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FILED

NOV 09 2016

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NOT FOR PUBLICATION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 Nos. NV-15-1349-KiLDo

) NV-15-1360-KiLDo

GLOYD GREEN and GAIL HOLLAND, ) (Related appeals)

)

Debtors. ) Bk. No. 14-15981-abl

 )

)

GLOYD GREEN; GAIL HOLLAND, )

)

Appellants, ) 

)

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

)

HOWARD FAMILY TRUST DATED )

AUGUST 21, 1998, )

)

Appellee. )

______________________________)

Argued and Submitted on October 21, 2016, 

at Las Vegas, Nevada

Filed - November 9, 2016

Appeal from the United States Bankruptcy Court

for the District of Nevada

Honorable August B. Landis, Bankruptcy Judge, Presiding

 

Appearances: Christopher Burke argued for appellants; Jerimy L.

Kirschner argued for appellee.

 

Before: KIRSCHER, LAFFERTY and DORE,2 Bankruptcy Judges.

1 This disposition is not appropriate for publication. 

Although it may be cited for whatever persuasive value it may

have, it has no precedential value. See 9th Cir. BAP Rule 8024-1.

2 Hon. Timothy W. Dore, Bankruptcy Judge for the Western

District of Washington, sitting by designation.
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Debtors Gloyd Green (“Green”) and his wife Gail Holland

appeal an order converting their chapter 113 case to chapter 7 for

bad faith under § 1112(b). Debtors also appeal an order

estimating and temporarily allowing for voting purposes the claim

of creditor Howard Family Trust dated August 21, 1998 ("Trust"). 

We AFFIRM the conversion order. Consequently, we DISMISS the

appeal of the claim estimation order as MOOT.

I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY 

A. Prepetition events

The Trust was created in 1998 by Oscar Brannon Howard, Jr.

and his wife, who had both passed away by late 2005. They were

survived by their only son and beneficiary, Oscar Brannon

Howard, III. Green, a family friend, was named successor trustee. 

He became trustee of the Trust on November 5, 2005, upon the

passing of Howard, Jr. Green was also a beneficiary under the

Trust. 

1. The probate action 

Suspecting possible misappropriation of Trust assets, in

September 2008, Truman Holt, Mrs. Howard's brother and also a

Trust beneficiary, brought a probate action against trustee Green,

seeking to compel Green to account for and report information

about Trust assets ("Probate Action" 08P063929).

In October 2008, Green was ordered to provide an inventory

and accounting of income and expenses from November 5, 2005

through October 2008, and copies of tax returns for the same

3 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.

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period. Green was also ordered to pay Holt's attorney’s fees and

costs or to show cause why he should not (“2008 Order”).

In response, Green produced a two-page handwritten document

purporting to list the assets, income and expenses of the Trust

for the required time period ("2008 List"). The 2008 List did not

provide all information required under the 2008 Order, lacked any

substantive detail or supporting documentation or other

corroborative information, omitted Trust assets and provided no

information about which Trust assets Green claimed to have

administered. 

In March 2009, Holt moved to have Green removed as trustee

for cause, citing Green's continuing failure to account for Trust

assets. At the hearing, the probate court removed Green and

appointed Holt as trustee. Green failed to respond to the removal

petition or appear at the hearing. 

In an order filed in April 2009, the probate court found that

Green, while acting as Trustee, failed to: (1) provide an

adequate inventory and accounting of Trust assets and their

values; (2) provide details for distributions purportedly made to

Trust beneficiaries or details of any income received by the

Trust; (3) pay Holt's attorney's fees and costs as ordered; and

(4) provide any Trust tax returns. Green was ordered to turn over

to newly appointed trustee Holt: (1) complete copies of the Trust

agreement and all amendments thereto;4 (2) copies of all Trust

4 Prior to his removal as trustee, Green had produced an

undated, but signed and notarized, two-page document entitled

Amendment of Trust (“Amendment”). Green claimed Howard, Jr. made

the Amendment just prior to his death. The Amendment purports to

(continued...)

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records during the term of his administration, including tax

returns, check registers, canceled checks and information

regarding Trust investments; and (3) copies of all deeds,

mortgages, deeds of trust, promissory notes and the like related

to Trust activities.

In response to the April 2009 order, Green sent a list of

Trust assets and liabilities as of November 5, 2005, by email to

Holt's attorney, Harriet Roland, in June 2009 ("2009 List"). The

2009 List differed materially from the 2008 List, stating that the

Trust held $612,000 in assets, almost a two-fold increase from

Green's previous accounting.5 

In November 2009, Holt, individually and on behalf of the

Trust, moved to enforce the Trust's forfeiture clause and compel

Green to forfeit any right to property or benefits received from

the Trust based on his malfeasance. Green did not oppose the

motion. After a hearing and finding that notice was proper, the

probate court entered an order directing that Green forfeit his

beneficial interest in the Trust or any rights to use or keep

Trust property ("Forfeiture Order"). The Forfeiture Order

4(...continued)

modify the distribution of the Trust's residuary estate. The

names of Trust beneficiaries had been redacted from the document. 

Holt alleged that Trust beneficiaries were previously unaware of

the Amendment's existence and claimed that Green never mentioned

it before the Probate Action. The purported Amendment apparently

caused further litigation between Trust beneficiaries, who

ultimately settled their dispute and decided that Holt and the

Howards' son would investigate any malfeasance by Green.

5 Holt and the Trust contended that a later investigation

revealed the 2009 List still under-reported Trust assets and

income by at least $1 million. The bankruptcy court found,

however, that the record did not substantiate a loss of Trust

assets of that magnitude.

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contains findings establishing that Green had violated the terms

of the Trust and had failed to carry out properly his duties as

trustee. Green was also ordered "to return any and all prior or

current property of [the Trust] previously taken by [Green] from

the Trust" to Holt. Green did not appeal the Forfeiture Order.

In March 2012, Holt, on behalf of the Trust, filed a notice

of taking Green's deposition for May 3, 2012. Green was also

summoned by the probate court to appear at a hearing on May 11,

2012, and show cause why he should not be held in contempt for

failure to comply with the October 2008 and April 2009 orders. 

Green failed to appear for the deposition or appear at the May 11

hearing. 

On September 6, 2012, the probate court issued a second

citation for Green to appear at a hearing on September 21, 2012. 

Green failed to appear for the September 21 hearing. 

2. The civil action 

In August 2012, Holt/Trust filed a complaint against Debtors

and their revocable trust alleging ten causes of action, including

conversion, embezzlement, breach of fiduciary duty, civil theft 

and fraud, both actual and constructive ("Civil Action,"

A-12-667650-C). The complaint further alleged that Holland

"knowingly accepted the benefits of, and participated in, Green's

unlawful conversion of Trust assets." 

Debtors never answered the complaint. Holt/Trust then sought

default entries against Debtors; the state court entered defaults

against Debtors and their revocable trust on January 31, 2013. 

The state court held a prove-up hearing to establish damages

about 18 months later on May 22 and August 28, 2014. Green

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appeared pro se at both sessions of the prove-up hearing, but

because the May 22 session started earlier than scheduled, Green

missed most of it. Prior to his arrival, a forensic investigator

for the Trust, Jayne Klein, was admitted as an expert witness and

testified about her findings regarding the alleged

misappropriation of Trust assets by Debtors. 

At the later prove-up session on August 28, Green crossexamined Klein, presented documentary evidence and testified under

oath. In summary, Klein testified that she had analyzed hundreds

of transactions and transfers between multiple accounts held in

the names of Debtors and the Trust. Her analysis also extended to

several home purchase and sale transactions involving the Debtors,

as well as transactions involving several individual deeds of

trust. Klein concluded that at least $638,427.07 "was either

stolen or taken or lost by the [Debtors]." Klein opined that more

Trust assets could have existed, but Green's refusal to assist in

her investigation made finding any additional assets problematic. 

During the August 28 session of the prove-up hearing, the

state court commended Holt/Trust's tracing of Trust assets,

stating that "[t]hey did the best job of tracing in a fraudulent

case that I have seen in almost 40 years of doing this[.]" The

court further noted:

Mr. Green, I have gone through this amended application

and looked at the various transactions that they have

done, that they have examined, to show me you’re a thief. 

You have stolen substantial amounts of money from this

trust over a period of years. The total amount that they

have compiled, and I believe it to be accurate, is

$638,427.07[.]

In conclusion, the court stated that a money judgment would be

entered for $638,427.07, with a like amount for punitive damages,

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and equitable relief in the form of a constructive trust and

equitable liens on Debtors' property. Green asked the court about

filing an appeal; the court told him to seek counsel.

Holt/Trust counsel submitted on August 28, 2014, a Proposed

Judgment consistent with the relief announced by the state court

at the conclusion of the hearing. It provided for a constructive

trust over Debtors’ home; an equitable lien on Debtors’ rental

property and vacant land they owned; an equitable lien on Debtors’

personal property; actual damages of $638,427.07; punitive damages

of $638,427.07; and costs. The Proposed Judgment, however, was

not entered because of Debtors' bankruptcy filing six days later.6

B. Postpetition events

Debtors filed a skeletal chapter 11 case on September 3,

2014. They had not previously filed for bankruptcy. They had

also historically paid their debts as they became due, including

paying off credit card balances every month. The initial

schedules filed two weeks later showed that Debtors owned free and

clear all three of their real properties valued at $455,000. They

also had nearly $1 million in their retirement accounts. They had

no secured creditors or unsecured priority creditors. 

Absent Holt/Trust's scheduled "unsecured" claim of

$1.3 million, Debtors had only four other unsecured creditors: 

three credit card companies collectively owed $5,100; and

6 The Proposed Judgment was subsequently signed by the state

court on September 10, 2014, after Debtors’ bankruptcy petition

had been filed, but it was never docketed. Nonetheless, the

Proposed Judgment was the subject of a separate motion by Debtors

for contempt sanctions against Holt/Trust for violation of the

automatic stay. In the bankruptcy court's order granting the

contempt motion, it determined that the judgment was void. 

Holt/Trust appealed the contempt order to the district court.

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Ms. Holland’s mother, who loaned Debtors $7,500 to cover a portion

of Debtors’ bankruptcy related fees of $32,000. Debtors listed

the Holt/Trust debt from the Civil Action as "contingent,

unliquidated and disputed." 

1. The motion to dismiss 

In November 2014, Holt/Trust filed an Omnibus Motion: (1) To

Dismiss for Bad Faith; (2) To Remove Debtors as Trustee; and

(3) For Relief from Stay ("Motion to Dismiss").7 For dismissal

under § 1112(b), Holt/Trust argued that Debtors' chapter 11 case

had been filed in bad faith solely as a litigation tactic to

defeat or delay the Civil Action judgment. In short, Holt/Trust

contended that Debtors' bankruptcy filing was merely a substitute

for posting an appeal bond. Holt/Trust contended that the timing

of Debtors' case — filed just days after an announced adverse

judgment for $1.3 million and a constructive trust against their

real property (purchased with allegedly stolen Trust money) — was

a glaring example of a bad faith filing intended to prevent a

written order being entered and to circumvent the appeals process.

Holt/Trust contended that Debtors had provided direct

evidence of their bad faith by admitting at their § 341(a)

meetings that the sole reason for filing the bankruptcy case was

to impede entry of the Civil Action judgment. Debtors also

admitted they were aware of their right to appeal, but chose to

file for bankruptcy instead. Finally, Holt/Trust argued that

7 Because the bankruptcy court decided to convert the case

to chapter 7, no relief to appoint a chapter 11 trustee or

examiner was necessary. No party disputes that ruling. 

Holt/Trust also withdrew the request for relief from stay before

the evidentiary hearing on the Motion to Dismiss. Therefore, we

focus only on the court's decision to convert.

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Debtors were solvent. At the time of filing, Debtors' liabilities

were $12,600; their assets were $1,435,849.04. 

Debtors opposed the Motion to Dismiss, maintaining that their

case was not filed in bad faith. First, they asserted that they

arguably were not solvent, considering the large Holt/Trust debt. 

Second, the bankruptcy case was filed 18 months after the defaults

had been entered. Third, litigation in the Civil Action was

essentially over except for some accounting. Finally, since their

case had been filed only three months ago, they had not been given

a reasonable opportunity to file a plan of reorganization. 

Alternatively, Debtors argued that "unusual circumstances" existed

to not dismiss their case, which included the fact they were

defaulted in the Civil Action.

a. Initial hearing on the Motion to Dismiss

Both parties appeared with counsel at the initial hearing on

the Motion to Dismiss on December 10, 2014. Holt/Trust requested

a continuance for an opportunity to remedy notice deficiencies. 

Because of the seriousness of the issue, the bankruptcy court

decided that an evidentiary hearing was appropriate. In its

scheduling order entered December 15, 2014, the court ordered the

parties to submit briefs to "elaborate on and address the evidence

elicited during the trial in connection with the parties' state

court litigation and the issues identified in the Motion and

Debtors' response to it." An evidentiary hearing was set for

March 2, 2015. 

Debtors' pre-hearing brief in opposition to the Motion to

Dismiss was essentially a copy and paste of their prior brief and

did not address the issues noted by the bankruptcy court in the

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scheduling order. Holt/Trust's brief, however, did provide more

details about the Civil Action. Holt/Trust noted that when Green

received notice of the pleading to remove him as trustee, he

withdrew $125,000 in cash and securities from Trust accounts and

provided the Amendment with the redacted beneficiary designation,

which caused havoc between the beneficiaries. The distribution

pattern to beneficiaries during Green's tenure matched neither the

original Trust nor the Amendment. Holt/Trust also emphasized that

the prove-up hearing was originally scheduled for November 7,

2013. However, on Green's request, the state court reset the

hearing for November 26, 2013; then to December 11, 2013; then to

January 23, 2014; then to March 13, 2014; then to May 8, 2014;

then to May 22, 2014. At the end of the May 22 session, the court

continued the prove-up hearing for Green to review a copy of the

transcript and to file any written objections and/or obtain

counsel; Green did neither by the deadline of June 11, 2014. 

Green then asked for another continuance for extra time to

respond. The state court again continued the prove-up hearing to

August 28, 2014.

b. The evidentiary hearing on the Motion to Dismiss

Roland, Klein and Debtors testified at the evidentiary

hearing on March 2, 2015. Klein stated that she had been employed

at the law firm representing Holt/Trust for the past 15 years. 

Klein explained that a forensic investigator is someone who looks

into, particularly at her firm, probate trust malfeasance. She

admitted that she had no college level degree in forensic

accounting, accounting or any other subject. She testified that,

besides work done for her firm, she had done forensic

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investigation of this type for several other parties for a fee. 

Klein admitted that Green did not appear at the May 22 session of

the prove-up hearing in the Civil Action until after she had been

admitted as an expert, so he was not there to object. 

Green's testimony as to the state court proceedings was vague

and sometimes contradictory; he recalled little. As for the

petition seeking his removal as trustee and subsequent order,

Green claimed that he understood nothing about Holt/Trust's

allegations of malfeasance and that he had no knowledge of the

state court finding that the accounting he submitted in 2008 was

inaccurate. Green could not recall being served with the orders

to appear and to provide an accounting of Trust assets or to

appear for deposition. Green did not recall that he had been

removed as trustee of the Trust for malfeasance, claiming that the

April 2009 order never stated a reason for his removal. Green was

also unsure as to whether he even received notice of the hearing

seeking his removal as trustee. However, Green admitted that when

he removed thousands of dollars out of Trust accounts as repayment

for approximately $163,311 in loans he made to the Trust years

prior, it could have been in response to the removal notice. 

Green also testified that although he deposited check payments for

Trust assets into his personal bank accounts, he did not believe

that he commingled his personal assets with those of the Trust. 

Green testified that once he provided the 2009 List to Roland in

June 2009, he was under the impression that everything was settled

and his involvement was over. 

Green also stated that he did not recall getting notice of

the Forfeiture Order in 2012, which contradicted his § 341(a)

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meeting testimony, but he later testified that he did not dispute

receiving it. He testified that he knew nothing about the default

entries in the Civil Action in January 2013. Green also said he

did not recall the state court's oral ruling at the August 28,

2014 session of the prove-up hearing, just six months prior, that

he was a thief and had stolen hundreds of thousands of dollars

from the Trust. 

Holland testified that her understanding when filing their

bankruptcy case was that Green would be able to produce documents

showing that no Trust funds were misappropriated, that all of

their assets would not be dissolved, and that if they did owe

anything to Holt/Trust it could be paid in an orderly fashion.

Holland testified that she knew "very little" about Green's

activities while he was acting as trustee for the Trust. Holland

stated that she had no involvement with the Trust or had any

control over Trust assets. She also knew nothing about the

Probate Action when it was pending. 

After closing arguments from the parties, the bankruptcy

court took the matter under submission, noting that it would issue

a written decision promptly. The written decision was not issued

for several months. 

2. Debtors' disclosure statement and plan

Meanwhile, the exclusivity period for Debtors to file their

chapter 11 plan and disclosure statement was set to expire on

January 1, 2015, with a plan confirmation deadline of March 3,

2015. On December 30, 2014, Debtors moved to extend the

exclusivity period. The bankruptcy granted the extension, giving

Debtors until April 1, 2015, to file their plan and disclosure

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statement and until June 1, 2015, to get their plan confirmed. 

Debtors filed their disclosure statement and plan on April 1,

2015. 

Before any decision was entered, Debtors again moved for an

extension of another 180 days to get their plan confirmed. 

Although discussed more fully below, Debtors contended another

extension was warranted due to: (1) Holt/Trust's objection to

Debtors' claimed exemptions set for hearing on July 2, 2015; and

(2) two pending adversary proceedings between Holt/Trust and

Debtors that had been consolidated and not resolved, as well as

two appeals, one of which was the contempt order. In addition,

Holt/Trust had sought to withdraw the reference, which had not yet

been decided. 

On June 10, 2015, the bankruptcy court entered an order

giving Debtors until November 28, 2015, to get their plan

confirmed. 

Meanwhile, on June 2, 2015, the bankruptcy court disapproved

Debtors' disclosure statement on the basis that it failed to

provide adequate information under § 1125(a). Debtors never filed

an amended disclosure statement or another plan. 

3. Holt/Trust's motion to estimate and temporarily allow

claim for voting purposes

Holt/Trust filed an amended proof of claim on December 31,

2014 ("Claim"). The Claim was based on a "compensatory and

punitive judgment" of $1,276,854.14, alleged to be secured in part

pursuant to a constructive trust and equitable lien on Debtors'

(stolen) real estate and other property in the amount of

$638,427.07; the remaining $638,427.07 was unsecured.

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Some additional background here is warranted for context.

Shortly after Debtors filed their bankruptcy case, they removed

the Civil Action to the bankruptcy court ("Removal Action," Adv.

No. 14-01177). Thereafter, Holt/Trust moved for remand and asked

the bankruptcy court to abstain from hearing the matter. The

bankruptcy court denied remand. Holt/Trust appealed the remand

denial to the district court. Holt/Trust also moved for

withdrawal of the reference in the Removal Action. 

The same day Debtors filed the Removal Action, Holt/Trust

filed a dischargeability action against Debtors, seeking to except

the debt from discharge under § 523(a)(2), (4) and (6) (the "523

Action," Adv. No. 14-01178). In their answer, Debtors asserted a

counterclaim objecting to Holt/Trust's Claim and sought a

determination of the validity, extent and priority of any lien

held by Holt/Trust. 

On Debtors' motion, the Removal Action and the 523 Action

were consolidated on February 18, 2015. Thus, matters pending in

both the Removal Action and the 523 Action are subject to the

withdrawal of the reference, which is still undecided. 

On August 5, 2015, Holt/Trust moved to estimate and

temporarily allow the Claim for voting purposes ("Claim Estimation

Motion"). At that point, Debtors' disclosure statement had been

disapproved and not amended.

Debtors opposed the Claim Estimation Motion for three

reasons. First, Debtors questioned the bankruptcy court's

jurisdiction to estimate the Claim because allowance of the Claim

was subject to the 523 Action, which had now been consolidated

with the Removal Action, which was subject to Holt/Trust's

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withdrawal of the reference. Second, even if the bankruptcy court

had jurisdiction, Debtors contended the Claim Estimation Motion

was premature as there was no plan pending. Finally, Debtors

contended the court had discretion to deny the Claim Estimation

Motion because the Claim was subject to dispute and the delay in

its resolution was the fault of Holt/Trust. 

In reply, Holt/Trust contended the bankruptcy court had

jurisdiction to estimate the Claim even though the removed

523 Action contained the counterclaim seeking to disallow it. 

Plan confirmation was still within the bankruptcy court's

jurisdiction, which was a separate question from claim allowance. 

Further, argued Holt/Trust, the Claim Estimation Motion was not

premature. Debtors had cited no case law that requires a plan to

be pending before a request to vote a disputed claim is sought. 

Finally, while Holt/Trust conceded they had caused some delay in

resolving the Claim issue, nothing about it was improper. In

fact, Debtors consolidating the two adversaries ensured that

appeal of any one substantive issue within them would delay all

issues, including resolution of Debtors' Claim objection.

After a hearing on September 9, 2015, the bankruptcy court

issued its oral ruling on the Claim Estimation Motion on

September 18, 2015. Concluding that it had jurisdiction to

estimate and temporarily allow the Claim for voting purposes, the

court granted the motion on the basis that the Claim was both

contingent and unliquidated, and waiting until the Claim was

liquidated would cause undue delay in the administration of the

case. The court estimated the unsecured Claim at $638,427.07

(“Estimated Claim”). 

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The bankruptcy court entered an order allowing the Estimated

Claim for voting purposes only under § 502(c)(1) and Rule 3018(a)

on September 23, 2015 ("Claim Estimation Order"). Debtors timely

appealed the Claim Estimation Order. 

4. The bankruptcy court's decision on the Motion to Dismiss

The bankruptcy court entered its 43-page Memorandum Decision

on the Motion to Dismiss on September 30, 2015, one week after the

Claim Estimation Order had been entered. The court found that

Debtors' bankruptcy case had been filed in bad faith, thereby

providing "cause" under § 1112(b)(1). Debtors had failed to

establish that any "unusual circumstances" existed under 

§ 1112(b)(2) to not dismiss or convert the case. However, the

court declined to dismiss the case, finding that conversion to

chapter 7 was in the best interest of creditors and the estate. 

The bankruptcy court entered an order converting Debtors'

case to chapter 7 on October 1, 2015 ("Conversion Order"). 

Debtors timely appealed the Conversion Order. 

II. JURISDICTION

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

and 157(b)(2)(A). Subject to our discussion below, we have

jurisdiction under 28 U.S.C. § 158.

III. ISSUES

1. Did the bankruptcy court abuse its discretion when it

converted Debtors' chapter 11 bankruptcy case to chapter 7?

2. Did the bankruptcy court abuse its discretion by estimating

and temporarily allowing the Claim for voting purposes?

IV. STANDARDS OF REVIEW

The bankruptcy court's interpretation of the Code is reviewed

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de novo. Barrientos v. Wells Fargo Bank, N.A., 633 F.3d 1186,

1188 (9th Cir. 2011). We review our own jurisdiction, including

questions of mootness, de novo. Ellis v. Yu (In re Ellis),

523 B.R. 673, 677 (9th Cir. BAP 2014) (citing Silver Sage

Partners, Ltd. v. City of Desert Hot Springs (In re City of Desert

Hot Springs), 339 F.3d 782, 787 (9th Cir. 2003)). 

We review the bankruptcy court's order converting Debtors'

chapter 11 case to chapter 7 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). We review the

bankruptcy court's finding of "bad faith" for clear error. Marsch

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

We also review for an abuse of discretion the bankruptcy

court's decision to allow temporarily the Estimated Claim for

voting purposes. See Beal Bank USA v. Windmill Durango Office,

LLC (In re Windmill Durango Office, LLC), 481 B.R. 51, 63 (9th

Cir. BAP 2012) (Rule 3018(a) decisions are reviewed for abuse of

discretion). However, we review de novo whether the bankruptcy

court had subject matter jurisdiction to enter the Claim

Estimation Order. See McCowan v. Fraley (In re McCowan), 296 B.R.

1, 2 (9th Cir. BAP 2003) ("Whether a court has subject matter

jurisdiction is a question of law that we review de novo."). 

A bankruptcy court abuses its discretion if it applied the

wrong legal standard or its factual findings were illogical,

implausible or without support in the record. TrafficSchool.com

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

///

///

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V. DISCUSSION

A. The bankruptcy court did not abuse its discretion when it

converted Debtors' chapter 11 case to chapter 7.

1. Dismissal or conversion under § 1112(b)

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 . . . ." 

If cause is established, the decision whether to convert or

dismiss the case falls within the sound discretion of the court. 

Sullivan v. Harnisch (In re Sullivan), 522 B.R. 604, 612 (9th Cir.

BAP 2014). And, if the bankruptcy court determines that cause

exists 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. Id. (citing § 1112(b)(1),

(b)(2)).

The movant seeking relief under § 1112(b) bears the initial

burden of proving by a preponderance of the evidence that "cause"

exists. Id. at 614. 

2. Bad faith as cause to convert or dismiss 

The bankruptcy court found that "cause" existed to convert on

the basis that Debtors' petition was filed in bad faith. Although

§ 1112(b) does not explicitly require that cases be filed in "good

faith," a lack of good faith in filing a chapter 11 case

establishes cause for dismissal. Marshall v. Marshall

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(In re Marshall), 721 F.3d 1032, 1047 (9th Cir. 2013);

In re Marsch, 36 F.3d at 828; In re Sullivan, 522 B.R. at 614. In

determining whether the petition was filed in good faith, "the

debtor’s subjective intent is not determinative." In re Marsch,

36 F.3d at 828. Rather, the good faith inquiry focuses on the

manifest purpose of the filing and whether the debtor is seeking

to achieve thereby "objectives outside the legitimate scope of the

bankruptcy laws." Id.; In re Sullivan, 522 B.R. at 614. 

Simply put, in determining whether the chapter 11 petition

was filed in good faith, the bankruptcy court must ascertain

“whether [the] debtor is attempting to unreasonably deter and

harass creditors or attempting to effect a speedy, efficient

reorganization on a feasible basis." In re Marsch, 36 F.3d at 828

(citing Idaho Dep't of Lands v. Arnold (In re Arnold), 806 F.2d

937, 939 (9th Cir. 1986)); Grego v. U.S. Tr. (In re Grego), 2015

WL 3451559, at *5 (9th Cir. BAP May 29, 2015).

When bad faith is relied upon and established as cause for

relief under § 1112(b), "[d]ebtor bears the burden of proving that

the petition was filed in good faith." In re Marshall, 721 F.3d

at 1048 (quoting Leavitt v. Soto (In re Leavitt), 209 B.R. 935,

940 (9th Cir. BAP 1997)), aff'd, 171 F.3d 1219 (9th Cir. 1999).

In making the good faith determination, the bankruptcy court

typically must consider "an amalgam of factors," instead of

relying on a single dispositive fact. In re Marsch, 36 F.3d at

828. Such determinations are to be made "on a case by case basis,

and there is no talismanic list of factors that must be present in

each case in order to find bad faith; the weight given to any

particular factor depends on all of the circumstances of the

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individual case." In re Grego, 2015 WL 3451559, at *6 (citing

Laguna Assocs. Ltd. P'ship v. Aetna Cas. & Sur. Co. (In re Laguna

Assocs. Ltd. P'ship), 30 F.3d 734, 738 (6th Cir. 1994); de la

Salle v. U.S. Bank, N.A. (In re de la Salle), 461 B.R. 593, 605

(9th Cir. BAP 2011) (holding that, in chapter 13 cases, bankruptcy

courts must consider the “totality of the circumstances” before

making a bad faith determination)).

3. Analysis

After carefully reviewing an amalgam of factors, the

bankruptcy court determined that Debtors were and are attempting

to unreasonably deter and harass Holt/Trust by filing their

chapter 11 petition. In addition, the court found that Debtors

were not attempting to effect a speedy, efficient reorganization

on a feasible basis, but were instead attempting to achieve delay

and other objectives outside the legitimate scope of the Code. 

Thus, Debtors' bankruptcy petition was not filed in good faith and

established "cause." Debtors do not challenge the bankruptcy

court's finding of bad faith directly, but rather raise procedural

arguments and challenge the court's finding that unusual

circumstances were not present under § 1112(b)(2). We now turn to

these arguments. 

Debtors contend that because the bankruptcy court held the

evidentiary hearing four months after the Motion to Dismiss was

filed and did not decide the matter until seven months later, it

erred as a matter of law. Under § 1112(b)(3), the bankruptcy

court is required to hear a motion under § 1112(b) within 30 days

after the filing of the motion and decide the motion not later

than 15 days after the initial hearing, "unless the movant

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expressly consents to a continuance for a specific period of time

or compelling circumstances prevent the court from meeting the

time limits established by this paragraph." 

Debtors never before objected to the timing of the

evidentiary hearing or of the bankruptcy court's decision. 

Generally we will not consider an issue raised for the first time

on appeal; the failure to raise an issue before the bankruptcy

court may constitute a waiver. See Price v. Lehtinen

(In re Lehtinen), 332 B.R. 404, 411 (9th Cir. BAP 2005). We may

consider such an issue later on appeal. See Mano–Y & M, Ltd. v.

Field (In re Mortg. Store, Inc.), 773 F.3d 990, 998 (9th Cir.

2014). Given the pure legal issue here and the developed record,

we exercise our discretion to consider Debtors' argument and

conclude to the contrary. See Id. (we have discretion to consider

arguments raised for the first time on appeal if the issue

presented is purely a legal one and either does not depend on the

factual record developed below or the pertinent record has been

fully developed). As prescribed by the statute, which is clearly

designed for the party seeking dismissal or conversion, movant

Holt/Trust expressly consented to the evidentiary hearing set four

months out. See Smith v. Colo. Dep't of Rev. (In re Hook), 2008

WL 3906794, at *5 (10th Cir. BAP Aug. 26, 2008) (statutory right

under § 1112(b)(3) to have hearing conducted within 30 days

"plainly belongs to the moving party" rather than to the debtor). 

Secondly, while the seven month wait for a decision was arguably

lengthy, particularly when considering the court's statement at

the evidentiary hearing that it would render a decision promptly,

Debtors fail to acknowledge the second part of § 1112(b)(3), which

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permits the court to decide the motion beyond the 15-day time

limit if "compelling circumstances" so require. Clearly, the

15-day decision rule in § 1112(b)(3) is flexible; the court is

allowed to extend that time limit if necessary. 

We further observe that § 1112(b)(3) is not self-executing

and does not provide for a specific consequence for either party

should a motion to dismiss or convert not be heard within 30 days

or decided within 15 days thereafter. See In re Pinnacle Labs.,

Inc., 2008 WL 5157981, at *4 n.1 (Bankr. D.N.M. June 19, 2008)

(noting the difference between § 1112(b)(3) and § 362(e)(1) & (2),

which allow relief or modification from stay if hearings are not

conducted or decisions rendered within certain periods of time). 

Therefore, the bankruptcy court did not commit reversible error by

conducting an evidentiary hearing four months after the Motion to

Dismiss had been filed or by not adhering to the 15-day decision

rule after that hearing's conclusion.

Debtors next contend the bankruptcy court erred by

considering in its decision to convert events that occurred months

after the evidentiary hearing, when it should have based its

decision only on facts from the Motion to Dismiss and the related

evidentiary hearing in March 2015. In particular, Debtors assign

error to the court's consideration of evidence regarding alleged

commingled Trust funds used to purchase their residence that was

presented at a hearing on Holt/Trust's objection to Debtors'

claimed exemptions in July 2015. In making a credibility

determination about Debtors, the bankruptcy court indicated that

the testimony regarding whether alleged commingled Trust funds

were used to purchase their residence was in fact presented at the

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evidentiary hearing on the Motion to Dismiss. Review of that

transcript reflects that no such testimony was offered there. So,

with respect to that factual statement, the court did err.

However, careful review of the transcript from the

evidentiary hearing on the Motion to Dismiss also shows that

Green's testimony was not particularly creditworthy and was

impeached on a variety of issues. In addition, Green admitted to

depositing Trust funds into Debtors' personal accounts, but then

claimed he did not commingle any Trust funds with Debtors'. More

importantly, the fact of the alleged commingled Trust funds

evidence at the hearing on Debtors' exemptions was only one part

of one factor the court relied upon as indicia of bad faith for

the Motion to Dismiss (i.e., whether egregious behavior by debtor

is present). Thus, even if the court erred in considering that

evidence and in making any factual finding respecting it, it does

not negate the court's other factual findings supporting its bad

faith ruling which Debtors do not contest. 

Next, Debtors argue that the bankruptcy court should not have

converted the case at the time it did, because of the pending

Claim objection, pending appeals, and an undecided withdrawal of

the reference filed by Holt/Trust. This argument appears to go to

Debtors' argument that "unusual circumstances" existed to not

convert their case, and the bankruptcy court erred by not

concluding otherwise. As noted above, once the bankruptcy court

determines that cause exists 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

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estate;8 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. In re Sullivan, 522 B.R.

at 612; § 1112(b)(1), (b)(2). The word "unusual" is not defined

in the Code, but contemplates facts that are not common to

chapter 11 cases, generally. 7 COLLIER ON BANKRUPTCY ¶ 1112.05[2]

(Alan N. Resnick & Henry J. Sommers, eds., 16th ed.). 

If the bankruptcy court does specifically find and identify

such "unusual circumstances," the debtor must also prove (1) there

is a reasonable likelihood of plan confirmation within a

reasonable time, (2) that the "cause" shown for conversion or

dismissal was reasonably justified, and (3) that the cause for

conversion or dismissal can be "cured" within a reasonable time.

Warren v. Young (In re Warren), 2015 WL 3407244, at *4 (9th Cir.

BAP May 14, 2015) (citing § 1112(b)(2)(A) & (B)). 

Debtors concede it was their burden to demonstrate unusual

circumstances existed so that dismissal or conversion was not in

the best interests of creditors and the estate. See id. at *4

("Once the movant has established cause, the burden shifts to the

respondent to demonstrate by evidence the unusual circumstances

that establish that dismissal or conversion is not in the best

8 Debtors do not dispute the bankruptcy court's decision to

convert as opposed to dismiss. We see no error in that ruling. 

The court independently analyzed the issue and determined that

conversion was in the best interest of creditors and the estate,

particularly because conversion ensured that all estate assets

could be properly collected, secured and distributed promptly in

an equitable manner. See In re Sullivan, 522 B.R. at 613

(bankruptcy court has an independent duty under § 1112 to consider

whether dismissal or conversion would be in the best interest of

all creditors and the estate, regardless of what form of relief

the moving party has requested); In re Sann, 2015 WL 1943911 at

*10-11 (Bankr. D. Mont. Apr. 29, 2015) (same).

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interests of creditors and the estate.”) (quoting 7 COLLIER ON

BANKRUPTCY at ¶ 1112.05[2]). The only "unusual circumstances"

Debtors raised before the bankruptcy court was the fact of the

default entry. The bankruptcy court disagreed this constituted

anything unusual in a chapter 11 case. We agree; this hardly

seems unusual, as many debtors prior to filing for bankruptcy have

had defaults entered against them in another court. 

However, Debtors now argue that the proposed plan and

disclosure statement, pending Claim objection, pending appeals,

and the undecided withdrawal of the reference constitute unusual

circumstances. Leaving aside momentarily the proposed plan,

Debtors do not explain how any of these issues establish that

chapter 11, as opposed to conversion or dismissal, is in the best

interest of creditors or the estate. Also, nothing is unusual

about pending dischargeability actions or claim objections in an

individual chapter 11 case. As for the proposed plan, a

compelling ground for denying a motion to dismiss grounded on bad

faith is a debtor showing that a plan of reorganization qualifies

and is ready for confirmation. In re Marshall, 721 F.3d at 1049. 

Although Debtors had filed a proposed plan, their disclosure

statement was rejected and they never filed an amended version

curing the defect(s). Thus, this does not help them either.

Along this same vein, and assuming unusual circumstances

exist, Debtors argue that the bankruptcy court erred in converting

their case to chapter 7 on October 1, 2015, after giving them

until November 30, 2015, to confirm a plan, and in finding that a

plan could not be confirmed in a reasonable time. Debtors argue

that with the Claim Estimation Order being entered just one week

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earlier estimating the Claim at $638,427.07, they were not given

time to file a new plan and disclosure statement based on that

decision. The bankruptcy court noted that while Debtors had filed

a plan, no disclosure statement had been approved and the plan was

never set for a confirmation hearing. Even if Debtors were

correct that they should have been given more time, they failed to

address the court's other concern that Debtors identified only one

class of creditors — general unsecured. As such, the court found

that no separate impaired class of creditors existed that could

vote in support of the plan, and the likelihood that Holt/Trust

would vote in favor of it was remote. Any new plan would appear

to have the same challenges. 

More importantly, even if Debtors could confirm a plan within

a reasonable time, they have not shown how the "cause" established

to convert their case — bad faith — was either reasonably

justified or is curable. See § 1112(b)(2)(B). As the bankruptcy

court found, filing a petition in bad faith could never be

reasonably justified or curable, no matter what plan Debtors could

now propose. For this same reason, we reject Debtors' argument

that because they had the assets to fund a 100% plan if needed,

the bankruptcy court erred in holding that they could not propose

a confirmable plan.

Debtors' last contention seems to go more to their appeal of

the Claim Estimation Order, arguing that the bankruptcy court

erroneously based its decision to convert, in part, on its

estimation of the Claim. Debtors’ argument here is unclear. 

Although the bankruptcy court had entered the Claim Estimation

Order one week before the Conversion Order, the court said nothing

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in its Memorandum Decision about the Estimated Claim or that it

was a basis for converting. In any event, Debtors’ argument is

without merit as the bankruptcy court temporarily estimated the

Claim solely and exclusively for purposes of voting to accept or

reject any proposed plan under § 502(c)(1) and Rule 3018(a); such

estimation did not serve as a basis for converting the case under

§ 1112 or applicable case law. Moreover, the resolution of the

appeal of the Claim Estimation Order will not change the

bankruptcy court's ruling that Debtors filed their petition in bad

faith, which was not substantially justified and cannot be cured.9

Accordingly, because the bankruptcy court's finding of bad

faith is supported by the record and not clearly erroneous, and it

properly applied the governing law, we AFFIRM the Conversion

Order.

B. Because we are affirming the Conversion Order, the appeal of

the Claim Estimation Order is DISMISSED as MOOT.

Debtors also appeal the Claim Estimation Order. After

determining it had jurisdiction over the matter, the bankruptcy

court proceeded to estimate and temporarily allow Holt/Trust's

unsecured Claim for voting purposes only in the amount of

9 Debtors make a great deal of Klein's testimony, arguing

that she lacked the credentials necessary to be admitted as an

expert witness. First, Klein was admitted as an expert witness at

the state court prove-up hearing, not at the evidentiary hearing

on the Motion to Dismiss, which the bankruptcy court merely

acknowledged in its recitation of the facts. Second, Debtors had

months between the two sessions of the prove-up hearing to object

to Klein's testimony or to hire counsel but did not do so. 

Finally, while Klein may not have a degree in forensic accounting,

she has been doing probate trust malfeasance investigation for at

least 15 years, and the state court judge commented favorably on

her abilities, noting that her work was the best he had seen in

his 40 years on the bench.

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$638,427.07. Notably, the court's ruling here was very narrow. 

It explicitly stated at the hearing and in the order that the

temporary estimate and allowance of the Claim was solely and

exclusively for purposes of voting to accept or reject a

chapter 11 plan of reorganization; the court was not determining

the allowance or disallowance of the Claim, the allowable amount

or the extent of any lien securing the Claim if allowed, nor the

nondischargeability of the Claim under § 523(a). In other words,

the Claim Estimation Order would have no preclusive effect in any

other matter or before any other court. 

In light of the bankruptcy court's narrow ruling and our

decision affirming the Conversion Order, we must dismiss the

appeal of the Claim Estimation Order. See United States v.

Pattullo (In re Pattullo), 271 F.3d 898, 900 (9th Cir. 2001) (we

cannot exercise jurisdiction over a moot appeal). No chapter 11

case exists and no plan will be presented requiring voting from

creditors. Therefore, even if we were to reverse the Claim

Estimation Order, we can provide no effective relief to Debtors. 

See Castaic Partners II, LLC v. Daca-Castaic, LLC (In re Castaic

Partners II, LLC), 823 F.3d 966, 968-69 (9th Cir. 2016) (test for

mootness is whether an appellate court can still grant effective

relief to the prevailing party if it decides the merits in his or

her favor). 

VI. CONCLUSION

For the foregoing reasons, we AFFIRM the Conversion Order. 

Because we are affirming the Conversion Order, the appeal of the

Claim Estimation Order is therefore DISMISSED as MOOT.

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