Donald F. Collins and Christine D. Collins

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
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06/10/06
Donald F. Collins and Christine D. Collins
05-15747
Order Resulting From Confirmation Hearing Re: [3-1] Chapter 13 Plan . IT IS
ORDERED that debtors shall submit a confirmation order within 10 days of the
entry of this Order. See this Order for specific details.
Received on: 2006-01-18 10:35:33.000
2006-01-18 00:00:00.000
2006-01-18 00:00:00.000
Patti Hennessy
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UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re: DONALD COLLINS and No. 13-05-15747 MA
CHRISTINE COLLINS,
Debtors.
ORDER RESULTING FROM CONFIRMATION HEARING
THIS MATTER is before the Court on the hearing on confirmation of the Debtors’ Chapter 13
plan of reorganization. The Chapter 13 Trustee, State of New Mexico Taxation and Revenue
Department (“NMTR”), Chase Home Finance LLC, f/k/a Chase Manhattan Mortgage Corporation
(“Chase”), and Creditors Tom and Cindy Hawley each filed an objection to the Debtors’ proposed
plan. The Court held a final hearing on confirmation on January 11, 2006 and took the matter under
advisement. At the final hearing, the Debtors represented on the record that they would make certain
modifications to their proposed Chapter 13 plan to satisfy the objections of the Chapter 13 Trustee.
Similarly, the Debtors have resolved the objections of NMTR and Chase. Tom and Cindy Hawley
(together, the “Hawleys”) object to confirmation of the Debtors’ Chapter 13 plan on grounds that the
Debtors have not proposed their plan in good faith in that the plan provides for a minimal distribution to
unsecured creditors and will discharge a large portion of the debt owing to the Hawleys which would
have been non-dischargeable had the case been filed under Chapter 7 of the bankruptcy code.
At the final hearing on confirmation, Debtors raised for the first time the issue of whether the
Hawleys have standing to object to confirmation, given that they had not timely filed a proof of claim in
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1The deadline for filing proofs of claim was November 15, 2005. The Hawleys filed a proof of
claim in this bankruptcy proceeding on January 11, 2006.
2The required elements for establishing an informal proof of claim are:
1. the proof of claim must be in writing;
2. the writing must contain a demand by the creditor on the debtor's estate;
3. the writing must express an intent to hold the debtor liable for the debt;
4. the proof of claim must be filed with the Bankruptcy Court; and
5. based on the facts of the case, it would be equitable to allow the [proof of claim].
In re Reliance Equities, Inc., 966 F.2d 1338, 1345 (10th Cir. 1992) (citing In re Bowers,
104 B.R. 362, 364 (Bankr.D.Colo. 1989)).
The Objection, filed well before the November 15, 2005 deadline for filing proofs of claim,
constitutes a writing that was filed with the Bankruptcy Court, clearly identified the claim, expressed an
intent to hold the debtor liable for the debt, and made a demand on the Debtors’ estate. The Debtors
have been well aware of the Hawleys’ claim since filing their prior Chapter 13 bankruptcy proceeding;
therefore the equities weigh in favor of treating the Objection as an informal proof of claim and allowing
the untimely filed proof of claim as an amendment thereto. Under 11 U.S.C. § 1324, any party in
interest may object to confirmation of a debtor’s plan. Having found that the Objection constitutes an
informal proof of claim and allowing the untimely proof of claim as an amendment thereto, the Hawleys
have standing to object to confirmation of the Debtors’ proposed Chapter 13 plan. Moreover, “parties
in interest” for purposes of determining standing to object to confirmation of a Chapter 13 plan include
any person “who has an interest in the property to be administered and distributed under the Chapter
13 plan.” In re Davis, 239 B.R. 573, 579 (10th Cir. BAP 1999).
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the Debtors’ bankruptcy proceeding.1 In light of the fact that the Debtors filed a prior Chapter 13
proceeding (Case No. 13-05-10110 SA) in which the Hawleys filed a proof of claim for the same
amount claimed in this bankruptcy proceeding, and the fact that the Objection of Tom and Cindy
Hawley to Confirmation of Chapter 13 Plan (“Objection”) filed in this bankruptcy proceeding identifies
their claim as a judgment in the sum of $21,148.46, the Court is satisfied that the Hawleys have met the
requirements for an informal proof of claim which would give them standing to object to the Debtors’
chapter 13 plan.2
Having considered the evidence presented at the final hearing, reviewed the relevant case law,
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and being otherwise sufficiently informed, the Court finds that the Debtors’ proposed plan of
reorganization can be confirmed, provided the Debtors comply with certain additional requirements. In
reaching this determination, the Court FINDS:
1. Debtors filed a voluntary petition under Chapter 13 of the Bankruptcy Code on March 17,
1998 as Case No. 13-98-11666 MA. That case was converted to Chapter 7 on May 9, 2001, and
the Debtors received a discharge on August 16, 2001 (See Docket #65 and Docket # 70).
2. Debtors filed a second voluntary petition under Chapter 13 of the Bankruptcy Code on
January 7, 2005, as Case No. 13-05-10110 SA. That bankruptcy proceeding was dismissed on July
5, 2005 for the Debtors’ failure to timely file certain tax returns. (See Docket # 25).
3. Debtors filed the instant Chapter 13 proceeding on July 14, 2005.
4. Debtors’ plan of reorganization proposes to make monthly payments of $245.00 each for a
period of sixty months. Debtors’ plan of reorganization filed in connection with Case No. 13-05-
10110 SA proposed a thirty-six month plan with monthly payments in the amount of $215.00.
5. In 2003 Donald Collins formed a business entity called Diamond Custom Homes and
Remodeling, LLC. See Debtors’ Exhibit 4. Diamond Custom Homes and Remodeling is a limited
liability company. Id.
6. Diamond Custom Homes and Remodeling, LLC holds a contractor’s license issued by the
State of New Mexico. Donald Collins is the qualifying party under the contractor’s license. 7.
Diamond Custom Homes and Remodeling, LLC entered into an agreement with Cindy Hawley in
February 2004 for the purpose of remodeling two bathrooms at the Hawleys’ residence. The agreed
contract price was $24,000.00.
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3That section provides:
A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not
discharge an individual debtor from any debt --
(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or
larceny.
11 U.S.C. § 523(a)(4).
Under Tenth Circuit precedent, licensed contractors who receive funds for a designated
purpose and fail to use those funds for their intended purpose have committed a defalcation while acting
in a fiduciary capacity sufficient for purposes of non-dischargeability under 11 U.S.C. § 523(a)(4). See
Allen v. Romero (In re Romero), 535 F.2d 618 (10th Cir. 1976) (interpreting New Mexico contractor
licensing statute, the predecessor to N.M.S.A. 1978 § 60-13-23(F) (Repl. Pamp. 2004) (providing
that a contractor’s license may be revoked based on a conversion of funds received for completion of a
specific contract), and concluding that it imposed a fiduciary duty upon contractors in favor of the
property owner within the meaning of 11 U.S.C. § 523(a)(4)); Antlers Roof-Truss and Builders
Supply v. Storie (In re Storie), 216 B.R. 283, 286, 288 (10th Cir. BAP 1997) (upon a showing of
fiduciary capacity, debtor must show that he complied with his fiduciary duty by accounting for the
funds received). Debtor has admitted that he did not use all the funds he received from the Hawleys on
materials or labor for the Hawleys’ project.
Under New Mexico law, “[a] qualifying party who is issued a certificate of qualification is an
individual who submits to be examined and who is responsible for the licensee’s compliance with the
Act.” State v. Jenkins, 108 N.M. 669, 670, 777 P.2d 908, 909 (N.M. App. 1989) (citing N.M.S.A.
1978 § 60-13-2(E), (F)). Thus, even though the Debtor’s limited liability company, Diamond Custom
Homes and Remodeling, LLC, was the contracting party, Donald Collins, as qualifying party, remains
individually responsible for any defalcation committed by his company. See Woodworking
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8. Debtor received payments under the contractor agreement, but did not use all of the funds
he received for payment of labor and or materials in connection with the construction project at the
Hawley residence. Debtor did not complete the project.
9. The Hawleys obtained a default judgment against Donald Collins, d/b/a Diamond Custom
Homes and Remodeling, LLC in the amount of $21,148.46. See Hawley Exhibit D.
10. The debt to the Hawleys would be non-dischargeable in a Chapter 7 proceeding under 11
U.S.C. § 523(a)(4).3
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Enterprises, Inc. v. Baird (In re Baird), 114 B.R. 198, 205 (9th Cir. BAP 1990) (finding that
corporate officers could not avoid the application of § 523(a)(4) by substituting the corporation as the
fiduciary).
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11. Debtor no longer operates his contracting business. He now works for his step brother
who owns a distributorship business. Debtor has formed a new business, Enchanted Enterprises, under
which he conducts his distributing business. Enchanted Enterprises is operated as a sole
proprietorship. Debtor earns a 15% commission based on sales of the distributorship’s products to
grocery stores, convenience stores, produce stores and gas stations.
12. Debtors have been submitting monthly operating reports for Enchanted Enterprises.
Although the Operating Reports submitted for the months of July 2005 through November 2005 report
New Mexico Gross Receipts taxes as expenses, not all of the gross receipts taxes have, in fact, been
paid. Nor were copies of the CRS-1 forms attached to the operating reports. (See Debtors’ Exhibit
3). Debtor’s father-in-law has agreed to pay the outstanding gross receipts tax debt in the
approximate amount of $800.00, and does not expect to be repaid through the Debtors’ bankruptcy
proceeding.
13. The operating reports do not reflect the personal draw Debtor has been taking from the
income received by Enchanted Enterprises. Debtor testified that, in fact, he has been retaining for
personal use all the net income from the operation of his business.
14. In order to confirm a plan, a debtor’s plan must be “proposed in good faith and not by any
means forbidden by law.” 11 U.S.C. § 1325(a)(3). A debtor’s good faith in proposing a chapter 13
plan of reorganization is measured against the following relevant factors:
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(1) the amount of the proposed payments and the amount of the debtor's surplus;
(2) the debtor's employment history, ability to earn and likelihood of future increases in income;
(3) the probable or expected duration of the plan;
(4) the accuracy of the plan's statements of the debts, expenses and percentage repayment of
unsecured debt and whether any inaccuracies are an attempt to mislead the court;
(5) the extent of preferential treatment between classes of creditors;
(6) the extent to which secured claims are modified;
(7) the type of debt sought to be discharged and whether any such debt is non-dischargeable in
Chapter 7;
(8) the existence of special circumstances such as inordinate medical expenses;
(9) the frequency with which the debtor has sought relief under the Bankruptcy Reform Act;
(10) the motivation and sincerity of the debtor in seeking Chapter 13 relief; and
(11) the burden which the plan's administration would place upon the trustee.
Flygare v. Boulden, 709 F.2d 1344, 1347 (10th Cir. 1983) (quoting In re Estus, 695 F.2d
311, 317 (8th Cir. 1982)). “This list is not exhaustive, and the weight given each factor will necessarily
vary with the facts and circumstances of each case.” Id.
15. The Debtors propose payments that will result in a minimal distribution to unsecured
creditors. However, they have agreed to contribute 50% of any net monthly income over $1,400.00
from the operation of the business toward the plan. In addition, they have extended the length of their
plan from thirty-six months as proposed in their prior Chapter 13 proceeding to sixty months, which is
the maximum length allowed under the Code. See 11 U.S.C. § 1322(d) (“the court may not approve a
period that is longer than five years.”).
16. This is the third time the Debtors have filed for bankruptcy relief. However, their first
bankruptcy was discharged and closed prior to the time the debt to the Hawleys was incurred. The
second bankruptcy proceeding was dismissed for failure to submit unfiled tax returns. Debtors have
since reached an agreement with the taxing authorities to resolve the objections to their current Chapter
13 plan. Debtors have represented to the Court that NMTR has agreed to file an amended proof of
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claim reducing the amount of its claim, but that if NMTR fails to amend its claim, the Debtors will file an
objection to the proof of claim.
17. Although the debt to the Hawleys would be non-dischargeable in a Chapter 7 proceeding,
the Debtors’ statements and schedules do not reflect significant non-exempt assets from which the
Hawleys could satisfy their judgment. Debtors have agreed to contribute surplus income to their plan
which will result in a larger distribution to creditors over the life of the plan than they would received
were this a Chapter 7 case.
18. In weighing all the facts and circumstances, the Court does not find that the Debtors have
failed to file their plan in good faith. Provided that the Debtors agree to the following additional
modifications to their Chapter 13 plan, the Court concludes that 11 U.S.C. § 1325(a)(3) has been
satisfied and the Debtors’ plan can be confirmed:
A. Beginning in the month of January 2006, Debtors shall contribute 50% of any net
monthly income from the operation of Enchanted Enterprises in excess of $1,400.00 toward the plan.
Payments of these excess amounts, if any, shall be made to the Chapter 13 Trustee on a monthly basis,
the first payment due February 15, 2006 representing the month of January 2006, and on the fifteenth
day of each successive month thereafter for the duration of the plan.
B. Debtors must file with the Court and continue to provide to the Chapter 13 Trustee
and counsel for the Hawleys copies of monthly operating reports for the operation of Enchanted
Enterprises. Monthly operating reports are due on the fifteenth day of each successive month.
C. Debtors must file all required tax returns, including monthly CRS-1 returns, and
attach a copy of each such return that becomes due during the life of the plan to the monthly operating
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report.
D. Debtors must open and maintain a separate business checking account for
Enchanted Enterprises, deposit all income received from the operation of Enchanted Enterprises into
this account, and deduct all business expenses from this account. Debtors shall attach a copy of the
monthly bank statement for the business account of Enchanted Enterprises to the monthly operating
reports.
E. Debtors shall attach to the monthly operating reports a copy of all commission
and/or checks representing income to Enchanted Enterprises. All expenses must be paid by check or a
receipt obtained and a copy attached to the appropriate monthly operating report.
F. Donald Collins must file an affidavit certifying that he understands how to keep
basic business records and accounts within sixty days of the date of this Order.
WHEREFORE, IT IS HEREBY ORDERED, that the Debtors shall submit a confirmation
order that incorporates the additional terms contained in this order as well as the stipulations reached
with NMTR, Chase, and the Chapter 13 Trustee within ten days of the entry of this Order. If no such
order is submitted, confirmation will be denied and this case will be dismissed.
_________________________________________
MARK B. McFEELEY
United States Bankruptcy Judge
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I certify that on the date shown on the attached document verification, a true and correct copy of
the foregoing was either electronically transmitted, faxed, delivered or mailed to the listed counsel
and/or parties.
Ronald E. Holmes Kelley L. Skehen Stephen C.M. Long
Attorney for Debtors Chapter 13 Trustee Attorney for the Hawleys
112 Edith Blvd. NE 625 Silver Ave SW, Ste 350 2501 Yale SE, Ste. 204
Albuquerque, NM 87102 Albuquerque, NM 87102 Albuquerque, NM 87106
________________________________
Patti G. Hennessy
Law Clerk
(505) 348-2545
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