Court Opinion

ID: 4035565
Source: CourtListenerOpinion
Date Created: 2016-09-21 15:01:19.691672+00
Date Added: 2024-06-11T14:36:44.279870
License: Public Domain

United States Bankruptcy Appellate Panel
                         For the Eighth Circuit
                     ___________________________

                             No. 16-6008
                     ___________________________

                       In re: Michael Robert Wigley

                            lllllllllllllllllllllDebtor

                          ------------------------------

                           Lariat Companies, Inc.

                    lllllllllllllllllllllCreditor - Appellant

                                        v.

                           Michael Robert Wigley

                      lllllllllllllllllllllDebtor - Appellee

                               Barbara Wigley

                 lllllllllllllllllllllInterested party - Appellee
                                    ____________

               Appeal from United States Bankruptcy Court
                for the District of Minnesota - Minneapolis
                               ____________

                         Submitted: August 12, 2016
                          Filed: September 21, 2016
                               ____________

Before SCHERMER, NAIL and SHODEEN, Bankruptcy Judges.
                           ____________
SCHERMER, Bankruptcy Judge

        Creditor, Lariat Companies, Inc. (Lariat), appeals from: (1) the bankruptcy
court’s1 November 18, 2015 order denying Lariat’s request to dismiss the Chapter 11
case of debtor, Michael Robert Wigley (Debtor), or to convert the case to Chapter 7,
denying confirmation of the Debtor’s second modified Chapter 11 plan, and
establishing deadlines for the Debtor to file a modified plan and obtain confirmation
of it (November 18 Order);2 and (2) the bankruptcy court’s February 18, 2016 order
confirming the Debtor’s fourth modified Chapter 11 plan. We have jurisdiction over
this appeal from the final order of the bankruptcy court.3 See 28 U.S.C. § 158(b). For
the reasons that follow, we affirm.

                                      ISSUE
       The main issue on appeal is whether the bankruptcy court properly denied
Lariat’s request to dismiss the Debtor’s case or convert it to Chapter 7, resulting in
the ultimate confirmation of the Debtor’s fourth modified Chapter 11 plan. We see
no error with the bankruptcy court’s decisions.

                                  BACKGROUND
       This dispute arises in the Debtor’s Chapter 11 bankruptcy case. An outline
of the litigation leading to the Chapter 11 bankruptcy filing is relevant.

      1
             The Honorable Katherine A. Constantine, United States Bankruptcy
Judge for the District of Minnesota.
      2
              Lariat states that it only appeals the portions of the order denying its
requests for dismissal or conversion, and we consider only those issues in this appeal.
      3
              We review the November 18, 2015 order in connection with the
February 18, 2016 order, which is a final order. We have jurisdiction over “the events
and rulings leading to a final order.” Zahn . Fink (In re Zahn), 526 F.3d 1140, 1143
(8th Cir. 2008).

                                         -2-
Events Prior to the Debtor’s Bankruptcy Case

       Pre-petition, the Debtor personally guaranteed the lease obligations of an LLC
he had formed (Baja Sol Cantina EP, LLC). The lease was entered into by the LLC
(as lessee) with Lariat (as lessor). After the LLC defaulted on the lease and Lariat
evicted it from the premises, Lariat sued the LLC and the Debtor. The state court
awarded Lariat summary judgment against both parties for an amount of over $2.2
million in damages. The state court of appeals affirmed the judgment.

      Litigation also commenced in bankruptcy court. Lariat (along with other
creditors) filed an involuntary Chapter 7 bankruptcy petition against the Debtor,
which was dismissed by consent of the parties. Following the filing of the
involuntary petition, Lariat and the other petitioning creditors commenced a
fraudulent transfer action against the Debtor’s wife in state court. They added the
Debtor as a co-defendant after his involuntary bankruptcy case was dismissed.
Ultimately, the Debtor and his wife were held jointly and severally liable to Lariat for
fraudulent transfers totaling approximately $800,000.

       The Debtor and his wife later moved in the state court for amended findings in
the fraudulent transfer action. On the petition date of the Debtor’s Chapter 11 case,
the state court had not ruled on the motion for amended findings and the Debtor
believed that the automatic stay applied to the fraudulent transfer proceeding.

       The Debtor also initiated litigation. He filed a suit against Lariat in state court
seeking relief from the judgment in the guarantee action. The state court granted
Lariat’s motion to dismiss the Debtor’s complaint. The appeal of the state court’s
decision was stayed by the Debtor’s filing of his Chapter 11 petition, and it remains
pending.

      One month prior to the Debtor’s filing of his Chapter 11 bankruptcy petition,
the Debtor’s LLC filed its own Chapter 11 petition. In that case, the LLC commenced

                                           -3-
an adversary proceeding (which was ultimately dismissed) seeking to enjoin Lariat
from enforcing its judgment in the guarantee action against the Debtor. On the
motion of the United States Trustee, the LLC’s Chapter 11 case was dismissed.

       After attempts by the Debtor to avoid such a ruling, the state court in the
guarantee action granted a motion by Lariat for application of assets to the judgment
(Assets Order). The Assets Order required the Debtor to provide an updated
accounting of his assets and mandated (upon the request of Lariat) the surrender of
the Debtor’s non-exempt property to Lariat. Lariat was authorized to liquidate the
Debtor’s non-exempt property to satisfy the judgment in the guarantee action, and any
person or entity who owed money to the Debtor was ordered to pay the funds to
Lariat instead.

The Debtor’s Bankruptcy Case

       On February 10, 2014, ten days after the entry of the Assets Order, the Debtor
filed his Chapter 11 bankruptcy petition. On his schedules, the Debtor listed assets
exceeding the amount of his liabilities. Lariat’s guarantee judgment in the Debtor’s
bankruptcy case was capped under Bankruptcy Code § 502(b)(6).4

      The Debtor filed his Second Modified Plan of Reorganization (Second
Modified Plan), which proposed to release his wife, Barbara Wigley, from all claims
held against her by the Debtor or the estate (eliminating Lariat’s fraudulent transfer
judgment against her) in exchange for her settlement payment. Lariat objected to the
Second Modified Plan and filed a motion seeking dismissal or conversion of the

      4
             Lariat appealed the bankruptcy court’s order capping its proof of claim
under § 502(b)(6). We affirmed in part, reversed in part and remanded to the
bankruptcy court for further proceedings. Following our opinion, the bankruptcy
court entered an order allowing Lariat’s claim in an amount certain. That order has
not been appealed.

                                         -4-
Debtor’s case to Chapter 7 (specifying a preference for dismissal over conversion) for
bad faith. On November 18, 2015, the bankruptcy court denied Lariat’s motion to
dismiss or covert, denied confirmation of the Second Modified Plan, and established
deadlines for the Debtor to file a modified plan and obtain confirmation of it.

       We dismissed Lariat’s original appeal from the November 18 Order because
it is not a final order. Lariat appealed our decision to the Eighth Circuit Court of
Appeals, where it remains pending.

      The bankruptcy court ultimately confirmed the Debtor’s Fourth Modified Plan
of Reorganization (Fourth Modified Plan). Following confirmation of the Debtor’s
Fourth Amended Plan and upon Lariat’s motion, the bankruptcy court granted relief
from the automatic stay, allowing Lariat to continue the pending fraudulent transfer
action against Barbara Wigley.

       Lariat filed a new notice of appeal, this time from the November 18, 2015
Order and from the order confirming the Debtor’s Fourth Modified Plan. Lariat states
that it appeals the order confirming the Fourth Modified Plan to ensure that the
November 18 Order denying its motion to dismiss or convert will be reviewed by us.

                            STANDARD OF REVIEW
       The bankruptcy court’s findings of fact are reviewed for clear error and its
conclusions of law are reviewed de novo. Loop Corp. v. U.S. Trustee (In re Loop
Corp.), 379 F.3d 511, 515 (8th Cir. 2004) (citing Cedar Shore Resort, Inc. v. Mueller
(In re Cedar Shore Resort, Inc.), 235 F.3d 375, 379 (8th Cir. 2000)). “Whether a
bankruptcy case has been filed in bad faith is a question of fact, and a dismissal will
only be reversed if the court abused its broad discretion.” Cedar Shore Resort, Inc.,
235 F.3d at 379.

                                         -5-
                                   DISCUSSION
      The focus of this appeal is the bankruptcy court’s denial of Lariat’s request to
dismiss or convert the Debtor’s case to Chapter 7 for bad faith. Bankruptcy Code
§1112(b)(1) provides that:

      on request of a party in interest, and after notice and a hearing, 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. . . .

11 U.S.C. § 1112(b)(1). Section 1112(b)(2) sets forth an exception to this rule in the
case of unusual circumstances. 11 U.S.C. § 1112(b)(1). Although there is no explicit
requirement in § 1112 that a case be filed in good faith, the Eighth Circuit has
recognized that “a bad faith filing can be cause for dismissal.” Cedar Shore Resort,
Inc., 235 F.3d at 379 (citing First Nat’l Bank of Sioux City v. Kerr (In re Kerr), 908
F.2d 400, 404 (8th Cir. 1990)) (recognizing a good faith requirement and collecting
cases from other circuits with the same requirement). There is no single test for
determining whether a Chapter 11 filing was made in bad faith. Id. at 379. To
determine whether a case has been filed in bad faith, “courts consider the totality of
the circumstances, including the court's evaluation of the debtor's financial condition,
motives, and the local financial realities.” Id. (citing Little Creek Dev. Co. v.
Commonwealth Mortgage Corp. (In re Little Creek Dev. Co.), 779 F.2d 1068, 1072
(5th Cir. 1986)); see Kerr, 908 F.2d at 404 (“We . . . must require a pattern of
concealment, evasion, and direct violations of the Code or court order which clearly
establishes an improper motive before allowing dismissals for bad faith.”) (citation
omitted).

        Lariat submitted its case only on exhibits admitted into evidence and provided
its attorney’s narrative summation of those documents. The Debtor’s case was based
mostly on his testimony. He testified and was examined by Lariat on cross

                                          -6-
examination.5 After reviewing the evidence, the bankruptcy court credited the
Debtor’s testimony in finding that the Chapter 11 petition was filed in good faith. The
bankruptcy court evaluated the totality of the circumstances, viewing various factors,
to determine that cause did not exist for dismissal of the Debtor’s case. We see no
error with its determinations that the filing served a valid bankruptcy purpose and was
not filed merely to obtain a litigation advantage. The record supports the bankruptcy
court’s findings that the Debtor:

      did not file to escape the Lariat judgments; he filed to maximize the
      value of his assets for the benefit of himself and all of his creditors
      including Lariat, and to avail himself of the protections of the
      Bankruptcy Code with respect to limiting Lariat’s claim as provided and
      allowed by the Code and in a bankruptcy case.

      On appeal, Lariat focuses on certain factors assessed by the bankruptcy court,
claiming that the bankruptcy court’s decision was made in error. Lariat’s main
argument is that the bankruptcy court erred in finding that the Debtor’s Chapter 11
case was filed in good faith because (according to Lariat) the Debtor was not in
financial distress.

      The bankruptcy court did not err in determining that the Debtor was in
financial distress. It is undisputed that Lariat held a judgment against the Debtor in
an amount exceeding $2.2 million.6 The Assets Order allowed Lariat to obtain and
liquidate all of the Debtor’s non-exempt assets. The court found that the Debtor was
not able to satisfy the guarantee judgment without liquidating assets that would lead

      5
            The parties stipulated to the admission of all of each party’s exhibits
except one. The court admitted all of the exhibits for which the parties stipulated to
admission.
      6
             The bankruptcy court found that “[b]ut for the Lariat judgments against
the [D]ebtor and his wife, the [D]ebtor would have been a financially healthy debtor.”

                                         -7-
to his own insolvency and the sharing of the financial distress to other entities.
According to the court, the guarantee judgment and Assets Order caused the Debtor
to be “teetering on the verge of a fatal financial plummet.” It stated that “the majority
of the debtors assets . . . are partnership, stock, or other investment or receivable
interests in various entities and generally not subject to typical or easily identifiable
markets for liquidation purposes.” The court credited the Debtor’s belief that Lariat
would take immediate action to liquidate these assets in a manner that would not
maximize the value of the assets, that would be inadequate to satisfy Lariat’s
guarantee judgment in full, and that would lead to an inability of the Debtor to satisfy
other creditors. The court also credited the Debtor’s belief that such liquidation
would imperil the interest of other entities in which the Debtor had an interest, as well
as their creditors, employees, customers and vendors.

       Lariat argues that the record does not support the bankruptcy court’s
determinations. However, the Debtor testified regarding a liquidation analysis that
he prepared, stating that in a forced liquidation (90 days) his assets would have a
value of approximately $2 million to $2.5 million less than their scheduled value.
The Debtor also testified that he believed that Lariat would be unreasonable in its
collection efforts and would follow a forced liquidation process that would not
preserve the going concern value of his assets. Lariat points to an acknowledgment
by the Debtor on cross-examination that a creditor might realize more than the
liquidation value of the assets by taking a more patient approach. From this, Lariat
concludes that any reasonable creditor (including Lariat) would have solicited expert
assistance and obtained market values for the assets. We will not second guess the
bankruptcy court’s assessment of the evidence and the Debtor as a witness, which
was supported by the record. The bankruptcy court credited the Debtor’s testimony
that he believed that Lariat would effectuate a forced liquidation of his assets.
Moreover, Lariat did not offer testimony to state that Lariat would act patiently in
collection. In fact, no testimony was offered on Lariat’s behalf. We see no error with

                                          -8-
the bankruptcy court’s weighing of the evidence and its decision to credit the
Debtor’s testimony.

       We also see no error with the bankruptcy court’s determination that the
Debtor’s case did not evidence a two-party dispute. Contrary to suggestions by
Lariat, there is no reason why the bankruptcy court should have found that the
Debtor’s bankruptcy case amounts to a collateral attack on the state court’s guarantee
judgment, evidencing a two-party dispute. The purposes found by the bankruptcy
court for the Debtor’s filing were supported by the record. We also see no merit to
Lariat’s contention that the bankruptcy court erroneously limited two-party disputes
to those involving secured creditors. The court’s reference to cases involving secured
creditors as examples of two-party disputes was not limiting or improper. Lariat
disputes the bankruptcy court’s finding that, although Lariat was the largest and most
significant creditor, it was not the only meaningful creditor. However, it has not
adequately explained why this finding is incorrect based on the record. And the
creditor body realized meaningful protection by the Debtor’s bankruptcy filing in that
all creditors are being paid in full with interest or they are not impaired.

       Lariat complains that the Debtor filed his Chapter 11 petition to evade the state
court judgments. The bankruptcy court did not err in finding a lack of evasive
conduct by the Debtor. As the bankruptcy court pointed out, the bankruptcy does not
allow the Debtor to evade his state court judgments; it requires him to acknowledge
the state court judgments and provide for them in his plan. The Debtor did exactly
that. Although we understand Lariat’s frustration with the Debtor’s conduct in
leading it through state courts and other bankruptcy proceedings only to find itself
having to defend its interests in this bankruptcy case, the bankruptcy court did not err
in finding that the Debtor’s Chapter 11 filing did not evidence bad faith.

     We see no error with the bankruptcy court’s finding that the fraudulent transfer
judgment does not support a finding of evasive conduct since the transfers to the
Debtor’s wife that were the subject of that judgment were made almost three years

                                          -9-
pre-petition and that the judgment was entered pre-petition. We also see no evidence
of evasiveness by the Debtor’s attempt to compromise that judgment through the
plan. As the bankruptcy court pointed out, that was an issue for confirmation. In
addition, the record supported the bankruptcy court’s determination that filing the
petition so the Debtor could use § 502(b)(6) to cap Lariat’s claim (especially in light
of the other facts in this case) reflects nothing other than a proper motive in filing the
case. The Debtor testified that capping Lariat’s claim was not his only purpose in
filing and that he also filed to avoid the harm to himself and his creditors from a
forced liquidation by Lariat.

       Lariat also sets forth a plethora of other factors that it believes support its
position that the Debtor’ petition was filed in bad faith. We see no error with the
bankruptcy court’s decision to not credit any of these factors that were presented to
it.

       Lariat claims that there exists “striking parallels” between this case and the
case of In re SGL Carbon Corp., 200 F.3d 154 (3d Cir. 1999), where the debtor’s
petition was filed in bad faith. We disagree. The evidence showed that the debtor in
SGL Carbon was financially healthy and filed solely to address pending anti-trust
claims (i.e. as a litigation tactic). The SGL Carbon debtor’s viability might
eventually have been threatened by the claims, but, at the time the case was filed, the
evidence showed that the debtor faced no immediate financial difficulty. The filing
was premature and was not made for a valid bankruptcy purpose. Here, Lariat’s
judgments had already been entered against the Debtor. As stated, we see no error
with the bankruptcy court’s findings that the Debtor was in financial distress, and that
he filed his Chapter 11 petition to maximize the value of his assets and to obtain the
benefits of the Bankruptcy Code. Likewise, we see no parallel to the Eighth Circuit’s
Cedar Shore Resort, Inc. case where the Chapter 11 filing was dismissed as being in
bad faith because it was made for the purpose of preventing creditors from pursuing
claims in state court, rather than to effectuate a valid bankruptcy purpose. 235 F.3d
375.

                                          -10-
                            CONCLUSION
For the reasons stated, the decisions of the bankruptcy court are affirmed.

                                 -11-