Colburn v. Reaves ( 2022 )

1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8 9 Charles Michael Colburn, No. CV-21-01630-PHX-SMM 10 Appellant, BK NO. 2:21-bk-05407-MCW 11 v. ORDER 12 David M Reaves, et al., 13 Appellees. 14 15 Appellant/Debtor Charles Michael Colburn appeals an Order from the United States 16 Bankruptcy Court granting a Motion to Convert, filed by Appellee Medmen Enterprises, 17 Inc. The appeal is fully briefed. (Docs. 8, 11, 14). For the reasons set forth below, the Court 18 affirms the Bankruptcy Court’s decision. 19 I. BACKGROUND 20 Prepetition, Colburn and Medmen engaged in a business deal that resulted in a 21 lawsuit in a state court. (Doc. 9-14). As part of the lawsuit, the parties argued, and still 22 argue, about whether Colburn owes Medmen $10.3 million in surplus sale proceeds. (Doc. 23 8). However, the trial court agreed with Medmen and directed Colburn to pay the $10.3 24 million. (Doc. 9-6). Later, the appellate court found that the award was not a final judgment. 25 (Doc. 9-16). 26 During a hearing on April 9, 2021, the trial court found that Colburn and his business 27 partner “as a matter of law [were] dissipating assets.” (Doc. 9-8, at 79). The trial court then 28 ordered Colburn to post a bond by April 26, 2021. Id. at 84. Subsequently, on June 17, 1 2021, the trial court ordered Colburn to deposit the money into the court registry within 2 five days. (Doc. 9-14, at 10). The funds were not deposited. (Doc. 9-17). The trial court set 3 a contempt hearing for July 13, 2021 to determine the sanctions to be imposed on Colburn. 4 (Doc. 9-14, at 10). 5 On the morning of the contempt hearing, Colburn filed a pro se petition for a Chapter 6 13 bankruptcy. (Doc. 9-1). Colburn then obtained counsel, Kenneth Neely, who filed a 7 notice of appearance on July 19, 2021. (Doc. 9-5). The following day, Medmen filed an 8 Emergency Motion to Convert Case to Chapter 7 Proceeding, arguing that the Chapter 13 9 case should be converted because Colburn filed the petition in bad faith. (Doc. 9-6). 10 Medmen also filed a Motion to Accelerate, requesting expedited briefing and an expedited 11 hearing. (Doc. 9-11). 12 In the filings, the parties raised facts and issues regarding the state court litigation. 13 Additionally, at multiple points in the Objection to Emergency Motion to Convert, Colburn 14 asked for the case to be dismissed instead of converted if the Bankruptcy Court finds that 15 it cannot proceed under Chapter 13. (Doc. 9-14, at 15-16 (“Dismissal rather than 16 conversion would be the appropriate course of action if the Court found that cause exists 17 to convert or dismiss.”; “If Debtor is not provided the opportunity to file his schedules and 18 propose a plan, Debtor requests that this Court dismiss the case instead.”; and “If this Court 19 does not permit Debtor’s case to proceed under Chapter 13 of the Bankruptcy Code, then 20 this Court should simply dismiss the case.”)). 21 On July 30, 2021, the Bankruptcy Court held an expedited hearing on the 22 Conversion Motion. (Doc. 9-20). Again, at the hearing, Colburn’s counsel stated that “if 23 [the case] can’t [proceed], then it needs to be dismissed, not converted.” Id. at 26. 24 After the parties made their remarks, the Bankruptcy Court noted that it must look 25 to the totality of the circumstances to determine whether conversion is warranted and 26 acknowledged that there was no schedules and statements nor a Chapter 13 plan to review 27 because the debtor had not filed them. Id. at 41. The Bankruptcy Court then discussed other 28 circumstances in the case: 1 2 I'm also concerned with the actions that were taken before this case was filed, the fact that MedMen was entitled to $10 3 million, which was apparently transferred and dissipated by Colburn and DeSantis as determined by the State court judge. 4 I'm also aware that the trial that was to take place on the day of the filing was not just a simple evidentiary hearing, but it was 5 one on sanctions for contempt of court. 6 Id. at 41-42. The Bankruptcy Court found that cause was established to convert or dismiss 7 the case under § 1307 (c). Id. at 42. The Bankruptcy Court also decided that converting the 8 case was in the best interests of the creditors “given the significant sums of money” in play. 9 Id. After the hearing, the Bankruptcy Court issued a formal order converting the case to a 10 Chapter 7 proceeding. (Doc. 9-19). Colburn timely appealed on August 20, 2021. (Doc. 1). 11 II. REQUESTS FOR JUDICIAL NOTICE 12 While this appeal was pending, Medmen files two Requests for Judicial Notice. 13 (Docs. 13, 15). In both of these Requests, Medmen asks the Court to take notice of 14 documents from the underlying bankruptcy proceeding. The Court declines to rule on either 15 request because it did not rely on any of these documents in making its decision. 16 III. STANDARD OF REVIEW 17 A bankruptcy court’s decision to convert a case is reviewed for abuse of discretion. 18 Rosson v. Fitzgerald (In re Rosson), 545 F.3d 764, 771 (9th Cir. 2008). In determining 19 whether the bankruptcy court abused its discretion, courts first review “de novo whether 20 the bankruptcy court identified the correct legal rule to apply to the relief requested.” 21 USAA Fed. Sav. Bank v. Thacker (In re Taylor), 599 F.3d 880, 887 (9th Cir. 2010) (quoting 22 United States v. Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009)). Then, if it did, courts ask 23 whether the bankruptcy court’s “application of the correct legal standard to the facts was 24 (1) illogical, (2) implausible, or (3) without support in inferences that may be drawn from 25 the facts in the record.” Id. (quoting Hinkson, 585 F.3d at 1262). 26 IV. DISCUSSION 27 Colburn appeals from the Bankruptcy Court’s conversion order. The first issue 28 before this Court is whether the Bankruptcy Court, in the face of requests for dismissal 1 after a motion to convert was filed, in which § 1307(b) was not cited or referenced, should 2 have dismissed the case. The second issue is whether the Bankruptcy Court abused its 3 discretion by converting the matter under § 1307(c) to a Chapter 7. The third issue is 4 whether the Bankruptcy Court denied Colburn a fair opportunity to be heard. 5 A. Invoking § 1307(b) 6 Colburn argues that the Bankruptcy should have dismissed the case under 11 U.S.C. 7 § 1307(b) because he requested dismissal within the meaning of § 1307(b) when requesting 8 dismissal in the written objection to the conversion motion and orally at the conversion 9 hearing. Medmen argues that Colburn did not move for dismissal under § 1307(b) and did 10 not follow necessary procedural rules. 11 Colburn argues that a recent Ninth Circuit case, Nichols v. Marana Stockyard & 12 Livestock Mkt., Inc. (In re Nichols), 10 F.4th 956 (9th Cir. 2021), resolves the issue. In 13 Nichols, a creditor moved for conversion under § 1307(c) after the debtors failed to 14 complete steps required by the Bankruptcy Code. Id. at 958. After the bankruptcy court 15 postponed entering the conversion order, the debtors filed for dismissal under § 1307(b). 16 Id. at 959. The bankruptcy court then denied the debtors motion to dismiss, finding that it 17 could deny dismissal because the bad faith exception applied. Id. The Bankruptcy 18 Appellate Panel affirmed the order. Id. However, the Ninth Circuit reversed, finding that, 19 after a recent Supreme Court decision, the bad faith exception does not apply to dismissal 20 requests made under § 1307(b). Id. at 963. Ultimately, the Ninth Circuit held that “§ 21 1307(b)'s text confers upon the debtor an absolute right to dismiss a Chapter 13 bankruptcy 22 case, subject to the [previous conversion] exception noted expressly in the statute itself.” 23 Id. at 964. 24 However, unlike the current matter, the debtors in Nichols filed a written motion 25 with the court, expressly requesting dismissal under § 1307(b). The Nichols court did not 26 address how to invoke § 1307(b); it discussed what must be done after a dismissal request 27 under § 1307(b) is before a bankruptcy court. Thus, the Nichols court did not decide a 28 threshold question at issue here—that is, whether dismissal under § 1307(b) is before a 1 bankruptcy court. 2 A dismissal request under § 1307(b) is before a bankruptcy court if procedural rules 3 are followed. See In re Duran v. Rojas, 630 B.R. 797, 811 (9th Cir. BAP 2021) (“Rule 4 1017(f)(2) directs that a debtor who wishes to exercise the § 1307(b) ‘right’ to dismiss a 5 chapter 13 case must proceed by motion filed and served as required by Rule 9013.” (citing 6 Fed. R. Bankr. P. 1017(f)(2)). Pursuant to Bankruptcy Rule 1017(f)(2), “[c]onversion or 7 dismissal under . . . § 1307(b) shall be on motion filed and served as required by Rule 8 9013.” Rule 9013 provides that “[a] request for an order, except when an application is 9 authorized by the rules, shall be by written motion, unless made during a hearing.” If a 10 motion is written, Rule 9013 requires the motion be served. Rule 9013 also requires that 11 motions must “state with particularity the grounds” that dismissal is sought. 12 Medmen argues that Colburn’s request for dismissal did not comport with Rule 13 9013’s particularity requirement. The Court agrees. First, Colburn did not reference the 14 statute or state that he was requesting a voluntary dismissal. If Colburn intended to request 15 dismissal under § 1307(b), the grounds should have been made clear to the Bankruptcy 16 Court. 17 Additionally, even aside from Colburn’s failure to cite to § 1307(b) or state that he 18 was requesting a voluntary dismissal, given the context of the requests—first, made in a 19 written objection to a motion under § 1307(c) and second, made during an oral argument 20 on the same motion—and the subject matter discussed during the requests, it is logical that 21 the Bankruptcy Court considered Colburn’s request for dismissal under § 1307(c). Colburn 22 does not point to, nor does the Court find, anything in the record that sufficiently indicates 23 that Colburn requested dismissal under § 1307(b). And even if Colburn indeed intended to 24 request dismissal under § 1307(b), a court cannot be expected to read minds, and a court 25 cannot rule on an issue when the court does not know what the issue is. See United States 26 v. Dunkel, 927 F.2d 955, 956 (7th Cir. 1991) (per curiam) (“Judges are not like pigs, 27 hunting for truffles buried in briefs.”). 28 Medmen also argues that Colburn failed to move for dismissal under § 1307(b) 1 because the request was not written or served and was not accompanied by a memorandum. 2 However, because the Court has found that Colburn did not make a procedurally correct 3 motion because the request for dismissal did not meet Rule 9013’s particularity 4 requirement, Court will not address these issues. 5 Thus, for the reasons above, the Court finds that the Bankruptcy Court correctly 6 considered Colburn’s request for dismissal under § 1307(c). 7 B. Conversion Under § 1307(c) 8 Colburn next argues that the Bankruptcy Court abused its discretion by converting 9 the case to a Chapter 7 proceeding. Pursuant to § 1307(c), a bankruptcy “court may convert 10 a case under this chapter to a case under chapter 7 of this title, or may dismiss a case under 11 this chapter, whichever is in the best interests of creditors and the estate, for cause.” When 12 evaluating a § 1307(c) motion, bankruptcy courts engage in a two-step analysis. Nelson v. 13 Meyer (In re Nelson), 343 B.R. 671, 675 (9th Cir BAP 2006). First, courts look to whether 14 there is “cause.” Id. Second, courts must decide “between conversion and dismissal based 15 on the ‘best interests of the creditors and the estate.’” Nelson, 343 B.R. at 675 (citing Ho 16 v. Dowell, 274 B.R. 867, 877 (9th Cir. BAP 2002)). 17 Section 1307(c) lists eleven non-exclusive grounds that can constitute cause, 18 including “failure to file a plan.” Cause also exists where a bankruptcy petition was filed 19 in bad faith. Eisen v. Curry (In re Eisen), 14 F.3d 469, 470 (9th Cir. 1994). To determine 20 whether there is bad faith, a bankruptcy court evaluates the totality of the circumstances, 21 and considers multiple factors: 22 (1) whether the debtor misrepresented facts in his petition or plan, unfairly manipulated the Bankruptcy Code, or otherwise 23 filed his Chapter 13 petition or plan in an inequitable manner; 24 (2) the debtor's history of filings and dismissals; 25 (3) whether the debtor only intended to defeat state court litigation; and 26 (4) whether egregious behavior is present. 27 HSBC Bank USA, N.A. v. Blendheim (In re Blendheim), 803 F.3d 477, 499 (9th 28 Cir. 2015) (quoting Leavitt v. Soto (In re Leavitt), 171 F.3d 1219, 1224 (9th Cir. 1999)). 1 To determine whether debtors intended to defeat state court litigation, courts consider the 2 timing of the bankruptcy filing. See, e.g., Khan v. Barton (In re Khan), 846 F.3d 1058, 3 1066 (9th Cir. 2017) (finding conversion was justified in part because of the “highly 4 suspect timing” of the filings). 5 Here, Colburn filed for bankruptcy on the morning of a state court proceeding where 6 sanctions against him were to be discussed. See, e.g., Eisen, 14 F.3d at 470-71 (finding that 7 a debtor only intended to defeat state court litigation where the petition was filed on the 8 eve of trial in a state action). Colburn also failed to submit his schedules and statements, 9 or his plan within the fourteen days post-petition allowed by Rule 3015(b). See Ellsworth 10 v. Lifescape Med. Assocs., P.C. (In re Ellsworth), 455 B.R. 904, 916 (9th Cir. BAP 2011). 11 Having reviewed the record, the Court finds that the Bankruptcy Court’s finding of cause 12 was supported. 13 The Court also finds that the Bankruptcy Court did not abuse its discretion by 14 converting instead of dismissing the case. The Bankruptcy Court found that conversion 15 was in the best interest of the creditors due to the large amount of money at issue. Though 16 the state court’s order requiring Colburn to pay $10.3 million to Medmen is not a final 17 judgment, it is still an order from a court, and the Bankruptcy Court did not err in factoring 18 the $10.3 million into its best interests analysis. Additionally, the record contains evidence 19 of Colburn’s attempt to frustrate creditors, which can further indicate conversion was more 20 appropriate than dismissal. 21 C. Evidentiary Hearing and Fair Opportunity 22 Colburn also claims that the Bankruptcy Court made its decision without providing 23 him with a “fair opportunity to present his defense” and without providing an evidentiary 24 hearing. Pursuant to Rule 9014, “reasonable notice and opportunity for hearing shall be 25 afforded the party against whom relief is sought.” 26 As an initial matter, Colburn did not request an evidentiary hearing in the 27 Bankruptcy Court. Because this issue was not before the Bankruptcy Court, it cannot be 28 brought up on appeal. See Team Spirit Am., LLC v. Kriegman (In re LLS Am., LLC), 2012 1 Bankr. LEXIS 2603, at *27 (9th Cir. BAP 2012) (“By not making a request for an 2 evidentiary hearing on the Substantive Consolidation Motion, as other parties had done, 3 [the debtor] waived its right to complain about the lack of an evidentiary hearing.”). 4 Next, the Court finds that Colburn was given a fair opportunity to present his 5 defense. Due process requires “notice reasonably calculated, under all the circumstances, 6 to appraise interested parties of the pendency of the action and afford them an opportunity 7 to present their objections.” Walthall v. United States, 131 F.3d 1289, 1294 (9th Cir. 1997) 8 (quoting Mullane v. Cent. Hanover Bank & Tr. Co., 339 U.S. 306, 314 (1950)). 9 Here, Colburn had ten days to prepare for the hearing. See, e.g., Knedlik v. Spark 10 Networks Ltd. (In re Knedlik), 2008 Bankr. LEXIS 4670, at *20 (9th Cir. BAP, June 30, 11 2008) (finding that ten days were sufficient for pro se, repeat filers to prepare for an 12 emergency hearing on a motion to dismiss and automatic stay). Additionally, Colburn 13 responded to the motion and appeared at the hearing. See Buchakian v. Musikahn Corp., 14 69 B.R. 55, 56 (E.D.N.Y. 1986) (finding that a creditor was not deprived of opportunity to 15 be heard when the creditor responded to a motion and appeared at the hearing, despite the 16 debtor’s failure to serve the motion to give ten days’ notice as required by local rule). 17 Though the matter was complicated due to the state court litigation and counsel’s recent 18 appearance in the matter, Colburn’s state court counsel was available at the hearing and 19 therefore involved with the bankruptcy case. Thus, though the hearing and motion practice 20 took place on an expedited basis, it did not rise to the level of a denial of opportunity to be 21 heard. 22 V. CONCLUSION 23 Accordingly, 24 IT IS ORDERED affirming the Bankruptcy Court’s Order in favor of Appellees. 25 (Doc. 1). 26 IT IS FURTHER ORDERED that the Clerk of Court shall forward a copy of this 27 Order to the Chambers of U.S. Bankruptcy Judge Madeleine C. Wanslee, U.S. Bankruptcy 28 Court for the District of Arizona, 230 N. First Avenue, Phoenix, AZ 85003. 1 IT IS FURTHER ORDERED that the Clerk of the Court shall terminate and □□ remand this case to the Bankruptcy Court. 3 Dated this 29th day of August, 2022. 4 5 6 Laphee Z.. - Bir avrnee Hdhorable Stephen M. McNamee 7 Senior United States District Judge 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -9-