November 23, 2017

Tenth Circuit: Bankruptcy Exemption for Retirement Plan Property Not Applicable When Property Withdrawn from Plan

The Tenth Circuit Court of Appeals issued its opinion in In re Gordon: Gordon v. Wadsworth on Friday, June 26, 2015.

In this bankruptcy appeal, the Gordons claimed $2,051 in their savings account as an exempt asset under C.R.S. § 13-54-102(1)(s) because the money represented a lump-sum distribution from their retirement plan and had not been commingled with other funds. The bankruptcy trustee objected on the ground that the exemption for retirement plans does not apply once the money is withdrawn from the plan. The bankruptcy judge agreed with the trustee’s objection and denied the Gordons’ motion for reconsideration. On appeal, the U.S. District Court for the District of Colorado affirmed, as did the Tenth Circuit.

The Tenth Circuit evaluated the language of C.R.S. § 13-54-102(1)(s), which exempts property held in or payable from retirement plans from levy and sale under writ of execution. The Gordons argued that the legislature intended to create an exemption from all retirement funds, regardless of whether they remained in the plan. The Tenth Circuit disagreed, finding the plain language of the statute precluded this reading. The Tenth Circuit found no statutory support for the Gordons’ argument.

The Tenth Circuit affirmed the district court and denied the Gordons’ request to certify questions of law to the Colorado Supreme Court.

Colorado Court of Appeals: Partial Subordination Approach to Lien Priority Best Reflects Colorado Law

The Colorado Court of Appeals issued its opinion in Tomar Development, Inc. v. Friend on Thursday, June 4, 2015.

Lien—Subordination Agreement—Partial Subordination Approach.

The Friend family sold its ranch to Friend Ranch Investors Group (FRIG) to develop it into a resort-style golf course community. In 2010, FRIG conveyed the property to Mulligan, LLC, and at that time, the relevant order of priority was (1) Colorado Capital Bank’s (CCB) senior lien; (2) Tomar Development (Tomar); (3) the Damyanoviches; (4) the Friends; and (5) CCB’s junior lien. Bent Tree, Mulligan, and CCB then entered into a subordination agreement whereby CCB’s senior lien became subordinate to CCB’s junior lien. Neither Tomar, the Damyanoviches, nor the Friends was involved in or an intended beneficiary of the subordination agreement. CCB’s senior lien was never released. Bent Tree then foreclosed on CCB’s senior lien and, in November 2010, Bent Tree bought the property at a public trustee’s foreclosure sale for approximately $11,800. Tomar, the Friends, and the Damyanoviches filed claims, each of which sought declaratory judgments as to the priority of their interests, which were dismissed by the trial court under CRCP 12(b)(5).

On appeal, Tomar, the Friends, and the Damyanoviches argued that the trial court erred in applying the partial subordination approach to the subordination of liens. The partial subordination approach applies when the most senior lienholder (A) agrees to subordinate his interest to the most junior lienholder (C) without consulting the intermediary lienholders (B). Under this approach, when A subordinates to C, C becomes the most senior lienholder, but only to the extent of A’s original lien. Under this partial subordination approach, B is not affected by the agreement between A and C, to which it was not privy. Colorado adopts the partial subordination approach, and it was properly applied in this case. Accordingly, the trial court did not err in dismissing Tomar’s, the Damyanoviches’, and the Friends’ claims seeking a declaratory judgment that each of their interests was senior to all other interests.

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.

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: 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.

Tenth Circuit: If Debtor Transfers More Than 15% of GAI to Qualified Organization, Trustee May Recover Entire Amount, Not Just Amount in Excess of 15%

The Tenth Circuit Court of Appeals published its opinion in Wadsworth v. The Word of Life Christian Center on Monday, December 16, 2013.

Debtors Lisa and Scott McGough filed for bankruptcy relief under Chapter 7 in 2009. During 2008, the McGoughs made contributions to the Word of Life Christian Center (the Center), totaling $3,478. During 2009, they made contributions to the Center totaling $1,280. Their taxable income for 2008 and 2009 was $6,800 and $7,487, respectively. They also received social security benefits in 2008 and 2009 totaling $22,036 and $23,164, respectively.

The Trustee filed an adversary proceeding against the Center seeking to recover the contributions made to it by the McGoughs under 11 U.S.C. §§ 548(a)(1)(B) and 550. Both parties filed motions for summary judgment. According to the Center, because the individual amounts of each contribution made by the McGoughs did not exceed 15% of their gross annual income (“GAI”), none were avoidable under the safe harbor provision of § 548(a)(2). The Trustee took the opposite view: the contributions must be considered in the aggregate and because the total contributions made by the McGoughs exceeded 15% of their GAI in those years, he could recover them in their entirety.

The bankruptcy court agreed with the Trustee in part: for purposes of the safe harbor provision of § 548(a)(2), a debtor’s contributions must be considered in their annual aggregate. However, it sided with the Center on the avoidance issue—if the contributions exceeded 15% of a debtor’s GAI, only the amount exceeding 15% is subject to avoidance. Thus, the Trustee’s recovery was limited to the amount of the contributions exceeding 15% of the McGoughs’ GAI. The Trustee appealed to the Bankruptcy Court of Appeals (BAP). Therefore, the only issue before the BAP was whether § 548(a)(2) allows a trustee to recover the entire amount of a charitable contribution if it exceeds 15% of GIA or only the amount in excess of 15%. The BAP agreed with the bankruptcy court—only the amount exceeding 15% was avoidable.

The sole question on appeal was a narrow one: If a restricted debtor transfers more than 15% of his GAI to a qualified religious or charitable organization, may the trustee avoid the entire annual transfer or only the portion exceeding 15%? The bankruptcy court and Bankruptcy Court of Appeals (BAP) said circumstances here only permitted the trustee to avoid the portion of the transfer exceeding 15%. The issue presented was a matter of first impression in the Tenth Circuit.

The Tenth Circuit agreed with the Trustee’s argument: § 548(a)(2) is unambiguous and clearly provides a safe harbor from the trustee’s avoidance power only if the “transfer” does not exceed 15% of GAI. Thus the converse must also be true—if the “transfer” exceeds 15% of GAI, then the “transfer”—meaning the entire transfer—is subject to avoidance. Had Congress intended for only the portion of the transfer exceeding 15% of GAI to be subject to avoidance, it would have added limiting language to that effect.  It did not.

REVERSED.

Tenth Circuit: Summary Judgment Reversed in Insurance Policy Exclusion Interpretation Case

The Tenth Circuit Court of Appeals published its opinion in CL Frates & Co. v. Westchester Fire Ins. Co. on Wednesday, September 4, 2013.

This dispute grew out of a stop-loss policy issued by United Re to a company that had hired Frates as a broker. After issuance of the policy, United filed for bankruptcy protection. When Frates learned of the bankruptcy, it investigated and learned that United was not an insurance company, had been sued in Ohio, and had filed bankruptcy to stall the Ohio litigation. Ultimately, Frates recommended to its client that it move the stop-loss insurance to another insurer. The client agreed. However, Frates had to reimburse the client for what it lost through higher deductibles.

Frates sued Westchester under the errors-and-omissions policy it had issued Frates. The policy excluded coverage for claims “arising out of” bankruptcy or insolvency. The district court granted summary judgment to Frates, agreeing that the claim arose out of United’s deception. The Tenth Circuit reversed, holding that a reasonable trier of fact could find that Frates’ claim arose out of United’s bankruptcy or insolvency.

Tenth Circuit: In Case of First Impression, 2005 Amendments to Bankruptcy Code Do Not Exempt Individual Chapter 11 Debtors from the Absolute Priority Rule

The Tenth Circuit issued its opinion in Dill Oil Company, Inc. v. Stephens on Tuesday, January 15, 2013.

Arvin E. Stephens and Karen J. Stephens, f/d/b/a/ Ninnekah Quick Mart, LLC (“Debtors”) owned a chain of convenience stores for which Dill Oil Company, LLC, and Danny and Nancy Dill (“the Dills”) were the primary supplier of gasoline and gas station products. Due to the rising price of gas and a diminishing customer base, Debtors’ stores began operating at a loss. Debtors became liable to the Dills for approximately $1.8 million.

In 2010, Debtors filed for relief under Chapter 11 of the Bankruptcy Code. Pursuant to the plan, the Dills would be paid approximately $15,000 as a secured creditor, but their remaining claim would be considered unsecured. The Debtors would retain possession and control of their property; the Dills would receive a monthly payment for five years, totaling about 1% of their unsecured claim. The Dills objected to confirmation on the ground that the proposed plan violated the absolute priority rule (“APR”), which bars junior claimants, including debtors, from retaining any interest in property when a dissenting class of senior creditors has not been paid in full.  The bankruptcy court entered an order confirming the plan and the Dills appealed.

This appeal presents an issue of first impression for the Tenth Circuit: whether the 2005 amendments to the Bankruptcy Code exempt individual Chapter 11 debtors from the absolute priority rule.

After examining the divergent interpretations among the Circuits of the statutory language and endeavoring to ascertain Congress’s intent, the Tenth Circuit refused to read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a departure. Here, the statutory language and legislative history lacked any clear indication that Congress intended to erode the absolute priority rule, a pillar of creditor bankruptcy protection.

Accordingly, the Court REVERSED the bankruptcy court’s order confirming the plan and REMANDED for further proceedings.