April 27, 2017

Tenth Circuit: No Avoidance of Transaction Made Within Ordinary Course of Business

The Tenth Circuit Court of Appeals issued its opinion in In re C.W. Mining Co.: Jubber v. SMC Electrical Products, Inc. on Monday, August 10, 2015.

C.W. Mining was forced into bankruptcy after creditors filed a petition for involuntary bankruptcy on January 8, 2008. In June 2007, C.W. had entered into an agreement with SMC Electrical Products, Inc., to purchase equipment in order to switch from a continuous method of mining to a longwall method. On September 18, 2007, SMC submitted an invoice to C.W. for $808,539.75, due in 30 days. C.W. made a $200,000 payment on the invoice on October 16, 2007, two days before it was due. The bankruptcy trustee initiated an adversary proceeding to avoid the transfer under 11 U.S.C. § 547(b). The bankruptcy court granted SMC summary judgment and rejected the trustee’s claim on the grounds that the transfer was made in the ordinary course of business. The BAP affirmed, and the trustee appealed to the Tenth Circuit.

The Tenth Circuit analyzed avoidance and the ordinary course of business exception, including the scrutiny applied to first-time transactions. The Tenth Circuit explained the purpose of the ordinary course of business transaction in detail, and examined its application as to both parties in the business transaction. Applying its analysis to the circumstances of this case, the Tenth Circuit found that the transaction between C.W. and SMC was within the ordinary course of business. The purchase was an arms’ length transaction for the purpose of assisting in mining operations. The Tenth Circuit dismissed the trustee’s arguments, characterizing them as an argument against a first-time transaction and finding that was not enough to avoid the transfer.

The bankruptcy court’s ruling was affirmed.

Hon. Janice Karlin Appointed 10th Circuit BAP Chief Judge

On Monday, August 31, 2015, the Tenth Circuit Court of Appeals announced that Hon. Janice Karlin will be the new Chief Judge of the Tenth Circuit Bankruptcy Appellate Panel, effective September 4, 2015. Judge Karlin will replace Judge Thurman, Bankruptcy Judge for the District of Utah, as Chief Judge of the BAP. Judge Thurman will continue to serve as a recalled bankruptcy judge despite his retirement.

Judge Karlin has been a judge on the Bankruptcy Appellate Panel since 2008, and prior to that was a Bankruptcy Judge for the District of Kansas since 2002. She was an Assistant United States Attorney for 22 years prior to her appointment to the bench, where she practiced civil litigation and was in charge of the Kansas City office. She received both her undergraduate and law degrees from the University of Kansas.

For more information about the appointment, click here.

Comment Period Open for Proposed Changes to Bankruptcy Court Local Rules

Significant changes to the Federal Rules of Bankruptcy Procedure will take effect December 1, 2014. The changes are to the 8000 series of rules, which govern appeals. Correspondingly, the Bankruptcy Appellate Panel of the 10th Circuit has amended its local rules, effective December 1, 2014.

The comment period for the proposed changes to the local bankruptcy rules is open until October 15, 2014. Comments may be submitted via email to 10th_Circuit_BAP@ca10.uscourts.gov. A redline of the proposed changes is available here, and a summary of the revisions is available here.

Tenth Circuit: Debt for Principal Residence Arises out of Farming Operation if It is Directly and Substantially Connected to Activities Constituting a “Farming Operation” Within 11 U.S.C. § 101(21)

The Tenth Circuit Court of Appeals published its opinion in First National Bank of Durango v. Woods on Wednesday, February 19, 2014.

Debtors were a husband and wife who purchased farmland in Colorado on which to ran their hay-farming operation. Until they filed for bankruptcy, they accumulated various debts, some of which were related to their farming operation and others of which were not. One such debt was a $480,000 loan Debtors obtained from First National Bank. Approximately $284,000 of this loan was used to pay off a loan from another bank that was obtained to purchase Debtors’ farmland. The parties did not dispute that this portion of the debt “arose out of” a farming operation; nor did they dispute that the majority of the remaining loan proceeds—what we called the “construction loan”—were used to construct Debtors’ principal residence on the farmland.

It was the construction loan that was the primary focus. This was because Debtors petitioned for Chapter 12 relief as family farmers. From the outset of this case—and again on appeal—First National Bank maintained that, if the construction loan was excluded from the debt total because it did not “arise out of” a farming operation, less than fifty percent of Debtors’ aggregate noncontingent, liquidated debts “arose out of” a farming operation, which would preclude Debtors from qualifying as family farmers. And, if Debtors were not “family farmers,” they could not seek relief under Chapter 12.

The bankruptcy court concluded that the construction loan should be included in the debt total under § 101(18)(A) because it arose from farm operations. The BAP agreed with the bankruptcy court that the construction loan arose out of a farming operation. The Bank appealed.

Although First National Bank raised several issues on appeal, the Tenth Circuit only reached the first: whether Debtors were permitted to seek relief under Chapter 12 as “family farmers.” In deciding this issue, the court was presented with a question of first impression for the Tenth Circuit — namely, when does a debt “for” a principal residence “arise[] out of a farming operation”? See 11 U.S.C. § 101(18)(A).

The Tenth Circuit concluded that a debt so arises if it is directly and substantially connected to any of the activities constituting a “farming operation” within the meaning of 11 U.S.C. § 101(21). More specifically, when the debt at issue is loan debt, as here, the court concluded that an objective “direct-use” test serves as the optimal vehicle for discerning when the direct-and-substantial-connection standard is satisfied. That is, if the loan proceeds were used directly for or in a farming operation, the debt “arises out of” that farming operation. This was not the test applied by the bankruptcy court (or the BAP).

Because the court concluded that the bankruptcy court did not apply the proper legal standard and test in its analysis of Debtors’ eligibility for Chapter 12 relief, the Tenth Circuit VACATED the bankruptcy court’s judgment and REMANDED the case to the bankruptcy court for further proceedings.

Tenth Circuit: Debtor May Not Appeal from Bankruptcy Court to Both Bankruptcy Appellate Panel (BAP) and District Court

The Tenth Circuit issued its opinion in Woodman v. Concept Construction on Thursday, October 25, 2012.

Mr. and Mrs. Woodman filed for bankruptcy in 2008. On December 1, 2009, the bankruptcy court ruled that Peter Woodman owed Concept Construction, his former employer, over $600,000, a debt not dischargeable in bankruptcy since it was obtained through embezzlement. Mr. Woodman filed two timely notices of appeal from this decision by the bankruptcy court.  One appeal was heard by the bankruptcy appellate panel (BAP), which dismissed the appeal a month later for failure to prosecute.  The other appeal was heard by the district court, which decided to consider the matter despite the prior BAP ruling, but ruled against Mr. Woodman on the merits.  Mr. Woodman appealed from the judgment of the district court.

Bankruptcy appellate panels were designed to provide an alternative, not a supplement, to an appeal to the district court. Nothing in the statutory language creating the panels suggests that Congress would tolerate the confusion and waste of resources that would result from simultaneous appeals of the same bankruptcy court decision to both the district court and a panel. To the contrary, the statute authorizing appeals from the bankruptcy court speaks in terms of alternatives, giving a party a choice—an election—between the two appellate forums.

Accordingly, The Tenth Circuit concluded that Mr. Woodman’s second notice of appeal to the district court was a nullity. He could not have filed a second appeal to the district court so long as he had a pending appeal before the BAP. His “Notice Voluntary Withdrawal of Appeal” did not comply with the bankruptcy rules.

Therefore, the district court did not have jurisdiction to review the decision of the bankruptcy court. The district court’s judgment is VACATED and the case is REMANDED to that court for dismissal of the appeal from the bankruptcy court.