  A jury trial was conducted in the fall of 2019, which resulted in a jury verdict and final judgment awarding damages in favor of Plaintiff in the amount of $1,497,278, plus fees, costs, and post-judgment interest.  The state appellate court affirmed the judgment in its entirety on December 29, 2022.  The Court found that the jury verdict and the final judgment entered in the state court action were entitled to preclusive effect in the discharge litigation.  The issues necessary to determine the non-dischargeability of the debt were actually litigated, and necessary to the resulting final judgment in the state court.

The Bankruptcy Court rejected the Debtors’ argument that they were denied a full and fair opportunity to litigate in the state court proceeding.  They listed various counterclaims against the Plaintiff in their bankruptcy filings and they argued the Chapter 7 Trustee of their bankruptcy cases was the only real party in interest and had a duty to pursue the counterclaims and defend them and HBC.  The Debtors also argued that because the alleged counterclaims were the property of the respective bankruptcy estates, they were unable to assert the alleged counterclaims at trial.  The Court found the Debtors had the opportunity to seek timely abandonment of the counterclaims, but did not.  The Court found the Halls were collaterally estopped from challenging the state court jury verdict and final judgments of fraud and civil theft in the bankruptcy court.  The bankruptcy dischargeability issues were identical to two of the issues decided by the state court: fraud (Section 523(a)(2)(A)) and civil theft (Section 523(a)(6)).

In his Chapter 11 case, the Debtor employed special litigation counsel to pursue an attorney malpractice claim arising from a pre-petition lawsuit.  The scope of employment was subsequently expanded to include representation of the Debtor in an appeal of the adverse judgment entered in the same action.
The law firm was engaged on a 40% contingency fee basis in the malpractice action and on an hourly basis for the appeal.  The malpractice case was ultimately settled for $356,000 plus the release of a $273,000 unsecured claim asserted against the bankruptcy estate.  Fees in the amount of $142,400 were sought pursuant to the contingency fee agreement.  Total fees of $125,900 were incurred in the appeal, which were voluntarily discounted by $11,000.  After interim payments, an award of $107,468 was sought.  The Debtor objected to the contingency fee as being too high based on the extent of services provided and the results obtained.  The Debtor also objected that the appellate fees were too high, again based on the extent of services provided, the quality of the legal services, and because of inadequate time-keeping practices.  The Debtor’s major creditor and opposing party in the prepetition litigation joined the Debtor in objecting to the fees.  They submitted a 25% contingency fee was justified given the circumstances and that the appellate fees should be reduced to $75,000.  The Court discussed the factors and risks involved in contingency fee arrangements and found the 40% fee reasonable in light of the nature of the litigation and the results obtained.  The Court, exercising its discretion, allowed the requested appellate fees in the reduced amount of $90,000, representing an approximate 10% discount for the timekeeping deficiencies and particularly problematic block-billing.  The Court declined to award interest on the appellate fees because a fee award had not yet been approved when interest was requested and declined to award additional legal research expenses that were not originally included in the fee application.

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.

Judge Thomas B. McNamara (TBM)

In this adversary proceeding, Plaintiff Together Real Estate Holdings, LLC (“TRE”), sought a determination that Debtor Victoria P. Roberts (“Ms. Roberts”) owed it debts pursuant to two promissory notes, and that such debts were nondischargeable under 11 U.S.C. § 523(a)(2)(A).   The Court determined that Ms. Roberts was obligated on the first promissory note, but that such debt was dischargeable.  The Court decided that Ms. Roberts was not indebted on the second promissory note.  In reaching its verdict, the Court emphasized two key points:  (1) a borrower’s promise to pay a promissory note and failure to do so cannot constitute actionable misrepresentation pursuant to Section 523(a)(2)(A) unless the creditor proves that the borrower had no present intention to make payments when the promissory note was signed; and (2) because Section 523(a)(2)(A) requires that a plaintiff show evidence of a debt for money, property, services or credit that was “obtained by . . . false pretenses, a false representation, or actual fraud” (emphasis added), a false representation made after the plaintiff has loaned money to the defendant cannot serve as a basis for a finding of nondischargeability under Section 523(a)(2)(A).

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.

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).