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FILED

DEC 22 2014

SUSAN M. SPRAUL, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re: ) BAP No. CC-14-1225-TaDKi

)

JOSEPH WILLIAM SULLIVAN, ) Bk. No. SA 14-bk-10711-CB

 )

Debtor. )

______________________________)

)

JOSEPH WILLIAM SULLIVAN, )

)

Appellant, )

)

v. ) OPINION

)

WILLIAM HARNISCH; PECONIC )

PARTNERS LLC; PECONIC ASSET )

MANAGERS LLC, )

)

Appellees. )

______________________________)

Argued and Submitted on October 23, 2014

at Malibu, California

Filed - December 22, 2014

Appeal from the United States Bankruptcy Court

for the Central District of California

Honorable Catherine E. Bauer, Bankruptcy Judge, Presiding ________________________________

Appearances: Sean A. O’Keefe of O’Keefe & Associates Law

Corporation, PC argued for Appellant Joseph

William Sullivan; Y. David Scharf of Morrison

Cohen LLP argued for Appellees William Harnisch,

Peconic Partners LLC, and Peconic Asset Managers

LLC.

__________________________________

Before: TAYLOR, DUNN, and KIRSCHER, Bankruptcy Judges.
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TAYLOR, Bankruptcy Judge:

INTRODUCTION

Fifteen days after debtor Joseph Sullivan filed a

chapter 111

 petition, Appellees, as holders of a large state

court judgment and related judgment liens, filed a motion to

dismiss the case as a bad faith filing. They contended that the

case was a two-party dispute and that Debtor improperly filed

solely to delay their collection efforts. They also argued that

Debtor lacked any reasonable probability of confirming a chapter

11 plan because Appellees would vote against it. 

Debtor opposed the motion, supported by his declaration and

timely filed schedules, statement of financial affairs, and a

chapter 11 status report. In the status report, he outlined the

events leading to the filing of his petition, including

Appellees’ active efforts to execute on their judgment lien and

to seize his non-exempt assets, and stated his intent to file a

plan within the exclusivity period. The United States Trustee

did not file any papers in response to Appellees’ motion but

advised the bankruptcy court orally that it did not join in the

motion.

Notwithstanding the early state of the chapter 11 case and

the merely circumstantial nature of Appellees’ evidence, the

bankruptcy court granted Appellees’ motion, finding that Debtor

filed the case in bad faith without any possibility of confirming

1 Unless specified otherwise, all chapter and section

references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and

all “Rule” references are to the Federal Rules of Bankruptcy

Procedure, Rules 1001-9037.

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a plan. Then, without considering or determining whether

dismissal or conversion of the case would be in the best

interests of creditors and the estate, the bankruptcy court

dismissed the case. Because we determine that the bankruptcy

court’s failure to consider the best interests of creditors and

the estate was an abuse of its discretion and further because we

determine that its finding of bad faith was in error on this

record, we REVERSE. 

FACTS

Debtor filed his bare bones petition for relief under

chapter 11 on February 4, 2014. Eight days later he filed2 a

Chapter 11 Status Report and supporting declaration. 

Chapter 11 Status Report

In the status report, Debtor presented his version of the

prepetition disputes and six years of litigation between Debtor

and Appellees in New York and the events immediately leading to

the petition. According to Debtor, he was employed until October

2008 as the Chief Operating Officer and Chief Compliance Officer

of appellees Peconic Partners, LLC and Peconic Asset Managers,

LLC (together, “Peconic”). He was also a member of Peconic

entitled to share in profits. He described Peconic as an

institutional investment manager and registered investment

adviser founded by appellee William Harnisch. 

2 The status report filed as docket 17 on the bankruptcy

case electronic docket is not contained in the record provided by

the parties in this appeal. We have exercised our discretion to

take judicial notice of documents electronically filed in the

underlying bankruptcy case. See O’Rourke v. Seaboard Sur. Co.

(In re E.R. Fegert, Inc.), 887 F.2d 955, 957-58 (9th Cir. 1989);

Atwood v. Chase Manhattan Mortg. Co. (In re Atwood), 293 B.R.

227, 233 n.9 (9th Cir. BAP 2003).

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Disagreements arose, Debtor’s employment was involuntarily

terminated in late 2008, and litigation followed. Although

Debtor recited some initial successes at the trial court level,

such successes were overturned on appeal and eventually Appellees

obtained a judgment of approximately $1.5 million that resolved

one of several counterclaims Appellees filed against Debtor. The

record contains no evidence that this judgment is

nondischargeable; it appears to be based exclusively on contract.

Debtor described the judgment as requiring that he repay to

Peconic a $1 million advance that Peconic made to him, with

interest. The judgment did not fully resolve the state court

litigation. Debtor stated that costs to continue litigation plus

entry of the judgment rendered him insolvent and that he filed

bankruptcy seeking a breathing spell to allow him time either to

reorganize his financial affairs through a plan of reorganization

or to effect a liquidation through a liquidating plan. 

Debtor set forth his intent to resolve a tax issue that

could provide recovery of over $550,0003 for the estate; to

determine if and how to proceed with the remaining New York

litigation; and to analyze the costs and benefits to recover as

preferential transfers over $70,000 removed from Debtor’s bank

accounts by the sheriff as part of Appellees’ collection efforts

on the unstayed judgment and to deal with Appellees’ judgment

3 Debtor later increased his estimate of the potential tax

recovery to $850,000. When Debtor filed the status report he

already had obtained court approval to retain a CPA to pursue the

recovery.

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lien recorded against Debtor’s New York residence.4 Debtor also

stated his intent to file a plan and disclosure statement within

the 120 day exclusivity period.

Debtor described his primary assets as consisting of: a 50%

interest in a residence owned in New York with his wife, with a

market value of approximately $700,000 and subject to a mortgage

and Appellees’ judicial lien (combined total of $2.2 million);

two 401K retirement accounts he claimed as fully exempt; and

three vehicles owned free and clear, which he intended to claim

as partially exempt. He estimated the total value of his assets

at $749,002, exclusive of the potential tax refunds, a possible

employment performance bonus, and pending claims against

Appellees. Exclusive of the judgment, Debtor estimated total

unsecured claims of $217,296. 

Six days after filing the status report, Debtor filed his

schedules and statement of financial affairs. 

Schedules and Statement of Financial Condition

The Debtor’s summary of schedules reflects $350,000 in real

property assets and $397,985 in personal property assets for

total assets of $747,985; secured debt of $2,007,347; unsecured

claims of $231,036; and total liabilities of $2,238,383, which

Debtor identified as primarily business debt, not consumer debt.

Debtor’s secured debt consisted of a $498,151 mortgage secured by

the New York residence and the $1,509,195 judgment. His

scheduled unsecured debt consisted of $52,208 on four credit

4

 Appellees filed the judgment with the New York County

Clerk 89 days prior to the petition date, and Debtor did not post

a bond to stop their collection efforts.

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cards; $73,192 owed to three different law firms; $600 in 

membership dues; $27.00 in unpaid utilities; and $105,000 in

personal loans from two individuals (Gerard Sullivan and Thomas

Sullivan, apparently members of Debtor’s family). 

In his statement of financial affairs, among other things,

Debtor disclosed $875,000 in gross income in 2013 which included

$675,000 that he described as a gross settlement amount; $242,639

in IRA distributions taken in the two years preceding bankruptcy;

$249,000 paid to the IRS and Franchise Tax Board in November

2013; the pending litigation in New York and related entry of a

sister state judgment in California in November 2013; and

multiple restraining orders, account restrictions, and apparent

levies on behalf of Appellees in the two months preceding the

bankruptcy filing. Debtor also disclosed legal retainers of

$222,543 paid in the one year pre-filing, $98,000 of which was

paid by Gerard, Joseph, or Thomas Sullivan. Of the retainers

paid, $42,049 was for fees incurred pre-petition. 

The day after Debtor filed his schedules and statement of

financial affairs, Appellees filed their motion seeking dismissal

of the case. 

The Motion to Dismiss

Appellees’ motion5 sought dismissal of the case under § 1112

on the stated grounds that: (1) Debtor filed the petition in bad

faith – to “delay, hinder or interfere with enforcement” of

Appellees’ judgment; (2) Debtor had “no reasonable probability of

5 Appellees’ only support for the motion was a declaration

that authenticated and attached documents consisting primarily of

documents filed by the parties at various stages of the six years

of litigation in New York.

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confirming a Chapter 11 plan”; and (3) the filing was a

“strategic move in a two-party dispute.” Motion, Dkt. #38 at

6:6-9. Appellees supplied no evidence in support of their

contentions beyond a request that the bankruptcy court take

judicial notice of the record in the New York litigation which

documented their litigation victory but failed to evidence either

a judgment that would be nondischargeable or any kind of

inappropriate litigation conduct by Debtor.

Lack of a confirmable plan

Appellees argued that Debtor’s chapter 11 case must be

dismissed based on the lack of any reasonable likelihood that

Debtor could propose a confirmable plan of reorganization. They

argued that they would not consent to any plan that proposed less

than 100% payment on unsecured creditors’ claims. 

Two-party dispute and timing of petition6

Appellees also contended that Debtor’s case represented a

typical two-party dispute and that through the bankruptcy case

Debtor sought to collaterally attack final rulings in New York. 

They argued that Peconic was the creditor most impacted by any

6

 For the balance of their arguments, and the factors

identified and analyzed, Appellees relied on Marshall v. Marshall

(In re Marshall), 721 F.3d 1032, 1048 (9th Cir. 2013) (in

considering bad faith as cause for dismissal, courts “may

consider any factors which evidence ‘an intent to abuse the

judicial process and the purposes of the reorganization

provisions.’”); Leavitt v. Soto (In re Leavitt), 171 F.3d 1219,

1225 (9th Cir. 1999) (dismissal with prejudice of chapter 13 case

for bad faith requires consideration of whether debtor

misrepresented facts or manipulated the Bankruptcy Code, debtor’s

history of filings and dismissals, whether debtor “only intended

to defeat state court litigation,” whether egregious behavior is

present); and Ellsworth v. Lifescape Med. Assocs.

(In re Ellsworth), 455 B.R. 904, 917-18 (9th Cir. BAP 2011)

(same).

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proposed plan and that the New York forum, not the bankruptcy

court, would best and adequately protect all parties and assure a

just and equitable result. Appellees made no attempt to explain

how the New York forum would protect anyone other than Appellees.

Misrepresentations/manipulation

As additional indication of Debtor’s alleged bad faith,

Appellees asserted that Debtor was less than forthright in his

filings in the bankruptcy case. In support, Appellees contended

that Debtor’s characterization of his debts as primarily business

debts, rather than consumer debts, was improper. Appellees

argued that the judgment debt was for repayment of funds Debtor

borrowed for personal or family purposes, that Debtor

mischaracterized this debt as a tax advance, and that the related

legal fees also were not business expenses. They provided no

case law support for their argument regarding characterization of

Debtor’s debts. Appellees also argued that Debtor lacked

substantial unsecured debt and that this suggested that Debtor

was abusing the system. 

Other indicators of bad faith

Appellees also argued that Debtor’s failure to pay anything

toward the judgment prior to filing bankruptcy showed Debtor’s

bad faith. Finally, Appellees also contended that they would get

nothing under a plan by Debtor, there was no business to be

preserved, there were no jobs to be saved – and, thus, that there

was no proper purpose for Debtor’s case. Appellees failed to

explain how their business preservation arguments squared with

the fact that this is an individual chapter 11 case.

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Conversion to chapter 7 not a proper option

Based on Appellees’ conclusion that Debtor’s debts were

primarily consumer debts, Appellees argued that a presumption of

abuse would arise under § 707(b) if Debtor were to seek

conversion of his case to chapter 7. Therefore, Appellees

summarily concluded, conversion to chapter 7 was not an option. 

Appellees provided no case law to support this conclusion.

Debtor’s Opposition

Debtor opposed the motion and supported the opposition with

his declaration. Debtor described himself as a 57-year-old

resident of Seal Beach, California, employed as an investment

executive at a salary of $200,000 per annum. 

Relying on the legal standard identified by the Ninth

Circuit in Idaho Dep’t of Lands v. Arnold (In re Arnold), 806

F.2d 937, 939 (9th Cir. 1986),7 and citing In re Marshall, 298

B.R. 670, 680-81 (Bankr. C.D. Cal. 2003), Debtor argued that the

“good faith inquiry ‘is essentially directed to two questions:

(1) whether the debtor is trying to abuse the bankruptcy process

and invoke the automatic stay for improper purposes; and (2)

whether the debtor is really in need of reorganization.’” 

Opposition, Dkt. #68 at 14:13-16. Debtor stated that he was

forced to file bankruptcy to obtain a breathing spell from

Appellees’ aggressive collection efforts and that he filed with

7 Debtor provided the following quote from the Ninth

Circuit’s decision in In re Arnold: “The existence of good faith

depends on an amalgam of factors and not upon a specific fact.

The bankruptcy court should examine the debtor’s financial

status, motives, and the local economic environment. . . . Good

faith is lacking only when the debtor’s actions are a clear abuse

of the bankruptcy process.” 806 F.2d at 939 (internal citations

omitted). Opposition, Dkt. #68 at 14:9-11.

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the intent to prepare a fair and equitable plan of

reorganization. He argued that he was hopelessly insolvent both

from a balance sheet perspective and from his inability to pay

debts as they became due in light of the accrual of 9% interest

on the judgment ($150,000 annually) compared to his current

before-tax annual salary of $200,000. Debtor also argued that

through the bankruptcy filing he sought to preserve the home he

owned in New York with his wife. 

As to Appellees’ specific allegations of bad faith factors,

Debtor responded as follows:

Plan confirmability

Debtor primarily argued that consideration of confirmability

of a plan not yet filed was premature and placed an improper

burden on him at such an early stage of the case. Debtor argued

that despite Appellees’ contention that they will thwart any plan

the Debtor files, “[f]requently even the most obstreperous of

creditor ultimately finds common ground with the debtor later in

the case.” Opposition, Dkt #68 at 15:1-2. In addition, Debtor

argued that ample law existed to justify separately classifying

the Appellees’ claim given their particular characteristics,

including receipt of a preferential transfer within 90 days prior

to the petition.8 

Two-party dispute

Debtor argued that the bankruptcy case involved over

8

 In a footnote in the opposition, Debtor alleged that

Peconic filed a transcript of the judgment with the Clerk of

Nassau County, New York, on January 17, 2014, which resulted in

the creation of a lien in favor of Peconic on the residence in

New York owned by the Debtor with his wife.

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$400,000 in other claims and thus, factually, did not constitute

a two-party dispute. As to Appellees’ collateral attack

argument, Debtor argued that he did not seek to defeat the

validity of the judgment in the bankruptcy court, but would treat

the judgment under the plan in accordance with the Bankruptcy

Code, including distributions and appropriate discharge of any

unpaid balance, “[u]nless and until the New York Judgment is

vacated in the course of a continuation of the New York Action.”

Id. at 18:10-11.

Alleged misrepresentations and the conversion option

Debtor argued that he properly categorized his case as a

non-consumer case. Because the debt resulted from a judgment on

a business dispute between employer and employee, Debtor argued

it had no consumer attributes. Thus, Debtor argued that

chapter 7 was clearly an option. 

Other alleged bad faith indicators

Debtor argued that Appellees were wrong to contend that

Debtor had the ability to pay the judgment, especially in light

of the accruing interest. 

Other arguments

Debtor finally argued that the Supreme Court’s decision in

Toibb v. Radloff, 501 U.S. 157 (1991), specifically held that an

individual is eligible to reorganize under chapter 11 despite the

lack of any ongoing business. Further, Debtor argued that his

filing was consistent with the objectives of the Bankruptcy Abuse

Prevention and Consumer Protection Action (“BAPCPA”): “to channel

individuals with higher levels of income and larger balance

sheets into Chapter 13, or Chapter 11.” Id. at 21:20-21. He

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acknowledged in his opposition that § 1115, added by BAPCPA,

brings an individual chapter 11 debtor’s post-petition income

into the estate, and that § 1129(a)(15), also added under BAPCPA,

requires that he commit five years of projected disposable net

income to his plan effort. 

Appellees’ Reply

On reply, Appellees responded that although they believed

Debtor was capable of paying all his debts, Debtor’s allegation

that he was insolvent established his inability to present a

confirmable plan, and thus the case should be dismissed.9

Appellees argued that the case was simple: Debtor “lives a lavish

lifestyle” and “filed this case in order to maintain his current

level of spending,” and concluded that, therefore, the case “does

not belong in bankruptcy.” Reply, Dkt. #77 at 9:7-14.

The bankruptcy court’s findings and conclusion

The hearing on the motion was set concurrently with Debtor’s

applications to employ two law firms, his motion for approval of

his budget, and a chapter 11 scheduling and management

conference. The bankruptcy court heard argument on the

Appellees’ motion first. Counsel for the United States Trustee,

who appeared but did not otherwise participate in the arguments,

advised the bankruptcy court that the United States Trustee did

not join in the motion. After oral argument by the parties, and

9

 Appellees also argued against Debtor’s contention that

Appellees’ judgment appropriately could be separately classified

and presented their assessment of Debtor’s legitimate debts and

his inability to appropriately identify an impaired class capable

of accepting a plan over Appellees’ objection. And Appellees

argued that Debtor’s arguments that his debts are not consumer

debts were unsupportable.

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without allowing testimony or other additional evidence, the

bankruptcy court took the motion under submission and continued

the other hearings. Shortly thereafter, it issued its written

Statement of Decision and a separate order dismissing the case. 

In the Statement of Decision the bankruptcy court held that

the bankruptcy case was not filed in good faith. It stated that

“[t]he existence of good faith depends on an amalgam of factors

and not upon a specific fact,” criticizing Debtor’s argument that

his subjective good faith in filing the case was important. 

Statement of Decision, Dkt. #93 at 2 n.1 (citing In re Arnold,

806 F.2d at 939). It identified as the appropriate test:

“whether a debtor is attempting to unreasonably deter and harass

creditors or attempting to effect a speedy, efficient

reorganization on a feasible basis.” Id. (again citing

In re Arnold, along with In re Marsch, 36 F.3d at 828). 

The bankruptcy court then specifically found that: “It is

obvious that Debtor’s sole purpose for filing bankruptcy was to

stop Peconic from collecting on its judgment.” Id. at 3:1-3. As

supporting facts it stated that the case was a two-party dispute

filed after six years of litigation, only 89 days after judgment

was entered against the Debtor, and when Peconic had just begun

collection efforts. 

In addition, the bankruptcy court found that “a confirmable

plan of reorganization is not possible since Peconic (by far the

largest unsecured creditor), has indicated that it will vote

against any plan of reorganization that does not propose to pay

unsecured creditors 100 percent of their claims.” Id. at 2. The

bankruptcy court referred to Debtor’s estimation in the bare

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bones petition that there would be no funds available for

distribution to unsecured creditors; and it concluded that Debtor

could not artificially impair his mortgage lender because there

was no unsecured portion to impair. 

The Debtor timely filed a notice of appeal to the BAP and an

emergency motion with the bankruptcy court for stay pending

appeal, which was denied. Debtor thereafter filed a motion with

the BAP for a stay pending appeal, which a motions panel granted. 

JURISDICTION

The bankruptcy court had jurisdiction pursuant to 28 U.S.C.

§§ 1334 and 157(b)(2)(A). We have jurisdiction under 28 U.S.C.

§ 158.

ISSUES

Whether the bankruptcy court abused its discretion when it

dismissed the bankruptcy case.

STANDARD OF REVIEW

We review the bankruptcy court’s decision to dismiss a case

under an abuse of discretion standard. Leavitt v. Soto

(In re Leavitt), 171 F.3d 1219, 1223 (9th Cir. 1999). We apply a

two-part test to determine whether the bankruptcy court abused

its discretion. United States v. Hinkson, 585 F.3d 1247, 1261-62

(9th Cir. 2009) (en banc). First, we consider de novo whether

the bankruptcy court applied the correct legal standard to the

relief requested. Id. Then, we review the bankruptcy court’s

fact findings for clear error. Id. at 1262 & n.20. See also

Eisen v. Curry (In re Eisen), 14 F.3d 469, 470 (9th Cir. 1994)

(the bankruptcy court’s finding of “bad faith” is reviewed for

clear error); St. Paul Self Storage Ltd. P’ship v. Port Auth.

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(In re St. Paul Self Storage Ltd. P’ship), 185 B.R. 580, 582 (9th

Cir. BAP 1995) (same). We must affirm the bankruptcy court’s

fact findings unless we conclude that they are illogical,

implausible, or without support in the record. Hinkson, 585 F.3d

at 1262. We may view a factual determination as clearly

erroneous if it was without adequate evidentiary support or was

induced by an erroneous view of the law. Wall St. Plaza, LLC v.

JSJF Corp. (In re JSJF Corp.), 344 B.R. 94, 99 (9th Cir. BAP

2006).

DISCUSSION

The bankruptcy court dismissed Debtor’s case as a bad faith

filing based on two primary determinations: (1) its factual

finding that the case was a two-party dispute and that Debtor’s

sole purpose in filing was to stop Appellees’ collection efforts;

and (2) its legal conclusion that Debtor could not propose a

confirmable plan. These determinations are not supported

adequately by the record. Alternatively, the bankruptcy court

abused its discretion by dismissing the case without considering

whether conversion or dismissal would be in the best interests of

all creditors and the estate.

Section 1112(b)(1) provides in relevant part that “. . . the

court shall convert a case under this chapter to a case under

chapter 7 or dismiss a case under this chapter, whichever is in

the best interests of creditors and the estate, for cause

. . . .” 11 U.S.C. § 1112(b)(1). If cause is established, the

decision whether to convert or dismiss the case falls within the

sound discretion of the court. Mitan v. Duval (In re Mitan),

573 F.3d 237, 247 (6th Cir. 2009); Nelson v. Meyer

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(In re Nelson), 343 B.R. 671, 675 (9th Cir. BAP 2006) (chapter 13

case). And, if a bankruptcy court determines that there is cause

to convert or dismiss, it must also: (1) decide whether

dismissal, conversion, or the appointment of a trustee or

examiner is in the best interests of creditors and the estate;

and (2) identify whether there are unusual circumstances that

establish that dismissal or conversion is not in the best

interests of creditors and the estate. § 1112(b)(1), (b)(2); and

see Shulkin Hutton, Inc., P.S. v. Treiger (In re Owens), 552 F.3d

958, 961 (9th Cir. 2009) (“the court must consider the interests

of all of the creditors”); In re Prods. Int’l Co., 395 B.R. 101,

107 (Bankr. D. Ariz. 2008).

A. The bankruptcy court abused its discretion when it failed to

consider whether conversion or dismissal was in the best

interests of all creditors and the estate.

We determine as a preliminary matter that even if we

determine that the bankruptcy court’s findings of bad faith and

plan futility were not in error, the bankruptcy court abused its

discretion by failing to consider whether conversion or dismissal

was in the best interests of all creditors and the estate. We

also determine that on the current record this error was not

harmless. We begin here because clarification on this point

provides guidance in our analysis of the bankruptcy court’s other

determinations.

Appellees argue on appeal that dismissal was in the best

interests of creditors and that Debtor waived any contrary

argument because he did not raise it in his opposition to the

motion. We disagree. In the motion and opposition the parties

both argued as to whether chapter 7 was an available option for

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the Debtor.10 And regardless of the parties’ arguments, the

bankruptcy court had an independent obligation under § 1112 to

consider what would happen to all creditors on dismissal and, in

light of its analysis, whether dismissal or conversion would be

in the best interest of all creditors, not just the largest and

most vocal creditor. See In re Owens, 552 F.3d at 961 (agreeing

with the Fourth Circuit that “when deciding between dismissal and

conversion under 11 U.S.C. § 1112(b), ‘the court must consider

the interest of all of the creditors.’”) (quoting Rollex Corp. v.

Assoc. Materials (In re Superior Siding & Window, Inc.), 14 F.3d

240, 243 (4th Cir. 1994)). 

When determining the best interest of the creditors under

§ 1112(b), the Code’s fundamental policy of achieving equality

among creditors must be a factor considered, “and it is not

served by merely tallying the votes of the unsecured creditors

and yielding to the majority interest.” In re Superior Siding &

Window, Inc., 14 F.3d at 243; and see In re Graphic Trade

Bindery, Inc., 2012 Bankr. LEXIS 1598 at *17 (Bankr. D. Md.

Apr. 12, 2012) (“the mere fact that a section 1112(b) motion

seeks only conversion is no bar to dismissal if the court

determines that dismissal is in the best interest of the

creditors and the estate. The opposite is also true. The task

of the bankruptcy court is to determine which option is the

better choice.”). 

10 Both sides focused their arguments, however, on whether

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

debts. Appellees argued that Debtor mischaracterized his

consumer debts as primarily business debts; Debtor argued to the

contrary.

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While we acknowledge that unsecured creditors did not take a

position here, it is notable that the United States Trustee made

clear that it did not support dismissal. 

Based on our reading of the hearing transcript, it appears

that the bankruptcy court may have believed that its limited task

was to grant or deny the relief requested by Appellees –

dismissal. The bankruptcy court was not so limited. It had at

least three options available to it: let Debtor try to propose a

plan; convert the case to chapter 7; or dismiss it, as Appellees

requested. When considering these options, the bankruptcy court

was required to consider the unrefuted evidence that:

(1) Appellees had judgment liens and immediate collection

abilities superior to all of Debtor’s unsecured creditors upon

dismissal of the case; (2) Appellees’ judgment liens, however,

were subject to attack as preferences; (3) there was no evidence

that creditors other than Appellees had any avenue for prompt or

meaningful payment outside a bankruptcy case; (4) recovery of the

tax refund would be enhanced in either a chapter 11 or chapter 7

case; and (5) dismissal as a result of these factors was far less

advantageous than conversion for all creditors of the estate

other than Appellees. This was not harmless error.

We cannot determine from the record whether the bankruptcy

court believed that § 707(b) barred conversion to chapter 7, but

the Appellees certainly argued that this was the case. We

disagree; § 707(b) abuse analysis did not bar conversion on this

record.

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There is a substantial body of decisional law11 focusing on

the applicability of § 707(b) when a debtor seeks to voluntarily

convert a chapter 13 case to chapter 7 – and the courts are split

as to whether conversion under these facts is appropriate. We

located only one case discussing a debtor’s attempt to

voluntarily convert a chapter 11 case to chapter 7. See

In re Traub, 140 B.R. 286 (Bankr. D.N.M. 1992). We located no

case authority, and the parties cited none, addressing the

applicability of § 707(b) abuse analysis to chapter 7 cases

converted involuntarily from chapter 11. Dismissal under

§ 707(b), however, requires the exercise of the bankruptcy

court’s discretion; the statute states that the bankruptcy court

“may” dismiss - dismissal is not required. 

Further, the bankruptcy court’s ability to rely on § 707(b)

for dismissal requires a determination that the Debtor’s debts

were primarily consumer. Suffice it to say that this question

is, at best for Appellees, an open one. 

Finally, we are aware of individual chapter 11 cases

converted to chapter 7 by court order after either failure by

debtors to achieve plan confirmation timely or as a result of

default under confirmed chapter 11 plans – none of which involved

“means test” or § 707(b) abuse consideration. We located nothing

in the record before the bankruptcy court to support a conclusion

that Debtor’s chapter 11 case would not be eligible for

conversion to chapter 7 in the event Debtor was not able to

11 For an interesting survey of the majority, minority, and

hybrid approaches, see Anna Haugen, James C. Eidson and Amir

Shachmurove, Should § 707(b) Apply in Chapter 7 Cases Converted

from Chapter 13?, 33-APR Am. Bankr. Inst. J. 48 (2014).

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confirm a plan because Appellees ultimately prevailed in a plan

objection based on their veto under § 1129(a)(8). 

The bankruptcy court here failed to consider whether

dismissal or conversion was in the best interests of the

creditors and the estate. Conversion was and is a viable option

even if § 707(b) is applicable. And given the facts in the

record currently before us, we cannot conclude that the

bankruptcy court’s failure to consider conversion was harmless

error. The evidence strongly suggests that conversion is in the

best interest of all creditors other than Appellees. Thus, the

bankruptcy court erred in this regard. 

B. The bankruptcy court erred when it found the Debtor filed

this case not in good faith.

The bankruptcy court has broad discretion in determining

what constitutes “cause” under section 1112(b). See Chu v.

Syntron Bioresearch, Inc. (In re Chu), 253 B.R. 92, 95 (S.D. Cal.

2000). The movant bears the burden of establishing by a

preponderance of the evidence that cause exists. StellarOne Bank

v. Lakewatch LLC (In re Park), 436 B.R. 811, 815 (Bankr. W.D. Va.

2010). Because good faith is required in the commencement and

prosecution of a chapter 11 case, “the lack thereof constitutes

‘cause’ for dismissal under § 1112(b)(1).” In re Mense, 509 B.R.

269, 276 (Bankr. C.D. Cal. 2014) (citing In re Marsch, 36 F.3d at

828 (“Although section 1112(b) does not expressly require that

cases be filed in ‘good faith,’ courts have overwhelmingly held

that a lack of good faith in filing a Chapter 11 petition

establishes cause for dismissal.”)). “The good faith requirement

‘deter[s] filings that seek to achieve objectives outside the

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legitimate scope of the bankruptcy laws.’” Id.

The bankruptcy court found that the bankruptcy case was a

two-party dispute with no possibility of plan confirmation and

was filed for the sole purpose of stopping Appellees’ collection

on their judgment. The limited record then before the bankruptcy

court in the early stages of the case does not support these

findings and conclusions.

1. The bankruptcy court erred by finding Debtor’s sole and

bad faith purpose was to stop Appellees’ collection

efforts. 

It is well recognized that the automatic stay under § 362,

activated upon filing a bankruptcy petition (with some exceptions

not applicable here), is intended to provide debtors in

bankruptcy with a breathing spell from their creditors’

collection actions. And it is not unusual to encounter a

chapter 11 case filed “because of the crushing weight of a

judgment.” In re Marshall, 298 B.R. at 683. If, however, a

debtor seeks to use a chapter 11 filing to “unreasonably deter

and harass creditors,” such a filing lacks good faith. 

In re Marsch, 36 F.3d at 828. 

The bankruptcy court here found that Debtor filed his

chapter 11 case solely to stop Appellees’ collection efforts and

concluded that this constituted bad faith. The bankruptcy court

made no finding that stopping Appellees’ collection efforts was

unreasonable or was intended to harass Appellees, however, and we

find no support in the record for such inferences. 

Based on Debtor’s schedules and statement of financial

affairs, for at least the two years preceding the bankruptcy

filing, Debtor supplemented his salary with substantial

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withdrawals from retirement accounts, credit cards, and

significant loans from family members. Then two months before

filing, Appellees commenced aggressive collection efforts,

freezing or levying against bank and brokerage accounts. The

Debtor concurrently continued to incur substantial legal fees. 

As stated in Debtor’s declaration in opposition to the motion,

which was not disputed by any evidence submitted by Appellees,

the litigation costs, entry of the judgment, and unpaid legal

bills left him insolvent. Appellees’ contrary argument that

Debtor was solvent and could and should have paid Appellees’

judgment is not supported by the record. 

At oral argument, the bankruptcy court expressed its

disbelief12 in assertions by Debtor that he was financially

strapped prepetition, when he had a house in New York that he

planned to keep and three high-end vehicles – unlike the people

the bankruptcy court was “used to” – “people who literally are

living in homeless shelters.” Hr’g Tr. (Apr. 9, 2014) at

17:22-23. The bankruptcy court directed argument away from

Debtor’s alleged insolvency,13 as a “non-issue.” Id. at 15:17. 

As articulated by the Ninth Circuit, however, when assessing a

debtor’s good faith the bankruptcy court “should examine the

debtor’s financial status [and] motives. . . .” In re Arnold,

12 The bankruptcy court told Debtor’s counsel “don’t tell

me this gentleman is impoverished, please.” Hr’g Tr. (Apr. 9,

2014) at 18:10-11.

13 Nonetheless Debtor’s counsel advised the bankruptcy

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

for employment. His wife remained in New York as a cancer

survivor who had a network of people and medical caregivers

supporting her there.

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806 F.2d at 939. Here, the bankruptcy court’s disinclination to

examine the Debtor’s financial status beyond his possession of a

home in New York and three admittedly valuable vehicles

contributed to its erroneous conclusion.14

Debtor’s petition, filed within 8915 days of perfection of

Appellees’ judgment lien, not only appropriately provided Debtor

a breathing spell,16 it laid the ground work for another key goal

underlying the bankruptcy process, leveling the playing field for

other creditors of the estate. See In re Superior Siding &

Window, Inc., 14 F.3d at 243. Appellees appear to have obtained

their judgment lien within the preference period. Not

surprisingly, Appellees argued that they would be better off if

allowed to pursue collection on their judgment outside of the

bankruptcy case – absent the bankruptcy filing, Appellees would

have a substantial advantage over other creditors.

In addition, Debtor stated his clear intention to save

equity in the New York home, where his wife lived, and his desire

for orderly liquidation of assets if he could not propose a

confirmable plan. The record does not evidence that the

14 As recently discussed by the Ninth Circuit, “bankruptcy

law must apply equally to the rich and poor alike, fulfilling the

Constitution’s requirement that Congress establish ‘uniform laws

on the subject of bankruptcies throughout the United States.’”

Hawkins v. Franchise Tax Bd. of Cal., 769 F.3d 662, 669 (9th Cir.

2014).

15 The record is not fully developed as to the mechanism by

which Appellees obtained lienholder status; it appears

undisputed, however, that Debtor’s filing on February 4, 2014,

put Appellees’ lien status within the 90-day preference period.

16 At the hearing on the motion, Debtor’s counsel argued

that the breathing spell benefit of the automatic stay was

negated here by Appellees’ quickly filed motion.

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bankruptcy court considered either of these goals. But both

goals are legitimate reasons to file bankruptcy. See Warner v.

Universal Guardian Corp. (In re Warner), 30 B.R. 528, 529 (9th

Cir. BAP 1983) (nothing in the Code prohibits the use of chapter

11 by debtors seeking to save their family home from

foreclosure); and In re Soundview Elite, Ltd., 503 B.R. 571, 580

(Bankr. S.D.N.Y. 2014) (“[I]t is not bad faith to file a chapter

11 petition for the purpose of a more orderly liquidation.”). 

And although Debtor had not filed a proposed plan as of the

hearing on the motion, Debtor argued that through the chapter 11

bankruptcy process he intended to seek recovery of as much as

$850,000 on overpayment of taxes.

All the evidence before the bankruptcy court indicated that

Debtor had significant financial need for protection under the

Bankruptcy Code. No evidence was presented from which the

bankruptcy court could infer that Debtor intended to unreasonably

deter or harass Appellees or any of his other creditors. 

2. The existence of disputes between Debtor and Appellees

does not render the case a two-party dispute filed in

bad faith.

“Petitions in bankruptcy arising out of a two-party dispute

do not per se constitute a bad-faith filing by the debtors.” 

In re Stolrow’s, Inc., 84 B.R. 167, 171 (9th Cir. BAP 1988). 

Courts that find bad faith based on two-party disputes do so

where “it is an apparent two-party dispute that can be resolved

outside of the Bankruptcy Court’s jurisdiction.” Oasis at Wild

Horse Ranch, LLC v. Sholes (In re Oasis at Wild Horse Ranch,

LLC), 2011 Bankr. LEXIS 4314 at *29 (9th Cir. BAP Aug. 26, 2011)

(emphasis added) (citing N. Cent. Dev. Co. v. Landmark Capital

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Co. (In re Landmark Capital Co.), 27 B.R. 273, 279 (D. Ariz.

1983)); and see St. Paul Self Storage Ltd. P’ship, 185 B.R. at

583 (debtor’s only significant asset was a claim against one

creditor set to be tried in state court and bankruptcy court

supervision of debtor’s liquidation was not necessary to protect

other creditors). Typical bad faith two-party dispute cases may

involve delays on the eve of trial (litigation tactics), forum

shopping, new-debtor syndrome (special purpose entities), repeat

filers, and repeatedly delayed foreclosure sales. There are no

such common indicators here. 

The evidence before the bankruptcy court established that

the parties were involved in six years of litigation in state

court prior to the petition date; Debtor was using exempt assets,

family loans, and credit card debt to fund the litigation and his

expenses; and Appellees started to aggressively collect on their

judgment. With assets of approximately $750,000 versus the

$1.5 million judgment, and interest accruing at 9% on the

judgment versus Debtor’s annual salary of $200,000, Debtor was

balance sheet and cash flow insolvent before considering living

expenses and other significant debt. Such numbers do not support

the bankruptcy court’s implicit determination that resolution

outside the bankruptcy court was preferable or even possible. 

This was not a case where Appellees offered any kind of

settlement or any resolution of the judgment other than Debtor’s

full liquidation. Nor does the evidence support a conclusion

that the bankruptcy filing did not provide important protection

to other legitimate creditors by leveling the playing field. 

“Good faith is lacking only when the debtor’s actions are a clear

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abuse of the bankruptcy process.” In re Arnold, 806 F.2d at 939. 

Keeping the Appellees from seizing all liquid assets ahead of

other creditors and bringing preferential transfers back into the

estate for the benefit of all creditors not only do not

constitute abuses of the bankruptcy process, they achieve primary

goals of the bankruptcy process. Nor did Appellees present any

evidence to support an inference that Debtor sought to have the

bankruptcy court act as an appellate court in connection with the

pending state court matters or to shift to the bankruptcy court

the decision making on claims in the state court litigation.

During oral argument on the motion, the bankruptcy court

repeatedly stated that Debtor had one creditor. Appellees argued

that Debtor’s scheduled debts were insignificant and questionable

– Appellees were most affected by the filing, and, implicitly, of

singular importance. To the contrary, Debtor’s schedules, which

the bankruptcy court acknowledged having reviewed, establish the

existence of significant debt owed to credit card companies,

attorneys, and family members. The bankruptcy court had no

evidence before it from which it could appropriately infer that

any of such debt was not legitimate. Nor did any evidence exist

to dispute Debtor’s contention that the interest accrual on the

judgment alone made his financial survival outside of bankruptcy

impossible. To conclude otherwise was not supported by the

record.

3. Appellees’ stated intention not to accept a less-than-100%-

plan by Debtor, alone, does not support a conclusion that

Debtor filed the case in bad faith.

The bankruptcy court also found that Debtor could not

propose a confirmable plan because Appellees argued they would

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vote against it. Many are the judgment creditors who gnash their

teeth (metaphorical or otherwise) in chagrin when their

collection campaign is stayed by a bankruptcy filing. Only

slightly less frequent are the immediate post-filing threats that

no quarter will be given. Such jeremiads, however, are not a

sufficient basis for a universal conclusion of plan futility. 

And they certainly do not unequivocally establish the debtor’s

bad faith. Economic considerations and rationality often result

in resolution.

Here, the Appellees’ statements must be taken in context. 

Debtor had not filed a plan, and Appellees, apparently, had not

had time to compare their possible treatment under a plan with

the certainly less favorable treatment in a chapter 7 case. It

is indeed possible that Appellees would elect chapter 7,

notwithstanding that they lose the opportunity to obtain any

access to Debtor’s post-petition income. It is further possible

that the tax refunds will not be more easily collected in a

chapter 11 case such that this factor does not support a

continuation in chapter 11. And it is certainly possible that

the Debtor will try to take advantage of his creditors rather

than dealing with them forthrightly as he promises. But the

possibility that the Appellees will not act in their economic

best interest, when the choice is correctly presented as not

being limited to dismissal or chapter 11, or that the Debtor will

act in a manner inconsistent with the only evidence before the

bankruptcy court, do not equate to bad faith. Here, the only

evidence is not supportive of bad faith and only suggestive of

plan futility. Indeed, it is worth noting that the Appellees’

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stated unwillingness to ever support Debtor’s plan was not

supported by declaratory evidence of any type. It is possible

that this is a reasoned response that would retain rationality

even if conversion is the alternative, but on this record it is

illogical to so assume.

Moreover, nothing in the record indicates that Debtor was

aware that Appellees would take such a position when he filed his

petition. And when the bankruptcy court ruled on the motion,

Debtor had not filed a proposed plan at all.17 In essence, the

bankruptcy court concluded, based on a very scant record, that

Debtor could neither propose the 100% plan Appellees demanded,

negotiate a consensual resolution, or cram down a lesser payout

plan.18 Such determinations were premature. 

17 At oral argument, the bankruptcy court heard the Debtor

to suggest that he would artificially impair the secured lender

on the New York property to obtain an impaired class to vote in

favor of a future plan. The bankruptcy court included in its

findings, however, that the “New York property is worth more than

what is owed to the secured lender, so there is no unsecured

portion to impair.” Statement of Decision at 2. We were unable

to find support in the record for this finding. Debtor scheduled

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

is not clear from the schedules whether Debtor likewise scheduled

50% of the mortgage debt against the property or 100%. Nor did

we locate any evidence regarding the status of payments to the

mortgage lender or whether Debtor’s nonfiling spouse contributed

to the mortgage payments or had independent assets or income.

18 The bankruptcy court referred to an estimate contained

in Debtor’s petition itself that no funds would be available for

distribution after exempt property and administrative claims. In

his appellate opening brief, Debtor undertook to explain in a

footnote that the “no distribution” box in the emergency

petition, as referred to by the bankruptcy court, was checked

automatically by the software system used by counsel. As the

bankruptcy court acknowledged at oral argument on the motion that

it had reviewed the schedules and other documents on the docket,

which necessarily included Debtor’s multiple declarations, we

conclude that reliance on a checked box on the bare bones

(continued...)

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We note that Debtor acknowledged that his postpetition

earnings and net disposable income are available in a chapter 11

plan. Under § 502 of the Code, Appellees would not be entitled

to the 9% interest on their judgment postpetition,19 reducing the

amount required to be paid from Debtor’s not-insubstantial

$200,000 annual salary. Debtor proposed to seek a large recovery

from the IRS to contribute to plan payments. And Debtor’s

schedules disclosed not-insignificant amounts of exempt assets

that the Debtor could, if so inclined, commit to a chapter 11

plan payout. Such possibilities were neither discussed nor

considered nor given adequate time for development.

Although it is well within a bankruptcy court’s decisionmaking authority to determine facial non-confirmability of a

proposed plan (such as when considering a motion for approval of

a filed disclosure statement20), determining the facial nonconfirmability of an unfiled plan so early in the case and absent

a fully developed record is not supportable. See Can-Alta

Props., Ltd. v. State Sav. Mortg. Co. (In re Can-Alta Properties,

Ltd.), 87 B.R. 89, 92-93 (9th Cir. BAP 1988) (lifting of the

automatic stay based on bad faith, where the court lacked

evidence of confirmability or feasibility of a plan and afforded

18(...continued)

petition was insufficient grounds for the bankruptcy court to

conclude no plan could be confirmed.

19 Section 502(b)(2) provides for the disallowance of a

claim to the extent that “such claim is for unmatured interest.”

20 See e.g., In re Main St. AC, Inc., 234 B.R. 771, 775

(Bankr. N.D. Cal. 1999) (a court may disapprove of a disclosure

statement if the plan to which it refers could not possibly be

confirmed).

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no opportunity for the debtor to amend the then existing plan to

respond to the court’s concerns, constituted an abuse of

discretion).

CONCLUSION

Based on the foregoing, we REVERSE.

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