Chapter 13 debtor confirmed a five-year plan that required her to make direct payments to her mortgage lender. When she failed to make the last three mortgage payments, the lender moved to dismiss the case. The debtor then cured the arrearage but did so two and one-half months after the end of her plan. Applying its earlier decision in In re Humes, 579 B.R. 557 (Bankr. D. Colo. 2018), the Court granted the lender’s motion to dismiss. The Debtor filed a motion to reconsider. Surmising that the debtor intended to appeal the issue, the Court gave more background on chapter 13 practice in this district for appellate court consideration in ruling on the debtor’s motion for reconsideration.
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Unpublished Opinions
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Judge Elizabeth E. Brown (EEB)
Chapter 13 debtor confirmed a five-year plan that required her to make direct payments to her mortgage lender. When she failed to make the last three mortgage payments, the lender moved to dismiss the case. The debtor then cured the arrearage but did so two and one-half months after the end of her plan. Applying its earlier decision in In re Humes, 579 B.R. 557 (Bankr. D. Colo. 2018), the Court granted the lender’s motion to dismiss. The Debtor filed a motion to reconsider. Surmising that the debtor intended to appeal the issue, the Court gave more background on chapter 13 practice in this district for appellate court consideration in ruling on the debtor’s motion for reconsideration.
Judge Joseph G. Rosania, Jr. (JGR)
Plaintiff Jeffrey Weinman, Chapter 7 Trustee of the Haimark bankruptcy estate (“Trustee”), filed fifty-six avoidance actions in October 2017. He sued Vantage Travel Services, LLC (“Vantage”) for recovery of an alleged preferential transfer in the amount of $474,718. The parties agreed the Trustee met his burden to establish all elements of a preferential transfer under 11 U.S.C. § 547, except 11 U.S.C. § 547(b)(2), that the transfer was made for or on account of an antecedent debt.
Vantage was a tour operator which entered into several contracts with Haimark Line under which it purchased allotments for cruises on the MS Saint Laurent. In turn, Vantage sold those cruise spaces to its own customers.
In June 2015, during its maiden voyage, the MS Saint Laurent collided with a concrete canal lock on the St. Lawrence River near Massena, New York (the “Allision”). The ship was damaged, numerous passengers were injured, and an insurance dispute arose regarding responsibility for the Allision. These events caused Haimark to file a Chapter 11 bankruptcy case.
Vantage entered into several contracts with Haimark, which required Vantage to pay deposits ranging from 15-20% of the contract prices. In August 2015, Vantage paid Haimark $915,288, of which $499,193 was paid by mistake. After discovering the mistake, the parties agreed to apply $416,094 of the $915,288 to deposits due for other cruise allotments. Haimark wired the remaining $491,913 to Vantage from its general operating account for “the overpayment that was made on the MS Saint Laurent products.”
The matter came before the Court on cross motions for summary judgment. The parties agreed there were no facts in dispute. The Trustee asserted that Haimark had a legal obligation to refund the overpayment to Vantage, such that Haimark owed an antecedent debt to Vantage. Vantage argued that Haimark made an advance payment which was not for or on account of antecedent debt.
The Bankruptcy Code does not define what constitutes an antecedent debt. The test for when a debt is incurred is whether the debtor is legally obligated to pay. The Trustee relied on a line of cases for the proposition that a refund due as a result of an overpayment, made by a debtor to a creditor, was made for or on account of antecedent debt such as In re Twin Contracting Corp., 582 B.R. 400 (Bankr. E.D. Va. 2017) and In re Farr, 407 B.R. 343 (B.A.P. 8th Cir. 2009).
Vantage relied on a line of cases for the proposition that advance payments made by a debtor to a creditor for goods or services to be provided in the future are not made for or on account of antecedent debt such as In re New Page Corp., 569 B.R. 593 (D. Del. 2017) and In re Dots, LLC, 533 B.R. 432 (Bankr. D.N.J. 2015). Thus, the dispositive issue was whether the overpayment made by Vantage could be characterized as an advance payment. If so, no debt existed at the time of the transfer, so the transfer was not made for or on account of antecedent debt.
Here, Vantage (the creditor) made payments to Haimark (the debtor) pursuant to an agreement that required the debtor to provide future services (spots on cruises). Under the agreement, the debtor was required to provide the future services, so Vantage held a claim against the debtor for the value of any future services that were not provided. Once the overpayment occurred, the debtor had a legal obligation to repay that amount to Vantage and Vantage became the debtor’s creditor.
The case did not involve an advance payment by a debtor to a creditor for future goods and services to be provided. The cases cited by Vantage were distinguishable because they involved fact patterns in which the debtor made an advance payment to a creditor for future goods and service to be provided. While the distinction seems thin, it turns on the purpose of the transfer. If the transfer was made by a debtor to a creditor to refund an overpayment, the cases uniformly hold it was made for or on account of antecedent debt. On the other hand, if the transfer was an advance payment by a debtor to a creditor for good or services to be provided in the future, there is no antecedent debt owed to the creditor when the money is returned.
The Court held that the payment was a refund made on account of an antecedent debt and granted summary judgment in favor of the Trustee in the amount of $474,718.
Pre-petition, an employee-creditor worked for the debtor in contract management and sales, earning salary and commission. Under the terms of his compensation agreement, the creditor earned commissions as a percentage of gross sales on contracts that he assisted in procuring. The debtor’s employee handbook provided that commissions were “paid once the [debtor] is paid in full” on a contract, and “on the last payday of the month following the end of the quarter.” The debtor’s compensation and incentive plan confirmed that commissions were “paid on the Quarter of receipt of payment” on a contract.
The creditor assisted in procuring a certain contract with the USDA 194 days pre-petition. The USDA paid the debtor in full on the contract 178 days pre-petition. The debtor failed to pay the creditor his commission on the USDA contract.
Post-petition, the creditor filed a proof of claim for unpaid wages, a portion of which the creditor claimed was entitled to priority status under 11 U.S.C. § 507(a)(4). The debtor objected, arguing that no portion of the creditor’s claim was entitled to priority status because his commission was earned outside the 180 days prescribed by the statute. On cross-motions for summary judgment, the debtor argued that for priority purposes, the date that the creditor’s commission was earned was the date that the creditor assisted in procuring the USDA contract. The creditor argued that the date that his commission was earned was the date that the USDA paid the debtor in full on the contract. In support of his position, the creditor argued, “The point at which commissions are ‘earned’ can vary depending upon the particular contract between the parties at issue.” The creditor construed the debtor’s employee handbook as a contract between the parties.
The Court found that the creditor offered no evidence to suggest that there was a contract between himself and the debtor which dictated when commissions were earned. The Court acknowledged that other courts that have interpreted the meaning of “earned” in the context of the priority wage statute have uniformly held that wages are earned when the employee provides the services that give rise to the wages. This is true regardless of when, if ever, the wages are actually paid. The Court concluded that the creditor’s commission was earned 194 days pre-petition when the debtor and the USDA entered into the contract, even though the creditor’s commission was not payable until the USDA subsequently paid the debtor in full on the contract. Accordingly, the Court held that no portion of the creditor’s claim was entitled to priority status.
Pre-petition, the debtor-defendant invented a clip which holds mesh against solar panels to prevent animals from damaging the panels. The debtor did not patent or copyright his invention. The debtor was contacted by and entered into an oral agreement with a certain company, whereby the company would manufacture, market, and sell the clip and make monthly payments to the debtor. The payments to the debtor varied based on the amount of sales generated by the clip in the preceding month, and there was no agreement between the debtor and the company as to the duration of the payments.
The debtor subsequently filed for relief under Chapter 7 of the Bankruptcy Code and listed his interest in the payments in his Schedules. At the 341 meeting, where the debtor was represented by appearance counsel, the Chapter 7 trustee questioned the debtor about the payments and requested, inter alia, that any further payments from the company be forwarded to the trustee. The debtor forwarded payments to the trustee for the two months that followed the 341 meeting. Thereafter, the debtor received his discharge.
Based on conversations with his retained counsel, the debtor believed that his bankruptcy case was “done and over” after he received his discharge. As a result, the debtor did not forward any of the eight payments he received post-discharge to the trustee, which prompted the trustee to move for turnover of the payments. The debtor was subsequently contacted by his counsel to discuss the motion for turnover, after which the debtor, again, believed that his bankruptcy case was completed. The debtor’s counsel then moved to withdraw from the case.
The following month, the trustee commenced an adversary proceeding against the company directly for turnover of the payments. Several months later, the trustee commenced an adversary proceeding against the debtor for revocation of discharge under 11 U.S.C. §§ 727(d)(2) and 727(d)(3), and turnover of the payments in the amount of about $5,000. Approximately two weeks later, the trustee settled with the company in the amount of about $5,000. The company then ceased making any further payments to the debtor. The debtor believed that because the company paid the $5,000 to the trustee, he was no longer required to pay that amount to the trustee.
The Court found in favor of the debtor on the trustee’s first claim under 11 U.S.C. § 727(d)(2) for the debtor’s failure to deliver the payments to the trustee. Citing In re Reid, No. 02-34592, 2006 WL 2475332 (Bankr. W.D. Ky. Aug. 25, 2006), aff’d, appeal dismissed sub nom. Schilling v. Reid, 372 B.R. 1 (W.D. Ky. 2007), the Court found that the debtor lacked a knowing intent to defraud because his failure to deliver property resulted from a reasonable belief that his bankruptcy case was completed. The Court noted that at two critical junctures in his bankruptcy case—the 341 meeting and the filing of the motion for turnover—the debtor was all but abandoned by his retained counsel. As a layperson, the debtor acted under the reasonable understanding that he was relieved from the obligation to provide the payments to the trustee because (i) his bankruptcy case was closed, and (ii) the trustee recovered a similar amount directly from the company.
The Court also found in favor of the debtor on the trustee’s second claim under 11 U.S.C. § 727(d)(3) for the debtor’s failure to comply with the turnover order. Citing various Tenth Circuit precedent, the Court noted that a debtor’s non-compliance with a court order must be willful or intentional for revocation of discharge. The Court found that the debtor’s non-compliance with the turnover order was neither willful nor intentional because it resulted from his reasonable belief that his bankruptcy case was completed.
The Court found in favor of the trustee on his third claim for turnover under 11 U.S.C. § 542(a). However, citing Hill v. Muniz (In re Muniz), 320 B.R. 697, 699–700 (Bankr. D. Colo. 2005), the Court limited the trustee’s recovery to the payments that the debtor had in his possession at the time that the turnover motion was filed. The Court found that the debtor only had about $1,500, not $5,000, in his possession when the turnover motion was filed and granted.
The Debtor owned a 1994 Allegro Bay motor home he valued at $5,000.00. He used the motor home for daily transportation, including to get to and from work. The Debtor also lived in the motor home. The Debtor claimed an exemption in the motor home as a motor vehicle under C.R.S. 13-54-102(1)(j)(I), and the Chapter 7 Trustee objected.
The Trustee’s objection was sustained. The Court recognized that exemption statutes under Colorado law are to be liberally construed but could not ignore the express language of C.R.S. 13-54-102(1)(j)(III), which excludes motor homes from the motor vehicle exemption. The Court also rejected the Debtor’s alternative argument that the motor home could be exempt as a tool of trade where the motor home was simply used as a means of transportation to get to and from work.
An individual Chapter 11 Debtor proposed a plan of reorganization which provided that he would retain his interests in all assets owned prior to confirmation, unless: “[i]f confirmation of the Plan was sought pursuant to 11 U.S.C. § 1129(b), all property of the Debtor which is property of the Debtor’s bankruptcy case as of the Effective Date of the Plan shall remain property of the estate during the term of the Plan.” The U.S. Department of Education, which held a student loan claim against the Debtor, voted to reject the plan. As the largest impaired voting creditor in its class of unsecured creditors, the U.S. Department of Education’s rejection gave rise to a dissenting class of creditors. As a result, the Debtor sought confirmation under the “cram-down” mechanism of § 1129(b).
The Debtor asserted that the plan was fair and equitable because it met the requirements of § 1129(b)(2), including the absolute priority rule codified in § 1129(b)(2)(B)(ii). The Debtor attempted to circumvent the absolute priority rule by providing that, contrary to § 1141, “all property of the Debtor which is property of the Debtor’s bankruptcy case as of the Effective Date of the Plan shall remain property of the estate during the term of the Plan.” Thus, the Debtor contended that he would not receive or retain any property under the plan on account of his interest (which was junior to that of the class containing the U.S. Department of Education’s claim). However, the plan also provided that the Debtor would remain in possession of his assets, including his pre-petition property which fell within the purview of § 541. The Debtor maintained that his continued possession of property was not a result of the plan, but rather by operation of § 1115. The Court found that this was a distinction without a difference. Citing Dill Oil Co., LLC v. Stephens (In re Stephens), 704 F.3d 1279 (10th Cir. 2013), the Court found that the plan ran afoul of the absolute priority rule because it allowed the Debtor to “retain possession and control” of prepetition property notwithstanding a senior dissenting class of creditors.
The Debtor argued, however, that the plan could still be confirmed under the concept of new value because the Debtor proposed to contribute “all property of the Debtor which is property of the Debtor’s bankruptcy case as of the Effective Date of the Plan.” The Court noted that the proposed new value contribution came from the Debtor, not—as required by many courts—from an outside source. Therefore, to the extent that the new value exception applies in individual Chapter 11 cases, the Court found that the Debtor failed to satisfy the requirements of the exception.
The Debtors initially filed a pro se Chapter 7 bankruptcy case not understanding their home would be liquidated and non-exempt equity would be used to pay creditors. Thereafter, they retained counsel and converted the case to Chapter 13. The plan, which proposed to pay to creditors the equity in the home over time, drew an objection from the Chapter 13 Trustee due to the provision that the home would revest with the Debtors upon confirmation.
The Court discussed various approaches addressing what constitutes property of the estate post-confirmation and determined the Tenth Circuit adopted the estate termination approach in In re Talbot, 124 F.3d 1201, 1208 (10th Cir. 1997). The Court then examined possible scenarios that may confront the Debtors during the pendency of the plan. One of the potential scenarios speculates the Debtors could sell their home, spend the proceeds and seek to re-convert their case to Chapter 7. The Chapter 13 Trustee argued this scenario could be avoided by preventing the revestment of the property at confirmation.
The Court held under 11 U.S.C. §1327(b) Chapter 13 debtors are entitled to propose plans that provide for the revestment of property of the estate upon confirmation notwithstanding a prior conversion from Chapter 7 and discussed other remedies that would be available in the event of a subsequent bad faith conversion.
Chief Judge Kimberley H. Tyson (KHT)
In McDaniel, the Court dealt with the issue of whether Debtors’ private educational loans issued by Navient Solutions, LLC (“Navient”) fit within the exception to discharge enumerated in Section 523(a)(8)(A)(ii) for “obligation[s] to repay funds received as an educational benefit, scholarship, or stipend” as a matter of law. 11 U.S.C. 523(a)(8)(A)(ii). The Court held they did not.
In their Complaint, Plaintiffs seek declaratory judgment their private student loans were discharged. Navient moved to dismiss the Complaint on several grounds, including that such loans were, as a matter of law, excepted from discharge pursuant to Section 523(a)(8)(A)(ii).
The Court denied Navient’s motion to dismiss. The Court determined a private student loan is not “an obligation to repay funds received as an educational benefit, scholarship, or stipend” under Section 523(a)(8)(A)(ii). Taking a narrow view of the subsection, the Court held such exception to discharge does not encompass any loan that confers an educational benefit upon the debtor – such as a private educational loan – but rather, the language of the statute sets an educational benefit apart from a loan, and excepts from discharge a category of obligations that does not include loans but rather, “educational benefit[s]”, “scholarship[s],” and “stipend[s].” The Court based its decision on the plain language of Section 523(a)(8)(A)(ii), in the context of its neighboring provisions, Sections 523(a)(8)(A)(i) and (B). The Court also found to the extent the statute was at all ambiguous, application of the doctrine of noscitur a sociis and the legislative history supported the Court’s conclusion.
Judge Thomas B. McNamara (TBM)
The Chapter 7 trustee commenced an adversary proceeding to recover fraudulent transfers under the Colorado Uniform Fraudulent Transfer Act (“CUFTA”), Colo. Rev. Stat. §38-8-105, and 11 U.S.C. §544 and to obtain a declaratory judgment. A central issue in the adversary proceeding was the solvency of the Debtor at the time he made certain transfers alleged to be fraudulent.
Pursuant to Fed. R. Civ. P. 26(a)(2)(B), the Trustee disclosed that he intended to call an accountant as an expert to testify that the Debtor was insolvent on the date of a particular transfer. Just over a month before trial, the defendants moved to exclude the testimony of the accountant as unreliable and irrelevant under Fed. R. Evid. 702.
Thus, the Court was required to perform the “gatekeeping” role imposed by Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579 (1993), Kumho Tire Co., Ltd. v. Carmichael, 526 U.S. 137 (1999) and Fed. R. Evid. 702. The Court convened an evidentiary Daubert hearing at which the Trustee offered the testimony of the accountant to establish the methodology he used in formulating his opinion on the Debtor’s solvency—particularly that the accountant used sufficient facts and data as required by the method he employed and properly applied the method.
The Court found that the accountant was sufficiently qualified by his “knowledge, skill, experience, training and education” to offer expert testimony about the Debtor’s solvency, and that he selected an appropriate methodology for determining the Debtor’s solvency: the fair value balance sheet method. The Court concluded, however, that the accountant did not have sufficient facts or data to reach a solvency determination and that he failed to reliably apply the facts and data in accordance with the methodology he used. Thus, the Court excluded the testimony of the accountant as unreliable and irrelevant under Fed. R. Evid. 702.