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Defalcation Defined by the United States Supreme Court

Case: Bullock v. BankChampaign, 569 U.S. _____ (2013).

The term “defalcation” has been an exception to discharge in bankruptcy statutes since 1867. However, courts have disagreed as to what mental state must accompany a “defalcation.”

After a century and a half, the United States Supreme Court addressed what the term “defalcation” meant in the context of an exception to discharge. Specifically, 11 U.S.C. section 523(a)(4) provides that a debt for “fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny” is not dischargeable.
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Default Provision Divesting LLC Management Authority Not Self-Executing

Case: Crossover Financial I, LLC, Case No. 11-24257 SBB (Bankr.D.Colo. 2012).

Discussion:  Order Denying Second Motion to Dismiss Chapter 11 Case for lack of Authority to File.  This Matter came before the Court for an evidentiary hearing on May 12, 2012.
The central issue before the Court is whether the sole member and manager of an LLC lacked the statutory and contractual authority to file a Chapter 11 case, placing the LLC into bankruptcy, where creditors contended the sole member/manager (“Mr. Yellen”) acted without the requisite contractual authority pursuant to the Debtor’s Operating Agreement and the Security Agreement held by the secured creditors (collectively the “DeCelles Creditors and Mr. Reineke”).
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“Tool of the Trade” Exemption Not Available to Foster Parent

Case: In re Sedillo, Case No. 11-31982 MER (Bankr.D.Colo. 2012).

Discussion:  Debtor claimed a tool of the trade exemption for a 2003 Nissan Murano she used to transport foster children for their everyday activities.  On the Petition Date, in addition to one biological child and two adopted children, Debtor was also caring for two foster children and receiving approximately $3,434 per month in reimbursement to defray the costs associated with caring for the foster children.  Debtor also generated approximately $1,782.54 in gross income per month as a cosmetologist.
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Annuity Not Exempt Property Under C.R.S. § 10-7-106

Case: In re May, Case No. 11-26492 EEB (Bankr.D.Colo. 2012).

Discussion:  Section 541(a)(1) of the Bankruptcy Code provides, in relevant part, that a debtor’s bankruptcy estate is comprised of “all legal or equitable interests of the debtor in property as of the commencement of the case.”  11 U.S.C. § 541(a)(1).  The Code allows debtors to exempt certain property from the bankruptcy estate, 11 U.S.C. § 522(b), but permits states to opt out of the federal scheme of property exemptions in favor of state-law exemptions.

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Cash Value Increase in Life Insurance Policy Not Reduced by Debtor’s Pre-Petition Cash Withdrawals

Case: Cohen v. Prudential Insurance Company, et al. (In re Moosman), Adv. Pro. No. 11-1482 ABC (Bankr.D.Colo. 2012).

Discussion: Exemptions allow debtors to protect certain property from creditors or a bankruptcy trustee. Section 522 of the Bankruptcy Code sets forth the federal exemptions for debtors in bankruptcy. These exemptions are available to debtors unless the law of the state that is applicable in the debtor’s bankruptcy case specifically provides that the federal exemptions do not apply. In 1981, the Colorado state legislature opted out of the federal exemptions set forth in 11 U.S.C. § 522.
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