FILED

APR 10 2020

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NOT FOR PUBLICATION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:

THE SUNSHINE GROUP, LLC,

Debtor.

THE SUNSHINE GROUP, LLC

Appellant,

v.

CITY OF DANA POINT; CALIFORNIA

RECEIVERSHIP GROUP; MARK

ADAMS, as State Court-appointed

Receiver,

Appellees.

BAP Nos. CC-19-1105-GSL

 CC-19-1106-GSL

 CC-19-1107-GSL

 (Related Appeals)

Bk. No. 2:19-bk-12760-ER

MEMORANDUM*

Argued and Submitted on March 26, 2020

Filed – April 10, 2020

Appeal from the United States Bankruptcy Court

for the Central District of California

*

 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 8024-1.
Honorable Ernest M. Robles, Bankruptcy Judge, Presiding

 

Appearances: Robert P. Goe of Goe & Forsythe, LLP argued for

Appellant; Jennifer Farrell of Rutan & Tucker, LLP

argued for Appellee The City of Dana Point; Ori

Blumenfeld for Appellees California Receivership Group

and Mark Adams, as State Court-appointed Receiver.

 

Before: GAN, SPRAKER, and LAFFERTY, Bankruptcy Judges.

INTRODUCTION

Appellant, The Sunshine Group, LLC, (“Debtor”) appeals from two

orders dismissing its chapter 111case and from an order denying its motion

to sell property free and clear of liens and interests. Appellees, the

City of Dana Point, California, (the “City”) and California Receivership

Group, (“Receiver”) each filed motions to dismiss the chapter 11 case and

asserted that Debtor filed its petition in bad faith as a litigation tactic to

evade rulings made by the state court in a receivership action involving

Debtor’s sole asset, a 28-room motel located in Dana Point, California (the

“Property”).

The bankruptcy court determined that Debtor filed the petition in

bad faith and that the motion to sell was part of Debtor’s bad faith scheme

1

 Unless specified otherwise, all chapter and section references are to the

Bankruptcy Code, 11 U.S.C. §§ 101-1532, all “Rule” references are to the Federal Rules

of Bankruptcy Procedure.

2
to avoid rulings in the state court. The bankruptcy court found that the

Property was Debtor’s only valuable asset, Debtor was not operating and

had no revenues to reorganize debts, and the case was essentially a two

party dispute. The bankruptcy court concluded that Debtor filed the

bankruptcy for an improper purpose to avoid the rulings of the state court

pertaining to the Receiver’s rehabilitation plan and the infeasibility of

Debtor’s development plan.

The bankruptcy court did not abuse its discretion in dismissing the

case or in denying the sale motion. Accordingly, we AFFIRM the dismissal

orders and the order denying the motion to sell. 

FACTS

A. Prepetition Events

Debtor was formed by Dr. Ramesh Manchanda in the late 1990s for

the purpose of purchasing and developing commercial properties in

Dana Point, California. In 1998, Debtor purchased the Property for $2.4

million. Between 1998 and 2012, Dr. Manchanda purchased several

adjacent parcels of vacant land through separate entities. 

For approximately 18 years, Debtor operated the Property and earned

revenue. However, by about 2015, Debtor states that it was developing

plans to demolish the Property and build an upgraded motel with larger

rooms and more amenities.

In 2016, the City notified Debtor of several municipal code violations

3
which needed to be immediately rectified. On September 1, 2016, the City

“red-tagged” the Property after a Fire and Life Safety Inspection uncovered

several violations of the California Fire Code, California Building Code,

and the Dana Point Municipal Code which posed an immediate fire threat

and safety hazard to the public. The City issued a notice to Debtor

describing the violations and requiring corrective actions to be completed

by December 5, 2016.

The red tag precluded the Debtor from using the Property for any

purpose until the violations were abated. After the Property was redtagged, the Orange County Sheriff’s Department received increased calls

for service at the Property related to homeless individuals sleeping on the

Property, attempting to break into the Property, or actually breaking in to

the Property’s vacant rooms. These individuals were observed using open

flames in the Property, which presented a significant public safety hazard

because the Property had no telephone service or utilities, and the

numerous code violations had not been remediated.

Debtor states that it advised the City that it intended to demolish the

Property rather than abate the code violations. Between October 2016 and

January 2017, the City had several meetings with the Debtor to discuss the

process to bring the Property into compliance and the potential

complexities involved with Debtor’s intent to demolish the Property and

rebuild. In April 2017, Debtor submitted a formal application to demolish

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the Property.

1. The Receivership Action

In April 2017, the City filed a nuisance action in Orange County

Superior Court and moved, ex parte, for an appointment of a health and

safety receiver to take possession and control of the Property. The City

stated that because of the Property’s status as a “low cost overnight

accommodation” and a “historic resource,” it expected Debtor’s application

to demolish to take approximately 36 months to be processed by the City

and the California Coastal Commission, and ultimately to be denied. As a

result of the continuing health and safety risks, the City decided to pursue

the receivership action.

The state court appointed the Receiver and authorized it to take

control of the Property and correct the code violations. The Receiver was

permitted to borrow funds to correct the conditions and to issue a

receiver’s certificate to secure the debt with a super-priority lien on the

Property. The state court permitted the Receiver to fund a receiver’s

certificate with super priority status in the amount of $55,000 for the

purpose of securing the Property, cleaning it out, and obtaining bids to

remediate the violations.

The state court then set a hearing to determine whether to confirm

the appointment of the Receiver. Prior to the hearing, the Receiver retained

Miken Construction (“Miken”) to submit a bid for the remediation work.

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The Receiver also filed a report indicating that an additional $943,000

would be needed to fully remediate the health and safety violations. The

Debtor opposed the Receiver’s remediation plan and argued that the

Property should instead be demolished and the receivership should be

terminated. 

At the hearing, the state court confirmed the appointment of the

Receiver, rejected Debtor’s request to terminate the receivership, and

authorized the Receiver to increase the receiver’s certificate to $998,000.

Dr. Manchanda agreed to fund the receiver’s certificate.

The Receiver then met with the City and the Debtor to discuss the

scope of the remediation project. Based on the City’s requests, the Receiver

retained an architectural firm experienced in historical restoration as well

as structural and soils engineers to evaluate the stability of the hillside, the

retaining wall, and the structural elements of the Property. The engineering

reports revealed that the Property was in a seismic hazard zone and

hillside movement had caused a partial failure of the retaining wall.

The Receiver developed a construction plan to remediate the

hazardous conditions and abate the code violations while preserving the

historical character of the Property and its low cost affordable

accommodation status. The Receiver then filed a motion in state court

seeking approval of additional funding of $4,063,832 for: (1) preconstruction demolition costs; (2) hillside protection and retaining wall

6
work; and (3) remaining health and safety repair costs. The Receiver

attached contracts to substantiate the expenses. Debtor objected to the

Receiver’s request and submitted an alternate bid from another contractor.

Debtor also filed a motion to terminate the receivership.

The state court determined that the Receiver’s plan was reasonable

and necessary to remediate the violations. The court approved the contracts

for pre-construction demolition, hillside protection, and building

remediation, and authorized the Receiver to incur the additional funding

necessary to complete the work. The state court rejected Debtor’s proposed

alternative bid because it failed to include numerous necessary items, such

as foundation repair and structural retrofitting. Once the funding was

approved, Miken began work on the hazardous retaining wall and carport.

The state court also denied Debtor’s motion to terminate the

receivership and stated that although Debtor disagreed with the proposed

construction and remediation costs, it failed to provide any reasonable

alternative other than to repeatedly demand authorization to demolish the

property. The court stated that the request to demolish the property had

been rejected in the past because “[t]he purpose of the receivership here is

to abate the substandard conditions at the property, while at the same time

maintaining its historical character and compliance with the Coastal Act

requirements; demolition would not further these goals.” Minute Order, at

3, Case No. 30-2017-00915900-CU-PT-CJC, October 26, 2018. 

7
Debtor appealed the ruling to the California Court of Appeal and

sought an immediate stay. The Court of Appeal entered a temporary stay

of the order, except for construction and repairs of the hillside which were

necessary for public safety. The Court of Appeal later dissolved the stay

and denied Debtor’s request for a writ of supersedeas. Ultimately, Debtor

dismissed the appeal.

The Receiver obtained a loan for the initial phase of the retaining wall

project from Glan Investments, LLC (“Glan”), secured by a junior receiver’s

certificate. However, due to the pending appeal, the Receiver was unable to

secure sufficient third-party funding to complete the retaining wall project

or the remainder of the court-approved plan.

The Receiver filed a motion to subordinate the existing receiver’s

certificate held by Dr. Manchanda, and stated that the first phase of the

retaining wall was complete, but lenders were unwilling to fund the

remaining amounts because of the priority of Dr. Manchanda’s claim. At

the hearing on the Receiver’s motion, the parties negotiated a resolution

whereby Dr. Manchanda agreed to advance a portion of the funds to

complete the retaining wall work. Based on the agreement, the state court

continued the hearing.

The Receiver alleged that Dr. Manchanda reneged on the agreement

so the Receiver issued a junior receiver’s certificate to Miken in the amount

of $871,809. The day before the continued hearing, Debtor filed its chapter

8
11 petition.

B. The Bankruptcy

Debtor scheduled assets including the Property and two notes

receivable from Rohit and Martha Ramos Manchanda, and Foothill

Vascular Center. Debtor’s only scheduled liabilities are attorneys’ fees,

loans from the Manchanda Family Trust, and debts related to the

receivership.

1. The Motions to Dismiss

In March 2019, the City and Receiver each filed a motion to dismiss

the case. The Receiver argued that Debtor’s chapter 11 filing was a bad

faith litigation tactic to avoid completing and paying for the state courtapproved remediation plan. The City argued that the case was filed in bad

faith because Debtor had no ongoing business to reorganize, no cash flow

to pay creditors, and only one asset which was inoperable until the

nuisance conditions were abated. The City also argued that it was

essentially a two party dispute and Debtor did not have any real creditors

other than the City, insiders, and Debtor’s own professionals.

Debtor opposed the motions and argued that the case was filed to

preserve assets of the estate and to allow the Debtor to pay all claims in

full. Debtor stated that the Receiver was now attempting to redesign and

rebuild the Property to meet the City’s specific interests which would

require it to incur an unsustainable amount of debt that would ultimately

9
lead to foreclosure. Debtor argued that the Receiver already abated all

health and safety concerns by stripping the Property of furniture, fixtures,

and its electrical system, as well as removing debris and chemicals. As a

result, Debtor asserted it should be allowed to proceed with a § 363 sale of

the Property to a third party who planned to develop the Property.

2. The Sale Motion

In April 2019, Debtor filed a motion for authorization to sell the

Property free and clear of liens and interests though a private sale. Under

the terms of the proposed sale, the buyer would pay $1,600,000 and take

the Property subject to Dr. Manchanda’s first priority lien. Debtor argued

that the sale should be free and clear of other liens and interests pursuant

to § 363(f)(3) and (4) because the sale price was sufficient to pay all

creditors and the liens of Miken, Glan, and the Receiver were subject to a

bona fide dispute. Debtor asserted the Property could be sold free from the

control of the Receiver and the state court action because the Property was

no longer a health and safety hazard.

The City objected that the sale motion was based on two erroneous

allegations: that the nuisance conditions at the Property had been abated,

and that the sale of the Property would terminate the receivership. The City

argued that Debtor conceded that the violations still existed because the

Property had no plumbing or electricity, and that Debtor had cited no

authority to support the contention that the receivership would terminate

10
upon sale of the Property. The City reiterated its argument that the

bankruptcy filing was an attempt to forum shop and seek a different result

than the state court’s ruling.

The Receiver objected and argued that the attempted sale was in

direct violation of the receivership order which charged the Receiver, and

not a third party purchaser, with abating the violations on the Property.

The Receiver asserted that although the pre-construction demolition and

the hillside protection projects were completed, the Property still posed a

substantial threat to the public and the state court-approved repairs had

not been completed. The Receiver argued that the sale motion was an

attempt to have the bankruptcy court act as a court of appeal over the state

court receivership.

3. The Rulings

After a hearing, the bankruptcy court granted the motions to dismiss

and denied the motion to sell the Property. 

The bankruptcy court determined that Debtor filed the petition in

bad faith for three reasons. First, the court found that Debtor filed the case

as a litigation tactic to avoid implementation of the Receiver’s plan and

conceded this fact when it stated “the bankruptcy was filed to protect

Debtor’s assets from an additional $4 million in encumbrances for a

redevelopment project that has nothing to do with remediating health and

safety issues or a public nuisance.” Final Order (April 23, 2019) at 12. 

11
Second, the bankruptcy court determined that the case was

essentially a two-party dispute over the competing plans to rehabilitate the

Property which had already been the subject of significant argument before

the state court. The court stated that Debtor offered no legitimate reason

why the dispute should not be resolved by the state court.

Finally, the bankruptcy court applied the factors enumerated in St.

Paul Self Storage Ltd. P’ship v. Port Authority of St. Paul (In re St. Paul Self

Storage Ltd. P’ship), 185 B.R. 580, (9th Cir. BAP 1995), and concluded that all

of those factors weighed in favor of finding bad faith. Specifically, the court

found that the Property was Debtor’s only valuable asset, the Debtor was

not operating and had no revenues to reorganize debt, and all unsecured

creditors arose from the two party dispute in state court.

After finding bad faith, the bankruptcy court considered whether

conversion, dismissal, or appointment of a chapter 11 trustee best served

the interests of the creditors and the estate. Based on the existence of a

pending state court action and the additional costs imposed by

appointment of a trustee, the bankruptcy court dismissed the case and

imposed a 180-day bar to refiling. The court also denied Debtor’s sale

motion, finding that it was proposed in furtherance of Debtor’s bad faith

tactic to evade state court orders. Debtor timely appealed.

C. Post-dismissal Events

In its Opening Brief, Debtor provides a recitation of “new facts”

12
consisting of a post-dismissal state court ruling, which Debtor argues is

likely to affect the outcome of this appeal. Debtor included a portion of the

ruling in its Amended Appellant’s Joint Supplemental Excerpts of Record

which demonstrates that the state court later determined that the Property

was not included on any historical resource list.

The City filed an objection and a motion to strike the post-dismissal

state court rulings and portions of Debtor’s brief that relate to that ruling,

because the document was entered five months after the dismissal and was

not before the bankruptcy court. The City argues that Debtor

mischaracterized the state court ruling and that no definitive decision

regarding the Property’s status as a historical resource had been rendered.

Regardless of the ultimate outcome of the matter, the City argues that any

state court ruling which occurred after the bankruptcy was dismissed is

irrelevant to this appeal. The City seeks sanctions against Debtor for its

reasonable attorneys’ fees in bringing the motion to strike.

Debtor argues that the new facts are extraordinary and should be

considered by the Panel because they demonstrate that the facts provided

to the bankruptcy court by the City and the Receiver ultimately turned out

to not be entirely true. Debtor also argues that although it did not file a

separate motion to supplement the record, its Opening Brief made it clear

which facts and documents were new.

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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.

ISSUES

Did the bankruptcy court abuse its discretion in dismissing Debtor’s

chapter 11 case for bad faith?

Did the bankruptcy court abuse its discretion in denying Debtor’s

motion to sell the Property free and clear of liens and interests?

STANDARD OF REVIEW

“We review for abuse of discretion the bankruptcy court’s decision to

dismiss a case as a ‘bad faith’ filing. We review the finding of ‘bad faith’ for

clear error.” Marsch v. Marsch (In re Marsch), 36 F.3d 825, 828 (9th Cir. 1994)

(internal citations omitted).

We review orders on motions to sell property pursuant to § 363 for

abuse of discretion. Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC),

391 B.R. 25, 32 (9th Cir. BAP 2008).

We apply a two-step test to determine whether the bankruptcy court

abused its discretion. Sullivan v. Harnisch (In re Sullivan), 522 B.R. 604, 611

(9th Cir. BAP 2014). First, we consider de novo whether the bankruptcy

court applied the correct legal standard to the requested relief. Id. Then we

review the bankruptcy court’s factual findings for clear error. Id.

“We must affirm the bankruptcy court’s fact findings unless we

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conclude that they are illogical, implausible, or without support in the

record.” Id. We may affirm on any basis supported by the record. Caviata

Attached Homes, LLC v. U.S. Bank Nat’l Assoc. (In re Caviata Attached Homes,

LLC), 481 B.R. 34, 44 (9th Cir. BAP 2012).

DISCUSSION

A. Debtor May Not Supplement The Record With Post-Dismissal

State Court Rulings

As an initial matter, we must decide whether we will consider

Debtor’s supplemental excerpt of record. The City requests that we strike

the Amended Appellant’s Joint Supplemental Excerpts of Record and the

portions of Debtor’s Briefs which purport to rely on the subsequent state

court decision, as well as sanction Debtor for reasonable attorneys’ fees

incurred in bringing the motion to strike.

The record on appeal consists of “the original papers and exhibits

filed in the district court.” Barcamerica Int’l USA Tr. v. Tyfield Importers,

Inc., 289 F.3d 589, 593-94 (9th Cir. 2002). “Papers not filed with the district

court or admitted into evidence by that court are not part of the record on

appeal.” Id. at 594 (quoting Kirshner v. Uniden Corp. of Am., 842 F.2d 1074,

1077 (9th Cir. 1988)). However, we can exercise inherent authority to

supplement the record in extraordinary cases. Lowry v. Barnhart, 329 F.3d

1019, 1024 (9th Cir. 2003). 

A party cannot “unilaterally supplement the record on appeal with

evidence not reviewed by the court below,” and any request to supplement

15
should be made by a formal request or motion. Id. at 1024-25. Debtor did

not file a motion to supplement the record, but it did raise the issue in its

opening brief so the Panel and opposing counsel were apprised of the

documents.

However, Debtor has not demonstrated any extraordinary

circumstances that would make the subsequent state court decision

relevant to this appeal. See Snow v. McDaniel, 681 F.3d 978, 991-92 (9th Cir.

2012) (overruled on other grounds). Debtor states that it filed the state

court decision as a supplemental excerpt of record in compliance with Rule

8014(f), but that rule only pertains to supplemental citations of authority to

support a legal argument, not to supplemental facts offered for their

probative value. Although we could take judicial notice of the state court

decision, we cannot do so to establish the truth of any facts alleged therein.

See Credit Alliance Corp. v. Idaho Asphalt Supply, Inc. (In re Blumer), 95 B.R.

143, 146-47 (9th Cir. BAP 1988).

Because the subsequent state court decision was not before the

bankruptcy court, it is not relevant to the bankruptcy court’s decision or

this appeal. The City’s motion to strike is GRANTED. However, we decline

to impose monetary sanctions at this time. See 9th Cir. BAP R. 8026-1;

Circuit Rule 30-2.

B. The Bankruptcy Court Did Not Abuse Its Discretion In Dismissing

The Case

Section 1112(b) provides that the bankruptcy court shall convert or

16
dismiss a case “for cause,” whichever is in the best interests of creditors

and the estate, unless the court determines that appointment of a chapter

11 trustee or examiner is in the best interests of the estate. Debtor does not

argue on appeal that the bankruptcy court should have converted the case

or appointed a trustee or examiner, and therefore, we consider only

whether the bankruptcy court erred in finding “cause” to dismiss the case.

See Smith v. Marsh, 194 F.3d 1045, 1052 (9th Cir. 1999) (“[O]n appeal,

arguments not raised by a party in its opening brief are deemed waived.”).

The bad faith filing of a bankruptcy petition constitutes “cause” for

dismissal under § 1112(b). In re Marsch, 36 F.3d at 828. The analysis focuses

on whether a debtor is attempting “to effect a speedy, efficient

reorganization on a feasible basis” or “to unreasonably deter and harass

creditors.” Id. A petition is filed in bad faith if a debtor seeks to “achieve

objectives outside the legitimate scope of the bankruptcy laws.” Id. A filing

may also be in bad faith if it is “an apparent two-party dispute that can be

resolved outside of the Bankruptcy Court’s jurisdiction.” In re Sullivan, 522

B.R. at 616.

Bad faith depends on an amalgam of factors and no specific factor is

determinative. Idaho Dep’t of Lands v. Arnold (In re Arnold), 806 F.2d 937, 939

(9th Cir. 1986). A bankruptcy court may consider any factor which

demonstrates an abuse of the bankruptcy process and the purpose of

reorganization. Marshall v. Marshall (In re Marshall), 721 F.3d 1032, 1048 (9th

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Cir. 2013). A finding of bad faith is made on a case by case basis, there is no

list of factors which must be present in each case to make the finding, and

the weight given to any particular factor depends on the circumstances of

the individual case. Can-Alta Props., Ltd. v. State Sav. Mortg. Co. (In re CanAlta Props., Ltd.), 87 B.R. 89, 91 (9th Cir. BAP 1988); Meadowbrook Investors’

Group v. Thirtieth Place, Inc. (In re Thirtieth Place), 30 B.R. 503, 506 (9th Cir.

BAP 1983).

Here, the bankruptcy court determined that Debtor filed the case in

bad faith as a litigation tactic to avoid state court rulings and that the case

was essentially a two-party dispute. The court found that the factors we

enumerated in St. Paul Self Storage weighed in favor of finding bad faith. In

St. Paul Self Storage we said:

To determine whether a debtor has filed a petition

in bad faith, courts weigh a variety of circumstantial

factors such as whether:

(1) the debtor has only one asset;

(2) the debtor has an ongoing business to

reorganize;

(3) there are any unsecured creditors;

(4) the debtor has any cash flow or sources of

income to sustain a plan of reorganization or to

make adequate protection payments; and

(5) the case is essentially a two party dispute

capable of prompt adjudication in state court.

185 B.R. at 582-83.

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Debtor does not dispute that the St. Paul Self Storage factors are

appropriate factors to consider in determining whether a bankruptcy

petition was filed in bad faith. Instead, Debtor argues that the bankruptcy

court’s application of these factors was illogical, implausible or without

support in the record.

1. The Bankruptcy Court Did Not Err In Determining That The

Bankruptcy Was A Litigation Tactic And A Two-Party

Dispute Capable of Resolution In State Court

The bankruptcy court determined that the case was a two-party

dispute and Debtor filed the case as a litigation tactic to avoid the state

court rulings. Debtor argues that the bankruptcy court erred because there

were legitimate creditors besides the City who would have materially

benefitted from the bankruptcy, and those creditors would not have been

protected in the state court litigation due to the Receiver’s plan to overencumber the Property.

Debtor asserts that the Bankruptcy Code expressly provides for

debtors whose assets are under the control of a receiver and empowers

bankruptcy courts to end a state court receiver’s possession by ordering

turnover of the assets. Because virtually every bankruptcy filed after a

receiver has been appointed will involve an attempt to dispossess the

receiver, Debtor argues that filing a bankruptcy petition cannot be a

litigation tactic designed to evade the receivership orders and cannot be

considered forum shopping.

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We agree that filing a bankruptcy petition during a pending

receivership is not, per se, a litigation tactic or forum shopping. However,

in the present case, the bankruptcy court did not clearly err in determining

that Debtor filed the petition in bad faith.

Debtor’s purpose in filing the bankruptcy case was to protect its

assets from an additional $4 million in encumbrances necessary to

complete the Receiver’s remediation plan. Debtor argues that all health and

safety concerns which necessitated the receivership were abated by the

time of the bankruptcy filing and therefore, the Receiver’s plan to restore

the Property was a financial decision that would harm creditors and the

Debtor.

If all health and safety issues were resolved, as Debtor argues, the

state court could promptly make that determination and terminate the

receivership. Debtor offers no credible argument why asking the

bankruptcy court to make that decision instead of the state court is not

forum shopping or an abuse of the Bankruptcy Code.

The dispute over the future restoration of the Property is entirely

capable of prompt resolution in state court because this is not truly a

financial reorganization. It is a question of what method should be

employed to remediate the public nuisance at the Property. The state court

considered and rejected Debtor’s objections that the Receivers’s proposed

plan was unnecessary and would make operation of the Property

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infeasible. The state court approved the Receiver’s plan, authorized the

increase in funding, and denied Debtor’s motion to terminate the

receivership.

We are cognizant that a health and safety receiver may take actions

which go beyond the proper exercise of regulatory authority and are

instead pecuniary in nature. In such a case, filing a bankruptcy to

reorganize debts may not be an abuse of the Bankruptcy Code. But in the

present case, the Receiver’s plan was specifically approved by the state

court as a means to fully abate the nuisance conditions on the Property.

The bankruptcy relief sought by Debtor would require the court to

determine not only that the Receiver’s actions were unnecessary to abate

the nuisance, but also that the state court’s decision approving the

Receiver’s plan was in error. The bankruptcy court lacks jurisdiction to

hear a de facto appeal of a state court decision or to decide any issue

“inextricably intertwined” with issues resolved by the state court decision.

See Noel v. Hall, 341 F.3d 1148 (9th Cir. 2003).

The bankruptcy court did not clearly err in determining that the case

was a two-party dispute capable of prompt adjudication in state court and

that filing the case was a litigation tactic to avoid the state court’s rulings.

2. The Remaining St. Paul Self Storage Factors Favor Dismissal

The first two St. Paul Self Storage factors weigh in favor of dismissal.

Debtor concedes that the Property is essentially its only asset and that it has

21
no ongoing business, but argues that these factors should be given little

weight because single asset real estate cases are contemplated by the Code

and even a non-operating business can use bankruptcy to liquidate. The

bankruptcy court did not clearly err in determining that these factors

favored dismissal.

The bankruptcy court also found that Debtor had no revenues and no

ability to fund a reorganization. Debtor argues that the court erred because

a sale under § 363 was an appropriate means to fund its reorganization,

and the bankruptcy court failed to consider the benefit to creditors.

Filing a bankruptcy with the intent to sell property under § 363 to

pay creditors might constitute a legitimate bankruptcy purpose under

ordinary circumstances, but Debtor’s sale motion is predicated on the

bankruptcy court determining that the Receiver’s plan was not necessary to

abate the nuisance conditions. As we discuss above, it would not be proper

for the bankruptcy court to make such a finding.

The bankruptcy court properly applied factors which we have stated

are appropriate for determining bad faith in filing a petition, and the record

supports the court’s factual findings. The bankruptcy court did not clearly

err in determining that the Debtor filed the case in bad faith and did not

abuse its discretion in finding cause to dismiss the case. 

C. The Bankruptcy Court Did Not Abuse Its Discretion In Denying

The Sale Motion

The bankruptcy court denied Debtor’s motion to sell the Property

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because it concluded that the motion was part of Debtor’s bad faith

objective of divesting control of the Property from the Receiver. Debtor

argues that the bankruptcy court failed to consider that there was a

legitimate business purpose for the sale which would pay creditors in full.

The bankruptcy court properly determined that the petition was filed

in bad faith. Regardless of whether there was a business purpose for the

sale, once the bankruptcy court found cause to dismiss or convert, there

was no basis to grant Debtor’s sale motion, even if some creditors might

have benefitted.

CONCLUSION

For the reasons set forth above, we AFFIRM the bankruptcy court's

orders dismissing the case and its order denying Debtor’s motion to sell the

Property.

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