Court Opinion

ID: 4192735
Source: CourtListenerOpinion
Date Created: 2017-08-03 17:02:26.072823+00
Date Added: 2024-06-11T14:40:20.800776
License: Public Domain

FILED
                                                            JUN 06 2016
 1                         NOT FOR PUBLICATION
                                                        SUSAN M. SPRAUL, CLERK
                                                          U.S. BKCY. APP. PANEL
 2                                                        OF THE NINTH CIRCUIT

 3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                            OF THE NINTH CIRCUIT
 5   In re:                        )      BAP No.    NV-14-1593-FBD
                                   )
 6   PAUL A. MORABITO,             )      Bk. No.    13-51237-GWZ
                                   )
 7                  Debtor.        )
     _____________________________ )
 8                                 )
     PAUL A. MORABITO,             )
 9                                 )
                    Appellant,     )
10                                 )
     v.                            )      MEMORANDUM*
11                                 )
     JH, INC.; JERRY HERBST;       )
12   BERRY-HINCKLEY INDUSTRIES,    )
                                   )
13                  Appellees.     )
     ______________________________)
14
                Submitted Without Oral Argument on May 19, 2016
15
                              Filed – June 6, 2016
16
                 Appeal from the United States Bankruptcy Court
17                         for the District of Nevada
18            Honorable Gregg W. Zive, Bankruptcy Judge, Presiding
19
     Appearances:     Cecilia Lee and Elizabeth High of Lee & High, Ltd.
20                    on brief for Appellant Paul A. Morabito; Gerald M.
                      Gordon, Brian R. Irvine, Gabrielle A. Hamm, and
21                    Mark M. Weisenmiller of Gordon Silver on brief for
                      Appellees JH, Inc., Jerry Herbst, and Berry-
22                    Hinckley Industries.
23
24
25
26        *
            This disposition is not appropriate for publication.
27   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
28   9th Cir. BAP Rule 8024-1.
 1   Before: FARIS, BARASH,** and DUNN, Bankruptcy Judges.
 2                              INTRODUCTION
 3        Appellees JH, Inc., Jerry Herbst, and Berry-Hinckley
 4   Industries filed an involuntary chapter 71 petition against
 5   Appellant Paul A. Morabito in the United States Bankruptcy Court
 6   for the District of Nevada.   Mr. Morabito appeals the bankruptcy
 7   court’s decisions to (1) decline to dismiss the involuntary
 8   petition and instead suspend the case; (2) lift the suspension of
 9   the involuntary petition; and (3) grant summary judgment in favor
10   of Appellees and enter an order for relief.   We AFFIRM.
11                           FACTUAL BACKGROUND
12   A.   The underlying dispute
13        This case arises from a business dispute between Appellees
14   and Mr. Morabito and his associated entities.   In 2007, JH, Inc.
15   agreed to purchase the stock of Berry-Hinckley Industries from
16   P.A. Morabito & Co. Ltd.   Mr. Herbst guaranteed JH, Inc.’s
17   obligations, and Mr. Morabito was the guarantor for P.A. Morabito
18   & Co.
19        Thereafter, a dispute arose between the parties, and the
20   Morabito parties filed suit against the Herbst parties in Nevada
21   state court.   The Herbst parties filed numerous counterclaims
22   against the Morabito parties.
23
24        **
            Hon. Martin R. Barash, United States Bankruptcy Judge for
     the Central District of California, sitting by designation.
25
          1
26          Unless specified otherwise, all chapter and section
     references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, all
27   “Rule” references are to the Federal Rules of Bankruptcy
     Procedure, Rules 1001-9037, and all “Civil Rule” references are
28   to the Federal Rules of Civil Procedure, Rules 1-86.

                                      2
 1        After a bench trial in 2010, the state court found that the
 2   Morabito parties breached the stock sale agreement and engaged in
 3   fraud in the inducement and misrepresentation regarding the
 4   transaction.   It awarded the Herbst parties $149,444,777.80 in
 5   compensatory and punitive damages.   The Morabito parties filed an
 6   appeal with the Nevada Supreme Court, and the Herbst parties
 7   filed counter-appeals.
 8        While the case was on appeal, the parties executed a
 9   settlement agreement in November 2011.   The parties agreed to
10   dismiss the state court action with prejudice, and the Herbst
11   parties agreed to accept (1) $13,000,000 in cash; (2) assumption
12   by the Morabito parties of obligations of a commercial lease and
13   a $4,500,000 note; (3) indemnification in related litigation; and
14   (4) proceeds from the sale of Mr. Morabito’s residence.
15        Additionally, the Morabito parties agreed to execute a
16   Confession of Judgment in the amount of $85,000,000 and
17   Stipulation to Confession of Judgment.   Therein, Mr. Morabito
18   admitted that he had acted in bad faith and committed fraud,
19   including fraudulently inducing JH, Inc. to purchase Berry-
20   Hinckley Industries.   If the Morabito parties breached the
21   settlement agreement, the Herbst parties could file the
22   Confession of Judgment in state court.
23        The Morabito parties defaulted under the settlement
24   agreement by failing to make timely payments.   The parties then
25   entered into a forbearance agreement in which the Morabito
26   parties admitted that they defaulted on various provisions of the
27   settlement agreement and agreed to make payments to the Herbst
28   parties totaling $875,000.   However, the Morabito parties

                                      3
 1   defaulted on the forebearance agreement.   The Herbst parties
 2   filed the Confession of Judgment in the state court.
 3   B.   The involuntary petition and motion to dismiss
 4        Appellees filed an involuntary chapter 7 petition against
 5   Mr. Morabito.   Relying on the Confession of Judgment and the
 6   Stipulation to Confession of Judgment, Appellees asserted that
 7   they held claims against Mr. Morabito totaling $77,000,000.
 8        In response, Mr. Morabito filed a Motion to Dismiss
 9   Involuntary Chapter 7 Petition (“Motion to Dismiss”).   He
10   essentially argued that: (1) the case did not satisfy § 303(b);
11   (2) the petition was filed in bad faith; and (3) the court should
12   abstain under § 305(a).   He stated that he had “no significant
13   debts on the Petition Date other than credit card debt and the
14   obligation to [Appellees,]” but admitted that he had more than
15   twelve creditors.   He represented that “[w]ith the exception of
16   the obligations to [Appellees] . . . the obligations to all of
17   Morabito’s creditors were paid as they came due.”    He provided a
18   list of creditors pursuant to Rule 1003(b) that allegedly listed
19   all of his creditors and corresponding debt, including a
20   promissory note for $600,000 held by Edward Bayuk.
21   C.   Suspension of the involuntary petition
22        After a hearing, the court denied the Motion to Dismiss, but
23   suspended the case pursuant to § 305(a)(1).   The court said that
24   it “stated its findings of fact and conclusions of law on the
25   record in open court”2 and held that the allegations in the
26
          2
27          Although the Order Denying Motion to Dismiss Involuntary
     Chapter 7 Petition and Suspending Proceedings Pursuant to
28                                                      (continued...)

                                      4
 1   involuntary complaint were sufficient to overcome the Motion to
 2   Dismiss.    Among other things, it found sufficient the allegation
 3   that Mr. Morabito was generally not paying his debts as they
 4   became due.   Nevertheless, the court held that there was no
 5   evidence that there were other significant creditors, so the case
 6   was a two-party collection action; the court was not the proper
 7   forum for the collection action; and “the best interests of the
 8   creditors and the debtor would be better served by suspension of
 9   this case, and the Court will at this time abstain from hearing
10   this case pursuant to 11 U.S.C. § 305(a)(1).”   The court
11   suspended the bankruptcy proceedings and lifted the automatic
12   stay.
13   D.   Discovery disputes and additional lawsuits
14        Appellees sought to depose Mr. Morabito in the original
15   state court action.   The state court repeatedly required
16   Mr. Morabito to appear for his deposition.   Mr. Morabito refused
17   to submit to a deposition because of “inconvenience.”
18        Mr. Morabito filed a petition for writ of prohibition in the
19   Nevada Supreme Court, but the supreme court rejected the
20   petition.   Nevertheless, Mr. Morabito still refused to appear for
21   his deposition until the state court threatened to sanction him.
22        Also during this period, a number of other lawsuits with
23   creditors holding potential claims against Mr. Morabito came to
24   light: (1) a state court case entitled Desi Moreno, et al. v.
25
          2
26         (...continued)
     11 U.S.C. § 305(a)(1) (“Suspension Order”) is in the record,
27   neither party has provided the Panel with a copy of the hearing
     transcript. Moreover, the transcript does not appear on the
28   bankruptcy court’s docket.

                                       5
 1   Berry-Hinckley Industries, et al., in which Mr. Morabito was a
 2   defendant; (2) a federal action in the United States District
 3   Court for the Northern District of California brought by Electric
 4   Properties East, LLC against Mr. Morabito under the Racketeer
 5   Influenced and Corrupt Organizations Act and state law; (3) one
 6   or more arbitration proceedings in California; and (4) a Nevada
 7   state court action initiated by The Hartford Fire Insurance
 8   Company, which was seeking indemnification and payment on
 9   guarantees from Mr. Morabito and others.
10   E.   Lifting of the suspension
11        In February 2014, the Moreno parties, Appellees, and
12   Mr. Morabito filed a stipulation in bankruptcy court, whereby the
13   parties stipulated “that the lift of the automatic stay set forth
14   in the Court’s Suspension Order applies to the [Moreno] State
15   Court case, and allows the State Court case to proceed in its
16   normal course . . . .”   The court approved the stipulation.
17        In March 2014, the Moreno parties and Mr. Morabito entered
18   into a settlement agreement.   Appellees’ counsel then sent a
19   letter to Mr. Morabito and the Moreno parties, warning that the
20   settlement would violate the automatic stay.   Nevertheless, the
21   parties to the Moreno litigation stipulated to dismiss the case
22   pursuant to the confidential settlement agreement.
23        Eight days later, Mr. Morabito filed a Motion for
24   Clarification of Order (“Clarification Motion”), seeking to
25   clarify that the automatic stay did not bar the Moreno
26   settlement.   In response, Appellees filed a combined status
27   report and opposition to the Clarification Motion.   Appellees
28   apprised the bankruptcy court of the various undisclosed lawsuits

                                      6
 1   against Mr. Morabito and his alleged hindering and delay of
 2   discovery and collection efforts.    Appellees argued that
 3   Mr. Morabito misled the court by swearing under oath that
 4   Appellees were his only significant creditors.    They alleged that
 5   Mr. Morabito had demonstrated bad faith and fraudulent conduct by
 6   resisting discovery.   Appellees also contended that they require
 7   the protections of the bankruptcy court.
 8        Mr. Morabito then filed an Amended Rule 1003(b) List of
 9   Creditors that disclosed two additional creditors.    He
10   concurrently filed a declaration in which he admitted that he was
11   a defendant in three lawsuits that he had “inadvertently omitted”
12   from his original Rule 1003(b) list.
13        On June 26, 2014, the court held a hearing on the
14   Clarification Motion and a status conference.    It concluded that
15   the Moreno settlement agreement did not violate the automatic
16   stay.
17        The bankruptcy court further concluded, however, that the
18   Suspension Order “was not premised upon an adequate factual
19   foundation.”   The court noted Mr. Morabito’s failure to disclose
20   all of the lawsuits and stated that the court had a “difficult
21   time accepting” the argument that the omission was a mere
22   oversight.   The bankruptcy court further noted that the state
23   court found Mr. Morabito in contempt for refusing to appear at
24   his deposition and obstructing Appellees’ attempts to exercise
25   their rights under state law.   On July 10, 2014, the court
26   entered its written order lifting the suspension (“Status
27   Conference Order”).
28

                                      7
 1   F.     The motion for summary judgment
 2          Appellees moved for summary judgment, arguing that
 3   Mr. Morabito was generally not paying his debts as they became
 4   due.       They noted that Mr. Morabito was not paying Appellees under
 5   the Confessed Judgment, which amounted to over 98% of his debts;
 6   that Mr. Morabito systematically divested himself of estate
 7   assets through preferential and fraudulent transfers; and that
 8   Mr. Morabito has “played fast and loose with his obligation to
 9   fully disclose his assets, creditors, and the claims asserted
10   against him.”
11          Appellees also cited portions of Mr. Morabito’s deposition
12   testimony concerning the $600,000 note held by Mr. Bayuk.
13   Mr. Bayuk, who is Mr. Morabito’s former companion, has continued
14   to pay Mr. Morabito’s debts for “living expenses” totaling
15   $50,000 to $75,000 per month.      The expenses include $11,000 per
16   month in rent, $2,700 per month for lease of a Bentley, and seven
17   credit card balances that include Mr. Morabito’s legal expenses.
18          Mr. Morabito argued that he was generally paying his debts
19   when due, the involuntary petition implicated only a two-party
20   dispute, and dismissal or abstention was in the best interest of
21   the creditors and the debtor.3      He attached the declarations of
22   various creditors who stated that Mr. Morabito was current with
23   payments and that they did not desire to participate in
24   bankruptcy proceedings.      Mr. Bayuk, the holder of the $600,000
25   note, submitted a declaration in which he stated that, although
26
27
            3
            Prior to filing his opposition, Mr. Morabito also filed a
28   second amended Rule 1003(b) list.

                                          8
 1   he was a creditor prior to September 1, 2014, he has since made a
 2   gift to Mr. Morabito in the amount of the promissory note and
 3   destroyed the note.   He further stated that he intended to
 4   continue gifting Mr. Morabito money in the future.
 5        After a hearing,4 the court granted Appellees’ Motion for
 6   Summary Judgment and entered its Order Granting Summary Judgment
 7   and Judgment (“Summary Judgment Order”) and Amended Findings of
 8   Fact and Conclusions of Law in Support of Order Granting Summary
 9   Judgment and Judgment (“FOF/COL”).   The court found that:
10              f.  There is no genuine dispute that Morabito was
          not paying at least 98% of his debt[s] on the Petition
11        Date.
12             g.   The Involuntary Proceeding is not a one-
          creditor dispute.
13
               h.   Special circumstances exist that would permit
14        the Court to enter an order for relief even if the
          Involuntary Proceeding is a one-creditor dispute.
15
               i.   Even if the Involuntary Proceeding was a
16        one-creditor dispute, it is because Morabito and Bayuk
          sought to isolate the Petitioning Creditors by paying
17        all of Morabito’s other debts.
18             j.   The materiality of the debt owned to the
          Petitioning Creditors swamped Morabito’s other debt.
19
               k.   The conduct of Morabito before the State
20        Court and the bankruptcy court was gamesmanship.
21             l.   [Bayuk’s declaration] demonstrates that, on
          the Petition Date, Morabito was not paying his debts
22        himself, but that Bayuk was paying Morabito’s debts.
23             . . . .
24             o.   The Bayuk Declaration establishes that Bayuk
          expected, as of the Petition Date, to be repaid by
25        Morabito the amounts due under the Bayuk Note
26
          4
27          The transcript of the hearing on the Motion for Summary
     Judgment is not included in the record on appeal. Moreover, the
28   transcript is not included on the bankruptcy court’s docket.

                                      9
 1        [$600,000].
 2             p.   Bayuk was a creditor of Morabito on the
          Petition Date and, as a result, the Involuntary
 3        Proceeding was not a one-creditor dispute on the
          Petition Date.
 4
               . . . .
 5
               r.   Morabito was not paying the amounts due and
 6        owing to Bayuk under the Bayuk Note in addition to
          failing to pay the Petitioning Creditors under the
 7        Confessed Judgment.
 8             . . . .
 9             t.   The amount of delinquency, the materiality of
          debt and nonpayment, the nature of the conduct of
10        Morabito’s affairs, and the inconsistent positions
          taken by Morabito and Bayuk before the Court by
11        declarations, pleadings and Morabito’s testimony in
          deposition demonstrate that, under a totality of
12        circumstances, Morabito was not generally paying his
          debts as they became due on the Petition Date.
13
14        The court concluded that no evidence could be presented at
15   trial to vary the undisputed facts, so “there is no question that
16   the Court would render a directed verdict in favor of the
17   Petitioning Creditors at trial.”
18        The court also entered its amended Order for Relief Under
19   Chapter 7 (“Order for Relief”), wherein it held that the
20   requirements under § 303 had been satisfied.
21        Mr. Morabito timely filed his notice of appeal from the
22   (1) Suspension Order, (2) Status Conference Order, (3) Summary
23   Judgment Order, (4) FOF/COL, and (5) Order for Relief.
24                              JURISDICTION
25        The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
26   §§ 1334 and 157(b)(1).   We have jurisdiction under 28 U.S.C.
27   § 158.
28

                                     10
 1                                 ISSUES
 2        (1)   Whether the bankruptcy court erred in denying the
 3   Motion to Dismiss and instead suspending the case.
 4        (2)   Whether the bankruptcy court erred in lifting the
 5   suspension.
 6        (3)   Whether the bankruptcy court erred in granting summary
 7   judgment in favor of Appellees and issuing the Order for Relief.
 8                           STANDARDS OF REVIEW
 9        We review for an abuse of discretion a bankruptcy court’s
10   decision to suspend proceedings under § 305(a).   See Marciano v.
11   Fahs (In re Marciano), 459 B.R. 27, 45 (9th Cir. BAP 2011),
12   aff’d, 708 F.3d 1123 (9th Cir. 2013) (holding that the court did
13   not abuse its discretion in declining to stay proceedings).
14        To determine whether the bankruptcy court abused its
15   discretion, we conduct a two-step inquiry: (1) we review de novo
16   whether the bankruptcy court “identified the correct legal rule
17   to apply to the relief requested” and (2) if it did, whether the
18   bankruptcy court’s application of the legal standard was
19   illogical, implausible, or “without support in inferences that
20   may be drawn from the facts in the record.”   United States v.
21   Hinkson, 585 F.3d 1247, 1261–62 & n.21 (9th Cir. 2009) (en banc).
22   “If the bankruptcy court did not identify the correct legal rule,
23   or its application of the correct legal standard to the facts was
24   illogical, implausible, or without support in inferences that may
25   be drawn from the facts in the record, then the bankruptcy court
26   has abused its discretion.”   USAA Fed. Sav. Bank v. Thacker
27   (In re Taylor), 599 F.3d 880, 887–88 (9th Cir. 2010) (citing
28   Hinkson, 585 F.3d at 1261–62).

                                      11
 1        “[W]e review de novo a bankruptcy court’s decision to grant
 2   summary judgment.”   In re Marciano, 459 B.R. at 35.   “De novo
 3   review requires that we consider a matter anew, as if no decision
 4   had been made previously.”   Francis v. Wallace (In re Francis),
 5   505 B.R. 914, 917 (9th Cir. BAP 2014) (citations omitted).
 6                                DISCUSSION
 7   A.   Mr. Morabito fails to provide the Panel with a sufficient
          record to review the bankruptcy court’s decision to suspend
 8        the proceedings.
 9        Mr. Morabito argues that the court erred in suspending the
10   involuntary proceedings and that it should have dismissed the
11   petition outright.   Because Mr. Morabito fails to provide us with
12   a complete record, we cannot review the court’s ruling, and we
13   affirm the bankruptcy court’s Suspension Order.
14        To dismiss or suspend a case under § 305(a)(1), the court
15   needs to determine that “the interests of creditors and the
16   debtor would be better served by such dismissal or suspension[.]”
17   See Eastman v. Eastman (In re Eastman), 188 B.R. 621, 624 (9th
18   Cir. BAP 1995) (“abstention in a properly filed bankruptcy case
19   is an extraordinary remedy, and . . . dismissal is appropriate
20   under § 305(a)(1) only in the situation where the court finds
21   that both ‘creditors and the debtor’ would be ‘better served’ by
22   a dismissal”).   The BAP has adopted the multi-factor test set
23   forth in In re Monitor Single Lift I, Ltd., 381 B.R. 455, 464–65
24   (Bankr. S.D.N.Y. 2008), to determine the best interests of the
25   creditors and the debtor:
26        (1) the economy and efficiency of administration;
          (2) whether another forum is available to protect the
27        interests of both parties or there is already a pending
          proceeding in state court; (3) whether federal
28        proceedings are necessary to reach a just and equitable

                                      12
 1        solution; (4) whether there is an alternative means of
          achieving an equitable distribution of assets;
 2        (5) whether the debtor and the creditors are able to
          work out a less expensive out-of-court arrangement
 3        which better serves all interests in the case;
          (6) whether a non-federal insolvency has proceeded so
 4        far in those proceedings that it would be costly and
          time consuming to start afresh with the federal
 5        bankruptcy process; and (7) the purpose for which
          bankruptcy jurisdiction has been sought.
 6
 7   In re Marciano, 459 B.R. at 46-47.     The analysis is “based on the
 8   totality of the circumstances.”    Id. at 48.   The bankruptcy court
 9   “must make specific and substantiated findings that the interests
10   of the creditors and the debtor will be better served by
11   dismissal or suspension.”   Id. at 46 (quoting Wechsler v. Macke
12   Int’l Trade, Inc. (In re Macke Int’l Trade, Inc.), 370 B.R. 236,
13   247 (9th Cir. BAP 2007)).
14        In determining whether dismissal or suspension is
15   appropriate, the bankruptcy court must adhere to a two-step
16   analysis.   We analogized the analysis under § 305(a) to § 1112(b)
17   and stated:
18             We believe this two-step process also is
          appropriate in the context of deciding a § 305(a)
19        motion with respect to a pending Involuntary Petition.
          The bankruptcy court first must make findings that
20        continuing the adjudication of the Involuntary Petition
          is or is not appropriate. While no specific statutory
21        cause is stated to guide a bankruptcy court, the
          development of the case law has provided guidance as to
22        the factors to consider. Those were the factors
          identified in the Monitor Single Lift case . . . .
23        Only if the bankruptcy court had determined that
          adjudication of the Involuntary Petition should not go
24        forward at the time of its decision would it need to
          consider whether it should dismiss the Involuntary
25        Petition outright or simply “stay” the adjudication of
          the Involuntary Petition, for instance, until the state
26        court appeals had concluded.
27   Id. at 48 (emphases added).
28        In the present case, the bankruptcy court held a hearing on

                                       13
 1   the Motion to Dismiss on October 22, 2013 and denied the Motion
 2   to Dismiss, but suspended the involuntary proceedings pursuant to
 3   § 305(a)(1).   The Suspension Order does not indicate that the
 4   bankruptcy court engaged in the analysis required by Marciano.
 5   But the written order also says that the court “stated its
 6   findings of fact and conclusions of law on the record in open
 7   court . . . .”    We cannot review the oral ruling because
 8   Mr. Morabito has not provided a transcript.
 9        Without the benefit of the hearing transcript, we are unable
10   to discern (1) whether the bankruptcy court identified the proper
11   legal standard and (2) whether the bankruptcy court’s application
12   of the legal standard was illogical, implausible, or “without
13   support in inferences that may be drawn from the facts in the
14   record.”   Hinkson, 585 F.3d at 1261–62.
15        It is Mr. Morabito’s duty to provide the Panel with a
16   complete record on appeal.    See Welther v. Donell (In re Oakmore
17   Ranch Mgmt.), 337 B.R. 222, 226 (9th Cir. BAP 2006) (the
18   appellant “bears the burden of presenting a complete record”)
19   (citing Kritt v. Kritt (In re Kritt), 190 B.R. 382, 387 (9th Cir.
20   BAP 1995)).    “The settled rule on transcripts in particular is
21   that failure to provide a sufficient transcript may, but need
22   not, result in dismissal or summary affirmance and that the
23   appellate court has discretion to disregard the defect and decide
24   the appeal on the merits.”    Kyle v. Dye (In re Kyle), 317 B.R.
25   390, 393 (9th Cir. BAP 2004), aff’d, 170 F. App’x 457 (9th Cir.
26   2006) (citations omitted).    But see Ehrenberg v. Cal. State.
27   Univ. (In re Beachport Entm’t), 396 F.3d 1083, 1087 (9th Cir.
28   2005) (“Although summary dismissal is within the BAP’s

                                      14
 1   discretion, it ‘should first consider whether informed review is
 2   possible in light of what record has been provided.’”).
 3        Mr. Morabito’s failure to present us with a complete record
 4   prevents us from conducting an “informed review” to determine
 5   whether the court abused its discretion.    Therefore, we affirm
 6   the Suspension Order.
 7   B.   The bankruptcy court did not err in lifting the suspension.
 8        Mr. Morabito argues that the court erred in lifting the
 9   suspension.    We disagree.
10        The bankruptcy court was free to reconsider the Suspension
11   Order, especially given the newly-discovered facts raised by
12   Appellees.    The Ninth Circuit has stated that “bankruptcy courts,
13   as courts of equity, have the power to reconsider, modify or
14   vacate their previous orders so long as no intervening rights
15   have become vested in reliance on the orders.”    Meyer v. Lenox
16   (In re Lenox), 902 F.2d 737, 739-40 (9th Cir. 1990) (citations
17   omitted).    In other words, a bankruptcy court has “power to
18   reconsider any of its previous orders when equity so requires.”
19   Id. at 740 (citations omitted).
20        The court previously found that Appellees established
21   sufficient grounds for filing the involuntary petition; however,
22   it invoked § 305(a)(1) to suspend the proceedings, because
23   (1) there was no other significant creditor and the case was
24   essentially a two-party collection action, and (2) Appellees
25   cannot use the bankruptcy court and Bankruptcy Code merely to
26   collect on a judgment.    At the status conference and hearing on
27   the Clarification Motion, the bankruptcy court focused on
28   Mr. Morabito’s failure to disclose multiple ongoing litigation

                                       15
 1   and his disregard of the state court’s orders.    It stated that
 2   its initial ruling “was not premised upon an adequate factual
 3   foundation” and that it would correct its mistake by lifting the
 4   suspension.
 5        We find no error in the court’s determination that
 6   Mr. Morabito misled the court into believing that he had no other
 7   significant creditors.   We also find no error in the court’s
 8   determination that Mr. Morabito has willfully disobeyed the state
 9   court’s orders.   The court did not abuse its discretion when it
10   determined that Mr. Morabito’s misrepresentations and defiance of
11   the state court warranted resumption of the bankruptcy
12   proceedings.
13        In sum, the court decided that the factual basis for its
14   suspension of the case was false.    Given that the court had
15   discretion to impose the suspension in the first place, it was
16   not an error for the court to lift the suspension.
17   C.   The bankruptcy court did not err in granting summary
          judgment and issuing the Order for Relief.
18
19        Mr. Morabito contends that the court erred in granting
20   summary judgment in favor of Appellees.    He argues that the court
21   erred by concluding that (1) he was generally not paying his
22   debts as they came due and (2) his debt to Bayuk was due and
23   owing.   We disagree.
24        In order to prevail on summary judgment, the petitioning
25   creditors “must establish that (1) three or more creditors
26   (2) hold claims against the alleged debtor that are not
27   contingent as to liability and (3) are not the subject of a bona
28   fide dispute as to liability or amount (4) in the aggregate

                                     16
 1   amount of at least [$15,325], and (5) that the alleged debtor is
 2   generally not paying such debtor’s debts as such debts become
 3   due.”     In re Marciano, 446 B.R. 407, 420 (Bankr. C.D. Cal. 2010),
 4   aff’d, 459 B.R. 27 (9th Cir. BAP 2011), aff’d, 708 F.3d 1123 (9th
 5   Cir. 2013) (citing 11 U.S.C. § 303(b), (h)).
 6        Appellees hold undisputed, non-contingent claims against
 7   Mr. Morabito that exceed the threshold amount, as memorialized in
 8   the Confession of Judgment.     The only dispute is whether Mr.
 9   Morabito is generally not paying his debts as they become due.
10        1.      Summary judgment standard
11        Under Civil Rule 56, made applicable through Rule 7056, “the
12   court shall grant summary judgment if the movant shows that there
13   is no genuine dispute as to any material fact and the movant is
14   entitled to judgment as a matter of law.”     The party moving for
15   summary judgment must identify “those portions of ‘the pleadings,
16   depositions, answers to interrogatories, and admissions on file,
17   together with the affidavits, if any,’ which it believes
18   demonstrate the absence of a genuine issue of material fact.”
19   Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986).     Once the
20   moving party meets its burden, the non-moving party must “set out
21   specific facts showing a genuine issue for trial.”     Civil
22   Rule 56(e)(2).
23        In reviewing an order granting summary judgment, the Panel
24   “must view the evidence in the light most favorable to the
25   non-moving party and ‘determine whether there are any genuine
26   issues of material fact and whether the bankruptcy court
27   correctly applied the substantive law.’”     Caneva v. Sun
28   Communities Operating Ltd. P’ship (In re Caneva), 550 F.3d 755,

                                       17
 1   760 (9th Cir. 2008) (citation omitted).    A genuine issue of
 2   material fact exists when the evidence is such that a reasonable
 3   jury could return a verdict for the non-moving party.    Id. at 761
 4   (citation omitted).    Findings of fact made in summary judgment
 5   proceedings are not subject to the “clearly erroneous” standard
 6   of review, because the trial court has not weighed the evidence
 7   in the conventional sense.    In re Marciano, 459 B.R. at 35
 8   (citations omitted).
 9        The bankruptcy court found that there was no genuine dispute
10   of material fact.   We agree that summary judgment was warranted
11   on this record.   There was no conflict in the evidence about what
12   had happened in the real world, and the only dispute concerned
13   the application of the legal standard to the facts.    Summary
14   judgment was a proper way to resolve this purely legal dispute.
15        2.   Whether Mr. Morabito was generally not paying his debts
               as they became due
16
17        The crux of the Motion for Summary Judgment was whether
18   Mr. Morabito was “generally not paying his debts as such debts
19   become due.”   § 303(h)(1).
20        The Ninth Circuit has “adopted a ‘totality of the
21   circumstances’ test for determining whether a debtor is generally
22   not paying its debts under 11 U.S.C. § 303(h).”    Liberty Tool &
23   Mfg. v. Vortex Fishing Sys., Inc. (In re Vortex Fishing Sys.,
24   Inc.), 277 F.3d 1057, 1072 (9th Cir. 2002) (quoting Hayes v.
25   Rewald (In re Bishop, Baldwin, Rewald, Dillingham & Wong, Inc.),
26   779 F.2d 471, 475 (9th Cir. 1985)).    “A finding that a debtor is
27   generally not paying its debts ‘requires a more general showing
28   of the debtor’s financial condition and debt structure than

                                      18
 1   merely establishing the existence of a few unpaid debts.’”   Id.
 2   (quoting In re Dill, 731 F.2d 629, 632 (9th Cir. 1984)).
 3        The “totality of the circumstances test” is not a rigid,
 4   mathematic analysis: “The authority of the court is triggered and
 5   guided by the totality of the circumstances existing when the
 6   petition is filed.   Congress intended to provide a flexibility
 7   which is not reducible to a simplistic formula.”   In re Bishop,
 8   Baldwin, Rewald, Dillingham & Wong, Inc., 779 F.2d at 475.   “[I]t
 9   is not possible to lay down guidelines that fit all cases . . . .
10   It is intended that the court consider both the number and amount
11   [of debts] in determining whether the inability or failure is
12   general.”   2 Collier on Bankruptcy ¶ 303.31 (16th ed.) (quoting
13   Report of the Commission on the Bankruptcy Laws of the United
14   States, H.R. Doc. No. 137, 93d Cong., 1st Sess. Pt. II, 75 n.5
15   (1973)).
16        The Ninth Circuit has cited with approval an Eleventh
17   Circuit decision holding that, “[i]n determining whether a debtor
18   is generally paying its debts as they become due, courts ‘compare
19   the number of debts unpaid each month to those paid, the amount
20   of the delinquency, the materiality of the non-payment, and the
21   nature of the [d]ebtor’s conduct of its financial affairs.’”
22   In re Vortex Fishing Sys., Inc., 277 F.3d at 1072 (quoting Gen.
23   Trading Inc. v. Yale Materials Handling Corp., 119 F.3d 1485,
24   1504 n.41 (11th Cir. 1997)).5
25
          5
26          Courts around the country have considered: the number of
     debts; the amount of the delinquency; the materiality of the
27   nonpayment; the nature and conduct of the debtor’s business; the
     debtor’s ability to satisfy only small periodic payments, not
28                                                      (continued...)

                                     19
 1        In the present case, the bankruptcy court found that there
 2   was no dispute of material fact that Mr. Morabito was generally
 3   not paying his debts as they became due.   It so held because he
 4   was not paying at least 98% of his debts; the size of the debt
 5   owed to Appellees swamped his other debt; and he and Mr. Bayuk
 6   were paying off all other debts to isolate Appellees.   It
 7   concluded that “[t]he amount of delinquency, the materiality of
 8   debt and nonpayment, the nature of the conduct of Morabito’s
 9   affairs, and the inconsistent positions taken by Morabito and
10   Bayuk before the Court by declarations, pleadings and Morabito’s
11   testimony in deposition demonstrate that, under a totality of
12   circumstances, Morabito was not generally paying his debts as
13   they became due on the Petition Date.”   The bankruptcy court did
14   not err.
15              a.   Amount of delinquency
16        While it may be true that Mr. Morabito was current on all
17   other debt payments thanks to Mr. Bayuk’s largess, it is
18   undisputed that he was not making payments on Appellees’ claim.
19   It is also not disputed that his debt to Appellees constituted at
20
21        5
           (...continued)
     long-term obligations; the debtor’s making regular payments only
22
     on small, recurring obligations, not on larger debts; the rapid
23   decline in the value of the debtor’s assets resulting from asset
     sales rather than profit-generating activities; the amount of the
24   debtor’s debts compared to the debtor’s yearly income; payments
     made by third parties or a waiver of claims by a third party; the
25   debtor’s liquidation of assets; the fact that debtor’s defaults
26   are only on extraordinary debts; and the fact that the due and
     unpaid debts are made up entirely of the claims of the
27   petitioning creditors while other non-petitioning creditors are
     all paid. 2 Collier on Bankruptcy ¶ 303.31[2] (citations
28   omitted).

                                     20
 1   least 98% of his outstanding debt.     We find no error in the
 2   court’s consideration of the unpaid debt as a percentage of
 3   Mr. Morabito’s overall debt.    See Focus Media, Inc. v. Nat’l
 4   Broadcasting Co., Inc. (In re Focus Media, Inc.), 378 F.3d 916,
 5   929 (9th Cir. 2004) (agreeing that, under the totality of the
 6   circumstances, “[h]aving 80% of your debts over 90 days old is
 7   not paying debts as they come due”).
 8             b.   Number of unpaid debts
 9        We also find no error with the bankruptcy court’s holding
10   that, in this situation, the fact that Appellees’ claim
11   represents a single debt does not mean Mr. Morabito was
12   “generally paying” his debts.    Mr. Morabito and Mr. Bayuk were
13   selectively making payments to other creditors while defaulting
14   only on the debt to Appellees.    In other words, it is by
15   Mr. Morabito’s own design that he was not paying only one debt,
16   and he was “isolating” Appellees so that it appeared as though he
17   was paying the majority of his debts.     We agree that “there is
18   ‘substantial authority for the proposition that even though an
19   alleged debtor may owe only one debt, or very few debts, an order
20   for relief may be granted where such debt or debts are
21   sufficiently substantial to establish the generality of the
22   alleged debtor’s default.’   For example, courts have entered an
23   order for relief ‘where the creditors were few in number but a
24   large amount was owed to them.’”      In re Marciano, 446 B.R. at 421
25   (quoting Crown Heights Jewish Cmty. Council, Inc. v. Fischer
26   (In re Fischer), 202 B.R. 341, 350, 351 (Bankr. E.D.N.Y. 1996)).
27        Mr. Morabito argues extensively that the involuntary
28   petition was deficient because Mr. Bayuk was not a creditor to

                                      21
 1   whom a debt was due and owing at the time Appellees filed the
 2   involuntary petition.6    He contends that Mr. Bayuk had never made
 3   a demand on the note, and there was no timeline for him to repay
 4   Mr. Bayuk; thus, the involuntary petition was a two-party
 5   collection action.
 6        Whether Mr. Bayuk was a creditor of Mr. Morabito is not
 7   dispositive.     As discussed above, the comparative number of paid
 8   and unpaid creditors may be relevant to the “totality of the
 9   circumstances” test to determine whether a debtor is “generally
10   not paying” his debts under § 303(h)(1).    Even if Mr. Bayuk were
11   not a creditor, the bankruptcy court did not err in considering
12   the “totality of the circumstances” and granting summary
13   judgment.
14               c.    Efforts to thwart collection attempts
15        The bankruptcy court properly considered, in its evaluation
16   of the totality of the circumstances, the exceptional
17   circumstances of this case.    Those “exceptional” circumstances
18   include: “(1) an exceptional case of a debtor with a sole
19   creditor who would otherwise be without an adequate remedy under
20   State or Federal law (other than bankruptcy law) if denied an
21   order for relief or (2) a showing of special circumstances
22   amounting to fraud, trick, artifice or scam.”    In re 7H Land &
23   Cattle Co., 6 B.R. 29, 34 (Bankr. D. Nev. 1980); see In re Cent.
24   Hobron Assocs., 41 B.R. 444, 449 (D. Haw. 1984) (“An exception to
25
26        6
            Mr. Morabito also argues that Mr. Bayuk later tore up the
27   note and forgave the $600,000 debt. However, it is undisputed
     that this event occurred post-petition and the note was valid as
28   of the petition date.

                                       22
 1   the rule that one unpaid debt will not merit relief is that a
 2   single creditor may get relief if it can show that it has a
 3   special need for bankruptcy court relief and that state-law
 4   remedies would not be adequate, or that the debtor has engaged in
 5   trick, sham, artifice or fraud.”); see also 2 Collier on
 6   Bankruptcy ¶ 303.31[5] (“Examples of ‘exceptional’ circumstances
 7   include when the sole creditor has no other available remedy
 8   under federal or state law, recovery of a preference that is
 9   unavoidable under state law, the transfer of assets to insiders
10   and third parties or ‘there are [other] circumstances amounting
11   to fraud, trick, artifice, or scam on the part of the debtor.’     A
12   further example of an exceptional circumstance is when the debtor
13   has paid all of its small creditors, leaving only one large
14   creditor.” (citations omitted)).
15        In the present case, Appellees have provided evidence of
16   fraud, artifice, or a scam.   The record supports the bankruptcy
17   court’s findings that Mr. Morabito schemed to isolate Appellees
18   by paying all debts but those owed to Appellees, in an attempt to
19   thwart Appellees’ efforts to bring Mr. Morabito into bankruptcy.
20   Further, the record also shows a pattern of wilful disregard of
21   state court discovery orders and false representations to the
22   bankruptcy court.   Mr. Morabito’s conduct amounts to
23   gamesmanship, fraud, and artifice that constitute exceptional
24   circumstances.
25             d.     The debtor’s ability to pay
26        Mr. Morabito’s ability or plan to pay creditors is also
27   important.   See In re Focus Media, 378 F.3d at 929 (order for
28   relief was appropriate where the debtor was “a company that had

                                      23
 1   substantial amounts of unpaid bills and no plans or ability to
 2   pay them”).    He has admitted that he has no means or plan to
 3   satisfy his debt to Appellees, and indeed has no way to pay any
 4   of his debts other than through Mr. Bayuk’s generosity.
 5             e.     The debtor’s conduct of his financial affairs
 6        Lastly, the court did not err in faulting Mr. Morabito for
 7   his conduct of his financial matters.     “The court may examine the
 8   Debtor’s overall contemporaneous handling of its affairs in
 9   evaluating whether to order relief.   If the Debtor is conducting
10   his financial affairs in a manner inconsistent with good faith
11   and outside the ordinary course of business, it may affect the
12   court’s determination.”   In re Bishop, Baldwin, Rewald,
13   Dillingham & Wong, Inc., 779 F.2d at 475 (quoting In re Reed,
14   11 B.R. 755, 760 (Bankr. S.D.W.Va. 1981)).    There is no dispute
15   that Mr. Morabito only defaulted on payments to Appellees.    As a
16   result, he was able to claim that the involuntary proceeding is
17   merely a one-creditor dispute outside of the Bankruptcy Code.
18   Mr. Morabito’s purposeful isolation of Appellees evidences a lack
19   of good faith that supports summary judgment.
20        Accordingly, considering the totality of the circumstances,
21   the court did not err in determining that Mr. Morabito was
22   generally not paying his debts and granting summary judgment and
23   relief against Mr. Morabito.
24                                CONCLUSION
25        For the foregoing reasons, we AFFIRM.
26
27
28

                                      24