Court Opinion

ID: 3210204
Source: CourtListenerOpinion
Date Created: 2016-06-07 23:01:05.492742+00
Date Added: 2024-06-11T14:45:51.365052
License: Public Domain

FILED
                                                                 JUN 07 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 1                          NOT FOR PUBLICATION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                              FOR THE NINTH CIRCUIT
 5   In re:                            )       BAP No. CC-15-1426-LKiTa
                                       )
 6   MARLOW CURTIS LAFOUNTAINE,        )       Bk. No. 6:14-bk-22000-SY
                                       )
 7                    Debtor.          )
                                       )
 8                                     )
     MARLOW CURTIS LAFOUNTAINE,        )
 9                                     )
                      Appellant,       )
10                                     )
     v.                                )       MEMORANDUM*
11                                     )
     HOWARD B. GROBSTEIN,              )
12   Chapter 7 Trustee,                )
                                       )
13                    Appellee.        )
                                       )
14
                      Argued and Submitted On May 19, 2016
15                           at Pasadena, California
16                              Filed - June 7, 2016
17              Appeal from the United States Bankruptcy Court
                    for the Central District of California
18
              Honorable Scott H. Yun, Bankruptcy Judge, Presiding
19
20   Appearances:     Krystina T. Tran of Law Offices of Tran &
                      Iserhien, PC argued for Appellant Marlow Curtis
21                    LaFountaine; Michael R. Adele argued for Appellee
                      Howard B. Grobstein, Chapter 7 Trustee.
22
23
24
25
26        *
            This disposition is not appropriate for publication.
     Although it may be cited for whatever persuasive value it may
27
     have (see Fed. R. App. P. 32.1), it has no precedential value.
28   See 9th Cir. BAP Rule 8024-1.

                                           1
 1   Before: LANDIS,1 KIRSCHER, and TAYLOR Bankruptcy Judges.
 2                             INTRODUCTION2
 3        This appeal arises from debtor/appellant Marlow Curtis
 4   LaFountaine’s unsuccessful attempts to convert his chapter 7
 5   bankruptcy case to a chapter 11 proceeding.    The bankruptcy court
 6   denied the Debtor’s conversion motion.    We AFFIRM.
 7                          STATEMENT OF FACTS
 8        On September 25, 2014, Debtor/Appellant Marlow Curtis
 9   LaFountaine (“Debtor”) filed a voluntary petition under
10   chapter 13 of the Bankruptcy Code for the purpose of protecting
11   his family home, located in Banning, California (the
12   “Property”).3   Thirty-nine (39) days later, on November 3, 2014,
13   Debtor consented to conversion of his case to chapter 7.
14        Ninety-one days after agreeing to convert from chapter 13 to
15   chapter 7, Debtor cited changed circumstances and sought
16   conversion once again, this time to chapter 11.    After a hearing
17   on Debtor’s motion to convert to chapter 11, the bankruptcy court
18   entered an order denying Debtor’s motion.    Denial was due to a
19
          1
            Hon. August B. Landis, Bankruptcy Judge for the District
20   of Nevada, sitting by designation.
21        2
            Unless specified otherwise, all chapter and section
22   references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.
     All Rule references are to the Federal Rules of Bankruptcy
23   Procedure, Rules 1001-9037. All Local Rule references are to the
     Local Rules of the United States Bankruptcy Court for the Central
24   District of California.
25        3
            This case commenced with the filing of Debtor’s second
26   chapter 13 bankruptcy petition in the Central District of
     California. Debtor’s first chapter 13 case was filed in 2011,
27   and was dismissed on July 29, 2014, for failure to make plan
     payments. Neither Debtor nor the Trustee has provided the case
28   number of Debtor’s first chapter 13 bankruptcy.
                                     2
 1   lack of supporting evidence regarding Debtor’s changed financial
 2   circumstances, in particular, the bankruptcy court noted that
 3   Debtor had not even filed an amended Schedule I or J to support
 4   his allegations.
 5        Eight months later, Debtor filed another motion to convert
 6   his chapter 7 case to a chapter 11 proceeding (the “Motion”).
 7   The Motion again cited changed financial circumstances as the
 8   predicate for conversion to chapter 11.   That same day, Debtor
 9   filed Amended Schedules I and J.
10        The Trustee filed a timely Opposition to Debtor’s Motion,
11   asserting that Debtor provided absolutely no evidence in support
12   of the Motion.    The Trustee specifically argued that neither the
13   Motion nor Debtor’s Amended Schedules provided any explanation of
14   how Debtor would be able to cure the current deficiency on the
15   loan payments regarding the Property or to make the monthly
16   payments on the Property during the term of the proposed plan of
17   reorganization.
18        The day before the hearing on the Motion, Debtor belatedly
19   filed a Reply Brief to the Trustee’s Opposition (the “Reply”).
20   Attached to the Reply was Debtor’s Declaration, a letter
21   regarding Debtor’s employment, a lease agreement regarding the
22   Property, and an appraisal of the Property.4
23        At the commencement of the December 3, 2015 hearing on the
24   Motion, the bankruptcy court noted that Debtor had filed his
25   Reply late, that the court had therefore not read the Reply, and
26
          4
27          Counsel for the Trustee argued at the December 3 hearing
     on the Motion that the copy of the Reply served upon their office
28   did not include all of the exhibits referenced in the Reply.
                                     3
 1   that the court was going to disregard the Reply and the attached
 2   declaration and exhibits in rendering its decision on the
 3   Motion.5
 4        The bankruptcy court referenced Debtor’s earlier motion to
 5   convert to chapter 11, which it denied for lack of evidence of
 6   changed circumstances.6   During the course of the hearing, the
 7   court engaged Debtor’s counsel in a dialog regarding Debtor’s
 8   bankruptcy history, including his prior and unsuccessful
 9   chapter 13 bankruptcy case, Debtor’s choice to convert his second
10   chapter 13 case to chapter 7, Debtor’s failure to support his
11   previous motion to convert to chapter 11 with any evidence of
12   changed circumstances, Debtor’s delay in filing the pending and
13   second Motion to convert to chapter 11, as well as the secured
14   creditor’s desire to move forward with a negotiated sale on the
15   Property.
16        At the end of the hearing, the court sua sponte struck the
17   Debtor’s late-filed Reply.    The court denied Debtor's motion to
18   convert his case from chapter 7 to chapter 11; Debtor timely
19   appealed.
20                                JURISDICTION
21        The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
22   §§ 1334 and 157(b)(2)(A).    We have jurisdiction under 28 U.S.C.
23   § 158.
24
          5
25          Pursuant to Local Rule 9013-1(g)(3): “Unless the court
     finds good cause, a reply document not filed or served [at least
26   7 days prior to the hearing] . . . will not be considered.”
          6
27          During the earlier hearing, the court specifically looked
     for and noted the lack of an amended Schedule I and Schedule J to
28   support Debtor’s purported changed financial circumstances.
                                     4
 1                                  ISSUE
 2        Did the bankruptcy court commit reversible error when it
 3   denied the Debtor’s Motion to convert this case from chapter 7 to
 4   chapter 11?
 5                           STANDARDS OF REVIEW
 6        We review a bankruptcy court’s order denying conversion to
 7   chapter 11 under Section 706(b) for abuse of discretion.
 8   In re Parvin, 2016 W.L. 1584068, *1 (W.D. Wash. 2016).   A
 9   bankruptcy court abuses its discretion if it applies the wrong
10   legal standard, misapplies the correct legal standard, or if its
11   factual findings are illogical, implausible, or without support
12   in inferences that may be drawn from the facts in the record.
13   See TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 832
14   (9th Cir. 2011) (citing United States v. Hinkson, 585 F.3d 1247,
15   1262 (9th Cir. 2009) (en banc)); Willis v. Rice (In re Willis),
16   345 B.R. 647, 654 (8th Cir. BAP 2006) (quoting H.R.Rep. No. 595,
17   95th Cong., 1st Sess. at 380 (1977), as reprinted in
18   1978 U.S.C.C.A.N. 5963; S.Rep. No. 989, 95th Cong.2d Sess. at 94
19   (1978), as reprinted in 1978 U.S.C.C.A.N. 5787).
20                               DISCUSSION
21        Debtor raises a single argument in assigning error to the
22   bankruptcy court’s denial of his Motion.   Specifically, Debtor
23   argues that the Motion should have been granted because he was
24   acting in good faith when it was filed.    That argument lacks
25   merit.   The bankruptcy court should be affirmed.
26
27
28
                                      5
 1   A.   Conversion pursuant to Section 706(b) is within the
          discretion of the bankruptcy court, based upon what will
 2        inure to the benefit of all interested parties, including
          the Debtor.
 3
 4        A motion to convert a chapter 7 case to a case under
 5   chapter 11 is governed by Section 706 of the Code.    Under
 6   Section 706(a), a debtor may voluntarily convert a chapter 7 case
 7   to one under chapter 11 if the case has not previously been
 8   converted under Section 1307.   Debtor originally filed this case
 9   under chapter 13 and then consented to having his case converted
10   to chapter 7.   Since Debtor could not convert his case to
11   chapter 11 under Section 706(a), Debtor necessarily looked to
12   Section 706(b) in seeking conversion to chapter 11.
13        Section 706(b) provides that “[o]n request of a party in
14   interest and after notice and a hearing, the court may convert a
15   case under this chapter to a case under chapter 11 of this title
16   at any time.”   Under Section 706(b) then, any party in interest,
17   including a debtor, may request conversion of the case to
18   chapter 11 at any time.
19        “The decision whether to convert [a case under
20   Section 706(b)] is left in the sound discretion of the court,
21   based on what will most inure to the benefit of all parties in
22   interest.”   H.R.Rep. No. 595, 95th Cong., 1st Sess. at 380
23   (1977), as reprinted in 1978 U.S.C.C.A.N. 5963; S.Rep. No. 989,
24   95th Cong.2d Sess. at 94 (1978), as reprinted in
25   1978 U.S.C.C.A.N. 5787.   In the course of the hearing on the
26   Motion, the bankruptcy court determined that conversion of the
27   Debtor’s case to chapter 11 would not benefit all parties in
28   interest.
                                      6
 1        Section 706(b) does not provide guidance regarding the
 2   factors a court should consider in resolving a conversion motion.
 3   Schlehuber v. Fremont Nat'l Bank & Trust Co. (In re Schlehuber),
 4   489 B.R. 570, 573 (8th Cir. BAP 2013), aff'd, 558 Fed. App’x 715
 5   (8th Cir. 2014) (footnote omitted).   “Since there are no specific
 6   grounds for conversion, a court ‘should consider anything
 7   relevant that would further the goals of the Bankruptcy Code.’”
 8   Proudfoot Consulting Co. v. Gordon (In re Gordon), 465 B.R. 683,
 9   692 (Bankr. N.D. Ga. 2012) (quoting In re Lobera, 454 B.R. 824,
10   854 (Bankr. D. N.M. 2011)).
11        While Section 706(b) does not mandate a balancing of
12   parties’ interests as a predicate to conversion of a chapter 7
13   case to chapter 11, courts consistently consider several factors,
14   including a debtor’s ability to fund a chapter 11 plan, in
15   exercising their discretion under Section 706(b).   See
16   In re Parvin, 538 B.R. 96, 102 (Bankr. W.D. Wash. 2015), aff’d,
17   --- B.R. ---, 2016 W.L. 1584068 (W.D. Wash. March 22, 2016);
18   In re Decker, 535 B.R. at 838 (citing In re Baker, 503 B.R. 751,
19   755 (Bankr. M.D. Fla. 2013)); In re Gordon, 465 B.R. at 692;
20   In re Graham, 21 B.R. 235, 238 (Bankr. N.D. Iowa 1982).
21        A debtor's ability to pay typically is a starting point
          in the [§ 706(b)] analysis, however, since the whole
22        reason for asking [for] a case to be converted is the
          assumption that creditors would receive more in a
23        chapter 11 than in a chapter 7.
24   In re Parvin, 538 B.R. at 102 (quoting In re Peterson, 524 B.R.
25   at 815); see also In re Karlinger-Smith, 544 B.R. 126, 134
26   (Bankr. W.D. Tex. 2016) (quoting In re Decker, 535 B.R. 828, 839
27   (Bankr. D. Alaska 2015) (“[T]he U.S. Trustee’s focus on the
28   Debtors' ability to pay makes sense as ‘an exceedingly relevant,
                                     7
 1   if not necessary, factor and the obvious starting point for any
 2   analysis under section 706(b).’”)); In re Gordon, 465 B.R. at
 3   692–93 (“The cases considering conversion to Chapter 11 begin the
 4   analysis with the acknowledgment that the debtor can pay more in
 5   a Chapter 11 case than in a Chapter 7 case, which is a benefit to
 6   creditors.”); In re Schlehuber, 489 B.R. at 574 (“The Debtor's
 7   ability to fund a Chapter 11 plan if he chooses to do so was
 8   certainly an important and relevant consideration.”).
 9   B.   Debtor failed to carry his burden of proving that conversion
          would inure to the benefit of all parties.
10
11        The burden is on the moving party to establish that the case
12   should be converted under Section 706(b).    In re Parvin, 538 B.R.
13   at 101.    Debtor made no such showing in support of the Motion.
14        Debtor based his Motion to convert from chapter 7 to
15   chapter 11 upon an assertion that his financial circumstances had
16   changed.    Debtor did file amendments to Schedule I, Debtor’s
17   Income, and Schedule J, Debtor’s Expenses.    These amended
18   schedules were presumably filed to document changes in his
19   financial circumstances.    In addition to his amendments to
20   Schedules I and J, Debtor belatedly filed a Reply with an
21   attached Declaration, an employment letter, lease agreement on
22   the Property, and an appraisal of the Property as additional
23   evidence of his changed financial circumstances.    Because the
24   Reply and related attachments were not timely filed, they were
25   disregarded by the bankruptcy court in its consideration of
26   Debtor’s claim of changed circumstances in accordance with Local
27   Rule 9013-1(g)(3).    Ultimately, the Reply and attachments were
28   stricken from the record by the bankruptcy court.
                                       8
 1        Although the bankruptcy court chose to disregard the Reply,
 2   together with its attachments and exhibits, Debtor’s Amended
 3   Schedules I and J were filed well before the hearing and are part
 4   of the bankruptcy court’s docket.   They were not stricken and
 5   could, depending upon their contents, independently support
 6   Debtor’s claim of changed financial circumstances.
 7        On close examination, however, Debtor’s Amended Schedules I
 8   and J undermine Debtor’s claim that he can successfully
 9   reorganize in a chapter 11.7   Amended Schedule I reflects monthly
10   rental income of $3,605.92 on line 8a.   When combined with $5,000
11   Independent Contractor Income reflected on line 8h, Debtor’s
12   Amended Schedule I reflects monthly income of $8,605.92.
13        Debtor’s Amended Schedule J shows monthly expenses of
14   $6,017.00, yielding monthly net income of only $2,588.92.
15   Debtor’s Amended Schedule I fails to address how Debtor would
16   cure the existing arrearage of over $318,000 on the mortgage
17   encumbering the Property if his case were converted to
18   chapter 11.   Even if Debtor applied the entirety of his monthly
19   net income to paying the arrearage, simultaneously paying no
20   other creditors, it would take Debtor roughly eleven years to
21   cure the arrearage.   Further clouding the arrearage repayment
22   issue, the current lease on the Property is for only three years,
23   not eleven, leaving a significant plan funding gap.   Ultimately,
24   Amended Schedules I and J provide little independent support for
25
26
          7
            Debtor failed to include his original Schedules I and J in
27   the appellate record, so there is no baseline for comparison to
     determine whether and to what extent Debtor’s financial
28   circumstances had changed.
                                     9
 1   Debtor’s claim of changed financial circumstances, and they
 2   undercut his claim that he is able to reorganize under
 3   chapter 11.
 4        More importantly, Debtor’s purported actions in renting out
 5   the Property after the case was converted to chapter 7 create a
 6   potentially significant problem for both the estate and the
 7   Chapter 7 Trustee.   As the bankruptcy court noted, Debtor is not
 8   the real party in interest in his chapter 7 bankruptcy8 and had
 9   no legal authority or right to lease estate property
10   postpetition.   Accordingly, the purported lease of the Property
11   cannot support Debtor’s claim of changed financial circumstances.
12   C.   The bankruptcy court properly applied a multi-factor test in
          evaluating Debtor’s Motion.
13
14        Debtor firmly believes that:
15        [t]here is a realistic possibility of an effective
          reorganization, because Debtor has sufficient income
16        and resources to obtain confirmation of a plan.
17
18        8
            When Debtor declared bankruptcy, all the "legal or
19   equitable interests" he had in the Property became the property
     of the bankruptcy estate. See 11 U.S.C. § 541(a); Suncrest
20   Healthcare Center LLC v. Omedga Healthcare Investors
     (In re Raintree Healthcare Corp.), 431 F.3d 685, 688 (9th Cir.
21   2005). When Debtor's case converted to chapter 7, Debtor
22   relinquished possession of the estate to the trustee for
     liquidation and distribution to his creditors. See 11 U.S.C.
23   § 704. To effectuate this purpose, the trustee's management of
     the estate — including renting or selling outright the Debtor's
24   real property — must necessarily be free from interference by the
     Debtor. Thus, the chapter 7 trustee, not the Debtor, became the
25
     real party in interest with authority to control the Debtor's
26   estate property upon conversion of the case. Therefore, Debtor
     had no standing or authority to rent the property to anyone.
27   Accordingly, the lease signed by Debtor is voidable, since he had
     no right or authority to affect the future use of the Property
28   following conversion.
                                     10
 1   Consistent with this premise, Debtor’s counsel argued before the
 2   bankruptcy court that Debtor could provide proof that, upon
 3   conversion to chapter 11, he could propose and confirm a 100%
 4   plan.    The evidentiary record before the bankruptcy court at the
 5   conversion hearing failed to support that contention.
 6        On appeal, Debtor also argues that:
 7        [t]he issue of good faith was the deciding factor that
          the bankruptcy judge considered most in making his
 8        decision on the Motion to Convert filed on October 22,
          2015.
 9
10   (Emphasis added).    Debtor is incorrect.
11        A careful search of the hearing transcript establishes that
12   the bankruptcy court never used the phrase “good faith” nor the
13   phrase “bad faith” during the course of the hearing on Debtor’s
14   Motion.    The bankruptcy court did, however, engage in a fairly
15   substantial discussion with Debtor’s counsel regarding Debtor’s
16   history in bankruptcy, including Debtor’s prior unsuccessful
17   chapter 13 bankruptcy case, Debtor’s failure to support his first
18   motion to convert to chapter 11 with any evidence, Debtor’s delay
19   in filing the second Motion to convert, and the secured
20   creditor’s desire to move forward with a negotiated sale on the
21   Property.9
22        The record evidences that the bankruptcy court based its
23   decision upon consideration of three factors, none of which
24   involved a determination of bad faith.      These factors were:
25
          9
26          The Trustee negotiated with the secured creditor to obtain
     a carve-out that would pay both the Trustee’s professionals as
27   well as general unsecured creditors from a sale of the Property,
     even though the creditor will receive far less than the full
28   amount of its debt.
                                     11
 1        whether the debtor can propose and confirm a plan; the
          primary purpose of converting the case to a different
 2        chapter; and whether the conversion benefits all
          parties in the case.10
 3
 4        The bankruptcy court specifically found that Debtor was not
 5   likely to be able to propose and confirm a chapter 11 plan.
 6   Debtor failed to present any evidence, other than Amended
 7   Schedules I and J, to establish that his financial circumstances
 8   had changed.   As noted previously, those Amended Schedules do not
 9   substantiate Debtor’s changed circumstances claim, and, absent
10   evidence of changed circumstances, Debtor was not capable of
11   confirming a chapter 11 plan.
12        The bankruptcy court also found that while Debtor’s stated
13   purpose for converting to a chapter 11 was to save his house, a
14   chapter 11 plan simply was not feasible.   The bankruptcy court
15   noted that:
16             I just don’t believe this debtor has shown the
          ability to propose and confirm a plan. I’m very
17        skeptical that the debtor will be able to keep this
          house, even if I allow the debtor to propose a plan in
18        Chapter 11. I mean, this is a big loan. Whether the
          property is worth one point -- a million dollars or
19        1.3, I think the amount owed is 1.3 million. That’s a
          big loan for a home in the Inland Empire in Riverside
20        Division. Maybe the debtor really likes the home but,
          you know what, sometimes house is just a thing. Don’t
21        let the things that you own, own you. At this point,
          Mr. LaFountaine doesn’t own this home; that home owns
22        him.
               He clearly cannot afford this house. If he hasn’t
23        paid a mortgage payment in two years, come on. How is
24
          10
            Consistent with the bankruptcy court’s ruling, courts
25
     have held that “[a]mong the factors considered are whether the
26   debtor can propose a confirmable plan, whether the primary
     purpose of the chapter 11 is to liquidate or reorganize, and
27   whether conversion benefits all parties in the case.”
     In re Peterson, 524 B.R. 808, 815 (Bankr. S.D. Ind. 2015) (citing
28   In re Gordon, 465 B.R. at 691–92); In re Parvin, 538 B.R. at 101.
                                     12
 1        he going to -- to try to propose and confirm this
          Chapter 11 plan? And it’s very clear U.S. Bank would
 2        rather get paid less with the Trustee now through a
          short sale than count on the debtor over time to cure
 3        that arrearage.
 4        Finally, the bankruptcy court found that Debtor failed to
 5   present evidence establishing that an effort to keep his house
 6   and reorganize his debts would inure to the benefit of any
 7   parties in interest other than the Debtor and his family.    The
 8   bankruptcy court found that secured creditor U.S. Bank, in
 9   particular, and the Debtor’s unsecured creditors, in general, had
10   been waiting four years to be paid by the Debtor and should not
11   have to wait an additional five years to get their money,
12   assuming that Debtor made his plan payments.
13        Put simply, Debtor failed to establish that he had the
14   ability to propose and confirm a chapter 11 plan that would inure
15   to the benefit of all parties in interest.   Thus, Debtor failed
16   to carry his burden of proving that his case should be converted
17   to chapter 11 under Section 706(b).   The bankruptcy court did not
18   abuse its discretion, or otherwise commit reversible error, in
19   denying Debtor’s Motion.
20                              CONCLUSION
21        For all of the reasons set forth above, the bankruptcy
22   court’s order denying Debtor’s Motion to convert this case to
23   chapter 11 under Section 706(b) is AFFIRMED.
24
25
26
27
28
                                    13