November 21, 2014

Tenth Circuit Announces Bankruptcy Judge Vacancy in District of Wyoming

The Tenth Circuit Court of Appeals announced a vacancy for a bankruptcy judge in the District of Wyoming. This position will open after February 28, 2015, and it will be officially located in Cheyenne, Wyoming. Bankruptcy judges are appointed to 14-year terms. The District of Wyoming has a relatively low bankruptcy caseload, so the selected judge will be expected to carry a partial caseload in the District of Colorado as well.

To qualify for appointment, applicants must be a member in good standing of the highest court in at least one state or the District of Columbia, and be a member in good standing of every other bar in which the applicant is a member; possess and demonstrate various qualifications of fitness for duty, including outstanding legal ability and competence, a commitment to equal justice under the law, judicial temperament, and sound physical and mental health; not be related by blood or marriage to any other judge on the Tenth Circuit, a member of the Judicial Council of the Tenth Circuit, or a judge of the District of Wyoming; and must have been engaged in the practice of law or similarly suitable occupation for five years.

Applications are available on the Tenth Circuit’s website, and may also be obtained by calling the Office of the Circuit Executive at (303) 844-2067 and requesting to speak to a member of the Judicial Resources team. Applications must be received on or before December 19, 2014, and should be submitted via email to hr@ca10.uscourts.gov or by mail to Office of the Circuit Executive, Byron White U.S. Courthouse, 1823 Stout St., Denver, CO 80257. For more information about the vacancy and required qualifications of applicants, 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.

Colorado Court of Appeals: Dismissal Prior to Completion of Bankruptcy Case Re-Vests Claims in Debtors

The Colorado Court of Appeals issued its opinion in Mackall v. JPMorgan Chase Bank, N.A. on Thursday, September 11, 2014.

Bankruptcy—Dismissal—Standing—Issue Preclusion—Failure to State a Claim.

Plaintiffs purchased a home and subsequently refinanced it. After the court issued a written order authorizing JPMorgan Chase Bank (Chase), the assigned lender, to sell the house, plaintiffs filed a Chapter 13 petition for bankruptcy. The bankruptcy court dismissed the bankruptcy proceeding before confirmation of a plan or discharge. Plaintiffs thereafter filed a civil complaint against Chase, alleging that Chase’s note was fraudulent and that Chase was not the proper party to enforce it. The district court granted Chase’s motion to dismiss some of plaintiffs’ claims.

On appeal, Chase contended that plaintiffs lacked standing to assert any claims against it because (1) all of the claims were actionable when plaintiffs filed for bankruptcy, and (2) plaintiffs failed to disclose the claims to the bankruptcy court. When a bankruptcy case is dismissed, the debtor is granted standing to assert any claim that it possessed before it filed for bankruptcy, regardless of whether it disclosed the claim to the bankruptcy court during the bankruptcy proceedings. Here, the dismissal of the bankruptcy petition re-vested the claims in plaintiffs, and they had standing to bring those claims against Chase after the dismissal.

Plaintiffs argued that the district court erred in dismissing some of their claims based on issue preclusion. The district court held that both the CRCP 120 order authorizing sale and the bankruptcy court order allowing Chase’s proof of claim precluded some of plaintiffs’ claims. Because the bankruptcy court ruling had preclusive effect on these issues, plaintiffs were barred from re-litigating the issues that were dismissed based on issue preclusion.

Plaintiffs also argued that the district court erred by dismissing several of their claims for failure to state a claim. Because the complaint failed to allege that Chase filed the CRCP 120 actions for any purpose other than to obtain an order authorizing sale, the district court properly dismissed plaintiffs’ abuse of process claim. Plaintiffs’ complaint failed to allege that their property was on the market for sale and, therefore, the district court properly dismissed plaintiffs’ slander of title claim. Additionally, plaintiffs claims for breach of contract, implied covenant of good faith and fair dealing, and promissory estoppel were properly dismissed because the statute of frauds barred any unwritten modification of the loan agreement. Finally, because Chase had the right to seek enforcement of the promissory note against plaintiffs, plaintiffs’ claim for intentional infliction of emotional distress failed. The judgment was affirmed.

Summary and full case available here, courtesy of The Colorado Lawyer.

Tenth Circuit: Debtor’s Participation in Tax Evasion Scheme was Willful

The Tenth Circuit Court of Appeals issued its opinion in In re Vaughn: Vaughn v. United States on Tuesday, August 26, 2014.

In the mid-1990s, James Charles Vaughn was the CEO of FrontierVision Partners, L.P., a cable television acquisitions company. In 1999, Vaughn sold FrontierVision for roughly $2.1 billion. He received approximately $20 million cash and $11 million in the purchasing company’s stock from this transaction. Vaughn contacted KPMG LLP regarding tax planning and learned of a tax strategy called Bond Linked Issue Premium Structure (“BLIPS”), in which relatively small cash contributions were made to an investment fund with a non-recourse loan and loan premium in order to facilitate a high tax loss without a corresponding economic loss. Vaughn utilized the BLIPS strategy for his 1999 taxes. In September 2000, the IRS issued Revenue Bulletin Notice 2000-44, which specifically disclaimed BLIPS-type practices, although not naming BLIPS. Vaughn was notified of the IRS’s position by KPMG in 2000. In 2001, another BLIPS participant was audited by the IRS, and contacted Vaughn to inform him of the audit. KPMG was audited in 2002, and at that time informed Vaughn that he likely would face an audit as well. KPMG representatives suggested to Vaughn that he participate in an IRS voluntary disclosure program.

Meanwhile, Vaughn divorced his first wife, Cindy Vaughn, in 2001, and the couple’s assets were divided. Vaughn married Kathy St. Onge shortly thereafter and made large purchases with her. In 2002, three weeks before filing his voluntary disclosure with the IRS, Vaughn created an irrevocable trust for his stepdaughter and transferred $1.5 million to the trust. Vaughn and St. Onge spent large amounts of money from 2001 through 2003. When the couple divorced in 2003, St. Onge received many of the remaining assets.

The IRS notified Vaughn in 2003 that Cindy had requested innocent spouse relief for her 1999 tax return. Vaughn requested the same relief, stating that the divorces had depleted his assets but neglecting to mention the trust for the stepdaughter or the unequal division of assets in his divorce from St. Onge. In June 2004, the IRS notified Vaughn of an approximately $8.6 million tax deficiency relating to the BLIPS transaction, and notified him of a further $200,000 deficiency regarding carryover from 2000.

Vaughn filed his Chapter 11 bankruptcy petition in November 2006. The IRS subsequently filed a proof of claim in that action for the 1999 and 2000 tax deficiencies for approximately $14.3 million. Vaughn initiated an adversary proceeding, seeking to have the taxes declared dischargeable. The bankruptcy court found that Vaughn had both filed a fraudulent tax return and willfully evaded his taxes, and his tax liabilities were non-dischargeable. Vaughn appealed to the federal district court, which affirmed the bankruptcy court. Vaughn then appealed to the Tenth Circuit, arguing that the district court erroneously employed a “holistic” review to support the bankruptcy court’s determination of willful evasion of taxes, and also arguing that the bankruptcy court’s finding of willful evasion was based on conduct that was negligent, not willful.

The Tenth Circuit first addressed the “holistic” review argument, and noted that the bankruptcy court made no mention of employing a “holistic” review, instead applying a two-pronged approach. Turning next to the argument that Vaughn’s conduct was negligent, not willful, the Tenth Circuit found that the bankruptcy court made specific findings regarding Vaughn’s intentions in participating in the BLIPS scheme. The Tenth Circuit rejected Vaughn’s argument that his conduct was negligent because he did not know the exact amount of taxes due, finding instead that the assessment of tax is not required for debtor’s conduct to be willful.

The Tenth Circuit affirmed the district court and the bankruptcy court.

Comment Period Open for Proposed Changes to 10th Circuit Local Rules

The Tenth Circuit Court of Appeals has proposed changes to its local rules, effective January 1, 2015. From August 22 through October 20, the comment period for these proposed changes will be open to all interested parties. Comments are welcome on all rules, but practitioners are encouraged to carefully review the appendix requirement in counseled civil cases and criminal cases where there is retained counsel.

In addition to the changes to the 10th Circuit Local Rules, a change to Rule 6 of the Federal Rules of Appellate Procedure regarding bankruptcy appeals will take effect December 1, 2014. The change addresses three areas: (1) it has been updated to include the latest numeric revisions to the bankruptcy rules; (2) language has been changed to address electronic records; and (3) references have been added to discretionary bankruptcy appeals.

The changes to Fed. R. App. P. 6 and the 10th Circuit Local Rules are available in a clean version and a redline. Comments may be submitted to the clerk of the 10th Circuit via email at 10th_Circuit_Clerk@ca10.uscourts.gov. Interested parties are welcome to call the clerk’s office with questions at (303) 844-3157.

Tenth Circuit: Fundamentally Ambiguous Questioning Required Plain Error Reversal

The Tenth Circuit Court of Appeals issued its opinion in United States v. Hale on Tuesday, August 12, 2014.

Thomas Hale filed a voluntary Chapter 13 bankruptcy petition in 2005. He listed three pieces of property in Schedule A, including a Salt Lake City property he listed as valued at $190,000 despite a property tax assessment indicating the property was worth $268,900; he had challenged the property tax valuation. He moved to convert his Chapter 13 case to Chapter 7 in July 2006 and an order was entered to that effect. This transferred control of his non-exempt assets, including the Salt Lake City property, to a bankruptcy trustee, Elizabeth Loveridge. Loveridge questioned Hale under oath at a creditors’ meeting on August 22, 2006, and Hale testified that the information he provided in his bankruptcy document was true, complete, and accurate. However, that same day, he advertised the Salt Lake City property in two newspapers for $396,075 or appraisal. A real estate agent contacted him and eventually found a buyer for the property who would pay $395,000 if Hale paid half the closing costs. Hale entered into a contract with the buyer and did not inform the buyer about the bankruptcy proceedings. Hale also signed an agreement with the buyer that Hale could continue to live on the property. He did not inform the trustee about the transaction.

When a title insurance representative contacted Loveridge, she instructed him to cancel the sale. Hale appeared at her office twice that day unannounced and appearing “agitated and angry.” At the second meeting, he gave Loveridge several documents, including an ex parte motion to approve the sale and a motion to revert to Chapter 13 status, both of which he had filed with the bankrutpcy court. He attached a letter to the ex parte motion dated ten days previous and an affidavit by his office manager that the letter was mailed on that previous date. However, the letter referenced the ex parte motion, which was filed ten days later and would not have been created if Loveridge had received the letter.

Loveridge hired a real estate agent to renegotiate the contract with the buyer. The renegotiated contract specified that all tenants would be evicted. The bankruptcy court approved the sale and Loveridge initiated eviction proceedings. Hale sent Loveridge several handwritten notes via fax, one of which advised her of a possible haz-mat problem in an orange package. When the orange package arrived, Loveridge called the police. After much inspection, the package was opened, and it contained a baggie with unidentified material and a note that said “Possible haz-mat? Termites or hanta virus [sic] from mice?” It was eventually determined to contain no hantavirus material.

After a jury trial, Hale was convicted of making a materially false statement under oath during the bankruptcy proceeding regarding the value of the Salt Lake City property, concealing the purchase contract from the trustee and creditors, and perpetrating a hoax regarding the transmission of a biological agent. Hale challenged his convictions.

The Tenth Circuit first addressed Hale’s challenge for knowingly and fraudulently making a false statement under oath. The government alleged that he knew well that his property was worth more than he listed in the bankruptcy documents at the time he made statements under oath that the documents were true and correct. Hale countered that the questions were fundamentally ambiguous. The Tenth Circuit conducted a plain error review and concluded that the statements were indeed ambiguous based on prior Tenth Circuit precedent involving similar questions. The Tenth Circuit reversed Hale’s conviction based on this charge and remanded for entry of judgment of acquittal on the false statement charge.

Next, the Tenth Circuit turned to Hale’s concealment of the purchase of the Salt Lake City property. Hale argued that the purchase agreement was void or, alternatively, that it did not meet the statutory definition of “property belonging to the estate of a debtor.” The Tenth Circuit did not support Hale’s argument that the contract was void ab initio, instead finding it was voidable. Hale conceded that the proceeds would be property of the bankruptcy estate but the contract was not. However, the purchase agreement created an interest in proceeds, so the Tenth Circuit affirmed Hale’s conviction on this count.

Finally, the Tenth Circuit addressed Hale’s conviction for perpetrating a hoax involving biological weapons. Hale had relied on the pending U.S. Supreme Court decision in Bond v. United States to render the error plain by holding an analogous statute unconstitutional. However, the Bond ruling did not reach the constitutional issue. Hale’s attack to the sufficiency of the evidence failed and the Tenth Circuit affirmed his conviction on this count.

The order of the district court was affirmed in part, reversed in part, and remanded for entry of acquittal on the false statement charge.

Tenth Circuit: Bankruptcy Reorganization Does Not Create Separate Legal Entity

The Tenth Circuit Court of Appeals issued its opinion in ASARCO LLC v. Union Pacific Railroad Co. on Monday, June 23, 2014.

ASARCO, along with Union Pacific Railroad Corp. and Pepsi Co., operated in a four-square-mile area in Denver known as the Vasquez site, which was found to be environmentally contaminated. The EPA brought a CERCLA action against ASARCO. The CERCLA action was still pending when ASARCO filed for Chapter 11 bankruptcy in the Southern District of Texas. The EPA filed proofs of claim in ASARCO’s bankruptcy case to recover its expenses for cleaning the Vasquez site. ASARCO eventually moved for approval of a settlement agreement, in which it would agree to pay over $1.5 million to resolve its CERCLA claims at the Vasquez site and other sites, and the bankruptcy court approved the settlement on June 5, 2009. The bankruptcy plan was also approved, which reorganized ASARCO as ASARCO LLC and noted that all claims, including any pending environmental claims, would be paid in full on the effective date of December 9, 2009.

ASARCO LLC filed a lawsuit against Union Pacific and Pepsi on December 10, 2012, asserting that it paid more than its fair share for environmental remediation at the Vasquez site. ASARCO LLC brought two claims: a direct contribution claim under CERCLA, and a contribution claim as debtor-ASARCO’s subrogee under CERCLA. The magistrate judge recommended dismissal of both claims – as to the first claim, it found that the claim was untimely, as it was brought more than three years after the date the bankruptcy court approved the settlement. As to the second claim, the magistrate judge rejected ASARCO’s argument that it was a separate legal entity from debtor-ASARCO and it could not be subrogated to itself. The magistrate judge also noted that CERCLA provided the exclusive legal remedy to ASARCO’s claims. The district judge accepted the magistrate judge’s recommendations and dismissed the complaint in its entirety. ASARCO appealed to the Tenth Circuit.

ASARCO first argued that its claim was not barred by the statute of limitations. The Tenth Circuit commented that the plain language of the statute did not support ASARCO’s argument, since the statute refers to the date the judicially approved settlement is entered. The Tenth Circuit also noted that all of the case law cited by ASARCO counseled the same result, that the statute of limitations had expired prior to ASARCO’s filing of the complaint. As to the second argument, the Tenth Circuit denied that ASARCO became a separate legal entity after bankruptcy reorganization, and noted that an entity cannot become subrogated to itself. Because the direct contribution claim was time-barred and because ASARCO is not a subrogee, the Tenth Circuit affirmed the district court’s order.

Inherited IRAs in Light of the U.S. Supreme Court’s Decision in Clark v. Rameker

This post originally appeared on Barbara Cashman’s Denver Elder Law blog on June 18, 2014.

CashmanBy Barbara Cashman

Everyone knows what an IRA is – right?  We think IRAs have been around a really long time, but they only came into being in 1975 with ERISA legislation, and Roth IRAs came in 1997. IRAs are classic nonprobate property that someone can pass to others without probate in many circumstances.

Q: What happens if I complete the beneficiary designation form?

A: Your beneficiaries will have much more flexibility and protections (especially on the tax front).

Q: What happens if I don’t bother with the beneficiary form?

A: Well, you won’t be around to find out – right?!  Here’s a link to a Colorado Business Magazine article about the importance of designating a beneficiary to maintain that flexibility.

Some handy IRA vocabulary words:

  • RBD – required beginning date (701/2 years of age), after which you are required to withdraw the
  • RMD – required minimum distribution, an annual distribution.

Here it is important to consider whether the decedent died after his or her RBD.  If she or he was already receiving RMDs, you will want to determine whether the distribution for that final year needs to be paid. Be sure to check with the account custodians to determine if the distribution was made before the date of death.  There are two basic types of IRAs that can be passed along to survivors:

  1. Spousal IRA 
    This is generally the simplest to accomplish and a spouse will want to consider among several choices –  to roll them over into an IRA, start receiving benefits, have them paid out in a lump sum, or disclaim some portion to minimize estate taxes in the spouse’s estate.
  2. Inherited IRA
    There is an important distinction initially regarding whether the beneficiary designation was made out to the beneficiaries or left blank. . .  There is generally much more flexibility when the designations are completed.

So here’s a question . . . . Whether inherited IRAs are generally exempt from creditors depends on where you live! Are these funds still qualified and exempt, or are they just another inherited asset?

In an inherited IRA scenario, a beneficiary (often an adult child) will need to take out the RMD in the parent’s IRA every year and declare that as income. In addition, the IRA cannot be added to by the inheritor. You might be wondering what types of protections are afforded inherited IRAs from the creditors of the inheritor. Well, I can say with all lawyerlike confidence . . .  it depends. Under Colorado law, specifically Colo. Rev. Stat. § 13-54-102(1)(s), there is an exemption from judgment creditors for certain types of retirement accounts and benefits. The definition includes IRAs “as defined under Section 408 of the Code” (this would be 26 U.S.C. § 408(d)(3)(C)(ii)). Under the Bankruptcy Abuse Preventive and Consumer Protection Act of 2005 (BAPCPA), many states opted out of the federal bankruptcy exemptions in favor of state law exemptions. Read more on this topic here from my learned colleague Laurie Hunter.

It is important to consider that there are at least three different layers to the inherited IRA treatment: federal tax law, state law relating to bankruptcy and what creditors can collect, and bankruptcy. Until just a few days ago, when the U.S. Supreme Court ruled on a writ of certiorari on the U.S. Court of Appeals for the Seventh Circuit’s 2013 decision, In re Clark, there was a split among the federal circuit courts of appeal – you can read more about it here.

The Federal Circuit Courts of Appeal Were Split Over the Meaning of the Phrase “Retirement Funds”

Two federal courts of appeal – the Fifth and Seventh Circuits (whose decisions were binding in the regions that they cover – Colorado is part of the Tenth Circuit) had come to opposite conclusions while interpreting the meaning of the same term. In 2013, the Fifth Circuit decided that the phrase “retirement funds” in the bankruptcy exemption statute quoted above means any funds “set apart” in anticipation of “withdrawal from office, active service, or business” and that the statute does not limit “retirement funds” solely to funds of the bankrupt debtor, so long as the funds were originally “set apart” for someone’s retirement. In re Chilton, 674 F.3d 486 (5th Cir. 2012). Once the funds were set apart for retirement, they maintained that same character for bankruptcy exemption purposes. The court thereby permitted the debtor in Chilton to exempt all of a $170,000 IRA inherited from her mother.

In Clark, the Seventh Circuit expressly disagreed with the Fifth Circuit, adding that it “do[es] not think the question is close.” The Seventh Circuit observed that, while inherited IRAs do shelter money from taxes until it is withdrawn, they lack many of the other attributes of an IRA. That court noted in particular that the beneficiary of an inherited IRA is prohibited from rolling those funds over into his or her own IRA and from adding her own funds to the inherited IRA. The beneficiary must take distributions from the inherited IRA within a year of the original owner’s death and complete those payouts over a defined period, often as little as five years, regardless of the beneficiary’s age and employment status. In short, once the original owned died, “the money in the inherited IRA did not represent anyone’s retirement funds.” That court of appeals declined to extend the character of a decedent’s retirement funds into the inheritance context and therefore decedent’s daughter could not then use that money as her own retirement savings, and it became no different from an inherited certificate of deposit or money market account: non-exempt and available to distribute to the daughter’s creditors.  That was the essence of the split in the circuits.

Just a few days ago, the U.S. Supreme Court ruled unanimously in Clark v. Rameker that inherited IRAs are not protected in bankruptcy. Here’s a link to the SCOTUSblog coverage of the decision. The US Supreme Court followed the line of reasoning of the bankruptcy court and the Seventh Circuit, disallowing the attempt by petitioner in bankruptcy court, Hedi Heffron-Clark, to exclude the funds in the IRA from the bankruptcy estate using the “retirement funds” exemption under Section 522 of the Bankruptcy Code, which exempts tax-exempt retirement funds from a bankruptcy estate. Just in case you are an insomniac and want to read the entire decision, rendered June 12, 2014, here it is in pdf format.

I still think that, notwithstanding the U.S. Supreme Court’s ruling, inherited IRAs are  an important legacy for a parent to leave an adult child, and it is important to not underestimate the “emotional” value of the money from a deceased parent’s retirement savings for the use of a child’s retirement. But beware, they won’t be protected from an adult child’s creditors in a bankruptcy proceeding. So please remember that an IRA and an inherited IRA are not really the same animal!

Barbara Cashman is a solo practitioner in Denver, focusing on elder law, estate law, and mediation. She is active in the Trust & Estate and Elder Law sections of the CBA and is the incoming chair of the Solo/Small Firm section. She contributes to the SOLOinCOLO blog and blogs weekly on her law firm blog, where this post originally appeared. She can be contacted at barb@DenverElderLaw.org.

The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.

Bankruptcy Plan Modification by Debtor’s Counsel – Part of Bankruptcy Update 2014

In any three- to five-year period, many of us face unanticipated financial obstacles – medical expenses, educational expenses, dependent expenses. For a bankruptcy debtor, these unexpected financial burdens can derail a payment plan. Thankfully, the Bankruptcy Code at 11 U.S.C. § 1329 allows post-confirmation plan modifications so that debtors can adapt to changing life circumstances.

Section 1329 permits a debtor, trustee, or holder of an unsecured loan to request modification to increase or reduce payments to a particular class; prolong or shorten the time for those payments; alter the amount of distribution to a creditor in order to account for another payment not covered by the plan; or reduce payments in order to cover health insurance expenses for the debtor.

Experienced bankruptcy attorney Andrew S. Trexler offers some of the common scenarios in which his clients have requested post-confirmation plan modification:

  • To remove unpaid mortgage arrears following a mortgage loan modification and reduce plan length;
  • To bring payments current and reduce payments to account for change in projected disposable income, such as from retirement;
  • To allow for debtor to transition from one job or business to another through temporary reduction in monthly payment and provide for post-petition mortgage and HOA arrears;
  • To provide for pre-petition priority support arrears and cram down secured debt;
  • To surrender property securing Class 2 or 3 debts (Note: this is explicitly allowed by Judge Tallman so long as in good faith but disallowed by Judge Campbell);
  • Generally, to accommodate any significant decrease in disposable income caused by reduction in hours, job loss, increase in taxes due to end of payroll tax holiday in 2013 or increased medical bills, insurance costs, lawsuit defense, etc.; or
  • To allow for the purchase of health insurance (now generally required by the Affordable Care Act), so long as the debtor complies with § 1329(a)(4).

Trexler also provides the sample modification request motions and projected plans for several of these scenarios. He will present on this topic at Friday’s CLE program – Bankruptcy Update 2014 – along with several bankruptcy court judges and other area bankruptcy attorneys. Click the links below to register or call (303) 860-0608.

CLE Program: Bankruptcy Update 2014

This CLE presentation will take place on June 6, 2014. Click here to register for the live program and click here to register for the webcast. You can also register by phone at (303) 860-0608.

Can’t make the live program? Order the homestudy here — CD homestudy • MP3 audio downloadVideo OnDemand

Tenth Circuit: Avoidance of Transfer to Bank Would Restore Bank’s Lien on Estate as Fully Secured Creditor

On Tuesday, April 15, 2014, the Tenth Circuit Court of Appeals issued its opinion in C.W. Mining Co. v. Bank of Utah.

In this bankruptcy matter, the Chapter 7 Trustee filed a complaint with the bankruptcy court seeking to recover a post-petition transfer to the Bank of Utah. C.W. Mining had deposited $362,000 with the bank in exchange for a certificate of deposit. C.W. Mining then was subject to an involuntary Chapter 11 proceeding, which was converted to a Chapter 7 proceeding. The bank then liquidated the certificate of deposit, which had a value of $383,099. The bank applied the proceeds to the balance owing on two of three promissory notes executed by C.W. Mining in favor of the Bank in 2005, 2006, and 2007. Although the bank knew of the bankruptcy proceeding, it did not inform the trustee, who learned of the transfer when the bank sold its rights on the third promissory note to a third-party seller and the seller sought recovery from the estate. The trustee commenced an adversary proceeding to recover $383,099 from the bank and the parties filed cross-motions for summary judgment.

The bankruptcy court awarded summary judgment to the bank, reasoning that avoidance would be pointless because a transfer to a fully secured creditor cannot be avoided under 11 U.S.C. § 549 without also reviving the secured creditor’s lien. The trustee failed to allege any injury from the bank’s transfer.

The trustee appealed to the Bankruptcy Appellate Panel, which affirmed the bankruptcy court’s judgment. He appealed again to the Tenth Circuit, but the Tenth Circuit affirmed the BAP, finding that the bankruptcy court’s decision was thorough, well-reasoned, and correct.

Tenth Circuit: In Consolidated Bankruptcy Appeal, One Case is Moot, Court Lacks Jurisdiction to Hear Other

The Tenth Circuit Court of Appeals published its opinion in Gordon v. Bank of America and Pahs v. Kiehl on Thursday, February 20, 2014.

After Pahs filed his appeal with this court, he and the Chapter 13 trustee agreed that Pahs would continue to make the payments required by the Chapter 13 plan while this appeal was pending. When Pahs failed to make those payments, one of his creditors moved for the dismissal of Pahs’ bankruptcy. After no one objected to the motion, the bankruptcy court granted it, dismissing Pahs’ bankruptcy. In light of that dismissal, the Tenth Circuit held it could no longer grant Pahs any relief and his appeal was therefore moot.

Regarding the Gordons’ appeal, The Tenth Circuit held it had no jurisdiction because it was not taken from a final appealable decision and the parties had not invoked any mechanism that might permit an interlocutory appeal.

Although the district court’s decision required the Gordons to use the model Chapter 13 plan without modification, they would be free to revise the substantive portion of their plan. And the bankruptcy court will have to give creditors notice of the new amended plan, permit time for any objections, and then conduct another confirmation hearing. All of which is to say, the district court remanded the Gordons’ case to the bankruptcy court for significant further proceedings. This did not constitute a final appealable decision, and the Tenth Circuit lacked jurisdiction to hear the appeal.

The Pahs’ appeal was DISMISSED as moot.

The Gordons’ appeal was DISMISSED for lack of jurisdiction.

Tenth Circuit: Issue Preclusion Does Not Apply in Bankruptcy Court to a Final Determination in District Court Where Party Waived Issue

The Tenth Circuit Court of Appeals published its opinion in In re Zwanziger on Tuesday, January 28, 2014.

James Hamilton and Richard Kus sued Wolfgang Zwanziger for fraud and violations of Oklahoma’s wage laws. A jury found Zwanziger liable and awarded Hamilton and Kus a combined sum of $573,000. Zwanziger appealed.

On appeal, the Tenth Circuit affirmed the jury’s verdict on liability but reversed on damages. Hamilton and Kus had failed to include damages for emotional distress in their final pretrial order, even though they listed such damages in their complaint. Thus, the Tenth Circuit concluded that the district court erred in instructing the jury to consider emotional distress damages. So the Tenth Circuit remanded to the district court to recalculate damages.

But before the district court could recalculate damages, Zwanziger declared bankruptcy. Kus and William Clark, as trustee of Hamilton’s estate, (since Hamilton had also declared bankruptcy), then filed a complaint in bankruptcy court to determine how much of Zwanziger’s liability was not dischargeable. After reviewing both sides’ damages case, the bankruptcy court awarded Clark and Kus a combined sum of $181,300 in nondischargeable damages, $50,000 of which was for emotional distress. Zwanziger appealed to the Bankruptcy Appellate Panel (BAP), arguing that res judicata precluded the bankruptcy court from including damages for emotional distress. The BAP reversed. Clark and Kus appealed the BAP’s decision.

In this appeal, the Tenth Circuit considered a novel question: Does issue preclusion apply in bankruptcy court to a final determination in district court that a party waived an issue? The court concluded issue preclusion does not apply to the waiver finding here. In this case, issue preclusion does not apply because a finding that an issue of fact or law is waived is not a decision on the merits. Waiver as a general matter is a procedural determination that governs only the case in which it is made.

Therefore, the court REVERSED the judgment of the Bankruptcy Appellate Panel and REMANDED for the bankruptcy court to REINSTATE its order.