Case: 14-10956 Document: 00513151653 Page: 1 Date Filed: 08/12/2015
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
No. 14-10956 August 12, 2015
Summary Calendar Lyle W. Cayce
Clerk
In the Matter of: CYPRESS FINANCIAL TRADING COMPANY, L.P.,
Debtor
------------------------------
DOUGLAS A. KELLEY, in his capacity as chapter 11 trustee of Petters
Company, Inc.,
Appellee
v.
CYPRESS FINANCIAL TRADING COMPANY, L.P.,
Appellant
Appeal from the United States District Court
for the Northern District of Texas
USDC: 3:13-CV-2282
Before JOLLY, JONES, and HIGGINSON, Circuit Judges.
PER CURIAM:*
A corporate Chapter 7 bankruptcy has one purpose: to allow an entity
breathing space to marshal assets for orderly distribution to creditors. In re
*Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH
CIR. R. 47.5.4.
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MortgageAmerica Corp., 714 F.2d 1266, 1273 (5th Cir. 1983). When, as here,
the debtor has no assets, no viable claims or causes of action, and no other
money-making prospects, Chapter 7 bankruptcy cannot serve even this limited
function. Under 11 U.S.C. § 707(a), “cause” to dismiss exists when bankruptcy
cannot benefit outside creditors or the debtor and the process serves only to
delay the prosecution of a lawsuit against the debtor. Accordingly, we AFFIRM
the district court’s judgment.
BACKGROUND
Cypress Financial Trading Company, L.P. is a limited partnership
consisting of one general partner, EFO GP Interests, Inc., and one limited
partner, JBJ Lending Company. Its sole function was to invest in Petters
Company, Inc. (“PCI”). Over several years, Cypress received approximately
$11.4 million from its investments, approximately $500,000 of which was
profit. In 2008, federal law enforcement swarmed PCI’s corporate
headquarters. It turns out that PCI was a large Ponzi scheme and Cypress’s
$500,000 “profit” was in fact transferred from less fortunate investors. PCI
subsequently filed bankruptcy in Minnesota. In October 2010, PCI’s Chapter
11 trustee sued Cypress to avoid and recover the $11.4 million in transfers.
For the next two years, Cypress and PCI’s trustee litigated the avoidance
action in federal bankruptcy court in Minnesota. Then on December 4, 2012,
Cypress filed this Chapter 7 bankruptcy case. According to Cypress, it has not
had any assets since early or middle 2008. And, according to the Chapter 7
trustee, Cypress has no viable claims or causes of action. Cypress listed only
two creditors: the PCI trustee and an entity related to its general partner. 1
Cypress listed EFO Management, LLC as the other creditor in its bankruptcy. EFO
1
Management and EFO GP Interest appear to be related entities.
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Three months after the bankruptcy petition, Cypress’s trustee filed a
“Report of No Distribution,” certifying that Cypress has no assets or claims of
any kind and requesting that the case be closed. PCI’s trustee then moved to
dismiss Cypress’s bankruptcy under 11 U.S.C. § 707(a). The bankruptcy court
denied the motion, reasoning that because “Chapter 7 is of some utility to any
defunct business to [w]rap up whatever is left in the company,” and there was
no bad faith on Cypress’s part, there is no “cause” to dismiss the case under
§ 707(a). On appeal, the district court reversed. In its view, because Chapter
7 provides Cypress no benefit and harms its only non-insider creditor, the
bankruptcy court abused its discretion. This appeal followed.
STANDARD OF REVIEW
“We review the decision of a district court, sitting as an appellate court,
by applying the same standards of review to the bankruptcy court’s findings of
fact and conclusions of law as applied by the district court.” In re Gerhardt,
348 F.3d 89, 91 (5th Cir. 2003) (citing In re Jack/Wade Drilling, Inc., 258 F.3d
385, 387 (5th Cir. 2001)). Accordingly, we review a bankruptcy court’s findings
of fact for clear error and its legal conclusions de novo. Id. (citing Williams v.
IBEW Local 520 (In re Williams), 337 F.3d 504, 508 (5th Cir. 2003)). We review
the ultimate decision to grant or deny a motion under § 707(a) for abuse of
discretion. In re Atlas Supply Corp., 857 F.2d 1061, 1063 (5th Cir. 1988).
DISCUSSION
In this appeal, Cypress contends that bad faith is not “cause” to dismiss
a Chapter 7 bankruptcy case under § 707(a) and invites us to choose sides in a
circuit split on that issue. Although the relevant law strongly suggests that
“cause” includes bad faith, see In re Piazza, 719 F.3d 1253 (11th Cir. 2013), we
need not so hold to resolve this case. When a bankruptcy serves no purpose,
results in no benefit for its creditors or the debtor, and only delays litigation
already pending against the debtor, there is “cause” to dismiss the case.
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Under 11 U.S.C. § 707(a), the bankruptcy court “may dismiss a case
under [Chapter 7] . . . for cause.” Section 707 does not define “cause,” but
instead provides a list of examples, like the debtor’s unreasonable delay of the
proceedings, failure to pay required fees, or untimely filing of schedules and
financial statements. 11 U.S.C. § 707(a)(1)–(3). The examples, however, are
illustrative, not exhaustive. “Cause” is a broad concept, designed to “afford
flexibility to the bankruptcy courts.” In re Little Creek Dev. Co., 779 F.2d 1068,
1072 (5th Cir. 1986). This flexibility derives from bankruptcy’s equitable roots.
Id. True to equity’s flexibility, we have instructed courts to “weigh the benefits
and prejudices” of dismissal—to the debtor, creditors, and the bankruptcy
system—when deciding a § 707(a) motion. Id. at 1073; Atlas Supply Corp.,
857 F.2d at 1063–64.
The equities of this case undoubtedly favor dismissal. This bankruptcy
(and subsequent appeals) imposed cost and delay, with absolutely no resulting
benefit to Cypress or its creditors. Under Chapter 7, a debtor can hope for a
permanent discharge of its debts; bankruptcy exists to grant a fresh start to
the “honest, but unfortunate” debtor. Grogan v. Garner, 498 U.S. 279, 286-87
(1991). There is no hope of discharge or a fresh start here, because a discharge
is unavailable to corporate debtors in Chapter 7 cases. 11 U.S.C. § 727(a)(1).
Nevertheless, a corporate Chapter 7 (and the resulting automatic stay) may
allow breathing space for a neutral third party to marshal assets for orderly
distribution to creditors. But again, there is no hope of that here. Everyone
agrees there are no assets to marshal or liquidate, and applicable statutes of
limitations bar any preference or fraudulent transfer actions that might lead
to additional assets. See 11 U.S.C. § 547(b)(4)(B) (one-year statute of
limitations for insider preference actions); § 548(a)(1) (two-year statute of
limitations for fraudulent transfer actions); § 544(b)(1) & Tex. Bus. & Com.
Code § 24.010(a) (four-year statute of limitations for fraudulent transfer
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actions under Texas law). Without any conceivable benefit to the debtor or
creditors, a bankruptcy loses its raison d’etre. Dismissal was compelled here
because besides conferring no benefit on Cypress or on the only two creditors,
this case served unreasonably and unjustifiably to delay the PCI Trustee’s suit.
With no benefit conferred but considerable harm inflicted by Cypress’s
Chapter 7 case, the district court properly concluded that the bankruptcy court
abused its discretion in not finding “cause” to dismiss under § 707(a).
Even if we were to agree with Cypress that the bankruptcy court had no
“cause” to dismiss the case, its victory is pyrrhic. If we held that the
bankruptcy court properly denied the § 707(a) motion, we would reverse the
district court judgment, and the district court would probably remand the case
to the bankruptcy court. The bankruptcy court would then promptly close the
case as the Chapter 7 trustee originally requested, lifting the automatic stay.
11 U.S.C. § 362(c)(2)(A). Once the stay is lifted, the Minnesota avoidance
litigation could resume. Cypress will have gained more time to avoid the
avoidance litigation, but it must ultimately face the music.
CONCLUSION
For these reasons, we AFFIRM the district court’s dismissal of Cypress’s
Chapter 7 bankruptcy.
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