In re: CHUZA OIL COMPANY

Summarized by Jaden Banks , Nyemaster Goode, P.C.
2 years 2 months ago

Case Type:

Business

Case Status:

Reversed

Citation:

No. 22-2073, BAP No. 21-029-NM (10th Circuit, Dec 12,2023) Published

Tag(s):

Ruling:

The Tenth Circuit Court of Appeals reversed the Tenth Circuit BAP and affirmed the Bankruptcy Court for the District of New Mexico after determining that Chuza Oil Co, lacked a cognizable interest in funds transferred to an insider, unsecured creditor before repayment of higher priority claims because the funds transferred to the insider had been earmarked for the insider's benefit and were part of a contemporaneous exchange for new value.

Procedural context:

In 2014, Chuza Oil Co. (the "Debtor") filed a petition for bankruptcy relief under Chapter 11 of the Bankruptcy Code. The Debtor confirmed a Chapter 11 plan in March of 2016. In July 2018, a Chapter 7 involuntary petition was filed against the Debtor. The Chapter 7 Trustee then filed an adversary proceeding, seeking to set aside transfers certain transfers to an insider, unsecured creditor as preferential transfers under 11 U.S.C. § 547(b), all transfers as fraudulent under 11 U.S.C. § 548(a)(1)(A), and all the transfers as constructively fraudulent under 11 U.S.C. § 548(a)(1)(B). The Bankruptcy Court refused to avoid the transfers and the Trustee appealed the Bankruptcy Appellate Panel for the 10th Circuit. The BAP reversed, finding the transfers diminished the estate by impairing the interests of a preferred class of creditors established by the Debtor's Chapter 11 plan. The Debtor and transferees appealed.

Facts:

The Debtor operated as a New Mexico petroleum production company, controlled by Mr. Golstein, who served as shareholder, CEO and Director. Mr. Goldstein also operated another company, BGPI, which Mr. Goldstein used to help run the Debtor. Starting in 2012, Mr. Goldstein's father loaned the Debtor $500,000 under a promissory note guaranteed by Mr. Goldstein and BGPI. After Mr. Goldstein's father passed away, Paula, Mr. Goldstein's mother, held the note. Though the Debtor filed a Chapter 11 petition and confirmed a plan of reorganization—that proposed to pay its insider, unsecured creditors, like Paula, after its priority creditors—business did not improve. Between September 2016 and December 2017, Mr. Goldstein, BGPI, and Paula loaned the Debtor nearly $500,00 of additional funds. In contravention of the Chapter 11 Plan, the debtor transferred approximately $46,885 of the money it received from Mr. Goldstein and BGPI to Paula as payment on the note, despite not having paid all remaining higher priority claims. Mr. Goldstein testified that some of the funds he contributed to the Debtor were earmarked for Paula and he conditioned his loan on a transfer of funds to Paula. Following the filing of the Chapter 7 involuntary petition, the Chapter 7 trustee took the position that some of the transfers to Paula comprised preferential transfers, and all of the transfers comprised actual or constructively fraudulent transfers. After trial, the bankruptcy court refused to avoid the transfers because the Debtor never had an interest in the challenged funds because those funders were earmarked for Paula's benefit. The bankruptcy court also found Mr. Goldstein, BGPI, and Paula establishes their post confirmation loans were part of a contemporaneous exchange for new value, therefore there was no intent to commit fraud and the parties exchanged reasonably equivalent value for the transfers. On appeal, the BAP found the Debtor had an interest in the transfers because they diminished the estate by impairing the interest of a preferred class of creditors because the transfers replaced Paula's debt ,subordinated under the plan, with new unsubordinated debt to Mr. Goldstein and BGPI from the postconfirmation loans. Upon appeal to the 10th Circuit, the Court of Appeals observed that the funds contributed by Mr. Goldstein and earmarked for Paula fell outside the Debtor's dominion and control, therefore the Debtor lacked an interest in the funds transferred to Paula. The Court of Appeals further explained that though the Trustee's argument that the loan to the Debtor allowed it to replace one creditor with another, the economic realities of the case reflected that the Debtor was insolvent before the loans and those loans provided hundreds of thousands of dollars for other noninsider creditors in exchange for a small transfer to Paula. Moreover, the Court of Appeals noted that the influx of cash into the Debtor with a concurrent payment to Paula reflected a contemporaneous exchange of new value.

Judge(s):

TYMKOVICH, BACHARACH, and PHILLIPS

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