August 17, 2018

Colorado Court of Appeals: Attorney Fee Award Non-dischargeable as Civil Penalty Under CCPA

The Colorado Court of Appeals issued its opinion in State of Colorado ex rel. Coffman v. Robert J. Hopp & Associates, LLC on Thursday, May 17, 2018.

Bankruptcy—Attorney Fees—Colorado Consumer Protection Act—Colorado Fair Debt Collection Practices Act—Civil Penalty—Reasonableness—Groundless.

The State brought an action alleging that Hopp and his wife Lori Hopp, and Hopp’s law firms and affiliated companies, violated the Colorado Consumer Protection Act (CCPA) and the Colorado Fair Debt Collection Practices Act (CFDCPA) (see 2018 COA 69, No. 16CA1983, State of Colorado v. Robert J. Hopp & Associates, LLC). The district court entered judgment against Hopp and in favor of plaintiffs, but concluded there was insufficient evidence to find Lori Hopp liable for any alleged misconduct. The trial court also awarded plaintiffs most of their reasonable attorney fees and costs incurred in bringing the enforcement action under the CCPA and CFDCPA.

On appeal, Hopp contended that the trial court erred when it imposed an award of attorney fees and costs against him because it was precluded from doing so by his discharge of debts in bankruptcy. Hopp filed for bankruptcy in January 2013 and obtained a discharge in February 2014. Plaintiffs’ enforcement action was filed 10 months later. Hopp argued that the bankruptcy discharge applied to any claim for attorney fees and costs that could have been fairly or reasonably contemplated during the bankruptcy case. The trial court’s attorney fee awards under the CCPA and CFDCPA are not dischargeable, and the Court of Appeals declined to order that they be vacated as void under 11 U.S.C. § 5243.

Hopp further contended that the trial court erred when it failed to reduce plaintiffs’ attorney fees award by the amount of any fees incurred for their unpursued and unsuccessful claims. Because plaintiffs’ claims involved a common core of facts and were brought under the same legal theories, the trial court did not abuse its discretion in declining to reduce plaintiffs’ attorney fees.

Lori Hopp contended that the trial court erred in rejecting her argument that she was entitled to her attorney fees and costs under C.R.S. §§ 13-17-101 to -106 for defending against plaintiffs’ eventually unsuccessful claims against her. The trial court’s decision that plaintiffs’ CCPA claim against Lori Hopp was not substantially groundless was not manifestly arbitrary, unreasonable, or unfair, and the trial court did not abuse its discretion when it declined to award her attorney fees.

The order was affirmed.

Summary provided courtesy of Colorado Lawyer.

Tenth Circuit: Form 1040s Filed After IRS Tax Assessments Not “Returns” for Bankruptcy Dischargeability Purposes

The Tenth Circuit Court of Appeals issued its opinion in In re Mallo: Mallo v. Internal Revenue Service on Monday, December 29, 2014.

In these consolidated appeals, the debtors did not file tax returns timely and the IRS issued statutory notices of deficiency. The debtors in both cases eventually filed tax returns for the years at issue, changing their tax liabilities. The debtors in both cases later were subject to bankruptcy court orders discharging their debts but excluding their tax liabilities. They filed adversary proceedings against the IRS, seeking determinations that their tax debts had been discharged, and the IRS answered, denying that the debts had been discharged. The parties filed cross-motions for summary judgment on the legal question of whether the debtors’ tax debts were excepted from discharge under 11 U.S.C. § 523(a)(1)(B). In the Mallo case, the bankruptcy court granted the IRS’s motion for summary judgment based on the court’s conclusion that the Mallos had not filed a return and therefore their debt was not dischargeable. In the Martin case, the bankruptcy court reached the opposite conclusion. Both cases were appealed to the U.S. District Court for the District of Colorado, where they were consolidated. The district court concluded the late-filed returns were not “returns” for purposes of § 523(a)(1)(B) because they served no tax purpose. The debtors then appealed, and the appeals were consolidated.

The Tenth Circuit found the plain language of § 523(a) unambiguous, and found that the late-filed returns were not returns for purposes of § 523(a) and therefore their tax liabilities were excepted from the bankruptcy courts’ general orders of discharge. The Tenth Circuit noted that the district court in this case utilized the long-established Beard test to determine whether a filing is a return, focusing on the third prong of the test, i.e., whether a Form 1040 filed after the IRS assesses tax penalties evinces “an honest and reasonable attempt” to comply with tax law. The district court in this case adopted the reasoning of several other courts to consider the issue and determined that because the IRS has no use for the Form 1040 after it has calculated tax liability, the late-filed returns have no valid purpose and therefore are not “honest and reasonable attempts” to follow tax law. The Tenth Circuit took a different approach, instead applying a plain language analysis to § 523(a). The Tenth Circuit found the phrase “applicable filing requirements” to include time limits for filing. Because the debtors did not file their returns by the deadline, an applicable filing requirement, they were not “returns” as required by the Bankruptcy Code.

The Commissioner of the Internal Revenue Service proposed a different approach, instead relying on the official IRS position, which is that “a debt assessed prior to the filing of a Form 1040 is a debt for which [a] return was not ‘filed.’” In essence, the Commissioner argued that focusing on the meaning of the word “return” was not necessary, and would impermissibly work a “major change” in bankruptcy practice. The Tenth Circuit rejected this approach, relying instead on the plain and unambiguous statutory language and finding that Congress intended the result achieved by the Tenth Circuit because the language it chose was unambiguous. It would not create a “major change” in bankruptcy practice because the language the Tenth Circuit interpreted was part of the Bankruptcy Code.

The district court’s rulings were affirmed.