Opinion ID: 461646
Heading Depth: 2
Heading Rank: 2

Heading: Denial of Motion to Dismiss for Bad Faith Under 11 U.S.C. Sec. 1112.

Text: 15 Farber and Mattingly brought a motion to dismiss the bankruptcy case under 11 U.S.C. Sec. 1112 on the ground that the corporation filed for bankruptcy under chapter 11 in bad faith. Section 1112 provides that the bankruptcy court may dismiss a case under this chapter ... for cause.... 11 U.S.C. Sec. 1112(b) (1982) (amended by the Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub.L. No. 98-353, Sec. 505, 98 Stat. 333, 384-85). A number of courts have held that bad faith--i.e., filing under chapter 11 with the intent to abuse the reorganization process--is sufficient cause under section 1112 to dismiss a case. See, e.g., Meadowbrook Investors' Group v. Thirtieth Place, Inc. (In re Thirtieth Place, Inc.), 30 B.R. 503, 505 (Bankr. 9th Cir.1983); In re Spenard Ventures, Inc., 18 B.R. 164, 166 (Bankr.D.Alaska 1982). In the instant case, the bankruptcy court denied the beneficiaries' motion to dismiss, and the district court affirmed. The beneficiaries argue that the denial of their motion to dismiss is appealable to this court under the finality analysis we outlined above. We disagree. 16 The beneficiaries are not threatened with the possibility of irreparable harm if they cannot immediately appeal the district court's affirmance of the denial of their motion to dismiss. Although the beneficiaries will have to continue their participation in the reorganization process, their interests will be protected while they participate. See, e.g., 11 U.S.C. Secs. 361, 363(e) (right to adequate protection); 11 U.S.C. Sec. 362(d) (power to attain relief from automatic stay); 11 U.S.C. Sec. 363(f) (protecting interests of secured creditors when property is sold); 11 U.S.C. Sec. 1104 (power to have trustee or examiner appointed); 11 U.S.C. Sec. 1121 (power to propose a plan if one has not been proposed or approved within certain time periods). As secured creditors, the beneficiaries can protect their interests by moving the bankruptcy court to provide them adequate protection as defined by 11 U.S.C. Sec. 361, or by seeking relief from the automatic stay under 11 U.S.C. Sec. 362(d) if such protection is not provided. 17 Two prior decisions in which we recognized the potential for irreparable harm if similar bankruptcy orders were not immediately appealable are distinguishable from this case. In Mason v. Integrity Insurance Co. (In re Mason), 709 F.2d 1313 (9th Cir.1983), we held that the bankruptcy court's denial of the debtor's motion to vacate an order for relief entered on an involuntary bankruptcy petition was final and reviewable. Id. at 1315-18. We observed that an order for relief [similar to a denial of a motion to dismiss] can be viewed as merely a decision that a bankruptcy case can continue and does not meet the usual standard of finality. Id. at 1316. Nevertheless, we held that the denial of the debtor's motion to vacate an order for relief was final in light of the unique nature of bankruptcy procedure and therefore reviewable by this court. Id. 18 In reaching this decision, we made two important observations. First, we noted that the decision to enter an order for relief is prefaced by procedures similar to that preceding other final judgments in civil and criminal litigation. Id. at 1317. The petition for relief is treated as a complaint which the debtor must answer to avoid default; the debtor may respond to the petition by filing motions similar to those under Fed.R.Civ.P. 12; either side may conduct discovery; and the bankruptcy court is obliged to determine the issues of a contested petition at the earliest practicable time. Bankr.R. 1010-1013. We found that this procedural framework evidenced a recognition by the drafters of the rules that an order for relief should be an appealable final order. 709 F.2d at 1317. 19 Second, we found that none of the other protections for debtors under the Bankruptcy Code were adequate to prevent a debtor from suffering irreparable injury through loss of property where the bankruptcy court had granted an order for relief on an involuntary petition. Id. at 1317-18. 20 Neither of these two reasons for finding final and appealable a bankruptcy court's order that the case proceed where the creditors have filed an involuntary petition, as in Mason, applies where the debtor has filed a voluntary petition, as in the instant case. 21 First, the debtor's commencement of a voluntary case involves none of the adversary procedures that the Code requires for involuntary petitions. The mere filing of the voluntary petition constitutes an order for relief. 11 U.S.C. Sec. 301. The bankruptcy court does not approve the voluntary petition and the creditors are not given the chance to object. Bankr.R. 1002, Official Form 1. The procedures preceding a voluntary petition are thus dissimilar to those preceding final judgments in ordinary civil and criminal litigation; they do not indicate an intent on the part of the drafters that the denial of a motion to dismiss a voluntary petition be an appealable final order. 22 Second, as noted above, the Code contains substantial protection for the creditors, adequate to prevent them from suffering irreparable injury to their property interests while the bankruptcy case proceeds. See, e.g., 11 U.S.C. Secs. 361, 362(d), 363(e)(f), 1104 and 1121. Consequently, Mason 's holding that the denial of the debtor's motion to vacate an order for relief in an involuntary case is a final order does not require us to find that the denial of the creditors' motion to dismiss in a voluntary case is also final. 23 The other case in which we found a similar order final and appealable, Crocker National Bank v. American Mariner Industries, Inc. (In re American Mariner Industries, Inc.), 734 F.2d 426 (9th Cir.1984), is also distinguishable. In American Mariner, we held that an order denying the creditor's petition for relief from the automatic stay for lack of adequate protection, see 11 U.S.C. Sec. 362(d)(1), was final and appealable. Id. at 428-29. 24 Although the denial of a petition for relief from the automatic stay, like the denial of a motion to dismiss, basically permits the bankruptcy case to proceed under the debtor's control, there is a crucial difference between the two rulings. When a creditor moves to dismiss for bad faith filing, he need make no showing of harm to his property interests from the continuance of the bankruptcy case. On the other hand, his request for relief from the automatic stay for lack of adequate protection is premised on a showing of imminent harm to his property interests. It follows that a denial of the creditor's petition for relief from the automatic stay will frequently cause him irreparable harm if he has to wait to the end of the bankruptcy case to appeal. 25 In addition, the Bankruptcy Code explicitly provides for expedited and ex parte proceedings on complaints for relief from the automatic stay. 11 U.S.C. Sec. 362(e)(f). The American Mariner court relied on these provisions to conclude that Congress intended the courts to conclusively and expeditiously adjudicate, apart from the bankruptcy proceedings as a whole, complaints for relief from the automatic stay. 734 F.2d at 429. The lack of similar provisions for motions to dismiss under 11 U.S.C. Sec. 1112 indicates a contrary intent on the part of Congress. 26 In short, our decision in American Mariner does not lead us to conclude that a denial of a creditor's motion to dismiss is final and appealable. On the contrary, because American Mariner grants the creditor the right to an immediate appeal when his property interests are tangibly threatened, our finding that the motion to dismiss is not immediately appealable to this court will not cause him irreparable harm. He can petition for relief from the automatic stay, as the beneficiaries did in this case, and immediately appeal the bankruptcy court's denial of that petition to the district court and then to this court. 27 In addition, classifying the denial of a motion to dismiss for bad faith filing as a final order would have an undesirable impact on the reorganization process. Creditors would be forced to appeal the bad faith filing issue to this court immediately, or forego appealing the issue to this court entirely. Bankr.R. 8001(a), 8002(a) (must file notice of appeal within 10 days of final order; Fed.R.App.P. 4(a)(1)). If an immediate appeal to this court is permitted, the bankruptcy court is then faced with the difficult choice of whether to proceed with the reorganization process knowing that the appeal of the bad faith filing issue may render further reorganization proceedings unnecessary, or stay the reorganization pending our decision. If the reorganization process is stayed and we affirm the denial of the motion to dismiss, then the reorganization process is unnecessarily delayed. We find no potential for irreparable harm to the beneficiaries in this case. Accordingly, the denial of the motion to dismiss for bad faith filing is not a final order under our previous decisions, and we lack jurisdiction over this portion of the beneficiaries' appeal. 28