July 20, 2017

Comment Period Open for Reappointment of Federal Bankruptcy Judge Michael E. Romero

The Tenth Circuit Court of Appeals announced that Federal Bankruptcy Judge Michael E. Romero’s 14-year term of office will expire on December 21, 2017. The court is considering whether to reappoint Judge Romero for a new 14-year term of office. Under a new appointment, Judge Romero would continue to exercise jurisdiction as a bankruptcy judge under Titles 11 and 28 of the United States Code.

Comments about Judge Romero’s reappointment are now being accepted by the Tenth Circuit. All comments will be kept confidential. Comments should be mailed to

David Tighe
Circuit Executive
Byron White United States Courthouse
1823 Stout Street
Denver, CO 80257

and must be received no later than July 21, 2017. For more information about the reappointment, click here.

Why Good Lawyers Do Bad Things – Think It Can’t Happen to You?

High-Profile Lawyer Charged with Punching Client in Court,” Above the Law, October 30, 2015.

Storied Plaintiffs Lawyer Disbarred in Kentucky Over Excessive Fees,” National Law Journal, March 21, 2013.

Lawyer Charged with Forging Signatures of 7 Judges on Over 100 Court Documents,” Above the Law, February 24, 2016.

Biglaw Partner and Associate Destroyed Evidence, Suborned Perjury,” Above the Law, June 24, 2015

Headlines like these grab our attention, but they don’t give us much cause for concern. After all, we would NEVER do anything like that. But what about these?

“[Lawyer] agreed to represent a client in his immigration and criminal matters. On [Lawyer]’s advice, his client pleaded guilty to felony sexual assault. The client later regretted his decision to plead guilty, hired other counsel, successfully withdrew his plea, went to trial, and was acquitted.” People v. Romero, 16PDJ057, December 9, 2016.

“[Lawyer] was convicted five times of driving under the influence (DUI) or driving while ability impaired (DWAI). His most recent conviction took place in 2011. Through this conduct, [Lawyer] violated Colo. RPC 8.4(b) (a lawyer shall not commit a criminal act that reflects adversely on the lawyer’s honesty, trustworthiness, or fitness as a lawyer in other respects).” People v. Condon, 16PDJ050, December 23, 2016.

“In October 2015, [Lawyer] sought a $1,000.00 loan from a client to address cash flow problems. The client agreed, so [Lawyer] executed a promissory note in favor of the client, providing for 8% per annum interest and providing that the principal and interest would be due one month hence, in November 2015. The terms of the loan were fair and reasonable. But [Lawyer] did not advise the client in writing of the desirability of seeking independent legal counsel as to the transaction. Nor did he obtain the client’s written, informed consent to [Lawyer]’s role in the transaction, including whether [Lawyer] was representing the client in the transaction. [Lawyer] failed to pay the client by the agreed-upon date, though [Lawyer] did fully repay the client in March 2016. At that time, the client had not yet reported [Lawyer] to disciplinary authorities.” People v. Foster, 17PDJ018, March 15, 2017.

Do these still sound too far-fetched to you? How about these ones?

“Lawyer accepts $5,000 ‘flat fee,’ expecting a complex dispute, but skillfully resolves the matter in one hour. He then keeps the entire fee.”

“While [Lawyer] served as county attorney, he worked on legal issues involving third parties’ management of dirt track racing at El Paso County’s fairgrounds. He was involved with drafting a memorandum of understanding between the County and one of those third parties to address issues that exposed the County to liability. After [Lawyer] left the employ of El Paso County, the County faced ongoing legal issues with that same third party. In 2013, [Lawyer] began representing that party against El Paso County.”

“[Lawyer] is subject to several orders entered in Arapahoe County requiring him to pay child support, various child-related expenses, and child support arrearages. [Lawyer] paid just over half of the child support obligations he owed between June 2015 and November 2016. [Lawyer]’s failure to satisfy these obligations violated Colo. RPC 3.4(c) (a lawyer shall not knowingly disobey an obligation under the rules of a tribunal) and Colo. RPC 8.4(d) (a lawyer shall not engage in conduct prejudicial to the administration of justice).”

“[Lawyer] failed to obey a court order to pay monthly child support and to satisfy child support arrearages. Her failure to honor her court-mandated obligations tarnished the integrity of the legal system and harmed her child. Her conduct violated Colo. RPC 3.4(c) (a lawyer shall not knowingly disobey an obligation under the rules of a tribunal) and Colo. RPC 8.4(d) (a lawyer shall not engage in conduct prejudicial to the administration of justice).”

“[Lawyer] was retained by a client in March 2016 in a paternity case. Because he failed to pay registration fees, [Lawyer] was placed on administrative suspension on May 2, 2016. While suspended, [Lawyer] participated in a telephone conference with the court and set a status conference for June 2016.”

“[Lawyer], a bankruptcy attorney, was retained by a lawyer who had been disbarred for knowing conversion. The lawyer’s disbarment order required him to pay restitution to several former clients, as well as more than $220,000 to a medical lienholder. On the client’s behalf, [Lawyer] filed a Chapter 13 bankruptcy petition. He did so to stall a foreclosure sale on the client’s house in the hopes of protecting from creditors up to $105,000 in equity under the homestead exemption, and to avoid entangling the client’s second property in Crested Butte in a Chapter 7 bankruptcy. The petition showed that the client’s debt was over 99% of the allowable limit for Chapter 13 cases. The petition did not, however, list the $220,000 debt to the lienholder; instead, it characterized the amount of the debt as “unknown,” “unliquidated,” and “disputed.” Had that debt to the lienholder been included in the client’s total debt, the amount would have exceeded the Chapter 13 debt limit.”

Are you starting to feel uncomfortable? These situations and others are published monthly in The Colorado Lawyer. Although many of the disciplinary situations are too egregious to relate to, others could happen to anyone – even good lawyers like you.

If you ask any random group of people to rank how ethical they are on a scale of one to one hundred, responses will average about 75, meaning almost everyone is misjudging how they would react to actual ethical dilemmas. Studies regularly show a gap between an ethical goal (how ethical we aspire to be) and ethical judgment (what we actually do). This has been called “bounded ethicality,” and it examines why individuals fail to recognize that external influence and self-interest impact their ethical thinking.

Ethical decisions can be hard for anyone, but the stakes are higher for lawyers because the Colorado Rules of Professional Conduct dictate lawyers’ ethical responsibility. The preamble to the Rules states, “Virtually all difficult ethical problems arise from conflict between a lawyer’s responsibilities to clients, to the legal system, and to the lawyer’s own interest in remaining an ethical person while earning a satisfactory living. . . . The Rules do not . . . exhaust the moral and ethical considerations that should inform a lawyer, for no worthwhile human activity can be completely defined by legal rules.” There are plenty of shades of grey in determining the ethical path, in other words.

On May 15, 2017, Christopher P. Montville of Wheeler Trigg O’Donnell will present a one hour lunch program, “Why Good Lawyers Do Bad Things (And What to Do About it).” This can’t-miss program will explore the reasons why good people sometimes make bad choices, and how to avoid becoming a disciplinary summary in The Colorado Lawyer. Register today by calling (303) 860-0608 or clicking the links below.

 

CLELogo

CLE Program: Why Good Lawyers Do Bad Things

This CLE presentation will occur on May 15, 2017, at the CLE Large Classroom (1900 Grant St., 3rd Floor) from noon to 1 p.m. Register for the live program here and the webcast here. You may also call (303) 860-0608 to register.

Can’t make the live program? Order the homestudy here — Video OnDemandMP3 Audio

Tenth Circuit to Upgrade CM/ECF System

The Tenth Circuit Court of Appeals announced that it will upgrade its CM/ECF system to the Next Generation CM/ECF system (NextGen), beginning on Friday, May 12 at noon and finishing by Monday, May 15 at 7 a.m. CM/ECF will not be available during the upgrade. Frequently asked questions about the NextGen system are available here. There are also electronic learning modules available for the PACER NextGen; they are available here. For more information about the upgrade and NextGen, click here.

Colorado Court of Appeals: Trial Court Correctly Found that Crop Recovery Claims were Equitable in Nature

The Colorado Court of Appeals issued its opinion in Farm Credit of Southern Colorado, ACA v. Mason on Thursday, April 6, 2017.

Credit Agreement—Jury Demand—Equitable—Non-Disclosure—Abandonment—Estoppel—Waiver—Consent—Conversion—Bankruptcy—Collateral Estoppel—Damages.

Zachary funded his farming operations with loans from Farm Credit of Southern Colorado, ACA and Farm Credit of Southern Colorado, FLCA (collectively, Farm Credit). Zachary was having difficulty paying his debt to Farm Credit and had planted crops on seven farms for the coming harvest. Written agreements between Farm Credit and Zachary granted Farm Credit a perfected security interest in Zachary’s crops (Crop Collateral) and their proceeds. Farm Credit refused to continue funding Zachary’s farming operations and Zachary was unable to cultivate the Crop Collateral. Zachary’s father, James, thereafter took over the cultivation of the Crop Collateral. James never attempted to transfer the Crop Collateral or its proceeds to Farm Credit. Farm Credit filed a complaint for various claims against Zachary and other parties, but not James. Zachary thereafter filed for bankruptcy. As part of a bankruptcy adversary proceeding, Farm Credit filed an amended complaint alleging that Zachary transferred the Crop Collateral to James. Farm Credit later amended the state trial court complaint to add James as a defendant. Ultimately, the trial court entered a judgment against James, finding him liable for converting the Crop Collateral and awarding Farm Credit damages plus interest.

On appeal, James argued that the trial court erred in striking his demand for a jury trial. Based on the complaint, Farm Credit’s remedy was in the nature of a foreclosure, an equitable action. Because the basic thrust of the underlying action was equitable and not legal in nature, the trial court did not err in striking James’s demand for a jury trial.

James also asserted that the trial court erred in admitting evidence of Zachary’s debt because Farm Credit did not disclose it before trial, and this nondisclosure was intentional and material. However, this nondisclosure was harmless because the amount of debt far exceeded the most optimistic estimate given for the Crop Collateral’s value at the time of conversion. Therefore, James was not denied an adequate opportunity to defend against Farm Credit’s assertion that the value of the outstanding debt exceeded the value of the collateral, and the trial court did not abuse its discretion in refusing to dismiss the action as a result of this nondisclosure.

James next contended that the trial court reversibly erred when it determined that the defenses of abandonment, estoppel, waiver, and consent did not relieve him of liability for conversion. The written agreements evidencing Farm Credit’s perfected security interest in the Crop Collateral were “credit agreements” within the meaning of the Credit Agreement Statute of Frauds. Thus, any waiver involving Farm Credit’s rights to the Crop Collateral, including proceeds, would need to be in writing to be effective. Here, there was never a written waiver. Additionally, while the record shows that Farm Credit acquiesced to James’s cultivation and harvest of the otherwise doomed Crop Collateral, it does not show that Farm Credit consented to its security interest being completely extinguished. Finally, there is no evidence in the record showing Farm Credit manifested intent, or took action, to abandon the Crop Collateral and related claims at any point, including during the bankruptcy adversary proceeding. Accordingly, the trial court did not err in rejecting James’s defenses of waiver, consent, abandonment, and estoppel.

James further contended that the trial court erred when it determined that the bankruptcy court’s decision did not preclude Farm Credit from recovering on its claims and denied James’s motion for a directed verdict. Here, the legal issues before the bankruptcy court were different from those before the trial court. Because the issues litigated in the two proceedings at issue were not identical, the trial court correctly determined that collateral estoppel did not apply to the legal issues before it and properly denied James’s motion for a directed verdict.

Lastly, James argued that the trial court misapplied the law when assessing damages by determining that the date of conversion was the date of harvest rather than when James took over the crops’ cultivation. Because the trial court applied the correct standard in assessing damages and the record supports the trial court’s factual findings, there was no error with the damages award.

The orders and judgment were affirmed.

Summary provided courtesy of The Colorado Lawyer.

Courthouse of the U.S. District Court Closed on Friday, December 9, 2016

The U.S. District Court for the District of Colorado announced a courthouse closure. On Friday, December 9, 2016, from 12:45 to 6 p.m., the courthouse will be closed for business due to a law enforcement training exercise. The Alfred A. Arraj Courthouse will be closed to the public. The Byron G. Rogers Courthouse will remain open, but no court business will be conducted. Court business in the Durango and Grand Junction courthouses will be conducted as scheduled. All electronic systems to include CM/ECF and PACER will remain in operation during this time period. For more information, click here.

Retirement Reception for Hon. Howard Tallman of U.S. Bankruptcy Court on December 1

You are cordially invited to
a retirement reception

FOR THE
HONORABLE HOWARD R. TALLMAN

judge-tallman

United States Bankruptcy Court for the District of Colorado

Thursday, December 1, 2016

The Marriott Denver City Center
1701 California Street, Downtown Denver

5:30 – 8:00 p.m.

Complimentary hors d’oeuvres and a cash bar will be provided.

 This event is proudly co-sponsored with the Bankruptcy Subsection of the Colorado Bar Association.

After an already impressive legal career and service as the U.S. Trustee for Region 19, Judge Tallman was appointed to the United States Bankruptcy Court for the District of Colorado in 2002 and served as Chief Judge from 2007 to 2014.  Judge Tallman will officially retire on Tuesday, January 3, 2017.

We hope you will join us for this retirement reception to honor Judge Tallman for his exemplary judicial service during his tenure with the U.S. Bankruptcy Court and his contributions to the practice of law throughout his legal career.

Questions? Click Here to Email Amanda Hoffman.

Colorado Court of Appeals: Restitution Does Not Create a Debtor-Creditor Relationship with Victim

The Colorado Court of Appeals issued its opinion in People v. Foos on Thursday, September 22, 2016.

Bankruptcy—Discharge ofRestitution Order—Bad Faith.

In 2012, the U.S. Bankruptcy Court discharged Foos’s debts against the three victims in this case. Prior to his bankruptcy proceedings, Foos owed money to these victims. In 2013, Foos was charged with two counts of felony theft and one count of defrauding a secured creditor. Foos resolved these charges by pleading guilty to the charge of defrauding a secured creditor in exchange for dismissal of the other two counts. He stipulated to a deferred judgment and sentence with a requirement for full restitution.

On appeal, Foos argued that it was error to order him to pay restitution because he discharged his debts in bankruptcy before the charges were filed against him. C.R.S. § 18-1.3-603(4)(d) precludes the discharge of restitution orders in bankruptcy, and restitution serves a different purpose than bankruptcy. Accordingly, the district court did not err in ordering Foos to pay restitution.

Foos also argued that he was prosecuted in bad faith. The court of appeals noted that although the original prosecutor had a “cozy relationship” with Foos’s creditors, she was replaced with a special prosecutor who had no personal connection to the case and who made an independent decision to move forward with the prosecution. Moreover, Foos waived his right to challenge the validity of the charges by pleading guilty.

Finally, Foos argued that he was ordered to pay restitution to a listed victim in a theft count that was dismissed as part of the plea agreement. Colorado case law is clear that, for purposes of restitution, a victim does not have to be one of the named victims of a conviction.

The order was affirmed.

Summary provided courtesy of The Colorado Lawyer.

Application Period Open for Bankruptcy Judgeship in District of Colorado

BankruptcyCourtThe U.S. District Court for the District of Colorado announced that it is accepting applications for a bankruptcy judge in the District of Colorado. The position is located in Denver and will be available January 4, 2017, pending successful completion of a background investigation. Bankruptcy judges are appointed for 14-year terms pursuant to 28 U.S.C. § 152.

Qualified applicants must be members in good standing of the highest bar of at least one state, the District of Columbia, or the Commonwealth of Puerto Rico, and must be in good standing in every bar in which the applicant is a member. Applicants must possess, and have a reputation for, integrity and good character; possess, and have demonstrated, a commitment to equal justice under the law; possess, and have demonstrated, outstanding legal ability and competence; indicate by demeanor, character, and personality that the applicant would exhibit judicial temperament if appointed; and be of sound physical and mental health sufficient to perform the essential duties of the office. Applicants must have been engaged in the practice of law or other suitable law-related occupation for the last five years, must not be related by blood or marriage to any judge of the Tenth Circuit or District of Colorado or a member of the Tenth Circuit Judicial Council, must comply with financial disclosure requirements, and must be willing to serve.

Application forms are available on the Tenth Circuit website and will be accepted through August 15, 2016. For more information, click here.

Tenth Circuit: Default Judgment Non-Dischargeable in Bankruptcy Under 11 U.S.C. § 523(a)(19)

The Tenth Circuit Court of Appeals issued its opinion in Tripodi v. Welch on Wednesday, January 13, 2016.

Nathan Welch was a real estate developer, and beginning in 2006, he worked to procure funding for the Talisman project. Robert Tripodi invested in the Talisman project, ultimately putting $1 million into the development, secured by promissory notes from Welch. When Talisman failed, Welch defaulted on the notes, and Tripodi filed a complaint against Welch in federal district court in 2009, alleging violations of federal and state securities laws. Welch answered the complaint, but a few months later his counsel moved to withdraw. The district court granted counsel’s motion and gave Welch 20 days to find new counsel or appear pro se. Several months later, Tripodi moved for default judgment, and, because Welch did not respond to the motion, the district court entered default judgment against him in April 2010. For the next year, Tripodi presented proof of damages, costs, and attorney fees, and the district court found Tripodi was owed $729,161.65 plus post-judgment interest.

Welch filed a voluntary petition for Chapter 7 bankruptcy in August 2011. Nearly two years later, Tripodi filed a motion for relief from the automatic stay. The district court granted Tripodi’s motion and directed its clerk to enter final monetary judgment. The clerk entered judgment in his favor for $729,161.65 plus post-judgment interest accruing since May 2011. Welch opposed a determination of damages and filed a cross-motion to set aside entry of default. The district court denied his motion as untimely. Each party then filed post-judgment motions. Tripodi moved for an order determining that the default judgment against Welch was non-dischargeable under 11 U.S.C. § 523(a)(19), while Welch moved for the court to reconsider its order refusing to set aside the default, to set aside the default, and to enter a judgment on the pleadings in his favor. The district court granted Tripodi’s motion and denied Welch’s.

Welch appealed, arguing the district court erred in denying his motion for judgment on the pleadings and granting Tripodi’s motion that default is non-dischargeable under § 523(a)(19). The Tenth Circuit disagreed. The Tenth Circuit characterized Welch’s appeal as a roundabout way to challenge the entry of default against him by challenging the sufficiency of the pleadings. The Tenth Circuit addressed the district court’s grant of default judgment. The Tenth Circuit found that the pleadings were legally sufficient, as they showed (1) Tripodi invested in Talisman because he thought it would be a high-yeilding investment opportunity, (2) the investment was structured for broad distribution to unsophisticated investors such as himself, (3) the investing public would consider the notes to be securities, and (4) the collateral provided little security for investors. These four factors led the Tenth Circuit to conclude that the district court correctly ruled the notes were securities and Welch violated securities laws. The Tenth Circuit found no abuse of discretion.

Welch next contended that the district court erred in finding that the debt was non-dischargeable in bankruptcy under § 523(a)(19). The Tenth Circuit again disagreed. The Tenth Circuit noted that § 523(a)(19) renders debts non-dischargeable when they arise in connection with a violation of state or federal securities laws. Two factors prevent the debt from being discharged: (1) the debt must stem from a violation of federal or state securities law, and (2) the debt must be memorialized in a judicial order or settlement agreement. The Tenth Circuit found that Welch’s debt to Tripodi satisfied both factors.

The judgment of the district court was affirmed.

Tenth Circuit: Bankruptcy Creditor Has Standing to Object to Potentially Fraudulent Conveyance of Real Property

The Tenth Circuit Court of Appeals issued its opinion in In re Lavenhar: Lavenhar v. First American Title Insurance Co. on Thursday, December 17, 2015.

On October 28, 2010, First American Title Insurance Company (“First American”) earned a judgment and damages award in its favor in the amount of $434,913.39, plus interest, in Colorado state court against Jeffrey Lavenhar. During the pendency of this litigation, Jeffrey and his then-wife Laurie initiated dissolution proceedings, resulting in the issuance of a divorce decree in November 2010, which incorporated a separation agreement dated October 26, 2010. The separation agreement required Jeffrey pay Laurie $4,400 per month in spousal maintenance, and also contained a provision stating the property located on Antelope Ridge Trial is and always has been the sole property of the Laurie H. Lavenhar Living Trust.

In seeking to collect its damages, First American filed suit against the Lavenhars and the Laurie H. Lavenhar Living Trust, asserting the transfer of Jeffrey’s interest in the Antelope Ridge Trail property to the Laurie H. Lavenhar Living Trust was a fraudulent conveyance. In addition to that independent lawsuit, First American sought to intervene in the Lavenhars’ divorce, seeking a declaration that the Lavenhars’ divorce proceeding was a fraud upon the court designed to hinder its ability to collect on the judgment against Jeffrey. The state divorce court granted First American’s motion to intervene.

Before the resolution of the various legal proceedings instituted by First American against the Lavenhars, Jeffrey filed a Chapter 7 bankruptcy petition. In response, First American filed a motion to lift the automatic stay as to the Antelope Ridge Trail property, asserting it should be able to litigate its state-court fraudulent conveyance action. The bankruptcy court denied the motion, concluding only the Chapter 7 Trustee had standing to bring such an action. Shortly thereafter, Laurie filed in the bankruptcy court a priority unsecured claim for domestic support obligations in the amount of $347,400. First American then filed a new motion to lift the automatic stay, seeking permission to litigate its complain in intervention of the Lavenhars’ divorce proceeding, which was granted in part by the bankruptcy court such that both First American and the Chapter 7 Trustee could litigate the complaint in intervention as to the single issue that would affect the validity of Laurie’s proof of claim, but not as to any other issues resolved in the divorce decree.

The district court affirmed the bankruptcy court’s partial lifting of the automatic stay, and Laurie appealed, asserting the bankruptcy and district courts erred in concluding First American has standing to litigate the validity of the component of the divorce decree addressing domestic support obligations via its state-court complaint in intervention.

On appeal, the Tenth Circuit Court of Appeals determined First American has standing to object to Laurie’s potentially fraudulent proof of claim for domestic support obligations. Next, the Tenth Circuit affirmed the order of the bankruptcy court partially lifting the automatic stay to allow the state divorce court to declare whether or not the Lavenhars’ divorce decree was obtained through fraud on the court. In so ruling, the Tenth Circuit reasoned there is no indication that the state divorce court cannot or will not comply with the limited scope of the bankruptcy court’s order lifting the stay. In rejecting Laurie’s argument that the validity of the property division is not separable from the validly of the spousal maintenance provision, both of which are contained in the separation agreement, the Tenth Circuit noted the Antelope Ride Trial property is and always has been the sole property of the Laurie H. Lavenhar Living Trust. Thus, the court reasoned it is simply not true that the issue the bankruptcy court allowed to proceed in the motion in intervention is inseparably intertwined with the property-transfer issues to be litigated by the Chapter 7 Trustee in the fraudulent conveyance action. Lastly, the court noted a ruling on First American’s behalf on the limited issue the bankruptcy court allowed to be litigated in the complaint in intervention would benefit all creditors equally, such that there exists no danger of intrusion on the exclusive prerogatives of the Chapter 7 Trustee.

Max Montag is a 2016 J.D. Candidate at the University of Denver Sturm College of Law.

Tenth Circuit: Guarantors May Be Liable for More than Loan Amount in Bankruptcy

The Tenth Circuit Court of Appeals issued its opinion in In re Gentry: FB Acquisition Property I, LLC v. Gentry on Tuesday, December 8, 2015.

Susan and Larry Gentry are the sole shareholders, officers, and directors of Ball Four Inc., a sports complex in Adams County. In 2005, Ball Four received a $1.9 million loan from FirsTier Bank, which was secured with various Ball Four assets and personally guaranteed by the Gentrys. After four years, Ball Four stopped making payments to FirsTier. FirsTier initiated foreclosure proceedings, and Ball Four filed for Chapter 11 bankruptcy. Ball Four proposed a reorganization plan that provided for the bank’s lien to be paid in full. Ball Four’s plan was approved in 2011.

Meanwhile, the Colorado Division of Banking closed FirsTier and the FDIC was appointed as receiver. The FDIC assigned its rights to SIP, and in December 2014 SIP was replaced by FB Acquisition.

In October 2010, one month after Ball Four filed for bankruptcy, FirsTier sued the Gentrys in Colorado state court to collect the guarantees. The Gentrys filed their Chapter 11 case in November 2011. The Gentrys filed disclosures and an amended plan, asserting that the Gentrys’ liability on the 2005 loan would be satisfied by Ball Four. The bankruptcy court confirmed the Gentrys’ plan in 2013.

FB Acquisition appealed two decisions of the bankruptcy court to the Tenth Circuit: first, that the Gentry plan was feasible, and second, that under the plan language, the Gentrys’ liability mirrors Ball Four’s liability. The Tenth Circuit first addressed the feasibility of the Gentry plan. Although FB Acquisition argued the Gentry plan did not offer a reasonable assurance of success, the Tenth Circuit noted that even though the bankruptcy court’s findings were brief, they were sufficient to satisfy a clear error inquiry.

The Tenth Circuit next addressed FB Acquisition’s contention that the bankruptcy court erred in limiting the Gentrys’ liability to the amount that Ball Four owed. The Tenth Circuit disagreed with the bankruptcy court’s evaluation of the Gentrys’ liability. The bankruptcy court found no provisions in the loan contract creating a greater obligation for the Gentrys than that owed by Ball Four, but the Tenth Circuit found three. Because the bankruptcy court misunderstood its duty to confer liability for the entirety of the debt on the guarantors, the Tenth Circuit remanded for the bankruptcy court to determine the amount of FB Acquisition’s claims under the guarantees. The Tenth Circuit noted the bankruptcy court should also reevaluate the feasibility of the plan.

The bankruptcy court’s ruling was affirmed in part, reversed in part, and remanded for further proceedings.

Tenth Circuit: Severance Payments to Terminated President Not Avoidable Under § 548

The Tenth Circuit Court of Appeals issued its opinion in In re Adam Aircraft Industries, Inc.: Weinman v. Walker on Thursday, October 15, 2015.

Joseph Walker was the president and a board member for Adam Aircraft Industries (AAI). On February 1, 2007, George “Rick” Adam, AAI’s board chair, informed Walker that the board had decided to replace him as president and requested his resignation in lieu of terminating his employment. AAI was engaged in debt financing negotiations with Morgan Stanley for an $80 million loan and did not want to imperil its negotiations with bad publicity from Walker’s termination. Walker returned to his office late that night to collect his belongings, and sent an email to the board chair and another board member outlining requests for his resignation. His replacement as president started working for AAI on February 2. Over the next two weeks, AAI and Walker negotiated the terms of his separation and eventually entered into Separation Agreement I and a Memorandum of Understanding (MOU) on February 13, 2007. On March 20, 2007, AAI refunded Walker’s security deposit for an airplane, plus interest, and on May 18, 2007, the parties entered into Separation Agreement II. AAI continued to make twice-monthly severance payments to Walker between February 2007 and February 2008.

On February 15, 2008, AAI filed a voluntary petition for bankruptcy, and the trustee, Weinman, sold substantially all of AAI’s assets for a gross purchase price of $10 million in April 2008. Walker filed a proof of claim in AAI’s bankruptcy case for $134,931.00, including $10,950.00 as a priority-employee claim based on wages, salaries, and commissions under the MOU and Separation Agreements. AAI filed a complaint in January 2010, seeking to avoid and recover transfers to Walker under the MOU and Separation Agreements. The bankruptcy court held a trial in February 2013 and entered its order in June 2013, ruling that Walker ceased to be a statutory insider on February 1, 2007, and did not meet criteria for a non-statutory insider; the transfers to Walker did not occur under an employment contract; and Walker gave reasonably equivalent value for the transfers. AAI appealed to the BAP, which affirmed the bankruptcy court, and again appealed to the Tenth Circuit.

AAI argued to the Tenth Circuit that its transfers to Walker were avoidable under 11 U.S.C. § 548(a)(1). The Circuit iterated five prongs that AAI must meet to prove its transfers were avoidable: (1) the transfers must have occurred within two years of the bankruptcy filing; (2) Walker must have been an insider either when the transfers were negotiated or when the money was paid; (3) the transfers must have been made under an employment contract; (4) AAI must have received less than equivalent value for the transfers; and (5) the transfers must have been made outside the ordinary course of business. The Tenth Circuit noted that the burden was on AAI to prove all five prongs, and failure to prove even one prong would mean AAI could not prevail. Since the parties did not dispute the first factor, the Tenth Circuit began its analysis by looking at whether Walker was an insider when the transfers were negotiated or the money was paid.

The bankruptcy court concluded that Walker’s insider status ceased as of February 1, 2007, and the Tenth Circuit agreed. AAI argued that because the MOU listed March 1, 2007, as Walker’s termination date, the first Separation Agreement and MOU were entered into while Walker retained insider status. The bankruptcy court found, however, that Walker did no further work for AAI after that date, he did not return to the AAI premises, and his replacement started on February 2. The Tenth Circuit found no clear error in the bankruptcy court’s determinations. The bankruptcy court also held Walker could not qualify as a non-statutory insider, which AAI argued was applicable because Walker proposed the initial terms of his separation, which AAI ultimately accepted. The Tenth Circuit found this was insufficient to satisfy AAI’s burden. The Tenth Circuit similarly rejected AAI’s contention that refusing to classify Walker as an insider would frustrate the purpose of BAPCPA, noting it could not imagine Congress intended the BAPCPA to allow businesses to negotiate separation terms with an employee, which the employee fulfilled, then avoid any reciprocal obligations to the employee.

AAI next argued its payments to Walker were recoverable under the “non-insider” portions of § 548. The statute allows avoidance of transfers if AAI received less than equivalent value at the date of each transfer and AAI was insolvent. The Tenth Circuit again noted that failure of one prong would negate the possibility of avoidance. The bankruptcy court had found that the antecedent debt created by the MOU and Separation Agreements for the severance package constituted “reasonably equivalent value” because Walker had agreed to resign instead of facing termination in order not to imperil the debt financing with Morgan Stanley and had not retained employment with competing companies. As for the airplane deposit and stock purchase refund, the Tenth Circuit found no error in the bankruptcy court’s determination that these transactions were not avoidable.

The Tenth Circuit affirmed the bankruptcy court.