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FILED

AUG 20 2014

SUSAN M. SPRAUL, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT

NOT FOR PUBLICATION

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re: ) BAP No. CC-13-1527-KiTaPa

)

KENNY G ENTERPRISES, LLC, ) Bk. No. 8:11-24750-TA

)

Debtor. )

 )

)

KENNY G ENTERPRISES, LLC, )

)

Appellant, )

)

v. ) M E M O R A N D U M1

)

THOMAS H. CASEY, Chapter 7 )

Trustee; MOSTAFA KARIMABADI; )

EM TRUST; UNITED STATES )

TRUSTEE, )

)

Appellees. )

______________________________)

Argued and Submitted on July 25, 2014, 

at Pasadena, California

Filed - August 20, 2014

Appeal from the United States Bankruptcy Court

for the Central District of California

Honorable Theodor C. Albert, Bankruptcy Judge, Presiding

 

Appearances: Elizabeth LaRocque, Esq. argued for appellant,

Kenny G Enterprises, LLC; Appellee Thomas H. Casey,

Chapter 7 Trustee, argued pro se.

 

Before: KIRSCHER, TAYLOR and PAPPAS, Bankruptcy Judges.

1 This disposition is not appropriate for publication. 

Although it may be cited for whatever persuasive value it may have

(see Fed. R. App. P. 32.1), it has no precedential value. See 9th

Cir. BAP Rule 8013-1.
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Appellant, former chapter 112 debtor Kenny G Enterprises, LLC

("KGE"), appeals two orders, one converting its case to chapter 7

and the other denying its motion to reconsider the conversion

order. We AFFIRM.3

I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY

A. KGE's bankruptcy filing and confirmed plan

KGE is a Nevada limited liability company formed in 2008. KGE

was formed, owned and operated by Kenneth Gharib, who has also

used the aliases Kenneth "Garett" or "Garrett" and his birth name

Khosro Gharib Rashtabadi ("Kenny").4 KGE was in the business of

purchasing, improving and selling or renting real properties that

Kenny believed were good investment opportunities. At the time of

plan confirmation, KGE's bankruptcy estate consisted of only one

asset, a residential real property known as the Hillsborough

Property ("Property"), which was rented out to a third party. 

Rental income from the Property was the estate's sole source of

revenue. 

KGE filed a chapter 11 bankruptcy case on October 24, 2011. 

By way of stipulation, Bank of America, the first lienholder on

the Property, agreed to value the Property at $1.2 million. 

Shortly after the petition date, Kenny and KGE sued the sellers of

2 Unless specified otherwise, all chapter, code and rule

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

the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. The

Federal Rules of Civil Procedure are referred to as “Civil Rules.”

3 Appellees Mostafa Karimabadi and EM Trust filed a joinder

to the chapter 7 trustee's brief on April 2, 2014. No brief was

received from the United States Trustee.

4 Because of the aliases used by Mr. Gharib, we refer to him

as Kenny for clarity; no disrespect is intended.

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the Property, Mostafa Karimabadi and his wife Monir Zarrinnegar

("Mostafa"),5 in state court contending that Mostafa failed to

disclose certain defects in the Property. Mostafa filed a crosscomplaint contending that Kenny and/or KGE failed to tender the

purchase price of $3,125,000. Mostafa filed a proof of claim in

KGE's case for $1,265,000, which included a purported secured

claim of $200,000. KGE never objected to Mostafa's claim. 

KGE filed its first amended plan and disclosure statement in

November 2013 ("Plan"). Under the terms of the Plan, payments to

creditors were to be made from rental income derived "from the

continued operation of the Hillsborough Property as a residential

real property." Unsecured creditors were to receive a total of

approximately $33,300 on a pro rata basis, or $555 per month for

five years. Kenny agreed to contribute any funds necessary in

case of a shortfall. Although Section V of the Plan is entitled

"Sale or Transfer of Property; Assumption of Contracts and Leases;

Other Provisions," no representations were made in that section or

any other (or in the parallel Section XVI in the disclosure

statement) about the possibility of KGE selling the Property. The

Plan provided that all estate property vested in KGE upon

confirmation, but was silent as to whether estate property

remained vested in KGE upon conversion of the case to chapter 7.

Two creditors rejected the Plan, Mostafa and R&M Remodeling,

who held an unsecured claim of $1,950. Over their objections, an

order confirming the Plan was entered on January 9, 2013 (the

5 We refer to creditors Mr. Mostafa Karimabadi and Ms. Monir

Zarrinnegar as "Mostafa" simply because the parties have done so

throughout this case. Again, no disrespect is intended.

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"Confirmation Order"). The Confirmation Order, drafted by KGE's

counsel Dana Douglas ("Douglas"), stated "[c]onfirmation of the

Plan is not likely to be followed by the liquidation or need for

further financial reorganization of the Debtors [sic] or any

successor to the Debtor under the Plan, unless such liquidation or

reorganization is proposed in the Plan." No such liquidation

provision was provided for in the Plan.

B. Litigation with Mostafa and EM Trust 

Meanwhile, Mostafa recorded a lis pendens against the

Property in connection with the state court litigation involving

KGE and Kenny. Upon KGE's objection that such action violated the

automatic stay, the lis pendens was removed.

In February 2013, Mostafa moved for relief from stay to

continue with the state court litigation. KGE opposed. The

initial March 12 hearing on the motion was continued to April 9,

2013. No one appeared for KGE at the April 9 hearing.6 Counsel

for Mostafa pointed out to the bankruptcy court that the state

court litigation involved a claim against KGE and Kenny for

rescission, wherein Mostafa was seeking to recover the Property. 

Counsel requested that Mostafa be allowed to re-record a lis

pendens for fear the Property might be transferred during

litigation. Counsel's fear was based on a call he received from

an escrow company saying that KGE was trying to sell the Property. 

The court agreed and granted Mostafa's requested relief. An order

granting the stay relief motion and authorizing the re-recording

6 This lack of appearance was probably due to the fact that 

the Property had already been sold to another party on March 26,

2013.

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of the lis pendens was entered on June 3, 2013.

Meanwhile, in April 2013, EM Trust, a party who had sued KGE

and Kenny prepetition in state court for breach of a prior

settlement agreement, obtained a judgment against Kenny for

$1,729,080.82. Until that point, EM Trust had not participated in

KGE's bankruptcy case and had argued to the state court that it

wished to pursue Kenny individually. EM Trust would later file a

proof of claim in KGE's case based on its judgment. 

C. KGE sells the Property post-confirmation 

On March 26, 2013, between the two scheduled hearings on

Mostafa's stay relief motion and apparently unbeknownst to Mostafa

and other unsecured creditors, KGE sold the Property for

$3,140,000. The grant deed, Plan and Confirmation Order were

recorded with the county on that same day. 

D. KGE's motion for final decree and order converting the case

to chapter 7

KGE filed a motion for final decree, discharge and order

closing its chapter 11 case on July 20, 2013 ("Final Decree

Motion"). KGE contended it was entitled to a final decree and

discharge under Rule 3022 because the Property had been sold and

all creditors had been paid pursuant to the Plan, with the

exception of Mostafa for whom a payment of $2,650.68 had been put

into escrow and was conditioned upon a successful outcome of the

state court litigation. In support, KGE offered a declaration

from Steven Rashtabadi aka Farhad Gharib Rushtabadi (with a "u")

aka Steven Rush ("Steven"),7 Kenny's brother, who claimed to be

7 Because of the various aliases used by Mr. Rushtabadi, we

continue...

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the new managing member of KGE. Steven affirmed that KGE had made

all of the required payments under the Plan. Steven would later

testify at a Rule 2004 examination in August 2013 that Kenny sold

Steven all of his interest in KGE for $8,500 cash in June or July

2013, although a written agreement indicated the transfer of

ownership occurred on April 1, 2013. Steven also stated that he

had not yet taken control of KGE and knew little about its

operations; he is in the film industry. When questioned, Steven

did not know where KGE's offices were located and had never been

there. He was also unaware of the Property's existence or that

KGE had sold it. 

Mostafa, EM Trust and the United States Trustee ("UST")

objected to the Final Decree Motion. Mostafa argued that the

unnoticed sale of the Property, which it contended was "estate"

property, violated § 363(b)(1). Mostafa also argued that no

provision in the Plan provided for the sale of the Property. The

UST opposed the Final Decree Motion on the basis that KGE had not

paid $6,175 in quarterly fees owing. EM Trust's objection

consisted primarily of excerpts of Kenny's deposition testimony

taken at his recent judgment debtor exam in July 2013. EM Trust

argued that the only protection for creditors from Kenny's alleged

fraud was to convert the case to chapter 7 and appoint a trustee

to recover the stolen assets of KGE's estate. Attached to its

opposition was a copy of a state court judgment dated June 18,

2013, charging KGE with the payment of the unpaid and outstanding

7...continue

refer to him as Steven for clarity; no disrespect is intended.

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judgment initially entered against Kenny in April 2013 for

$1,729.080.82. Attached also was a copy of a bankruptcy court

order entered on July 25, 2013, in the chapter 11 case of another

one of Kenny's entities, Ken & Associates, Inc., converting the

case to chapter 7 for bad faith and lack of prospect for

successful reorganization. According to that order, Kenny has

filed three other bankruptcy cases that were dismissed for bad

faith: In re Union Inv. Corp., 12-17642; In re Ken & Assocs.,

Inc., 10-26670; and In re Hillsborough, 11-11181.

In its reply, KGE noted that it had paid the outstanding UST

fees. As for Mostafa's objection that any sale of the Property

required notice and court approval under § 363(b)(1), KGE

contended (1) the sale of the Property was in the ordinary course

of KGE's business so no notice or court approval was required, and

(2) confirmation of the Plan vested all estate property in KGE,

which permitted KGE to sell the Property without prior court

approval. Finally, KGE disputed that EM Trust had any interest in

KGE; its judgment was against Kenny. In conclusion, KGE again

asserted that all claims had been paid pursuant to the Plan and

that the estate had been fully administered. 

Prior to the hearing on the Final Decree Motion, the

bankruptcy court entered a tentative ruling requesting the

following information from KGE: 

(1) a list of who has been paid and when; 

(2) an explanation as to how and to whom property was

sold (was this pursuant to the plan?);

(3) an explanation as to why apparently some creditors

were omitted; and

(4) an explanation as to how management changed.

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Mostafa, EM Trust, the UST, and KGE (represented by Douglas)

appeared at the hearing on the Final Decree Motion on August 14,

2013. Douglas again represented that all claims had been paid;

secured creditors were paid out of the escrow, and unsecured

creditors received plan payments for February 2013 and received

balloon payments for any remaining amounts upon the sale of the

Property in March 2013. Douglas also represented that the sale

was disclosed in post-confirmation reporting. When Douglas argued

that KGE was free to sell the Property without notice, but that

KGE had proceeded in doing so without her counsel, the bankruptcy

court inquired:

THE COURT: Two questions. First, was the sale

contemplated in the plan?

MS. DOUGLAS: Not at all. 

Hr'g Tr. (Aug. 14, 2013) 4:14-16. The court's second question was 

why KGE deserved a discharge if this was simply a liquidation. 

Douglas later conceded that Mostafa's claim had not yet been paid,

but represented that KGE was holding the funds, and that she had

recommended that KGE tender them even though the litigation was

not yet resolved.

Counsel for EM Trust requested that the bankruptcy court take

action to gain control over the sale proceeds so Kenny could not

squander or steal them. The court inquired how that would occur

procedurally. Should it convert the case to chapter 7 and have

the trustee make demand on KGE for turnover of the sale proceeds? 

Douglas then stated that the sale proceeds were being held by a

Nevada entity called Freedom Investment, Inc. ("Freedom") and that

the funds could be placed into an account, which could be observed

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by other parties. Counsel for Mostafa argued that converting the

case to chapter 7 was the best remedy to allow supervision over

KGE. He further argued that the Plan did not provide for the sale

of the Property; the Plan was to lease it for a period of years. 

The bankruptcy court then announced its decision to convert

the case to chapter 7:

The wrinkle in this case, of course, is that you have a

confirmed plan. So you have a post-confirmation

reorganized Debtor deciding, plan schman, I'm just going

to go ahead and sell. And that creates a legal

conundrum, which I'm not entirely sure I have a ready

answer for. Is that subject to 549 avoidance or is it

not? A little hard to say. 

So, this is not necessarily an easy problem to unravel. 

But I can tell you one thing. There's nothing that I

have heard that suggests to me that the Court should

relax its jurisdiction and give a final decree, or

certainly not a discharge. I mean, that suggestion is

totally off the table, not the least of which the plan

didn't call for a liquidation, and this has now become,

effectively, a liquidation. 

So, you're not going to get – by outflanking the plan,

what the plan – you're not going to subvert the law which

denies in a liquidating case, a discharge by unilateral

action. And now the question becomes, what other

remedies should I employ right now beyond converting the

case to Chapter 7, which I intend to do?

Id. at 16:6-17:1. 

Douglas did not object to the court's decision to convert the

case. She agreed to relay the court’s directive to KGE that

either Kenny or Steven obtain a check from Freedom for the sale

proceeds and turn it over to the trustee, or they would be facing

a contempt charge. Douglas represented that the remaining sale

proceeds being held by Freedom were $1,750,560.16.

The UST then asked the bankruptcy court for an order

restraining Kenny or any other entity from transferring the funds. 

The court agreed to issue the TRO, but believed it was "already

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the law" that the funds could not be transferred. Id. at 20:13. 

The bankruptcy court entered an order on August 14, 2013,

denying the Final Decree Motion, converting the case to chapter 7

and restraining any further transfers of the sale proceeds (the

"Conversion Order"). The Conversion Order did not state the basis

for the conversion. 

E. KGE's motion to reconsider the Conversion Order

1. The parties' arguments 

Armed with a new attorney, KGE filed a motion to reconsider

the Conversion Order on August 28, 2013, thereby tolling its

appeal time under Rule 8002. KGE sought relief under both Civil

Rule 59, incorporated by Rule 9023, and Civil Rule 60(b)(1), (2),

(3), (4) and (6), incorporated by Rule 9024. KGE argued: (1) the

final decree should have been entered because the Property vested

in KGE upon confirmation, and the post-confirmation sale of the

Property, which provided full payment to all creditors, did not

require notice or court authority and was in compliance with the

Plan; (2) no party tried to revoke the Confirmation Order within

the required 180 days under § 1144, so creditors could not now

collaterally attack it in an attempt to get better treatment of

their claim; (3) the Plan was crammed down on Mostafa, who made

untruthful statements about KGE's alleged bad faith at the

August 14 hearing; (4) EM Trust, which made the same untruthful

statements, chose not to participate in the bankruptcy despite

having notice and its judgment was against Kenny only; (5) the

bankruptcy court violated KGE's due process rights by sua sponte

converting the case to chapter 7 without notice and opportunity to

be heard; and (6) no basis existed under § 1112(b)(4)(L), (M), (N)

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or (O) to convert the case: no party had sought revocation of the

Confirmation Order; KGE had substantially consummated the Plan; no

one had alleged that KGE materially defaulted on the Plan; and the

Plan did not provide for any occurrence or condition that would

automatically terminate it. KGE did not contest the bankruptcy

court's decision to enter the TRO.

In his declaration in support, Kenny stated that KGE was in

full compliance with the Plan and that all creditors had been paid

pursuant to its terms. Exhibit 14 was provided as evidence of

these payments. However, some of the alleged "balloon" payments

appeared to be missing, and Kenny failed to explain why he had

signed certain checks on April 10 and July 15, 2013, which is

after Steven had allegedly purchased KGE and became its managing

member on April 1, 2013.

Mostafa, EM Trust, the UST and the newly-appointed chapter 7

trustee, Thomas H. Casey ("Trustee"), opposed the motion to

reconsider. Among other things, Mostafa argued that KGE had

violated the terms of the Plan by not paying his claim. Thus,

argued Mostafa, the motion should be denied because conversion was

warranted under § 1112(b)(4)(M) and (N).

Trustee's opposition consisted of over 400 pages. A few days

after entry of the Conversion Order, Trustee had conducted Rule

2004 examinations of both Kenny and Steven. Kenny testified that

on the day the Property was sold, the $1.75 million in sale

proceeds were wired to KGE's DIP account.8 The following day,

8 Trustee's evidence showed that $1,897,126.22 in sale

proceeds were wired to KGE's DIP account, as opposed to the $1.75

continue...

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Kenny caused those funds to be wired to Freedom for the purchase

of real property in Iran, which was being sold by a third party. 

The purchase price was $1.8 million, but Kenny valued the Iranian

property at $2 million. Kenny testified that the owner of Freedom

was Mahadi Adib, and he denied having any interest in Freedom even

though a "Kenneth Garrett" was listed as its registered agent, and

Freedom's mailing address was the same P.O. Box address Kenny had

used for some of his other entities registered in Nevada.9

Trustee's counsel had also learned that on August 14, the day of

the hearing on the Final Decree Motion and the entry of the

Conversion Order and TRO, Freedom wired $1.4 million (the funds

remaining in its US Bank account) to another party and closed its

account. KGE had also issued several checks to insiders paid out

of the sale proceeds.

Trustee argued that KGE's actions violated the terms of the

Plan. Namely, the Plan did not provide for, or even contemplate,

the sale of the Property; it provided that rental income from the

Property was to fund payments to creditors. The Plan also did not

allow KGE to transfer the sale proceeds to various insiders and

use the sale proceeds to purchase real property in Iran. Further,

KGE had failed to provide evidence that creditors had been paid in

full per the Plan and, in fact, evidence showed to the contrary. 

KGE's exhibits filed the day after the August 14 hearing did not

provide sufficient evidence of full payment to all creditors,

8...continue

million represented at August 14 hearing.

9 Freedom was created on March 5, 2013, which is just

twenty-one days prior to the sale of the Property.

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including the unsecured claims of Bank of America and Wells Fargo. 

As for Mostafa's claim, Trustee learned that on August 14 only

$257.29 remained in KGE's DIP account. Thus, KGE's representation

that $3,000 had been set aside for Mostafa, whose $1,265,000 claim

remained unliquidated, was inaccurate. Further, no payment

appeared to have been made on the Franchise Tax Board's ("FTB")

claim. The evidence also indicated that none of the checks

written for creditors had cleared KGE's DIP account.

The UST agreed the Plan did not provide for the sale of the

Property and argued that the sale constituted a material default

under § 1112(b)(4)(N). The UST argued that based on the evidence

before the bankruptcy court on August 14, it had the power to

convert the case to chapter 7 under § 105. Moreover, Douglas

never raised or argued at the hearing that the court could not sua

sponte convert the case. The UST took offense to KGE's assertion

that it knew about the sale when it occurred but made no

objection. The Post-Confirmation Status Report disclosing the

sale was due May 8, 2013 (within 120 days post-confirmation), but

was not served on the UST until July 9, 2013, which was one day

after the last day to revoke plan confirmation. Also, even though

counsel for the UST had learned in late June 2013 about a possible

sale of the Property through a call from Mostafa, he was not able

to confirm that it actually occurred until that same July 9 date.

EM Trust adopted the arguments raised by Trustee, but spent a

majority of its brief providing what it contended were examples of

Kenny's perjury in connection with the EM Trust litigation and at

his Rule 2004 examination. EM Trust suggested the grant deed

Kenny produced for the Iranian property was fake and argued that

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the Republic of Iran would never allow a Nevada LLC to own real

property in Iran.

In its reply, KGE argued that no exigent circumstances

existed sufficient to justify sua sponte conversion of the case

and that it was wrongfully denied its due process right to address

the issues raised by the objecting parties at the August 14

hearing. While the court's tentative ruling on the Final Decree

Motion asked for clarification of whether creditors were paid,

among other things, the court did not at any time suggest the case

would be converted. 

KGE argued that no cause existed under § 1112(b)(4)(M) or (N)

to convert the case to chapter 7. The Plan was substantially

consummated, KGE was not in default of the Plan, and creditors

were paid the full amount required under the Plan. As for the

unsecured claims of Bank of America and Wells Fargo, KGE claimed

both claims were paid through escrow in full. KGE further claimed

the FTB had indicated after receiving partial payment of its claim

that it wanted to receive the remainder on a monthly basis

pursuant to the Plan. Accordingly, KGE would continue the monthly

payments to the FTB until the claim was paid in full. KGE

maintained that sufficient funds had been set aside for Mostafa

who, at most, was allowed only $3,000.

KGE argued that none of the opposing parties had provided any

authority that KGE needed authorization under § 363 to sell the

Property, when it was no longer property of the estate, or that

the sale was subject to avoidance under § 549, which applies only

to estate property. KGE also argued that creditors were bound by

the Confirmation Order and an increase in the value of the

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Property did not allow for better treatment of their claims. 

2. The bankruptcy court's tentative ruling

In its tentative ruling on the motion to reconsider, the

bankruptcy court found that KGE had not shown relief was warranted

under either Civil Rule 59 or 60. In fact, the evidence submitted

more strongly convinced the court that immediate placement of a

fiduciary was absolutely necessary. The court reasoned that

although the Property vested in KGE upon confirmation, it did not

follow that KGE was then free to do whatever it wanted in

contravention of the Plan. No provision in the Plan suggested

that KGE would sell its only asset, without any notice to affected

parties, and then transfer away all of the proceeds to buy

property in Iran. 

KGE's "no harm no foul" argument failed because all unsecured

creditors had not been paid as claimed. KGE admitted not paying

the FTB, and its "intent" to keep paying installments on that

claim was not convincing or consistent with the Plan. The court

was also "more than a bit perturbed" that its injunction against

disbursements of proceeds was deliberately ignored the very same

day it was issued. Even though a motion to approve the sale may

not have been required under the circumstances, failing to keep

intact the proceeds only showed that KGE had no intention of

fulfilling its duties under the Plan. KGE’s disbursement of

proceeds to undisclosed locations, while not paying allowed claims

provided for in the Plan, was an obvious default. Therefore,

relief under Civil Rules 59 or 60 would be denied, as conversion

was correct due to KGE's material default with respect to the Plan

and its inability to effectuate substantial consummation of the

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Plan. 

3. The hearing and the bankruptcy court's ruling 

At the hearing on the motion to reconsider, the bankruptcy

court agreed with KGE's counsel that § 363 did not apply to the

sale of the Property. Trustee argued that KGE was in default of

the Plan for not paying all unsecured creditors. No funds were

held back for Mostafa, the FTB had not been paid, no evidence

showed that Bank of America was paid on its unsecured claim and,

according to KGE's bank statements up through August 2013, none of

the written checks to creditors had cleared KGE's DIP account.

The bankruptcy court orally denied the motion to reconsider. 

Its findings consist of the following: 

THE COURT: By the way, in case any appellate court wants

to know why, the major reason I don't that [sic] Rule 59

or 60 is indicated, is that I don't think there's any

error of law. I don't think there's any change in the

law. I don't think there's any mistake or anything like

that. The fact that there was in fact a default under

the plan, I think that's been established. That alone,

if nothing else were true, is sufficient grounds to

convert the case. So, for those reasons --

MR. GOE: Just one question. What is the default --

what's the -- let me just ask two quick questions. 

. . . .

MR. GOE: Are you finding that a Section 363 order was 

 required?

THE COURT: No.

MR. GOE: You're not find [sic] that. Okay. Are you --

what is –- what were the defaults? Which creditors

weren't paid?

THE COURT: By your own admission, the Franchise Tax

Board --

. . . .

THE COURT: There were probably others. The point is, it

doesn't have to go that far. There was a default. 

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Bingo. 

MR. GOE: Okay.

THE COURT: Don't even get into the odor that surrounds

this, Mr. Goe. 

MR. GOE: Right.

THE COURT: Just if you want to have a basic, just the

basics of what you want to review by -- in a higher court? 

It was a default. And as long as there's a default, the

thing gets converted. . . .

Hr'g Tr. (Oct. 1, 2013) 33:19-34:4, 34:12-19, 34:23-35:8.

An order denying the motion to reconsider was entered on

October 30, 2013. KGE timely appealed the Conversion Order and

the order denying reconsideration of the Conversion Order.

II. JURISDICTION

The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334

and 157(b)(2)(A). We have jurisdiction under 28 U.S.C. § 158.

III. ISSUES

1. Did the bankruptcy court violate KGE's due process rights 

when it sua sponte converted the case to chapter 7 at the hearing

on the Final Decree Motion?

2. Did the bankruptcy court abuse its discretion in converting 

the case to chapter 7?

3. Did the bankruptcy court abuse its discretion in denying 

reconsideration of the Conversion Order? 

IV. STANDARDS OF REVIEW

Whether the bankruptcy court's procedures comport with due

process is reviewed de novo. Price v. Lehtinen (In re Lehtinen),

564 F.3d 1052, 1058 (9th Cir. 2009); Garner v. Shier

(In re Garner), 246 B.R. 617, 619 (9th Cir. BAP 2000).

The bankruptcy court's decision to convert a chapter 11 case

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to chapter 7 is reviewed for an abuse of discretion. Pioneer

Liquidating Corp. v. U.S. Trustee (In re Consol. Pioneer Mortg.

Entities), 264 F.3d 803, 806 (9th Cir. 2001); Johnston v. JEM Dev.

Co. (In re Johnston), 149 B.R. 158, 160 (9th Cir. BAP 1992). 

Likewise, we review a bankruptcy court's denial of a motion for

reconsideration for an abuse of discretion. Tracht Gut, LLC v.

Cnty. of L.A. Treasurer & Tax Collector (In re Tracht Gut, LLC),

503 B.R. 804, 809 (9th Cir. BAP 2014). A bankruptcy court abuses

its discretion if it applied the wrong legal standard or its

findings were illogical, implausible or without support from

evidence in the record. TrafficSchool.com, Inc. v. Edriver Inc.,

653 F.3d 820, 832 (9th Cir. 2011).

We may affirm the bankruptcy court's rulings on any ground

supported by the record. See Hartmann v. Cal. Dep't of Corr. &

Rehab., 707 F.3d 1114, 1121 (9th Cir. 2013). 

V. DISCUSSION10

A. The bankruptcy court did not violate KGE's due process rights

when it sua sponte converted the case to chapter 7, but even

if it did, such error was harmless.11

10 KGE argues that Trustee is wrongfully putting documents

before the Panel that were not before the bankruptcy court when it

entered the Conversion Order, such as Rule 2004 motions and

transcripts. It is true that these documents were not before the

bankruptcy court at that time. However, the transcripts were

before the court when it ruled on KGE's motion to reconsider, and

the Rule 2004 motions had been filed prior to the reconsideration

hearing. Accordingly, we DENY KGE's request not to consider these

documents. In any event, the Rule 2004 motions have no bearing on

the outcome of this appeal.

11 KGE's opening brief spends much time on matters that no

longer have any relevance. For instance, KGE continues to argue

that no order was necessary under § 363 to sell the Property and

that all estate property vested in KGE once the Confirmation Order

was entered. The bankruptcy court agreed with this and did not

continue...

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KGE contends it was denied due process when the bankruptcy

court sua sponte converted the case to chapter 7 without

sufficient notice and opportunity to be heard. KGE argues that,

at the very least, the court should have continued the hearing on

the Final Decree Motion to allow the parties to brief the issues

on conversion. 

Although not apparently disputed by KGE, the bankruptcy court

can convert a case sua sponte under § 105(a)12 if cause exists to

do so. Rosson v. Fitzgerald (In re Rosson), 545 F.3d 764, 771

(9th Cir. 2008)(bankruptcy court has authority to sua sponte

dismiss or convert a case on its own motion under § 105(a));

Tennant v. Rojas (In re Tennant), 318 B.R. 860, 869 (9th Cir. BAP

2004); YBA Nineteen, LLC v. IndyMac Venture, LLC (In re YBA

Nineteen, LLC), 505 B.R. 289, 302 (S.D. Cal. 2014). However, even

though the court can rely on § 105(a) for sua sponte conversion of

a case, it must afford the debtor sufficient notice and

opportunity to be heard. "If the notice is inadequate, then the

11...continue

convert the case on these grounds. KGE also contends the

objecting parties never timely moved to revoke the Confirmation

Order under § 1144, and so they cannot collaterally attack it now. 

This was conceded and never at issue. Finally, KGE continues to

contend that Mostafa's claim was crammed down, which no one has

ever disputed; this also was not a stated basis for conversion.

12 Section 105(a) provides:

The court may issue any order, process, or judgment that is

necessary or appropriate to carry out the provisions of this

title. No provision of this title providing for the raising

of an issue by a party in interest shall be construed to

preclude the court from, sua sponte, taking any action or

making any determination necessary or appropriate to enforce

or implement court orders or rules, or to prevent an abuse of

process.

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order is void." GMAC Mortg. Corp. v. Salisbury (In re Loloee),

241 B.R. 655, 661 (9th Cir. BAP 1999). 

Section 1112(b)(1) provides that only "on request of a party

in interest, and after notice and a hearing" may a case be

converted or dismissed. The Code provides guidance as to

the appropriate requirements:

(1) "after notice and a hearing", or a similar phrase —

(A) means after such notice as is appropriate in

the particular circumstances, and such opportunity

for a hearing as is appropriate in the particular

circumstances; but

(B) authorizes an act without an actual hearing if

such notice is given properly and if —

(i) such a hearing is not requested timely by a

party in interest; or 

(ii) there is insufficient time for a hearing to

be commenced before such act must be done, and the

court authorizes such act[.]

11 U.S.C. § 102(1). The “notice and hearing” definition in § 102

is flexible and sensitive to context. Boone v. Derham-Burk

(In re Eliapo), 468 F.3d 592, 603 (9th Cir. 2006); In re Tennant,

318 B.R. at 870. "The essential point is that the court should

give counsel a meaningful opportunity to be heard." In re Eliapo,

468 F.3d at 603 (citation omitted; emphasis in original). 

In addition to the statutory requirement of notice, a

constitutional requirement of due process also applies. Great

Pac. Money Mkts., Inc. v. Krueger (In re Krueger), 88 B.R. 238,

241 (9th Cir. BAP 1988). To meet the requirements of due process,

notice must be "reasonably calculated under all of the

circumstances to apprise interested parties of the pendency of the

action and afford them an opportunity to present their

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objections." Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S.

306, 314 (1950). In other words, we must determine whether the

notice given to KGE was "reasonably calculated" to give it a

meaningful opportunity to oppose the conversion if it so desired. 

We conclude that it was.

Undisputedly, the bankruptcy court did not give express

notice in its tentative ruling issued prior to the hearing on the

Final Decree Motion that it was considering conversion. However,

EM Trust had argued in its brief in opposition to the Final Decree

Motion that the case should be converted to chapter 7 to protect

creditors from Kenny's alleged fraud. KGE had an opportunity to

brief the conversion issue in its reply but did not do so. At the

August 14 hearing on the Final Decree Motion, both EM Trust and

Mostafa suggested the case be converted. Local Bankruptcy

Rule 3020-1(c) for the Central District of California provides

that "failure to file timely the required [post-confirmation]

reports is cause for dismissal or conversion to a case under

chapter 7 pursuant to 11 U.S.C. § 1112(b)." KGE did not file its

Post-Confirmation Status Report due on May 8, 2014, until July 9,

2014, thereby potentially subjecting the case to conversion or

dismissal. For these reasons, KGE had at least "reasonably

calculated" notice that conversion could be a possibility. 

Douglas, KGE's counsel, neither raised objections nor requested a

continuance when the bankruptcy court announced at the August 14

hearing that it was converting the case. 

In addition, and more importantly, KGE was given a full

opportunity to present any argument against conversion in its

later motion to reconsider. KGE fully briefed the issues, filed a

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reply and presented extensive oral argument at the related

hearing. Accordingly, we conclude the bankruptcy court afforded

KGE notice and opportunity to be heard that satisfied due process

requirements. 

In any event, even if the bankruptcy court failed to provide

KGE with sufficient notice and opportunity to be heard, KGE has

failed to show that it was prejudiced by the court's deficient

procedures. To reverse based on a due process violation, we must

conclude the appellant was prejudiced. See In re Rosson, 545 F.3d

at 777 ("Because there is no reason to think that, given

appropriate notice and a hearing, Rosson would have said anything

that could have made a difference, Rosson was not prejudiced by

any procedural deficiency. We hold that the bankruptcy court did

not abuse its discretion in denying the motion to dismiss and

converting the case to Chapter 7."); City Equities Anaheim, Ltd.

v. Lincoln Plaza Dev. Co. (In re City Equities Anaheim, Ltd.),

22 F.3d 954, 959 (9th Cir. 1994)(rejecting due process claim for

lack of prejudice where debtor could not show that any different

or additional arguments would have been presented if the

bankruptcy court had timely approved petition for new counsel). 

KGE never identified evidence or argument that it would have

presented to the bankruptcy court given more time. Thus, it

failed to establish that it possessed additional argument or

evidence that required, or even supported, a decision in its

favor. Indeed, the bankruptcy court's tentative ruling on the

motion to reconsider that it was "even more convinced" based on

the evidence "that immediate placement of a fiduciary" was

"absolutely necessary," indicates any such notice would have been

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futile. Thus, any potential due process error committed by the

bankruptcy court was harmless in light of KGE's inability to show

prejudice. In re Rosson, 545 F.3d at 776 (citing Rule 9005 and

Civil Rule 61); In re City Equities Anaheim, Ltd., 22 F.3d at 959. 

B. The bankruptcy court did not abuse its discretion in

converting the case to chapter 7.

KGE contends that no cause existed to convert its case to

chapter 7. Namely, KGE contends that no facts supported

conversion under § 1112(b)(4)(L), (M), (N) or (O).13 At the

hearing on the Final Decree Motion, the bankruptcy court did not

precisely articulate under what paragraph of § 1112(b) it was

converting the case; the Conversion Order (drafted by Trustee's

counsel) is also silent on the matter. However, based on the

court's statements at the hearing about the Plan not calling for a

liquidation and its question to Douglas about whether a sale was

contemplated, to which she replied "no," it seems clear the

bankruptcy court converted the case based on a material default

under § 1112(b)(4)(N). 

Section 1112(b)(4) lists sixteen specific factors that

constitute "cause" for dismissal or conversion. Cause includes

"material default by the debtor with respect to a confirmed plan." 

11 U.S.C. § 1112(b)(4)(N). However, these factors are not

exhaustive. See In re Consol. Pioneer Mortg. Entities, 248 B.R.

at 375. Indeed, bankruptcy courts enjoy wide latitude in

13 The bankruptcy court never indicated that it converted the

case under § 1112(b)(4)(L) [revocation of a confirmation order] or

(O) [termination of a confirmed plan by reason of the occurrence

of condition specified in the plan]. Therefore, we do not address

these issues.

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determining whether the facts of a particular case constitute

cause for conversion or dismissal under § 1112(b). See Greenfield

Drive Storage Park v. Cal. Para-Prof’l Servs., Inc.

(In re Greenfield Drive Storage Park), 207 B.R. 913, 916 (9th Cir.

BAP 1997). 

The parties have not cited any cases either supporting or

disputing the bankruptcy court's decision to convert the case

based on what it considered was a material default — the sale of

the asset intended to fund Plan payments, which was not

contemplated in the Plan. We, however, located a case that is

directly on point with the circumstances presented here. See

In re Mobile Freezers, Inc., 146 B.R. 1000 (S.D. Ala. 1992),

aff'd, 14 F.3d 57 (11th Cir. 1994). 

After confirming a chapter 11 plan over the dissent of the

unsecured creditors, the debtor in Mobile Freezers filed a motion

to sell all of its assets and pay creditors pursuant to the plan. 

Id. at 1002. The United States Trustee objected to the sale and

moved to convert the case to chapter 7. Id. at 1002, 1005. The

bankruptcy court denied the motion to convert, approved the sale

motion and ordered that the sale proceeds be placed into escrow. 

Id. at 1004. The district court reversed and the Eleventh Circuit

affirmed. 

The bankruptcy court had determined that while "technically"

the plan was in default because it did not contemplate a sale of

the assets, the default was excused because debtor proposed to

make the payments specified by the plan. Id. at 1004-05. The

district court disagreed with the bankruptcy court's "no harm no

foul" approach. It reasoned that the asset sale clearly

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contradicted the terms of the plan and was therefore a material

breach. Id. at 1005. The disclosure statement provided that

debtor would continue operations and retain title to the assets. 

By selling the assets, debtor was doing neither of these things,

and it thwarted the essential purpose of the chapter 11 plan. As

a result, debtor was in material default of the plan. Id.

(applying former § 1112(b)(8), which is identical to

§ 1112(b)(4)(N)). 

While the outcome may not be the same in all situations,

given the facts in this appeal, we believe the district court’s

reasoning in In re Mobile Freezers applies here. KGE's Plan

stated that it was a "reorganizing plan" and that plan payments

would come from rental income derived "from the continued

operation of the Hillsborough Property as a residential real

property." The Plan, as conceded by KGE's counsel, did not

contemplate the sale of the Property — its only income-generating

asset. While Section V. of the Plan is entitled "Sale or Transfer

of Property; Assumption of Contracts and Leases; Other

Provisions," no representations were made in that section or any

other (or in the disclosure statement) that a sale might occur. 

The Confirmation Order also states that a liquidation was

unlikely, which is what precisely occurred here. Contrary to

KGE's position, the Plan did not provide for the sale of its only

asset and the payment of claims out of any sale proceeds. Thus,

the sale of the Property contradicted the terms of the Plan,

thwarted its essential purpose of reorganization and constituted a

material default with respect to the confirmed Plan under

§ 1112(b)(4)(N). In re Mobile Freezers, Inc., 146 B.R. at

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1004-05. Further, KGE cannot argue that the default was not

material, it neither utilized sale proceeds to pay all its

creditors to the extent required by the Plan nor sequestered funds

sufficient for this purpose. 

Section 1112(b) requires the bankruptcy court to engage in a

two-step analysis. Woods v. Erickson, LLP v. Leonard (In re AVI,

Inc.), 389 B.R. 721, 729 (9th Cir. BAP 2008). First, the court

must determine if "cause" exists for conversion or dismissal. Id. 

If so, then the court must determine which remedy, conversion or

dismissal, better serves the interests of the creditors and the

estate. Id. Even though the bankruptcy court's findings were not

clearly erroneous, nothing in the record indicates that it

considered dismissing KGE's case as an alternative to conversion. 

Nonetheless, we decline to reverse the Conversion Order on this

ground. KGE never argued that the bankruptcy court should have

considered dismissal as an alternative remedy. It also has not

raised this argument on appeal. Indeed, KGE would like the

chapter 11 case to be reinstated so that it can seek the entry of

a final decree and discharge. It could not obtain either if the

case were dismissed. Consequently, KGE has forfeited any argument

regarding the bankruptcy court not considering dismissal as an

alternative to conversion. See O'Guinn v. Lovelock Corr. Ctr.,

502 F.3d 1056, 1063 n.3 (9th Cir. 2007)(holding that arguments not

raised before the trial court are waived). 

Finally, KGE questions the bankruptcy court's authority to

issue the TRO to prevent transfer of the sale proceeds, which

apparently occurred despite the order. KGE argues that injunctive

relief could only be issued in a pending adversary proceeding per

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Rule 7001(7). Trustee has moved to dismiss this issue on appeal

as moot and unripe. We disagree that the issue is moot or unripe,

and we decline to grant Trustee's motion. In any event, the

issuance of the TRO made no difference in this case. Local

Bankruptcy Rule 3020-1(b)(5), which no party cited, provides:

Unless otherwise provided in the plan, if the abovereferenced case [a chapter 11 case] is converted to one

under chapter 7, the property of the reorganized debtor

shall be revested in the chapter 7 estate[.] (Emphasis

added). 

No provision was made in the Plan for anything other than this

default rule. Accordingly, KGE's assets became property of the

chapter 7 estate upon conversion of the case. Thus, a TRO was not

necessary, as KGE and its insiders were already prohibited from

transferring any of KGE's assets, including the sale proceeds. 

Even the bankruptcy court intimated at the August 14 hearing that

this was "already the law." At best, any potential error here was

harmless.

Accordingly, we conclude the bankruptcy court did not abuse

its discretion in converting KGE's case to chapter 7. It follows,

therefore, that the court did not err by denying the Final Decree

Motion. The Plan was not fully administered and KGE was not

entitled to a discharge.

C. The bankruptcy court did not abuse its discretion in denying

reconsideration of the Conversion Order.

The bankruptcy court determined that KGE was not entitled to 

reconsideration of the Conversion Order under either Civil Rule 59

or 60. Unfortunately, the court's findings are brief, but we

believe they are sufficient to allow for review.

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1. Reconsideration under Civil Rule 59(e) 

Because the motion to reconsider was filed within 14 days of

entry of the Conversion Order, it could be treated as a motion to

alter or amend under Civil Rule 59(e). Heritage Pac. Fin., LLC v.

Edgar (In re Montano), 501 B.R. 96, 112 (9th Cir. BAP 2013). A

motion under Civil Rule 59(e) should not be granted, absent highly

unusual circumstances, unless the court is presented with newly

discovered evidence, committed clear error or if there is an

intervening change in the controlling law. Marlyn Nutraceuticals,

Inc. v. Mucos Pharma GmbH & Co., 571 F.3d 873, 880 (9th Cir.

2009); Jeffries v. Carlson (In re Jeffries), 468 B.R. 373, 380

(9th Cir. BAP 2012). 

In its motion to reconsider, KGE did not present any newly

discovered evidence or claim any intervening change in the law. 

KGE contends the bankruptcy court made "errors of law and fact" on

which the Conversion Order was based and therefore the motion to

reconsider should have been granted. KGE does not articulate

precisely what these "errors of law and fact" were. However, in

its reply brief, KGE clarifies. KGE contends the Conversion Order

was entered solely because KGE sold the Property without court

authorization, which was an error of law. Again, the bankruptcy

court agreed that a § 363 order was not required for the sale and

that lack of such an order was not the basis for conversion. The

bankruptcy court entered the Conversion Order because the sale of

the Property was not contemplated in the Plan. This conclusion

was not an error of law. 

Further, Trustee's evidence presented in opposition to the

motion to reconsider and statements made by the parties at the

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related hearing revealed that KGE had not paid all creditors under

the Plan as claimed. With only $257.29 remaining in KGE's DIP

account on August 14, 2013, it was clear that an insufficient

amount of funds had been set aside for Mostafa's approximate

$3,000 claim and that KGE did not have the ability to fund the

monthly payments to the FTB as the FTB allegedly requested. 

Moreover, none of the checks written for unsecured creditors in

February 2013 or for the alleged balloon payments made to them

following the March 26 sale had cleared KGE's DIP account as of

August 2013. A mere $257.29 could never cover those payments once

the checks, presuming they were even sent, were presented. 

Obviously, as noted by the bankruptcy court, KGE had no intention

of fulfilling its duties under the Plan.

Accordingly, even if the sale of the Property was not a

material default under § 1112(b)(4)(N) constituting cause for

conversion, KGE's failure to pay creditors pursuant to the Plan

certainly was. AMC Mortg. Co. v. Tenn. Dep't of Revenue

(In re AMC Mortg. Co.), 213 F.3d 917, 921 (6th Cir. 2000)(failure

to make required plan payment is a material default and is cause

for dismissal)(citing Ohio Dep't of Taxation v. H.R.P. Auto Ctr.,

Inc. (In re H.R.P. Auto Ctr., Inc.), 130 B.R. 247, 256 (Bankr.

N.D. Ohio 1991)). Thus, the bankruptcy court did not abuse its

discretion in denying KGE relief under Civil Rule 59(e). 

2. Reconsideration under Civil Rule 60(b)(1) and (4)

Civil Rule 60(b)(1) provides that a court may relieve a party

from a final judgment for "(1) mistake, inadvertence, surprise, or

excusable neglect." A judgment rendered "in a manner inconsistent

with due process of law" is a void judgment within the meaning of

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Civil Rule 60(b)(4). Owens-Corning Fiberglas Corp. v. Ctr.

Wholesale, Inc. (In re Ctr. Wholesale, Inc.), 759 F.2d 1440, 1448

(9th Cir. 1985); In re Loloee, 241 B.R. at 660-61. 

KGE contends that because it was in full compliance with the

terms of the Plan and UST reporting requirements, it had no basis

to believe the bankruptcy court would sua sponte convert its case

at the hearing on the Final Decree Motion. KGE argues it was

denied due process in that it was denied the opportunity for a

hearing on a motion to convert or to present evidence and relevant

law demonstrating that it had not engaged in any conduct

warranting conversion. Whether KGE was entirely "surprised" that

conversion might be a possibility is questionable based on the

record. EM Trust had raised the issue in its opposition to the

Final Decree Motion. Further, KGE knew it had not complied with

its post-confirmation reporting requirements, which can constitute

cause for conversion under the local rules. Finally, for KGE to

contend that it was in full compliance with the Plan at this point

is simply disingenuous.

Had KGE appealed the Conversion Order without filing a motion

to reconsider, its arguments may have some merit. Nonetheless,

and contrary to KGE's assertion, the bankruptcy court did in fact

reconsider the conversion ruling. It considered the merits of

KGE's motion, the evidence it presented in support and counsel's

argument at the related hearing. Thus, the bankruptcy court did

provide KGE a meaningful opportunity to be heard on the merits. 

It simply was not convinced that KGE was not in material default

of the Plan and that the case was improperly converted to

chapter 7. Accordingly, the bankruptcy court did not abuse its

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discretion in denying KGE relief under Civil Rule 60(b)(1) or (4).

3. Reconsideration under Civil Rule 60(b)(2), (3) and (6)

Civil Rule 60(b)(2) provides relief from a judgment or order

based on "newly discovered evidence that, with reasonable

diligence, could not have been discovered in time to move for a

new trial under [Civil] Rule 59(b)." We are hard-pressed to

figure out why KGE sought relief on this basis, as it did file its

motion to reconsider within the 14 days required under Civil

Rule 59. In any event, the only argument KGE raises here is that

it was not provided with an opportunity to present evidence on a

motion to convert, which we have already rejected. 

To secure relief under Civil Rule 60(b)(3), a party must

establish: (1) by clear and convincing evidence that the court's

order was obtained through the fraud, misrepresentation, or other

misconduct of the movant's opponent; and (2) that the conduct

complained of prevented the losing party from fully and fairly

presenting his case or defense. Jones v. Aero/Chem Corp.,

921 F.2d 875, 878 (9th Cir. 1990). KGE contends Mostafa and EM

Trust made untruthful allegations at the hearing on the Final

Decree Motion about KGE's alleged bad faith. KGE fails to say

what these "untruthful" allegations were or to show that these

allegations are what procured the Conversion Order, and it fails

to identify how the bankruptcy court erred when it determined that

no fraud occurred in this case, except perhaps for debtor's. To

the extent KGE contends EM Trust misrepresented at the August 14

hearing that it was a creditor, EM Trust's status was not the

basis for the court’s entry of the Conversion Order. Further,

counsel for KGE was present at that hearing and had the

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opportunity to defend against any allegedly untruthful statements

made by the objecting parties.

Finally, Civil Rule 60(b)(6) provides for relief from a

judgment or order based on "any other reason that justifies

relief." This "catch-all" provision applies only when the reason

for granting relief is not covered by any of the other reasons set

forth in Civil Rule 60. Cmty. Dental Servs. v. Tani, 282 F.3d

1164, 1168 & n.8 (9th Cir. 2002). It is to be used sparingly as

an equitable remedy to prevent manifest injustice and should be

utilized only where extraordinary circumstances prevented a party

from taking timely action to prevent or correct an erroneous

judgment. United States v. Alpine Land & Reservoir Co., 984 F.2d

1047, 1049 (9th Cir. 1993). A party seeking relief from a

judgment under Civil Rule 60(b)(6) must demonstrate both injury

and circumstances beyond its control that prevented it from

proceeding with the prosecution or defense of the action in a

proper fashion. Cmty. Dental Servs., 282 F.2d at 1168. 

Other than asserting that relief was appropriate under Civil

Rule 60(b)(6), KGE's opening brief fails to present any supporting

argument as to why it was entitled to such relief or how the

bankruptcy court abused its discretion by not granting it. As a

result, this issue has been abandoned. City of Emeryville v.

Robinson, 621 F.3d 1251, 1262 n.10 (9th Cir. 2010)(appellate court

in this circuit "will not review issues which are not argued

specifically and distinctly in a party's opening brief, especially

when a host of other issues are raised"). To the extent KGE

raises a due process argument in its reply brief, we reject it for

the same reasons stated above.

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Accordingly, the bankruptcy court did not abuse its

discretion in denying KGE relief under Civil Rule 60(b)(2), (3) or

(6).

VI. CONCLUSION

For the foregoing reasons, we AFFIRM.

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