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Unpublished Opinions

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Judge Howard R. Tallman (HRT)

This is a series of cases upon which the Court has entered orders addressing issues that have arisen involving Rule 3002.1.

Previously, the Debtor had moved, under 11 U.S.C. § 522(f), to avoid judgment liens held by attorneys who had represented his former spouse in a pre-petition domestic case. Those § 522(f) motions were dismissed with prejudice, however, after the Debtor failed to cooperate with discovery. Thereafter, the attorneys moved in state court for writs of execution to force the sale of the Debtor's home to satisfy their judgment liens. The pro se Debtor filed notices removing those state court cases to this Court. Upon the Court's consideration of the attorneys' motion for remand, the Court determined that it must abstain from hearing the state court matters under 28 U.S.C. § 1334(c)(2)'s mandatory abstention provisions and, even if abstention were not mandatory, discretionary abstention was appropriate. The bankruptcy case had been fully administered; the removed cases presented exclusively state law issues and forum shopping by the Debtor was a distinct possibility. Each side also sought sanctions against the other. The Debtor claimed the attorneys violated the discharge injunction and the attorneys sought Rule 9011 sanctions based on the Debtor's removal of the state cases. The Court found that the attorneys had not violated the discharge injunction both because their judgment liens were unaffected by the Debtor's chapter 7 discharge and because the underlying attorney fee awards in the domestic case were not dischargeable debts in any case. The Court also declined to consider Rule 9011 sanctions even though the attorneys' case for such sanctions was much stronger. The Court found the utility of further proceedings on the sanctions issue was outweighed by its concerns over multiplying legal proceedings and by the fact that, following remand, the parties would be back under the jurisdiction of a state court with a long history dealing with the same parties and the power to sanction improper conduct.

The Debtor filed an adversary proceeding against the servicer of his mortgage, and the law firm and individually-named attorneys employed by the law firm representing the servicer, which had instituted a foreclosure proceeding after the Debtor's case was dismissed and before it was reinstated. The Court found that the defendants' actions did not violate any stay that may have been reimposed on the reinstatement of the Debtor's Chapter 13 case. The Debtor's complaint, seeking sanctions under 11 U.S.C. § 362(k)(1), was dismissed. Because the Debtor did not respond to the servicer's motion for relief from stay, the Court granted that relief by separate order.

Judge Thomas B. McNamara (TBM)

In an individual Chapter 11 case involving competing plans of reorganization, the Court denied confirmation of both plans, one propounded by the debtor, and the other propounded by debtor's only significant non-insider creditor. After denying confirmation of both plans, albeit on different grounds, the Court dismissed the case on the non-insider creditor's motion to dismiss.

The individual debtor, a man who had amassed considerable wealth in a 30 year career in the financial services industry, filed Chapter 11 immediately after a bank obtained a $2,600,000 judgment against him on a guaranty. When debtor filed his case, he had only two other significant creditors, a family partnership and a family trust. In addition, debtor owed a total of $11,000 to a handful of other unsecured creditors, including his law firm.

The day after the bank obtained a judgment against the debtor, the debtor effected a change in the ownership structure of the family partnership to dilute his control. The Court found that debtor's conduct was done to thwart the bank's effort to collect on its judgment. Another pre-petition planning device the debtor employed was to inflate the claims of the family partnership and the family trust.

After a contested evidentiary trial, the Court found that the debtor's prepetition conduct as well as the manner and methods used to prosecute his plan epitomized bad faith. In prosecuting his plan, the debtor created an artificially impaired "administrative convenience class," and improperly placed his law firm in that class in an effort to gerrymander the affirmative vote of that class.

The Court denied confirmation of debtor's plan. In addition, the Court found that the competing plan propounded by the bank was not confirmable because the mechanism it proposed to pay the family partnership and the family trust was neither feasible nor fair and equitable. The bank's plan also suffered from classification infirmities.

Finally the Court found that "cause" existed for dismissal or conversion and then considered which was in the best interests of the creditors and the estate. Among the factors which weighed heavily in the Court's decision to dismiss, rather than convert the case, were the unique structural alignment of the parties, the amounts of their respective claims, the history of the dispute between the debtor and the bank, the debtor's bad faith, and the apparent futility of involving a Chapter 7 trustee in this two party dispute.

Noting that prepetition claims in a Chapter 11 case are typically paid only through a confirmed plan of reorganization and according to the priority scheme established in the Bankruptcy Code, the Court considered the statutory basis for allowing payment of prepetition employee wages and benefits and concluded that payment of the prepetition wages and benefits was permitted by the Bankruptcy Code and warranted in this case. In reaching this conclusion, the Court noted that Congress had afforded a very high priority to employee wages under 11 U.S.C. § 507. The Court found that under 11 U.S.C. §§ 1106, 1107, and 1108, payment of such prepetition claims is consistent with the fiduciary duty of the debtor-in-possession to stabilize, protect, and preserve the estate, including an operating business's going-concern value. The Court also held that its power to approve early payment of prepetition wage and benefits claims to employees was augmented by the Court's equitable powers, as codified in 11 U.S.C. § 105, to fill in "statutory gaps" as necessary to implement the priority scheme of the Bankruptcy Code. Accordingly, the Debtor was authorized to pay certain prepetition wages and benefits obligations.

The Court found that the holder of a durable power of attorney, valid under the Colorado Uniform Power of Attorney Act, Colo. Rev. Stat. § 15-14-701, et seq., may qualify under Fed. R. Bank. P. 1004.1 as a representative for an incompetent bankruptcy debtor. Further, when the power of attorney contemplates that the attorney-in-fact will have broadest scope of authority, encompassing the right to act on the principal's behalf with respect to claims and litigation, the attorney-in-fact has the right to file a petition for bankruptcy relief and otherwise participate in a bankruptcy proceeding for the principal. In this case, the Court concluded that there was no need for it to appoint the Debtor's wife as attorney-in-fact to act for the Debtor in their joint bankruptcy case, because the Debtor, through his general power of attorney, had already appointed his wife to act on his behalf.