Court Opinion

ID: 4192704
Source: CourtListenerOpinion
Date Created: 2017-08-03 17:02:17.610684+00
Date Added: 2024-06-11T14:40:20.440297
License: Public Domain

FILED
                                                               AUG 03 2016
 1                         NOT FOR PUBLICATION
 2                                                         SUSAN M. SPRAUL, CLERK
                                                             U.S. BKCY. APP. PANEL
                                                             OF THE NINTH CIRCUIT
 3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                            OF THE NINTH CIRCUIT
 5   In re:                        )      BAP No. CC-15-1422-DKuF
                                   )
 6   PROMETHEUS HEALTH IMAGING,    )      Bk. No. 14-10250-SC
     INC.,                         )
 7                                 )
                    Debtor.        )
 8   ______________________________)
                                   )
 9   PROMETHEUS HEALTH IMAGING,    )
     INC.,                         )
10                                 )
                    Appellant,     )
11                                 )
     v.                            )      AMENDED MEMORANDUM1
12                                 )
     UNITED STATES TRUSTEE,        )
13                                 )
                    Appellee.      )
14   ______________________________)
15                   Argued and Submitted on July 28, 2016
                            at Pasadena, California
16
                       Originally Filed - August 2, 2016
17
               Appeal from the United States Bankruptcy Court
18                 for the Central District of California
19       Honorable Scott C. Clarkson, Bankruptcy Judge, Presiding
20
     Appearances:     Matthew D. Rifat argued for appellant.
21
22   Before:   DUNN, KURTZ, and FARIS, Bankruptcy Judges.
23
24
25
26        1
               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        For the second time, Appellant Prometheus Health Imaging,
 2   Inc. (“Prometheus”) appeals from a bankruptcy court order
 3   dismissing its chapter 112 bankruptcy petition for bad faith.       In
 4   the first appeal, the Panel vacated and remanded to the
 5   bankruptcy court because the record lacked evidentiary support
 6   for the factual findings on which the bankruptcy court’s bad
 7   faith determination was based.   (See Prometheus Health Imaging,
 8   Inc. v. U.S. Trustee (In re Prometheus Health Imaging, Inc.),
 9   BAP No. CC-14-1576-FKiKu, 2015 WL 6719804 (9th Cir. BAP
10   November 2, 2015) (“Prometheus I”).     On remand, the bankruptcy
11   court conducted further proceedings, made detailed findings, and
12   again dismissed based on a determination that the bankruptcy
13   petition had been filed in bad faith.3
14        We AFFIRM.
15                             I.   BACKGROUND
16        In 2002, Prometheus ordered from General Electric Medical
17   Systems Europe (“GEM”) an imaging machine for delivery in Saudi
18   Arabia.   A dispute arose regarding whether GEM fulfilled the
19   contract with an adequate machine.     Ultimately, GEM obtained a
20   judgment in the principal amount of $951,000 against Prometheus
21   in the federal district court in Ohio.      Thereafter, in 2010,
22   Prometheus commenced litigation against GEM in Paris, France,
23   where the court (“Paris Trial Court”) ruled against Prometheus.
24
          2
25             Unless specified otherwise, all chapter and section
     references are to the Bankruptcy Code, 11 U.S.C. §§ 101–1532, and
26   all “Rule” references are to the Federal Rules of Bankruptcy
27   Procedure, Rules 1001–9037.
          3
28              On remand the case was reassigned to Judge Clarkson.

                                      -2-
 1   In 2012, Prometheus filed an appeal from the Paris Trial Court
 2   decision.   Prometheus contends that the French Appellate Court is
 3   not bound by the rulings of the Paris Trial Court.   However,
 4   Prometheus had no assets from which to post the bond required to
 5   proceed in the French Appellate Court, so Prometheus filed its
 6   chapter 11 petition on January 14, 2014.   At that time,
 7   Prometheus was not operating a business.
 8        On September 19, 2014, the bankruptcy court entered an order
 9   to show cause (“Show Cause Order”), which required Prometheus’
10   counsel to appear and which gave notice that the bankruptcy court
11   would be determining whether Prometheus’ bankruptcy case “should
12   be dismissed as a bad faith filing . . . .”   In response,
13   Prometheus’ counsel filed a declaration that stated, inter alia:
14        8. The Debtor’s bankruptcy case should not be
          dismissed as a bad faith filing. As I previously
15        advised the Court, this case is the most unusual
          chapter 11 case I have ever handled. The Debtor ceased
16        business operations in 2004, and the Debtor’s primary
          asset is the Appeal of litigation pending in Paris. As
17        previously disclosed to the court, Frederic Jeannin,
          counsel for the Debtor for the Paris Appeal, advised me
18        that the Debtor had to file bankruptcy in order to
          proceed with the Appeal. As I advised the Court at one
19        of the initial status conferences, this was not a bad
          faith filing, a la Marsch v. Marsch (In re Marsch),
20        36 F.3d 825 (9th Cir. 1994), where the Ninth Circuit
          affirmed the ruling of the bankruptcy court that it was
21        bad faith for debtors to file a chapter 11 petition to
          obtain a stay of a pending appeal when the debtor had
22        the necessary funds to bond the appeal. Here, the
          Debtor has no funds, and the Appeal cannot proceed
23        unless the bankruptcy case remains active.
24   Prometheus’ sole officer and director, Wendee Luke, also provided
25   a declaration, which provided in relevant part:
26        6. The Debtor needed to file a chapter 11 case to
          proceed with the litigation in Paris against GEM. I
27        believed it was appropriate for the Debtor to file its
          chapter 11 case in Orange County because (I) the
28        Debtor’s principal place of business is in Orange

                                     -3-
 1         County; (ii) the Debtor’s sole officer and director
           lives in Orange County; and (iii) the Debtor’s agent
 2         for service of process lives in Orange County.
 3   After the show cause hearing was held, the bankruptcy court
 4   entered its dismissal order and Prometheus filed its first
 5   appeal, Prometheus I.    The Prometheus I Panel vacated the
 6   dismissal order and remanded to the bankruptcy court to, inter
 7   alia, make appropriate findings of fact.
 8         On remand, the bankruptcy court promptly entered an order
 9   (“Order on Remand”) requiring Prometheus to bring its Monthly
10   Rule 2015 Reports current, to pay all outstanding United States
11   Trustee fees, to seek employment of its bankruptcy counsel, and
12   to provide a status report (“Status Report”) regarding all
13   activities Prometheus had engaged in during the pendency of the
14   Prometheus I appeal.    The Order on Remand also mandated the
15   appearance both of Prometheus’ counsel and of Ms. Luke, as
16   Prometheus’ representative, at the hearing (“Hearing on Remand”)
17   scheduled for November 17, 2015.
18         At the Hearing on Remand, the bankruptcy court noted that
19   Prometheus appeared to have substantially complied with the Order
20   on Remand.   The bankruptcy court engaged in an extended colloquy
21   with Prometheus’ counsel at the Hearing on Remand.    Among the
22   primary issues explored were the following:
23   -   Although Prometheus, through counsel and Ms. Luke, had
24   repeatedly represented to the bankruptcy court that the
25   bankruptcy case had been filed because it was the only way the
26   litigation in the French Appellate Court could proceed in the
27   absence of a bond, in fact a certificate of insolvency from a
28   certified public accountant would have served the same purpose.

                                      -4-
 1   -   Despite the fact that the bankruptcy case had been used as the
 2   substitute for a bond for the French Appellate Court proceedings,
 3   after the first dismissal order was entered Prometheus neither
 4   obtained a stay pending appeal of the dismissal order nor
 5   informed the French Appellate Court that its substitute for the
 6   bond no longer was in existence.      As a consequence, the French
 7   Appellate Court held the trial de novo in May 2015, and
 8   Prometheus was awaiting news of the disposition of that
 9   litigation.
10   -   Prometheus had not been an operating business since 2004.     It
11   had no funds with which to make the payments to the U.S. Trustee
12   under the Remand Order.   Ms. Luke provided the funds to make the
13   payments on behalf of Prometheus.
14         At the conclusion of the Hearing on Remand, the bankruptcy
15   court made the following ruling on the record:
16         Okay. I’m dismissing this case. This case is
           dismissed. It is a bad faith filing. The reason it’s
17         a bad faith filing is because, one, the original
           description by your French counsel was that the only
18         reason this case should go forward is that they needed
           to avoid an appeal bond, but now we know that that’s
19         not the only reason. They could have simply filed a
           certificate of insolvency, and I have to tell you that
20         a company that hasn’t generated money in 10 years and
           doesn’t have any assets except for . . . $125 doesn’t
21         need to be in Chapter 11.
22         Now -- and that certificate would have been efficient.
           The other thing is this. The bad faith that’s been
23         demonstrated by having this case dismissed on
           November 26, 2014, not . . . obtaining a stay pending
24         appeal, and then going to French court and not getting
           a certificate of insolvency and not revealing prior to
25         that hearing -- and I -- and I’m only assuming that
           that didn’t happen because I have to assume and I’m
26         going to assume that they would have required you to
           get an appeal bond because you no longer had the
27         benefit of the bankruptcy.
28         So there’s bad faith toward the French court.     As an

                                     -5-
 1        honor to courts both in America and to other courts in
          democratic societies and a nation such as France, which
 2        has been the friend of America prior to the Revolution,
          I’m going to honor the -- the point that they should
 3        have been informed that prior to the trial de novo, the
          bankruptcy was not in place, a stay was not in place,
 4        and that no certificate of insolvency was in place.
 5        I think that is very much bad faith and an abuse of the
          bankruptcy system, and now we have a Debtor that has no
 6        assets, lots of liabilities, has lost I believe in Ohio
          on this matter with GE, has lost a court fight in
 7        France and now has asked for a trial de novo in France
          and has had the hearing, and there’s nobody attacking
 8        you, by the way. There’s no one out there seeking
          writs of execution or writs of possession against
 9        Prometheus Health Imaging, and I know this because I’ve
          reviewed the statement of financial affairs, and I look
10        at the statement of financial affairs where it states
          that there are no pending actions that are occurring
11        with respect to collection of debt.
12        So with all of that -- and I guess I could go on, but I
          guess the final nail in the coffin is the Debtor
13        doesn’t even have enough money to pay for the U.S.
          Trustee quarterly fees. I’m dismissing the case.
14
          So I would like you to -- no, I’ll do it. The chambers
15        will provide an order dismissing this case as a bad
          faith for the reasons -- based upon the reasons that
16        are stated on the record, and you can take that back up
          to the Bankruptcy Appellate Panel.
17
18   Hr'g Tr. (Nov. 17, 2015) 25:11-27:11.
19        After the Hearing on Remand, the bankruptcy court entered
20   its “Order Dismissing Chapter 11 Case on Remand From Ninth
21   Circuit B.A.P.” (“Second Dismissal Order”).   The Second Dismissal
22   Order contained the bankruptcy court’s written findings of fact
23   and conclusions of law.   The written findings provide a
24   significant additional basis upon which the bankruptcy court
25   ordered dismissal of Prometheus’ case:
26        When asked by the Court what the estate’s stake or
          interest in the French appeal consisted of, Mr. Broidy
27        advised that the Debtor may have counterclaims against
          GEM. If the Debtor prevailed in its appeal, assumed
28        Mr. Broidy, funds may come into the estate sufficient

                                     -6-
 1        to pay Debtor’s creditors. However, in light of the
          prior Chapter 7, it is unclear whether the Debtor’s
 2        alleged claims against GEM are even property of this
          Chapter 11 estate. The Debtor had filed Chapter 7 on
 3        November 4, 2004 (2:04-bk-33283-VZ), but did not
          disclose the presence of claims against GEM. The
 4        Debtor’s principal states that the Debtor’s claim
          against GEM arose in 2002, when GEM delivered a “slower
 5        machine that was not suitable for the Debtor’s
          needs. . . .” Declaration of Wendee Luke [Dk. 40 at
 6        ¶ 3]. If the Debtor’s claims against GEM arose at any
          time prior to November 4, 2004, the date of the
 7        Chapter 7 filing, those unscheduled claims would remain
          unadministered property of the Chapter 7 estate. See
 8        11 U.S.C. § 541 (property of the estate); 11 U.S.C.
          § 544(d) (property not abandoned or administered
 9        remains property of the estate); Lopez v. Specialty
          Rests. Corp. (In re Lopez), 283 B.R. 22, 28 (9th Cir.
10        BAP 2002) (An unscheduled claim “that is neither
          abandoned nor administered remains property of the
11        estate even after the case is closed.”). To the extent
          Debtor’s claims against GEM are unadministered assets
12        of the former Chapter 7 estate, the Debtor lacks
          standing to prosecute them. 11 U.S.C. § 323 (trustee
13        is the representative of the estate with capacity to
          sue and be sued); In re Edwards, 2011 WL 4485560, at *3
14        n.2 (9th Cir. BAP Aug. 26, 2011) (unpublished)
          (citations omitted).
15
16   Second Dismissal Order at 5:16-6:8.
17        The bankruptcy court made the following written conclusions
18   to support entry of the Second Dismissal Order dismissing the
19   bankruptcy case for cause pursuant to § 1112(b):
20        In light of these findings, the Court concludes that
          this Chapter 11 case was filed in bad faith. The
21        Debtor is not an operating business, and is not
          generating any income, but it is continuing to accrue
22        expenses. The only purported assets of the estate are
          claims which appear to have arisen prior to the
23        Debtor’s previous Chapter 7 case and may not even be
          property of this bankruptcy estate. The Debtor has
24        shown no evidence of abandonment of the claims by the
          Chapter 7 trustee to this estate. The Debtor has not
25        provided any evidence of a reasonable likelihood of
          reorganization. The Debtor admits that the purpose of
26        the bankruptcy was to avoid paying an appeal bond.
          Indeed, Mr. Broidy admits that the Debtor had other
27        avenues available to it to prosecute the French appeal,
          including the filing of a certificate of insolvency.
28        Instead of doing so, the Debtor invoked the time and

                                    -7-
 1        resources of the bankruptcy court system for the
          purpose of obtaining the automatic stay to allow it to
 2        prosecute the French appeal. Neither the Debtor’s
          bankruptcy counsel nor the Debtor’s attorney in the
 3        French court system were employed by the estate. The
          Debtor’s counsel only filed an application for
 4        employment upon this Court’s order requiring him to do
          so. No such application has been filed for the French
 5        attorney. Finally, the Debtor was unable to explain
          satisfactorily whether it gave any notice directly to
 6        the French court or GEM about the dismissal of this
          case in November of 2014, which may involve a fraud on
 7        the French court.
 8   Second Dismissal Order at 7:23-8:15.
 9        The Second Dismissal Order was entered December 2, 2015.
10   Prometheus once again filed a timely notice of appeal.
11                               II.    JURISDICTION
12        The bankruptcy court had jurisdiction under 28 U.S.C.
13   §§ 1334 and 157(1).   We have jurisdiction under 28 U.S.C. § 158.
14                                     III.     ISSUE
15        Whether the bankruptcy court abused its discretion when it
16   dismissed Prometheus’ chapter 11 petition.
17                         IV.    STANDARDS OF REVIEW
18        “We review de novo whether the cause for dismissal of a
19   Chapter 11 case under [§ 1112(b)] is within the
20   contemplation of that section of the [Bankruptcy] Code.           We
21   review for abuse of discretion the bankruptcy court’s decision to
22   dismiss a case as a ‘bad faith’ filing.”           Marsch v. Marsch
23   (In re Marsch), 36 F.3d 825, 828 (9th Cir. 1994) (citing Stolrow
24   v. Stolrow’s, Inc. (In re Stolrow’s, Inc.), 84 B.R. 167, 170 (9th
25   Cir. BAP 1988)).
26        We apply a two-part test to determine whether the bankruptcy
27   court abused its discretion.        United States v. Hinkson, 585 F.3d
28   1247, 1261-62 (9th Cir. 2009) (en banc).           First, we consider

                                              -8-
 1   de novo whether the bankruptcy court applied the correct legal
 2   standard.   Id.   Then, we review the bankruptcy court’s factual
 3   findings for clear error.    Id. at 1262 & n.20; see Eisen v. Curry
 4   (In re Eisen), 14 F.3d 469, 470 (9th Cir. 1994) (the bankruptcy
 5   court’s finding of “bad faith” is reviewed for clear error).    A
 6   bankruptcy court abuses its discretion if it applied the wrong
 7   legal standard or its findings were illogical, implausible or
 8   without support in inferences that may be drawn from facts in the
 9   record.   TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820,
10   832 (9th Cir. 2011).
11        “We may affirm ‘on any ground supported by the record,
12   regardless of whether the [bankruptcy] court relied upon,
13   rejected, or even considered that ground.’”    Fresno Motors, LLC
14   v. Mercedes Benz USA, LLC, 771 F.3d 1119, 1125 (9th Cir. 2014);
15   see also ASARCO, LLC v. Union Pac. R.R. Co., 765 F.3d 999, 1004
16   (9th Cir. 2014); Shanks v. Dressel, 540 F.3d 1082, 1086 (9th Cir.
17   2008).
18                               V.   DISCUSSION
19        The Prometheus I Panel determined that the bankruptcy court
20   could dismiss a chapter 11 case for bad faith under § 1112(b).
21   Thus, the only issue to be decided on this appeal is whether the
22   bankruptcy court abused its discretion when it entered the Second
23   Dismissal Order dismissing Prometheus’ case on the basis that the
24   petition had been filed in bad faith.
25        It is undisputed on the record before us that (1) the reason
26   Prometheus filed its chapter 11 case was to obtain a bankruptcy
27   stay as a substitute to posting a bond in the litigation in the
28   French Appellate Court; (2) Prometheus’ claim (“Litigation

                                        -9-
 1   Claim”) against GEM arose in 2002; (3) Prometheus did not
 2   disclose the Litigation Claim as an asset in the chapter 7 case
 3   it filed in 2004.    The bankruptcy court correctly determined
 4   that, as a matter of law, the Litigation Claim remained an
 5   unadministered asset of Prometheus’ chapter 7 case when it was
 6   closed.   Prometheus has no standing to prosecute the Litigation
 7   Claim, and certainly no basis for filing a chapter 11 case
 8   ostensibly for the purpose of liquidating that claim and
 9   administering it for the benefit of creditors.
10        Remarkably, in its brief on appeal, Prometheus ignores
11   completely the bankruptcy court’s findings of fact and
12   conclusions of law relating to whether Prometheus has any
13   interest in the Litigation Claim which could be protected in a
14   chapter 11 case.    Prometheus makes no assertion that the
15   bankruptcy court’s fact findings in this context were clearly
16   erroneous.   Prometheus makes no assertion that the bankruptcy
17   court erred as a matter of law when it concluded that Prometheus
18   had no cognizable interest in the Litigation Claim to protect in
19   the chapter 11 case.    As a consequence, Prometheus has waived
20   these issues on appeal.    See Branam v. Crowder (In re Branam),
21   226 B.R. 45, 55 (9th Cir. BAP 1998), aff'd, 205 F.3d 1350 (9th
22   Cir. 1999) (an issue not adequately addressed by appellant in its
23   opening brief is deemed abandoned).
24        In our reading of the Second Dismissal Order, the
25   nondisclosure of the existence of the Litigation Claim in the
26   prior chapter 7 case constitutes the bankruptcy court’s primary
27   basis for finding the petition was filed in bad faith.
28        While this is sufficient in and of itself to support the

                                      -10-
 1   dismissal of Prometheus’ case, we share the bankruptcy court’s
 2   concerns that neither Prometheus’ bankruptcy counsel (until
 3   responding to the Order on Remand) nor its counsel in the French
 4   Appellate Court (ever) sought or obtained bankruptcy court
 5   approval for representation of Prometheus during the pendency of
 6   the chapter 11 case.
 7        Further, that Ms. Luke, who has no disclosed monetary
 8   relationship with Prometheus,4 provided the funds necessary for
 9   Prometheus to meet its obligation to pay quarterly U.S. Trustee
10   fees, is also troubling.    It is unlikely that Ms. Luke “gave” the
11   money to Prometheus.   To the contrary, in her declaration filed
12   with the Status Report Ms. Luke states:
13        Since January 14, 2014, the Debtor has received a total
          of $775, all as set forth in the Debtor’s Monthly
14        Operating Reports. The source of those funds is money
          that I caused to be advanced to the Debtor. In
15        addition, I advanced $1,625 for payment of the fees due
          and owing to the Office of the United States Trustee
16        for the third quarter of 2014 through and including the
          third quarter of 2015.
17
18   To “advance” is “to supply or furnish in expectation of
19   repayment.”   Merriam-Webster Collegiate Dictionary 18 (11th ed.
20   2005) (emphasis added).    Because these funds were advanced to
21   Prometheus other than in the ordinary course of its business,
22
23        4
               The monthly operating reports do not reflect that
     Prometheus pays Ms. Luke for the services she renders on its
24
     behalf, and the amended disclosure statement explicitly stated
25   that “Wendee Luke shall manage the Debtor post-confirmation for
     no compensation.” Clearly, adequate disclosure of Prometheus’
26   relationship with its insider, Ms. Luke, has not been made.
27             In addition, Prometheus’ two shareholders are located
     outside of the United States; neither has participated actively
28   in the bankruptcy case.

                                      -11-
 1   bankruptcy court approval was necessary.      See § 364(b).   There is
 2   nothing in the record to suggest that Prometheus ever sought
 3   approval from the bankruptcy court to borrow money from Ms. Luke
 4   for the purpose of paying the U.S. Trustee quarterly fees.
 5        Finally, it is undisputed in the record that Prometheus
 6   actively continued the litigation against GEM in the French
 7   Appellate Court notwithstanding that (1) no bankruptcy stay was
 8   in effect and (2) it neither posted a bond nor provided a
 9   certificate of insolvency.   Taken together with Prometheus’
10   failure to disclose the Litigation Claim in its chapter 7 case
11   and its demonstrated disregard for compliance with the Bankruptcy
12   Code in the chapter 11 case, it is clear that Prometheus is
13   playing fast and loose with the courts.
14                             VI.    CONCLUSION
15        The record establishes that Prometheus filed its chapter 11
16   petition in bad faith.
17        This appeal is frivolous.     See DeWitt v. W. Pac. R.R. Co.,
18   719 F.2d 1448, 1451 (9th Cir. 1983) (an appeal is frivolous if
19   the result is obvious and the arguments of error are wholly
20   without merit).   Had there been an appellee participating in this
21   appeal we would not have hesitated to determine the appeal
22   frivolous and to award costs and fees as authorized by Rule
23   8020(a).
24        We AFFIRM the bankruptcy court’s Second Dismissal Order.
25
26
27
28

                                       -12-