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Unpublished Opinions

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Judge Joseph G. Rosania, Jr. (JGR)

In re James Michael Summers, Case No. 16-20128 JGR Order entered October 19, 2018 (absolute priority rule and new value exception in individual Chapter 11 case) 10/19/2018

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.

In re Thomas Allen Froehlich and Lori Ann Frohlich, Case No. 17-14231-JGR Order entered September 27, 2018 (revestment of property of estate in Chapter 13 cases) 09/27/2018

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.

In re Eastman, Case 17-21290-JGR; Order entered July 20, 2018 (Colorado Statute of Limitations, C.R.S. Sections 13-80-103.5(1)(a) and 13-80-108(4)). 07/20/2018

The Court addressed the issue of whether the amount due under a secured promissory note providing for installment payments could be reduced for missed payments due more than six (6) years prior to the acceleration of the note. 

The Debtor filed a Chapter 13 bankruptcy case seeking to save his home.  The home was valued at $152,000 and subject to two secured claims:  A first priority claim in the amount of $80,974 held by Wells Fargo; and a disputed second priority claim held by NPL Capital, LLC (“NPL”) in the amount of $64,738.00.  

In July 2017, NPL accelerated the note and commenced a foreclosure proceeding which precipitated the bankruptcy filing.  The Debtor objected to NPL’s Proof of Claim arguing the claim should be reduced by the cumulative amount of missed installment payments occurring more than six-years prior to acceleration.  In this case, seventeen payments between March 2010 and July 2011, totaling approximately $2,621, occurred more than six-years prior to acceleration. 

The Debtor argued the statute of limitations began to run on the date each respective installment payment became due and the payments that became due more than six prior to acceleration are barred.  The Debtor finds support for his argument in In re Church, 833 P2.d 813 (Colo. App. 1992).  Church held that when an obligation is payable in installments, and the holder of the note possesses the option to accelerate and declare all amounts due upon a single default but fails to do so, a separate cause of action arises on each unpaid installment and the statute of limitations begins to run when the payment is missed.   

NPL argued that the six-year statute of limitations did not begin until the acceleration of the debt in July 2017 when it initiated foreclosure proceedings and all amounts due under the note became due at that point relying on the more recent cases of Hassler v. Account Brokers of Larimer County, Inc., 274 P.3d 547 (Colo. 2012) and Castle Rock Bank v. Team Transit, LLC, 292 P.3d 1077 (Colo. App. 2012).  In Hassler, the Colorado Supreme Court held a suit to recover a deficiency balance after the repossession of vehicle was barred by the six year statute of limitations when the action was filed more than six years after the note was accelerated and opined that while the six-year statute of limitations runs from the date of the default of each installment, when an obligation to be repaid in installments is accelerated the entire remaining balance becomes due.

Castle Rock Bank discusses options the holder of an installment note may exercise upon default.  First, the creditor could elect to file suit on each missed installment payment.  Second, the creditor could elect to accelerate the note and demand payment of the entire unpaid balance.  Third, the creditor could sue for the unpaid balance upon maturity.    

The Court held the entire amount due under the installment obligation became payable when the note was accelerated in July 2017 and overruled the claim objection to the extent the Debtor sought to reduce the claim by the amount of the missed installment payments.

The holding was consistent with two recent Colorado District Court decisions: Froid v. Ditech Financial, LLC, 2018 U.S. Dist. Lexis 23377; 2018 WL 835041 (D. Colo. 2018) and Davis v. Wells Fargo Bank, 2017 U.S. Dist. Lexis 167150; 2017 WL 451830 (D. Colo. 2017).  

Atna Liquidating Trust, Kenneth J. Beuchler, Liquidating Trustee v. Black Diamond Blade Company, d/b/a Cutting Edge Supply, Adv. Pro. No. 17-1156 JGR Order entered March 23, 2018 (preference avoidance and ordinary course defense under 11 U.S.C. § 547) 03/23/2018

The liquidating trustee sued the defendant under 11 U.S.C. §§ 547 and 550  to avoid certain preferential transfers. The defendant moved for summary judgment, arguing that the transfers were made in the ordinary course of business pursuant to 11 U.S.C. § 547(c)(2)(A). For two years before the petition was filed, the debtor contracted for the defendant to provide products, tools, and equipment for the debtor’s business operations. The agreement was silent as to payment terms. During the earlier part of the two-year period, the debtor paid twenty-two of the defendant’s invoices in full. In the ninety days before the petition was filed, the debtor made payments toward two invoices. The debtor did not pay either of the invoices in full. Rather, the debtor made split payments in equal amounts toward one of the invoices and a partial payment toward the other invoice. The defendant did not engage in any unusual collection activities with respect to the split and partial payments.

Comparing the pre-preference period payments to the preference period payments, the Court found that the amount of the payments made by the debtor during the preference period differed markedly from the amount of the payments made by the debtor before the preference period. Specifically, the debtor paid the pre-preference period invoices in full but made split and partial payments toward invoices during the preference period. Examining the factors set forth in In re Sunset Sales, 220 B.R. 1005 (10th Cir. B.A.P. 1998), and citing In re Ewald, 45 B.R. 52 (Bankr. D. Minn. 1984) and In re Radnor Holdings Co., 2009 WL 2004226 (Bankr. D. Del. 2009), the Court found that the split and partial payments differed fromthe debtor’s pre-preference period payment practices such that the payments made during the preference period were not made in the ordinary course of business.

Chief Judge Kimberley H. Tyson (KHT)

McDaniel v. Navient (In re McDaniel), Adv. Proceeding No. 17-1274 KHT Order entered September 24, 2018 (11 U.S.C. § 523(a)(8)(A)(ii)) 09/24/2018

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.

In re Boisjoli, Case 17-19178 KHT, Order entered June 18, 2018 (11 U.S.C. § 1325(a)(3), 11 U.S.C. § 1325(b)(1)) 06/18/2018

In Boisjoli, the Court dealt with the issue of whether above-median debtors can be forced to pay a 100% plan in fewer than 60 months if they are able. 

The Chapter 13 trustee objected to above-median Debtors’ Chapter 13 plan, which proposed to pay 100% of general unsecured claims over a period of 60 months despite Debtors’ ability to pay the debts sooner.  The trustee argued the plan violated Section 1325(a)(3) and the purpose and spirit of the Bankruptcy Code; Debtors should either be required to commit their full disposable income to plan payments or the Court should impose modifications in order to mitigate the risk of loss to creditors (such as to require concurrent payments to general unsecured creditors, or limit Debtors’ ability to obtain a discharge if they failed to pay 100% of the unsecured claims as proposed, or prohibit Debtors from seeking to modify the Plan at a later date to reduce the dividend to unsecured creditors).

Debtors argued the Plan fully complied with the letter and spirit of the Bankruptcy Code by proposing a 100% plan over the applicable commitment period pursuant to Section 1325 and Trustee’s proposed modifications deprived them of due process and gave creditors rights that do not exist under the Bankruptcy Code.

The Court agreed with Debtors and held Section 1325(b)(1)(A) and (B) provide two alternatives when an objection to plan confirmation is lodged:  Debtors must either pay unsecured creditors in full in accordance with Section 1325(b)(1)(A) or commit all projected disposable income to the plan pursuant to Section 1325(b)(1)(B).  Although Section 1325(b)(4)(B) permits an above-median debtor to shorten the applicable commitment period to fewer than five years if the plan provides for payment of all allowed unsecured claims in full, Debtors were not required to do so.  Without any specific factual allegations to the contrary (such as deceitful conduct or unfair manipulation of the Bankruptcy Code), the Court would not construe Debtors’ adherence to Section 1325(b) as lacking good faith even though Debtors benefited; the Bankruptcy Code permitted the choices Debtors made concerning the repayment amounts and timing they proposed in their plan.  The Court relied on Anderson v. Cranmer (In re Cranmer), 697 F.3d 1314 (10th Cir. 2012); In re Conklin, Case 17-16247 MER, ECF No. 43 (Bankr. D. Colo. March 28, 2018) and In re McGehan, 495 B.R. 37 (Bankr. D. Colo. 2013). 

Trustee’s request to impose the suggested plan modifications directly contravened other provisions of the Bankruptcy Code, prohibited under Law v. Siegel, 571 U.S 415 (2014).  However, the Court noted the required analysis for post-confirmation modification under Section 1329(b)(1) incorporates the good faith requirement, so trustee is not wholly without recourse.

Judge Thomas B. McNamara (TBM)

Weinman v. Crowley (In re Peter H. Blair), Adv. Case No. 17-1195 TBM; Fed. R. Evid. 702; Exclusion of Expert Testimony as Unreliable and Irrelevant under Daubert and the Court’s “Gatekeeping” Function. 08/02/2018

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.

In re Blair Oil Investments, LLC, Case No. 15-15009 TBM; 11 U.S.C. §§ 326, 327 and 503(b)(1)(A) and who is a “professional person” under Section 327 06/01/2018

The Chapter 7 Trustee appointed in the case of an individual debtor (the “Individual Case”) exercised control of an asset of the Chapter 7 estate, a 100% member interest in a limited liability company (the “LLC”). The LLC was also in bankruptcy, but in Chapter 11 (the “LLC Case”). The Chapter 7 Trustee, on the authority of In re Albright, 291 B.R. 538, 541 (Bankr. D. Colo. 2003), elected to take over control and appointed himself as Manager of the LLC.

The Chapter 7 Trustee, in his role as Manager of the LLC, did not request Court approval of his employment as a “professional person” under Section 327 of the Code. Instead, almost two years after taking over management of the LLC, he filed in the LLC Case a motion to have a compensation package approved as an administrative expense under Section 503(b)(1)(A).

The United States Trustee (the “UST”) objected arguing that the Chapter 7 Trustee may only be compensated in the Individual Case in accordance with the formula for calculating trustees’ commissions embodied in Section 326 of the Code. The UST contended that the Chapter 7 Trustee could not capitalize on an asset of the Chapter 7 case for his personal benefit and to augment that commission. The UST asserted the Chapter 7 Trustee was a “professional person” for purposes of Section 327(a) of the Code who had not obtained approval of his employment and, thus, could not be paid. Moreover, the UST urged that Section 503(b) could not be used as a vehicle to circumvent the requirements for employment under Section 327.

Following an evidentiary hearing, the Court denied the Chapter 7 Trustee’s application for allowance of an administrative expense. The Court held that the Chapter 7 Trustee was a “professional person” within the meaning of Section 327. Because he had not been employed as Manager under Section 327 in the LLC Case, the Chapter 7 Trustee could not be paid. Moreover, as a “professional person,” the Chapter 7 Trustee could not bypass the requirements of Section 327 by claiming entitlement to an administrative expense under Section 503(b). The Court agreed with the UST that a Chapter 7 trustee may only be compensated in the Chapter 7 case in which the trustee serves as a fiduciary and that a trustee’s compensation is limited by and to the commission calculated according to the formula of Section 326. Finally, even if the Chapter 7 Trustee had moved to be employed under Section 327, the Court expressed grave doubt as to whether, in a case such as this, the Trustee could pass the “disinterestedness” test of Section 327.

In re Chamberlain, Bankr. Case No. 15-22234 TBM; Order entered August 4, 2016 08/04/2016

In re Chamberlain, Bankr. Case No. 15-22234 TBM; Order entered August 4, 2016 (attorney’s fees award to prevailing party in contested matter under Fed. R. Bankr. P. 9014 and 7054 and Fed. R. Civ. P. 54 and order of payment to priority claimholders under 11 U.S.C. §§ 507, 1322, and 1326)

            In this Chapter 13 case, the court held a trial in which it ruled on a contested proof of claim filed by the Debtor’s ex-wife (the “Creditor”), ordering that her proof of claim be allowed in a reduced amount as a “domestic support obligation” (“DSO”) under 11 U.S.C. § 101(14A) and entitled to priority under 11 U.S.C. § 507(a)(1)(A).  Following the ruling, the Creditor did not seek an award of fees or costs pursuant to Fed. R. Bankr. P. 7054 and Fed. R. Civ. P. 54.  Instead, well after the Fed. R. Civ. P. 54 deadline had expired, the Creditor amended her proof of claim unilaterally to include a claim for attorney’s fees incurred in the bankruptcy proceeding.   She also objected to the amended Chapter 13 plan filed by the Debtor, which provided for payment of her DSO in the amount allowed by the Court’s ruling, but did not provide for payment of the amounts now claimed by the Creditor in her amended proof of claim.  The Creditor also objected that the Debtor’s Third Plan did not comply with Sections 507(a)(1)(A) and 1322(a)(2) because it provided for the payment of the Debtor’s Class One attorney’s fees prior to paying in full the Class One DSO owed to the Creditor. 

            The Court held that the Debtor’s objection to the amount and priority of the Creditor’s proof of claim, which was also a dispute regarding the priority of the Creditor’s claim, was a “contested matter” under Fed. R. Bankr. P. 9014.  The Court also held its ruling on the contested matter had ended the litigation on the merits.  Because Rule 7054 governed the Creditor’s rights to recover fees and costs incurred in the bankruptcy case, and because the Creditor failed to seek an award of fees and costs within the time limits in that Rule and in Fed. R. Civ. P. 54(d) the Creditor waived her right to request fees and costs in this case.  Accordingly, the Court sustained the Debtor’s objection to the Creditor’s amended proof of claim and overruled the Creditor’s objection that the plan did not provide for payment in full of her claim.

            The Court also rejected the Creditor’s contention that the Debtor’s amended Chapter 13 Plan could not be confirmed because it provided for payment of the Debtor’s attorney’s fees and costs prior to payment of the Creditor’s DSO claim.  Though Section 507 provides first-priority status to claims for DSOs, it is a statute of general application that in Chapter 13 is more specifically modified by Sections 1322(a)(2) and 1326(b)(1). Under Section 1322(a)(2), the plan is required to provide for the “full payment, in deferred cash payments, of all claims entitled to priority under section 507” but does not require that claims entitled to priority under Section 507 be paid in the order listed in Section 507.  And under Section 1326(b)(1), unpaid claims of the kind specified in Section 507(a)(2) – that is, claims for administrative costs, including attorney’s fees – must be paid ahead of, or at least concurrently with, other priority claims.   Accordingly, the Court overruled the Creditor’s objection.

Judge Howard R. Tallman (HRT)

Reeves v. Arnold , Case No. 15-01496-HRT; Order entered June 9, 2016 (domestic support obligations under 11 U.S.C. §§ 523(a)(5) and (a)(15)). 06/09/2016

In this Chapter 7 case, Debtor’s ex-wife (“Plaintiff”) filed an adversary proceeding against Debtor alleging certain debts were nondischargeable under 11 U.S.C. §§ 523(a)(5) and (a)(15). The debts at issue included an amount due under a state court contempt citation as well as attorney fees awarded in state court arising out of the contempt proceeding. Debtor argued the debts were not in the nature of support and therefore dischargeable. Plaintiff contended the debts were nondischargeable, either under § 523(a)(5) or (a)(15). Plaintiff also asked the Court to award attorney fees incurred in pursuing the adversary proceeding.

The Court found it did not need to determine whether the debts were in the nature of support under § 523(a)(5), because after BAPCPA, in Chapter 7 cases, “the distinction between a domestic support obligation and other types of obligations arising out of a marital relationship is of no practical consequence in determining the dischargeability of the debt.” The Court found the debts were nondischargeable under § 523(a)(15) because they were incurred in connection with a state domestic court order.

The Court also determined it did not have the authority to award attorney fees to Plaintiff for pursuing the adversary proceeding, citing In re Taylor, 737 F.3d 670, 680 (10th Cir. 2013), because the separation agreement in the Court’s record did not contain any provision regarding attorney fees. The Court noted the state court has concurrent jurisdiction to determine that issue.

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