Court Opinion

ID: 4106503
Source: CourtListenerOpinion
Date Created: 2016-12-12 19:02:14.195093+00
Date Added: 2024-06-11T14:33:32.314914
License: Public Domain

FILED
                                                                    DEC 09 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 1                          NOT FOR PUBLICATION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.     WW-15-1089-KuJuTa
                                   )
 6   RENEWABLE ENERGY, INC.,       )       Bk. No.     15-10421
                                   )
 7                  Debtor.        )
     ______________________________)
 8                                 )
     RENEWABLE ENERGY, INC.,       )
 9                                 )
                    Appellant,     )
10                                 )
     v.                            )       MEMORANDUM*
11                                 )
     UNITED STATES TRUSTEE,        )
12                                 )
                    Appellee.      )
13   ______________________________)
14                  Argued and Submitted on November 17, 2016
                             at Pasadena, California
15
                            Filed – December 9, 2016
16
              Appeal from the United States Bankruptcy Court
17                for the Western District of Washington
18        Honorable Marc L. Barreca, Bankruptcy Judge, Presiding
19   Appearances:      Edward P Weigelt argued for appellant Renewable
                       Energy, Inc.; Thomas Buford argued for appellee
20                     United States Trustee.
21
     Before: KURTZ, JURY and TAYLOR, Bankruptcy Judges.
22
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.
28   See 9th Cir. BAP Rule 8024-1.
 1                               INTRODUCTION
 2        On the United States Trustee’s motion, the bankruptcy court
 3   converted debtor Renewable Energy Inc.’s bankruptcy case from
 4   chapter 11 to chapter 7.1
 5        In the bankruptcy court, Renewable Energy conceded that
 6   cause for conversion or dismissal existed under § 1112(b)(4)(C)
 7   because it could not afford to purchase liquor liability
 8   insurance covering its continued operation of a bar.    But
 9   Renewable Energy claimed that dismissal was a better option than
10   conversion because it might be able to retain possession of the
11   leased premises in which its businesses had operated and it might
12   be able to sell those businesses as going concerns.    The
13   bankruptcy court disagreed, finding that the interests of
14   Renewable Energy’s creditors and the bankruptcy estate were
15   better served by conversion rather than dismissal.
16        Because the bankruptcy court’s finding regarding the
17   interests of creditors and the estate was not clearly erroneous,
18   we AFFIRM.
19                                  FACTS
20        Most of the relevant facts are not in dispute.    Renewable
21   Energy occupied two units in a commercial building located in
22   Seattle, Washington.   In one of these two units, Renewable Energy
23   operated a bar.   In the other, Renewable Energy was supposed to
24
25
          1
           Unless specified otherwise, all chapter and section
26   references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
     all "Rule" references are to the Federal Rules of Bankruptcy
27
     Procedure, Rules 1001-9037. All “Local Rule” references are to
28   the Local Bankruptcy Rules for the Western District of
     Washington.

                                      2
 1   operate a restaurant, but the restaurant was non-operational
 2   during the time Renewable Energy’s chapter 11 case was pending.
 3   Renewable Energy filed its chapter 11 petition shortly before
 4   being evicted from the leased premises.   The landlord’s successor
 5   in interest, Wells Fargo Bank, as trustee for a commercial
 6   mortgage pool securitization trust,2 asserted that Renewable
 7   Energy’s leases had expired by their own terms and that Renewable
 8   Energy also was in default under the leases for nonpayment of
 9   rent and for not keeping the leased premises properly insured.3
10   For its part, Renewable Energy asserted that it did not owe the
11   alleged past-due rent to Wells Fargo and that Wells Fargo had
12   improperly interfered with its use and enjoyment of the leased
13   premises.   According to Renewable Energy, it held a $500,000
14   claim against Wells Fargo for interfering with Renewable Energy’s
15   proposed sale of its restaurant business to a third party and for
16   its improper handling of the eviction proceedings.   As reflected
17   in its schedules, Renewable Energy’s only other significant asset
18   was roughly $400,000 of unencumbered restaurant equipment.
19        Within one month of Renewable Energy’s chapter 11 petition
20   filing, the United States Trustee filed a motion to dismiss or
21
          2
22         Wells Fargo’s full official designation in the underlying
     case was: “Wells Fargo Bank, N.A., as Trustee for the Registered
23   Holders of Credit Suisse First Boston Mortgage Securities Corp.,
     Commercial Mortgage Pass-Through Certificates, Series 2007-C5.”
24
          3
           We can and do take judicial notice of the parties’ filings
25   in Renewable Energy’s bankruptcy case. See O'Rourke v. Seaboard
26   Sur. Co. (In re E.R. Fegert, Inc.), 887 F.2d 955, 957–58 (9th
     Cir. 1989). The record indicates that the bankruptcy court was
27   aware of and considered these filings when it entered the order
     on appeal. Additionally, the parties have referenced these
28   filings in their appeal briefs without objection.

                                      3
 1   convert the case under § 1112(b).    The sole ground offered in
 2   support of the motion was Renewable Energy’s failure to provide
 3   to the United States Trustee proof that it held a liquor
 4   liability insurance policy.   The United States Trustee argued
 5   that Renewable Energy’s lack of such insurance exposed its
 6   bankruptcy estate to an unacceptable risk of postpetition liquor-
 7   related liability and hence constituted cause for dismissal or
 8   conversion under § 1112(b).
 9        The United States Trustee noticed its motion to dismiss or
10   convert for hearing on March 6, 2015.    According to the United
11   States Trustee, the roughly 16 days’ notice it provided was more
12   than sufficient because Local Rule 2015-1(c) only required seven
13   days notice when a lack of insurance was the basis for the
14   requested relief.
15        Renewable Energy filed a one-page response to the United
16   States Trustee’s motion.   It did not oppose the timing of the
17   motion or the amount of notice given.    Nor did it request a
18   continuance of the March 6, 2015 hearing.    In fact, Renewable
19   Energy admitted in its response that liquor liability insurance
20   was prohibitively expensive and conceded that cause existed to
21   dismiss the case.
22         At the hearing on the motion to dismiss or convert,
23   Renewable Energy reiterated the admissions and concessions it had
24   made in its response.   But it opposed conversion of the case from
25   chapter 11 to chapter 7.   It pointed out to the court that the
26   amount of debt involved (as reflected in its schedules) was
27   relatively small and that its $400,000 in unencumbered restaurant
28   equipment was far more valuable if sold as part of a going

                                      4
 1   concern rather than piecemeal on a liquidation basis.    Renewable
 2   Energy expressed its hope that it could reach a deal with Wells
 3   Fargo that would allow it to retain possession of the premises,
 4   reopen the restaurant, sell it as a going concern, and pay
 5   creditors in full.   Therefore, Renewable Energy posited, its
 6   bankruptcy case should be dismissed rather than converted.
 7        The United States Trustee favored conversion over dismissal.
 8   The United States Trustee urged that the creditors of the estate
 9   would be fully, immediately and better served if the restaurant
10   equipment was liquidated in chapter 7.   In making its argument
11   for conversion, the United States Trustee accepted as true the
12   accuracy of Renewable Energy’s representations in its schedules
13   regarding the value of its equipment and the amount of claims
14   held by its creditors.
15        Wells Fargo also appeared at the hearing and sided with the
16   United States Trustee.   Wells Fargo further indicated that it had
17   no interest in attempting to continue to work with Renewable
18   Energy as tenant in the premises.
19        After acknowledging and accepting Renewable Energy’s
20   concession that its lack of liquor liability insurance
21   constituted cause for either conversion or dismissal, the
22   bankruptcy court proceeded to consider which of those two options
23   was in the best interests of creditors and the estate.   The
24   bankruptcy court determined that the creditors and the estate
25   would be best served by conversion rather than dismissal.    In
26   particular, the bankruptcy court focused on the undisputed fact
27   that Renewable Energy had a free and clear asset (the restaurant
28   equipment) which could be administered to pay off the debts owed

                                      5
 1   to Renewable Energy’s creditors.       The bankruptcy court thus
 2   ordered the bankruptcy case converted from chapter 11 to
 3   chapter 7.   The bankruptcy court entered the conversion order on
 4   March 6, 2015, and Renewable Energy timely appealed.
 5                              JURISDICTION
 6        The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
 7   §§ 1334 and 157(b)(2)(A), and we have jurisdiction under
 8   28 U.S.C. § 158.4
 9                                  ISSUE
10        Did the bankruptcy court abuse its discretion when it
11   converted Renewable Energy’s bankruptcy case from chapter 11 to
12   chapter 7?
13                           STANDARDS OF REVIEW
14        We review the bankruptcy court's order converting Renewable
15   Energy's chapter 11 case to chapter 7 for an abuse of discretion.
16   Pioneer Liquidating Corp. v. U.S. Trustee (In re Consol. Pioneer
17   Mortg. Entities), 264 F.3d 803, 806 (9th Cir. 2001).
18        A bankruptcy court abuses its discretion if it applies an
19   incorrect legal standard or misapplies the correct legal
20   standard, or if its factual findings are illogical, implausible
21   or without support in the record.       United States v. Hinkson,
22   585 F.3d 1247, 1262 (9th Cir. 2009) (en banc).
23
24
          4
           This appeal is not moot. The parties represented at oral
25   argument that the chapter 7 trustee has been holding estate funds
26   from the sale of the restaurant equipment pending resolution of
     this appeal. If Renewable Energy were to prevail on appeal and
27   if its bankruptcy case were dismissed on remand, the funds
     currently held by the trustee presumably would be turned over to
28   Renewable Energy upon dismissal.

                                        6
 1                               DISCUSSION
 2        Section 1112 governs dismissal and conversion of chapter 11
 3   cases.   As set forth in § 1112(b), if the bankruptcy court finds
 4   “cause” to dismiss or convert, the court is required to decide
 5   which of several actions will best serve the interests of the
 6   debtor’s creditors and the estate.   It must:
 7        (1) decide whether dismissal, conversion, or the
          appointment of a trustee or examiner is in the best
 8        interests of creditors and the estate; and (2) identify
          whether there are unusual circumstances that establish
 9        that dismissal or conversion is not in the best
          interests of creditors and the estate.
10
11   Sullivan v. Harnisch (In re Sullivan), 522 B.R. 604, 612 (9th
12   Cir. BAP 2014).   The bankruptcy court has an independent duty to
13   consider the impact of dismissal and conversion and to decide
14   which alternative is in the best interest of all creditors.    Id.
15   at 612-13.
16        Here, the bankruptcy court considered the impact of these
17   two alternatives and decided that Renewable Energy’s creditors
18   would be better served by conversion under the undisputed facts
19   of the case.   Those facts established that Renewable Energy’s
20   creditors likely could be paid in full if the estate’s
21   unencumbered assets were liquidated by a chapter 7 trustee and
22   the proceeds distributed to creditors.
23        The bankruptcy court did not explicitly consider the
24   appointment of a trustee or an examiner, or the potential
25   existence of unusual circumstances that might have militated
26   against dismissal or conversion under § 1112(b)(2).   Even so,
27   Renewable Energy did not seek in the bankruptcy court the
28   appointment of a trustee or examiner as an alternative to

                                      7
 1   conversion, nor has it discussed these alternatives in its appeal
 2   brief.   As a result, Renewable Energy has forfeited its right to
 3   raise these alternatives on appeal.   Kenny G Enters., LLC v.
 4   Casey (In re Kenny G Enters., LLC), 2014 WL 4100429, *12 (Mem.
 5   Dec.) (9th Cir. BAP Aug. 20, 2014); see also Christian Legal
 6   Soc'y v. Wu, 626 F.3d 483, 487–88 (9th Cir. 2010) (stating that
 7   appellate court would not consider matters not “specifically and
 8   distinctly argued in appellant's opening brief.”).
 9        As for the applicability of § 1112(b)(2)’s unusual
10   circumstances rule, that rule does not apply under the undisputed
11   facts of this case.   Renewable Energy admitted to the bankruptcy
12   court that it had not purchased liquor liability insurance and
13   that it could not afford to do so.    As a result, there was no way
14   Renewable Energy could have satisfied the unusual circumstances
15   rule’s cure requirement set forth in § 1112(b)(2)(B)(ii), and,
16   hence, the unusual circumstances rule indisputably was
17   inapplicable.
18        Renewable Energy argues on appeal that its admitted failure
19   to procure liquor liability insurance might not have constituted
20   “cause” under § 1112(b)(4)(C).   As Renewable Energy puts it,
21   because Washington law does not require all bars to maintain
22   liquor liability insurance, the bankruptcy court should not have
23   viewed its failure to obtain such insurance as cause to dismiss
24   or convert.   As a threshold matter, we are loathe to consider
25   this argument because the bankruptcy court relied upon Renewable
26   Energy’s concession that its failure to obtain liquor liability
27   insurance constituted “cause” under § 1112(b)(4)(C).   See Mano–Y
28   & M, Ltd. v. Field (In re Mortg. Store, Inc.), 773 F.3d 990,

                                      8
 1   998–99 (9th Cir. 2014) (holding that issue not raised in the
 2   bankruptcy court was forfeited); Barnes v. Belice (In re Belice),
 3   461 B.R. 564, 569 n.4 (9th Cir. BAP 2011) (same).
 4        Even if we were to consider this argument, it has no merit.
 5   Whatever the position of the state of Washington might be
 6   regarding bars such as Renewable Energy’s carrying liquor
 7   liability insurance, Renewable Energy’s failure to carry such
 8   insurance posed a genuine risk to both Renewable Energy’s
 9   creditors and the public.   The United States Trustee and the
10   bankruptcy court recognized this risk, and the bankruptcy court
11   correctly determined that liquor liability insurance was an
12   “appropriate” type of insurance for purposes of § 1112(b)(4)(C).
13   See In re Daniels, 362 B.R. 428, 435–36 (Bankr. S.D. Iowa 2007)
14   (holding that chapter 11 debtor attorney’s failure to obtain
15   legal malpractice liability insurance posed a risk both to the
16   estate and to the public); see also 7 Collier on Bankruptcy
17   ¶ 1112.04 [6][c] (16th ed. 2015) (stating that 1112(b)(4)(C)
18   requires the chapter 11 debtor to maintain the types of insurance
19   necessary to mitigate the risks to the estate and the public
20   arising from the debtor’s continued operations).
21        Renewable Energy’s bond argument similarly lacks merit.
22   According to Renewable Energy, the bond that Wells Fargo was
23   required to post in order to move forward with the eviction
24   proceedings sufficiently protected its creditors.   Once again,
25   Renewable Energy could have raised this argument in the
26   bankruptcy court but failed to do so.   Regardless, it is plain
27   that the bond did not sufficiently protect Renewable Energy’s
28   creditors.   The bond only addressed one type of risk: the risk

                                      9
 1   that Renewable Energy ultimately would prevail in the eviction
 2   proceedings but would incur compensable damages in the process.
 3   Renewable Energy has not pointed to anything in the record
 4   indicating that the bond would have protected its creditors or
 5   the public from any other type of risk associated with Renewable
 6   Energy’s continued operations.
 7        Renewable Energy additionally argued that, in order for the
 8   bankruptcy court to find cause under § 1112(b)(4), the United
 9   States Trustee was required to demonstrate: (1) an ongoing and
10   continuing loss to or diminution of the estate; and (2) the
11   absence of a reasonable likelihood of reorganization.      Renewable
12   Energy misconstrues the statute.       Any of the factors individually
13   set forth in § 1112(b)(4) can, by themselves, constitute cause
14   for conversion or dismissal of a chapter 11 case.      In re Products
15   Int'l Co., 395 B.R. 101, 110 (Bankr. D. Ariz. 2008) (holding that
16   the factors constituting cause set forth in the statute are meant
17   to be read in the disjunctive).    Accord, 7 Collier on Bankruptcy,
18   supra, at ¶ 1112.04[6].   Thus, having established the existence
19   of one of the grounds for dismissal or conversion under
20   § 1112(b)(4) – a failure to maintain appropriate insurance – the
21   United States Trustee was not required to establish any
22   additional cause for the relief it requested in its motion to
23   dismiss or convert.
24        Renewable Energy further contends that the bankruptcy court,
25   in choosing conversion over dismissal, ignored the debtor’s
26   interests and all of the economic benefits its businesses as
27   going concerns could provide to suppliers, employees and the
28   community.   There are two significant problems with this

                                       10
 1   contention.   First, the statute necessarily requires the
 2   bankruptcy court to focus on the interests of the estate’s
 3   creditors and not on the debtor’s interests.     See generally
 4   Shulkin Hutton, Inc., P.S. v. Treiger (In re Owens), 552 F.3d
 5   958, 961 (9th Cir. 2009) (“the court must consider the interests
 6   of all of the creditors”).   And second, Renewable Energy assumes
 7   without any factual basis that it would have been able to
 8   realize, going forward, the claimed benefits to itself, to its
 9   suppliers, and to its employees.     The record before the
10   bankruptcy court indicated otherwise.     Renewable Energy’s
11   contention simply ignores the dire situation it was confronted
12   with at the time.   It was forced to file bankruptcy shortly
13   before being evicted by Wells Fargo, and Wells Fargo appeared at
14   the hearing on the United States Trustee’s motion and made it
15   clear that it had no interest in consensually resolving its
16   battle with Renewable Energy for possession of the leased
17   premises.   Under these circumstances, the bankruptcy court’s
18   finding that the interests of Renewable Energy’s creditors and
19   its bankruptcy estate were best served by conversion rather than
20   dismissal was not clearly erroneous.
21        Renewable Energy only makes one other comprehensible
22   argument on appeal.   Renewable Energy maintains that it did not
23   have sufficient time or opportunity to present evidence
24   demonstrating that dismissal was a better option than conversion.
25   The bankruptcy court was required to ensure that the United
26   States Trustee gave Renewable Energy sufficient notice and
27   opportunity to respond to the motion as was appropriate under the
28   circumstances.   §§ 102(1), 1112(b)(1); In re Kenny G Enters.,

                                     11
 1   LLC, 2014 WL 4100429, *9.    Renewable Energy was given roughly
 2   sixteen days advance notice of the hearing on the motion to
 3   dismiss or convert, and it never asked the bankruptcy court for a
 4   continuance.   Thus, it is difficult to comprehend how Renewable
 5   Energy credibly can claim that it was denied a sufficient
 6   opportunity to present its case.
 7        Moreover, the undisputed facts in the record amply supported
 8   the bankruptcy court’s choice of conversion over dismissal, and
 9   Renewable Energy has not on appeal pointed us to any other facts
10   that might have materially altered that choice.    Nor are we
11   independently aware of any such facts.    In the absence of any
12   indication of prejudice, any alleged lack of notice or due
13   process fails to justify reversal.    Rosson v. Fitzgerald
14   (In re Rosson), 545 F.3d 764, 777 (9th Cir. 2008); see also
15   In re Bartle, 560 F.3d 724, 729–30 (7th Cir. 2009)
16   (“[appellant’s] substantial rights must have been affected by the
17   [notice] error, and that is true only if [the appellant] had a
18   response to the [appellee's] motion that might have altered the
19   court's decision.”).
20        To the extent Renewable Energy could have argued that the
21   governing procedural rules required a longer notice period than
22   was given, we disagree.   While Rule 2002(a)(4) generally requires
23   twenty-one days advance notice of a hearing on a motion to
24   dismiss or convert, Rule 9006(c) permitted the bankruptcy court
25   to reduce that amount of time.    In re Bartle, 560 F.3d at 728-29.
26   This is what the bankruptcy court did by way of its Local Rule
27   2015-1(c), which provides:
28        Insurance.   If the debtor in possession fails timely to

                                      12
 1        provide the United States trustee with proof of
          insurance or insurance renewal, the United States
 2        trustee may move to convert or dismiss the case on
          7 days’ notice to the debtor, parties who have
 3        requested notice, and any committee, unless the court
          allows a shorter period on a showing of exigent
 4        circumstances.
 5   In any event, if Renewable Energy took issue with the United
 6   States Trustee’s compliance with Rule 2002(a)(4) or its reliance
 7   on Local Rule 2015-1(c), it was incumbent upon Renewable Energy
 8   to raise these issues both in the bankruptcy court and on appeal.
 9   It did not do so, and thus it has forfeited these issues.
10   In re Mortg. Store, Inc., 773 F.3d at 998–99; Christian Legal
11   Soc'y, 626 F.3d at 487–88.
12                                CONCLUSION
13        For the reasons set forth above, we AFFIRM the bankruptcy
14   court’s conversion of Renewable Energy’s bankruptcy case from
15   chapter 11 to chapter 7.
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