Category: Bankruptcy

Everett runs an equipment dealership in Clovis. Last spring a farm-services company wanted $160,000 in loaders and attachments on trade credit, and its officer signed a financial statement listing receivables the company did not have. The invoices went unpaid. In September the company filed a Subchapter V case in Albuquerque.

Does the lie still matter now? It can, but only if Everett files a complaint on time and votes the right way on the plan. Missing either step can quietly erase the fraud claim.

Can a company in Subchapter V be stuck with a fraud debt?

Every federal circuit court to rule says yes, if the plan is confirmed without creditor consent. Under 11 U.S.C. § 1192, a debtor whose plan is confirmed under § 1191(b) (a “cramdown”) is not discharged from any debt “of the kind specified in section 523(a).” Yet § 523(a) itself speaks of an “individual debtor,” and an LLC is not an individual.

The Fourth Circuit read § 1192(2) as borrowing a list of debts, not a class of debtors, in Cantwell-Cleary Co. v. Cleary Packaging, LLC (In re Cleary Packaging, LLC), 36 F.4th 509 (4th Cir. 2022). The Fifth Circuit followed in Avion Funding, L.L.C. v. GFS Industries, L.L.C. (In re GFS Industries, L.L.C.), 99 F.4th 223 (5th Cir. 2024), where a cleaning company took a merchant cash advance, denied any plan to file, and filed two weeks later. It called Subchapter V a compromise: owners keep their equity without paying unsecured creditors in full, and the § 523(a) categories survive as the price.

The Eleventh Circuit joined them on July 9, 2025, in BenShot, LLC v. 2 Monkey Trading, LLC (In re 2 Monkey Trading, LLC), 142 F.4th 1323 (11th Cir. 2025). Judge Luck’s one-paragraph dissent sided with most bankruptcy courts, including In re Satellite Restaurants Inc. Crabcake Factory USA, 626 B.R. 871 (Bankr. D. Md. 2021), and the Ninth Circuit Bankruptcy Appellate Panel in Lafferty v. Off-Spec Solutions, LLC (In re Off-Spec Solutions, LLC), 651 B.R. 862 (B.A.P. 9th Cir. 2023). Fifteen months on, it is three circuits to none, and I found no Supreme Court petition.

Has the Tenth Circuit or a New Mexico bankruptcy court decided the § 1192 question?

No. The Tenth Circuit has not ruled, and the New Mexico bankruptcy court’s published opinions back to 2021 do not address it. The most detailed ruling inside the circuit is Marmic Fire & Safety Co. v. ETG Fire, LLC (In re ETG Fire, LLC), Adv. No. 24-1225 (Bankr. D. Colo. Mar. 17, 2025), which adopted the Fourth and Fifth Circuit reading and held that a company’s intent can be shown through its managers.

So the Albuquerque judge decides it fresh, with appeal to the Tenth Circuit Bankruptcy Appellate Panel or the district court and then the Tenth Circuit (28 U.S.C. § 158). Three circuits should carry weight, but the point is open.

What is the Rule 4007(c) deadline for a Subchapter V fraud claim?

Sixty days after the first date set for the § 341 meeting of creditors. Debts under § 523(a)(2), (4) and (6) are discharged unless the creditor asks the court to except them (§ 523(c)(1)). Fed. R. Bankr. P. 4007(c) sets the 60-day clock in Chapter 11 cases and allows more time only “on a party in interest’s motion filed before the time expires,” and Rule 9006(b)(3) closes the excusable-neglect door.

The Tenth Circuit calls it a “strict sixty-day time limit” (Themy v. Yu (In re Themy), 6 F.3d 688 (10th Cir. 1993)). Last month, in In re Ortega, No. 25-11139-j7 (Bankr. D.N.M. Sept. 15, 2026), a Las Cruces creditor holding a stipulated $150,000 fraud judgment missed the date by 24 days after a calendaring lapse and got no extension.

Subchapter V adds a squeeze. The plan is due 90 days after the order for relief (§ 1189(b)), which in a voluntary case is the filing date (§ 301(b)), so the complaint deadline can arrive before anyone knows whether the plan will be consensual. A timely motion to extend is possible, but I know of no Tenth Circuit or New Mexico ruling treating plan uncertainty as cause. File on time.

Debtor Filed Subchapter V on Your Claim? Contact Us Now

Why does a creditor’s vote decide whether the fraud claim matters?

The § 523(a) exceptions ride only on a § 1192 discharge. If every impaired class accepts, the plan is confirmed under § 1191(a), and § 1181(c) leaves the discharge to § 1141(d). The company is discharged at confirmation, and the corporate carve-out in § 1141(d)(6) covers government fraud debts, False Claims Act-type recoveries and tax fraud, not a dealer’s invoice.

In In re American Dental of LaGrange, LLC, Adv. No. 24-01004 (Bankr. M.D. Ga. Jan. 31, 2025), a creditor filed its fraud complaint, objected to the plan, and then withdrew the objection by stipulation. The plan was confirmed as consensual, and the complaint was dismissed.

Doing nothing is also a vote. Under Heins v. Ruti-Sweetwater, Inc. (In re Ruti-Sweetwater, Inc.), 836 F.2d 1263 (10th Cir. 1988), a creditor who neither votes nor objects is deemed to accept, and the New Mexico bankruptcy court applied that rule in Subchapter V in In re Jaramillo, No. 21-10306-t11 (Bankr. D.N.M. Sept. 22, 2022). A class accepts when creditors holding at least two-thirds of the dollars and more than half the number of those voting say yes (§ 1126(c)), so how the plan classifies Everett matters.

What else can a New Mexico creditor do in the Subchapter V case?

A state-court fraud or Unfair Practices Act suit against the company is frozen by the automatic stay (§ 362(a)(1)), but a creditor can object to confirmation. The plan must be proposed in good faith (§ 1129(a)(3)) and include a liquidation analysis and projections (§ 1190), and a cramdown plan must commit three to five years of projected disposable income (§ 1191(c)). If the filing looks tactical, a motion to dismiss or convert for cause under § 1112(b) is available. A company in Chapter 7 gets no discharge at all (§ 727(a)(1)).

Check eligibility. For cases filed on or after April 1, 2025, Subchapter V is capped at $3,424,000 of qualifying debt (§ 101(51D), as adjusted); the firm’s post on contingent debt and the Alecto case covers that math. As of October 23, 2026, H.R. 7730 (raising the cap to $7.5 million) had passed both chambers but was unsigned; see the firm’s debt-limit post.

An owner’s personal guaranty is a separate claim. The company’s discharge does not release a guarantor (§ 524(e)), and in S-Tek 1, LLC v. Surv-Tek, Inc., Adv. No. 20-01074-j (Bankr. D.N.M. Sept. 19, 2022), the court refused to halt a creditor’s collection against a Subchapter V debtor’s guarantors. Whether the guaranty is enforceable is a state-law question.

How would Everett’s fraud claim play out?

Illustration only: the customer files on September 8, 2026, and the § 341 meeting is first set for October 9. Everett’s complaint is due Tuesday, December 8, 2026; electronic filing runs to midnight in the court’s time zone (Rule 9006(a)(4)), Mountain Standard Time by then. The plan is due December 7.

The complaint rests on § 523(a)(2)(B): a materially false written statement about the debtor’s or an insider’s financial condition, reasonably relied on and made with intent to deceive. A statement about even one asset counts as one about financial condition (Lamar, Archer & Cofrin, LLP v. Appling, 584 U.S. 709 (2018)), so an oral promise would not do. He must prove it by a preponderance (Grogan v. Garner, 498 U.S. 279 (1991)), and reliance will be contested. A state-law win is no shortcut: McCutcheon v. Davide, Adv. No. 25-1002-j (Bankr. D.N.M. Oct. 7, 2025), explains that an Unfair Practices Act violation needs neither intent to deceive nor reliance.

Say the plan pays trade creditors 20 cents on the dollar over three years. If his class accepts, he collects about $32,000 and the complaint likely fails. If it rejects and the plan is crammed down, the complaint decides whether the other $128,000 survives the § 1192 discharge.

How the case ends	Discharge rule	Effect of Everett’s § 523 complaint
Consensual plan, § 1191(a)	§ 1141(d) discharge at confirmation	Likely dismissed; (d)(6) does not reach private trade debt
Everett neither votes nor objects	Deemed acceptance under Ruti-Sweetwater	Same as consensual if his class goes along
Cramdown, § 1191(b)	§ 1192 discharge after plan payments	Decides survival if the judge follows the three circuits
Converted to Chapter 7	No discharge for an entity, § 727(a)(1)	Not needed against the company
Dismissed under § 1112(b)	No discharge	State-court remedies resume

Frequently Asked Questions

Does a corporate Subchapter V debtor get a discharge of fraud debts?

Under a consensual plan, generally yes. Under a cramdown plan, the Fourth, Fifth and Eleventh Circuits hold that § 523(a) debts survive, and the Tenth Circuit has not decided the question.

When is the deadline to file a nondischargeability complaint in Subchapter V?

Sixty days after the first date set for the § 341 meeting, under Rule 4007(c). A motion to extend must be filed before that date, and excusable neglect is not a ground for a late extension.

Should a defrauded creditor vote against the Subchapter V plan?

Often, yes. The § 523(a) exceptions apply only if the plan is confirmed under § 1191(b), which requires an impaired class that has not accepted. In the Tenth Circuit, a creditor who neither votes nor objects can be deemed to accept.

Can I keep suing the company in New Mexico state court?

Not while the case is pending, unless the bankruptcy court grants relief from the automatic stay under § 362(d). The fraud question against the company is usually decided there.

Can I still collect on the owner’s personal guaranty?

Generally yes. Section 524(e) says the company’s discharge does not affect another party’s liability. If the owner files a separate bankruptcy, that case brings its own stay.

How North Star Law Firm Can Help

North Star Law Firm represents creditors and business owners in Subchapter V cases, including nondischargeability complaints, plan objections and ballot strategy. It also handles traditional Chapter 11 and other bankruptcy matters.

Phillip Zagotti, JD/CPA, is admitted to the U.S. District Court and Bankruptcy Court for the District of New Mexico and represents taxpayers before the IRS and the U.S. Tax Court. The firm works alongside New Mexico-licensed counsel on state-law questions. If a customer that lied about its finances has filed Subchapter V, contact North Star Law Firm.

Teresa closed her Alamogordo print shop, and in March 2026 the company filed Chapter 7 in the U.S. Bankruptcy Court for the District of New Mexico. Two weeks later she logged in to the business account and sent its $38,000 balance to her brother’s LLC. By July the trustee’s lawyer had sent two demand letters, the second mentioning possible criminal consequences and suggesting she hire a lawyer. Teresa wants to sue them both in Otero County for defamation and emotional distress.

Teresa is fictional, but her plan has a real twin. In In re Prehired LLC, No. 22-11007 (Bankr. D. Del. May 30, 2025), a former CEO who had pulled $74,000 from an estate account sued the trustee and the trustee’s law firm without asking the bankruptcy judge first. Leave was denied, and the District of Delaware affirmed in March 2026. New Mexico applies the same rule, the Barton doctrine, with Tenth Circuit and local case law of its own.

Can I sue a bankruptcy trustee in New Mexico without the bankruptcy court’s permission?

Usually not. In Barton v. Barbour, 104 U.S. 126 (1881), a passenger hurt in a Virginia derailment sued the railroad’s court-appointed receiver in a District of Columbia court. The Supreme Court held that the D.C. court “had no jurisdiction to entertain a suit” filed without leave of the Virginia court that appointed him; otherwise that court “would be impotent to restrain” its own officer. The appointing court decides where a claim gets heard.

The Tenth Circuit applied the rule to bankruptcy trustees in Satterfield v. Malloy, 700 F.3d 1231 (10th Cir. 2012), barring suit “for claims based on alleged misconduct in the discharge of a trustee’s official duties absent approval from the appointing bankruptcy court.” The requirement is jurisdictional, so an unauthorized suit is dismissed under Rule 12(b)(1). Calling the claim an “individual capacity” suit or alleging spite changes nothing, since the court refused to recognize a “generalized tort exception.” The court also rejected the argument that Barton lapses once the bankruptcy is over.

This is federal law about a federal court’s control of its own appointee, not a New Mexico rule, so it follows the trustee into state district court. The Third Circuit required leave for a suit against a trustee in a Pennsylvania county court in In re VistaCare Group, LLC, 678 F.3d 218 (3d Cir. 2012).

What can a Chapter 7 trustee do about money moved after the filing?

Look at Teresa’s own position first. A filing creates an estate holding “all legal or equitable interests of the debtor in property as of the commencement of the case” (11 U.S.C. § 541(a)(1)), so the company’s balance became estate property the day the petition was filed. The stay in 11 U.S.C. § 362(a)(3) applies “to all entities” and bars any act “to exercise control over property of the estate.” A former owner with online banking access is one of them (see also the firm’s post on suing a non-debtor spouse during the stay).

The trustee must “collect and reduce to money the property of the estate” (11 U.S.C. § 704(a)(1)). Section 542(a) compels turnover. Section 549(a) undoes unauthorized postpetition transfers, and § 550(a) lets the trustee recover from the initial transferee, with suit due within two years after the transfer or before the case closes, whichever is earlier (§ 549(d)). Because § 362(k) damages run to “an individual injured,” a company estate’s trustee generally seeks contempt sanctions under 11 U.S.C. § 105(a). And 18 U.S.C. § 3057(a) requires a trustee with “reasonable grounds for believing” a bankruptcy crime occurred to report it to the U.S. attorney.

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Does the Barton doctrine protect the trustee’s lawyers and accountants?

For lawyers, yes, and the Tenth Circuit decided it in a New Mexico case. Lankford v. Wagner, 853 F.3d 1119 (10th Cir. 2017), came out of the Vaughan Company Realtors Ponzi scheme case. The trustee sued two investors for fictitious profits, and Judge Jacobvitz twice refused to let them counterclaim against her and her lawyers (Wagner v. Lankford (In re Vaughan Co., Realtors), Adv. No. 12-1139 (Bankr. D.N.M. Feb. 14, 2014)). After losing, they sued the trustee and her counsel in federal district court without asking at all.

Affirming dismissal, the Tenth Circuit held that Barton “also extend[s] to the trustee’s counsel, where counsel acts under the direction of, or as the functional equivalent of, the trustee,” joining Allard v. Weitzman (In re DeLorean Motor Co.), 991 F.2d 1236 (6th Cir. 1993), and Lawrence v. Goldberg, 573 F.3d 1265 (11th Cir. 2009). Accountants are less settled. Lankford addressed only counsel, while Lawrence covered a trustee’s investigator that “functioned as the equivalent of court appointed officers.” I would expect a D.N.M. judge to apply the same functional test to an accountant working at the trustee’s direction, but that is a prediction.

When can someone sue a bankruptcy trustee without leave?

The statutory exception, 28 U.S.C. § 959(a), permits suit “without leave of the court appointing them” over acts “in carrying on business connected with such property.” Think of a guest who slips on ice at a motel the trustee keeps open. Satterfield read it narrowly: “Merely collecting, taking steps to preserve, and/or holding assets,” and the rest of liquidating an estate, is not carrying on business.

The judge-made exception covers ultra vires conduct, where a trustee “by mistake or wrongfully” takes someone else’s property. Satterfield found none alleged.

Suing inside the bankruptcy court is a closer call here. In In re Horton, No. 19-11162-t7 (Bankr. D.N.M. Jan. 9, 2020), Judge Thuma followed “the majority rule” that no approval is needed to sue a trustee in the appointing court, though it is needed in “foreign courts (which includes the district court),” and noted that Vaughan had required leave even at home. I would file a motion for leave regardless. And the forum does not fix weak claims: the Prehired CEO’s adversary complaint against the trustee was dismissed on December 12, 2025.

What does a motion for leave in the D.N.M. bankruptcy court have to show?

In Vaughan, Judge Jacobvitz adopted VistaCare‘s test: the movant “must make a prima facie case showing that its claim is not without foundation.” I found no published Tenth Circuit or Tenth Circuit BAP opinion adopting a different standard. The District of Delaware applied the same one in affirming Prehired (Jordan v. Beskrone, C.A. No. 25-679 (D. Del. Mar. 17, 2026)).

Foundation depends on what a trustee can be liable for. Under Sherr v. Winkler, 552 F.2d 1367 (10th Cir. 1977), personal liability requires acting “willfully and deliberately in violation of his fiduciary duties.” Mistakes in judgment carry no liability, and negligence is answered only in the trustee’s official capacity. In Hunter v. Madrid (In re Hunter), Adv. No. 16-1022 (Bankr. D.N.M. July 8, 2016), Judge Thuma dismissed a negligence claim against a Chapter 13 trustee on that basis.

For complaints about conduct, 28 U.S.C. § 586(a) has the United States Trustee supervise the private trustee panel and “the administration of cases and trustees.” Writing to that office needs no leave.

How would Teresa’s Otero County lawsuit play out?

Illustration only. The company filed on March 2, 2026, Teresa moved the money on March 16, and the letters went out June 8 and July 6. In November she sues in the Twelfth Judicial District Court in Alamogordo without leave.

Under Satterfield and Lankford, that court lacks jurisdiction over claims arising from the trustee’s or counsel’s official duties. To proceed she needs leave from the D.N.M. bankruptcy court and a claim with foundation. The letters sought estate cash the Code tells the trustee to collect. Rule 16-403 NMRA, New Mexico’s ethics rule on unrepresented persons, permits “the advice to secure counsel,” and § 3057(a) contemplates criminal referrals. Whether a letter is defamatory under New Mexico law is a question the bankruptcy judge would likely never reach, because demanding estate funds is core trustee work.

Her exposure runs the other way. The trustee can sue the brother’s LLC under §§ 549 and 550 until March 16, 2028, unless the case closes sooner, and can pursue turnover and contempt against Teresa over the stay violation.

Situation	Leave needed?	Key authority	Likely result
Suit in another court over official acts	Yes, from the appointing bankruptcy court	Barton; Satterfield	Dismissed for lack of jurisdiction
Suit against trustee’s counsel for directed work	Yes	Lankford	Same as a suit against the trustee
Injury from a business the trustee operates	No	28 U.S.C. § 959(a)	Ordinary suit, subject to the court’s equity power
Trustee seizes non-estate property	No (ultra vires)	Satterfield	Suit against the trustee personally
Claim filed in the D.N.M. bankruptcy court	Unsettled locally; majority says no	Horton; Vaughan	Seek leave anyway
Conduct complaint	No	28 U.S.C. § 586(a)	United States Trustee review

Frequently Asked Questions

Does the Barton doctrine apply after the bankruptcy case is closed?

Yes. Satterfield rejected the argument that Barton stops applying once the bankruptcy ends. Leave is still required for claims tied to the trustee’s official duties.

Can I sue a Chapter 7 trustee in New Mexico state court?

Not over official conduct unless the appointing bankruptcy court grants leave first. The Barton rule is federal, so it binds state district courts too.

Is a bankruptcy trustee personally liable for negligence?

Not under Sherr v. Winkler, which limits personal liability to willful and deliberate violations of duty. Negligence is answered in the trustee’s official capacity.

Does the Barton doctrine protect the trustee’s attorney?

Yes, when the attorney acts under the trustee’s direction or as the trustee’s functional equivalent. The Tenth Circuit so held in Lankford v. Wagner, which began in the D.N.M. bankruptcy court.

What happens if I moved money out of a company account after its bankruptcy filing?

The money was estate property, and moving it violated the automatic stay. The trustee can demand turnover, sue the recipient under §§ 549 and 550, and seek contempt sanctions.

How North Star Law Firm Can Help

North Star Law Firm represents owners, insiders and creditors in New Mexico bankruptcy cases, including Chapter 7 matters where a trustee seeks turnover or pursues clawback claims.

Phillip Zagotti, JD/CPA, is admitted to the U.S. District Court and Bankruptcy Court for the District of New Mexico and represents taxpayers before the IRS and the U.S. Tax Court. The firm works alongside New Mexico-licensed counsel on state-law questions. If a trustee’s demand letter is on your desk, or you are thinking about suing one, contact North Star Law Firm.

A parts distributor in Carlsbad opens its email on a Tuesday in September to a notice from a Houston claims agent. Its largest customer, a Permian Basin operator, filed Chapter 11 overnight owing $210,000, with two trucks of valves already loaded for its leases.

Unpaid suppliers have more tools than most realize, and several expire within weeks. The one owners fear most, a suit over money already collected, can come two years later.

What can a New Mexico supplier do the day its customer files Chapter 11?

The automatic stay in 11 U.S.C. § 362(a)(6) bars “any act to collect, assess, or recover a claim against the debtor” that arose before the case. Hauling stock off the customer’s yard (§ 362(a)(3)) or netting a credit memo against the balance (§ 362(a)(7)) needs court permission too.

New orders are different. Unless a contract obligates you to sell on credit, you can insist on cash; New Mexico’s commercial code lets a seller who learns of insolvency “refuse delivery except for cash” (NMSA 1978, § 55-2-702(1)). Postpetition shipments on credit are generally an administrative expense under § 503(b)(1)(A), as recognized in In re Rio Valley Motors Co., No. 11-06-11866 SS (Bankr. D.N.M. Mar. 24, 2008).

A written supply agreement cannot be ended just because the customer filed (§ 365(e)(1)). The debtor may decide by confirmation whether to keep it (§ 365(d)(2)), and keeping it means curing the old default (§ 365(b)(1)).

Which unpaid invoices qualify for a section 503(b)(9) claim?

Section 503(b)(9) gives administrative priority to “the value of any goods received by the debtor within 20 days before the date of commencement of a case,” if sold in the ordinary course of the debtor’s business. A standard Chapter 11 plan must pay that claim in cash on the effective date unless the holder agrees otherwise (§ 1129(a)(9)(A)).

“Received” means physical possession. In In re World Imports, Ltd., 862 F.3d 338 (3d Cir. 2017), furniture shipped from China more than 20 days out but reached the debtor inside the window, and the court held that receipt “requires physical possession by the buyer or his agent.” For a Carlsbad distributor, arrival at the yard or well site controls. I found no Tenth Circuit or BAP decision on the point, and Rio Valley applied § 503(b)(9) without defining it, so a New Mexico judge would likely start from World Imports.

Services are excluded. In re Goody’s Family Clothing, Inc., 401 B.R. 131 (Bankr. D. Del. 2009), denied priority to a vendor that ticketed garments. For mixed invoices, In re Circuit City Stores, Inc., 416 B.R. 531 (Bankr. E.D. Va. 2009), applied a predominant-purpose test, bad news for a Los Alamos machine shop billing parts and labor on one line. No demand letter is needed (§ 546(c)(2)), but the claim must be asserted by the court’s deadline.

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Is a reclamation demand under section 546(c) worth sending?

Section 546(c)(1) preserves a seller’s right to reclaim goods an insolvent buyer received on credit within 45 days before the filing, on a written demand “not later than 45 days after the date of receipt” or, if that period runs past the petition, “not later than 20 days after the date of commencement of the case.” The clauses can be read two ways, so I treat day 20 after the petition as the last safe day.

The same sentence makes the right “subject to the prior rights of a holder of a security interest in such goods,” and in my experience a customer big enough to owe $200,000 has a lender with an inventory lien. In re Pilgrim’s Pride Corp., No. 08-45664 (Bankr. N.D. Tex. Nov. 10, 2009), held reclamation claims “subordinate to the liens held by Debtors’ pre-petition lenders” and worth only any surplus. Send it anyway as cheap leverage.

Oilfield suppliers may have a lien on the leasehold under the Oil and Gas Lien Act (NMSA 1978, § 70-4-1), claimed within 180 or 210 days after the last materials (§ 70-4-4). Sections 362(b)(3) and 546(b) allow perfection where state law lets it relate back, a question for New Mexico counsel.

Can my company become a critical vendor, and what does the trade agreement require?

The Code never says “critical vendor.” In In re Kmart Corp., 359 F.3d 866 (7th Cir. 2004), about 2,330 suppliers had been paid roughly $300 million. The Seventh Circuit held that § 105(a) is a power “to implement rather than override” the Code and called § 363(b)(1) “more promising,” but demanded proof that vendors would otherwise stop selling and other creditors would be no worse off. I found no Tenth Circuit ruling, so New Mexico courts would likely follow Kmart.

Marelli Automotive Lighting USA LLC, which filed in Delaware on June 11, 2025 (No. 25-11034), asked on day one to pay four groups of old vendor invoices: overseas suppliers, holders of lien rights, § 503(b)(9) goods sellers and a critical-vendor list. Payment comes with a trade agreement; proposed procedures posted by the Southern District of Texas would require “the best terms” the vendor gave the debtor within 120 days before filing, and repayment if it stops shipping. Weigh cash now on part of the old balance against new credit on the terms that left you holding $210,000.

Do I need a Delaware or Houston lawyer for a proof of claim in a Chapter 11 case?

Not for the claim itself. Bankruptcy Rule 9010(a) lets a creditor “perform any act not constituting the practice of law” through an authorized agent. Delaware Local Rule 9010-1(e)(iii) allows a proof of claim “pro se or through out of state counsel,” though other appearances need Delaware counsel (Rule 9010-1(c)). The Southern District of Texas pro hac vice form does not ask for local counsel.

Official Form 410 says not to use it for administrative expenses, but claims-agent forms in many large cases add a § 503(b)(9) box. An undisputed scheduled claim is prima facie valid (Rule 3003(b)(1)), but schedules rarely split out 20-day goods, so I file anyway. The court sets the bar date (Rule 3003(c)(3)); the Southern District of Texas complex-case procedures default to 90 days after the first date set for the creditors’ meeting.

In New Mexico, NM LBR 1074-1 requires an LLC or corporation to use an attorney for nearly everything but proofs of claim, so a § 503(b)(9) motion in Albuquerque needs counsel. I found no D.N.M. rule or form for such requests. In the smaller Chapter 11 and Subchapter V cases I follow in the District of New Mexico, first-day papers seldom pay vendors, and § 1191(e) lets a Subchapter V cramdown plan pay administrative claims over time.

What can a Carlsbad oilfield parts distributor recover, and what can be clawed back?

Illustration only. The customer files in the Southern District of Texas on Tuesday, September 15, 2026. Parts physically received from August 26 through September 14, worth $60,000, support a § 503(b)(9) claim; the other $150,000 is unsecured and paid at the plan’s rate. The reclamation demand is due Monday, October 5. With the creditors’ meeting first set for October 14, the default bar date is January 12, 2027.

The distributor also cashed $15,000 checks on July 10, August 7 and August 28, inside the 90-day look-back that began June 17. Section 547(b) can recover them absent a defense. Payments matching past practice or industry terms are safe (§ 547(c)(2)), and the firm’s post on the ordinary-course defense in the Tenth Circuit covers collection pressure. Under § 547(c)(4), later unpaid deliveries offset earlier payments, and $52,000 shipped after August 28 went unpaid.

Does paying the $60,000 claim later erase that new value? In re Friedman’s Inc., 738 F.3d 547 (3d Cir. 2013), held a postpetition transfer “does not affect the new value defense,” and Auriga Polymers Inc. v. PMCM2, LLC, No. 20-14647 (11th Cir. July 18, 2022), applied that to § 503(b)(9) payments. I found no Tenth Circuit decision. A non-insider trade-debt suit under $31,425 must be filed where the defendant resides (28 U.S.C. § 1409(b), as adjusted), but at $45,000 this distributor can be sued in Houston, within two years (§ 546(a)).

When	What the supplier does	Authority	Carlsbad example
Day of filing	Stop open credit and read the first-day motions	§§ 362(a), 503(b)(9)	Sept. 15, 2026
20 days after the petition	Written reclamation demand	§ 546(c)(1)	Oct. 5, 2026
Trade agreement offered	Weigh the payment against new credit terms	Kmart; first-day order	Set by the debtor
Bar date	Proof of claim stating the § 503(b)(9) amount	Rule 3003(c)(3)	Jan. 12, 2027
Plan vote	Ballot on the unsecured claim	§§ 1129(a)(9)(A), 1191(e)	Set by the court
Up to 2 years after filing	Answer preference demands with payment history	§§ 546(a), 547(c)	By Sept. 15, 2028

Frequently Asked Questions

Can I refuse to ship to a customer that has filed Chapter 11?

If no contract requires you to sell, yes, and you can demand cash in advance. A supply contract is different, so get advice before you stop performing one.

Is a proof of claim required if my invoice is on the debtor’s schedules?

Not always, since an undisputed scheduled claim is prima facie valid. Schedules seldom separate 20-day goods, though, so filing is safer.

Does a 503(b)(9) claim cover freight, labor or services?

Only the value of goods. Courts use the UCC definition, and some apply a predominant-purpose test to mixed invoices.

If my business is named a critical vendor, is the payment safe?

Only while you keep shipping on the agreed terms. The proposed Southern District of Texas procedures would make a paid vendor that stops shipping repay it.

Can a trustee recover small preference payments from a New Mexico supplier?

Transfers totaling less than $8,575 cannot be avoided in a case of mainly business debts (§ 547(c)(9), as adjusted April 1, 2025). A trade-debt suit under $31,425 must be filed where your company resides, usually the District of New Mexico.

How North Star Law Firm Can Help

North Star Law Firm represents New Mexico suppliers in Chapter 11 cases, including Subchapter V cases in the District of New Mexico, and answers clawback demands through its preference defense work.

Phillip Zagotti, JD/CPA, is admitted to the U.S. District Court and Bankruptcy Court for the District of New Mexico and represents taxpayers before the IRS and the U.S. Tax Court. He is also admitted in the Southern District of Texas, where many Permian Basin operators file. The firm works alongside New Mexico-licensed counsel on state-law questions. If a customer’s bankruptcy notice just landed on your desk, contact North Star Law Firm.

The owner of a small Gallup trucking company tries to pay a fuel bill in September 2026 and the card is declined. Her bank has frozen the operating account under a writ of garnishment on a 2023 judgment from the U.S. Bankruptcy Court in Albuquerque. She has never heard of the case. The summons, it turns out, went to a yard on the east side of town that the company left in 2021.

Until this year, a business in her position could tell a federal court in New Mexico that a judgment entered without valid service was void and open to attack whenever it surfaced. In January the Supreme Court put that attack on a clock.

What did the Supreme Court decide in Coney Island Auto Parts v. Burton?

In Coney Island Auto Parts Unlimited, Inc. v. Burton, No. 24-808 (U.S. Jan. 20, 2026), Justice Alito wrote for eight Justices and Justice Sotomayor concurred in the judgment. The holding: “Litigants seeking relief under Rule 60(b)(4) must comply with Rule 60(c)(1) and file a motion within a reasonable time.” Civil Rule 60(b)(4) covers a judgment that “is void,” and Rule 60(c)(1) requires every Rule 60(b) motion to be “made within a reasonable time.” Bankruptcy default judgments are covered through Bankruptcy Rules 7055 and 9024.

The case began as an adversary proceeding, a lawsuit inside a bankruptcy. Process was mailed to the corporate name alone, and default judgment followed in 2015. The trustee’s demand reached the CEO in April 2016; funds were seized in 2021. Per the Sixth Circuit’s opinion, 109 F.4th 438 (6th Cir. 2024), the motion at issue was filed in July 2022. The Court expressly declined to decide whether the mailing voided the judgment (footnote 4).

Could a void default judgment be challenged at any time in the Tenth Circuit before 2026?

Yes. V.T.A., Inc. v. Airco, Inc., 597 F.2d 220, 224 (10th Cir. 1979), said Rule 60(b)(4) “is not subject to any time limitation,” and a footnote explained that the judgment is then “a nullity from the outset and any 60(b)(4) motion for relief is therefore filed within a reasonable time.” Orner v. Shalala, 30 F.3d 1307 (10th Cir. 1994), repeated it and added that once voidness is shown, “relief is not a discretionary matter; it is mandatory.” The Supreme Court’s footnote 1 places V.T.A. on the side of the split it rejected.

New Mexico defendants lost that protection on January 20, 2026. The mandatory-relief half of Orner should survive for a timely motion. Hukill v. Oklahoma Native American Domestic Violence Coalition, 542 F.3d 794 (10th Cir. 2008), shows it working: mail signed for by someone with no authority to accept it was not valid service, and a motion filed within a month got the default judgment vacated. I found no Tenth Circuit or BAP opinion applying Coney Island; a Utah federal court cited it in United States v. Geddes (D. Utah Aug. 12, 2026).

Old Bankruptcy Judgment Surfaced? Contact Us Now

How does Rule 7004 service by mail go wrong for a New Mexico LLC?

Bankruptcy courts allow service by first-class mail. Bankruptcy Rule 7004(b)(3) lets a plaintiff serve a corporation, partnership or other association by mailing the papers “to an officer, a managing or general agent, or an agent authorized by appointment or by law to receive service.” Individuals are served under Rule 7004(b)(1) at a dwelling or regular place of business. Cheap service is easy to botch.

New Mexico makes the agent easy to find. Every LLC must keep a registered office and registered agent in the state under NMSA 1978, § 53-19-5, corporations must do the same under § 53-11-11, and changes are filed with the Secretary of State. A trustee who mails to the company name at an old invoice address, ignoring the agent on file, has a weak position. A company that lets its agent lapse gives the trustee an argument that the company caused the miss. Dissolved entities and departed agents raise state-law wrinkles (§ 38-1-5 addresses corporations whose agent cannot be found) that belong with New Mexico counsel.

Rule 7004(i), effective December 1, 2022, says the officer or agent “need not be correctly named in the address” if the envelope goes to the proper address “directed to the attention of the officer’s or agent’s position or title.” The 2024 restyling kept it. “Attention: Managing Member” now works. An envelope bearing only the company name never qualified, and mail sent before December 2022 is judged without subdivision (i).

How much delay will a court accept under Rule 60(c)(1)’s reasonable-time limit?

The Supreme Court did not define it, but said “it might be reasonable for a defendant not to seek relief before learning about a plaintiff’s attempted enforcement.” The Sixth Circuit asked how long the company waited and why, and whether the trustee was hurt by the wait, starting the clock when the movant knew or should have known the basis for the motion. I expect the Tenth Circuit to ask much the same.

Within the circuit, V.T.A. found no error in calling a Rule 60(b)(5) and (6) motion untimely at 16 months after judgment. In Hukill, the motion came within a month and timing never came up. Notice starts the trouble, not the judgment date, and a demand letter that reached the owner may count.

How would this play out for a Gallup trucking company?

Illustration only. A Chapter 7 trustee for a bankrupt fuel supplier sues a two-truck Gallup LLC for $38,400 in alleged preferences. The summons issues Monday, April 11, 2022, and on April 13 is mailed to the LLC’s name at the yard address on the debtor’s old invoices. No officer, agent or title is on the envelope, and the registered agent on file, the owner at her home address, gets nothing. Default judgment enters Wednesday, February 8, 2023.

A writ of garnishment freezes $41,200 at a Gallup bank on Monday, September 14, 2026. She learns the next day and files under Rule 9024 and Rule 60(b)(4) on Tuesday, September 29. Excusable neglect under Rule 60(b)(1) expired a year after the judgment. Voidness is her argument: the mailing missed Rule 7004(b)(3), a defect subdivision (i) would not cure. Her timing looks strong because nothing reached her before the garnishment. Change one fact, a 2023 email from the trustee’s counsel that she forwarded to her bookkeeper and forgot, and she starts to look like Coney Island.

What should a New Mexico business do when an old bankruptcy judgment freezes its account?

Move at once, in the court that entered the judgment. Under Rule 7069, collection follows Civil Rule 69 and state procedure, so a garnishment can look like a state-court matter. Coney Island’s first motion, in October 2021, went to a bankruptcy court in New York, which sent it back to Tennessee. A D.N.M. adversary judgment is attacked in the D.N.M. adversary case.

Plead Rule 60(b)(4) first and Rule 60(b)(6) in the alternative. In re Gledhill, 76 F.3d 1070 (10th Cir. 1996), confirms Rule 9024 relief is sought by motion, but limits (b)(6) to “extraordinary circumstances” and bars resting it on a ground (b)(1) through (b)(5) covers, so the alternative needs its own facts. A denial must be appealed within 14 days under Rule 8002(a); in In re Vaughan Co. Realtors, No. 18-2030 (10th Cir. Nov. 6, 2018) (unpublished), a D.N.M. case, an appeal filed 23 days after the court refused to vacate was dismissed. The firm’s post on the 14-day bankruptcy appeal deadline explains it.

If a summons does arrive, even a defective one, answer it instead of planning a voidness motion later. Rule 7012 allows 30 days from issuance of the summons and imports Civil Rule 12(b)(5), insufficient service, which Rule 12(h)(1) treats as waived if omitted from the first response. Raise it alongside the merits, as with a trustee’s fraudulent transfer complaint. New Mexico’s Rule 1-060(B) NMRA has a parallel void-judgment ground, a separate state-law question.

Rule 60(b) ground	Time limit after Coney Island	Use against an old default judgment
(1) Mistake, inadvertence, excusable neglect	Reasonable time, no more than one year after judgment	Usually expired before a garnishment hits
(2) New evidence; (3) fraud by the opposing party	Reasonable time, no more than one year	Rarely available years later
(4) Judgment is void	Reasonable time, now enforced in the Tenth Circuit	Main tool for defective Rule 7004 service; clock runs from notice
(5) Satisfied or no longer equitable	Reasonable time	Paid or settled judgments, not service defects
(6) Any other reason	Reasonable time; extraordinary circumstances	Alternative only, on facts beyond voidness (Gledhill)

Frequently Asked Questions

Is a void default judgment in New Mexico still void after Coney Island?

The Court did not hold that time cures defective service. It held that the motion to vacate must come within a reasonable time, so a company that waits too long can be stuck with the judgment.

Does the one-year deadline apply when the motion argues the judgment is void?

No. The one-year cap in Rule 60(c)(1) covers grounds (1) through (3). A voidness motion has no fixed cap, but it must be prompt once the company learns of the judgment.

When does the reasonable-time clock start?

When the defendant knew or should have known the basis for the motion. A garnishment is the usual trigger, but an earlier demand letter that reached an owner may start it sooner.

Is mail addressed only to my company’s name proper service under Rule 7004?

Generally not. Rule 7004(b)(3) requires mail directed to someone who can accept service, such as an officer or the registered agent, and since December 1, 2022, a title such as “President” is enough. The Supreme Court left open whether that defect voids a judgment.

Where do I file the motion to vacate a bankruptcy default judgment?

In the bankruptcy court that entered it, in the same adversary proceeding, under Bankruptcy Rule 9024. A detour to another court can cost months that will count against you.

How North Star Law Firm Can Help

North Star Law Firm defends New Mexico businesses in trustee lawsuits, including preference and clawback actions, and moves to vacate default judgments entered in them. Its bankruptcy practice also represents owners whose companies are in, or facing, Chapter 7.

Phillip Zagotti, JD/CPA, is admitted to the U.S. District Court and Bankruptcy Court for the District of New Mexico and represents taxpayers before the IRS and the U.S. Tax Court. The firm works alongside New Mexico-licensed counsel on state-law questions. If a judgment you never knew about has frozen your account, contact North Star Law Firm.

In the spring of 2026, a nurse in Eldorado, southeast of Santa Fe, opens a demand letter from a Chapter 7 trustee. It wants back the $90,000 her mother gave her in 2018 toward a house. Her mother filed bankruptcy in February, nearly eight years after the gift. New Mexico gives creditors four years, she thought. The trustee’s answer fits in three letters: IRS.

Trustees call it the golden creditor theory. The trustee borrows the IRS’s ten-year collection window and turns it on private transferees. United States v. Miller is often read as a loss for trustees. On this question it changed less than people assume.

Did United States v. Miller decide whether a trustee can use the IRS to reach back ten years?

No. Miller, 604 U.S. ___ (2025), decided 8 to 1 on March 26, 2025, involved company funds a Utah company’s principals spent on their own income taxes. The trustee sued the United States under 11 U.S.C. § 544(b) to get them back. The Court held that the waiver in 11 U.S.C. § 106(a) “applies only to the §544(b) claim itself and not to any state-law claims nested within that federal claim,” reversing In re All Resort Group, Inc., 71 F.4th 1247 (10th Cir. 2023).

The opinion never mentions 26 U.S.C. § 6502 or a trustee using the IRS’s claim against someone else. Footnote 1 says only that trustees chasing older transfers “will ordinarily bring a §544(b) action” and point to state law “with a longer lookback period.” The ten-year question is not reserved; it is absent.

How does the IRS as triggering creditor stretch a New Mexico clawback to ten years?

Section 544(b)(1) lets a trustee avoid a transfer “voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502.” The triggering creditor would normally sue under New Mexico’s Uniform Voidable Transactions Act, and NMSA 1978, § 56-10-23 extinguishes the claim after four years (for actual intent under § 56-10-18(A)(1), one year after discovery if later).

The IRS is different. 26 U.S.C. § 6502(a)(1) lets it sue “within 10 years after the assessment,” free of state limits. In United States v. Holmes, 727 F.3d 1230 (10th Cir. 2013), the government recovered 1995 to 2002 distributions to a Colorado company’s sole shareholder in a 2008 suit, counting from the company’s assessments. An unpublished New Mexico appeal, United States v. Spence (10th Cir. Nov. 15, 2000), did the same with land deeded to a sham church and then a son in the 1980s. The trustee’s pitch: if the IRS could have sued you, so can I.

Trustee Reaching Back Past Four Years? Contact Us Now

Does In re Vaughan Company Realtors still protect New Mexico transferees?

It is this district’s only decision, and it went against the trustee. In Wagner v. Ultima Homes, Inc. (In re Vaughan Co., Realtors), 498 B.R. 297 (Bankr. D.N.M. 2013), the trustee of Douglas Vaughan’s Ponzi company sought about $501,849 paid in 2005 to the builder of his house; the petition came in 2010. Judge Jacobvitz refused to lend her the IRS’s ten years. He did “not believe that Congress, by enacting Section 544(b), intended to vest sovereign powers in a bankruptcy trustee,” and because the IRS appears in so many cases, the theory “would eviscerate the UFTA’s four-year look back period in most bankruptcy cases.”

Most courts read § 544(b) literally and side with trustees, including Kaiser (Bankr. N.D. Ill. 2014) and Zagaroli (Bankr. W.D.N.C. 2020). In Kansas, also within the Tenth Circuit, Williamson v. Smith (In re Smith) (Bankr. D. Kan. June 2, 2022) declined to follow Vaughan while sharing its policy worries. In re Kossoff PLLC, 667 B.R. 405 (Bankr. S.D.N.Y. 2025), accepted the IRS as triggering creditor and was on appeal to the Second Circuit (No. 26-229) as of February 2026. I found no Tenth Circuit or Tenth Circuit BAP ruling on the question, before or since Miller, and no later D.N.M. opinion revisiting Vaughan.

Does Miller’s “no new cause of action” reasoning help New Mexico transferees?

It offers an argument. Miller relied on § 106(a)(5), which says the waiver does not “create any substantive claim for relief or cause of action not otherwise existing,” and on the rule that a trustee takes the actual creditor as it stood. A transferee can say bankruptcy likewise should not hand a trustee a sovereign privilege no private creditor has.

The reply is stronger. Section 106 governs suits against governmental units, and a nurse in Eldorado is not one. Nothing new is created when the IRS really could have sued her within ten years of assessment, as Holmes shows. The shoes carry advantages as well as disabilities, and the weight of authority favors trustees. I would raise the Miller point to preserve it, not to carry a case.

Who in New Mexico is exposed when the IRS is the triggering creditor?

Anyone who took money or property from someone who later owed the IRS, starting with adult children who got a parent’s “gifts.” An LLC member who took distributions in 2019 while company taxes went unpaid sits where the shareholder in Holmes sat; the firm’s post on clawing back LLC distributions covers the state-law side. A bought-out partner is exposed too, though a fair price is a strong answer.

Churches get special treatment. Section 544(b)(2) bars state-law attacks on an individual’s gifts of cash or financial instruments that 11 U.S.C. § 548(a)(2) protects, meaning gifts within 15 percent of gross annual income or consistent with past giving. That protects ordinary tithes from constructive-fraud claims, but not business donations or schemes like Spence.

What must a trustee prove to borrow the IRS’s ten years, and what defenses work?

Start with the predicate claim. In In re J&M Sales Inc. (Bankr. D. Del. Feb. 22, 2022), no proof of claim meant “it is not an allowable claim,” though § 501(c) lets the debtor or trustee file one. The assessment must have been timely and the ten years open on the petition date. A prior bankruptcy pauses the clock under § 6503(h). An installment agreement in effect does not, but a pending request or offer does under § 6331(k). A filed lien adds no time, because § 6322 keeps it alive only while the liability is enforceable.

Timing at the transfer matters too. The insolvency provision, § 56-10-19, protects only creditors whose claims predate the transfer; § 56-10-18 also reaches later ones. Hillen v. City of Many Trees (In re CVAH, Inc.), 570 B.R. 816 (Bankr. D. Idaho 2017), held the IRS’s claim arises when the tax accrues, not at assessment. Kossoff held a lien release did not prove the tax was gone.

On the merits, good faith plus reasonably equivalent value defeats an actual-intent claim under § 56-10-22(A), and value given earns a credit under subsection (D). Intent must be pleaded under Rule 9(b), the subject of the firm’s post on what a trustee must plead. And 11 U.S.C. § 546(a) generally gives the trustee two years after the order for relief to sue.

How would a ten-year clawback play out for a Santa Fe family?

Illustration only. A Santa Fe interior designer gives her daughter $90,000 on March 12, 2018, and deeds a rental condo to her son on September 4, 2018. Auditing her 2017 and 2018 returns, the IRS assesses $140,000 on June 14, 2021 (assume timely). With the tax unpaid, she files Chapter 7 on February 2, 2026, and the IRS files a claim.

Section 548 reaches back only to February 2, 2024, and a private creditor’s four years ended in 2022; the recorded deed undercuts discovery arguments. Borrowing the IRS, the trustee points to a collection window open on the petition date and running to June 14, 2031. The majority view puts both transfers in play; Vaughan puts neither. The 2017 tax predates both transfers, but the 2018 tax accrued at year-end, so for that slice only § 56-10-18 theories work. The children’s real fight is whether their mother was insolvent in 2018. The trustee must sue by February 2, 2028.

Route	How far back	What the trustee must show	Main defenses
11 U.S.C. § 548	2 years before the petition	Actual intent, or too little value plus insolvency or similar	Good faith and value (§ 548(c))
NM UVTA actual intent, § 56-10-18(A)(1)	4 years, or 1 year after discovery if later	A private creditor; intent pleaded under Rule 9(b)	Good faith and reasonably equivalent value (§ 56-10-22(A))
NM UVTA constructive, §§ 56-10-18(A)(2), 56-10-19	4 years, no discovery rule	No reasonably equivalent value plus insolvency or similar	Value given; § 544(b)(2) for qualifying charitable gifts
IRS as triggering creditor, 26 U.S.C. § 6502	10 years from assessment	Allowable IRS claim, timely assessment, period open at filing, plus a UVTA claim	Vaughan; no proof of claim; expired period; merits

Frequently Asked Questions

Did the Supreme Court in Miller end the IRS golden creditor theory?

No. Miller held only that a trustee cannot use § 544(b) and state law to recover a payment made to the IRS itself. It never mentions § 6502.

Must a New Mexico bankruptcy judge follow In re Vaughan?

No. One bankruptcy judge’s decision persuades others but does not bind them. Vaughan is still the only D.N.M. ruling, and the Tenth Circuit has not spoken.

Can a trustee use the IRS’s ten years if the IRS never filed a claim?

Not in the Delaware court that decided J&M Sales, which required a proof of claim. The debtor or trustee can file one for the IRS, though.

Does an IRS installment agreement stop the ten-year clock?

Not while it is in effect. A pending installment request, a pending offer in compromise or an earlier bankruptcy case does suspend it.

Are tithes paid to a New Mexico church at risk?

Mostly not. An individual’s gifts within 15 percent of gross annual income, or consistent with past giving, are protected from constructive-fraud claims. Gifts made to hide money from creditors are not.

How North Star Law Firm Can Help

North Star Law Firm defends transferees in clawback actions and advises Chapter 7 debtors on what a trustee may pursue. Because the predicate is a tax claim, the firm also tests assessment and collection dates through its tax defense practice.

Phillip Zagotti, JD/CPA, is admitted to the U.S. District Court and Bankruptcy Court for the District of New Mexico and represents taxpayers before the IRS and the U.S. Tax Court. The firm works alongside New Mexico-licensed counsel on state-law questions. If a trustee wants back money you received more than four years ago, contact North Star Law Firm.

She owns 20 percent of a Taos LLC that runs a small inn, and the operating agreement gives her personally the exclusive right to run its restaurant. The two managing members locked her out anyway and leased the space to their own company. Weeks after she sued them in state court, the LLC filed Chapter 11 in the U.S. Bankruptcy Court for the District of New Mexico, and the managers’ lawyer wrote that her lawsuit now belongs to the bankruptcy estate.

That letter is often half right. Which claims stay hers decides who controls the case and whether a plan injunction can shut her out, and New Mexico law on the question is thinner than owners expect.

Who owns an LLC member’s lawsuit once a New Mexico LLC files bankruptcy?

The estate takes “all legal or equitable interests of the debtor in property as of the commencement of the case” under 11 U.S.C. § 541(a)(1), and lawsuits are property. A claim the LLC could bring against its managers goes to the estate; a claim the member holds in her own right does not. Butner v. United States, 440 U.S. 48, 55 (1979), holds that “Property interests are created and defined by state law,” and Sender v. Simon, 84 F.3d 1299 (10th Cir. 1996), applies that to causes of action: state law decides whether a claim belongs to the debtor.

Pressing an estate-owned claim can be an act “to exercise control over property of the estate,” barred by 11 U.S.C. § 362(a)(3), even against the managers. The bankruptcy judge decides ownership; the Tenth Circuit Bankruptcy Appellate Panel reversed a court that left it to a state judge in In re Hafen, 616 B.R. 570 (B.A.P. 10th Cir. 2020).

Her stake is narrow. “A member has no interest in an item of limited liability company property” (NMSA 1978, § 53-19-29(A)), and her own creditors can reach her interest only by charging order under § 53-19-35. That equity sits behind every creditor, so her leverage lies in the agreement’s personal promises.

How does New Mexico law decide whether an LLC member’s claim is direct or derivative?

The Limited Liability Company Act, NMSA 1978, § 53-19-1 et seq., has no member derivative-suit provision; § 53-19-58 by default requires a vote of non-adverse members before a member sues in the LLC’s name. Judge Jacobvitz noted the gap in In re Patel, Adv. No. 10-1200 J (Bankr. D.N.M. 2012), citing § 53-19-65(B), which supplements the Act with legal principles “including such principles applicable to corporations and their owners.” A 2023 bill to adopt the Revised Uniform LLC Act died.

So corporate law fills in. Marchman v. NCNB Texas National Bank, 120 N.M. 74 (1995), bars a shareholder suit over a corporate injury unless the wrongdoer owed the shareholder “a special duty, such as a contractual duty,” or the shareholder “suffered an injury separate and distinct from that suffered by other shareholders.” Clark v. Sims, 2009-NMCA-118, 147 N.M. 252, relaxed that for close corporations with an ALI test that asks whether a direct suit would prejudice creditors.

I found no New Mexico appellate decision applying either case to an LLC, and none citing Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004). Tooley asks who suffered the harm and who gets the recovery, and it disapproved the “special injury” idea Marchman’s second exception resembles. The Second Circuit applied Tooley in Little Hearts Marks Family II L.P. v. Carter, 130 F.4th 272 (2d Cir. 2025) because New York’s intermediate courts had adopted it. Predicting New Mexico’s rule from its lower courts and the weight of authority, as Wade v. EMCASCO Ins. Co., 483 F.3d 657 (10th Cir. 2007), directs, I expect the bankruptcy court here would start from Marchman and Clark and treat Tooley as support.

Can a Chapter 11 plan injunction wipe out a member’s claims against the managers?

Only the estate’s claims. Section 1123(b)(3) lets a plan settle estate claims or keep them for “a representative of the estate appointed for such purpose,” the basis for litigation trusts, and § 1141(a) binds members who voted no. Releasing her own claims against the managers without consent is different, and Harrington v. Purdue Pharma L.P., 603 U.S. 204 (2024) held the Code does not allow it. The Tenth Circuit had refused a similar injunction in In re Western Real Estate Fund, Inc., 922 F.2d 592 (10th Cir. 1990), because it effectively released a nondebtor.

Purdue left open what counts as consent, and I found no Tenth Circuit or District of New Mexico ruling on opt-out ballots since, so ignoring a ballot is risky. The larger trap is labels. In Little Hearts the sorting came after confirmation. The fiduciary claims against the managing member were enjoined as derivative while the member’s own operating-agreement claims survived, and those went back to the bankruptcy court to address jurisdiction and abstention first, the subject of the firm’s post on mandatory abstention and remand.

Is a “direct” claim always the better result for a frozen-out member?

No, and here I read Little Hearts differently from most summaries. Its direct claims ran against a co-member and its owner, not the debtor. If the LLC itself made the promise, the direct claim is an unsecured claim paid in plan dollars, and the debtor can reject the promise under 11 U.S.C. § 365(a), which turns it into a prepetition damages claim (§§ 365(g)(1), 502(g)(1)), as the firm’s post on rejecting a bad contract explains.

A derivative recovery pays creditors first, but it is often the bigger claim, and a trustee may sell it under § 363(b)(1) or place it in a trust the member helps fund for a share of collections. Little Hearts also noted that a direct recovery may shrink the member’s share of any fiduciary recovery.

How would a Taos restaurant member’s claims sort out in the New Mexico bankruptcy court?

An illustrative example with invented figures: four members own a Taos LLC with a 22-room inn. Elena holds 20 percent, and the operating agreement gives her the exclusive right to operate the restaurant through 2031, which the other members promise to honor. In March 2026 the two managing members, holding 60 percent, lock her out and lease the space to their own company at $900 a month; fair rent is $2,000. The LLC files Chapter 11 on March 1, 2027, owing the bank $2.4 million and trade creditors $310,000.

The cheap lease costs the LLC $13,200 over the year, and the managers’ company keeps about $95,000 in restaurant profit. Both harms fall on the company, and § 53-19-16(D) makes managers hold as trustee for the LLC any benefit from using its property, so that $108,200 claim is derivative and goes to creditors first. Elena’s lost profits, say $150,000, rest on a contractual duty owed to her alone, so her claim against the managers is direct and needs her consent to release. Against the LLC, the same claim at a 20 percent plan dividend is worth $30,000. The lost value of her 20 percent is a closer call, but with creditors unpaid I would expect a derivative ruling despite Clark.

What should a frozen-out member do before the plan is confirmed?

A creditor scheduled as disputed, contingent, or unliquidated must file a proof of claim under Fed. R. Bankr. P. 3003(c)(2) or lose voting and distribution rights. Under § 1109(b) she can be heard on any issue, including release language, and should demand a carve-out for her direct claims. Managers running the debtor will not sue themselves; § 1104(a)(1) permits a trustee for “dishonesty” or “gross mismanagement” by current management. A § 362(d)(1) motion or comfort order protects a continued suit in Taos.

A cheap settlement of the derivative claim needs approval under Fed. R. Bankr. P. 9019, on notice to creditors, and she can object. Abandonment under 11 U.S.C. § 554(a) generally returns the claim to the debtor and the same managers. Appeals are limited to persons “directly and adversely affected pecuniarily” (Holmes v. Silver Wings Aviation, Inc., 881 F.2d 939 (10th Cir. 1989)), so a member who is also a creditor or bidder stands on firmer ground.

Claim in the Taos example	Who owns it	Where a recovery goes	Member’s move
Below-market lease and diverted profit	Estate (derivative)	Creditors first	Seek a trustee or bid
Managers’ breach of her exclusive-use promise	Member (direct)	Member	Carve-out; opt out
LLC’s breach of the same promise	Member, as creditor	Plan dividend	Proof of claim; watch for rejection
Lost value of her 20 percent	Likely the estate	Creditors first	Treat as derivative unless Clark fits

Frequently Asked Questions

Can I keep suing the managers after the LLC files Chapter 11?

Claims personal to you generally are not estate property, but overlapping claims may be. The bankruptcy court decides, so ask it for stay relief or a comfort order first.

Has New Mexico adopted the Delaware Tooley test for LLC member claims?

Not that I could find. New Mexico courts use Marchman’s two exceptions, which Clark v. Sims relaxed for close corporations, and the LLC Act points courts to corporate principles.

Does a plan injunction against estate claims bar all my claims against the managers?

No. It reaches only claims the estate owns, and after Purdue Pharma a plan cannot release your own claims against nondebtors without consent. Read the ballot, because consent is still unsettled.

If my operating-agreement claim is direct, will it be paid in full?

Only if it runs against someone who can pay. Against the managers personally it keeps full value; against the bankrupt LLC it is an unsecured claim paid at the plan’s rate.

Can I buy the estate’s claim against the managers?

Often. A trustee can sell litigation after notice and a hearing, and a plan can move claims into a trust. A member who outbids the settlement value can end up controlling the case.

How North Star Law Firm Can Help

North Star Law Firm’s bankruptcy practice advises New Mexico LLC members on proofs of claim, plan objections, and claim purchases when a company files Chapter 11 or Subchapter V.

Phillip Zagotti, JD/CPA, is admitted to the U.S. District Court and Bankruptcy Court for the District of New Mexico and represents taxpayers before the IRS and the U.S. Tax Court. The firm works alongside New Mexico-licensed counsel on state-law questions. If you have been frozen out of a New Mexico LLC that is now in bankruptcy, contact North Star Law Firm.

The envelope reaches a Roswell office in late September: a summons and an adversary complaint from the Chapter 7 trustee of an oilfield services company that shut down last spring. The defendant is a small consulting LLC owned by the former owner’s brother-in-law (his wife’s brother), and the trustee wants $180,000 in payments undone and returned. The first question is always the same: does the trustee have a case, or just a theory?

That depends on what the complaint says. In February 2026 a New York bankruptcy court dismissed a trustee’s conclusory complaint against a produce supplier, mostly on condition, and gave the trustee 21 days to replead (Mendelsohn v. Dole Fresh Fruit Co. (In re Barnett Corp.), Adv. No. 8-24-08121-AST (Bankr. E.D.N.Y. Feb. 13, 2026)). Here is how the same fight looks in the District of New Mexico.

What happens in the first 30 days after a bankruptcy trustee lawsuit in New Mexico is served?

Under Fed. R. Bankr. P. 7012(a), the answer is due 30 days after the summons was issued, not after you received it. Rule 7004 allows service by first-class mail deposited within 7 days of issuance. A summons issued September 21 means an answer due October 21.

The alternative is a Rule 12(b)(6) motion to dismiss. Under Fed. R. Civ. P. 12(a)(4)(A), the answer then comes due 14 days after the court denies the motion, and Wagner v. Pruett (In re Vaughan Co., Realtors), Adv. No. 11-1185 J (Bankr. D.N.M. Aug. 2, 2012) held that a partial motion suspends the deadline for every count.

The complaint may change. Fed. R. Civ. P. 15(a), applied through Rule 7015, lets the trustee amend once within 21 days after your motion is served, and leave comes freely after that. In Montoya v. Akbari-Shahmirzadi, Adv. No. 13-01035-t (Bankr. D.N.M. Nov. 14, 2016), Judge Thuma kept a thin count alive but ordered a second amended complaint stating whether it rested on § 548, § 544, or both.

Why does the trustee plead New Mexico’s Uniform Voidable Transactions Act on top of the Bankruptcy Code?

Reach. 11 U.S.C. § 548(a)(1) covers transfers within 2 years before the petition. Section 544(b)(1) lets the trustee use any avoidance right a real unsecured creditor holds under “applicable law,” here the Uniform Voidable Transactions Act, NMSA 1978, §§ 56-10-14 to -29, as rewritten in 2015. Actual intent is § 56-10-18(A)(1); the constructive claims are § 56-10-18(A)(2) and § 56-10-19(A).

Under § 56-10-23, those claims reach back four years; an actual-intent claim may instead run one year after the transfer “was or could reasonably have been discovered,” if later. If the state period was still open on the petition date, Pruett says the trustee then gets the § 546(a) window, generally two years after the order for relief.

Some trustees borrow the IRS’s 10-year collection period in 26 U.S.C. § 6502 whenever the IRS holds an unsecured claim. Most courts that have ruled allow it. This district does not. In Wagner v. Ultima Homes, Inc. (In re Vaughan Co., Realtors), 498 B.R. 297 (Bankr. D.N.M. 2013), Judge Jacobvitz held that the government’s immunity from state limitation periods does not pass to a trustee, and that the discovery rule asks when a creditor could have found the transfer. I found no Tenth Circuit or BAP ruling either way.

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What must a fraudulent transfer complaint in New Mexico plead under Rule 9(b)?

Fed. R. Bankr. P. 7009 imports Fed. R. Civ. P. 9(b): fraud must be stated “with particularity,” though intent “may be alleged generally.” The Tenth Circuit wants the “time, place and contents of the false representation, the identity of the party making the false statements and the consequences thereof.” Koch v. Koch Industries, Inc., 203 F.3d 1202, 1236 (10th Cir. 2000).

I found no published Tenth Circuit or BAP decision squarely applying Rule 9(b) to a § 548(a)(1)(A) claim. The New Mexico bankruptcy court applies it anyway. Pruett used Koch for claims under § 548(a)(1) and § 56-10-18(A)(1) and, while giving an outsider trustee some slack, still required facts tying the defendant to the scheme. Standing alone, the counts were “a formulaic recitation of the statutory elements,” saved only by incorporated paragraphs naming each payment. Akbari likewise said actual fraud claims “must be plead with specificity.”

Trustees plead the debtor’s intent through badges of fraud, the eleven listed in § 56-10-18(B), and Montoya v. Ferguson (In re Motiva Performance Engineering, LLC), Adv. No. 21-1026-t (Bankr. D.N.M. Oct. 7, 2022) applied the same badges under both statutes.

How much must the trustee allege about value and insolvency?

Constructive claims need no intent, so the plausibility test of Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009) governs, and “threadbare recitals” fail it. New Mexico’s insolvency test in § 56-10-16 is a fair-value balance sheet, with a presumption against a debtor generally not paying debts as they come due.

The trustee carries the value burden, and paying a real debt is generally value. In Montoya v. Goldstein (In re Chuza Oil Co.), Adv. No. 20-1008-t (Bankr. D.N.M. July 16, 2021), an oil company’s note payments to the owner’s mother survived trial. The family had put about $395,663 back in, and insider status plus insolvency, with “no other indicia of fraud,” proved no intent.

Which clawback defenses work for a New Mexico defendant?

Good faith for value comes first. A transferee that “takes for value and in good faith” keeps what it paid for under § 548(c), to the extent of value given; New Mexico’s counterpart is § 56-10-22(A) and (D), with the burden on the defendant. Pruett notes the Tenth Circuit judges § 548(c) good faith objectively, by what a diligent inquiry would have revealed.

Next: who actually got the money? Section 550 makes the initial transferee strictly liable but protects later transferees who took for value, in good faith, and without knowledge. The Tenth Circuit requires “dominion over the money,” so a mere conduit is not a transferee. Bailey v. Big Sky Motors, Ltd. (In re Ogden), 314 F.3d 1190 (10th Cir. 2002). In Montoya v. Goldstein (In re Chuza Oil Co.), Adv. No. 20-1007-t (Bankr. D.N.M. Feb. 12, 2021), the owner’s 17-year-old daughter, who deposited three checks into her father’s accounts, won on that defense, though the court said it “should have been front and center” in her answer.

Deadlines in § 546(a) and § 550(f) are hard limits. But if the debtor ran a Ponzi scheme, intent is presumed, as the Tenth Circuit holds under Utah’s uniform act, Klein v. Cornelius, 786 F.3d 1310, 1320 (10th Cir. 2015); Hafen v. Howell, No. 23-4116 (10th Cir. Nov. 15, 2024), and Pruett applied it under § 548 and New Mexico law. I found no New Mexico appellate ruling on it.

How would a Roswell trustee plead the brother-in-law’s consulting fees?

An illustrative case: the company, a corporation, wired the LLC $15,000 a month from March 2025 through February 2026, $180,000 in all, and filed Chapter 7 on May 4, 2026. A voluntary filing is the order for relief under § 301(b), so the § 546(a) deadline is May 4, 2028.

Every wire falls inside § 548’s two years. Expect § 548(a)(1)(A) and (B) counts, mirror counts under §§ 56-10-18 and 56-10-19(A), and a § 550 count against the LLC and the brother-in-law. For intent, Rule 9(b) asks for each wire’s date, amount, approver, invoice description, and badges. The brother-in-law is a “relative” under 11 U.S.C. § 101(45) and § 56-10-15, so he is an insider under § 101(31)(B)(vi) and § 56-10-15(H)(2)(f). Both definitions say “includes,” and the trustee will argue the LLC counts too.

The defense answers the § 56-10-18(B) checklist with documents: an engagement letter, field reports, a market rate, open entries in the books, no lawsuit pending when the wires went out, and bank records showing the LLC kept the money. I see these cases turn most often on whether the consulting left a paper trail.

Count	Reach-back	Pleading standard	Main defenses
§ 548(a)(1)(A) actual intent	2 years	Rule 9(b), as D.N.M. applies it	Good faith for value, § 548(c)
§ 548(a)(1)(B) constructive	2 years	Twombly and Iqbal plausibility	Reasonably equivalent value; solvency
NMSA § 56-10-18(A)(1) via § 544(b)	4 years, or 1 year after discovery	Rule 9(b)	§ 56-10-22(A) good faith; limitations
NMSA §§ 56-10-18(A)(2), 56-10-19(A)	4 years	Plausibility	Value; solvency under § 56-10-16
§ 550 recovery	§ 546(a) and § 550(f) deadlines	Facts on who received the funds	Mere conduit; later-transferee good faith

Frequently Asked Questions

How long do I have to answer a trustee’s adversary complaint in New Mexico?

Thirty days after the summons was issued, under Rule 7012(a). Check the issue date on the summons, not the postmark. A timely Rule 12(b) motion postpones the answer until 14 days after the court rules.

Can a trustee recover payments older than two years?

Yes. Through § 544(b), the trustee can use New Mexico’s four-year reach-back under § 56-10-23. The New Mexico bankruptcy court has rejected stretching that to the IRS’s 10-year collection period.

Does Rule 9(b) apply to constructive fraudulent transfer claims?

Generally not. Those claims involve no intent to deceive, so courts test them for plausibility under Twombly and Iqbal. Bare claims of no value or insolvency still fail.

I only passed the money along to someone else. Am I liable?

Possibly not. The Tenth Circuit treats a party without dominion and control over the funds as a conduit rather than an initial transferee. Raise the defense in your answer.

Is a relative automatically liable for payments from a failed family business?

No. Insider status is one badge of fraud, and the New Mexico bankruptcy court has found no actual intent where insider status and insolvency were the only badges. Value the relative gave also counts.

How North Star Law Firm Can Help

North Star Law Firm defends vendors, relatives, and former owners sued by bankruptcy trustees through its preference and clawback defense practice, and its bankruptcy practice includes Chapter 7 cases. Owners who took LLC distributions should also read how creditors claw them back.

Phillip Zagotti, JD/CPA, is admitted to the U.S. District Court and Bankruptcy Court for the District of New Mexico and represents taxpayers before the IRS and the U.S. Tax Court. The firm works alongside New Mexico-licensed counsel on state-law questions. If a trustee’s complaint has landed on your desk, contact North Star Law Firm.

Two contractors who rebuilt a commercial building off Cerrillos Road in Santa Fe have waited two years for trial. Six days before the setting, the LLC that owns the building files a Subchapter V petition, and the automatic stay freezes the lawsuit. The contractors call it a bad faith bankruptcy filing and want the case thrown out.

A June 2026 Washington, D.C. bankruptcy ruling, In re JPK Newco, LLC, kept a similar case alive under Carolin Corp. v. Miller, 886 F.2d 693 (4th Cir. 1989), which permits dismissal only if reorganization is hopeless on objective grounds and the debtor’s motive was improper. New Mexico sits in the Tenth Circuit, where no court has adopted that two-part test and every circumstance is weighed together.

Can a creditor get a New Mexico bankruptcy dismissed for bad faith?

Yes, though the statute never says “bad faith.” Under 11 U.S.C. § 1112(b)(1), once a party shows cause, the court must convert a Chapter 11 case to Chapter 7 or dismiss it, whichever is better for creditors and the estate, unless appointing a trustee or examiner under § 1104(a) would serve them better. Section 1112(b)(4) lists sixteen kinds of cause. Bad faith is not among them, but Hall v. Vance, 887 F.2d 1041 (10th Cir. 1989), holds the list is not exhaustive. In re Pacific Rim Investments, LLP, 243 B.R. 768 (D. Colo. 2000), treats a bad faith petition as cause, and Judge Thuma followed it in In re Jet Sales West LLC, No. 20-12179-ta11 (Bankr. D.N.M. Dec. 15, 2021).

The remedy matters: dismissal sends everyone back to state court, while conversion hands the building to a Chapter 7 trustee.

What test does the Tenth Circuit use for a bad faith bankruptcy filing?

None, formally. Its leading published decisions on bad faith Chapter 11 petitions are sanctions appeals. In Jones v. Bank of Santa Fe (In re Courtesy Inns, Ltd.), 40 F.3d 1084 (10th Cir. 1994), a one-asset motel company filed the day before a foreclosure sale; in Udall v. FDIC (In re Nursery Land Development, Inc.), 91 F.3d 1414 (10th Cir. 1996), an entity took a quitclaim deed the day before the FDIC’s sale and filed a handwritten petition the same day, the pattern lawyers call new debtor syndrome. The court listed seven “classic badges” of bad faith, including a single asset, a single creditor, no employees, and no reasonable possibility of reorganization.

Futility is one badge among seven, not a separate hurdle. In Pacific Rim, the debtor owned one Denver office building and filed three days before a foreclosure trial; the bankruptcy judge found equity and a proposed plan and dismissed anyway. Affirming, the district court said bad faith is judged on all the circumstances together, with no factor dispositive, and an ability to reorganize does not bar dismissal. The Tenth Circuit BAP took the same approach in In re Muth, BAP No. CO-13-055 (10th Cir. BAP May 1, 2014) (unpublished).

Put plainly, a New Mexico creditor need not prove objective futility as its own element. Jet Sales West weighed eight factors, including whether the problem is a two-party dispute the pending state case could resolve.

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Is it bad faith to file bankruptcy to stop a lawsuit in New Mexico?

Not by itself. In In re LTL Management, LLC, 64 F.4th 84 (3d Cir. 2023), dismissed for lack of financial distress, a footnote borrowed a Seventh Circuit line that seeking an advantage from bankruptcy is not bad faith, since that is why anyone files. The Tenth Circuit has said nothing comparable, and in-circuit rulings point both ways. Pacific Rim affirmed dismissal where the debtor was running from discovery sanctions and a trial date, conduct the judge likened to forum shopping. Jet Sales West gave a tactical motive slight weight because the Roswell debtor also needed to stop El Paso from seizing its jets.

In my experience the deciding question is what else the bankruptcy accomplishes. When the plaintiffs are the only real creditors, it starts to look like Pacific Rim. Chief Judge Jacobvitz struck a cautionary note in In re Golden, No. 25-10646-j13 (Bankr. D.N.M. Mar. 12, 2026), a Chapter 13 stay ruling, saying the doctrine should be used sparingly.

How fast does a Chapter 11 dismissal for cause motion move?

Fast. Section 1112(b)(3) requires the hearing to begin within 30 days after the motion is filed and a ruling within 15 days after it starts, absent the movant’s express consent to a set continuance or compelling circumstances.

The debtor’s escape hatch, § 1112(b)(2), requires specifically identified unusual circumstances, a reasonable likelihood of timely confirmation, and a justified, curable lapse. It fits a late report better than a bad faith petition; the Third Circuit refused to apply it in LTL.

Pacific Rim also held bad faith is cause for stay relief under § 362(d)(1), and under § 362(e)(1) the stay lapses 30 days after the request unless the court continues it after a hearing. A trustee motion is a middle path. In In re New Mexico Terminal Services, LLC, No. 25-11291-j11 (Bankr. D.N.M. Mar. 13, 2026), an Albuquerque single asset real estate case, the court denied a bank’s § 1104 motion but promised a trustee if the debtor missed plan deadlines.

Does Subchapter V change the bad faith analysis in New Mexico?

I found no Tenth Circuit, BAP, or District of New Mexico opinion applying a different bad faith test in Subchapter V. What changes is the clock. Section 1189(b) requires the debtor’s plan within 90 days after the order for relief, extended only for circumstances the debtor should not justly be held accountable for. Section 1185(a) lets the court remove a dishonest or mismanaging debtor in possession, and § 1183(b)(5) lets the Subchapter V trustee run the business. Creditors can contest feasibility at confirmation under § 1191.

Eligibility is often the stronger attack. Section 1182(1) limits Subchapter V to a small business debtor under § 101(51D), capped at $3,424,000 of noncontingent, liquidated debt since April 1, 2025, per a February 2025 Federal Register notice. Disputed claims are their own fight; see the firm’s post on Subchapter V eligibility and contingent debt. The definition also excludes anyone whose primary activity is owning single asset real estate. Congress passed H.R. 7730 on September 28, 2026 to restore a $7,500,000 cap; as of October 9 it awaited the President’s signature, and it keeps the real estate exclusion. Objections to the designation go under Fed. R. Bankr. P. 1020(b), within 30 days after the meeting of creditors concludes.

What would the creditors do if a Santa Fe LLC files Subchapter V six days before trial?

Every name, number and date here is hypothetical. Cerrillos Commercial LLC owns one Santa Fe building worth about $4.2 million, leased to five tenants, with a $2.6 million bank mortgage. Two contractors claim $900,000 and $450,000, disputed, with trial set in Santa Fe County district court for Monday, November 16, 2026. The LLC files on Tuesday, November 10, which under § 301(b) is the order for relief.

On November 16 the contractors move to dismiss and for stay relief. The court must open the dismissal hearing by Wednesday, December 16 and rule by Thursday, December 31; the stay motion hits its 30-day mark December 16. If the creditors’ meeting concludes December 9, a Rule 1020(b) objection is due January 8, 2027.

The bad faith factors split, so eligibility may be the better card. If the disputed claims are unliquidated, debt is about $2.6 million; if they count, $3.95 million exceeds the cap. Either way, if rents are substantially all of the LLC’s income and it does nothing but operate the building, it is single asset real estate and outside Subchapter V. In ordinary Chapter 11, the bank gains the § 362(d)(3) clock: by February 8, 2027, or 30 days after a single asset ruling if later, the LLC must file a plan with a reasonable possibility of confirmation or begin monthly interest at the nondefault contract rate on the value of the bank’s interest. A surviving Subchapter V plan is due that same day.

Creditor tool	Source	Clock	Possible result
Motion to dismiss or convert	11 U.S.C. § 1112(b)	Hearing within 30 days, ruling 15 days later	Dismissal, conversion, or a trustee
Relief from stay	§ 362(d)(1), (e)(1)	Stay lapses 30 days after request unless continued	State court trial resumes
Subchapter V designation objection	Rule 1020(b); § 101(51D)	30 days after the creditors’ meeting ends	Ordinary Chapter 11
Single asset real estate relief	§ 362(d)(3)	90 days after petition, or 30 days after the ruling	Plan or monthly interest, or stay relief
Remove debtor in possession	§ 1185(a); § 1104(a)	No fixed deadline	Trustee operates the business

Frequently Asked Questions

Does the Tenth Circuit follow the Carolin two-part test?

No published Tenth Circuit decision adopts it. The circuit treats lack of a realistic reorganization as one badge among several, and courts within it weigh every circumstance together.

Can a New Mexico business file bankruptcy to stop a lawsuit?

Yes, if the case also serves a real reorganization purpose. A filing aimed only at escaping a trial date, with the plaintiffs as the only meaningful creditors, invites a motion to dismiss.

How long does a motion to dismiss a Chapter 11 case take in New Mexico?

The hearing must start within 30 days after filing, with a ruling 15 days later. A continuance the movant agrees to, or compelling circumstances, can stretch it.

Can a one-building LLC use Subchapter V?

Often not. The small business debtor definition excludes a person whose primary activity is owning single asset real estate. An LLC running its own operating business in the building may still qualify.

Is the Subchapter V debt limit $7.5 million again?

Not yet. The cap is $3,424,000 today. Congress passed H.R. 7730 to restore $7,500,000, but as of October 9, 2026 it was unsigned, and it would apply only to cases filed after enactment.

How North Star Law Firm Can Help

North Star Law Firm represents business owners and creditors in New Mexico Chapter 11 cases, including dismissal, stay relief, and eligibility disputes in Subchapter V, as part of its bankruptcy practice.

Phillip Zagotti, JD/CPA, is admitted to the U.S. District Court and Bankruptcy Court for the District of New Mexico and represents taxpayers before the IRS and the U.S. Tax Court. The firm works alongside New Mexico-licensed counsel on state-law questions. If a bankruptcy petition has stopped your lawsuit, or a creditor is calling your filing bad faith, contact North Star Law Firm.

A Chapter 7 case filed in Los Angeles in February 2011 is still open in 2026. The debtor lost his discharge, a judgment creditor fought his homestead exemption for most of a decade, the debtor died, and the creditor then sued the trustee personally. On May 7, 2026, the en banc Ninth Circuit revived that suit in Phillips v. Goldman (In re Gilman), 176 F.4th 1152.

So how long does Chapter 7 take in New Mexico? Usually, the discharge arrives three to four months after the petition. A case runs long only when one of four clocks is reset, missed, or left unattended: the exemption objection window, the discharge deadlines, the trustee’s administration, and the rules for holding a trustee to account.

What did the en banc Ninth Circuit decide in Phillips v. Goldman?

The creditor, attorney Tammy Phillips, alleged that trustee Amy Goldman let two properties deteriorate and never went after rent the debtor was collecting. The lower courts held her immune from claims of ordinary negligence. The en banc court reversed. Judge Nguyen’s opinion separates two doctrines. Quasi-judicial immunity is absolute, but it reaches only functions “essential to the authoritative adjudication of private rights to the bankruptcy estate.” Derived immunity covers court-approved acts within the trustee’s authority, if interested parties had notice and her disclosure was candid. Collecting rent and preserving buildings is property-manager work, and no order approved the inaction, so neither applied on that record. Fault level is not the test, and a trustee without immunity can be personally liable for negligence under Mosser v. Darrow, 341 U.S. 267 (1951). Goldman’s certiorari petition, No. 26-315, is pending, with a response due October 13, 2026.

How long does Chapter 7 take in New Mexico when nothing goes wrong?

Take a Las Cruces nurse filing on Monday, November 2, 2026. Under Fed. R. Bankr. P. 2003(a) the meeting of creditors comes 21 to 40 days after the order for relief (here, the filing), between November 23 and December 12. Say it is held and concluded on Thursday, December 3.

Exemption objections fall due 30 days later, on Saturday, January 2, 2027, which Rule 9006(a)(1)(C) rolls to Monday, January 4. Discharge objections and § 523(c) complaints are due 60 days after the first date set for the meeting: February 1, 2027. The judiciary’s Chapter 7 overview says the discharge generally follows 60 to 90 days after that first date.

Her house is worth $340,000 with a $175,000 mortgage. The $150,000 homestead in NMSA 1978, § 42-10-9 leaves $15,000 exposed, less than a sale would cost, so the trustee reports no assets to administer. That figure is as enacted in 2023; § 42-10-14 calls for biennial adjustments from July 1, 2025, and no published adjustment was located.

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Why is the 30-day exemption deadline the one that bites?

Under 11 U.S.C. § 522(l), listed property is exempt “unless a party in interest objects.” Rule 4003(b)(1) allows 30 days after the later of the meeting’s conclusion, an amendment to the list, or a supplemental schedule, and an extension for cause only “on a party in interest’s motion filed before the time to object expires.” In Taylor v. Freeland & Kronz, 503 U.S. 638 (1992), a trustee who missed the window could not contest an exemption that had no colorable basis. The window stretches when a trustee continues the meeting under NM LBR 2003-1 or a debtor amends Schedule C.

The local rules also reshape Schwab v. Reilly, 560 U.S. 770 (2010), which let trustees rely on the dollar value a debtor assigns and suggested claiming “100% of FMV” to keep a whole asset. NM LBR 4003-1(b) and (c) require a dollar figure and cap the allowed exemption at it, even if the property proves worth more. New Mexico has not opted out of the federal list, so debtors choose between § 522(d) and state law. In In re Romo, No. 24-10185-j7 (Bankr. D.N.M. Feb. 27, 2025), Judge Jacobvitz overruled a creditor’s and the trustee’s objections and allowed an Albuquerque couple up to $150,000 each. Once an exemption stands, Law v. Siegel, 571 U.S. 415 (2014) bars surcharging it.

What can stop or revoke the discharge?

Rule 4004(a) and Rule 4007(c) allow extensions only on a motion filed before the 60 days run. Kontrick v. Ryan, 540 U.S. 443 (2004) held these are claim-processing rules, so a debtor who litigates the merits without raising untimeliness forfeits the point.

The grounds in 11 U.S.C. § 727(a) concern conduct, such as concealing property or swearing falsely. Gilman lost his discharge in 2016 on a concealment finding. Revocation for knowingly failing to report or turn over estate property may be sought until the later of one year after discharge or the case’s closing under § 727(e)(2), so an open case keeps that exposure alive. Unlisted claims are the usual trigger; see the firm’s post on judicial estoppel after Keathley.

What keeps a no-asset case open, and what brings a closed one back?

Section 704(a)(1) tells the trustee to “close such estate as expeditiously as is compatible with the best interests of parties in interest.” Section 554 provides abandonment on notice, on a party’s request, or automatically at closing for scheduled property not administered; unscheduled property stays in the estate. NM LBR 6007-1 lets a creditor pair stay relief on a home or car with abandonment.

In Gilman, a June 2011 no-asset report sat until the creditor’s 2020 motion; the trustee then withdrew it and abandoned the properties in 2021. Rule 1016(a) kept the case going after the debtor died. A closed case may be reopened under § 350(b) “to administer assets, to accord relief to the debtor, or for other cause,” by motion under Rule 5010.

Can a creditor sue a New Mexico Chapter 7 trustee personally?

Permission comes first. Satterfield v. Malloy, 700 F.3d 1231 (10th Cir. 2012) held that the Barton doctrine “precludes suit against a bankruptcy trustee for claims based on alleged misconduct in the discharge of a trustee’s official duties absent approval from the appointing bankruptcy court.” Pleading an individual-capacity tort does not escape it. The exceptions are narrow: ultra vires acts, and suits under 28 U.S.C. § 959(a) about a trustee actually carrying on a business.

The liability standard also differs. Sherr v. Winkler, 552 F.2d 1367 (10th Cir. 1977) read Mosser to make a trustee “liable personally only for acts determined to be willful and deliberate in violation of his duties” and “liable, in his official capacity, for acts of negligence.” Judge Thuma applied Sherr in In re Hunter, 553 B.R. 866 (Bankr. D.N.M. 2016), dismissing a Deming couple’s negligence claim against a Chapter 13 trustee over a $1,798.93 tax underpayment. Goldman’s petition cites Sherr as one side of a circuit split. On timing, the Gilman bankruptcy court used California’s four-year catch-all; New Mexico’s residual period in NMSA 1978, § 37-1-4 is also four years, but no published Tenth Circuit decision was located on which period governs these claims.

When is an exemption fight worth it for a creditor?

Rule 4003(c) puts the burden on the objector, which for a homestead means proof of residence and an appraisal as of the petition date under § 522(a)(2). Net of the mortgage and exemption, the Las Cruces house leaves less than sale costs. Phillips litigated the homestead for twelve years and lost. If the trustee is idle, removal “for cause” under § 324(a) is the more direct tool; Phillips’s 2020 motion got her trustee moving.

Clock	Rule	Las Cruces date	Extension	How it runs long
Exemption objection	Rule 4003(b)(1)	Jan. 4, 2027	Motion before deadline	Continued meetings, amendments
Discharge objection	Rule 4004(a)	Feb. 1, 2027	Motion before deadline	§ 727 trial, revocation
Dischargeability	Rule 4007(c)	Feb. 1, 2027	Motion before deadline	Adversary over one debt
Administration	§§ 554, 704	No-asset report	No fixed limit	Asset sales, idle reports
Suing the trustee	Satterfield, Sherr	Leave required	Limitations period	Immunity appeals

Frequently Asked Questions

How long does Chapter 7 take in New Mexico?

Most individual cases reach discharge three to four months after filing. The meeting of creditors is set 21 to 40 days after the petition, and the discharge generally follows 60 to 90 days after the first date set for that meeting unless someone objects or seeks more time. Property to sell or litigation can add months or years.

Is the New Mexico homestead exemption still $150,000?

NMSA 1978, § 42-10-9 sets $150,000, or $300,000 when the claimant’s spouse died within two years before the claim, as enacted in 2023. Section 42-10-14 calls for adjustments every two years beginning July 1, 2025, published by the Administrative Office of the Courts. No published adjustment was located, so confirm the current figure before filing.

Can a closed Chapter 7 case be reopened?

Yes. Under 11 U.S.C. § 350(b), a closed case may be reopened to administer assets, to accord relief to the debtor, or for other cause, on motion under Bankruptcy Rule 5010. Scheduled property not administered is abandoned at closing, but property never scheduled stays in the estate, which is why an unlisted lawsuit can bring a case back.

Do I need court permission to sue a bankruptcy trustee in New Mexico?

Generally, yes. In Satterfield v. Malloy, the Tenth Circuit adopted the Barton doctrine: a suit over a trustee’s official duties needs leave of the appointing bankruptcy court, even if pleaded as an individual-capacity tort and even after the case closes. Narrow exceptions cover ultra vires acts and a trustee’s operation of a business.

Does Phillips v. Goldman apply in New Mexico?

Not directly; it binds courts in the Ninth Circuit. New Mexico sits in the Tenth Circuit, where Sherr v. Winkler makes a trustee personally liable only for willful and deliberate violations of duty and treats negligence as an official-capacity matter. The pending certiorari petition, No. 26-315, asks the Supreme Court to resolve that split.

How North Star Law Firm Can Help

North Star Law Firm represents New Mexico debtors and creditors in Chapter 7 exemption, discharge, reopening, and trustee disputes. See the bankruptcy and Chapter 7 pages, and the Chapter 13 page for homeowners with equity above the exemption.

Phillip Zagotti, JD/CPA, is admitted to the U.S. District Court and the U.S. Bankruptcy Court for the District of New Mexico. See also the firm’s posts on the New Mexico exemption overhaul and the 14-day bankruptcy appeal deadline. The firm works alongside New Mexico-licensed counsel on state-law questions. To discuss a case, contact North Star Law Firm.