ANDRÉ BIROTTE, Jr., District Judge.
Appellant Thomas C. Nelson ("Appellant") appeals the Bankruptcy Court's September 27, 2016 Order Dismissing Chapter 11 Case With 180-Day Bar To Refiling Pursuant to 11 U.S.C. § 1112(b). Appellant filed his Opening Brief on January 31, 2017 ("Opening Br.," Dkt. No. 17); no responsive brief was filed. For the following reasons, the Court
Appellant is an unsecured creditor of the debtor Stage Coach Venture, LLC ("Debtor"). Debtor had previously filed a chapter 11 petition on June 10, 2011 (Case No. 1:11-bk-17217-AA). On June 17, 2014, the Court dismissed Debtor's prior chapter 11 case because Debtor did not have a disclosure statement approved and did not confirm a chapter 11 plan by the Court-set deadline.
On October 18, 2015, Debtor filed the voluntary chapter 11 petition that initiated the bankruptcy case giving rise to this appeal. On December 8, 2015, the Court entered the Order Setting Hearing on Status of Chapter 11 Case ("Status Conference Order," Bk. Dkt. No. 20
Subsequently, the Court entered an order setting deadlines ("Order Setting Deadlines," Bk. Dkt. No. 34) setting the following deadlines: by March 28, 2016, Debtor had to file and serve a proposed disclosure statement for the purpose of soliciting acceptances or rejections of Debtor's Chapter 11 Plan of Reorganization; and by August 31, 2016, Debtor had to confirm a chapter 11 plan.
Thereafter, Debtor filed a motion to extend to extend the deadline by which to file a proposed chapter 11 plan and related disclosure statement, and a motion to extend the deadline by which to file an amended disclosure statement. (Bk. Dkt. Nos. 49, 57.) The Court granted both motions, ultimately extending until May 13, 2016 Debtor's deadline to file an amended chapter 11 plan and disclosure statement . (Bk. Dkt. No. 60.)
On May 13, 2016, Debtor filed an amended chapter 11 plan and amended disclosure statement. (Bk. Dkt. Nos. 61, 62.) On June 23, 2016, Debtor filed a status report in preparation for an upcoming status conference. (Bk. Dkt. No. 75.) In the status report, Debtor informed the Court that it had settled a state court lawsuit against three former tenants ("Settlement"), subject to Court approval.
On July 7, 2016, the Court held a hearing on the adequacy of Debtor's amended disclosure statement. The Court provided a tentative ruling identifying numerous deficiencies in the Debtor's filings. (Bk. Dkt. No. 82.) Specifically, the Court found that the amended disclosure statement did not contain adequate information as required by 11 U.S.C. § 1125(a)(1) because the Debtor had not filed a motion for approval of the Settlement, nor had he disclosed the terms of the Settlement in the amended disclosure statement. The Court also found that the disclosure statement was deficient in the following six respects: (1) Debtor did not explicitly state the amount of the claims in each class and the amount of the proposed monthly payments; (2) the amended chapter 11 plan did not provide for the secured claim of the San Diego County Treasurer-Tax Collector; (3) Debtor did not provide valuation of the real property located at 18675 Old Coach Drive, Poway, California 92064 (the "Poway Property"); (4) the appraisal attached to the amended disclosure statement indicated that the Poway Property was listed for short sale, with offers dated between September 23, 2015 and January 4, 2016, but the Court had not approved employment of a broker and such offers were not attached to the amended disclosure statement; (5) the amended disclosure statement did not discuss the amount of funds Debtor's President and sole shareholder intended to contribute for the purpose of making plan payments; and (6) Debtor did not discuss whether Debtor intended to terminate its current month-to-month lease for the Poway Property.
During the July 7, 2016 hearing, Debtor largely conceded that the filings had all the defects the Court identified in the tentative and committed to fixing them by filing a second amended petition. See Tr. 07/07/2016 (Excerpts of Record ("EOR"), Dkt. No. 19, Ex. 5), 2:14-6:15. The Court also said that given the delays already in the case, Debtor would have to file a motion if he wanted an extension of the deadline to confirm the plan. Id. 6:17-7:16. On July 14, 2016, the Court entered an Order Denying Approval of Debtor's First Amended Disclosure Statement which adopted the findings in its tentative ruling and denied approval of Debtor's amended disclosure statement. (Bk. Dkt. No. 84.)
Debtor did not file a second amended chapter 11 plan and related disclosure statement. Instead, on August 31, 2016, the deadline to confirm a chapter 11 plan in accordance with the Order Setting Deadlines, Debtor filed a motion to extend to December 29, 2016 the deadline by which to confirm a plan. (Bk. Dkt. No. 90.)
On September 8, 2016, the Court held a status conference. Both Debtor and Appellant appeared at the status conference. Before the status conference, the Court posted a tentative ruling that stated in part:
At the status conference, the Court expressed skepticism that the bankruptcy plan was workable and suspected that it was a delay tactic, especially in light of the Debtor's previously-dismissed chapter 11 case, involving the same property, that lasted from June 2011 to June 2014 before it was dismissed. The Debtor argued that it could not get a plan confirmed before the contested valuation of the Property was resolved, which would not happen until after the August 31 deadline to confirm a plan. The Court rejected this argument, suggesting that Debtor could have filed a plan using its own proposed valuation. But the court also stated that if the Debtor's principal invested at least $100,000 into the property to repair damage, make it rentable, and start making payments to creditors, that might make the bankruptcy more workable and convincing. The Court therefore deferred dismissing the case and set a further status conference for September 22. See Tr. 07/08/2016 (EOR Ex. 7).
Neither the Debtor nor the Appellant filed anything before the September 22 status conference. At the status conference, Debtor's attorney suggested that its principal fund $400,000 of repairs by setting up a construction fund control account.
Appellant's Brief recites the following issues on appeal:
Appellant's brief does not discuss ground 6 (the 180 day bar) so the Court finds that she has not genuinely put it in issue.
Whether the bankruptcy court's procedures comport with due process is reviewed de novo. Price v. Lehtinen (In re Lehtinen), 564 F.3d 1052, 1058 (9th Cir. 2009).
The bankruptcy court's decision to dismiss a case is reviewed under an abuse of discretion standard. Leavitt v. Soto (In re Leavitt), 171 F.3d 1219, 1223 (9th Cir. 1999). A two-part test determines whether the bankruptcy court abused its discretion. United States v. Hinkson, 585 f.3d 1247, 1261-2 (9th Cir. 2009) (en banc). First, the appellate court considers de novo whether the bankruptcy court applied the correct legal standard. Id. Then, the appellate court reviews the bankruptcy court's fact findings for clear error. Id. at 1262 & n. 20. See also Eison v. Curry (In re Eisen), 14 F.3d 469, 470 (9th Cir. 1994) (the bankruptcy court's finding of "bad faith" is reviewed for clear error).
An appellate court must affirm a bankruptcy court's fact findings unless they are illogical, implausible, or without support in the record. Hinkson, 585 F.3d at 1262. A factual determination is clearly erroneous if it lacks adequate evidentiary support or was induced by an erroneous view of the law. Wall St. Plaza, LLC v. JSJF Corp. (In re JSJF Corp.), 344 B.R. 94, 99 (9th Cir. BAP 2006).
Appellant argues that the Court did not provide adequate notice or an opportunity to be heard when it sua sponte dismissed the case, that is, when it dismissed the case when there was no motion to dismiss or order to show cause pending.
Although a bankruptcy case may be dismissed sua sponte, "the concept of procedural due process requires a notice and an opportunity to be heard." In re Tennant, 318 B.R. 860, 870 (B.A.P. 9th Cir. 2004). As relevant here, 11 U.S.C. § 102(1) defines "after notice and a hearing" to mean "after such notice as is appropriate in the particular circumstances, and such opportunity for a hearing as is appropriate in the particular circumstances . . ." 11 U.S.C. § 102(1)(A). "Thus, the concept of notice and a hearing is flexible and depends on what is appropriate in the particular circumstance." In re Tennant, 318 B.R. at 870. "The essential point is that the court should give counsel a meaningful opportunity to be heard." In re Rosson, 545 F.3d 764, 775 (9th Cir. 2008).
Here, Debtor and Appellant had adequate notice and an opportunity to be heard before the Court dismissed the case. First, the Court's Status Conference Order explicitly stated that the Court may dismiss this case sua sponte during any status conference.
Second, the tentative ruling posted before the September 8, 2016 status conference gave the parties notice that the Court was considering dismissing the case and explained the reasons in detail. Thus, although it was not entitled "order to show cause re dismissal," it was in substance akin to an OSC. Debtor was present at the hearing and had an opportunity to respond to the tentative ruling. As a result of the hearing, the Court decided to not dismiss the case immediately but instead continued the status conference for two weeks—to September 22—to give Debtor's principal a chance to deposit $100,000 into Debtor's account to establish good faith. Between September 8 and 22, neither Debtor nor Appellant filed anything. At the September 22 hearing, both Debtor's counsel and Appellant' counsel argued their positions at length, and reargued some of the matters previously discussed two weeks prior at the September 8 hearing. Both also advocated for Debtor's proposal to set up a construction loan fund account. Thus, both Debtor and Appellant had an opportunity to be heard, and they in fact argued their positions strenuously. The Court simply disagreed with them.
Based on the foregoing, the Court gave Debtor and Appellant adequate notice and an opportunity to be heard before dismissing the case sua sponte.
Appellant's remaining issues on appeal (items 2-5) all challenge the propriety of the dismissal, so the Court will address them together.
Appellant argues that dismissal was not appropriate on the following interrelated grounds: there was "no evidence supporting" the court's finding of cause to dismiss; there were "no facts" supporting the finding of gross mismanagement; the Court erred and abused its discretion by dismissing for Debtor's failure to confirm a plan "when the reason for said failure was occasioned by the Court itself and not the debtor"; and the Court erred and abused its discretion "when it did not consider the best interests of the unsecured creditors." See Opening Br. pp. 7-8. Each of these arguments is belied by the record.
The Court plainly applied the correct legal standard. Dismissal of a chapter 11 case under 11 U.S.C. § 1112(b) requires a two-step analysis. "First, it must be determined that there is `cause' to act. Second, once a determination of `cause' has been made, a choice must be made between conversion and dismissal based on the `best interests of the creditors and the estate.'" In re Nelson, 343 B.R. 671, 675 (B.A.P. 9th Cir. 2006) (quoting In re Ho, 274 B.R. 867, 877 (B.A.P. 9th Cir. 2002)). Both steps of this analysis were addressed in the Court's orders and at the hearing. Indeed, Appellant does not challenge this or any other legal standard the Court applied.
Appellant's factual and evidentiary challenges to the Court's findings are unavailing. The Court found cause to dismiss under § 1112(b)(4)(B), (E), and (J), which state that "cause" includes "gross mismanagement of the estate," "failure to comply with an order of the court" and "failure to file a disclosure statement, or to file or confirm a plan, within the time fixed by this title or by order of the court." Appellant argues that there was no evidence to support these findings. However, the latter two grounds — that Debtor failed to comply with a court order and failed to file a disclosure statement or confirm a plan by the deadlines — cannot reasonably be disputed because they are confirmed by the docket itself. And, the Court based its "gross mismanagement" finding on another undisputable fact: that Debtor failed to have its Settlement approved by the Court in a timely manner.
Appellant faults the Court for not having any declarations or documentary evidence that would ordinarily be filed with a motion to dismiss. But the Court had the authority to dismiss the case sua sponte without a motion, and the docket itself shows that Debtor disobeyed court orders, did not timely file a disclosure statement or confirm a plan, and did not seek approval of the Settlement, which is the evidence that the Court relied on to establish cause under § 1112(b)(4)(B), (E), and (J). The Court didn't need any evidence other than the docket to find these facts. Appellant argues that neither he nor the Debtor was given an opportunity to rebut these conclusions, but the transcript from the September 8 and 22 hearings again belie this.
Appellant also blames the Court for Debtor's failure to timely confirm a plan, but again, the record does not support this interpretation. Appellant argues that when the Court gave creditor Deutsche Bank time to appraise the property in order to oppose Debtor's valuation motion, that meant that the valuation motion would be decided after Debtor's deadline to confirm the plan. Appellant claims that the Debtor could not file and confirm a plan before the valuation motion was decided, so by continuing the valuation motion the Court itself caused Debtor to miss the confirmation deadline. As the Court pointed out, however, Deutsche Bank's opposition, which was timely, was prompted by Debtor's valuation motion, which Debtor did not file until June 2016—some eight months into the case—with a hearing date of July 7. Debtor himself left inadequate time to resolve any valuation disputes before the August 31 deadline to confirm his plan. And, at the September 8 conference, the Court pointed out that Debtor could have filed a timely plan using his own proposed valuation; in other words, it could have submitted a plan before the valuation motion was resolved. Furthermore, at the July 7 hearing, the Court warned Debtor that it would not extend the confirmation deadline just because it continued the valuation motion; rather, Debtor would need to file a motion to extend the confirmation deadline, and explain why an extension was warranted. Debtor did file a motion to extend the confirmation deadline, but not until the existing August 31 confirmation deadline. The motion consists of a brief and declaration, each about 1.5 pages long. (Bk. Dkt. No. 90.) The Court told Debtor nearly eight weeks before the August 31 deadline that he would need to move for an extension, yet Debtor filed his motion on the deadline itself. Certainly Debtor should have filed his motion for an extension much earlier if he wanted it to be resolved timely. For these reasons, Debtor's failure to timely confirm a plan or obtain an extension is not attributable to the Court.
Finally, Appellant claims that the Court did not consider the second element of § 1112(b)'s a two-step analysis: whether conversion or dismissal was in the best interests of the unsecured creditors. However, once again, the record disproves this argument. The Order itself reflects the Court's consideration if this element, saying "Based on Debtor's schedules A and D . . . it appears that the conversion of this case to chapter 7 will not generate a return to unsecured creditors. Thus, rather than converting this case to one under chapter 7, the Court will dismiss this case with 180-day bar." 09/27/2016 Order p. 3. The Court provided similar reasoning at the hearing, explaining that the case does not seem in good faith, that the Debtor has no money coming in to pay unsecured creditors, and that in light of the entirety of this case and the Debtor's prior bankruptcy case, the Court did not think Appellant would get paid. See Tr. 9/22/2016 (EOR Ex. 9), 14:15-19-23. Based on these considerations, the Court opted to dismiss the case rather than convert it. The Court therefore did consider the interests of the unsecured creditors.
The Court therefore finds that the bankruptcy court's factual findings were not clearly erroneous. Rather, they were supported by objective facts ascertainable from the docket. The conclusions the bankruptcy court drew from those facts were neither illogical, implausible, nor unsupported; they must therefore be affirmed.
For the foregoing reasons, the Order is
