In re: Joseph William Sullivan

FILED
DEC 9 2014
1 NOT FOR PUBLICATION
SUSAN M. SPRAUL, CLERK
2 U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5 In re: ) BAP No. CC-14-1225-TaDKi
)
6 JOSEPH WILLIAM SULLIVAN, ) Bk. No. 8:14-bk-10711-CB
)
7 Debtor. )
______________________________)
8 )
JOSEPH WILLIAM SULLIVAN, )
9 )
Appellant, )
10 )
v. ) MEMORANDUM*
11 )
WILLIAM HARNISCH; PECONIC )
12 PARTNERS LLC; PECONIC ASSET )
MANAGERS LLC, )
13 )
Appellees. )
14 ______________________________)
15 Argued and Submitted on October 23, 2014
at Malibu, California
16
Filed - December 9, 2014
17
Appeal from the United States Bankruptcy Court
18 for the Central District of California
19 Honorable Catherine E. Bauer, Bankruptcy Judge, Presiding
________________________________
20
Appearances: Sean A. O’Keefe of O’Keefe & Associates Law
21 Corporation, PC argued for Appellant Joseph
William Sullivan; Y. David Scharf of Morrison
22 Cohen LLP argued for Appellees William Harnisch,
Peconic Partners LLC, and Peconic Asset Managers
23 LLC
__________________________________
24
Before: TAYLOR, DUNN, and KIRSCHER, Bankruptcy Judges.
25
26
*
This disposition is not appropriate for publication.
27 Although it may be cited for whatever persuasive value it may
have (see Fed. R. App. P. 32.1), it has no precedential value.
28 See 9th Cir. BAP Rule 8013-1.
 1 INTRODUCTION
2 Fifteen days after debtor Joseph Sullivan filed a
3 chapter 111 petition, Appellees, as holders of a large state
4 court judgment and related judgment liens, filed a motion to
5 dismiss the case as a bad faith filing. They contended that the
6 case was a two-party dispute and that Debtor improperly filed
7 solely to delay their collection efforts. They also argued that
8 Debtor lacked any reasonable probability of confirming a chapter
9 11 plan because Appellees would vote against it.
10 Debtor opposed the motion, supported by his declaration and
11 timely filed schedules, statement of financial affairs, and a
12 chapter 11 status report. In the status report, he outlined the
13 events leading to the filing of his petition, including
14 Appellees’ active efforts to execute on their judgment lien and
15 to seize his non-exempt assets, and stated his intent to file a
16 plan within the exclusivity period. The United States Trustee
17 did not file any papers in response to Appellees’ motion but
18 advised the bankruptcy court orally that it did not join in the
19 motion.
20 Notwithstanding the early state of the chapter 11 case and
21 the merely circumstantial nature of Appellees’ evidence, the
22 bankruptcy court granted Appellees’ motion, finding that Debtor
23 filed the case in bad faith without any possibility of confirming
24 a plan. Then, without considering or determining whether
25 dismissal or conversion of the case would be in the best
26
1
Unless specified otherwise, all chapter and section
27 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
all “Rule” references are to the Federal Rules of Bankruptcy
28 Procedure, Rules 1001-9037.
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 1 interests of creditors and the estate, the bankruptcy court
2 dismissed the case. Because we determine that the bankruptcy
3 court’s failure to consider the best interests of creditors and
4 the estate was an abuse of its discretion and further because we
5 determine that its finding of bad faith was in error on this
6 record, we REVERSE.
7 FACTS
8 Debtor filed his bare bones petition for relief under
9 chapter 11 on February 4, 2014. Eight days later he filed2 a
10 Chapter 11 Status Report and supporting declaration.
11 Chapter 11 Status Report
12 In the status report, Debtor presented his version of the
13 prepetition disputes and six years of litigation between Debtor
14 and Appellees in New York and the events immediately leading to
15 the petition. According to Debtor, he was employed until October
16 2008 as the Chief Operating Officer and Chief Compliance Officer
17 of appellees Peconic Partners, LLC and Peconic Asset Managers,
18 LLC (together, “Peconic”). He was also a member of Peconic
19 entitled to share in profits. He described Peconic as an
20 institutional investment manager and registered investment
21 adviser founded by appellee William Harnisch.
22 Disagreements arose, Debtor’s employment was involuntarily
23 terminated in late 2008, and litigation followed. Although
24
2
The status report filed as docket 17 on the bankruptcy
25 case electronic docket is not contained in the record provided by
the parties in this appeal. We have exercised our discretion to
26 take judicial notice of documents electronically filed in the
underlying bankruptcy case. See O’Rourke v. Seaboard Sur. Co.
27 (In re E.R. Fegert, Inc.), 887 F.2d 955, 957-58 (9th Cir. 1989);
Atwood v. Chase Manhattan Mortg. Co. (In re Atwood), 392 B.R.
28 227, 233 n.9 (9th Cir. BAP 2003).
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 1 Debtor recited some initial successes at the trial court level,
2 such successes were overturned on appeal and eventually Appellees
3 obtained a judgment of approximately $1.5 million that resolved
4 one of several counterclaims Appellees filed against Debtor. The
5 record contains no evidence that this judgment is
6 nondischargeable; it appears to be based exclusively on contract.
7 Debtor described the judgment as requiring that he repay to
8 Peconic a $1 million advance that Peconic made to him, with
9 interest. The judgment did not fully resolve the state court
10 litigation. Debtor stated that costs to continue litigation plus
11 entry of the judgment rendered him insolvent and that he filed
12 bankruptcy seeking a breathing spell to allow him time either to
13 reorganize his financial affairs through a plan of reorganization
14 or to effect a liquidation through a liquidating plan.
15 Debtor set forth his intent to resolve a tax issue that
16 could provide recovery of over $550,0003 for the estate; to
17 determine if and how to proceed with the remaining New York
18 litigation; and to analyze the costs and benefits to recover as
19 preferential transfers over $70,000 removed from Debtor’s bank
20 accounts by the sheriff as part of Appellees’ collection efforts
21 on the unstayed judgment and to deal with Appellees’ judgment
22 lien recorded against Debtor’s New York residence.4 Debtor also
23 stated his intent to file a plan and disclosure statement within
24
3
Debtor later increased his estimate of the potential tax
25 recovery to $850,000. When Debtor filed the status report he
already had obtained court approval to retain a CPA to pursue the
26 recovery.
27 4
Appellees filed the judgment with the New York County
Clerk 89 days prior to the petition date, and Debtor did not post
28 a bond to stop their collection efforts.
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 1 the 120 day exclusivity period.
2 Debtor described his primary assets as consisting of: a 50%
3 interest in a residence owned in New York with his wife, with a
4 market value of approximately $700,000 and subject to a mortgage
5 and Appellees’ judicial lien (combined total of $2.2 million);
6 two 401K retirement accounts he claimed as fully exempt; and
7 three vehicles owned free and clear, which he intended to claim
8 as partially exempt. He estimated the total value of his assets
9 at $749,002, exclusive of the potential tax refunds, a possible
10 employment performance bonus, and pending claims against
11 Appellees. Exclusive of the judgment, Debtor estimated total
12 unsecured claims of $217,296.
13 Six days after filing the status report, Debtor filed his
14 schedules and statement of financial affairs.
15 Schedules and Statement of Financial Condition
16 The Debtor’s summary of schedules reflects $350,000 in real
17 property assets and $397,985 in personal property assets for
18 total assets of $747,985; secured debt of $2,007,347; unsecured
19 claims of $231,036; and total liabilities of $2,238,383, which
20 Debtor identified as primarily business debt, not consumer debt.
21 Debtor’s secured debt consisted of a $498,151 mortgage secured by
22 the New York residence and the $1,509,195 judgment. His
23 scheduled unsecured debt consisted of $52,208 on four credit
24 cards; $73,192 owed to three different law firms; $600 in
25 membership dues; $27.00 in unpaid utilities; and $105,000 in
26 personal loans from two individuals (Gerard Sullivan and Thomas
27 Sullivan, apparently members of Debtor’s family).
28 In his statement of financial affairs, among other things,

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 1 Debtor disclosed $875,000 in gross income in 2013 which included
2 $675,000 that he described as a gross settlement amount; $242,639
3 in IRA distributions taken in the two years preceding bankruptcy;
4 $249,000 paid to the IRS and Franchise Tax Board in November
5 2013; the pending litigation in New York and related entry of a
6 sister state judgment in California in November 2013; and
7 multiple restraining orders, account restrictions, and apparent
8 levies on behalf of Appellees in the two months preceding the
9 bankruptcy filing. Debtor also disclosed legal retainers of
10 $222,543 paid in the one year pre-filing, $98,000 of which was
11 paid by Gerard, Joseph, or Thomas Sullivan. Of the retainers
12 paid, $42,049 was for fees incurred pre-petition.
13 The day after Debtor filed his schedules and statement of
14 financial affairs, Appellees filed their motion seeking dismissal
15 of the case.
16 The Motion to Dismiss
17 Appellees’ motion5 sought dismissal of the case under § 1112
18 on the stated grounds that: (1) Debtor filed the petition in bad
19 faith – to “delay, hinder or interfere with enforcement” of
20 Appellees’ judgment; (2) Debtor had “no reasonable probability of
21 confirming a Chapter 11 plan”; and (3) the filing was a
22 “strategic move in a two-party dispute.” Motion, Dkt. #38 at
23 6:6-9. Appellees supplied no evidence in support of their
24 contentions beyond a request that the bankruptcy court take
25 judicial notice of the record in the New York litigation which
26
5
Appellees’ only support for the motion was a declaration
27 that authenticated and attached documents consisting primarily of
documents filed by the parties at various stages of the six years
28 of litigation in New York.
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 1 documented their litigation victory but failed to evidence either
2 a judgment that would be nondischargeable or any kind of
3 inappropriate litigation conduct by Debtor.
4 Lack of a confirmable plan
5 Appellees argued that Debtor’s chapter 11 case must be
6 dismissed based on the lack of any reasonable likelihood that
7 Debtor could propose a confirmable plan of reorganization.6 They
8 argued that they would not consent to any plan that proposed less
9 than 100% payment on unsecured creditors’ claims.
10 Two-party dispute and timing of petition7
11 Appellees also contended that Debtor’s case represented a
12 typical two-party dispute and that through the bankruptcy case
13 Debtor sought to collaterally attack final rulings in New York.
14 They argued that Peconic was the creditor most impacted by any
15 proposed plan and that the New York forum, not the bankruptcy
16 court, would best and adequately protect all parties and assure a
17 just and equitable result. Appellees made no attempt to explain
18
6
Appellees based this argument on In re C-TC 9th Ave.
19 P’ship v. Norton (In re C-TC 9th Ave. P’ship), 113 F.3d 1304,
1309-10 (2nd Cir. 1997) (“a Chapter 11 petition is not filed in
20 good faith unless it serves a valid reorganizational purpose”)
(citing Marsch v. Marsch (In re Marsch), 36 F.3d 825, 828 (9th
21 Cir. 1994)).
22 7
For the balance of their arguments, and the factors
identified and analyzed, Appellees relied on Marshall v. Marshall
23 (In re Marshall), 721 F.3d 1032, 1048 (9th Cir. 2013) (in
considering bad faith as cause for dismissal, courts “may
24 consider any factors which evidence ‘an intent to abuse the
judicial process and the purposes of the reorganization
25 provisions.’”); In re Leavitt, 171 F.3d 1219, 1225 (9th Cir.
1999) (dismissal with prejudice of chapter 13 case for bad faith
26 requires consideration of whether debtor misrepresented facts or
manipulated the Bankruptcy Code, debtor’s history of filings and
27 dismissals, whether debtor “only intended to defeat state court
litigation,” whether egregious behavior is present); and
28 In re Ellsworth, 455 B.R. 904, 917-18 (9th Cir. BAP 2011) (same).
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 1 how the New York forum would protect anyone other than Appellees.
2 Misrepresentations/manipulation
3 As additional indication of Debtor’s alleged bad faith,
4 Appellees asserted that Debtor was less than forthright in his
5 filings in the bankruptcy case. In support, Appellees contended
6 that Debtor’s characterization of his debts as primarily business
7 debts, rather than consumer debts, was improper. Appellees
8 argued that the judgment debt was for repayment of funds Debtor
9 borrowed for personal or family purposes, that Debtor
10 mischaracterized this debt as a tax advance, and that the related
11 legal fees also were not business expenses. They provided no
12 case law support for their argument regarding characterization of
13 Debtor’s debts. Appellees also argued that Debtor lacked
14 substantial unsecured debt and that this suggested that Debtor
15 was abusing the system.
16 Other indicators of bad faith
17 Appellees also argued that Debtor’s failure to pay anything
18 toward the judgment prior to filing bankruptcy showed Debtor’s
19 bad faith. Finally, Appellees also contended that they would get
20 nothing under a plan by Debtor, there was no business to be
21 preserved, there were no jobs to be saved – and, thus, that there
22 was no proper purpose for Debtor’s case. Appellees failed to
23 explain how their business preservation arguments squared with
24 the fact that this is an individual chapter 11 case.
25 Conversion to chapter 7 not a proper option
26 Based on Appellees’ conclusion that Debtor’s debts were
27 primarily consumer debts, Appellees argued that a presumption of
28 abuse would arise under § 707(b) if Debtor were to seek

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 1 conversion of his case to chapter 7. Therefore, Appellees
2 summarily concluded, conversion to chapter 7 was not an option.
3 Appellees provided no case law to support this conclusion.
4 Debtor’s Opposition
5 Debtor opposed the motion and supported the opposition with
6 his declaration. Debtor described himself as a 57-year-old
7 resident of Seal Beach, California, employed as an investment
8 executive at a salary of $200,000 per annum.
9 Relying on the legal standard identified by the Ninth
10 Circuit in In re Arnold, 806 F.2d 937, 939 (9th Cir. 1986),8 and
11 citing In re Marshall, 298 B.R. 670, 680-81 (Bankr. C.D. Cal.
12 2003), Debtor argued that the “good faith inquiry ‘is essentially
13 directed to two questions: (1) whether the debtor is trying to
14 abuse the bankruptcy process and invoke the automatic stay for
15 improper purposes; and (2) whether the debtor is really in need
16 of reorganization.’” Opposition, Dkt. #68 at 14:13-16. Debtor
17 stated that he was forced to file bankruptcy to obtain a
18 breathing spell from Appellees’ aggressive collection efforts and
19 that he filed with the intent to prepare a fair and equitable
20 plan of reorganization. He argued that he was hopelessly
21 insolvent both from a balance sheet perspective and from his
22 inability to pay debts as they became due in light of the accrual
23 of 9% interest on the judgment ($150,000 annually) compared to
24
8
Debtor provided the following quote from the Ninth
25 Circuit’s decision in In re Arnold: “The existence of good faith
depends on an amalgam of factors and not upon a specific fact.
26 The bankruptcy court should examine the debtor’s financial
status, motives, and the local economic environment. . . . Good
27 faith is lacking only when the debtor’s actions are a clear abuse
of the bankruptcy process.” 806 F.2d at 939 (internal citation
28 omitted). Opposition, Dkt. #68 at 14:9-11.
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 1 his current before-tax annual salary of $200,000. Debtor also
2 argued that through the bankruptcy filing he sought to preserve
3 the home he owned in New York with his wife.
4 As to Appellees’ specific allegations of bad faith factors,
5 Debtor responded as follows:
6 Plan confirmability
7 Debtor primarily argued that consideration of confirmability
8 of a plan not yet filed was premature and placed an improper
9 burden on him at such an early stage of the case. Debtor argued
10 that despite Appellees’ contention that they will thwart any plan
11 the Debtor files, “[f]requently even the most obstreperous of
12 creditor ultimately finds common ground with the debtor later in
13 the case.” Opposition, Dkt #68 at 15:1-2. In addition, Debtor
14 argued that ample law existed to justify separately classifying
15 the Appellees’ claim given their particular characteristics,
16 including receipt of a preferential transfer within 90 days prior
17 to the petition.9
18 Two-party dispute
19 Debtor argued that the bankruptcy case involved over
20 $400,000 in other claims and thus, factually, did not constitute
21 a two-party dispute. As to Appellees’ collateral attack
22 argument, Debtor argued that he did not seek to defeat the
23 validity of the judgment in the bankruptcy court, but would treat
24 the judgment under the plan in accordance with the Bankruptcy
25
26 9
In a footnote in the opposition, Debtor alleged that
Peconic filed a transcript of the judgment with the Clerk of
27 Nassau County, New York, on January 17, 2014, which resulted in
the creation of a lien in favor of Peconic on the residence in
28 New York owned by the Debtor with his wife.
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 1 Code, including distributions and appropriate discharge of any
2 unpaid balance, “[u]nless and until the New York Judgment is
3 vacated in the course of a continuation of the New York Action.”
4 Id. at 18:10-11.
5 Alleged misrepresentations and the conversion option
6 Debtor argued that he properly categorized his case as a
7 non-consumer case. Because the debt resulted from a judgment on
8 a business dispute between employer and employee, Debtor argued
9 it had no consumer attributes. Thus, Debtor argued that
10 chapter 7 was clearly an option.
11 Other alleged bad faith indicators
12 Debtor argued that Appellees were wrong to contend that
13 Debtor had the ability to pay the judgment, especially in light
14 of the accruing interest.
15 Other arguments
16 Debtor finally argued that the Supreme Court’s decision in
17 Toibb v. Radloff, 501 U.S. 157 (1991), specifically held that an
18 individual is eligible to reorganize under chapter 11 despite the
19 lack of any ongoing business. Further, Debtor argued that his
20 filing was consistent with the objectives of the Bankruptcy Abuse
21 Prevention and Consumer Protection Action (“BAPCPA”): “to channel
22 individuals with higher levels of income and larger balance
23 sheets into Chapter 13, or Chapter 11.” Id. at 21:20-21. He
24 acknowledged in his opposition that § 1115, added by BAPCPA,
25 brings an individual chapter 11 debtor’s post-petition income
26 into the estate, and that § 1129(a)(15), also added under BAPCPA,
27 requires that he commit five years of projected disposable net
28 income to his plan effort.

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 1 Appellees’ Reply
2 On reply, Appellees responded that although they believed
3 Debtor was capable of paying all his debts, Debtor’s allegation
4 that he was insolvent established his inability to present a
5 confirmable plan, and thus the case should be dismissed.10
6 Appellees argued that the case was simple: Debtor “lives a lavish
7 lifestyle” and “filed this case in order to maintain his current
8 level of spending,” and concluded that, therefore, the case “does
9 not belong in bankruptcy.” Reply, Dkt. #77 at 9:7-14.
10 The bankruptcy court’s findings and conclusion
11 The hearing on the motion was set concurrently with Debtor’s
12 applications to employ two law firms, his motion for approval of
13 his budget, and a chapter 11 scheduling and management
14 conference. The bankruptcy court heard argument on the
15 Appellees’ motion first. Counsel for the United States Trustee,
16 who appeared but did not otherwise participate in the arguments,
17 advised the bankruptcy court that the United States Trustee did
18 not join in the motion. After oral argument by the parties, and
19 without allowing testimony or other additional evidence, the
20 bankruptcy court took the motion under submission and continued
21 the other hearings. Shortly thereafter, it issued its written
22 Statement of Decision and a separate order dismissing the case.
23 In the Statement of Decision the bankruptcy court held that
24
25 10
Appellees also argued against Debtor’s contention that
Appellees’ judgment appropriately could be separately classified
26 and presented their assessment of Debtor’s legitimate debts and
his inability to appropriately identify an impaired class capable
27 of accepting a plan over Appellees’ objection. And Appellees
argued that Debtor’s arguments that his debts are not consumer
28 debts were unsupportable.
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 1 the bankruptcy case was not filed in good faith. It stated that
2 “[t]he existence of good faith depends on an amalgam of factors
3 and not upon a specific fact,” criticizing Debtor’s argument that
4 his subjective good faith in filing the case was important.
5 Statement of Decision, Dkt. #93 at 2 n.1 (citing In re Arnold,
6 806 F.2d at 939). It identified as the appropriate test:
7 “whether a debtor is attempting to unreasonably deter and harass
8 creditors or attempting to effect a speedy, efficient
9 reorganization on a feasible basis.” Id. (again citing
10 In re Arnold, along with In re Marsh, 36 F.3d at 828).
11 The bankruptcy court then specifically found that: “It is
12 obvious that Debtor’s sole purpose for filing bankruptcy was to
13 stop Peconic from collecting on its judgment.” Id. at 3:1-3. As
14 supporting facts it stated that the case was a two-party dispute
15 filed after six years of litigation, only 89 days after judgment
16 was entered against the Debtor, and when Peconic had just begun
17 collection efforts.
18 In addition, the bankruptcy court found that “a confirmable
19 plan of reorganization is not possible since Peconic (by far the
20 largest unsecured creditor), has indicated that it will vote
21 against any plan of reorganization that does not propose to pay
22 unsecured creditors 100 percent of their claims.” Id. The
23 bankruptcy court referred to Debtor’s estimation in the bare
24 bones petition that there would be no funds available for
25 distribution to unsecured creditors; and it concluded that Debtor
26 could not artificially impair his mortgage lender because there
27 was no unsecured portion to impair.
28 The Debtor timely filed a notice of appeal to the BAP and an

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 1 emergency motion with the bankruptcy court for stay pending
2 appeal, which was denied. Debtor thereafter filed a motion with
3 the BAP for a stay pending appeal, which a motions panel granted.
4 JURISDICTION
5 The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
6 §§ 1334 and 157(b)(2)(A). We have jurisdiction under 28 U.S.C.
7 § 158.
8 ISSUES
9 Whether the bankruptcy court abused its discretion when it
10 dismissed the bankruptcy case.
11 STANDARD OF REVIEW
12 We review the bankruptcy court’s decision to dismiss a case
13 under an abuse of discretion standard. Leavitt v. Soto
14 (In re Leavitt), 171 F.3d 1219, 1223 (9th Cir. 1999). We apply a
15 two-part test to determine whether the bankruptcy court abused
16 its discretion. United States v. Hinkson, 585 F.3d 1247, 1261-62
17 (9th Cir. 2009) (en banc). First, we consider de novo whether
18 the bankruptcy court applied the correct legal standard to the
19 relief requested. Id. Then, we review the bankruptcy court’s
20 fact findings for clear error. Id. at 1262 & n.20. See also
21 Eisen v. Curry (In re Eisen), 14 F.3d 469, 470 (9th Cir. 1994)
22 (the bankruptcy court’s finding of “bad faith” is reviewed for
23 clear error); St. Paul Self Storage Ltd. P’ship v. Port Auth.
24 (In re St. Paul Self Storage Ltd. P’ship), 185 B.R. 580, 582 (9th
25 Cir. BAP 1995) (same). We must affirm the bankruptcy court’s
26 fact findings unless we conclude that they are illogical,
27 implausible, or without support in the record. Hinkson, 585 F.3d
28 at 1262. We may view a factual determination as clearly

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 1 erroneous if it was without adequate evidentiary support or was
2 induced by an erroneous view of the law. Wall St. Plaza, LLC v.
3 JSJF Corp. (In re JSJF Corp.), 344 B.R. 94, 99 (9th Cir. BAP
4 2006).
5 DISCUSSION
6 The bankruptcy court dismissed Debtor’s case as a bad faith
7 filing based on two primary determinations: (1) its factual
8 finding that the case was a two-party dispute and that Debtor’s
9 sole purpose in filing was to stop Appellees’ collection efforts;
10 and (2) its legal conclusion that Debtor could not propose a
11 confirmable plan. These determinations are not supported
12 adequately by the record. Alternatively, the bankruptcy court
13 abused its discretion by dismissing the case without considering
14 whether conversion or dismissal would be in the best interests of
15 all creditors and the estate.
16 Section 1112(b)(1) provides in relevant part that ". . . the
17 court shall convert a case under this chapter to a case under
18 chapter 7 or dismiss a case under this chapter, whichever is in
19 the best interests of creditors and the estate, for cause
20 . . . ." 11 U.S.C. § 1112(b)(1). If cause is established, the
21 decision whether to convert or dismiss the case falls within the
22 sound discretion of the court. Mitan v. Duval (In re Mitan),
23 573 F.3d 237, 247 (6th Cir. 2009); Nelson v. Meyer
24 (In re Nelson), 343 B.R. 671, 675 (9th Cir. BAP 2006) (chapter 13
25 case). And, if a bankruptcy court determines that there is cause
26 to convert or dismiss, it must also: (1) decide whether
27 dismissal, conversion, or the appointment of a trustee or
28 examiner is in the best interests of creditors and the estate;

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 1 and (2) identify whether there are unusual circumstances that
2 establish that dismissal or conversion is not in the best
3 interests of creditors and the estate. § 1112(b)(1), (b)(2); and
4 see Shulkin Hutton, Inc., P.S. v. Treiger (In re Owens), 552 F.3d
5 958, 961 (9th Cir. 2009) (“the court must consider the interests
6 of all of the creditors”); In re Prods. Int'l Co., 395 B.R. 101,
7 107 (Bankr. D. Ariz. 2008).
8 A. The bankruptcy court abused its discretion when it failed to
consider whether conversion or dismissal was in the best
9 interests of all creditors and the estate.
10 We determine as a preliminary matter that even if we
11 determine that the bankruptcy court’s findings of bad faith and
12 plan futility were not in error, the bankruptcy court abused its
13 discretion by failing to consider whether conversion or dismissal
14 was in the best interests of all creditors and the estate. We
15 also determine that on the current record this error was not
16 harmless. We begin here because clarification on this point
17 provides guidance in our analysis of the bankruptcy court’s other
18 determinations.
19 Appellees argue on appeal that dismissal was in the best
20 interests of creditors and that Debtor waived any contrary
21 argument because he did not raise it in his opposition to the
22 motion. We disagree. In the motion and opposition the parties
23 both argued as to whether chapter 7 was an available option for
24 the Debtor.11 And regardless of the parties’ arguments, the
25
11
Both sides focused their arguments, however, on whether
26 Debtor’s case would be subject to dismissal as an abuse pursuant
to § 707(b) due to Debtor’s income level and the nature of his
27 debts. Appellees argued that Debtor mischaracterized his
consumer debts as primarily business debts; Debtor argued to the
28 (continued...)
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 1 bankruptcy court had an independent obligation under § 1112 to
2 consider what would happen to all creditors on dismissal and, in
3 light of its analysis, whether dismissal or conversion would be
4 in the best interest of all creditors, not just the largest and
5 most vocal creditor. See In re Owens, 552 F.3d at 961 (agreeing
6 with the Fourth Circuit that “when deciding between dismissal and
7 conversion under 11 U.S.C. § 1112(b), ‘the court must consider
8 the interest of all of the creditors.’”) (quoting Rollex Corp. v.
9 Assoc. Materials (In re Superior Siding & Window, Inc.), 14 F.3d
10 240, 243 (4th Cir. 1994)).
11 When determining the best interest of the creditors under
12 § 1112(b), the Code’s fundamental policy of achieving equality
13 among creditors must be a factor considered, “and it is not
14 served by merely tallying the votes of the unsecured creditors
15 and yielding to the majority interest.” In re Superior Siding &
16 Window, Inc., 14 F.3d at 243; and see In re Graphic Trade
17 Bindery, Inc., 2012 Bankr. LEXIS 1598 at *17 (Bankr. D. Md.
18 Apr. 12, 2012) (“the mere fact that a section 1112(b) motion
19 seeks only conversion is no bar to dismissal if the court
20 determines that dismissal is in the best interest of the
21 creditors and the estate. The opposite is also true. The task
22 of the bankruptcy court is to determine which option is the
23 better choice.”).
24 While we acknowledge that unsecured creditors did not take a
25 position here, it is notable that the United States Trustee made
26 clear that it did not support dismissal.
27
11
(...continued)
28 contrary.
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 1 Based on our reading of the hearing transcript, it appears
2 that the bankruptcy court may have believed that its limited task
3 was to grant or deny the relief requested by Appellees –
4 dismissal. The bankruptcy court was not so limited. It had at
5 least three options available to it: let Debtor try to propose a
6 plan; convert the case to chapter 7; or dismiss it, as Appellees
7 requested. When considering these options, the bankruptcy court
8 was required to consider the unrefuted evidence that:
9 (1) Appellees had judgment liens and immediate collection
10 abilities superior to all of Debtor’s unsecured creditors upon
11 dismissal of the case; (2) Appellees’ judgment liens, however,
12 were subject to attack as preferences; (3) there was no evidence
13 that creditors other than Appellees had any avenue for prompt or
14 meaningful payment outside a bankruptcy case; (4) recovery of the
15 tax refund would be enhanced in either a chapter 11 or chapter 7
16 case; and (5) dismissal as a result of these factors was far less
17 advantageous than conversion for all creditors of the estate
18 other than Appellees. This was not harmless error.
19 We cannot determine from the record whether the bankruptcy
20 court believed that § 707(b) barred conversion to chapter 7, but
21 the Appellees certainly argued that this was the case. We
22 disagree; § 707(b) abuse analysis did not bar conversion on this
23 record.
24 There is a substantial body of decisional law12 focusing on
25 the applicability of § 707(b) when a debtor seeks to voluntarily
26
12
For an interesting survey of the majority, minority, and
27 hybrid approaches, see Anna Haugen, James C. Eidson and Amir
Shachmurove, Should § 707(b) Apply in Chapter 7 Cases Converted
28 from Chapter 13?, 33-4 Am. Bankr. Inst. J. 48 (2014).
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 1 convert a chapter 13 case to chapter 7 – and the courts are split
2 as to whether conversion under these facts is appropriate. We
3 located only one case discussing a debtor’s attempt to
4 voluntarily convert a chapter 11 case to chapter 7. See
5 In re Traub, 140 B.R. 286 (Bankr. D.N.M. 1992). We located no
6 case authority, and the parties cited none, addressing the
7 applicability of § 707(b) abuse analysis to chapter 7 cases
8 converted involuntarily from chapter 11. Dismissal under
9 § 707(b), however, requires the exercise of the bankruptcy
10 court’s discretion; the statute states that the bankruptcy court
11 “may” dismiss - dismissal is not required.
12 Further, the bankruptcy court’s ability to rely on § 707(b)
13 for dismissal requires a determination that the Debtor’s debts
14 were primarily consumer. Suffice it to say that this question
15 is, at best for Appellees, an open one.
16 Finally, we are aware of individual chapter 11 cases
17 converted to chapter 7 by court order after either failure by
18 debtors to achieve plan confirmation timely or as a result of
19 default under confirmed chapter 11 plans – none of which involved
20 “means test” or § 707(b) abuse consideration. We located nothing
21 in the record before the bankruptcy court to support a conclusion
22 that Debtor’s chapter 11 case would not be eligible for
23 conversion to chapter 7 in the event Debtor was not able to
24 confirm a plan because Appellees ultimately prevailed in a plan
25 objection based on their veto under § 1129(a)(8).
26 The bankruptcy court here failed to consider whether
27 dismissal or conversion was in the best interests of the
28 creditors and the estate. Conversion was and is a viable option

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 1 even if § 707(b) is applicable. And given the facts in the
2 record currently before us, we cannot conclude that the
3 bankruptcy court’s failure to consider conversion was harmless
4 error. The evidence strongly suggests that conversion is in the
5 best interest of all creditors other than Appellees. Thus, the
6 bankruptcy court erred in this regard.
7
B. The bankruptcy court erred when it found the Debtor filed
8 this case not in good faith.
9 The bankruptcy court has broad discretion in determining
10 what constitutes "cause" under section 1112(b). See Chu v.
11 Syntron Bioresearch, Inc. (In re Chu), 253 B.R. 92, 95 (S.D. Cal.
12 2000). The movant bears the burden of establishing by a
13 preponderance of the evidence that cause exists. StellarOne Bank
14 v. Lakewatch LLC (In re Park), 436 B.R. 811, 815 (Bankr. W.D. Va.
15 2010). Because good faith is required in the commencement and
16 prosecution of a chapter 11 case, “the lack thereof constitutes
17 ‘cause’ for dismissal under § 1112(b)(1).” In re Mense, 509 B.R.
18 269, 276 (Bankr. C.D. Cal. 2014) (citing In re Marsch, 36 F.3d at
19 828 (“Although section 1112(b) does not expressly require that
20 cases be filed in ‘good faith,’ courts have overwhelmingly held
21 that a lack of good faith in filing a Chapter 11 petition
22 establishes cause for dismissal.”)). “The good faith requirement
23 ‘deter[s] filings that seek to achieve objectives outside the
24 legitimate scope of the bankruptcy laws.’” Id.
25 The bankruptcy court found that the bankruptcy case was a
26 two-party dispute with no possibility of plan confirmation and
27 was filed for the sole purpose of stopping Appellees’ collection
28 on their judgment. The limited record then before the bankruptcy

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 1 court in the early stages of the case does not support these
2 findings and conclusions.
3 1. The bankruptcy court erred by finding Debtor’s sole and
bad faith purpose was to stop Appellees’ collection
4 efforts.
5 It is well recognized that the automatic stay under § 362,
6 activated upon filing a bankruptcy petition (with some exceptions
7 not applicable here), is intended to provide debtors in
8 bankruptcy with a breathing spell from their creditors’
9 collection actions. And it is not unusual to encounter a
10 chapter 11 case filed “because of the crushing weight of a
11 judgment.” In re Marshall, 298 B.R. at 683. If, however, a
12 debtor seeks to use a chapter 11 filing to “unreasonably deter
13 and harass creditors,” such a filing lacks good faith.
14 In re Marsch, 36 F.3d at 828.
15 The bankruptcy court here found that Debtor filed his
16 chapter 11 case solely to stop Appellees’ collection efforts and
17 concluded that this constituted bad faith. The bankruptcy court
18 made no finding that stopping Appellees’ collection efforts was
19 unreasonable or was intended to harass Appellees, however, and we
20 find no support in the record for such inferences.
21 Based on Debtor’s schedules and statement of financial
22 affairs, for at least the two years preceding the bankruptcy
23 filing, Debtor supplemented his salary with substantial
24 withdrawals from retirement accounts, credit cards, and
25 significant loans from family members. Then two months before
26 filing, Appellees commenced aggressive collection efforts,
27 freezing or levying against bank and brokerage accounts. The
28 Debtor concurrently continued to incur substantial legal fees.

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 1 As stated in Debtor’s declaration in opposition to the motion,
2 which was not disputed by any evidence submitted by Appellees,
3 the litigation costs, entry of the judgment, and unpaid legal
4 bills left him insolvent. Appellees’ contrary argument that
5 Debtor was solvent and could and should have paid Appellees’
6 judgment is not supported by the record.
7 At oral argument, the bankruptcy court expressed its
8 disbelief13 in assertions by Debtor that he was financially
9 strapped prepetition, when he had a house in New York that he
10 planned to keep and three high-end vehicles – unlike the people
11 the bankruptcy court was “used to” – “people who literally are
12 living in homeless shelters.” Hr’g Tr. (Apr. 9, 2014) at
13 17:22-23. The bankruptcy court directed argument away from
14 Debtor’s alleged insolvency,14 as a “non-issue.” Id. at 15:17.
15 As articulated by the Ninth Circuit, however, when assessing a
16 debtor’s good faith the bankruptcy court “should examine the
17 debtor’s financial status [and] motives. . . .” In re Arnold,
18 806 F.2d at 939. Here, the bankruptcy court’s disinclination to
19 examine the Debtor’s financial status beyond his possession of a
20 home in New York and three admittedly valuable vehicles
21
22
23
13
The bankruptcy court told Debtor’s counsel “don’t tell
24 me this gentleman is impoverished, please.” Hr’g Tr. (Apr. 9,
2014) at 18:10-11.
25
14
Nonetheless Debtor’s counsel advised the bankruptcy
26 court that Debtor moved to California, not because he wanted to
be 2,000 miles away from his wife, but because he had to do so
27 for employment. His wife remained in New York as a cancer
survivor who had a network of people and medical caregivers
28 supporting her there.
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 1 contributed to its erroneous conclusion.15
2 Debtor’s petition, filed within 8916 days of perfection of
3 Appellees’ judgment lien, not only appropriately provided Debtor
4 a breathing spell,17 it laid the ground work for another key goal
5 underlying the bankruptcy process, leveling the playing field for
6 other creditors of the estate. See In re Superior Siding &
7 Window, Inc., 14 F.3d at 243. Appellees appear to have obtained
8 their judgment lien within the preference period. Not
9 surprisingly, Appellees argued that they would be better off if
10 allowed to pursue collection on their judgment outside of the
11 bankruptcy case – absent the bankruptcy filing, Appellees would
12 have a substantial advantage over other creditors.
13 In addition, Debtor stated his clear intention to save
14 equity in the New York home, where his wife lived, and his desire
15 for orderly liquidation of assets if he could not propose a
16 confirmable plan. The record does not evidence that the
17 bankruptcy court considered either of these goals. But both
18 goals are legitimate reasons to file bankruptcy. See Warner v.
19 Universal Guardian Corp. (In re Warner), 30 B.R. 528, 529 (9th
20
21 15
As recently discussed by the Ninth Circuit, “bankruptcy
law must apply equally to the rich and poor alike, fulfilling the
22 Constitution’s requirement that Congress establish ‘uniform laws
on the subject of bankruptcies throughout the United States.’”
23 Hawkins v. Franchise Tax Bd. of Cal., 769 F.3d 662, 669 (9th Cir.
2014).
24
16
The record is not fully developed as to the mechanism by
25 which Appellees obtained lienholder status; it appears
undisputed, however, that Debtor’s filing on February 4, 2014,
26 put Appellees’ lien status within the 90-day preference period.
27 17
At the hearing on the motion, Debtor’s counsel argued
that the breathing spell benefit of the automatic stay was
28 negated here by Appellees’ quickly filed motion.
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 1 Cir. BAP 1983) (Nothing in the Code prohibits the use of chapter
2 11 by debtors seeking to save their family home from
3 foreclosure); and In re Soundview Elite, Ltd., 503 B.R. 571, 580
4 (Bankr. S.D.N.Y. 2014) (“it is not bad faith to file a chapter 11
5 petition for the purpose of a more orderly liquidation.”). And
6 although Debtor had not filed a proposed plan as of the hearing
7 on the motion, Debtor argued that through the chapter 11
8 bankruptcy process he intended to seek recovery of as much as
9 $850,000 on overpayment of taxes.
10 All the evidence before the bankruptcy court indicated that
11 Debtor had significant financial need for protection under the
12 Bankruptcy Code. No evidence was presented from which the
13 bankruptcy court could infer that Debtor intended to unreasonably
14 deter or harass Appellees or any of his other creditors.
15 2. The existence of disputes between Debtor and Appellees
does not render the case a two-party dispute filed in
16 bad faith.
17 “Petitions in bankruptcy arising out of a two-party dispute
18 do not per se constitute a bad-faith filing by the debtors.”
19 In re Stolrow’s, Inc., 84 B.R. 167, 171 (9th Cir. BAP 1988).
20 Courts that find bad faith based on two-party disputes do so
21 where “it is an apparent two-party dispute that can be resolved
22 outside of the Bankruptcy Court’s jurisdiction.” Oasis at Wild
23 Horse Ranch, LLC v. Sholes (In re Oasis at Wild Horse Ranch,
24 LLC), 2011 Bankr. LEXIS 4314 at *29 (9th Cir. BAP Aug. 26, 2011)
25 (emphasis added) (citing N. Cent. Dev. Co. v. Landmark Capital
26 Co. (In re Landmark Capital Co.), 27 B.R. 273, 279 (D. Ariz.
27 1983)); and see St. Paul Self Storage Ltd. P’ship, 185 B.R. at
28 583 (debtor’s only significant asset was a claim against one

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 1 creditor set to be tried in state court and bankruptcy court
2 supervision of debtor’s liquidation was not necessary to protect
3 other creditors). Typical bad faith two-party dispute cases may
4 involve delays on the eve of trial (litigation tactics), forum
5 shopping, new-debtor syndrome (special purpose entities), repeat
6 filers, and repeatedly delayed foreclosure sales. There are no
7 such common indicators here.
8 The evidence before the bankruptcy court established that
9 the parties were involved in six years of litigation in state
10 court prior to the petition date; Debtor was using exempt assets,
11 family loans, and credit card debt to fund the litigation and his
12 expenses; and Appellees started to aggressively collect on their
13 judgment. With assets of approximately $750,000 versus the
14 $1.5 million judgment, and interest accruing at 9% on the
15 judgment versus Debtor’s annual salary of $200,000, Debtor was
16 balance sheet and cash flow insolvent before considering living
17 expenses and other significant debt. Such numbers do not support
18 the bankruptcy court’s implicit determination that resolution
19 outside the bankruptcy court was preferable or even possible.
20 This was not a case where Appellees offered any kind of
21 settlement or any resolution of the judgment other than Debtor’s
22 full liquidation. Nor does the evidence support a conclusion
23 that the bankruptcy filing did not provide important protection
24 to other legitimate creditors by leveling the playing field.
25 “Good faith is lacking only when the debtor’s actions are a clear
26 abuse of the bankruptcy process.” In re Arnold, 806 F.2d at 939.
27 Keeping the Appellees from seizing all liquid assets ahead of
28 other creditors and bringing preferential transfers back into the

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 1 estate for the benefit of all creditors not only do not
2 constitute abuses of the bankruptcy process, they achieve primary
3 goals of the bankruptcy process. Nor did Appellees present any
4 evidence to support an inference that Debtor sought to have the
5 bankruptcy court act as an appellate court in connection with the
6 pending state court matters or to shift to the bankruptcy court
7 the decision making on claims in the state court litigation.
8 During oral argument on the motion, the bankruptcy court
9 repeatedly stated that Debtor had one creditor. Appellees argued
10 that Debtor’s scheduled debts were insignificant and questionable
11 – Appellees were most affected by the filing, and, implicitly, of
12 singular importance. To the contrary, Debtor’s schedules, which
13 the bankruptcy court acknowledged having reviewed, establish the
14 existence of significant debt owed to credit card companies,
15 attorneys, and family members. The bankruptcy court had no
16 evidence before it from which it could appropriately infer that
17 any of such debt was not legitimate. Nor did any evidence exist
18 to dispute Debtor’s contention that the interest accrual on the
19 judgment alone made his financial survival outside of bankruptcy
20 impossible. To conclude otherwise was not supported by the
21 record.
22 3. Appellees’ stated intention not to accept a less-than-100%-
plan by Debtor, alone, does not support a conclusion that
23 Debtor filed the case in bad faith.
24 The bankruptcy court also found that Debtor could not
25 propose a confirmable plan because Appellees argued they would
26 vote against it. Many are the judgment creditors who gnash their
27 teeth (metaphorical or otherwise) in chagrin when their
28 collection campaign is stayed by a bankruptcy filing. Only

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 1 slightly less frequent are the immediate post-filing threats that
2 no quarter will be given. Such jeremiads, however, are not a
3 sufficient basis for a universal conclusion of plan futility.
4 And they certainly do not unequivocally establish the debtor’s
5 bad faith. Economic considerations and rationality often result
6 in resolution.
7 Here, the Appellees’ statements must be taken in context.
8 Debtor had not filed a plan, and Appellees, apparently, had not
9 had time to compare their possible treatment under a plan with
10 the certainly less favorable treatment in a chapter 7 case. It
11 is indeed possible that Appellees would elect chapter 7,
12 notwithstanding that they lose the opportunity to obtain any
13 access to Debtor’s post-petition income. It is further possible
14 that the tax refunds will not be more easily collected in a
15 chapter 11 case such that this factor does not support a
16 continuation in chapter 11. And it is certainly possible that
17 the Debtor will try to take advantage of his creditors rather
18 than dealing with them forthrightly as he promises. But the
19 possibility that the Appellees will not act in their economic
20 best interest, when the choice is correctly presented as not
21 being limited to dismissal or chapter 11, or that the Debtor will
22 act in a manner inconsistent with the only evidence before the
23 bankruptcy court, do not equate to bad faith. Here, the only
24 evidence is not supportive of bad faith and only suggestive of
25 plan futility. Indeed, it is worth noting that the Appellees’
26 stated unwillingness to ever support Debtor’s plan was not
27 supported by declaratory evidence of any type. It is possible
28 that this is a reasoned response that would retain rationality

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 1 even if conversion is the alternative, but on this record it is
2 illogical to so assume.
3 Moreover, nothing in the record indicates that Debtor was
4 aware that Appellees would take such a position when he filed his
5 petition. And when the bankruptcy court ruled on the motion,
6 Debtor had not filed a proposed plan at all.18 In essence, the
7 bankruptcy court concluded, based on a very scant record, that
8 Debtor could neither propose the 100% plan Appellees demanded,
9 negotiate a consensual resolution, or cram down a lesser payout
10 plan.19 Such determinations were premature.
11 We note that Debtor acknowledged that his postpetition
12 earnings and net disposable income are available in a chapter 11
13
14 18
At oral argument, the bankruptcy court heard the Debtor
to suggest that he would artificially impair the secured lender
15 on the New York property to obtain an impaired class to vote in
favor of a future plan. The bankruptcy court included in its
16 findings, however, that the “New York property is worth more than
what is owed to the secured lender, so there is no unsecured
17 portion to impair.” Statement of Decision at 2. We were unable
to find support in the record for this finding. Debtor scheduled
18 50% of the estimated value of the New York residence as property
of the estate due to his nonfiling wife’s joint interest, but it
19 is not clear from the schedules whether Debtor likewise scheduled
50% of the mortgage debt against the property or 100%. Nor did
20 we locate any evidence regarding the status of payments to the
mortgage lender or whether Debtor’s nonfiling spouse contributed
21 to the mortgage payments or had independent assets or income.
22 19
The bankruptcy court referred to an estimate contained
in Debtor’s petition itself that no funds would be available for
23 distribution after exempt property and administrative claims. In
his appellate opening brief, Debtor undertook to explain in a
24 footnote that the “no distribution” box in the emergency
petition, as referred to by the bankruptcy court, was checked
25 automatically by the software system used by counsel. As the
bankruptcy court acknowledged at oral argument on the motion that
26 it had reviewed the schedules and other documents on the docket,
which necessarily included Debtor’s multiple declarations, we
27 conclude that reliance on a checked box on the bare bones
petition was insufficient grounds for the bankruptcy court to
28 conclude no plan could be confirmed.
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 1 plan. Under § 502 of the Code, Appellees would not be entitled
2 to the 9% interest on their judgment postpetition,20 reducing the
3 amount required to be paid from Debtor’s not-insubstantial
4 $200,000 annual salary. Debtor proposed to seek a large recovery
5 from the IRS to contribute to plan payments. And Debtor’s
6 schedules disclosed not-insignificant amounts of exempt assets
7 that the Debtor could, if so inclined, commit to a chapter 11
8 plan payout. Such possibilities were neither discussed nor
9 considered nor given adequate time for development.
10 Although it is well within a bankruptcy court’s decision-
11 making authority to determine facial non-confirmability of a
12 proposed plan (such as when considering a motion for approval of
13 a filed disclosure statement21), determining the facial non-
14 confirmability of an unfiled plan so early in the case and absent
15 a fully developed record is not supportable. See Can-Alta
16 Props., Ltd. v. State Sav. Mortg. Co. (In re Can-Alta Properties,
17 Ltd.), 87 B.R. 89, 92-93 (9th Cir. BAP 1988) (lifting of the
18 automatic stay based on bad faith, where the court lacked
19 evidence of confirmability or feasibility of a plan and afforded
20 no opportunity for the debtor to amend the then existing plan to
21 respond to the court’s concerns, constituted an abuse of
22 discretion).
23
24
25 20
Section 502(b)(2) provides for the disallowance of a
claim to the extent that “such claim is for unmatured interest.”
26
21
See e.g., In re Main St. AC, Inc., 234 B.R. 771, 775
27 (Bankr. N.D. Cal. 1999) (a court may disapprove of a disclosure
statement if the plan to which it refers could not possibly be
28 confirmed).
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 1 CONCLUSION
2 Based on the foregoing, we REVERSE.
3
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