Chapter 11 debtor was a partner in three partnerships, each of which obtained a loan from bank that was guaranteed by debtor's president. As the partnerships' manager, debtor would "upstream" excess partnership funds to itself, and then "downstream" funds to the partnerships for expenses, as needed. Such transfers were documented by bookkeeping entries that indicated increases or decreases in the debt balance between debtor and the partnerships. The chapter 11 trustee filed an adversary action against bank, seeking avoidance and recovery of transfers made by debtor to the partnerships, which the partnerships then transferred to bank in payment of their loans. Trustee claimed that debtor had essentially paid bank directly, arguing that the partnerships were mere "conduits" between debtor and the bank. The bankruptcy court agreed, and bank appealed. The district court accepted the bankruptcy court's conclusion that all of the elements of a preference under 11 U.S.C. § 547(b) had been satisfied, noting that debtor's transfers benefitted a creditor whether they were to the partnerships or to the bank. The district court then turned to the issue of liability under 11 U.S.C. § 550, which only allows recovery of preferential transfers from the initial transferee. The bankruptcy court had concluded that, since the partnerships were mere conduits for debtor's transfers, bank was the initial transferee. Although several tests for determining whether an entity is a "conduit" had been used by other courts, the bankruptcy court had held that the partnerships' failure to exercise "dominion and control" over the transferred funds rendered all other tests unnecessary. The district court disagreed, both because it found the bankruptcy court's position to be unnecessarily restrictive, and because the partnerships retained the right to use money received from debtor for their own purposes and, as such, were not mere conduits for debtor.
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Title: Billings v. Key Bank of Utah (In re Granada, Inc.) | Date: Nov-19-1990 | Status: APPEAL 156 B.R. 303 (D.Utah) See also 305.pdf (U.S. District Court, Utah) | Case(s): 89PC-0420
Title: Household Bank, N.A. v. Touchard (In re Touchard), 121 B.R. 397 (Bankr.D.Utah) | Date: Nov-2-1990 | Status: PUBLISHED (Judge Boulden) | Case(s): 89PB-0771
Creditor sought non-dischargeability of credit card debt pursuant to 11 U.S.C. § 523(a)(2)(A). Debtor had been issued a Visa credit card in 1986, which she used regularly. Beginning in early 1989, debtor's credit limit for the card was raised to $2,500, which limit debtor did not exceed prior to July 1989. The balance on debtor's July 9, 1989 Visa bill was approximately $2,200, but that balance had ballooned to more than $11,000 by September 19, 1989, when debtor filed her chapter 7 petition. Purchases made by debtor on July 1, 1989 put her balance over the credit limit, and her purchases thereafter totaled approximately $8,650. When debtor made those purchases, she was insolvent. The court adopted the "implied representation" doctrine, to the effect that credit card purchases include an implied representation that the cardholder has the ability and intention to pay the charge, to conclude that creditor had established that debtor made a materially false representation, upon which creditor relied to its detriment, as required for non-dischargeability by § 523(a)(2)(A). In considering whether creditor had established debtor's intent to deceive, the court sought guidance from factors other courts within the Tenth Circuit had used, concluding that nearly all of those factors supported a finding that debtor intended to deceive creditor. The court additionally found that debtor's demeanor and credibility also supported a finding of intent to deceive. The court concluded that the charges in excess of debtor's credit limit were non-dischargeable under § 523(a)(2)(A), and that creditor was entitled to a non-dischargeable judgment for that amount, plus interest and attorney's fees.
Title: Billings v. Richards Woodbury Mortg. Corp. (In re Granada, Inc.) | Date: Oct-29-1990 | Status: UNPUBLISHED See also 345.pdf (Judge Clark) | Case(s): 89PC-0401
Chapter 11 trustee filed an adversary proceeding, seeking to avoid certain prepetition payments by debtor to a secured creditor as preferences under 11 U.S.C. § 547(b). The court considered whether the transfers in question satisfied the requirements of § 547(b)(5), which requires a determination of whether the creditor obtained more from the payments it received than it would have received from a liquidation. The court considered it "generally settled" that payments to a fully secured creditor will not meet the § 547(b)(5) standard, since each payment to a fully secured creditor proportionately reduces the secured debt, and thereby does not diminish the estate. Since the creditor that had received the targeted payments had been oversecured, the court concluded that the payments had not been preferential under § 547(b). Trustee's argument that security for the debt should be valued based solely on the debtor's own interest in it, which would render creditor under-secured, was rejected by the court, noting that creditor would have the ability to foreclose on the entire property in a liquidation, not just on the part of it that was owned by debtor.
Title: Research-Planning, Inc. v. Segal (In re First Capital Mortg. Loan Corp.) | Date: Oct-12-1990 | Status: APPEAL 917 F.2d 424 (10th Cir.) See 189.pdf & 226.pdf (Tenth Circuit Court of Appeals (en banc)) | Case(s): 84PC-0129
Debtor, who had agreed to act as escrow agent on a loan from plaintiff to a third party, improperly used escrowed funds to pay its own debts to a good faith creditor. After debtor was involuntarily placed in bankruptcy, the chapter 7 trustee recovered the funds from debtor's creditor on the ground that the payments had been avoidable preferences. Plaintiff filed an adversary proceeding, contending that the recovered amount was subject to a trust in its favor, and was thus not available for distribution to other creditors. Both the bankruptcy and district courts had ruled in favor of trustee, finding that the recovered funds were part of the bankruptcy estate. A divided Circuit panel reversed, leading to the Circuit's en banc hearing. The en banc court agreed with the lower courts that, once the recovered funds were transferred to a good faith creditor, plaintiff's interest in them was extinguished. Additionally, pursuant to 11 U.S.C. § 550(a), a trustee's power to recover preferences must be exercised "for the benefit of the estate." Therefore, the Circuit held that, while plaintiff had an unsecured claim against the estate, the recovered funds were estate property available for the benefit of all creditors.
Title: In re Group Commc'ns, Inc. | Date: Oct-2-1990 | Status: UNPUBLISHED (Judge Boulden) | Case(s): 88B-3045
Chapter 11 debtor objected to two proofs of claim filed by creditor, asserting that interest on under-secured notes ceased to accrue upon co-makers' filing of a bankruptcy petition. The court held that interest continued to accrue on debtor's obligation until the filing of debtor's own petition. The court also held that an order in the co-makers' bankruptcy case, which incorporated the terms of a stipulation between creditor and the co-makers regarding the fair market value of the property, the amounts secured, and the amounts owed by co-makers, had no res judicata effect in debtor's case. Debtor's objection to the claims was denied.
Title: Walker, McElliott, Wilkinson & Assocs. v. Smith, Halander, Smith & Assocs. (In reWalker, McElliott, Wilkinson & Assocs.) | Date: Sep-24-1990 | Status: UNPUBLISHED (Judge Boulden) | Case(s): 88PB-0669
Debtor had filed an action against defendant to avoid a property transfer, alleging defendant's conduct violated the automatic stay in debtor's Missouri bankruptcy, and that it constituted a fraudulent conveyance. The court found that the Missouri bankruptcy filing was ineffective, and ruled in favor of defendant. Defendant then sought sanctions from debtor under both Fed. R. Bankr. P. 9011 and 28 U.S.C. § 1927. The court found that, even though the Missouri filing was later determined to be ineffective, debtor's counsel had made reasonable inquiry into the facts and law in relation to debtor's stay violation claim. Defendant's Rule 9011 and § 1927 fee claims were therefore denied as to the stay violation claim. However, the court found that debtor's counsel had failed to sufficiently ascertain the legal requirements of the fraudulent conveyance claim under the Utah Fraudulent Conveyance Act, and had thereby violated both Rule 9011 and § 1927 as to that claim. The court imposed sanctions under Rule 9011, which are mandatory, and denied sanctions under § 1927, which are discretionary, concluding that the Rule 9011 sanction was sufficient for both statutes.
Title: Am. First Credit Union v. Shaw (In re Shaw) | Date: Sep-21-1990 | Status: UNPUBLISHED (Judge Boulden) | Case(s): 89PB-0668
Creditor had brought a non-dischargeability action that was based on an incomplete investigation of the facts, and the court had declined to award attorney's fees to debtor under 11 U.S.C. § 523(d). Debtor then requested fees under Utah Code Ann. § 78-27-56.5, which allows an award of fees to the prevailing party if the parties' contract allows at least one party to recover fees. The court found that creditor had a contractual right to attorney's fees in the contract, but that right was limited to fees incurred in taking possession of collateral. The court concluded that fees incurred by creditor in its non-dischargeability action could not be considered a cost of obtaining collateral, as the debt at issue was unsecured. Therefore, creditor did not have a contractual right to attorney fees in the adversary proceeding and, as debtor's right to fees was predicated on creditor's right to fees under the state statute, debtor could not rely on that statute to recover attorney's fees.
Title: In re Lopez | Date: Sep-17-1990 | Status: UNPUBLISHED (Judge Boulden) | Case(s): 90B-21420
Creditor filed a motion for sanctions against both debtor and debtor's counsel under Bankruptcy Rule 9011, based on their filing of a chapter 13 petition while a prior chapter 13 case dealing with substantially the same debt was still pending. Because of the second filing, creditor had been forced to seek relief from stay in that proceeding, despite having already obtained that relief in the prior one. The court found that debtor had merely relied on counsel, and had not refiled to either cause delay or harass his creditors. However, the court found that debtor's counsel knowingly and improperly filed a new petition while the previous case was still pending, and that his doing so had not been objectively reasonable. Sanctions were awarded against debtor's counsel.
Title: Haymond v. Grant (In re Grant) | Date: Sep-14-1990 | Status: UNPUBLISHED See 340.pdf (Judge Boulden) | Case(s): 88PB-0972
Plaintiffs sought a non-dischargeable judgment against debtor under 11 U.S.C. § 523(a)(2)(B), alleging that debtor had provided a materially false financial statement in support of his personal guarantee to repay the price of stock purchased from plaintiffs by a company debtor controlled. After hearing and analyzing extensive evidence, the court found that plaintiffs had failed to prove by clear and convincing evidence that debtor intended to deceive them, as required for non-dischargeability by § 523(a)(2)(B). The debt to plaintiffs was therefore discharged. This decision was reversed and remanded by the district court in 340.pdf for the bankruptcy court's reconsideration of the outcome, using a preponderance of the evidence standard.
Title: In re TS Indus., Inc., 117 B.R. 682 (Bankr.D.Utah) | Date: Aug-14-1990 | Status: PUBLISHED (Judge Clark) | Case(s): 89C-4919 through -4921
Chapter 11 debtor-in-possession moved to reject a prepetition executory contract, which the court described as "clearly a pre-bankruptcy workout." The court considered whether the contract, which involved the extension of financial accommodations to debtor, could be assumed under 11 U.S.C. § 365(a), notwithstanding the prohibitions of § 365(c)(2), since the contract had been entered in anticipation of debtor's bankruptcy. Concluding that § 365(c)(2) was intended to protect creditors that were unaware of an impending bankruptcy, the court determined that assumption of the contract at issue was not precluded by that provision. Therefore, the court held that the contract could be assumed or rejected by the debtor-in-possession, subject to claims by interested parties that debtor's choice was an abuse of business judgment. The court concluded that such issues could be addressed at the confirmation hearing.