Category: Bankruptcy

Bradley and Kelly Koetters could not file Chapter 13. Their student loans topped $630,000, far past the Chapter 13 unsecured debt ceiling. So when they fell about $13,000 behind on a $125,000 home mortgage, they filed an individual Subchapter V case and proposed to pay the arrears over five years while leaving the loan otherwise untouched. The lender said Chapter 11 does not allow that. On May 29, 2026, Chief Judge Peter W. Henderson disagreed in In re Koetters, No. 25-80895 (Bankr. C.D. Ill. May 29, 2026).

The ruling matters in New Mexico because the lender’s main authority was In re Jacobs, 644 B.R. 883 (Bankr. D.N.M. 2022), an Albuquerque bankruptcy court decision that reached the opposite result. A Santa Fe or Las Cruces homeowner who needs Subchapter V to save a house faces local precedent that cuts against a deferred cure.

Why do New Mexico homeowners end up in Subchapter V instead of Chapter 13?

Chapter 13 is the usual tool for curing a mortgage default over time, but it has debt caps. Under 11 U.S.C. § 109(e), as adjusted effective April 1, 2025, an individual qualifies only with noncontingent, liquidated unsecured debts under $526,700 and secured debts under $1,580,125.

Subchapter V of Chapter 11 picks up many of those people. An individual engaged in business activity with aggregate noncontingent liquidated debts under the current cap of $3,424,000, at least half of it from business, can elect it. Legislation to raise that ceiling to $7.5 million has moved through the Senate, so confirm the figure in force on the filing date.

What did the court decide in Koetters?

The plan treated the lender, NewRez LLC, as impaired, paid the $13,000 arrearage within five years without interest, and changed no other term. NewRez objected that Chapter 11 permits a cure only if arrears are paid in full by the effective date. The court overruled the objection.

The holding rests on 11 U.S.C. § 1123(a)(5)(G), which requires a plan to provide adequate means for its implementation, including “curing or waiving of any default.” Unlike most cure provisions in the Code, it states no deadline. Reading it alongside the Chapter 13 cure power in § 1322(b)(3) and (b)(5), Judge Henderson held that an individual debtor may impair an objecting home lender by curing the default “on or before the time the debtor receives a discharge.” In a Subchapter V cramdown, discharge under § 1192 comes only after the payments due in the first three to five years of the plan, so that is the outer deadline.

The court also noted § 1190(3), which lets a Subchapter V plan modify a home mortgage when the loan proceeds went primarily into the debtor’s business. The Koetters loan was ordinary purchase money, so it played no role.

Doesn’t the anti-modification rule block a mortgage cure in Chapter 11?

Section 1123(b)(5) lets a plan modify secured claims “other than a claim secured only by a security interest in real property that is the debtor’s principal residence,” and Nobelman v. American Savings Bank, 508 U.S. 324 (1993), reads the protected “rights” as the contractual terms of the note and mortgage. A cure is different: paying what is past due restores the original bargain. The Tenth Circuit drew that line in Wade v. Hannon, 968 F.2d 1036 (10th Cir. 1992), which Koetters cites for the point that Congress barred changes to the future payment stream, not restoration of it. Section 1123(d) then fixes the cure amount by the loan documents and nonbankruptcy law, not § 506(b).

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Why does In re Jacobs make this harder in Albuquerque?

In In re Jacobs, No. 19-12591-j11 (Bankr. D.N.M. Oct. 14, 2022), Judge Jacobvitz held that a Chapter 11 plan violates § 1123(b)(5) unless all preconfirmation home mortgage arrears are paid by the effective date, reasoning from § 1124(2), which lets a debtor leave a lender unimpaired by curing and reinstating. The debtor could not fund an immediate cure, and the case was dismissed.

Koetters answered Jacobs head on. Section 1124(2) decides whether a creditor is impaired and gets a vote; it is not the only source of cure authority. A debtor who can cure at confirmation may treat the lender as unimpaired and seek a consensual plan with a prompt discharge. One who cannot may treat the lender as impaired, accept a cramdown under § 1191(b), and stay in bankruptcy until the arrears are paid. Jacobs never mentioned § 1123(a)(5)(G), which is why Judge Henderson found it unpersuasive.

Neither opinion binds the District of New Mexico, and the Tenth Circuit has not spoken, so build a plan that survives either reading.

How would this play out for a Las Cruces dentist couple?

Two dentists own a Las Cruces practice and a Mesilla Valley home worth $520,000. They owe $410,000 on the mortgage and are $48,000 behind after a partner dispute cut collections. Their student loans total $700,000, and the practice LLC they both guaranteed owes $220,000. The lender filed a judicial foreclosure in Doña Ana County District Court in July 2026.

Chapter 13 is out because the student loans alone exceed the $526,700 unsecured cap. Total debt of about $1.33 million sits under the Subchapter V cap, but § 1182(1)(A) also requires that at least half of the debt arose from commercial or business activities, and $220,000 of practice debt is about 17 percent of the total. The couple qualifies only if the dental school loans count as business debt, an argument a court can reject. If Subchapter V is closed, the fallback is a traditional individual Chapter 11, where the same § 1123(a)(5)(G) reasoning applies but Jacobs is the local precedent and discharge under § 1141(d)(5) waits until all plan payments are complete. Their $110,000 of equity fits inside the $150,000 per-person homestead exemption in NMSA 1978 § 42-10-9, so the house adds nothing to the § 1129(a)(7) liquidation test.

The plan keeps the regular $2,600 monthly payment flowing and cures the $48,000 at $1,000 per month over 48 months, with interest on the arrears governed by the note under § 1123(d). Under Koetters that works; under Jacobs the court could demand the $48,000 at the effective date. The practical answer is to file before the foreclosure judgment, because NMSA 1978 § 39-5-18 leaves only a nine-month redemption window after a judicial sale (often cut to one month by the mortgage itself), and to line up a family loan that could fund an effective-date cure if the court follows Jacobs.

What does an attorney-CPA see in the numbers?

The servicer’s arrearage figure is rarely the cure amount. It usually bundles escrow shortages, force-placed insurance, and default interest, and § 1123(d) lets the debtor contest any charge the note or state law does not allow. Only the interest component of a cure payment is deductible. Subchapter V commits projected disposable income for three to five years, and with New Mexico income tax topping out at 5.9 percent, that budget is built on after-tax dollars.

Path	Who qualifies	When arrears must be paid	Discharge timing
Chapter 13	Unsecured under $526,700, secured under $1,580,125	Over the plan, up to 5 years	After plan completion
Subchapter V, consensual	Business debtor under $3,424,000	At the effective date (lender unimpaired)	At confirmation
Subchapter V, cramdown (Koetters)	Same	Before discharge, up to 3 to 5 years	After plan payments complete
Traditional Chapter 11 (Jacobs view)	Any individual	In full by the effective date	After plan completion
Loss mitigation outside bankruptcy	Depends on the servicer	Capitalized or deferred by agreement	Not applicable

What should a New Mexico debtor do before the foreclosure judgment is entered?

Pull the loan documents and payment history and reconcile the default amount. Recheck the § 109(e) math, because a Chapter 13 cure sidesteps Jacobs entirely. If Subchapter V is the only option, document the business-activity nexus, prepare the projections § 1190 requires, and check whether any home loan proceeds funded the business, which would open the § 1190(3) door. Then file before judgment, so the automatic stay under § 362 stops the sale.

Frequently Asked Questions

Can I cure a mortgage default in Subchapter V if I don't qualify for Chapter 13?

According to In re Koetters, No. 25-80895 (Bankr. C.D. Ill. May 29, 2026), yes: an individual Subchapter V debtor may pay home mortgage arrears through deferred plan payments under 11 U.S.C. § 1123(a)(5)(G) as long as the cure is complete before discharge. The Albuquerque bankruptcy court reached the opposite conclusion in In re Jacobs in 2022, so New Mexico debtors should plan for both outcomes.

What are the Chapter 13 debt limits in 2026?

For cases filed on or after April 1, 2025, 11 U.S.C. § 109(e) requires noncontingent, liquidated unsecured debts under $526,700 and secured debts under $1,580,125. Student loans count as unsecured debt for this test.

Does the New Mexico homestead exemption protect my house in a Subchapter V case?

NMSA 1978 § 42-10-9 exempts $150,000 of equity per person in a primary residence, so a married couple who both own the home can generally protect $300,000 combined. The exemption shields equity from unsecured creditors, but it does not stop a mortgage lender from foreclosing on its own lien, which is why curing the default matters.

Will I owe interest on the mortgage arrears I pay through the plan?

Under 11 U.S.C. § 1123(d), the amount needed to cure a default is set by the loan documents and applicable nonbankruptcy law rather than by bankruptcy formulas. If the note does not call for interest on past-due installments, the plan can propose to pay the arrearage without it, as the Koetters debtors did.

How long can a Subchapter V plan take to cure a home mortgage default?

In a nonconsensual (cramdown) Subchapter V plan, discharge under 11 U.S.C. § 1192 arrives after the debtor completes the payments due during the first three to five years of the plan. Koetters treats that discharge date as the outer limit for finishing the cure.

Can a New Mexico lender still foreclose after I file bankruptcy?

The automatic stay under 11 U.S.C. § 362 halts a pending judicial foreclosure in New Mexico district court once the petition is filed. Filing before the sale matters because afterward the debtor’s rights narrow to the redemption period in NMSA 1978 § 39-5-18, which the mortgage may shorten to one month.

How North Star Law Firm Can Help

North Star Law Firm represents individuals and small businesses in Subchapter V, Chapter 13, and traditional Chapter 11 cases, including plans that cure home mortgage defaults while restructuring practice, ranch, or other business debt. Phillip Zagotti, JD/CPA, is admitted to the United States District Court and the United States Bankruptcy Court for the District of New Mexico, and his accounting background goes into reconciling servicer payment histories and building the projections a Subchapter V plan requires. For New Mexico state-court foreclosure matters the firm works alongside New Mexico-licensed counsel. See also the firm’s post on choosing a bankruptcy chapter as a New Mexico business owner.

If a foreclosure complaint has been filed and student loan or business debt keeps Chapter 13 out of reach, the time to evaluate a Subchapter V filing is before the state court enters judgment. Contact North Star Law Firm to discuss the options.

Sometime in the 1970s a rancher holding a grazing permit in the Gila National Forest went bankrupt and walked away from his herd. Fifty years later, the herd’s descendants were being shot from helicopters, ranchers and environmentalists were suing the Forest Service in the District of New Mexico, and the Tenth Circuit was explaining why it couldn’t decide the case. The June 2026 decision is about constitutional mootness in an environmental dispute, but it’s a useful way into a subject New Mexico bankruptcy lawyers deal with constantly: the three different doctrines that can kill a bankruptcy appeal before anyone reaches the merits, and the steps an appellant has to take in the first days after an adverse order to avoid them.

What happened in the Gila cattle case?

In New Mexico Cattle Growers’ Ass’n v. U.S. Forest Service, No. 25-2034 (10th Cir. June 3, 2026), an unpublished order and judgment, the plaintiffs had challenged the Forest Service’s February 2023 decision to remove feral cattle from the Gila Wilderness by aerial shooting. The agency completed the operation in December 2023, the district court dismissed the case with prejudice in January 2025, and while the appeal was pending the Forest Service formally withdrew the 2023 decision memo and directed its officers to use nonlethal impoundment for future removals. The panel held that the appeal was moot: the plaintiffs sought declaratory and injunctive relief against a decision that no longer existed, so no ruling would have “some effect in the real world.” It rejected the voluntary cessation exception because the agency’s change appeared genuine, citing Rio Grande Silvery Minnow v. Bureau of Reclamation, 601 F.3d 1096 (10th Cir. 2010), and rejected the capable-of-repetition exception because the agency had renounced the method and committed to the precise relief the plaintiffs wanted. Then it did something bankruptcy appellants should note: because the prevailing party had mooted the appeal, the court vacated the district court’s judgment under the Munsingwear doctrine, leaving no adverse precedent behind.

What are the three mootness doctrines in bankruptcy appeals?

Constitutional mootness is the Article III rule the Gila panel applied: if no order the court could enter would change the parties’ position, there’s no case or controversy. In bankruptcy it appears when the underlying case is dismissed, the property is gone, or the debt has been paid. Statutory mootness comes from 11 U.S.C. § 363(m) and § 364(e), which protect a sale to a good-faith purchaser and a good-faith postpetition lender from reversal on appeal unless the appellant obtained a stay. Equitable mootness is a judge-made prudential doctrine under which an appellate court declines to unwind a confirmed plan that has been substantially consummated, even though it has the power to do so. Each has its own test and its own Tenth Circuit case law, which a New Mexico appellant needs to know before filing a notice of appeal.

How does the Tenth Circuit apply equitable mootness?

The controlling decision is Search Market Direct, Inc. v. Jubber (In re Paige), 584 F.3d 1327 (10th Cir. 2009), which adopted six questions: whether the appellant sought and obtained a stay, whether the plan has been substantially consummated, whether relief would harm innocent third parties, whether unwinding the plan would undermine the public policy favoring finality of confirmed plans, whether relief would jeopardize the reorganization, and, on a quick look, whether the appeal has merit. The party urging mootness bears the burden, and the court was explicit that none of the six factors creates a presumption; failing to get a stay counts against the appellant but doesn’t decide the question. The circuit applied the test in Dill Oil Co. v. Stephens, 704 F.3d 1279 (10th Cir. 2013), and refused to find an individual Chapter 11 appeal moot, and in Drivetrain, LLC v. Kozel (In re Abengoa Bioenergy Biomass of Kansas, LLC), 958 F.3d 949 (10th Cir. 2020), it extended equitable mootness to a liquidating plan that paid only cash, holding that distributions to more than a hundred creditors and settled claims made unwinding impractical. No published Tenth Circuit decision has yet applied the doctrine to a Subchapter V or Chapter 13 plan, so a New Mexico small-business appeal from a Subchapter V confirmation order would be argued from Paige and Abengoa by analogy.

When does a sale order become unreviewable?

Section 363(m) is narrower than lawyers sometimes assume and harsher than debtors sometimes hope. It protects the validity of a sale to a good-faith purchaser from reversal or modification on appeal if no stay was obtained, and the Supreme Court held in MOAC Mall Holdings LLC v. Transform Holdco LLC, 598 U.S. 288 (2023), that the provision isn’t jurisdictional, which means a purchaser can forfeit it by not raising it. Within those limits the Tenth Circuit enforces it strictly. In Osborn v. Durant Bank & Trust Co. (In re Osborn), 24 F.3d 1199 (10th Cir. 1994), a conditional stay lapsed, the property sold at auction, and the appeal was moot to the extent it attacked the sale. In In re C.W. Mining Co., 740 F.3d 548 (10th Cir. 2014), no stay was sought, the sale closed, and every appeal that would have affected the sale was dismissed. The court’s earlier decision in the same case, C.O.P. Coal Development Co. v. C.W. Mining Co., 641 F.3d 1235 (10th Cir. 2011), described an unstayed sale appeal as “perilously close to the edge of the mootness cliff” while finding it hadn’t gone over, because the relief sought didn’t disturb the sale itself. That’s the practical lesson: an appellant who can’t get a stay should frame the appeal around relief that doesn’t touch the purchaser’s title, such as the allocation of proceeds.

What does voluntary cessation look like in a bankruptcy case?

The Gila panel’s voluntary cessation analysis transfers directly. A defendant can’t moot a case simply by stopping the challenged conduct; under Already, LLC v. Nike, Inc., 568 U.S. 85 (2013), and FBI v. Fikre, 601 U.S. 234 (2024), it must show the conduct can’t reasonably be expected to recur. In bankruptcy the pattern arises when a creditor withdraws a claim after losing an objection, a debtor pays a disputed amount to end an appeal, or a trustee abandons a contested sale. The Gila panel accepted a government agency’s formal directive as genuine; a private litigant’s midstream change of heart gets harder scrutiny. And the Munsingwear vacatur the panel ordered is a tool worth requesting: when the other side moots an appeal, the appellant can ask that the adverse judgment be vacated so it carries no preclusive weight in the next dispute.

How does a New Mexico appellant keep a bankruptcy appeal alive?

Move for a stay pending appeal under Federal Rule of Bankruptcy Procedure 8007 in the bankruptcy court first, on the day of the order if the plan or sale is about to close, and renew the motion in the appellate court if it’s denied. Decide quickly whether to elect the district court under 28 U.S.C. § 158(c); appeals from the Bankruptcy Court for the District of New Mexico otherwise go to the Tenth Circuit Bankruptcy Appellate Panel, and the election must be made when the notice of appeal is filed or within 30 days of service by another party. Frame the requested relief so that some part of it survives consummation, because under Chafin v. Chafin, 568 U.S. 165 (2013), an appeal isn’t moot as long as any effective relief remains possible. If the other side raises mootness, insist that it do so by motion with evidence; in In re Novinda Corp., 585 B.R. 145 (10th Cir. BAP 2018), the panel refused to consider an equitable mootness argument raised only in a brief. And if the appeal is mooted by the appellee’s conduct, request Munsingwear vacatur so the loss below doesn’t follow the client into the next case.

Doctrine	Source	Tenth Circuit test	Appellant’s countermeasure
Constitutional mootness	Article III	Would a ruling have any real-world effect? (Gila; Chafin)	Seek relief that remains available; request Munsingwear vacatur
Statutory mootness	§§ 363(m), 364(e)	Unstayed sale to good-faith purchaser is protected (C.W. Mining; Osborn)	Obtain a stay, or challenge only relief that doesn’t disturb the sale
Equitable mootness	Prudential	Six Paige factors; no presumption from a missing stay (Abengoa)	Move under Rule 8007; show relief won’t unravel the plan

Frequently Asked Questions

Is the Gila cattle decision binding precedent?

No. It’s an unpublished Tenth Circuit order and judgment, citable for its persuasive value. The doctrines it applies, constitutional mootness and the voluntary cessation exception, rest on published Supreme Court and Tenth Circuit authority.

What is equitable mootness?

A prudential doctrine under which an appellate court declines to disturb a confirmed plan that has been substantially consummated. In the Tenth Circuit the six-factor test from In re Paige governs, and the party asserting mootness bears the burden.

If I didn’t get a stay, is my appeal automatically moot?

Not automatically. Failing to obtain a stay weighs against the appellant, but In re Paige rejected any presumption. Sale appeals are different: § 363(m) protects an unstayed sale to a good-faith purchaser from reversal.

Where do bankruptcy appeals from New Mexico go?

To the Tenth Circuit Bankruptcy Appellate Panel, unless the appellant elects the district court when filing the notice of appeal or another party elects within 30 days of service under 28 U.S.C. § 158(c).

Can the other side moot my appeal by giving me what I asked for?

Sometimes. Under the voluntary cessation doctrine the appellee must show the conduct can’t reasonably recur. If the appeal is mooted that way, you can ask the appellate court to vacate the judgment below under Munsingwear.

Does equitable mootness apply to Subchapter V or Chapter 13 plans in the Tenth Circuit?

No published Tenth Circuit decision has applied it to either, so those appeals are argued from the Paige factors and the Abengoa liquidating-plan decision by analogy.

How North Star Law Firm Can Help

North Star Law Firm handles bankruptcy appeals from the District of New Mexico to the Tenth Circuit Bankruptcy Appellate Panel and the district court, including stay motions under Rule 8007, confirmation and sale order appeals, and mootness disputes on both sides. Phillip Zagotti, JD/CPA, practices before the federal courts in the District of New Mexico and brings a forensic accountant’s perspective to the substantial-consummation and third-party-reliance questions that decide equitable mootness. The firm’s bankruptcy practice covers Chapter 11 and Subchapter V cases from filing through appeal, and its earlier post on bankruptcy appeal deadlines covers the timing rules that come before the mootness question. Contact North Star Law Firm the day an adverse order is entered; the stay motion can’t wait.

German insolvency law has a rule that reads like a warning label: a creditor who extracts payment from a failing debtor through pressure, early payment, or unusual terms in the month before the petition gives the money back, no questions asked about what it knew. American law reaches a similar place by a different road. Under the Bankruptcy Code, a payment received in the 90 days before a filing is presumptively recoverable, and the creditor’s main escape, the ordinary course defense, evaporates when the payment was the product of collection pressure. New Mexico creditors learned this in bulk during the Furr’s Supermarkets Chapter 11 in Albuquerque two decades ago, and the Tenth Circuit’s rules haven’t softened since.

What does a trustee have to prove, and what changed recently?

Under 11 U.S.C. § 547(b), a trustee or debtor in possession may avoid a transfer of the debtor’s property to a creditor, on account of an antecedent debt, made while the debtor was insolvent, within 90 days before the petition (one year for insiders), that let the creditor receive more than it would in a Chapter 7 liquidation. Insolvency is presumed for the 90 days under § 547(f). Since 2019 the statute has required the trustee to act “based on reasonable due diligence in the circumstances of the case and taking into account a party’s known or reasonably knowable affirmative defenses,” a basis for pushing back on form demand letters that ignore obvious defenses. Two dollar figures updated April 1, 2025 also matter. Transfers aggregating less than $8,575 can’t be avoided against a non-consumer debtor under § 547(c)(9), and under 28 U.S.C. § 1409(b) a suit to recover less than $31,425 from a non-insider on a non-consumer debt must be brought where the defendant resides, which keeps a Roswell supplier out of a Delaware courtroom, though courts are split on whether that rule covers preference actions. And the rule that a check is transferred when the bank honors it, not when it’s delivered, comes from a New Mexico case, Barnhill v. Johnson, 503 U.S. 393 (1992).

How does the ordinary course defense work in the Tenth Circuit?

Section 547(c)(2) protects a payment on an ordinary-course debt if the payment was either made in the ordinary course of business between the parties or made according to ordinary business terms in the industry; since 2005 one prong suffices. The Tenth Circuit explained the policy in Clark v. Balcor Real Estate Finance, Inc. (In re Meridith Hoffman Partners), 12 F.3d 1549 (10th Cir. 1993): preference law discourages “unusual action that may favor certain creditors or hasten bankruptcy by alarming other creditors,” so the defense protects routine dealings and nothing else. The Bankruptcy Appellate Panel’s four-factor test from Payne v. Clarendon National Insurance Co. (In re Sunset Sales, Inc.), 220 B.R. 1005 (10th Cir. BAP 1998), governs the subjective prong: the length of the relationship, whether the amount or form of payment differed from past practice, whether either side engaged in unusual collection or payment activity, and the circumstances of the payment. Late payments aren’t ordinary unless the creditor proves lateness was the norm between the parties. The circuit’s most recent word, Jubber v. SMC Electrical Products, Inc. (In re C.W. Mining Co.), 798 F.3d 983 (10th Cir. 2015), held that even a first-time transaction can be ordinary when the payment was made on normal terms with no collection activity by the creditor. The defense rewards creditors who behaved like nothing was wrong.

Which collection tactics turn a payment into a preference?

The cases draw the line at coercion, not persistence. A supplier that phones a slow-paying customer is doing what suppliers do; the Eighth Circuit said as much in Lovett v. St. Johnsbury Trucking Co., 931 F.2d 494 (8th Cir. 1991), where a documented history of late payments set the baseline for what was ordinary. Compare Marathon Oil Co. v. Flatau (In re Craig Oil Co.), 785 F.2d 1563 (11th Cir. 1986), where a credit manager demanded “a show of good faith” and the debtor switched to cashier’s checks to keep the creditor from joining an involuntary petition; those payments lost the defense. XTRA, Inc. v. Seawinds Ltd., 888 F.2d 640 (9th Cir. 1989), reached the same result where the creditor terminated contracts, demanded immediate payment, and raised rates. Threats of suit or credit hold, demands for a guaranty or deposit as a condition of continued shipment, a switch to certified funds, a negotiated catch-up schedule, owner-to-owner calls: each is evidence that the payment came out of pressure rather than routine. Consistency is the defense. A creditor that always put accounts on hold at 60 days and did so again stands on far firmer ground than one that invented a new rule when it smelled trouble.

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What does a New Mexico example look like?

An Albuquerque mechanical subcontractor billed a general contractor on net-30 terms for three years, and the contractor paid on average 52 days after invoice. In the 90 days before its Chapter 11 filing, the contractor made four payments totaling $84,000: two at 50 and 55 days, consistent with history, and two at 20 and 25 days, after the subcontractor’s owner called the contractor’s owner and said he would pull crews off a hospital job. Under Sunset Sales, the first two payments look ordinary; chronic lateness was the pattern, and nothing about amount or form changed. The last two, $46,000, were faster than any payment in three years and followed an explicit threat, exactly the “unusual collection activity” the test asks about. The fallback is the subsequent new value defense in § 547(c)(4): if the subcontractor kept working and delivered $30,000 of unpaid labor and materials after those payments, that amount offsets the exposure. A realistic settlement is well below the $84,000 demand, but only if the creditor can produce the payment history and job records to prove it.

What about insiders, and does New Mexico law add anything?

For insiders, defined in § 101(31) to include officers, directors, controlling owners, and their relatives, the reach-back is one year, and New Mexico law adds a second remedy. The New Mexico Uniform Voidable Transactions Act, NMSA 1978 §§ 56-10-14 through 56-10-29, has no preference provision for arm’s-length creditors, but § 56-10-19(B) lets a creditor avoid a transfer to an insider for an antecedent debt made while the debtor was insolvent if the insider had reasonable cause to believe it. That claim must be brought within one year of the transfer under § 56-10-23, and § 56-10-22(F) supplies defenses for new value, ordinary course dealings, and good-faith rehabilitation efforts. An owner who repaid his own loan to the company before the filing faces both versions of the same question, and the state claim exists even when no bankruptcy is ever filed.

What should a creditor do when the demand letter arrives?

Neither pay the number in the letter nor ignore it. The letter usually arrives near the two-year anniversary of the petition, as the trustee’s limitations period under § 546 is about to run, and it states gross transfers with no credit for defenses. The response is a defense analysis: at least a year of pre-window payment history as the baseline, invoices and shipping records to compute new value, the terms applied to similar customers for the objective prong, and an honest inventory of every collection communication in the 90 days. In the District of New Mexico, Local Rule 9019-3 lets the court appoint a bankruptcy judge as mediator, and most preference cases resolve there. Remember § 502(d) too: until a preference judgment is paid, the creditor’s own claim is disallowed, which changes the math for a vendor expecting a distribution.

Collection conduct in the 90 days	Likely effect on ordinary course defense	Authority
Routine reminder calls; payments consistent with a documented late-pay history	Defense preserved	Lovett; Sunset Sales
Consistently applied credit hold at the creditor’s usual threshold	Generally preserved	Tolona Pizza (7th Cir.)
Demand for cashier’s checks or wire after a payment dispute	Defense likely lost	Craig Oil
Threat to stop work, sue, or file an involuntary petition, then faster payment	Defense likely lost	Seawinds; Craig Oil
New deposit, guaranty, or catch-up schedule imposed mid-window	Defense likely lost	Yurika Foods (6th Cir.)
First-time transaction on normal terms, no collection activity	Defense available	C.W. Mining

Frequently Asked Questions

What is a preference in bankruptcy?

A transfer to a creditor within 90 days before the petition (one year for insiders), on an existing debt, while the debtor was insolvent, that gave the creditor more than a Chapter 7 liquidation would.

Does pressuring a customer to pay make the payment a preference?

Pressure doesn’t create a preference, but it usually destroys the ordinary course defense. Threats, demands for certified funds, new deposits, and accelerated schedules are unusual collection activity.

Is there a minimum amount before a trustee can sue?

Yes. For non-consumer debtors, transfers aggregating less than $8,575 can’t be avoided, and suits for less than $31,425 against non-insiders generally must be filed where the defendant resides, though courts disagree on whether that venue rule applies to preference actions.

What is the new value defense?

Under § 547(c)(4), unpaid goods or services the creditor provided on credit after receiving a preferential payment reduce what the trustee can recover.

Can a New Mexico creditor pursue an insider preference outside bankruptcy?

Yes. NMSA § 56-10-19(B) lets a creditor avoid a transfer to an insider on an antecedent debt made while the debtor was insolvent, if the insider had reasonable cause to believe it, within one year of the transfer.

Should I just pay the amount in the trustee’s demand letter?

Almost never without analysis. Demand letters state gross transfers without crediting ordinary course, new value, or contemporaneous exchange defenses, and most claims settle for a fraction of the demand once defenses are documented.

How North Star Law Firm Can Help

North Star Law Firm defends New Mexico vendors, subcontractors, landlords, and lenders against preference and fraudulent transfer demands in the District of New Mexico and in out-of-state cases where a New Mexico creditor has been sued, and advises businesses on collection practices that preserve their defenses before a customer fails. Phillip Zagotti, JD/CPA, practices before the federal courts in the District of New Mexico, and the payment baselines and new-value reconciliations that decide these cases are accounting work as much as legal work. The firm’s preference clawback defense practice handles demand letters through adversary proceedings within its bankruptcy practice, and its earlier post on trustees who sell clawback claims covers what happens when the plaintiff is a claims buyer rather than a trustee. Contact North Star Law Firm before responding to a demand letter; the first response frames the settlement.

A New York ice cream company won a $23,785,000 federal judgment on July 16, 2026, and by August 14 its defendant was a Chapter 11 debtor in Salt Lake City. That detail matters in Albuquerque more than it might seem. The Bankruptcy Court for the District of Utah and the Bankruptcy Court for the District of New Mexico answer to the same court of appeals, so every rule that decides what Van Leeuwen Ice Cream can do about Rebel Creamery’s filing is the rule a Santa Fe contractor, a Las Cruces landlord, or a Farmington equipment lessor faces when a judgment debtor files here. The case is a live tutorial in Tenth Circuit creditor law, and it has already produced one surprise.

How did a trademark win turn into a bankruptcy case?

The underlying decision, Van Leeuwen Ice Cream LLC v. Rebel Creamery LLC, No. 1:21-cv-02356 (E.D.N.Y. July 16, 2026), found that Rebel’s pint packaging infringed Van Leeuwen’s trade dress and that Rebel had acted in bad faith. The remedy was an accounting of Rebel’s profits under 15 U.S.C. § 1117(a), reduced by a third to reflect demand for keto ice cream that had nothing to do with the packaging, plus a permanent injunction requiring a redesign. Rebel noticed an appeal to the Second Circuit on August 12 and filed In re Rebel Creamery LLC, No. 26-25006 (Bankr. D. Utah), two days later. Its schedules list about $13.78 million in assets, mostly cash, receivables, and inventory, against $23.85 million in liabilities, of which the judgment is essentially all. Rebel scheduled the judgment as disputed because of the appeal. It’s a conventional Chapter 11, not a Subchapter V case, because the judgment alone is roughly seven times the $3,424,000 eligibility limit.

Why is Tenth Circuit law the law of this case?

Because the bankruptcy court sits in Utah, and Utah, like New Mexico, Colorado, Kansas, Oklahoma, and Wyoming, is in the Tenth Circuit. The district court in Brooklyn decided liability, and the Second Circuit will hear the appeal, but every question about the automatic stay, claim estimation, plan confirmation, and administrative expenses will be decided in Salt Lake City under Tenth Circuit precedent. That’s the same precedent the Bankruptcy Court for the District of New Mexico applies, with appeals going to the Tenth Circuit Bankruptcy Appellate Panel unless a party elects the district court under 28 U.S.C. § 158(c). A New Mexico creditor watching this case is watching its own rulebook get applied.

Is the debtor’s own appeal frozen by the stay?

In the Tenth Circuit, yes, and this is the surprise. Some circuits once held that the stay didn’t apply when the debtor was the party appealing, on the theory that the debtor was the one prosecuting the action. The Tenth Circuit abandoned that view in TW Telecom Holdings Inc. v. Carolina Internet Ltd., 661 F.3d 495 (10th Cir. 2011), holding that 11 U.S.C. § 362(a)(1) stays an appeal in any action that was originally brought against the debtor, “regardless of whether the debtor is the appellant or appellee.” Van Leeuwen sued Rebel, so Rebel’s Second Circuit appeal is stayed by Rebel’s own petition. If Rebel wants the appeal heard, it must ask Judge Hunt in Utah for relief under § 362(d), and Van Leeuwen will be heard on whether that’s the right sequence. For a New Mexico creditor the lesson is direct: when a judgment debtor files, its pending appeal doesn’t quietly continue in the background. The creditor gets a seat at the table on whether the appeal runs, whether the claim is instead estimated under 11 U.S.C. § 502(c) in the bankruptcy court, or whether the parties negotiate the number.

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How does a New Mexico creditor lock in a judgment before the petition?

New Mexico uses a transcript of judgment rather than an abstract. Under NMSA 1978 § 39-1-6, filing a transcript with the county clerk creates a lien on the debtor’s real estate in that county, and the judgment remains enforceable for fourteen years under § 37-1-2. The lien is what turns a general unsecured claim into a secured one in the debtor’s later bankruptcy, but only if it was recorded more than 90 days before the petition. A judicial lien created inside that window is a preferential transfer under 11 U.S.C. § 547(b), and a debtor in possession will avoid it. Rebel filed 29 days after judgment, which would have wiped out any lien Van Leeuwen recorded. The New Mexico creditor’s playbook is therefore to record transcripts in every county where the debtor owns real property on the day the judgment is entered, start post-judgment discovery immediately to map assets and recent transfers, and treat any request to reduce or waive a supersedeas bond under Rule 1-062 NMRA as a signal that a petition is coming. When the judgment debtor is an individual rather than a company, New Mexico’s exemptions shape what’s reachable: the homestead exemption is $150,000 under NMSA § 42-10-9, and the 2023 rewrite of § 42-10-1 protects $10,000 in a vehicle, $75,000 in household goods, $15,000 in tools of the trade, and a $15,000 catch-all.

What happens to the injunction and to new infringement?

The money judgment is a claim that will be paid, compromised, or estimated inside the case. The injunction is different. An order to stop selling confusingly similar packaging isn’t a right to payment, so it isn’t a claim and isn’t discharged, and Rebel’s obligation to redesign survives the filing. Enforcing it still requires attention to the stay, because the order was entered prepetition, but nothing in Chapter 11 permits a debtor to keep infringing. If Rebel sells infringing pints after August 14, the resulting liability arises postpetition, and in the Tenth Circuit a postpetition tort claim against the estate can qualify as an administrative expense under the standard in In re Mid Region Petroleum, Inc., 1 F.3d 1130 (10th Cir. 1993), paid ahead of every unsecured creditor. The police-power exception in § 362(b)(4), which the Tenth Circuit addressed in Eddleman v. U.S. Department of Labor, 923 F.2d 782 (10th Cir. 1991), doesn’t help a private plaintiff enforce a private injunction; it protects governmental units. So the creditor’s route is a motion in the bankruptcy court, not self-help.

What does the plan fight look like when one creditor holds nearly everything?

Van Leeuwen holds roughly 99.7 percent of Rebel’s unsecured debt. In a traditional Chapter 11 the debtor needs an impaired class to accept its plan under 11 U.S.C. § 1129(a)(10), and acceptance requires two-thirds in amount. A creditor with that share can’t be outvoted, so Rebel’s paths are a negotiated treatment, an estimation of the claim for voting purposes at a lower figure, or a sale of the business with proceeds distributed through a liquidating plan. Whatever the structure, § 1129(a)(7) requires that Van Leeuwen receive at least what a Chapter 7 liquidation would produce, which is why the creditor’s liquidation analysis, built from the asset map assembled in post-judgment discovery, is the exhibit that sets the floor. A New Mexico creditor in the same position should expect the debtor to argue that book value overstates liquidation value, that administrative costs consume the first layer, and that the appeal creates real risk of a lower claim. Each argument has a forensic answer, and the creditor who prepares it early controls the case.

Question	Tenth Circuit answer	New Mexico creditor action
Is the debtor’s appeal stayed?	Yes (TW Telecom)	Respond to any § 362(d) motion; weigh estimation instead
Does a judgment lien survive?	Only if recorded 90+ days prepetition (§ 547)	File transcripts of judgment immediately under § 39-1-6
Is the injunction discharged?	No; it isn’t a claim	Seek bankruptcy court leave before enforcing
What about new infringement?	Potential administrative expense (Mid Region)	Document postpetition sales; file an administrative claim
Who controls the plan vote?	Dominant creditor controls its class	Prepare liquidation analysis for § 1129(a)(7)

Frequently Asked Questions

Does Tenth Circuit law really apply to a Utah bankruptcy involving a New York judgment?

Yes. The bankruptcy court in Utah applies Tenth Circuit precedent on the stay, claims, and plan confirmation, and the District of New Mexico applies the same precedent. Only the merits appeal of the judgment stays in the Second Circuit.

Can a debtor keep appealing a judgment after filing Chapter 11 in the Tenth Circuit?

Not without relief from the stay. Under TW Telecom, the stay applies to appeals in actions originally brought against the debtor even when the debtor is the appellant.

How does a judgment creditor get a lien in New Mexico?

By filing a transcript of judgment with the county clerk under NMSA § 39-1-6, which creates a lien on the debtor’s real estate in that county. The lien is vulnerable as a preference if the debtor files bankruptcy within 90 days.

What is claim estimation?

A § 502(c) procedure in which the bankruptcy court sets a value on a disputed claim for plan purposes rather than waiting years for other litigation to finish. In practice it moves much faster than an appeal.

Does a bankruptcy filing cancel a permanent injunction?

No. A court order to stop doing something isn’t a debt, so bankruptcy doesn’t erase it. The creditor usually needs the bankruptcy court’s permission before enforcing it during the case.

What if the judgment debtor is a person rather than a company?

New Mexico exemptions then limit what’s reachable: a $150,000 homestead, $10,000 in a vehicle, $75,000 in household goods, $15,000 in tools of the trade, and a $15,000 catch-all, among others.

How North Star Law Firm Can Help

North Star Law Firm represents New Mexico businesses and individuals as creditors in Chapter 7 and Chapter 11 cases, including stay-relief disputes, claim estimation, plan objections, and the liquidation analyses that set a creditor’s floor, and it represents companies staring at judgments they have no way to bond. Phillip Zagotti, JD/CPA, practices before the federal courts in the District of New Mexico, and the asset tracing and valuation work these cases demand is the kind of forensic accounting he has done for years. The firm’s bankruptcy practice covers creditor representation and Chapter 11 matters, and its preference and clawback practice handles the lien-avoidance fights that follow a late-recorded transcript of judgment. Contact North Star Law Firm as soon as a judgment debtor files; the first weeks decide the recovery.

Last week this blog covered the Senate’s passage of S. 3977, the bill that would restore the $7.5 million Subchapter V debt limit. While Congress debates how high the cap should be, a precedential appellate decision just settled something more immediately useful: how to count the debts that go under it. In In re Alecto Healthcare Services LLC, No. 25-1853 (3d Cir. July 28, 2026), the Third Circuit held that a $3.7 million claim stayed out of the eligibility math because, on the day of filing, it was contingent and unliquidated: the creditor had not yet made the written demand its own settlement agreement required. One unsent letter kept the debtor inside Subchapter V. New Mexico owners weighing a filing, and creditors positioning against one, should understand exactly how that happened.

Why does Subchapter V eligibility get litigated at all?

Because the two tracks of Chapter 11 produce different winners. Subchapter V strips out creditor committees, softens the absolute priority rule so owners can keep their equity while paying projected disposable income over three to five years, and moves fast on a budget a small business can survive. Traditional Chapter 11 hands creditors far more leverage and burns far more cash. The gate between the tracks is 11 U.S.C. § 1182(1): only a debtor whose aggregate noncontingent, liquidated debts fall at or below the cap may elect Subchapter V. Today that cap is $3,424,000; S. 3977 would lift it back to $7.5 million, but the House has not yet acted, so the small number governs every New Mexico filing this week. When a debtor sits near the line, creditors who prefer the leverage of traditional Chapter 11 attack the election, and the fight is always over which claims count.

How did a $3.7 million debt escape the count in Alecto?

The debtor, a healthcare holding company, had agreed years earlier to cover another company’s lease obligations, with one procedural condition: the creditor had to make written demand before payment came due. The demand had never been sent when the bankruptcy petition hit the docket. The Third Circuit held the claim was contingent, because the obligation to pay would not exist until the demand occurred, and unliquidated, because the amount owed varied with the underlying leases and could not be readily and precisely computed without invoices. Both determinations were made as of the petition date; the creditor’s after-the-fact demand and $3.7 million proof of claim changed nothing. With that claim excluded, the debtor’s qualifying debt sat around $3.4 million, inside the then-applicable cap, and the Subchapter V election held.

What does petition-date debt counting mean for a New Mexico filer?

It means the eligibility snapshot is partly within the debtor’s control, and the pre-filing review should treat every obligation’s trigger conditions as seriously as its amount. Personal guarantees the lender has not called, indemnification promises no one has invoked, merchant cash advance reconciliation rights, disputed tax assessments still in administrative process, unbilled contract true-ups, and pending litigation without judgment can all be contingent, unliquidated, or both on the right facts. For a business straddling the $3.4 million line, the sequencing question is stark: file before the lender accelerates and the guarantee may not count; file after, and it almost certainly does. That is not gamesmanship; the statute makes the petition date the measuring stick, and the Third Circuit just confirmed courts will read the underlying agreements exactly as written. An owner who waits for the demand letter to arrive has, quite literally, let the creditor draft the eligibility analysis.

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What is the creditor counter-move?

Symmetrical and simple: convert conditional exposure into countable debt before the petition. A creditor holding demand-conditioned claims against a wobbling counterparty should send the demand, issue the invoices, liquidate the amount by stipulation or judgment, and paper the file, because those steps performed prepetition could push the debtor over the cap and out of Subchapter V. Once the case is filed, an objecting creditor needs evidence, not indignation. The Alecto creditors also lost a second fight, over a plan that settled fraudulent transfer claims against insiders who had received a subsidiary holding a $50.7 million building for $28.4 million; the $25,000 settlement survived because an independent director testified from a forensic review and unrebutted solvency evidence that the claims had little chance of success, and the objectors offered no affirmative evidence of their own. Courts approve settlements that clear the lowest point in the range of reasonableness, and objections without valuation or solvency proof do not move that needle in the Tenth Circuit any more than they did in the Third.

How does the pending debt-limit legislation change the calculus?

If the House passes S. 3977 and the President signs it, the cap returns to $7.5 million and most of the borderline questions dissolve for a few years: businesses carrying debt between $3.4 million and $7.5 million, the band where many New Mexico contractors, restaurant groups, and medical practices sit after layering SBA loans on top of trade debt, would regain the streamlined track. Until then, the contingent-unliquidated analysis is the only route into Subchapter V for that band, and it will not stretch to cover debts that are simply due and owing. A business in the gap has three honest options: engineer eligibility where legitimate trigger conditions genuinely have not occurred, file a traditional Chapter 11 and budget for it, or wait on Congress with a bridge plan and the risk that creditors act first. Each path has a shelf life, and the right one depends on how close the creditors are to moving.

Obligation on the petition date	Likely counted toward the cap?	Practice point
Trade payables, invoiced and due	Yes	No structuring changes these
Guarantee not yet called	Often no, contingent	Filing before acceleration can keep it out
Claim requiring written demand, none made	No, contingent (Alecto)	Creditors: send the demand early
Obligation with amount varying by month, uninvoiced	No, unliquidated (Alecto)	Readily and precisely determinable is the test
Judgment entered before filing	Yes	The Alecto objectors’ own wage judgment counted

Frequently Asked Questions

What is the Subchapter V debt limit for a New Mexico business today?

$3,424,000 in aggregate noncontingent, liquidated debt, measured on the petition date. S. 3977 would restore the $7.5 million cap, but it has not passed the House, so the lower figure controls current filings.

What makes a debt contingent for Subchapter V purposes?

The obligation to pay has not yet come into existence because it depends on a future event. In Alecto, a settlement requiring written demand before payment made the claim contingent until the demand was sent, which happened only after filing.

What makes a debt unliquidated?

Its amount is not readily and precisely determinable from the parties’ agreement. Varying monthly lease charges with no invoices meant the debtor could not compute what it owed, so the claim was unliquidated on the petition date.

Can creditors defeat a Subchapter V election?

Yes, with preparation. Making demands, invoicing, and liquidating claims before the petition adds them to the count, and a well-supported eligibility objection can push a debtor into traditional Chapter 11. Evidence, not argument, decides these fights.

Does a claim filed after the petition change the eligibility math?

No. Eligibility is fixed at the petition date. The Alecto creditor’s post-petition demand and $3.7 million proof of claim did not make the debt countable.

Is Subchapter V still worth it at the lower cap?

For qualifying businesses, yes: no committee in most cases, retained ownership, a three-to-five-year disposable income plan, and dramatically lower cost than traditional Chapter 11. The cap question is about access, not about the tool’s value.

How North Star Law Firm Can Help

North Star Law Firm guides New Mexico small businesses through Subchapter V from the eligibility analysis forward, mapping every claim’s contingency and liquidation status before the petition locks the snapshot, and represents creditors deciding when a demand letter changes the game. Phillip Zagotti, JD/CPA, practices before the federal courts in the District of New Mexico, and the claim-level accounting behind these disputes is native ground for an attorney-CPA. The firm’s Subchapter V practice sits within its full bankruptcy practice, and its earlier analysis of the Senate’s $7.5 million restoration bill tracks the legislation that could widen the gate. Contact North Star Law Firm before demands start arriving; Alecto shows eligibility is usually won or lost before anyone reaches the courthouse.

Fourteen days. That is how long a losing party has to appeal a bankruptcy court’s ruling, and the deadline is jurisdictional: miss it and no court can forgive the lapse, no matter how good the excuse. But when does the fourteen-day clock actually start? A federal district court decision this year, Campbell v. Radiance Capital Receivables Twelve, LLC, No. 26-CV-02134 (S.D.N.Y. Apr. 28, 2026), rescued an appeal that everyone, including at one point the appellant, believed was a month late, because the bankruptcy court’s detailed “Memorandum Decision and Order” never satisfied the separate document rule that triggers the clock. For anyone litigating in the District of New Mexico’s bankruptcy court, where appeals run to the Tenth Circuit Bankruptcy Appellate Panel, the case is a masterclass in a rule that saves and sinks appeals in equal measure.

What is the fourteen-day bankruptcy appeal deadline?

Federal Rule of Bankruptcy Procedure 8002(a) requires a notice of appeal to be filed with the bankruptcy clerk within fourteen days after entry of the judgment, order, or decree being appealed. Courts treat the limit as jurisdictional because it implements a statutory command, which means a district court or BAP simply lacks power to hear a late appeal; excusable neglect arguments that might rescue other missed deadlines do nothing here once the window plus any extension has closed. Rule 8002 does allow the bankruptcy court to extend the time within defined limits, including a motion filed within twenty-one days after the deadline on a showing of excusable neglect, but the safe assumption in every case is the simplest one: fourteen days, counted from entry, no mercy afterward.

What is the separate document rule and why did it save the appeal in Campbell?

In adversary proceedings, the lawsuit-within-the-bankruptcy where parties litigate dischargeability, fraudulent transfers, and similar claims, Bankruptcy Rule 7058 imports Civil Rule 58: every judgment must be set out in a separate document. The separate document is a short, self-contained entry of judgment, apart from any opinion explaining the court’s reasoning, and it is the filing of that document that starts the appeal clock. In Campbell, the bankruptcy court granted summary judgment against a debtor in a fourteen-page “Memorandum Decision and Order,” then weeks later entered a one-page judgment it described as a formality. The debtor appealed eight days after the judgment, thirty-one days after the memorandum. The bankruptcy court called the appeal untimely; the district court reversed, because a fourteen-page document full of factual findings and legal analysis is not a separate judgment, so the clock never started until the real judgment was entered. The Supreme Court has instructed that the rule be applied mechanically precisely so parties are never guessing which paper mattered.

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How do bankruptcy appeals work in New Mexico?

New Mexico sits in the Tenth Circuit, one of the two circuits that operate a Bankruptcy Appellate Panel. An appeal from the District of New Mexico’s bankruptcy court goes to the BAP by default, unless any party timely elects under 28 U.S.C. § 158(c) to have the United States District Court for the District of New Mexico hear it instead; either way, the fourteen-day trigger and the separate document analysis are identical, and a further appeal lies to the Tenth Circuit. The forum election is a genuine strategic decision, weighing the BAP’s bankruptcy specialization against a district court’s generalist perspective, but it is a decision you only get to make if the notice of appeal was timely. That is why the first document to study after losing any adversary proceeding is not the opinion; it is the docket, checked for whether a separate judgment exists yet.

What should a losing party do while the docket is ambiguous?

The Campbell debtor won relief, but only after litigating timeliness through two courts, an expensive way to learn a calendaring rule. The defensive playbook is short. File the notice of appeal within fourteen days of the substantive ruling whenever there is any doubt, because a premature notice is harmless: appealing before the separate judgment is entered is always permitted, and it is never necessary to wait. If the fourteen days from the opinion have already slipped, check immediately whether a separate document exists; if none does, the clock may not have started, and Civil Rule 58 includes a backstop under which judgment is deemed entered 150 days after the opinion hits the docket, an outer boundary no one should test voluntarily. If the deadline from a true judgment has passed within the last twenty-one days, move for an extension on excusable neglect grounds without delay. And when drafting proposed orders as the winning party, submit a clean, separate judgment, because the winner benefits from starting the clock as unambiguously as the loser benefits from spotting that it never started.

Which bankruptcy rulings does the separate document rule cover?

The rule’s home is the adversary proceeding, where Rule 7058 applies Civil Rule 58 to the “civil action” style of litigation. Contested matters, the motion-driven disputes resolved under Rule 9014 such as stay relief, claim objections, and sale approvals, generally sit outside the separate document requirement, so the fourteen days there usually run from entry of the order itself. That distinction is a trap in both directions: a party who assumes every ruling needs a separate judgment will blow deadlines on contested matters, and a party who assumes no ruling does will write off appeals, as in Campbell, that are still alive. Sorting each ruling into the right procedural box within a day of entry is the discipline that keeps options open.

Docket event in an adversary proceeding	Does it start the 14-day clock?	Why
Lengthy memorandum opinion granting summary judgment	No	Contains findings and reasoning; not a separate document under Rule 58(a)
One-sentence order denying a motion	Generally yes	Brief self-contained orders can satisfy the separate document standard
Separate one-page judgment entered after the opinion	Yes	This is the Rule 58 separate document; Campbell counted from this entry
No judgment ever entered	Clock starts at 150 days after the opinion’s entry	Civil Rule 58(c)(2) backstop deems judgment entered
Order in a contested matter (Rule 9014)	Yes, from entry of the order	Separate document requirement generally inapplicable

Frequently Asked Questions

How long do I have to appeal a New Mexico bankruptcy court ruling?

Fourteen days from entry of the judgment, order, or decree under Bankruptcy Rule 8002(a), and the deadline is jurisdictional. In adversary proceedings, entry of a Rule 58 separate judgment is what starts the clock.

What counts as a separate document under Rule 58?

A short, self-contained judgment set apart from any opinion or memorandum. A decision that details the court’s findings and legal reasoning does not qualify, which is why the fourteen-page ruling in Campbell never started the appeal period.

Can I appeal before the separate judgment is entered?

Yes. A notice of appeal filed after the ruling but before formal entry of judgment is effective, and filing early is the standard protective move when the docket is ambiguous.

Where do bankruptcy appeals from New Mexico go?

To the Tenth Circuit Bankruptcy Appellate Panel by default, unless a party timely elects district court review under 28 U.S.C. § 158(c). Further review lies in the Tenth Circuit Court of Appeals.

What if I missed the fourteen-day deadline?

Act within twenty-one days: Rule 8002 lets the bankruptcy court extend the appeal time on a showing of excusable neglect if the motion is filed within that window. Also verify whether a separate judgment was ever entered, because if not, the clock may not have started.

How North Star Law Firm Can Help

North Star Law Firm handles bankruptcy litigation and appeals for New Mexico debtors and creditors, including adversary proceedings over dischargeability and fraudulent transfers where these deadlines live. Phillip Zagotti, JD/CPA, practices before the federal courts in the District of New Mexico and builds appellate strategy into the trial record from the start. The firm’s bankruptcy practice spans Chapter 7, Chapter 11, and the adversary litigation that follows, and its guide to preference and clawback defense covers the disputes most likely to end in an appealable judgment. If a ruling just went against you, contact North Star Law Firm today, not next week, because the fourteen-day clock may already be running.

Most owners of New Mexico S corporations have never asked who controls the S election if the company ends up in bankruptcy. A new federal appellate decision answers the question in the shareholder’s favor, and the answer moves real money. In Owoc v. Liquidating Trustee, No. 24-14048 (11th Cir. Aug. 10, 2026), the Eleventh Circuit held that a corporate debtor’s S election is not property of the bankruptcy estate, so the automatic stay does not stop a shareholder from revoking it, even over the objection of the trustee and creditors who wanted the tax result the election produced. The Tenth Circuit, whose law governs New Mexico bankruptcy cases, has not decided the issue, which makes Owoc the newest and most important persuasive authority a District of New Mexico bankruptcy judge will see when the question arrives.

Who pays the tax when an S corporation sells assets in bankruptcy?

Start with the mechanics, because they create the conflict. An S corporation pays no federal income tax itself; gain passes through to shareholders under Subchapter S. When a debtor S corporation sells its assets in Chapter 11 or Chapter 7, the sale gain lands on the shareholders’ personal returns, while the sale cash stays in the estate for creditors. Shareholders can owe six or seven figures of tax on money they will never see. If the S election ends before the sale year closes, the corporation is taxed as a C corporation instead, the estate pays the tax, and creditor recoveries shrink dollar for dollar. So creditors want the election preserved, shareholders often want it dead, and the legal question is whether the Bankruptcy Code lets the estate lock the shareholders in.

How did the Eleventh Circuit resolve the fight?

The case grew out of the Chapter 11 of Vital Pharmaceuticals, the energy drink maker, whose founder remained sole shareholder after the board removed him as an officer. He asked the bankruptcy court for permission to revoke the company’s S election; the court refused, calling continued S status a valuable estate asset protected by the automatic stay. The Eleventh Circuit reversed. Property of the estate under 11 U.S.C. § 541 consists of the debtor’s own legal and equitable interests, and filing bankruptcy cannot give the estate rights the debtor never had. Under the tax code, shareholders control the events that make and unmake an S election: unanimous consent creates it, a majority can revoke it, and a transfer to an ineligible holder terminates it, all under 26 U.S.C. § 1362. A status the corporation cannot maintain against its own shareholders is not the corporation’s property, however valuable its continuation would be to creditors. The court expressly joined the Third Circuit’s In re Majestic Star Casino decision on this point.

What about NOLs and other tax attributes the estate does own?

The decision is careful about its limits, and the line it draws is control. Net operating losses arise from the debtor’s own operations, exist in a measurable amount at filing, and cannot be revoked by any shareholder, so courts protect them as estate property; the Second Circuit once enjoined a parent company from a worthless stock deduction that would have destroyed a debtor’s $74 million NOL carryforward. Refund claims and credits work the same way. The rule after Owoc is a sorting exercise: identify each tax attribute in the case, ask who holds the legal power over it, and only then ask what it is worth. For estate fiduciaries, that means the tax diligence belongs at the front of the case, not in the plan-drafting phase. For shareholders, it means rights the tax code gives you survive the bankruptcy filing, but only if you exercise them in time to matter.

How would this play out in a New Mexico bankruptcy?

Appeals from the District of New Mexico’s bankruptcy court run to the Tenth Circuit Bankruptcy Appellate Panel or the district court, and ultimately the Tenth Circuit, none of which has squarely ruled on S-election ownership. With the Third and Eleventh Circuits aligned and no circuit contra, a New Mexico judge has a clear persuasive path, and parties should plan as if Owoc states the rule here. The state overlay sharpens the stakes. New Mexico taxes S corporation income at the shareholder level too, so a preserved election passes through both federal and state tax on sale gain to owners. Community property adds a wrinkle worth checking early: where shares are community property, spousal consent rules can complicate who counts toward the majority needed to revoke. And for the small, closely held S corporations that dominate the state’s economy, the shareholder and the guarantor of company debt are usually the same person, so the revocation decision interacts with personal exposure on guarantees, a calculation that deserves modeling before any petition is filed.

What should owners and creditors negotiate now that the stay does not decide this?

Owoc converts a background assumption into a bargaining chip. A debtor’s plan or sale motion that depends on pass-through treatment now needs the shareholder’s cooperation, and that cooperation has a price: tax distributions sufficient to cover the pass-through liability, indemnities, or releases. Creditors and committees should test every recovery model against the question “what if the election dies?”, and buyers in bankruptcy sales should condition deals on the tax status they priced. Shareholders should mind the calendar: a revocation filed by the fifteenth day of the third month of the tax year can reach back to the year’s start, while a later filing generally waits until the next year, and the Eleventh Circuit left open on remand whether equitable doctrines like laches can trim a shareholder’s timing advantage. The one certainty is that silence is a choice, and after this decision it is usually the worst one available.

Question in the case	If S election survives the sale	If S election is revoked in time
Who pays federal and New Mexico tax on sale gain	Shareholders, on pass-through income	The corporate estate, at entity level
Cash available for creditors	Higher; estate keeps gross proceeds	Lower; tax comes off the top
Shareholder cash position	Tax owed with no matching distribution	No pass-through tax on the gain
Who controls the outcome after Owoc	Shareholders holding a majority of shares, subject to § 1362 timing rules

Frequently Asked Questions

Is an S corporation election property of the bankruptcy estate?

Under Owoc and the Third Circuit’s Majestic Star decision, no. Shareholders control the election’s creation, revocation, and termination, so the corporation holds no property interest in it and the automatic stay does not protect it.

Has the Tenth Circuit decided this issue for New Mexico cases?

No. Neither the Tenth Circuit nor its Bankruptcy Appellate Panel has squarely ruled. With two circuits holding the election is not estate property and none contrary, New Mexico parties should plan around the Owoc rule.

Can shareholders be taxed on gain they never receive in a bankruptcy?

Yes. If the S election continues through an asset sale, the gain passes through to shareholders for federal and New Mexico purposes even though the proceeds stay in the estate, which is why revocation leverage matters.

When does an S election revocation take effect?

Under 26 U.S.C. § 1362, a revocation with the required majority consent filed by the fifteenth day of the third month of the tax year can be retroactive to the start of that year; otherwise it generally takes effect the following year.

What can creditors do to protect pass-through treatment they are counting on?

Negotiate for it. Plan provisions, sale conditions, tax distribution mechanics, or a compensated agreement from shareholders not to revoke are now the tools, because the automatic stay will not preserve the election by default.

How North Star Law Firm Can Help

North Star Law Firm advises New Mexico S corporation owners, creditors, and fiduciaries on the tax structure of business bankruptcies, modeling pass-through and entity-level outcomes before filing and negotiating the election’s fate in plans and sale orders. Phillip Zagotti, JD/CPA, practices before the federal courts in the District of New Mexico and works both sides of the tax-bankruptcy line these cases sit on. The firm’s Chapter 11 practice and Subchapter V practice handle the restructuring, while its entity and tax structuring practice addresses the elections that drive the economics. Contact North Star Law Firm before the company’s assets go to market, because after Owoc the S election is a negotiating asset with a deadline attached.

Imagine you are a limited partner in a real estate partnership. The general partner sells the building, keeps the proceeds, and files Chapter 11. The obvious instinct: call a meeting, vote the general partner out, take the wheel. In July 2026, the Ninth Circuit Bankruptcy Appellate Panel held that this exact move was a legal nullity, because the debtor’s management rights became estate property the moment it filed. In re LeFever Mattson, BAP No. NC-25-1238-BCN (9th Cir. BAP July 2026). The decision construes California statutes, but New Mexico’s partnership and LLC acts contain the same bankruptcy-dissociation triggers, and the Tenth Circuit’s stay rule is at least as strict. Investors in Albuquerque real estate partnerships, Permian Basin working-interest vehicles, and family LLCs should understand why self-help removal fails — and what works.

What happened in In re LeFever Mattson?

LeFever Mattson Inc. was general partner of Live Oak Investments LP, a California limited partnership holding an apartment complex for passive investors. After the property sold for roughly $10.8 million, the general partner took about $2.3 million for itself — its claimed ownership share plus a sale commission — and distributed nothing to the limited partners. It then filed Chapter 11 for itself and its affiliates, including the partnership. A year into the case, the limited partners voted to remove the debtor as general partner, install one of their own, and hire separate counsel.

The creditors’ committee obtained a bankruptcy court order declaring the removal void as a stay violation. The BAP affirmed on an issue of first impression: California’s statute automatically dissociating a general partner that “becomes a debtor in bankruptcy” is an unenforceable ipso facto provision, so the debtor’s management rights survived the filing, entered the estate, and could not be taken by a postpetition vote.

Why are a general partner’s management rights property of the bankruptcy estate?

The starting point is 11 U.S.C. § 541(a)(1), which sweeps into the estate “all legal or equitable interests of the debtor in property as of the commencement of the case” — language the Supreme Court reads expansively. United States v. Whiting Pools, Inc., 462 U.S. 198 (1983). State law defines the underlying interest, Butner v. United States, 440 U.S. 48 (1979), but federal law decides what enters the estate. A general partner’s right to manage is both a statutory entitlement and a contract right under the partnership agreement — and contract rights are property. The limited partners argued that only the “transferable interest” (the right to distributions) counts, but the BAP rejected the premise: a right does not stop being property because state law makes it non-transferable. And under In re Computer Communications, Inc., 824 F.2d 725 (9th Cir. 1987), even a non-assignable executory contract remains estate property protected by the stay.

What makes a state dissociation statute an unenforceable “ipso facto” provision?

Section 541(c)(1)(B) provides that a debtor’s interest becomes estate property “notwithstanding any provision in an agreement, transfer instrument, or applicable nonbankruptcy law” that is conditioned on insolvency or a bankruptcy filing and that “effects or gives an option to effect a forfeiture, modification, or termination of the debtor’s interest in property.” A parallel rule, 11 U.S.C. § 365(e)(1), invalidates bankruptcy-triggered termination clauses in executory contracts. The phrase “applicable nonbankruptcy law” dooms statutes like California’s: as the panel put it, parties “cannot contract around what becomes estate property, and states cannot legislate estate property away.” A statute stripping management rights the instant a partner “becomes a debtor in bankruptcy” is a forfeiture conditioned on filing, and the Supremacy Clause preempts it. Courts had already so held for LLC statutes, e.g., In re Envision Healthcare Corp., 655 B.R. 701 (Bankr. S.D. Tex. 2023); the BAP found the limited-partnership setting a distinction without a difference.

Do New Mexico’s partnership and LLC statutes have the same bankruptcy triggers?

Yes — and that is why LeFever Mattson matters here. Under New Mexico’s Uniform Revised Limited Partnership Act, NMSA 1978, § 54-2A-603 dissociates a general partner that becomes a debtor in bankruptcy, and NMSA 1978, § 54-2A-605 then terminates its “right to participate as a general partner in the management and conduct of the partnership’s activities.” The New Mexico Limited Liability Company Act works the same way: under NMSA 1978, § 53-19-38, a member is dissociated upon filing a voluntary bankruptcy petition unless the operating agreement provides otherwise or all members consent in writing to continued membership.

These are textbook statutory ipso facto clauses. Under the logic of LeFever Mattson and the LLC cases it followed, a New Mexico bankruptcy court would very likely hold them unenforceable against the estate — along with the mirror-image clauses lawyers routinely copy into partnership and operating agreements.

Is a removal vote void or merely voidable in the Tenth Circuit?

The stay question is where the federal overlay bites hardest. The vote in LeFever Mattson was an “act to exercise control over property of the estate,” prohibited by 11 U.S.C. § 362(a)(3). In the Ninth Circuit, stay violations are void, not voidable. In re Schwartz, 954 F.2d 569 (9th Cir. 1992). The Tenth Circuit — home of the District of New Mexico — took the same position even earlier: “it is well established that any action taken in violation of the stay is void and without effect.” Ellis v. Consol. Diesel Elec. Corp., 894 F.2d 371 (10th Cir. 1990). Some circuits treat violations as merely voidable; in this circuit the removal simply never happened.

Void is only half the problem. Under 11 U.S.C. § 362(k)(1), an individual injured by a willful stay violation recovers actual damages, costs, and attorney’s fees — sometimes punitive damages; courts can also hold entities in civil contempt. “Willful” does not require bad intent; knowing about the bankruptcy and acting anyway is generally enough. Partners who orchestrate a postpetition removal vote are volunteering to be sanctions respondents. The stay’s reach surprises non-debtors in other contexts too, as the firm has written about the automatic stay and non-debtor spouses in New Mexico.

What can investors lawfully do when their general partner files bankruptcy?

The Bankruptcy Code channels every investor grievance into court-supervised remedies. First, they can seek relief from the stay under 11 U.S.C. § 362(d) — permission to exercise removal rights, with “cause” including mismanagement or conflicts. Second, in Chapter 11 they can seek an independent trustee under 11 U.S.C. § 1104 for fraud, dishonesty, or gross mismanagement, or move to convert or dismiss under 11 U.S.C. § 1112(b). Third, misconduct claims — in LeFever Mattson, the allegation that the general partner pocketed sale proceeds in breach of fiduciary duty — belong in the bankruptcy court as estate claims, often prosecuted by a committee with derivative standing. Finally, investors can negotiate: debtors in possession routinely trade governance concessions for plan support. What they cannot do is act first and ask forgiveness later.

How would this play out for an Albuquerque real estate partnership?

Picture a Northeast Heights apartment portfolio held by an Albuquerque limited partnership: one corporate general partner, eighteen limited partners, and a recent building sale whose proceeds never reached the investors. The general partner files Chapter 11 in the District of New Mexico. Week one, counsel reads the petition, calendars the section 341 meeting — and tells the clients not to schedule a removal vote. Week two, counsel demands an accounting of the sale proceeds. By weeks three and four, the investors choose a track: a section 1104 trustee motion if the accounting suggests diversion, or a section 362(d) motion to exercise removal rights if the problem is drift rather than dishonesty. Meanwhile they press for creditors’ committee formation, since a committee can seek standing to sue insiders. Within ninety days, most such cases settle into a negotiated framework — a chief restructuring officer, reporting covenants, or a consensual plan — because the investors kept sanctions risk off the table.

Investor option	Statutory basis	Who decides	Practical effect
Postpetition removal vote	State dissociation statute / agreement	No one — void ab initio	No effect; § 362(k) sanctions exposure
Motion for relief from stay	§ 362(d)	Bankruptcy judge	Court may authorize exercising removal rights
Motion to appoint Chapter 11 trustee	§ 1104(a)	Bankruptcy judge	Independent fiduciary displaces debtor management
Motion to convert or dismiss	§ 1112(b)	Bankruptcy judge	Case converts to Chapter 7 or ends for cause
Estate claims for fiduciary breach	§§ 541, 1109; derivative standing	Bankruptcy judge	Money recovery for diverted proceeds through the case

Frequently Asked Questions

Does a bankruptcy filing automatically remove a general partner under New Mexico law?

Outside bankruptcy, NMSA 1978, § 54-2A-603 says yes — becoming a debtor in bankruptcy is a dissociation event. But under In re LeFever Mattson and 11 U.S.C. § 541(c)(1)(B), that statutory forfeiture is an unenforceable ipso facto provision, so the debtor’s management rights survive the filing as estate property.

Can limited partners vote out a general partner that is in Chapter 11?

Not without court permission. A postpetition removal vote is an act to exercise control over estate property under 11 U.S.C. § 362(a)(3), and such acts are void in the Tenth Circuit. The lawful routes are stay relief, a trustee motion, or negotiation.

What is an ipso facto clause in bankruptcy?

An ipso facto provision is a contract term — or, as LeFever Mattson confirms, a state statute — that forfeits or terminates a debtor’s rights solely because of insolvency or a bankruptcy filing. Bankruptcy Code sections 541(c)(1)(B) and 365(e)(1) make such provisions generally unenforceable.

Are actions that violate the automatic stay void in New Mexico?

Yes. The District of New Mexico sits in the Tenth Circuit, which held in Ellis v. Consolidated Diesel Electric Corp. that any action violating the stay is void and without effect. Willful violations can also draw damages, fees, and punitive damages under 11 U.S.C. § 362(k)(1).

Does the LeFever Mattson rule apply to New Mexico LLCs?

Its logic almost certainly does. Courts nationwide have held that LLC statutes stripping a bankrupt member’s rights are preempted, and the BAP called the LLC-versus-partnership distinction meaningless. New Mexico’s LLC Act, NMSA 1978, § 53-19-38, contains the same bankruptcy-dissociation trigger.

How North Star Law Firm Can Help

North Star Law Firm counsels New Mexico clients statewide — Albuquerque, Santa Fe, Las Cruces, and beyond — on both sides of these disputes: investors confronting a general partner or LLC manager in bankruptcy, and business debtors preserving control through a Chapter 11 reorganization. Phillip Zagotti, JD/CPA, is admitted to practice before the federal courts in the District of New Mexico and handles bankruptcy matters across the state, pairing legal strategy with a CPA’s read of partnership accounting. To discuss a partnership or LLC caught in a bankruptcy, contact the firm for a free consultation.

Imagine your Albuquerque company gets a demand letter from a chapter 7 trustee: payments a customer made before its bankruptcy are allegedly recoverable as preferences. You open settlement talks, and a deal seems close. Then the trustee moves to sell the claims against you — not settle them — to another creditor: perhaps a rival with its own litigation budget, a grudge, and no interest in a cheap resolution.

That is what happened in In re Law Enforcement Officers Security Union (“LEOSU“), No. 24-70277-JAD, 2026 WL 560452 (Bankr. W.D. Pa. Feb. 27, 2026), where the court approved a trustee’s sale of avoidance actions to a creditor — and held the targets had no standing to object. For New Mexico businesses and insiders facing clawback claims, the decision is both warning and roadmap.

What Did the Bankruptcy Court Decide in In re LEOSU?

The debtor, a labor union, filed a chapter 7 petition in July 2024. The trustee identified preference and fraudulent transfer claims against several related unions, mediated with those targets, and reached a proposed $140,000 settlement. Before approval, a litigation creditor asserting claims of at least $2.4 million objected, valued the avoidance claims at roughly $1.8 million, and offered to buy them for $145,000, subject to higher bids.

The targets objected that avoidance claims are nontransferable statutory “powers” of the trustee, not saleable property, and urged approval of their settlement. The court rejected every piece of that argument: the targets lacked standing, avoidance actions are estate property saleable under 11 U.S.C. § 363(b), and the sale — not the settlement — best served the estate. The claims now belong to the targets’ adversary.

Are Preference and Fraudulent Transfer Claims Really Property of the Estate?

A bankruptcy filing creates an estate that includes “all legal or equitable interests of the debtor in property as of the commencement of the case” and any interest the estate acquires afterward. 11 U.S.C. § 541(a)(1), (a)(7). The LEOSU court reasoned that avoidance claims — preference claims under 11 U.S.C. § 547, fraudulent transfer claims under § 548, and state-law claims imported through § 544 — either exist at filing or spring into existence upon it, landing in the estate under one prong of § 541(a) or the other.

That tracks the majority appellate rule. The Fifth Circuit held in In re South Coast Supply Co., 91 F.4th 376, 385 (5th Cir. 2024), that preference actions may be sold under § 363(b) precisely because they are estate property; the Eighth Circuit agreed in In re Simply Essentials, LLC, 78 F.4th 1006 (8th Cir. 2023). Once a claim is estate property, the trustee can auction it, and the court reviews the sale only for benefit to the estate — not fairness to the people being sued.

Why Don’t Clawback Targets Get to Object to the Sale?

Bankruptcy standing generally belongs to “parties in interest” — entities “potentially concerned with or affected by a proceeding,” as the Supreme Court put it in Truck Insurance Exchange v. Kaiser Gypsum Co., 602 U.S. 268, 278 (2024), construing 11 U.S.C. § 1109(b). LEOSU shows the doctrine’s other edge: objections were limited to parties “whose pecuniary interests are directly and adversely affected by the order at issue,” and the targets flunked that test.

The targets owned no interest in the claims and were not creditors of the estate; the sale changed none of their legal rights — before it a trustee could sue them, after it an assignee can. Their real interest, the court said, was extinguishing the claims as cheaply as possible, which the sale-approval process does not protect. In short, you may have no formal voice in who ends up holding the lawsuit against you.

What Does a Sold Claim Mean for the New Mexico Business Defending It?

A trustee is an economically rational plaintiff: a certain $140,000 today often beats a speculative $1.8 million after years of litigation. A creditor-assignee can be a very different animal. If the buyer is a competitor or a creditor that believes you caused its losses, the claim stops being a mere asset and becomes an instrument. The assignee may value the litigation itself — discovery into your finances, leverage in related disputes, the satisfaction of a grudge — funded by its own budget.

The LEOSU targets learned a second lesson: settlement talks with a trustee protect nothing until court approval. Their mediated $140,000 settlement was undercut by a $145,000 sale offer, and the court chose the sale. A trustee owes fiduciary duties to the estate, not to you, and may take a better offer mid-negotiation. Assume the claims are on the market until an approval order is entered.

Facing a Clawback Claim? Get a Free Consultation

Can You Buy the Claims Against Your Own Business?

Here is the strategic flip side LEOSU itself validates: if avoidance claims are estate property anyone can buy, the target can bid too. Section 363 sales are generally subject to higher or better offers. A target that outbids the hostile creditor — structured as a purchase-and-release, or a settlement priced above the competing bid — gives the trustee an offer hard to refuse under the same best-interests review that doomed the targets’ cheaper deal.

Buying the claim against yourself can be dramatically cheaper than defending it: a purchase price is a known number paid once, while a defense means years of fees, discovery into your banking records, depositions of your principals, and judgment risk. The catch: the court will scrutinize whether your offer truly beats the alternative — insiders should expect heightened attention — and the move requires speed. Once a sale order is entered, your leverage with the estate is gone.

Do Your Section 547(c) Defenses Survive the Sale?

Yes — the most important point of comfort. An assignee buys the claim as it exists, subject to every statutory defense the target could raise against the trustee. Section 547(c) gives preference defendants three workhorses: the § 547(c)(1) defense for transfers that were “in fact a substantially contemporaneous exchange” for new value; the § 547(c)(2) defense for payments made in the ordinary course or “according to ordinary business terms”; and the § 547(c)(4) subsequent-new-value defense for creditors who kept extending credit after being paid.

A worked example shows the stakes. Suppose a Farmington oilfield vendor received $85,000 from a Permian Basin operator in the 90 days before its chapter 7 filing. After the first payment, the vendor delivered $22,000 in downhole tools on unpaid invoices; after the second, another $18,000 in services, also never paid. Under § 547(c)(4), that $40,000 of subsequent new value offsets exposure dollar for dollar, cutting the claim to $45,000 before the ordinary-course analysis begins; if the remaining payments matched pre-crisis invoice terms, § 547(c)(2) may shrink it toward zero. The math is identical whether the plaintiff is the trustee or a purchaser — and it frames a rational purchase price, which is why building the § 547(c) analysis early serves both defense and buyout strategies.

Where Do the Tenth Circuit and the District of New Mexico Stand?

New Mexico cases sit in the Tenth Circuit, which planted its flag early: Delgado Oil Co. v. Torres, 785 F.2d 857, 861 (10th Cir. 1986), held that a preferential transfer avoidance cause of action is property of the estate — the foundational premise for saleability. What the circuit and its Bankruptcy Appellate Panel have not squarely resolved is the second step: the mechanics and limits of selling avoidance actions under § 363(b), including whether state-law claims channeled through § 544(b) travel with the package. A District of New Mexico judge facing a LEOSU-style motion would find Delgado Oil pointing toward approval, reinforced by the Fifth and Eighth Circuits — so New Mexico targets should plan as though such sales are available here.

Option for the clawback target	How it works	Key risk
Settle with the trustee	Negotiate a release before any sale motion	Trustee can take a better offer any time before approval, as in LEOSU
Outbid the hostile creditor	Higher or better offer in the § 363 process, as purchase-and-release	Bidding war raises the price; scrutiny of insider offers
Buy the claims outright	Acquire and extinguish the claims at a fixed cost	Must move before the sale order; must beat alternatives under best-interests review
Defend against the assignee	Litigate § 547(c) and other defenses, which survive the sale	Years of fees and discovery against an adversary who may never settle cheaply

Frequently Asked Questions

Can a bankruptcy trustee really sell a preference claim against my business to another creditor?

Under the majority rule, yes. The Fifth and Eighth Circuits treat avoidance actions as estate property saleable under 11 U.S.C. § 363(b), and In re LEOSU approved such a sale over the targets’ objection.

Do I get to object if the trustee sells the claims against me?

Probably not. LEOSU held that targets’ pecuniary interests are not directly affected by the sale order — it merely changes who sues them — so they lacked standing. Your leverage lies in bidding or settling, not objecting.

Do my preference defenses change when a creditor buys the claim?

No. The buyer takes the claim subject to every defense you had against the trustee, including the § 547(c) defenses. What changes is the adversary’s motivation and budget, not the law.

Can I buy the avoidance claims against my own business?

Often, yes. Section 363 sales are typically subject to higher and better offers, so a target can outbid a hostile creditor or price a settlement above the competing bid. A purchase caps your cost and ends the litigation — but act before the sale is approved.

Does LEOSU apply in New Mexico bankruptcy cases?

It is persuasive, not binding — a Pennsylvania bankruptcy decision now on appeal. But the Tenth Circuit held in Delgado Oil Co. v. Torres that preference avoidance actions are estate property, so the foundation for LEOSU-style sales already exists in the circuit governing New Mexico.

How North Star Law Firm Can Help

North Star Law Firm defends businesses and individuals across New Mexico — Albuquerque, Santa Fe, Las Cruces, and beyond — against preference and clawback claims, whether the plaintiff is a trustee or a creditor that bought the claim. Phillip Zagotti, JD/CPA, is admitted to practice before the federal courts in the District of New Mexico and handles bankruptcy matters across the state; his accounting background drives the transaction-level § 547(c) analyses behind both defense value and buyout pricing. If exposure threatens your own company’s footing, see the firm’s guide to choosing the right bankruptcy chapter for a New Mexico business. Timing determines leverage — contact the firm for a free consultation before the claims change hands.