Court Opinion

ID: 4540250
Source: CourtListenerOpinion
Date Created: 2020-06-10 00:01:40.773584+00
Date Added: 2024-06-11T12:46:26.426429
License: Public Domain

FILED
                                                                               JUN 5 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                           NOT FOR PUBLICATION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. NV-19-1306-GLB

M. DAVID FESKO,                                      Bk. No. 2:19-bk-12146-ABL

                    Debtor.

M. DAVID FESKO,

                    Appellant,

v.                                                   MEMORANDUM*

JOHN FESKO; SHELLEY D. KROHN,
Chapter 7 Trustee,

                    Appellees.

                 Submitted Without Argument on May 21, 2020

                                 Filed – June 5, 2020

               Appeal from the United States Bankruptcy Court
                         for the District of Nevada

         *
        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.
      Honorable August B. Landis, Chief Bankruptcy Judge, Presiding

Appearances:        M. David Fesko, Appellant, pro se on brief; Steven B.
                    Scow and Daniel G. Scow of Koch & Scow, LLC on brief
                    for Appellee John Fesko; Jacob L. Houmand on brief for
                    Appellee Shelley D. Krohn.

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

                                 INTRODUCTION

      Appellant M. David Fesko (“Debtor”) appeals from the bankruptcy

court’s order converting Debtor’s chapter 111 case to a case under chapter 7

and from the order denying his motion for reconsideration. The

bankruptcy court determined that Debtor filed the petition to deter and

harass creditors, impede state court collection rights, and achieve other

objectives inconsistent with bankruptcy purposes. The court concluded that

cause existed pursuant to § 1112(b) based on Debtor’s bad faith in filing the

petition, and that conversion, rather than dismissal or appointment of a

trustee or examiner, would best serve the interests of creditors and the

estate. The bankruptcy court also denied Debtor’s motion for

      1
        Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532, all “Rule” references are to the Federal Rules
of Bankruptcy Procedure, and all “Civil Rule” references are to the Federal Rules of
Civil Procedure.

                                           2
reconsideration.

      The bankruptcy court’s factual findings were supported by the record

and it did not abuse its discretion in converting the case, or in denying the

motion for reconsideration. We AFFIRM both orders.

                                        FACTS

A.    Prepetition Events

      In 2017, Debtor’s son, John Fesko (“John”)2, filed a suit in the superior

court for San Francisco County, California (the “San Francisco Action”)

seeking an accounting and recovery of property which he alleged Debtor

wrongfully took from the Jack and Helen Fesko Family Limited

Partnership, an Indiana partnership (the “Partnership”), and two family

trusts created by Debtor’s parents, Jack and Helen Fesko, for the benefit of

their grandchildren, John, Matthew, and Michael Fesko. John alleged that

while acting as the trustee of the family trusts and as general partner of the

Partnership, Debtor engaged in wrongful self-dealing by diverting funds to

several offshore entities and accounts using multiple aliases.

      After Debtor resigned as general partner of the Partnership in 2009

and as trustee of the trusts in 2011, John became the trustee and general

partner. Debtor then filed several claims against John in the San Francisco

Action and also sued John in the superior court for San Diego County,

      2
        We refer to the son by his first name to distinguish him from his father. No
disrespect is intended.

                                           3
California for possession of personal property (the “San Diego Action”).

        John filed a cross-complaint in the San Diego Action individually and

on behalf of the Partnership, alleging fraud against the Debtor. In

September 2018, following a jury trial, the superior court entered judgment

against Debtor and in favor of the Partnership in the amount of $766,401,

based on claims that Debtor engaged in fraudulent activity while serving

as the general partner. The jury also awarded John $9,404 individually,

which was satisfied by setoff prior to entry of the judgment.

        During the pendency of the San Diego Action, Debtor engaged in

several transactions to transfer assets to his then girlfriend and now wife,

Ethel Merriman, including: (1) a transfer of $800,000 in March of 2018;

(2) transfer of his 50% ownership in a company called Maresco Oliva, Inc.

in 2017 or 2018; and (3) transfer of real property in Nebraska for no

consideration. Debtor also relocated from California to Nevada during the

case.

        After the judgment was entered against Debtor, he engaged in

further transfers including: (1) payment of $160,000 to Ms. Merriman in

September of 2018; (2) withdrawals of approximately $60,000 from a

Nevada State Bank account between September 2018 and December 2018;

(3) withdrawal of $60,000 from a Bank of America account in October 2018;

and (4) transfer of $180,000 from a foreign account in Great Britain to

Ms. Merriman in December of 2018.

                                       4
      John domesticated the judgment in Nevada and in December of 2018,

he obtained a writ of execution against Debtor’s personal property.

Pursuant to the writ of execution, the Laughlin Constable’s Office 3 seized

cash, coins, jewelry and guns valued at over $200,000, and a promissory

note payable to Debtor from Ethel Merriman in the amount of $800,000.

      In January 2019, John obtained an order in the San Diego Action

requiring Debtor to turn over funds in the foreign bank account. After the

order was entered, Debtor liquidated the account, which held

approximately $80,000, and transferred the funds to three law firms and a

real estate developer.

      While motions for contempt were pending in the San Diego Action

and in the Nevada state court action, Debtor filed his chapter 11 petition.

B.    The Bankruptcy Case

      Debtor filed a chapter 11 petition on April 8, 2019 and sought

turnover of assets from the Laughlin Constable’s Office. John objected to

turnover and argued that the Constable’s Office should be excused from

turnover under § 543(d) because Debtor had a history of mismanaging

assets as demonstrated by the fraud judgment, the pending San Francisco

Action, and Debtor’s post-judgment transfers. John also objected that

      3
        The Laughlin Constable is a Nevada civil enforcement officer tasked with
serving summons, complaints, civil subpoenas and notices, and with enforcing
garnishments, evictions, civil bench warrants, and property seizures.

                                          5
Debtor failed to fully disclose assets in his schedules and that Debtor was

not likely to reorganize because his monthly income was insufficient to

fund a plan. John noted that Debtor testified at the meeting of creditors that

he intended to file a liquidating plan that involved appealing the judgment,

replacing John as trustee of the trusts, and obtaining loans on trust assets to

pay creditors. The bankruptcy court denied the motion for turnover.

Debtor filed a motion to reconsider, which the court also denied.

      Debtor then filed a motion to extend the exclusivity period. The

bankruptcy court granted the motion over John’s objection and extended

the exclusivity period to November 4, 2019.

      1.    The Motion to Appoint a Trustee or Convert the Case

      In September 2019, John filed a motion to appoint a chapter 11 trustee

or alternatively to convert the case to chapter 7 (the “Conversion Motion”).

John argued that cause existed to appoint a trustee based on Debtor’s pre-

and post-petition misconduct in transferring millions of dollars out of his

creditors’ reach while litigation was pending, and Debtor’s unwillingness

to schedule voidable transfers or pursue estate causes of action.

      Alternatively, John argued that cause existed to convert the case

based on: (1) Debtor’s misrepresentations of material facts; (2) Debtor’s

failure to account for all estate assets or to pursue avoidable pre-petition

transfers to his wife; (3) diminution of the estate without a reasonable

likelihood of rehabilitation; (4) gross mismanagement of the estate; and

                                       6
(5) bad faith in filing the petition to delay state court collection

proceedings. Specifically, John alleged that Debtor concealed the $800,000

promissory note payable from Ms. Merriman, the pre-petition transfer to

Ms. Merriman of his 50% share in Maresco Oliva Inc., and the purchase of

$130,000 in gold.

      John supported the Conversion Motion with a declaration of the

Chief Clerk of the Laughlin Constable’s Office, which stated that the

$800,000 promissory note was seized from Debtor’s residence pursuant to

the writ of execution. John also provided documentary evidence

supporting Debtor’s various transfers, and transcripts of the meeting of

creditors in which Debtor admitted that he transferred $800,000 to

Ms. Merriman but denied that it was a loan or that he received a

promissory note in exchange.

      John provided notice that a hearing on the Conversion Motion was

scheduled for October 23, 2019, and pursuant to Local Bankruptcy Rule

9014(d), oppositions to the motion were required to be supported by

affidavits or declarations and filed no later than October 9, 2019. Debtor

failed to respond to the Conversion Motion by the deadline. However, on

September 24, 2019, Debtor personally filed an application to employ

special counsel, an application for compensation, a motion for turnover of

exempt property from the Laughlin Constable’s Office, and a motion for

turnover of third party property from the Laughlin Constable’s Office.

                                        7
     Less than a week later, Debtor’s counsel filed a motion to withdraw

as attorney of record. Debtor’s counsel stated that Debtor filed the motions

for turnover and the other applications by himself and that counsel had a

fundamental disagreement with Debtor concerning the motions for

turnover. Debtor’s counsel also filed a motion for a status conference to

discuss outstanding issues, including whether Debtor would have

sufficient time to respond to the Conversion Motion.

     The bankruptcy court set a hearing on the motion to withdraw on

shortened notice and conducted the hearing on October 10, 2019. At the

hearing, Debtor claimed to have been unaware of the deadline for filing an

opposition to the Conversion Motion. The court granted counsel’s motion

to withdraw, but because the deadline to respond to the Conversion

Motion had expired while Debtor’s counsel was still attorney of record, the

court determined that his withdrawal would not affect the hearing set for

October 23, 2019.

     On October 11, 2019, Debtor filed a motion to enlarge the time to

respond to the Conversion Motion. Debtor argued that his attorney was

negligent in failing to respond and had not forwarded a copy of the

Conversion Motion to Debtor. On October 18, 2019, Debtor filed an

opposition to the Conversion Motion.

     Debtor argued that John had not presented evidence of bad faith,

mismanagement, or concealment of assets. He also argued that he did not

                                      8
remove any funds from the Partnership or the trusts and that the transfers

to Ms. Merriman either occurred before the judgment was entered or were

legitimate investments made in the ordinary course of business. He denied

the existence of a promissory note for $800,000 from Ms. Merriman and

alleged that John manufactured this evidence because there was no

mention of it in the transcript of the inventory of items seized from

Debtor’s residence. Finally, he argued that John failed to establish cause

under any provision of § 1112(b)(4).

      Debtor supported his response with a declaration, but the declaration

only refers to Debtor’s actions to secure new counsel. He did not provide

any evidence to rebut the factual assertions made in the Conversion

Motion.

      2.    The Hearing and the Bankruptcy Court’s Ruling

      At the hearing on the Conversion Motion, the court first considered

whether to grant Debtor’s motion to enlarge the time to respond. The

bankruptcy court determined that Debtor’s delay was based on excusable

neglect, and because Debtor had already filed an opposition, the court

decided to consider it.

      The bankruptcy court first looked to whether there was cause to

dismiss or convert the case. The court noted that filing a petition in bad

faith constitutes “cause” to dismiss or convert, and bad faith depends on an

amalgam of factors that focus on whether the Debtor filed the case to

                                       9
unreasonably deter and harass creditors or to effect a speedy, efficient

reorganization. After applying the factors discussed in Little Creek

Development Co. v. Commonwealth Mortgage Corp (In re Little Creek

Development Co.), 779 F.2d 1068 (5th Cir. 1986), the court determined that a

majority of the factors were present.4

      In addition to the Little Creek factors, the bankruptcy court also

determined that the case was essentially a two-party dispute between

Debtor and John which could readily be resolved in pending state court

proceedings. The court suggested that cause may also exist under

§ 1112(b)(4)(a) because administrative expenses continued to accrue with

no offsetting income.

      Although filing a confirmable plan could be a factor that weighs

against a finding of bad faith, the court noted that Debtor sought an

extension of exclusivity and had not filed a plan. Based on the large size of

the judgment and an approximately $3.3 million debt owed to the IRS, the

      4
        The Little Creek factors are:
       (1) the debtor has one asset, such as a tract of undeveloped or developed real
property;
       (2) the debtor’s sole asset is encumbered by creditors’ liens;
       (3) the debtor has no employees, little or no cash flow, and no available sources
of income to sustain a plan or reorganization;
       (4) the debtor has few, if any, unsecured creditors with relatively small claims;
       (5) the property has been posted for foreclosure because of arrearages and the
debtor has been unsuccessful in defending foreclosure actions in state court;
       (6) the existence of the “new debtor syndrome,” in which a single asset entity has
been created on the eve of foreclosure to isolate the property and its creditors.

                                           10
court concluded that Debtor had little hope of proposing a feasible plan

based on his scheduled net income of $500 per month. The court noted that

Debtor was attempting to obtain a release of the funds in the possession of

the Laughlin Constable’s Office, not to pay creditors, but to pay attorneys

to pursue further state court litigation against John.

      Based on all of the facts and factors, the court concluded that Debtor

filed the case to “first, unreasonably deter and harass John and his other

creditors; second, to impede the exercise of John’s state court collection

right and remedies; and third, use assets levied upon to pay John’s fraud

judgment, to instead pay fees of multiple professionals in litigation with

uncertainty of any positive outcome.” Hr’g Tr. 63:10-15, October 23, 2019.

      After determining that cause existed, the court concluded that

appointment of a chapter 11 trustee or examiner would not be in the best

interests of the estate and creditors. The court also determined that there

were no unusual circumstances to preclude conversion or dismissal under

§ 1112(b)(2), and conversion, rather than dismissal, was in the best interests

of the creditors and the estate. The court entered the order converting the

case on October 23, 2019.

      3.    The Motion For Reconsideration

      On October 25, 2019, Debtor filed a motion for reconsideration.

Debtor argued that the court erred in making findings related to Debtor’s

ability to reorganize prior to the plan being filed, and by considering

                                      11
allegations made by John’s attorney which were not based on evidence.

     John opposed the motion to reconsider and argued that Debtor failed

to establish any new evidence, a clear error by the court, or an intervening

change in controlling law. The chapter 7 trustee also opposed the motion

and argued that with the exception of referencing a chapter 11 plan filed

after the conversion order, Debtor merely reiterated the arguments he

made in his opposition to the Conversion Motion.

     On November 14, 2019, the bankruptcy court conducted a hearing on

the motion to reconsider. At the hearing, Debtor argued for the first time

that John lacked standing to file the Conversion Motion. Debtor also

argued that the court relied on false factual assertions made by John, and

that creditors would fare better under Debtor’s plan than in a chapter 7.

     The court analyzed the motion under both Civil Rule 59(e),

incorporated by Rule 9023, and Civil Rule 60(b), incorporated by Rule 9024,

and concluded that Debtor failed to establish grounds for relief under

either rule. Debtor timely appealed.

                              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.

                                  ISSUES

     Did the bankruptcy court abuse its discretion in converting Debtor’s

case for cause?

                                       12
      Did the bankruptcy court abuse its discretion in denying Debtor’s

motion for reconsideration?

                         STANDARDS OF REVIEW

      “We review for abuse of discretion the bankruptcy court’s decision to

dismiss a case as a ‘bad faith’ filing. We review the finding of ‘bad faith’ for

clear error.” Marsch v. Marsch (In re Marsch), 36 F.3d 825, 828 (9th Cir. 1994)

(internal citations omitted).

      We review for abuse of discretion the denial of a motion for

reconsideration. Weiner v. Perry, Settles & Lawson, Inc. (In re Weiner), 161

F.3d 1216, 1217 (9th Cir. 1998).

      We apply a two-step test to determine whether the bankruptcy court

abused its discretion. Sullivan v. Harnisch (In re Sullivan), 522 B.R. 604, 611

(9th Cir. BAP 2014). First, we consider de novo whether the bankruptcy

court applied the correct legal standard to the requested relief. Id. Then we

review the bankruptcy court’s factual findings for clear error. Id.

      Factual findings are clearly erroneous if they are illogical,

implausible, or without support in the record. Retz v. Samson (In re Retz),

606 F.3d 1189, 1196 (9th Cir. 2010).

                                   DISCUSSION

      Section 1112(b) provides that the bankruptcy court shall convert or

dismiss a case, whichever is in the best interests of creditors and the estate,

“for cause,” unless the court determines that appointment of a chapter 11

                                       13
trustee or examiner is in the best interests of the estate.

      The bad faith filing of a bankruptcy petition constitutes “cause” for

dismissal under § 1112(b). In re Marsch, 36 F.3d at 828. The analysis focuses

on whether a debtor is attempting “to effect a speedy, efficient

reorganization on a feasible basis” or “to unreasonably deter and harass

creditors.” Id. A petition is filed in bad faith if a debtor seeks to “achieve

objectives outside the legitimate scope of the bankruptcy laws.” Id. A filing

may also be in bad faith if it is “an apparent two-party dispute that can be

resolved outside of the Bankruptcy Court’s jurisdiction.” In re Sullivan, 522

B.R. at 616.

      Bad faith depends on an amalgam of factors and no specific factor is

determinative. Idaho Dep’t of Lands v. Arnold (In re Arnold), 806 F.2d 937, 939

(9th Cir. 1986). A bankruptcy court may consider any factor which

demonstrates an abuse of the bankruptcy process and the purpose of

reorganization. Marshall v. Marshall (In re Marshall), 721 F.3d 1032, 1048 (9th

Cir. 2013). A finding of bad faith is made on a case by case basis, there is no

list of factors which must be present in each case to make the finding, and

the weight given to any particular factor depends on the circumstances of

the individual case. Can-Alta Props., Ltd. v. State Sav. Mortg. Co. (In re Can-

Alta Props., Ltd.), 87 B.R. 89, 91 (9th Cir. BAP 1988); Meadowbrook Investors’

Group v. Thirtieth Place, Inc. (In re Thirtieth Place), 30 B.R. 503, 506 (9th Cir.

BAP 1983).

                                         14
A.    The Bankruptcy Court Did Not Abuse Its Discretion In Converting
      The Case

      Debtor argues that the bankruptcy court erred by: (1) converting the

case without allowing Debtor time to find a new attorney; (2) relying on

inaccurate and biased facts; and (3) converting the case prior to the

expiration of the exclusivity period. Debtor also argues that his attorney

was incompetent and that John lacked standing to file the motion to

convert.

      Debtor has not demonstrated how the bankruptcy court’s decision to

proceed with the hearing on the Conversion Motion constituted an abuse

of discretion in deciding the motion. Although Debtor requested additional

time at the hearing to allow an attorney to review his opposition, the

opposition had already been filed, and the bankruptcy court considered it

in deciding the Conversion Motion. The court was not required to delay

proceedings to allow Debtor to seek replacement counsel to review the

filed opposition.

      Debtor has not shown that the court clearly erred in making its

factual findings of bad faith. Debtor argues that the facts asserted in the

Conversion Motion were inaccurate and biased, but those facts were

supported by documentary evidence and declarations, and by Debtor’s

own prior testimony. Debtor argues that the evidence is false, but he

offered no contravening evidence in support of his opposition. Arguments

                                      15
made in pleadings or in court do not constitute evidence. British Airways

Bd. v. Boeing Co., 585 F.2d 946, 952 (9th Cir. 1978). The bankruptcy court’s

factual findings were not implausible or illogical, and were supported by

evidence in the record.

       If Debtor had filed a plan of reorganization prior to the hearing, the

bankruptcy court may have considered the viability of the plan as a factor

in its analysis of bad faith. See In re Marshall, 721 F.3d at 1049. But, Debtor

did not file a plan until after the case was converted to chapter 7. The

bankruptcy court was not required to wait for Debtor to file a plan in order

to decide whether the petition was filed in bad faith.

      Finally, Debtor argues that John lacked standing to file the

Conversion Motion because the Partnership was dissolved in July of 2019.

Generally, we do not consider an issue that was not raised sufficiently to

permit the bankruptcy court to rule upon it. Ezra v. Seror (In re Ezra), 537

B.R. 924, 932 (9th Cir. BAP 2015). We may consider an issue not properly

raised in the bankruptcy court if:

            (1) there are exceptional circumstances why the
            issue was not raised in the [bankruptcy] court,
            (2) the new issue arises while the appeal is pending
            because of a change in law, or (3) the issue
            presented is purely one of law and the opposing
            party will suffer no prejudice as a result of the
            failure to raise the issue in the [bankruptcy] court.

Id. at 932 (citing Franchise Tax Bd. v. Roberts (In re Roberts), 175 B.R. 339, 345

                                        16
(9th Cir. BAP 1994)).

      Debtor did not raise the issue of John’s standing in his opposition to

the Conversion Motion or in his motion for reconsideration. Although

Debtor argued at the hearing on the motion for reconsideration that John

lacked standing, the argument was based on allegations of circumstances

which apparently existed prior to the filing of the Conversion Motion and

could have been raised in Debtor’s opposition to that motion. Debtor did

not sufficiently raise the issue of John’s standing to permit the bankruptcy

court to rule upon it, and he has not established exceptional circumstances

that would permit us to consider it. Thus, Debtor waived the issue of John’s

standing.

      Even if Debtor had not waived the issue, we would find that John

had standing to file the motion. It is undisputed that the Partnership holds

a judgment against Debtor and that John is a partner of the Partnership.

Debtor’s argument that the Partnership was administratively dissolved is

not relevant to the issue of standing because administrative dissolution

does not terminate a partnership or terminate the authority of any partner

to act on behalf of the partnership to wind up the affairs or complete

business begun prior to the dissolution. See Ind. Code §§ 23-4-1-30;

23-4-1-33.

      The bankruptcy court did not clearly err in finding bad faith and did

not abuse its discretion in converting the case.

                                      17
      2.    The Bankruptcy Court Did Not Abuse Its Discretion By
            Denying The Motion For Reconsideration

      Debtor appealed the order denying his motion for reconsideration,

but he has not provided any argument related to the order in his opening

brief. Accordingly, it has been waived. See Smith v. Marsh, 194 F.3d 1045,

1052 (9th Cir. 1999) ("[O]n appeal, arguments not raised by a party in its

opening brief are deemed waived."). If we were to review the matter, we

would find no abuse of discretion by the bankruptcy court in denying the

motion.

      A motion for reconsideration is treated as a motion to alter or amend

under Civil Rule 59(e), made applicable by Rule 9023, if it is filed within

fourteen days of the order. See Am. Ironworks & Erectors, Inc. v. N. Am.

Constr. Corp., 248 F.3d 898-99 (9th Cir. 2001). A Rule 9023 motion should

not be granted, “absent highly unusual circumstances, unless the

[bankruptcy] court is presented with newly discovered evidence,

committed clear error, or if there is an intervening change in the controlling

law.” 389 Orange St. Partners v. Arnold, 179 F.3d 656, 665 (9th Cir. 1999).

      Debtor did not provide any grounds to support relief under Rule

9023. He merely reiterated arguments made in his opposition and

suggested that his plan would provide a better outcome for creditors than

conversion. Debtor waived the issue of whether the bankruptcy court erred

in denying the motion for reconsideration, but, in any event, we see no

                                       18
abuse of discretion in the court’s ruling.

                               CONCLUSION

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

orders converting the case to chapter 7 and denying Debtor’s motion for

reconsideration.

                                      19