Filed: Apr. 10, 2020
Latest Update: Apr. 10, 2020
Summary: FILED APR 10 2020 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY.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 Nos. CC-19-1105-GSL CC-19-1106-GSL THE SUNSHINE GROUP, LLC, CC-19-1107-GSL (Related Appeals) Debtor. Bk. No. 2:19-bk-12760-ER THE SUNSHINE GROUP, LLC Appellant, v. MEMORANDUM* CITY OF DANA POINT; CALIFORNIA RECEIVERSHIP GROUP; MARK ADAMS, as State Court-appointed Receiver, Appellees. Argued and Submitted on March 26, 2020
Summary: FILED APR 10 2020 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY.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 Nos. CC-19-1105-GSL CC-19-1106-GSL THE SUNSHINE GROUP, LLC, CC-19-1107-GSL (Related Appeals) Debtor. Bk. No. 2:19-bk-12760-ER THE SUNSHINE GROUP, LLC Appellant, v. MEMORANDUM* CITY OF DANA POINT; CALIFORNIA RECEIVERSHIP GROUP; MARK ADAMS, as State Court-appointed Receiver, Appellees. Argued and Submitted on March 26, 2020 ..
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FILED
APR 10 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NOT FOR PUBLICATION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 Nos. CC-19-1105-GSL
CC-19-1106-GSL
THE SUNSHINE GROUP, LLC, CC-19-1107-GSL
(Related Appeals)
Debtor.
Bk. No. 2:19-bk-12760-ER
THE SUNSHINE GROUP, LLC
Appellant,
v.
MEMORANDUM*
CITY OF DANA POINT; CALIFORNIA
RECEIVERSHIP GROUP; MARK
ADAMS, as State Court-appointed
Receiver,
Appellees.
Argued and Submitted on March 26, 2020
Filed – April 10, 2020
Appeal from the United States Bankruptcy Court
for the Central District of California
*
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 Ernest M. Robles, Bankruptcy Judge, Presiding
Appearances: Robert P. Goe of Goe & Forsythe, LLP argued for
Appellant; Jennifer Farrell of Rutan & Tucker, LLP
argued for Appellee The City of Dana Point; Ori
Blumenfeld for Appellees California Receivership Group
and Mark Adams, as State Court-appointed Receiver.
Before: GAN, SPRAKER, and LAFFERTY, Bankruptcy Judges.
INTRODUCTION
Appellant, The Sunshine Group, LLC, (“Debtor”) appeals from two
orders dismissing its chapter 111 case and from an order denying its motion
to sell property free and clear of liens and interests. Appellees, the
City of Dana Point, California, (the “City”) and California Receivership
Group, (“Receiver”) each filed motions to dismiss the chapter 11 case and
asserted that Debtor filed its petition in bad faith as a litigation tactic to
evade rulings made by the state court in a receivership action involving
Debtor’s sole asset, a 28-room motel located in Dana Point, California (the
“Property”).
The bankruptcy court determined that Debtor filed the petition in
bad faith and that the motion to sell was part of Debtor’s bad faith scheme
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.
2
to avoid rulings in the state court. The bankruptcy court found that the
Property was Debtor’s only valuable asset, Debtor was not operating and
had no revenues to reorganize debts, and the case was essentially a two
party dispute. The bankruptcy court concluded that Debtor filed the
bankruptcy for an improper purpose to avoid the rulings of the state court
pertaining to the Receiver’s rehabilitation plan and the infeasibility of
Debtor’s development plan.
The bankruptcy court did not abuse its discretion in dismissing the
case or in denying the sale motion. Accordingly, we AFFIRM the dismissal
orders and the order denying the motion to sell.
FACTS
A. Prepetition Events
Debtor was formed by Dr. Ramesh Manchanda in the late 1990s for
the purpose of purchasing and developing commercial properties in
Dana Point, California. In 1998, Debtor purchased the Property for $2.4
million. Between 1998 and 2012, Dr. Manchanda purchased several
adjacent parcels of vacant land through separate entities.
For approximately 18 years, Debtor operated the Property and earned
revenue. However, by about 2015, Debtor states that it was developing
plans to demolish the Property and build an upgraded motel with larger
rooms and more amenities.
In 2016, the City notified Debtor of several municipal code violations
3
which needed to be immediately rectified. On September 1, 2016, the City
“red-tagged” the Property after a Fire and Life Safety Inspection uncovered
several violations of the California Fire Code, California Building Code,
and the Dana Point Municipal Code which posed an immediate fire threat
and safety hazard to the public. The City issued a notice to Debtor
describing the violations and requiring corrective actions to be completed
by December 5, 2016.
The red tag precluded the Debtor from using the Property for any
purpose until the violations were abated. After the Property was red-
tagged, the Orange County Sheriff’s Department received increased calls
for service at the Property related to homeless individuals sleeping on the
Property, attempting to break into the Property, or actually breaking in to
the Property’s vacant rooms. These individuals were observed using open
flames in the Property, which presented a significant public safety hazard
because the Property had no telephone service or utilities, and the
numerous code violations had not been remediated.
Debtor states that it advised the City that it intended to demolish the
Property rather than abate the code violations. Between October 2016 and
January 2017, the City had several meetings with the Debtor to discuss the
process to bring the Property into compliance and the potential
complexities involved with Debtor’s intent to demolish the Property and
rebuild. In April 2017, Debtor submitted a formal application to demolish
4
the Property.
1. The Receivership Action
In April 2017, the City filed a nuisance action in Orange County
Superior Court and moved, ex parte, for an appointment of a health and
safety receiver to take possession and control of the Property. The City
stated that because of the Property’s status as a “low cost overnight
accommodation” and a “historic resource,” it expected Debtor’s application
to demolish to take approximately 36 months to be processed by the City
and the California Coastal Commission, and ultimately to be denied. As a
result of the continuing health and safety risks, the City decided to pursue
the receivership action.
The state court appointed the Receiver and authorized it to take
control of the Property and correct the code violations. The Receiver was
permitted to borrow funds to correct the conditions and to issue a
receiver’s certificate to secure the debt with a super-priority lien on the
Property. The state court permitted the Receiver to fund a receiver’s
certificate with super priority status in the amount of $55,000 for the
purpose of securing the Property, cleaning it out, and obtaining bids to
remediate the violations.
The state court then set a hearing to determine whether to confirm
the appointment of the Receiver. Prior to the hearing, the Receiver retained
Miken Construction (“Miken”) to submit a bid for the remediation work.
5
The Receiver also filed a report indicating that an additional $943,000
would be needed to fully remediate the health and safety violations. The
Debtor opposed the Receiver’s remediation plan and argued that the
Property should instead be demolished and the receivership should be
terminated.
At the hearing, the state court confirmed the appointment of the
Receiver, rejected Debtor’s request to terminate the receivership, and
authorized the Receiver to increase the receiver’s certificate to $998,000.
Dr. Manchanda agreed to fund the receiver’s certificate.
The Receiver then met with the City and the Debtor to discuss the
scope of the remediation project. Based on the City’s requests, the Receiver
retained an architectural firm experienced in historical restoration as well
as structural and soils engineers to evaluate the stability of the hillside, the
retaining wall, and the structural elements of the Property. The engineering
reports revealed that the Property was in a seismic hazard zone and
hillside movement had caused a partial failure of the retaining wall.
The Receiver developed a construction plan to remediate the
hazardous conditions and abate the code violations while preserving the
historical character of the Property and its low cost affordable
accommodation status. The Receiver then filed a motion in state court
seeking approval of additional funding of $4,063,832 for: (1) pre-
construction demolition costs; (2) hillside protection and retaining wall
6
work; and (3) remaining health and safety repair costs. The Receiver
attached contracts to substantiate the expenses. Debtor objected to the
Receiver’s request and submitted an alternate bid from another contractor.
Debtor also filed a motion to terminate the receivership.
The state court determined that the Receiver’s plan was reasonable
and necessary to remediate the violations. The court approved the contracts
for pre-construction demolition, hillside protection, and building
remediation, and authorized the Receiver to incur the additional funding
necessary to complete the work. The state court rejected Debtor’s proposed
alternative bid because it failed to include numerous necessary items, such
as foundation repair and structural retrofitting. Once the funding was
approved, Miken began work on the hazardous retaining wall and carport.
The state court also denied Debtor’s motion to terminate the
receivership and stated that although Debtor disagreed with the proposed
construction and remediation costs, it failed to provide any reasonable
alternative other than to repeatedly demand authorization to demolish the
property. The court stated that the request to demolish the property had
been rejected in the past because “[t]he purpose of the receivership here is
to abate the substandard conditions at the property, while at the same time
maintaining its historical character and compliance with the Coastal Act
requirements; demolition would not further these goals.” Minute Order, at
3, Case No. 30-2017-00915900-CU-PT-CJC, October 26, 2018.
7
Debtor appealed the ruling to the California Court of Appeal and
sought an immediate stay. The Court of Appeal entered a temporary stay
of the order, except for construction and repairs of the hillside which were
necessary for public safety. The Court of Appeal later dissolved the stay
and denied Debtor’s request for a writ of supersedeas. Ultimately, Debtor
dismissed the appeal.
The Receiver obtained a loan for the initial phase of the retaining wall
project from Glan Investments, LLC (“Glan”), secured by a junior receiver’s
certificate. However, due to the pending appeal, the Receiver was unable to
secure sufficient third-party funding to complete the retaining wall project
or the remainder of the court-approved plan.
The Receiver filed a motion to subordinate the existing receiver’s
certificate held by Dr. Manchanda, and stated that the first phase of the
retaining wall was complete, but lenders were unwilling to fund the
remaining amounts because of the priority of Dr. Manchanda’s claim. At
the hearing on the Receiver’s motion, the parties negotiated a resolution
whereby Dr. Manchanda agreed to advance a portion of the funds to
complete the retaining wall work. Based on the agreement, the state court
continued the hearing.
The Receiver alleged that Dr. Manchanda reneged on the agreement
so the Receiver issued a junior receiver’s certificate to Miken in the amount
of $871,809. The day before the continued hearing, Debtor filed its chapter
8
11 petition.
B. The Bankruptcy
Debtor scheduled assets including the Property and two notes
receivable from Rohit and Martha Ramos Manchanda, and Foothill
Vascular Center. Debtor’s only scheduled liabilities are attorneys’ fees,
loans from the Manchanda Family Trust, and debts related to the
receivership.
1. The Motions to Dismiss
In March 2019, the City and Receiver each filed a motion to dismiss
the case. The Receiver argued that Debtor’s chapter 11 filing was a bad
faith litigation tactic to avoid completing and paying for the state court-
approved remediation plan. The City argued that the case was filed in bad
faith because Debtor had no ongoing business to reorganize, no cash flow
to pay creditors, and only one asset which was inoperable until the
nuisance conditions were abated. The City also argued that it was
essentially a two party dispute and Debtor did not have any real creditors
other than the City, insiders, and Debtor’s own professionals.
Debtor opposed the motions and argued that the case was filed to
preserve assets of the estate and to allow the Debtor to pay all claims in
full. Debtor stated that the Receiver was now attempting to redesign and
rebuild the Property to meet the City’s specific interests which would
require it to incur an unsustainable amount of debt that would ultimately
9
lead to foreclosure. Debtor argued that the Receiver already abated all
health and safety concerns by stripping the Property of furniture, fixtures,
and its electrical system, as well as removing debris and chemicals. As a
result, Debtor asserted it should be allowed to proceed with a § 363 sale of
the Property to a third party who planned to develop the Property.
2. The Sale Motion
In April 2019, Debtor filed a motion for authorization to sell the
Property free and clear of liens and interests though a private sale. Under
the terms of the proposed sale, the buyer would pay $1,600,000 and take
the Property subject to Dr. Manchanda’s first priority lien. Debtor argued
that the sale should be free and clear of other liens and interests pursuant
to § 363(f)(3) and (4) because the sale price was sufficient to pay all
creditors and the liens of Miken, Glan, and the Receiver were subject to a
bona fide dispute. Debtor asserted the Property could be sold free from the
control of the Receiver and the state court action because the Property was
no longer a health and safety hazard.
The City objected that the sale motion was based on two erroneous
allegations: that the nuisance conditions at the Property had been abated,
and that the sale of the Property would terminate the receivership. The City
argued that Debtor conceded that the violations still existed because the
Property had no plumbing or electricity, and that Debtor had cited no
authority to support the contention that the receivership would terminate
10
upon sale of the Property. The City reiterated its argument that the
bankruptcy filing was an attempt to forum shop and seek a different result
than the state court’s ruling.
The Receiver objected and argued that the attempted sale was in
direct violation of the receivership order which charged the Receiver, and
not a third party purchaser, with abating the violations on the Property.
The Receiver asserted that although the pre-construction demolition and
the hillside protection projects were completed, the Property still posed a
substantial threat to the public and the state court-approved repairs had
not been completed. The Receiver argued that the sale motion was an
attempt to have the bankruptcy court act as a court of appeal over the state
court receivership.
3. The Rulings
After a hearing, the bankruptcy court granted the motions to dismiss
and denied the motion to sell the Property.
The bankruptcy court determined that Debtor filed the petition in
bad faith for three reasons. First, the court found that Debtor filed the case
as a litigation tactic to avoid implementation of the Receiver’s plan and
conceded this fact when it stated “the bankruptcy was filed to protect
Debtor’s assets from an additional $4 million in encumbrances for a
redevelopment project that has nothing to do with remediating health and
safety issues or a public nuisance.” Final Order (April 23, 2019) at 12.
11
Second, the bankruptcy court determined that the case was
essentially a two-party dispute over the competing plans to rehabilitate the
Property which had already been the subject of significant argument before
the state court. The court stated that Debtor offered no legitimate reason
why the dispute should not be resolved by the state court.
Finally, the bankruptcy court applied the factors enumerated in St.
Paul Self Storage Ltd. P’ship v. Port Authority of St. Paul (In re St. Paul Self
Storage Ltd. P’ship), 185 B.R. 580, (9th Cir. BAP 1995), and concluded that all
of those factors weighed in favor of finding bad faith. Specifically, the court
found that the Property was Debtor’s only valuable asset, the Debtor was
not operating and had no revenues to reorganize debt, and all unsecured
creditors arose from the two party dispute in state court.
After finding bad faith, the bankruptcy court considered whether
conversion, dismissal, or appointment of a chapter 11 trustee best served
the interests of the creditors and the estate. Based on the existence of a
pending state court action and the additional costs imposed by
appointment of a trustee, the bankruptcy court dismissed the case and
imposed a 180-day bar to refiling. The court also denied Debtor’s sale
motion, finding that it was proposed in furtherance of Debtor’s bad faith
tactic to evade state court orders. Debtor timely appealed.
C. Post-dismissal Events
In its Opening Brief, Debtor provides a recitation of “new facts”
12
consisting of a post-dismissal state court ruling, which Debtor argues is
likely to affect the outcome of this appeal. Debtor included a portion of the
ruling in its Amended Appellant’s Joint Supplemental Excerpts of Record
which demonstrates that the state court later determined that the Property
was not included on any historical resource list.
The City filed an objection and a motion to strike the post-dismissal
state court rulings and portions of Debtor’s brief that relate to that ruling,
because the document was entered five months after the dismissal and was
not before the bankruptcy court. The City argues that Debtor
mischaracterized the state court ruling and that no definitive decision
regarding the Property’s status as a historical resource had been rendered.
Regardless of the ultimate outcome of the matter, the City argues that any
state court ruling which occurred after the bankruptcy was dismissed is
irrelevant to this appeal. The City seeks sanctions against Debtor for its
reasonable attorneys’ fees in bringing the motion to strike.
Debtor argues that the new facts are extraordinary and should be
considered by the Panel because they demonstrate that the facts provided
to the bankruptcy court by the City and the Receiver ultimately turned out
to not be entirely true. Debtor also argues that although it did not file a
separate motion to supplement the record, its Opening Brief made it clear
which facts and documents were new.
13
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 dismissing Debtor’s
chapter 11 case for bad faith?
Did the bankruptcy court abuse its discretion in denying Debtor’s
motion to sell the Property free and clear of liens and interests?
STANDARD 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 orders on motions to sell property pursuant to § 363 for
abuse of discretion. Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC),
391 B.R. 25, 32 (9th Cir. BAP 2008).
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.
“We must affirm the bankruptcy court’s fact findings unless we
14
conclude that they are illogical, implausible, or without support in the
record.” Id. We may affirm on any basis supported by the record. Caviata
Attached Homes, LLC v. U.S. Bank Nat’l Assoc. (In re Caviata Attached Homes,
LLC),
481 B.R. 34, 44 (9th Cir. BAP 2012).
DISCUSSION
A. Debtor May Not Supplement The Record With Post-Dismissal
State Court Rulings
As an initial matter, we must decide whether we will consider
Debtor’s supplemental excerpt of record. The City requests that we strike
the Amended Appellant’s Joint Supplemental Excerpts of Record and the
portions of Debtor’s Briefs which purport to rely on the subsequent state
court decision, as well as sanction Debtor for reasonable attorneys’ fees
incurred in bringing the motion to strike.
The record on appeal consists of “the original papers and exhibits
filed in the district court.” Barcamerica Int’l USA Tr. v. Tyfield Importers,
Inc., 289 F.3d 589, 593-94 (9th Cir. 2002). “Papers not filed with the district
court or admitted into evidence by that court are not part of the record on
appeal.”
Id. at 594 (quoting Kirshner v. Uniden Corp. of Am.,
842 F.2d 1074,
1077 (9th Cir. 1988)). However, we can exercise inherent authority to
supplement the record in extraordinary cases. Lowry v. Barnhart,
329 F.3d
1019, 1024 (9th Cir. 2003).
A party cannot “unilaterally supplement the record on appeal with
evidence not reviewed by the court below,” and any request to supplement
15
should be made by a formal request or motion. Id. at 1024-25. Debtor did
not file a motion to supplement the record, but it did raise the issue in its
opening brief so the Panel and opposing counsel were apprised of the
documents.
However, Debtor has not demonstrated any extraordinary
circumstances that would make the subsequent state court decision
relevant to this appeal. See Snow v. McDaniel, 681 F.3d 978, 991-92 (9th Cir.
2012) (overruled on other grounds). Debtor states that it filed the state
court decision as a supplemental excerpt of record in compliance with Rule
8014(f), but that rule only pertains to supplemental citations of authority to
support a legal argument, not to supplemental facts offered for their
probative value. Although we could take judicial notice of the state court
decision, we cannot do so to establish the truth of any facts alleged therein.
See Credit Alliance Corp. v. Idaho Asphalt Supply, Inc. (In re Blumer),
95 B.R.
143, 146-47 (9th Cir. BAP 1988).
Because the subsequent state court decision was not before the
bankruptcy court, it is not relevant to the bankruptcy court’s decision or
this appeal. The City’s motion to strike is GRANTED. However, we decline
to impose monetary sanctions at this time. See 9th Cir. BAP R. 8026-1;
Circuit Rule 30-2.
B. The Bankruptcy Court Did Not Abuse Its Discretion In Dismissing
The Case
Section 1112(b) provides that the bankruptcy court shall convert or
16
dismiss a case “for cause,” whichever is in the best interests of creditors
and the estate, unless the court determines that appointment of a chapter
11 trustee or examiner is in the best interests of the estate. Debtor does not
argue on appeal that the bankruptcy court should have converted the case
or appointed a trustee or examiner, and therefore, we consider only
whether the bankruptcy court erred in finding “cause” to dismiss the case.
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.”).
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
17
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).
Here, the bankruptcy court determined that Debtor filed the case in
bad faith as a litigation tactic to avoid state court rulings and that the case
was essentially a two-party dispute. The court found that the factors we
enumerated in St. Paul Self Storage weighed in favor of finding bad faith. In
St. Paul Self Storage we said:
To determine whether a debtor has filed a petition
in bad faith, courts weigh a variety of circumstantial
factors such as whether:
(1) the debtor has only one asset;
(2) the debtor has an ongoing business to
reorganize;
(3) there are any unsecured creditors;
(4) the debtor has any cash flow or sources of
income to sustain a plan of reorganization or to
make adequate protection payments; and
(5) the case is essentially a two party dispute
capable of prompt adjudication in state court.
185 B.R. at 582-83.
18
Debtor does not dispute that the St. Paul Self Storage factors are
appropriate factors to consider in determining whether a bankruptcy
petition was filed in bad faith. Instead, Debtor argues that the bankruptcy
court’s application of these factors was illogical, implausible or without
support in the record.
1. The Bankruptcy Court Did Not Err In Determining That The
Bankruptcy Was A Litigation Tactic And A Two-Party
Dispute Capable of Resolution In State Court
The bankruptcy court determined that the case was a two-party
dispute and Debtor filed the case as a litigation tactic to avoid the state
court rulings. Debtor argues that the bankruptcy court erred because there
were legitimate creditors besides the City who would have materially
benefitted from the bankruptcy, and those creditors would not have been
protected in the state court litigation due to the Receiver’s plan to over-
encumber the Property.
Debtor asserts that the Bankruptcy Code expressly provides for
debtors whose assets are under the control of a receiver and empowers
bankruptcy courts to end a state court receiver’s possession by ordering
turnover of the assets. Because virtually every bankruptcy filed after a
receiver has been appointed will involve an attempt to dispossess the
receiver, Debtor argues that filing a bankruptcy petition cannot be a
litigation tactic designed to evade the receivership orders and cannot be
considered forum shopping.
19
We agree that filing a bankruptcy petition during a pending
receivership is not, per se, a litigation tactic or forum shopping. However,
in the present case, the bankruptcy court did not clearly err in determining
that Debtor filed the petition in bad faith.
Debtor’s purpose in filing the bankruptcy case was to protect its
assets from an additional $4 million in encumbrances necessary to
complete the Receiver’s remediation plan. Debtor argues that all health and
safety concerns which necessitated the receivership were abated by the
time of the bankruptcy filing and therefore, the Receiver’s plan to restore
the Property was a financial decision that would harm creditors and the
Debtor.
If all health and safety issues were resolved, as Debtor argues, the
state court could promptly make that determination and terminate the
receivership. Debtor offers no credible argument why asking the
bankruptcy court to make that decision instead of the state court is not
forum shopping or an abuse of the Bankruptcy Code.
The dispute over the future restoration of the Property is entirely
capable of prompt resolution in state court because this is not truly a
financial reorganization. It is a question of what method should be
employed to remediate the public nuisance at the Property. The state court
considered and rejected Debtor’s objections that the Receivers’s proposed
plan was unnecessary and would make operation of the Property
20
infeasible. The state court approved the Receiver’s plan, authorized the
increase in funding, and denied Debtor’s motion to terminate the
receivership.
We are cognizant that a health and safety receiver may take actions
which go beyond the proper exercise of regulatory authority and are
instead pecuniary in nature. In such a case, filing a bankruptcy to
reorganize debts may not be an abuse of the Bankruptcy Code. But in the
present case, the Receiver’s plan was specifically approved by the state
court as a means to fully abate the nuisance conditions on the Property.
The bankruptcy relief sought by Debtor would require the court to
determine not only that the Receiver’s actions were unnecessary to abate
the nuisance, but also that the state court’s decision approving the
Receiver’s plan was in error. The bankruptcy court lacks jurisdiction to
hear a de facto appeal of a state court decision or to decide any issue
“inextricably intertwined” with issues resolved by the state court decision.
See Noel v. Hall, 341 F.3d 1148 (9th Cir. 2003).
The bankruptcy court did not clearly err in determining that the case
was a two-party dispute capable of prompt adjudication in state court and
that filing the case was a litigation tactic to avoid the state court’s rulings.
2. The Remaining St. Paul Self Storage Factors Favor Dismissal
The first two St. Paul Self Storage factors weigh in favor of dismissal.
Debtor concedes that the Property is essentially its only asset and that it has
21
no ongoing business, but argues that these factors should be given little
weight because single asset real estate cases are contemplated by the Code
and even a non-operating business can use bankruptcy to liquidate. The
bankruptcy court did not clearly err in determining that these factors
favored dismissal.
The bankruptcy court also found that Debtor had no revenues and no
ability to fund a reorganization. Debtor argues that the court erred because
a sale under § 363 was an appropriate means to fund its reorganization,
and the bankruptcy court failed to consider the benefit to creditors.
Filing a bankruptcy with the intent to sell property under § 363 to
pay creditors might constitute a legitimate bankruptcy purpose under
ordinary circumstances, but Debtor’s sale motion is predicated on the
bankruptcy court determining that the Receiver’s plan was not necessary to
abate the nuisance conditions. As we discuss above, it would not be proper
for the bankruptcy court to make such a finding.
The bankruptcy court properly applied factors which we have stated
are appropriate for determining bad faith in filing a petition, and the record
supports the court’s factual findings. The bankruptcy court did not clearly
err in determining that the Debtor filed the case in bad faith and did not
abuse its discretion in finding cause to dismiss the case.
C. The Bankruptcy Court Did Not Abuse Its Discretion In Denying
The Sale Motion
The bankruptcy court denied Debtor’s motion to sell the Property
22
because it concluded that the motion was part of Debtor’s bad faith
objective of divesting control of the Property from the Receiver. Debtor
argues that the bankruptcy court failed to consider that there was a
legitimate business purpose for the sale which would pay creditors in full.
The bankruptcy court properly determined that the petition was filed
in bad faith. Regardless of whether there was a business purpose for the
sale, once the bankruptcy court found cause to dismiss or convert, there
was no basis to grant Debtor’s sale motion, even if some creditors might
have benefitted.
CONCLUSION
For the reasons set forth above, we AFFIRM the bankruptcy court's
orders dismissing the case and its order denying Debtor’s motion to sell the
Property.
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