Court Opinion

ID: 9373897
Source: CourtListenerOpinion
Date Created: 2023-02-22 16:10:21.46644+00
Date Added: 2024-06-11T17:16:49.593641
License: Public Domain

FILED
                                                                                  JAN 12 2023
                          NOT FOR PUBLICATION                                 SUSAN M. SPRAUL, CLERK
                                                                                U.S. BKCY. APP. PANEL
                                                                                OF THE NINTH CIRCUIT
           UNITED STATES BANKRUPTCY APPELLATE PANEL
                     OF THE NINTH CIRCUIT

 In re:                                               BAP No. CC-22-1151-TLF
 SAMMY CILING and ANKE CILING,
             Debtors.                                 Bk. No. 2:22-bk-13456-VZ

 5757 WILSHIRE, LLC,
                Appellant,
 v.                               MEMORANDUM*
 SAMMY CILING; ANKE CILING;
 SEYEDJALIL MIRJAFARIFIROOZABADI,
                Appellees.

               Appeal from the United States Bankruptcy Court
                     for the Central District of California
                Vincent Zurzolo, Bankruptcy Judge, Presiding

Before: TAYLOR, LAFFERTY, and FARIS, Bankruptcy Judges.

                                 INTRODUCTION

       5757 Wilshire, LLC appeals the bankruptcy court’s order granting

Sammy Ciling and Anke Ciling’s motion to dismiss their voluntary

chapter 111 petition under § 1112. It argues that dismissal works “plain

       *
         This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
       1 Unless specified otherwise, all chapter and section references are to the

Bankruptcy Code, 11 U.S.C. §§ 101-1532, and all “Civil Rule” references are to the
Federal Rules of Civil Procedure.
legal prejudice” on the creditors, thus requiring that the motion be denied

or the case converted to chapter 7. We do not discern an abuse of discretion

in granting the motion. Accordingly, we AFFIRM.

                                         FACTS 2

       The Cilings filed a chapter 11 petition, scheduling as principal assets

an over-encumbered home and the 100% ownership of two businesses:

California Medical Imaging, Inc. with a stated value of unknown; and

Sanath, Inc. with a stated value of $0.00 (collectively, the “Corporations”).

Their most significant scheduled debt was a $2.9 million judgment arising

from the alleged breach of an agreement to sell a percentage of the

Corporations to the judgment creditor and fraudulently inducing the

judgment creditor to enter into a stock purchase agreement. Finally, their

Schedules I and J evidenced net income of negative $6,500 per month.

       Two weeks after filing the petition, Debtors filed their motion to

dismiss. They explained that Mr. Ciling’s father was very ill in Turkey,

they traveled there to aid him, and they were unable to manage their

chapter 11 case as a result.

       Appellant, an unsecured creditor, and the judgment creditor opposed

the motion, although neither disputed that Debtors needed to stay in

       2
          We exercise our discretion to take judicial notice of documents electronically
filed in the case. See Atwood v. Chase Manhattan Mortg. Co. (In re Atwood), 293 B.R. 227,
233 n.9 (9th Cir. BAP 2003).
                                             2
Turkey indefinitely. Instead, both argued that the case should be converted

to chapter 7 rather than dismissed.

      While both mentioned the ability to recover fraudulent transfers or to

set aside fraudulent liens, Appellant also argued that conversion would

allow subordination of the judgment creditor’s claim under § 510(b). That

option, it argued, was available only in a bankruptcy case and therefore

dismissal resulted in plain legal prejudice to it and the other creditors.

      Debtors replied to the oppositions, disputing generally that they

concealed any assets or fraudulently gave liens on their home. They also

disputed that § 510(b) applied to the judgment.

      At the hearing, the bankruptcy court commented that it would not

consider conversion to chapter 7:

             [I]n the opposition there was a request that I order an
      alternative remedy of conversion of the case to Chapter 7. I note
      that there are cases – there are courts that have determined that
      it is within the discretion of the court to order alternative
      remedy [sic]. I’m not convinced that that’s appropriate when
      there has not been notice given to all creditors and all parties-
      in-interest of the possibility of that remedy being sought. And
      that is not the case here. So I will not consider conversion as a
      possible alternative.

      As to dismissal, the bankruptcy court commented that Debtors were

unlikely to carry out their duties as fiduciaries of the estate. But it also

noted significant concerns about Debtors’ conduct and the significant

prejudice to creditors if Debtors refiled soon after case dismissal. Therefore,

                                        3
the bankruptcy court dismissed the case as requested by Debtors but also

restricted their ability to file a subsequent chapter 11 or 13 case without

court authorization.

      Appellant timely appealed. The judgment creditor did not appeal or

otherwise join in the appeal.

                                 JURISDICTION

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

157(b)(2)(A). We have jurisdiction under 28 U.S.C. § 158.3

                                       ISSUE

      Did the bankruptcy court abuse its discretion by granting Debtors’

motion to dismiss their chapter 11 case?

                            STANDARD OF REVIEW

      We review the bankruptcy court’s decision to dismiss a case under an

abuse of discretion standard. Sullivan v. Harnish (In re Sullivan), 522 B.R. 604

(9th Cir. BAP 2014) (citing Leavitt v. Soto (In re Leavitt), 171 F.3d 1219, 1223

(9th Cir. 1999)). We apply a two-part test to determine whether the

bankruptcy court abused its discretion. United States v. Hinkson, 585 F.3d

1247, 1261-62 (9th Cir. 2009) (en banc). First, we consider de novo whether

      3
        We acknowledge that Appellee questions Appellant’s standing on appeal and,
thus, our jurisdiction. We also acknowledge that Appellant’s claims against the Debtors
are based on alter ego allegations. But we find colorable evidence of standing on this
record which includes Appellant’s post-bankruptcy litigation against Debtors seeking
recovery on this basis and the evidence in the record suggesting Debtors’ control and
fraud in relation to the Corporations.
                                           4
the bankruptcy court applied the correct legal standard to the relief

requested. Id. Then, we review the bankruptcy court’s fact findings for

clear error. Id. at 1262 & n.20.

      Under the abuse of discretion standard, a reviewing court cannot

reverse absent a definite and firm conviction that the lower court

committed a clear error of judgment in the conclusion it reached upon a

weighing of relevant factors. See Est. of Diaz v. City of Anaheim, 840 F.3d 592,

601 (9th Cir. 2016) (under abuse of discretion standard, the court reverses

only when it is “convinced firmly that the reviewed decision lies beyond

the pale of reasonable justification under the …circumstances.”) (citation

omitted).

                                   DISCUSSION

A.    Section 1112

      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 . . . .” Section 1112(b)(4) provides a non-exclusive list of

causes for dismissal or conversion.

      Once cause is found, the bankruptcy court 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. § 1112(b)(1), (b)(2). See

                                         5
also Shulkin Hutton, Inc., P.S. v. Treiger (In re Owens), 552 F.3d 958, 961 (9th

Cir. 2009) (“[T]he court must consider the interests of all of the creditors.”

(citation omitted)).

        Here, the bankruptcy court found cause to dismiss given Debtors’

inability to fulfill their obligations as debtors in possession. The bankruptcy

court also noted that after dismissal the creditors would (1) be free to

pursue their remedies, including avoidance of alleged fraudulent transfers

and seizure of alleged undisclosed assets, and (2) be protected from

subsequent filings by the refiling restrictions it imposed.

B.      A finding that there is no plain legal prejudice to creditors before
        dismissing the chapter 11 case is not required.

        Appellant argues that the bankruptcy court applied an incorrect legal

standard in dismissing the case. In its view, dismissal caused the loss of the

§ 510(b) arguments, this constituted plain legal prejudice, and, under Ninth

Circuit precedent, dismissal was inappropriate. We review that issue de

novo.

        Appellant cites Gill v. Hall (In re Hall), 15 B.R. 913, 917 (9th Cir. BAP

1981), and Westlands Water Dist. v. United States, 100 F.3d 94, 97 (9th Cir.

1996), as supporting its position that the bankruptcy court cannot dismiss a

chapter 11 case if there is plain legal prejudice to creditors. Neither case

adequately supports Appellant’s argument.

        In Hall, the bankruptcy court granted the debtors’ request to dismiss

their voluntary chapter 7 under § 707. The debtors requested dismissal so

                                          6
that they could then file a homestead declaration, refile the chapter 7, and

save their home. The BAP reversed on the basis that there was no cause for

dismissal because of the “plain legal prejudice to the creditors[.]” In re Hall,

15 B.R. at 917.

          The BAP cited a Ninth Circuit case brought under Chapter XI of the

Bankruptcy Act, Schroeder v. Int’l Airport Inn P’ship (In re Int’l Airport Inn

P’ship), 517 F.2d 510 (9th Cir. 1975), where the Ninth Circuit affirmed the

dismissal ruling by the bankruptcy referee, explaining: “unless dismissal

will cause some plain legal prejudice to the creditors, it normally will be

proper.” Id. at 512 (citing 9 C. Wright & A. Miller, Federal Practice &

Procedure § 2364 at 165 (1971)). The debtor’s motion to dismiss was brought

under Section 59g of the Bankruptcy Act, former 11 U.S.C. § 95(g) [Act of

July 1, 1898, ch. 541, 30 Stat. 544, as amended (repealed 1978)], which the

bankruptcy court noted was analogous to Civil Rule 41(a)(2) which is

substantially different than § 1112. 4

          4
           The statute, as quoted by the Ninth Circuit, provided in pertinent part:
                   A voluntary or involuntary petition shall not be dismissed upon the
          application of the petitioner or petitioners . . . until after notice to the
          creditors as provided in section 94 of this title, and to that end the court
          shall, upon entering an application for dismissal, require the bankrupt to
          file a list . . . of all his creditors, with their addresses, shall cause such
          notice to be sent to the creditors of the pendency of such application and
          shall delay the hearing thereon for a reasonable time to allow all creditors
          and parties in interest an opportunity to be heard.
          In re Int’l Airport Inn P’ship, 517 F.2d at 512 n.2 (quoting former 11 U.S.C. §
95(g)).
                                                 7
      In Int’l Airport Inn P’ship, the debtor’s principal asset was an over-

encumbered motel, and likely complex litigation loomed. Id. at 511. In

granting dismissal, the referee emphasized the possibility that the estate’s

assets would be insufficient to pay administrative expenses. Id.

      The Ninth Circuit found no abuse of discretion in the dismissal:

            The appellants have pointed to nothing which in our
      view amounts to plain legal prejudice. The dismissal occurred
      early in the proceedings, less than two months after the filing of
      the petition and before the appointment of a trustee or a
      creditors’ committee. The appellants are free to pursue their
      remedies in state court, and because Section 391 of the
      Bankruptcy Act, 11 U.S.C. s 791, suspends the running of all
      periods of limitations prescribed by the Bankruptcy Act during
      the pendency of proceedings under Chapter XI, the dismissal
      did not prejudice the appellants’ right to commence
      involuntary bankruptcy proceedings.

Id. at 512.

      In short, while Hall and Int'l Airport Inn P'ship allude to plain legal

prejudice in the context of an Act case and a chapter 7 case, they do not

state that a chapter 11 bankruptcy case may not be dismissed if there is

some plain legal prejudice to some creditors.

      Westlands Water District helps Appellant even less. That case involved

litigation unrelated to any bankruptcy case. There the district court granted

plaintiff’s motion to dismiss its action without prejudice under Civil Rule

41(a)(2). The Ninth Circuit affirmed on the basis that the district court’s

                                       8
factual finding of no plain legal prejudice was not clearly erroneous.

Westlands Water Dist., 100 F.3d at 96.

      Debtors obtained dismissal of a chapter 11 case pursuant to § 1112(b),

which contains no language requiring a finding of no plain legal prejudice

to the creditors before dismissal. In fact, § 1112(b) mandates that the court

convert or dismiss, “whichever is in the best interests of creditors and the

estate.” Appellant’s position requires the bankruptcy court to focus on the

rights and interests of the creditors rather than balance the equities of the

various parties in interest including the estate. Appellant’s position adds

language to § 1112 that is not there.

      We agree that the bankruptcy court applied the correct legal standard

when it rejected Appellant’s argument that a finding of plain legal

prejudice to certain creditors mandated denial of the motion.

C.    The bankruptcy court’s decision was not an abuse of discretion.

      In determining whether to dismiss the case, the bankruptcy court was

required to consider the best interests of all creditors. In re Owens, 552 F.3d

at 961. It had an independent obligation under § 1112 to consider what

would happen to all creditors on dismissal and, in light of its analysis,

whether dismissal or conversion would be in the best interest of all

creditors, not just the largest and most vocal creditor. In re Sullivan, 522 B.R.

at 613 (citations omitted).

      Here, forcing the case to remain in bankruptcy might benefit some of

the unsecured creditors by ultimately subordinating the judgment creditor

                                         9
but that would not benefit the judgment creditor who, according to the

schedules, is the largest creditor by far. And the benefit to other creditors

would be speculative at best. There is no evidence that the estate had the

resources necessary to litigate the § 510(b) claims against the judgment

creditor; that Appellant offered to fund the litigation; or that if successful,

the litigation would provide any benefit to creditors given that the

principal assets appear worthless. Appellant argues that the Corporations

must have value given the award to the judgment creditor. But at oral

argument it did not dispute Debtors’ assertion that the Corporations are in

a receivership and non-functioning. And finally, administrative creditors

would be in the unenviable position of having to deal with an estate that

appears administratively insolvent.

      These factors, coupled with the enormous difficulty of administering

a bankruptcy case involving absent debtors and capturing post-petition

income from debtors outside the United States sufficiently justified the

decision to allow dismissal.

D.    Refusal to consider conversion to chapter 7 was harmless error.

      Section 1112(b)(1) requires a court to consider whether conversion is

a better option from the perspective of creditors and the estate once cause

to dismiss or convert is found. The bankruptcy court’s statement at the

hearing that it would not consider conversion was error, but it was

harmless.

                                       10
      Appellant requested conversion in its opposition to Debtors’ motion

to dismiss. But it did not argue in its opening brief on appeal that the

bankruptcy court’s refusal to consider conversion at the hearing was

reversible error. It merely commented, just before its conclusion, that the

refusal “confirms the Court’s lack of reliance on § 1112(b) to dismiss the

case because once cause is shown under § 1112(b), conversion to chapter 7

is clearly an available remedy based on the best interests of creditors.” The

argument is therefore waived. See Christian Legal Soc'y v. Wu, 626 F.3d 483,

485 (9th Cir. 2010) (“We review only issues [that] are argued specifically

and distinctly in a party’s opening brief.” (citation omitted)).

      Even if it were not waived, the reasons already outlined make clear

that conversion was not a viable option. The chapter 7 trustee would have

little to no ability to compel Debtors to act while in Turkey and would be

saddled with the obligation to administer an estate that is administratively

insolvent on its face. The litigation would be expensive with no visible

means for paying counsel to pursue it, and the litigation would

presumably be vigorously opposed if likely to affect any interest in

valuable assets. Outside of bankruptcy, the unsecured creditors have a full

range of options.

      For the reasons stated, the bankruptcy court’s refusal to consider

conversion to chapter 7 was harmless error.

                               CONCLUSION

      Based on the foregoing, we AFFIRM.

                                      11