Court Opinion

ID: 4639806
Source: CourtListenerOpinion
Date Created: 2020-12-05 00:00:37.334356+00
Date Added: 2024-06-11T07:59:10.065018
License: Public Domain

FILED
                                                                           DEC 4 2020
                           NOT FOR PUBLICATION                        SUSAN M. SPRAUL, CLERK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-20-1077-GLS
SERAPIO VENEGAS,
             Debtor.                                 Bk. No. 2:19-bk-13181-RK

ALLIANCE UNITED INSURANCE
COMPANY,
             Appellant,
v.                                                   MEMORANDUM*
BRAD D. KRASNOFF, Chapter 7 Trustee,
             Appellee.

               Appeal from the United States Bankruptcy Court
                    for the Central District of California
                Robert N. Kwan, Bankruptcy Judge, Presiding

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

                                 INTRODUCTION

      Alliance United Insurance Company (“Alliance”) appeals the

bankruptcy court’s order denying its motion to dismiss the involuntary

      *
        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.
chapter 71 case filed against Serapio Venegas (“Debtor”). Alliance argues

that the involuntary petition was filed by a single judgment creditor for the

improper purpose of circumventing state law collection limitations. The

bankruptcy court determined that Alliance lacked standing to file the

motion to dismiss and that cause did not exist to dismiss the case under

§ 707(a). Alliance has not established that it had standing to seek dismissal

and has not shown that the bankruptcy petition was filed for an improper

purpose. We AFFIRM.

                                       FACTS

A.    Prepetition Events

      In 2015, Debtor caused serious injuries to Stephan Wood (“Wood”)

when his vehicle struck the bicycle Wood was riding. Debtor attempted to

flee, dragging Wood under the vehicle for more than a quarter mile. Debtor

was later apprehended and criminally convicted. At the time of the injury

Debtor was insured by Alliance.

      In February 2016, Wood made a written demand to Alliance for

payment of the policy limits subject to specific terms and conditions.

Alliance purported to accept the settlement offer and tender payment, but

provided a release that was inconsistent with the terms and conditions of

Wood’s offer. The state court later determined that Alliance did not validly

      1
       Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532.

                                           2
accept the settlement offer.

      In July 2016, Wood filed suit against Debtor in state court (the

“Personal Injury Action”). The Personal Injury Action proceeded to trial

and resulted in a jury verdict against Debtor, and in favor of Wood, in the

amount of $13,832,242, including costs. As part of its verdict, the jury

determined that Debtor acted with “malice, oppression, or fraud.”

      Wood was unable to collect on the judgment. Through the assistance

of investigators, he determined that Debtor had assets of limited value

other than his potential rights against Alliance for its alleged bad faith in

failing to accept a reasonable settlement offer. However, Debtor did not

pursue such an action against Alliance and steadfastly refused to assign his

rights to Wood.

B.    The Involuntary Petition

      In March 2019, Wood filed an involuntary chapter 7 petition against

Debtor. Wood filed a unilateral status report stating that Debtor had few

creditors and few assets of value other than his rights against Alliance.

Debtor did not respond to the involuntary petition, and the bankruptcy

court entered an order for relief in April 2019. Brad D. Krasnoff (“Trustee”)

was appointed as chapter 7 trustee.

      Debtor failed to file schedules and statements pursuant to the order

for relief and failed to appear at the initial § 341 meeting of creditors or any

of the twelve continued § 341 meetings. Trustee obtained court authority to

                                       3
file the schedules and statements on Debtor’s behalf, and ultimately filed a

complaint to deny Debtor’s discharge under § 727(c). The bankruptcy court

entered a default judgment denying Debtor’s discharge in August 2020.

      After consulting with Wood, Trustee filed schedules and statements.

The schedules listed assets consisting of a parcel of land, valued at $17,000,

and the estate’s claims against Alliance, valued at $14,164,610. In addition

to Wood, the schedules listed only one other creditor, which held a claim

for $769.

C.    The State Court Action

      In September 2019, Trustee filed suit against Alliance in state court

(the “Bad Faith Action”). Trustee alleged that Alliance breached the

covenant of good faith and fair dealing by failing to accept a reasonable

settlement offer within policy limits. Alliance filed a notice of removal to

the bankruptcy court and filed its answer denying the allegations. As an

affirmative defense, Alliance claimed that the involuntary bankruptcy was

filed for an improper purpose, and upon dismissal of the case, Trustee

would lack standing.

      Trustee moved to remand the Bad Faith Action, arguing that the suit

was a non-core proceeding involving only state law claims. Alliance

responded by filing a combined opposition to the motion to remand and a

motion to dismiss the bankruptcy case.

                                       4
D.    The Motion To Dismiss And The Court’s Ruling

      Alliance argued that cause existed to dismiss the case under § 707(a)

because Wood filed the involuntary petition solely as a judgment

enforcement mechanism in a two-party dispute. Alliance asserted that the

petition served no legitimate bankruptcy purpose because there were no

competing creditors, no need for pro rata distribution, and no need for any

bankruptcy-specific avoidance powers. It argued that Wood had adequate

collection remedies under state law and Debtor had no need for a

bankruptcy discharge given that the judgment would likely be

nondischargeable based on the jury’s finding of malice, oppression, or

fraud. Alliance cited In re Murray, 543 B.R. 484 (Bankr. S.D.N.Y. 2016), aff’d,

565 B.R. 527 (S.D.N.Y. 2017), aff’d, 900 F.3d 53 (2d Cir. 2018), for the

proposition that an involuntary bankruptcy filed as a collection mechanism

should be dismissed for cause under § 707(a).

      Trustee opposed the motion to dismiss and argued that because

Alliance was not a creditor and had no interest in the outcome of the case,

it lacked standing to seek dismissal. Trustee also argued that Alliance

failed to show that cause existed to dismiss the case in light of the totality

of the circumstances and dismissal would prejudice Wood, the estate, and

the administrative claimants. Trustee distinguished Murray on the basis

that it involved a debtor’s challenge to the involuntary petition prior to the

order for relief and asserted that the factors cited in Murray did not favor

                                        5
dismissal of Debtor’s case.

      Alliance filed a reply, arguing that Wood’s ability to sue Alliance

directly was restricted by state law, and the bankruptcy was part of a

scheme to circumvent that limitation. Alliance contended that it had

standing to file the motion to dismiss by virtue of its affirmative defense

raised in the Bad Faith Action. It further argued that the issues raised in the

motion were structural and related to the integrity of the bankruptcy

system, such that the court should dismiss the case regardless of whether

Alliance had standing. Finally, Alliance argued that Trustee’s attempts to

distinguish Murray were unavailing, and because state law determined the

remedies available to Wood, neither he nor the administrative

professionals would be prejudiced by dismissal.

      The bankruptcy court determined that Alliance lacked standing to

seek dismissal under § 707(a) and cause did not exist because dismissal

would prejudice Wood, the estate, and the administrative claimants. The

court entered a written order denying the motion to dismiss, and later

remanded the Bad Faith Action to state court. Alliance timely appealed the

order denying its motion to dismiss.

                              JURISDICTION

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

157(b)(2)(A). An order denying a motion to dismiss is typically

interlocutory. Sherman v. SEC (In re Sherman), 491 F.3d 948, 967 n.24 (9th

                                       6
Cir. 2007). We granted leave to appeal the interlocutory order and

expedited the briefing schedule. We therefore have jurisdiction under

28 U.S.C. § 158(a)(3).

                                    ISSUES

      Whether Alliance had standing to file the motion to dismiss the

bankruptcy case.

      Whether the bankruptcy court erred by denying Alliance’s motion to

dismiss.

                         STANDARDS OF REVIEW

      Standing is a question of law which we review de novo. Hughes v.

Tower Park Props., LLC (In re Tower Park Props. LLC), 803 F.3d 450 n.5 (9th

Cir. 2015) (quoting Palmdale Hills Prop., LLC v. Lehman Commercial Paper, Inc.

(In re Palmdale Hills Prop. LLC), 654 F.3d 868, 873 (9th Cir. 2011)).

      With regard to a motion to dismiss, “we review de novo whether a

type of misconduct can constitute ‘cause ‘ under § 707(a).” In re Sherman,

491 F.3d at 969. We then review the bankruptcy court’s decision to grant or

deny the motion to dismiss for “cause” for abuse of discretion. Id.

      Under de novo review, we look at the matter anew, giving no

deference to the bankruptcy court’s determinations. Barnes v. Belice (In re

Belice), 461 B.R. 564, 572 (9th Cir. BAP 2011). A bankruptcy court abuses its

discretion if it applies the wrong legal standard, or misapplies the correct

legal standard, or if its factual findings are clearly erroneous.

                                        7
TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 832 (9th Cir. 2011) (citing

United States v. Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc)). We

may affirm the bankruptcy court’s order on any basis supported by the

record. Fresno Motors, LLC v. Mercedes-Benz USA, LLC, 771 F.3d 1119, 1125

(9th Cir. 2014); Arnot v. Endresen (In re Endresen), 548 B.R. 258, 268 (9th Cir.

BAP 2016).

                                 DISCUSSION

      Alliance argues that the bankruptcy court erred because: (1) Trustee

could not have filed the Bad Faith Action without the bankruptcy petition

and therefore Alliance had constitutional standing; and (2) the involuntary

petition was an improper use of the bankruptcy process which constituted

“cause” to dismiss under § 707(a).

A.    Alliance Did Not Have Standing To File The Motion To Dismiss

      Alliance argues that it satisfied the requirements of constitutional

standing and also argues that because it is an insurer, it had standing as a

party in interest in any case involving its insured under the holdings of

Motor Vehicle Casualty Company v. Thorpe Insulation Company (In re Thorpe

Insulation Company), 677 F.3d 869 (9th Cir. 2012) and In re Global Industrial

Technologies, Inc., 645 F.3d 201 (3d Cir. 2011) (“GIT”). In both Thorpe and

GIT, the insurers had standing to object to confirmation of chapter 11 plans

because the proposed plans directly affected their liability and contractual

rights and therefore, were not “insurance neutral.” 677 F.3d at 885-87; 645

                                         8
F.3d at 212. Neither case stands for the proposition that insurers always

have standing in bankruptcy cases involving their insureds. Standing must

be determined on a “case by case basis.” In re Thorpe Insulation Co., 677 F.3d

at 885 (quoting In re Amatex Corp., 755 F.2d 1034, 1042 (3d Cir. 1985)).

      To establish constitutional standing, Alliance must demonstrate “(1)

an injury in fact, (2) a causal connection between the injury and the conduct

complained of, and (3) a likelihood that the injury will be redressed by a

favorable decision.” In re Sisk, 962 F.3d 1133, 1141 (9th Cir. 2020) (citing

Lujan v. Defs. of Wildlife, 504 U.S. 555, 561 (1992)). “These requirements are

the ‘irreducible constitutional minimum of standing.’” Id. (citing Lujan, 504

U.S. at 560-61). “The party invoking federal jurisdiction bears the burden of

establishing these elements.” Lujan, 504 U.S. at 561.

      1.    Injury In Fact

      Alliance contends that the bankruptcy filing caused an injury in fact

because it allowed Trustee to file the Bad Faith Action which could not

have been filed but for the bankruptcy case.

      An injury in fact is “the ‘first and foremost’ of standing’s three

elements.” In re Sisk, 962 F.3d at 1142 (quoting Steel Co. v. Citizens for Better

Env’t, 523 U.S. 83, 103 (1998)). It requires “an invasion of a legally protected

interest which is (a) concrete and particularized and (b) actual or imminent,

not conjectural or hypothetical.” Bishop Paiute Tribe v. Inyo Cnty., 863 F.3d

1144, 1153 (9th Cir. 2017) (citing Lujan, 504 U.S. at 560). A “concrete” injury

                                        9
is one which actually exists and is not “abstract,” “remote,” or

“speculative.” In re Sisk, 962 F.3d at 1141 (citations omitted).

      The bankruptcy filing did not cause an injury in fact to Alliance

because Alliance had no interest in the outcome of the bankruptcy case. It

is not a creditor. See In re Sherman, 491 F.3d at 965 (holding that creditors

have standing to seek dismissal under § 707(a) because a bankruptcy filing

necessarily affects creditors’ rights to enforce debts). And, unlike the

insurers in Thorpe and GIT, Alliance’s litigation rights and potential

liabilities are unaffected by the bankruptcy case. See 677 F.3d at 887; 645

F.3d at 212.

      Furthermore, the bankruptcy petition did not affect state law

limitations regarding Alliance’s potential liability for an unreasonable

failure to settle a claim. Under state law, Wood was not permitted to sue

Alliance directly for its alleged breach of duty to settle the claim within

policy limits. Murphy v. Allstate Ins. Co., 17 Cal. 3d 937, 946 (1976).

      But, Trustee does not assert the Bad Faith Action on behalf of Wood.

The cause of action belonged to Debtor and became property of the estate

under § 541(a). See United States v. Whiting Pools, Inc., 462 U.S. 198, 205 n.9

(1983) (“The scope of [§ 541(a)(1)] is broad. It includes all kinds of property,

including . . . causes of action.”). It is Debtor’s cause of action which

Trustee asserts, not Wood’s. See Smith v. Arthur Andersen LLP, 421 F.3d 989,

1002 (9th Cir. 2005) (“[U]nder the Bankruptcy Code the trustee stands in

                                       10
the shoes of [the debtor] and has standing to bring any suit that [the

debtor] could have instituted had it not petitioned for bankruptcy . . . a

bankruptcy trustee has no standing generally to sue third parties on behalf

of the estate’s creditors.”) (citations omitted)).

      The filing of the bankruptcy petition and the entry of the order for

relief did not alter Alliance’s potential liability or legal rights under state

law. It merely placed Debtor’s cause of action under the control of an

independent trustee. Because the petition did not invade any legally

protected interest in a concrete and particularized way, the bankruptcy

filing does not constitute an injury in fact sufficient to confer standing on

Alliance to seek dismissal of the case under § 707(a).

      2.    Causal Connection

      Establishing a causal connection requires Alliance to show that its

injury was fairly traceable to the challenged action, and not “th[e] result

[of] the independent action of some third party not before the court.” Lujan,

504 U.S. at 560-61 (quoting Simon v. E. Ky. Welfare Rights Org., 426 U.S. 26,

41-42 (1976)).

      Because the bankruptcy petition did not alter Alliance’s potential

liability or rights under state law, any injury caused by the Bad Faith

Action is not causally connected to the bankruptcy petition. The Bad Faith

Action is not dependent on any bankruptcy-specific cause of action. The

source of Alliance’s potential liability is state law and the factual

                                        11
circumstances which occurred at the time of Wood’s settlement offer.

      Alliance argues that but for the bankruptcy filing, Trustee would not

have been able to file the Bad Faith Action. We agree, but this does not

mean that the Trustee’s suit is “fairly traceable” to the petition.

      Although Wood filed the involuntary petition with the expectation

that a trustee would be appointed and pursue the cause of action against

Alliance, the Bankruptcy Code imposes a duty on a chapter 7 trustee to

only pursue causes of action which, in the trustee’s business judgment, will

be of value to the estate. See Koch Ref. v. Farmers Union Cent. Exch., Inc., 831

F.2d 1339, 1346-47 (7th Cir. 1987) (“a trustee has the authority to prosecute

or to decline to bring an action on behalf of the estate”); In re Carvalho, 578

B.R. 1, 12-13 (Bankr. D.D.C. 2017) (“a trustee is granted wide authority and

discretion regarding . . . whether litigation is worth pursuing”); In re Consol.

Indus. Corp., 330 B.R. 712, 715 (Bankr. N.D. Ind. 2005) (“A bankruptcy

trustee is not required to prosecute every cause of action belonging to the

bankruptcy estate. Instead, the trustee is given a substantial degree of

discretion in deciding how best to administer the estate committed to his

care and his actions are measured by a business judgment standard.”).

      In other words, Trustee had to make an independent evaluation of

the claim against Alliance and exercise his independent business judgment

before filing the Bad Faith Action. Any injury to Alliance is fairly traceable

to Trustee’s business judgment and his obligations under the Code, but not

                                       12
to the petition itself.

      The involuntary petition did not cause Trustee to file the Bad Faith

Action, and as a result, any injury caused by the Bad Faith Action is not

fairly traceable to the challenged action.

      3.     Redressability

      The final element of constitutional standing requires Alliance to

demonstrate that it is “likely,” as opposed to merely “speculative,” that the

injury would be redressed by dismissal of the case. Lujan, 504 U.S. at 561.

“[R]edressability analyzes the connection between the alleged injury and

requested judicial relief. [It] does not require certainty, but only a

substantial likelihood that the injury will be redressed by a favorable

judicial decision.” Hooshim v. Wolkowitz (In re Kim), BAP No. CC-15-1273-

TaKuF, 2016 WL 2654350, at *3 (9th Cir. BAP May 2, 2016), aff’d, 700

F.Appx. 710 (9th Cir. 2017) (quoting Nw. Requirements Utils. v. FERC, 798

F.3d 796, 806 (9th Cir. 2015)).

      Alliance argues that dismissal of the bankruptcy case would deprive

Trustee of standing and would therefore redress the injury. But, as

discussed above, dismissal of the case will not change Alliance’s potential

liability because the source of that liability is not the bankruptcy case or the

Bankruptcy Code, it is the factual circumstances surrounding Alliance’s

alleged failure to settle the personal injury claims within policy limits.

      If the case were dismissed, the cause of action would not be

                                       13
eliminated. It would revest in Debtor pursuant to § 349, and Debtor would

again be free to pursue the action or assign it to Wood. Therefore, Alliance

cannot show that there is a substantial likelihood that dismissal of the case

would provide redress.2

      Because we find that Alliance lacks constitutional standing, we do

not consider whether prudential or statutory standing requirements are

applicable in this case. The bankruptcy court did not err by determining

that Alliance lacked standing to seek dismissal of the case.

B.    Even If Alliance Had Standing, The Bankruptcy Court Did Not Err
      By Denying The Motion To Dismiss

      Alliance argues that Wood filed the involuntary petition, which arose

from a two-party dispute, for the improper purpose of contravening state

law limitations in his effort to enforce the judgment. Alliance also argues

that the bankruptcy court erred by focusing its analysis on prejudice to

creditors and the estate.

      “Under § 707(a), a court may dismiss [a chapter 7 case] only after

notice and hearing and only for cause, including three enumerated causes.”

In re Sherman, 491 F.3d at 970 (internal quotation marks and citations

      2
        We are aware that Debtor refused to pursue Alliance or assign his rights
prepetition, but we cannot speculate that he would continue to do so if the case were
dismissed, especially in light of the bankruptcy court’s denial of discharge. We can
conceive of no reasonable basis, economic or otherwise, why Debtor would not assign
the cause of action to Wood upon dismissal.

                                          14
omitted). When the asserted “cause” is not one of the enumerated

examples in § 707(a), we first determine whether the asserted “cause” is

contemplated by a specific provision of the Bankruptcy Code. Id. If so, then

there is no “cause” under § 707(a). Id.

      But, “[i]f there is no specific Bankruptcy Code provision that

addresses the asserted ‘cause,’ the question becomes whether the totality of

circumstances amount to § 707(a) ‘cause.’” Hickman v. Hana (In re Hickman),

384 B.R. 832, 840 (9th Cir. BAP 2008) (citing In re Sherman, 491 F.3d at 970;

Leach v. United States (In re Leach), 130 B.R. 855, 856 (9th Cir. BAP 1991)); see

also Marciano v. Fahs (In re Marciano), 459 B.R. 27, 50 (9th Cir. BAP 2011),

aff’d 708 F.3d 1123 (9th Cir. 2013) (“The filing of an involuntary bankruptcy

petition is always a ‘litigation tactic.’ Whether the filing is inappropriate is

a fact-dependent determination.”).

      We agree that under appropriate factual circumstances, filing an

involuntary petition for reasons inconsistent with the purposes of the

Bankruptcy Code may constitute “cause” for dismissal under § 707(a).

However, the totality of circumstances here supports the bankruptcy

court’s ruling.

      The bankruptcy filing did not circumvent or contravene state law as

Alliance argues. State law prohibited Wood from directly suing Alliance

for a breach of the duty to settle, but the bankruptcy filing did not alter that

limitation. Trustee asserts Debtor’s cause of action, not Wood’s.

                                        15
      Additionally, the purpose of the state law limitation is to protect the

insured, not the insurer. Murphy, 17 Cal.3d at 946 (“the courts imposed the

duty to settle to protect the insured”). An insurer’s failure to settle within

policy limits can subject an insured to excess liability, but by limiting the

cause of action against the insurer for the breach, state law allows the

insured to control the cause of action and bargain with the injured party for

a release from liability in excess of coverage. Id. The insurer has no ability

to prevent the insured from assigning his claims. Id. at 942 (“The insured

may assign his cause of action for breach of the duty to settle without

consent of the insurance carrier, even when the policy provisions provide

the contrary.”).

      Unlike Murray, which involved the threat of potential sale of a

debtor’s and a non-debtor’s interests under § 363(h), the bankruptcy filing

here did not impose any means of recovery unavailable under state law.

543 B.R. at 488. And, unlike the creditor in Murray, Wood did not file the

involuntary petition to obtain a personal tactical advantage against Debtor

in collecting his judgment. Id. at 493.

      Wood filed the petition to allow Trustee to evaluate and pursue a

potentially valuable asset which Debtor was threatening to waste. This is a

legitimate use of the bankruptcy process. See Marciano v. Chapnick (In re

Marciano), 708 F.3d 1123, 1128 (9th Cir. 2013) (noting that “a central

purpose of the involuntary bankruptcy laws [is] to ‘protect the threatened

                                          16
depletion of assets’”) (quoting In re Manhattan Indus., Inc., 224 B.R. 195, 200

(Bankr. M.D. Fla. 1997)). The involuntary petition was not a judgment

enforcement mechanism as Alliance suggests, but rather an asset

preservation mechanism.

      Finally, Alliance argues that the bankruptcy court erred by focusing

its “cause” analysis on prejudice to creditors and the estate. Although the

cases cited by Trustee in support of this analysis pertain to voluntary

dismissals by debtors under § 707(a), it was not improper for the

bankruptcy court to consider prejudice as part of the totality of

circumstances. More importantly, the record demonstrates that the

involuntary petition was filed for a legitimate bankruptcy purpose. The

bankruptcy court did not abuse its discretion by determining that the

petition was not filed for an improper purpose and that cause did not exist

to dismiss the case.

                               CONCLUSION

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

order denying Alliance’s motion to dismiss.

                                       17