FILED
MAY 29 2013
1
SUSAN M SPRAUL, CLERK
U.S. BKCY. APP. PANEL
2 OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
3
OF THE NINTH CIRCUIT
4
5 In re: ) BAP No. AZ-12-1320-MkDJu
)
6 PETER F. BRONSON AND SHERRI L. ) Bk. No. 08-00777
BRONSON, )
7 )
Debtors. )
8 _______________________________)
)
9 PETER F. BRONSON; SHERRI L. )
BRONSON, )
10 )
Appellants, )
11 )
v. ) MEMORANDUM*
12 )
THOMAS M. THOMPSON, )
13 )
Appellee. )
14 _______________________________)
15 Submitted Without Oral Argument
on May 16, 2013
16
Filed – May 29, 2013
17
Appeal from the United States Bankruptcy Court
18 for the District of Arizona
19 Honorable George B. Nielsen, Jr., Bankruptcy Judge, Presiding
20
Appearances: Appellants Peter Bronson and Sherri Bronson on
21 brief pro se; Jimmie D. Smith on brief for
appellee Thomas M. Thompson.
22
23
Before: MARKELL, DUNN and JURY, Bankruptcy Judges.
24
25
26 *
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 8013-1.
1 INTRODUCTION
2 Peter and Sherri Bronson (“Bronsons”) appeal from an order
3 granting the motion of Thomas Thompson (“TMT”) to convert the
4 Bronsons’ bankruptcy case from chapter 111 to chapter 7. The
5 Bronsons also appeal from an order denying their motion to
6 reconsider the conversion order. We AFFIRM both orders.
7 FACTS
8 Notwithstanding the contentious nature of the litigation
9 between the parties, most of the facts relevant to this appeal
10 are undisputed.
11 A. Purchase of Office Building and Default on Financing
12 In 2001, the Bronsons and their business partner Carl
13 Mickler purchased from TMT and his parents a 39,000 square foot
14 commercial building in Miami, Arizona (“Office Building”) for
15 $170,000.2 The purchasers paid $25,000 at the time of the sale
16 and executed a promissory note (“Note”) for the remainder of the
17 purchase price. The Note was secured by a deed of trust and
18 assignment of rents (“Deed of Trust”).3
19 The Note provided for monthly payments of $1,272.00, with a
20
1
Unless specified otherwise, all chapter and section
21
references are to the Bankruptcy Code,
11 U.S.C. §§ 101-1532, and
22 all “Rule” references are to the Federal Rules of Bankruptcy
Procedure, Rules 1001-9037. All “Civil Rule” references are to
23 the Federal Rules of Civil Procedure.
24 2
The Bronsons later acquired from Mickler his 50% interest
in the Office Building.
25
3
26 The Note and Deed of Trust also named TMT’s parents as
parties to the transaction; however, their involvement is not
27 relevant to our analysis and disposition of this appeal. For
ease of reference, we refer herein to both TMT alone and TMT
28 along with his parents as TMT.
2
1 balloon payment for the remaining balance due in September 2007.
2 When the Bronsons defaulted on the balloon payment, TMT commenced
3 nonjudicial foreclosure proceedings. In furtherance thereof, TMT
4 recorded in October 2007 a notice of trustee’s sale, which
5 provided for an auction sale to be held on January 29, 2008.
6 B. Bankruptcy Filings, Relief from Stay and Foreclosure
7 On January 28, 2008, the day before the scheduled trustee’s
8 sale, the Bronsons filed their chapter 11 bankruptcy petition.
9 As a result of the automatic stay, the trustee’s sale could not
10 be held as scheduled. Before he could proceed with the trustee’s
11 sale, TMT had to obtain relief from the automatic stay not only
12 in the Bronsons’ bankruptcy case but also in the bankruptcy case
13 of the Bronsons’ business associate Mark Taylor, who claimed to
14 hold a junior security interest against the Office Building. TMT
15 obtained relief from stay in the Bronsons’ bankruptcy case as of
16 November 19, 2008 and in Taylor’s bankruptcy case as of June 30,
17 2009. The trustee’s sale was held on July 13, 2009, at which TMT
18 was the successful bidder based on a credit bid of $200,000. A
19 trustee’s deed was recorded on July 17, 2009.
20 C. Nondisclosure Lawsuit and Allowance of Judgment Claim
21 Even though the Bronsons had lost title to the property by
22 way of the foreclosure, this did not end the litigation between
23 the parties. In 2007, the Bronsons had commenced a lawsuit
24 against TMT in the Gila County Superior Court (Case No. 2007-
25 0264), alleging among other things breach of contract,
26 nondisclosure, concealment and fraud (“Nondisclosure Lawsuit”).
27 The Bronsons claimed that TMT had wrongfully failed to disclose
28 asbestos contamination in the Office Building.
3
1 At the time of the trustee’s sale, the Nondisclosure Lawsuit
2 was still pending.4 Ultimately, however, TMT prevailed in that
3 action. In June 2010, the Gila County Superior Court entered
4 summary judgment in favor of TMT with respect to all of the
5 Bronsons’ claims and awarded TMT his attorney’s fees and costs in
6 that action in the amount of $26,426.00 (“Gila Judgment”).
7 TMT filed a motion in the bankruptcy court seeking to have
8 the Gila Judgment allowed as an administrative expense. The
9 Bronsons duly opposed that motion. After a hearing on the
10 matter, the bankruptcy court declined to allow the Gila Judgment
11 as an administrative expense claim but instead entered an order
12 allowing it as a prepetition unsecured claim (“Gila Judgement
13 Claim Allowance”). The Bronsons never appealed either the Gila
14 Judgment or the Gila Judgement Claim Allowance.
15 D. Deficiency Lawsuit
16 Meanwhile, in October 2009, Thompson filed an adversary
17 complaint against the Bronsons asserting that he was entitled to
18 a deficiency judgment against them under A.R.S. § 33-814(A)
19 (“Deficiency Lawsuit”).5
20
21 4
The Bronsons removed the Nondisclosure Lawsuit to the
22 bankruptcy court in September 2009, but the bankruptcy court
entered an order in December 2009 remanding that matter to the
23 Gila County Superior Court.
5
24 A.R.S. § 33-814(A) provides in relevant part:
25 [W]ithin ninety days after the date of sale of trust
26 property under a trust deed pursuant to § 33-807, an
action may be maintained to recover a deficiency
27 judgment against any person directly, indirectly or
contingently liable on the contract for which the trust
28 (continued...)
4
1 Three principal issues arose in the Deficiency Lawsuit:
2 (1) whether TMT actually incurred attorney’s fees in enforcing
3 his rights under the Note and the Deed of Trust, (2) the
4 reasonableness of any such fees, and (3) whether the amount of
5 debt that the Bronsons owed TMT actually exceeded the fair market
6 value of the Office Building at the time of the foreclosure sale.
7 The Bronsons initially raised each of these issues in a Civil
8 Rule 12(b)(6) motion to dismiss. In ruling on that motion, the
9 bankruptcy court held that TMT needed to amend his complaint to
10 allege the amount of fees actually incurred and to allege that
11 those fees were reasonable. But the court otherwise denied the
12 Bronsons’ dismissal motion.
13 Over the next two years, the parties litigated over the two
14 fee-related issues (jointly, “Fee Issues”) but largely ignored
15 the third issue regarding the fair market value of the Office
16 Building (“FMV Issue”). At the January 8, 2010 hearing on the
17 Bronsons’ dismissal motion, the Bronsons orally requested that
18 the court set a hearing to determine the FMV Issue. The court,
19 however, indicated that TMT first should file his amended
20 complaint and that the Bronsons should answer that complaint.
21 The court further suggested that the Bronsons should bring up
22
23
5
(...continued)
24 deed was given as security . . . . In any such action
against such a person, the deficiency judgment shall be
25 for an amount equal to the sum of the total amount owed
26 the beneficiary as of the date of the sale, as
determined by the court less the fair market value of
27 the trust property on the date of the sale as
determined by the court or the sale price at the
28 trustee's sale, whichever is higher.
5
1 their request for a hearing on the FMV Issue at the next status
2 conference (scheduled for February 2010), but the Bronsons did
3 not do so. The litigation subsequently focused on the Fee Issues
4 because TMT filed in May 2010 a summary judgment motion seeking
5 partial summary adjudication of the Fee Issues. As the Bronsons
6 have admitted, TMT’s summary judgment motion did not address the
7 FMV Issue at all. The Bronsons filed a cross-motion for partial
8 summary judgment in September 2010, but that motion like TMT’s
9 motion only addressed the Fee Issues.
10 The court never explicitly stated that it was denying the
11 cross-motions for summary judgment, but it did orally rule at a
12 hearing held on September 30, 2010, that it needed an evidentiary
13 hearing on the Fee Issues. At the same hearing, the court
14 indicated that it was aiming to cut off both discovery and
15 dispositive motions by no later than December 2010.
16 The court set trial on the Fee Issues for April 2011;
17 however, shortly before the scheduled trial date, the Bronsons’
18 attorney obtained permission to withdraw as counsel.6 As a
19
6
20 According to the Bronsons’ former counsel, he felt
compelled to withdraw because he felt that his life and his
21 girlfriend’s life were being threatened as a result of his
litigation efforts against TMT. The Bronsons followed up with
22
their own list of events and occurrences which they felt
23 demonstrated that TMT’s influence over others in the local area
was causing them to experience hostility and unfair treatment
24 from, among others, the local state courts and the local police
department. But the claims of misconduct and improper influence
25 are based largely on hearsay and conjecture. Even the Bronsons
26 admitted that it was not possible for them to directly tie TMT to
the events and occurrences they were complaining about. More
27 importantly, the only relief the Bronsons sought in conjunction
with the above-reference alleged events was for the bankruptcy
28 (continued...)
6
1 result, TMT did not present his case in chief on the Fee Issues
2 until May 24, 2011, and the Bronsons did not present their
3 defense case on the Fee Issues until September 15, 2011. After
4 closing arguments by both sides and the filing of a closing
5 statement (“Closing Statement”) by the Bronsons, the court on
6 October 30, 2011 entered judgment in TMT’s favor on the Fee
7 Issues and further purported to finally determine that TMT was
8 entitled to a deficiency judgment in the amount of $18,574.
9 The Bronsons filed a series of motions seeking relief from
10 the deficiency judgment. These motions caused the bankruptcy
11 court to partially reconsider its October 30, 2011 judgment.
12 While the court upheld its ruling on the Fee Issues, the court
13 concluded that the parties had never litigated the FMV Issue.
14 Accordingly, the court vacated the portions of the October 30,
15 2011 judgment purporting to finally determine that TMT was
16 entitled to a deficiency judgment.7 The court set the FMV Issue
17 for trial in May 2012, but before that trial occurred, the court
18 vacated the trial date in light of the conversion of the case to
19 chapter 7, as discussed below.
20
21 6
(...continued)
22 court: (1) to permit withdrawal of their counsel, (2) to grant a
continuance of the pending litigation, and (3) to “order” an FBI
23 investigation. The court permitted the withdrawal and granted
the continuance. And as for the FBI investigation, the
24 bankruptcy court later correctly pointed out that it had no
authority to “order” the FBI to do anything. Oddly, the Bronsons
25 apparently never attempted to contact the FBI themselves.
26 7
The Bronsons filed an appeal from the court’s partial
27 denial of their motions for relief from the deficiency judgment,
but we dismissed that appeal as interlocutory by order entered
28 August 29, 2012 (BAP No. AZ-12-1058).
7
1 E. Plan Confirmation Proceedings
2 During the course of the chapter 11 proceedings, the
3 Bronsons proposed two plans. The Bronsons’ first proposed plan
4 was premised on the sale or refinancing of the Office Building.
5 The Bronsons abandoned that plan shortly after TMT foreclosed on
6 the Office Building. The Bronsons thereafter proposed an amended
7 plan. The amended plan provided three sources of funding:
8 (1) proceeds from litigation against TMT; (2) proceeds from
9 litigation and judgments against others; and (3) sale of a parcel
10 of real property known as the “Railroad Property” or as the
11 “Commercial Land.” TMT objected to the Bronsons’ amended plan.
12 TMT argued that the amended plan did not satisfy the best
13 interests of creditors test under § 1129(a)(7). TMT further
14 argued that the proposed means of funding the amended plan would
15 be insufficient in light of the actual value of the Railroad
16 Property and the value of the Bronsons’ litigation and judgments
17 against others. In addition, according to TMT, the amended plan
18 did not meet the requirements of § 1129(a)(15) (which requires
19 debtors under certain circumstances to commit their projected
20 disposable income to plan funding) and § 1129(a)(9) (which
21 generally requires debtors to pay allowed administrative claims
22 in full upon confirmation). TMT also claimed that the plan was
23 not proposed in good faith, as required by § 1129(a)(3).
24 In response to TMT’s plan objections, the Bronsons contended
25 that, in light of TMT’s foreclosure on the Office Building, all
26 of TMT’s claims against the Bronsons had been satisfied, and so
27 TMT no longer held any allowable claim against the Bronsons’
28
8
1 bankruptcy estate.8 Therefore, the Bronsons reasoned, TMT had no
2 standing to object to their amended plan.
3 The bankruptcy court held multiple hearings on the Bronsons’
4 amended plan and considered the issues referenced above as well
5 as other issues. Ultimately, the court sustained most of TMT’s
6 objections to plan confirmation, as reflected in the court’s
7 order entered on January 21, 2011.9 Even though the Bronsons’
8 bankruptcy case remained in chapter 11 for another 14 months
9 before the court converted the case to chapter 7, the Bronsons
10 never filed a new proposed plan attempting to cure the defects
11 the court had identified in their amended plan.
12 F. TMT’s Motions to Convert
13 TMT filed his first motion to dismiss or convert (“First
14 Conversion/Dismissal Motion”) in February 2009. The bankruptcy
15 court in effect let the First Conversion/Dismissal Motion trail
16 the confirmation proceedings. When the Bronsons abandoned their
17 initial proposed plan in July 2009 (in light of the foreclosure
18 of the Office Building), the court set the First
19 Conversion/Dismissal Motion for hearing. The Bronsons opposed
20 that motion, and on September 22, 2009, the bankruptcy court
21 orally ruled on that motion. The court wanted to give the
22 Bronsons another opportunity to propose a confirmable plan, but
23 the court also acknowledged TMT’s complaints regarding the
24
8
Of course, this contention was the subject of the
25 Deficiency Litigation, which has not been fully resolved.
26 9
While the voluminous record contains multiple transcripts,
27 neither party provided us with the transcript from the
January 11, 2011 hearing on plan confirmation, held just before
28 the court entered its order sustaining TMT’s objections.
9
1 Bronsons’ delay in moving their chapter 11 case forward. With
2 these considerations in mind, the court orally ruled that the
3 Bronsons would have until October 22, 2009, to file an amended
4 plan and disclosure statement. If the Bronsons did not timely do
5 so, the court indicated it was prepared to convert the case. If
6 the Bronsons did timely file an amended plan and disclosure
7 statement, the court indicated that this would “moot out” the
8 First Conversion/Dismissal Motion.10
9 Consistent with the bankruptcy court’s ruling, the Bronsons
10 filed their amended plan and disclosure statement on October 22,
11 2009. As mentioned above, the Bronsons proposed to fund and
12 effectuate their amended plan through the proceeds from various
13 lawsuits and judgments and by selling the Railroad Property. As
14 also mentioned above, TMT objected to the amended plan based in
15 part on the Bronsons’ alleged noncompliance with various portions
16 of § 1129(a) and in part on the allegedly minimal value of the
17 assets the Bronsons proposed to use for plan funding.
18 Roughly one year later, in October 2010, while the battle
19 over the amended plan was still ongoing, TMT filed a “Renewed
20 Motion to Convert Case to Chapter 7.” (“Second Conversion/
21 Dismissal Motion”). TMT’s grounds for conversion or dismissal
22 were similar to his objections to the amended plan. More
23 specifically, TMT asserted:
24 • The Bronsons’ chapter 11 case was two and one half years
25 old, and still they had not been able to confirm a plan.
26
10
27 The bankruptcy docket indicates that the bankruptcy court
never entered a written order memorializing its oral ruling on
28 the First Conversion/Dismissal Motion.
10
1 • During the pendency of the chapter 11 case, the Bronsons had
2 accrued unpaid administrative expenses in excess of
3 $100,000.
4 • The Bronsons had scheduled roughly $375,000 in general
5 unsecured debts, none of which had been paid or otherwise
6 resolved.
7 • The Bronsons had not managed to sell any of the real
8 property assets they had proposed selling in either of their
9 proposed plans.
10 • The Bronsons had not been successful in most of their
11 litigation against others and had not collected from most of
12 those parties against whom they held judgments.11
13 • The Bronsons’ chapter 11 operating reports showed little
14 cash on hand, even though the Bronsons had not made any
15 payments on account of either unsecured claims or
16 administrative claims during the course of their chapter 11
17 case.
18 • The Bronsons had little regular income and had not shown any
19 willingness to contribute other nonexempt assets towards the
20 funding of their proposed amended plan.
21 • The Bronsons’ creditors would be best served by the
22 liquidation of the Bronsons’ assets by a chapter 7 trustee.
23 Second Conversion/Dismissal Motion (Oct. 28, 2010) at pp. 1-3.
24
11
The Bronsons were successful in their litigation against
25 the Arizona Department of Environmental Quality (“ADEQ”). As a
26 result of a state appellate court judgment in their favor and a
subsequent settlement, the Bronsons apparently obtained a
27 recovery of $33,000. But the record indicates that the amount
recovered only served to defray a portion of the attorney fees
28 and costs the Bronsons incurred in that litigation.
11
1 The Bronsons opposed the Second Conversion/Dismissal Motion.
2 The Bronsons argued that, but for TMT, their amended plan already
3 would have been confirmed, as TMT was the only person who had
4 objected to their amended plan. The Bronsons further argued that
5 TMT had no standing either to object to their plan or to seek
6 conversion of their case. According to the Bronsons, all of
7 TMT’s claims had been satisfied by his foreclosure on the Office
8 Building, and all of the claims TMT had asserted since that
9 foreclosure were meritless.
10 Even though the bankruptcy court sustained most of TMT’s
11 objections to the Bronsons’ amended plan in January 2011, and
12 even though the Bronsons did not thereafter propose a new plan,
13 the bankruptcy court did not hold a hearing on the the Second
14 Conversion/Dismissal Motion until April 12, 2012. A week before
15 the hearing on the Second Conversion/Dismissal Motion, the
16 Bronsons filed a motion to continue that hearing. In support of
17 their motion to continue, the Bronsons argued that the court
18 should first resolve all of the disputes concerning TMT’s claims
19 and concerning the Deficiency Lawsuit. According to the
20 Bronsons, once they had prevailed in those disputes, TMT would no
21 longer have any claims against the Bronsons, and hence TMT would
22 have no standing in the Bronsons’ bankruptcy case. Therefore,
23 the Bronsons reasoned, they would be able to move forward with a
24 new plan and disclosure statement without any interference from
25 TMT. The bankruptcy court denied the continuance motion without
26 ///
27 ///
28 ///
12
1 explaining its reasoning.12
2 At the April 12, 2012 hearing, before permitting either side
3 to argue, the bankruptcy court expressed its concerns regarding
4 the viability of the Bronsons reorganizing under chapter 11. It
5 asked the Bronsons to address whether they had the financial
6 resources to fund a chapter 11 plan. In particular, the court
7 asked the Bronsons to update the court on the prospective revenue
8 sources the Bronsons relied upon in support of their amended
9 plan. More specifically, the court asked the Bronsons whether
10 any progress had been made to sell the Railroad Property. The
11 court also noted that the Nondisclosure Lawsuit, another
12 prospective source of plan funding, had been decided against the
13 Bronsons. In addition, the court asked the Bronsons for an
14 update regarding their efforts to collect on judgments they had
15 obtained against third parties.
16 The Bronsons did not address the court’s questions and
17 concerns. Instead, they recapitulated the contentions they had
18 made in their written opposition to the Second
19 Conversion/Dismissal Motion, particularly the need to complete
20 their litigation with TMT.
21 The court was not persuaded by the Bronsons’ presentation.
22 After each side argued, the court orally announced its findings
23 and conclusions. First, the court concluded that TMT had
24 standing. Based on § 1109(b) and prior decisions of this Panel,
25
12
26 Notwithstanding the absence of explicit reasoning for the
denial of the continuance motion, the record indicates that the
27 bankruptcy court disagreed with the Bronsons’ belief that
resolving their disputes with TMT was going to enable the
28 Bronsons to propose and effectuate a confirmable plan.
13
1 the bankruptcy court held that TMT was a party in interest
2 entitled to oppose the Bronsons plan and to seek conversion even
3 though the Bronsons disputed his claims.
4 The court then went on to address the merits of the
5 conversion motion. According to the court, cause existed under
6 § 1112(b) to dismiss or convert. The court further noted that
7 based on the particular circumstances of the Bronsons’ case,
8 conversion was appropriate. In so ruling, the court pointed to
9 several circumstances, including but not limited to the
10 following: (1) the length of time the case had been pending
11 without a confirmed plan (over four years); (2) the various
12 defects evident in the last plan the Bronsons had proposed, which
13 the court had ruled upon in January 2011 (over 14 months prior);
14 and (3) the Bronsons’ inability to demonstrate any tangible
15 progress toward proposing and funding a new confirmable plan.
16 The following statement by the bankruptcy court is
17 representative of the court’s findings regarding the Bronsons’
18 failure to address the issues critical to proposing and
19 effectuating a confirmable plan:
20 It appears that there have been money judgments that
. . . the State Court [has] entered against the
21 Debtors [in the Nondisclosure Lawsuit]. I have no
report or no understanding on the [Railroad Property]
22 or any current marketing efforts.
23 It's -- I have no information on the collection of
funds from the stock judgment. I have no indication
24 that they -- the prosecution of a collection action or
a liability action against the law firm Tidmore Lerma.
25 There's no amended plan on file. There's no disclosure
statement on file. Instead the clear preference is to
26 continue to litigate against Mr. Thompson on his
bankruptcy claim and that seems to also require a need
27 to involve the FBI into this case. And I'm told that
although the FBI has been talked about, apparently the
28 Bronsons have not talked to the FBI in connection with
14
1 this matter.
2 I don't have a good answer to my question that we
started this hearing with . . . . And that is, is
3 there a viable Chapter 11 plan such to make it useful
to continue this four year old litigation[?]
4
5 Hr’g Tr. (April 12, 2012) at 26:4-22.
6 G. The Bronsons’ Reconsideration Motion
7 On April 17, 2012, the bankruptcy court entered its order
8 converting the case, and on April 27, 2012, the Bronsons filed a
9 motion for relief from that order under Civil Rule 60(b)
10 (“Reconsideration Motion”). While most of the Bronsons’
11 arguments in the reconsideration motion reiterate their prior
12 arguments, the Bronsons sought for the first time to present to
13 the court an appraisal dated April 27, 2012, valuing the Office
14 Building as of the date of TMT’s foreclosure at $640,000 – far in
15 excess of the amount owed to TMT at the time of foreclosure.
16 Based on this new appraisal, the Bronsons made two new arguments:
17 (1) that they clearly had a meritorious defense that would cause
18 them to prevail in the Deficiency Lawsuit; and (2) that they now
19 had grounds to assert a cause of action against TMT for unjust
20 enrichment, because TMT otherwise would receive a windfall from
21 his purchase of the Office Building based on a $200,000 credit
22 bid. In their reply in support of their Reconsideration Motion,
23 the Bronsons further requested that the court recuse itself based
24 on the Bronsons’ perception of bias.
25 The bankruptcy court held a hearing on the Reconsideration
26 Motion on June 1, 2012. After finding no grounds to recuse
27 itself, the bankruptcy court denied the Reconsideration Motion,
28 in essence holding that the new information presented – the new
15
1 appraisal - would not have had any impact on the court’s
2 § 1112(b) ruling.
3 The bankruptcy court entered its order denying the
4 Reconsideration Motion on June 5, 2012, and the Bronsons timely
5 appealed on June 15, 2012.
6 JURISDICTION
7 The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
8 §§ 1334 and 157(b)(2)(A). We have jurisdiction under 28 U.S.C.
9 § 158.
10 ISSUES
11 1. Did the bankruptcy court err when it converted Bronsons’
12 chapter 11 bankruptcy case to chapter 7 pursuant to
13 § 1112(b)(1)?
14 2. Did the bankruptcy court err in ruling on the Second
15 Conversion Motion without first resolving the Deficiency
16 Lawsuit?
17 STANDARD OF REVIEW
18 Historically, we have reviewed a bankruptcy court’s decision
19 to convert a chapter 11 case to chapter 7 for abuse of
20 discretion. See, e.g., Greenfield Drive Storage Park v. Cal.
21 Para–Professional Servs., Inc. (In re Greenfield Drive Storage
22 Park),
207 B.R. 913, 916 (9th Cir. BAP 1997); Johnston v. Jem
23 Dev. Co. (In re Johnston),
149 B.R. 158, 161 (9th Cir. BAP 1992).
24 While the 2005 amendments to the Bankruptcy Code in some respects
25 limited the bankruptcy court’s discretion in this context, see
26 In re Prods. Int'l Co.,
395 B.R. 101, 108 (Bankr. D. Ariz. 2008),
27 it still is appropriate in this appeal to conduct the same type
28 of analysis we ordinarily utilize when reviewing the bankruptcy
16
1 court’s exercise of its discretion. Under the abuse of
2 discretion standard, we first determine de novo whether the court
3 identified the correct legal rule to apply. And if the court
4 identified the correct legal rule, we then review the court’s
5 findings of fact to determine whether those findings were
6 “(1) ‘illogical,’ (2) ‘implausible,’ or (3) without ‘support in
7 inferences that may be drawn from the facts in the record.’”
8 United States v. Hinkson,
585 F.3d 1247, 1261-62 (9th Cir. 2009)
9 (en banc) (quoting Anderson v. City of Bessemer City, N.C.,
10
470 U.S. 564, 577 (1985)).
11 We also review for an abuse of discretion the bankruptcy
12 court’s decision not to continue the final hearing on the Second
13 Conversion Motion until after resolution of the Deficiency
14 Lawsuit. See Orr v. Bank of Am.,
285 F.3d 764, 783 (9th Cir.
15 2002); Khachikyan v. Hahn (In re Khachikyan),
335 B.R. 121, 125
16 (9th Cir. BAP 2005).
17 DISCUSSION
18 As amended by the Bankruptcy Abuse Prevention and Consumer
19 Protection Act of 2005 (“BACPA”)13 and the Bankruptcy Technical
20 Corrections Act of 2010 (“BTCA”),14 § 1112(b) generally requires
21 a bankruptcy court to dismiss, convert, or appoint a chapter 11
22 trustee or examiner if it finds “cause.” See 11 U.S.C.
23 § 1112(b)(1);15 see also In re Prods. Int'l Co.,
395 B.R. at
24
13
25 Pub. L. 109-8,
119 Stat. 23 (Apr. 20, 2005).
14
26 Pub. L. 111-327, 124 Stat 3557 (Dec. 22, 2010).
15
27 Among other things, BTCA clarified that appointment of a
trustee or an examiner was an additional alternative to
28 (continued...)
17
1 107-08; 7 COLLIER ON BANKRUPTCY, ¶ 1112.04[7] (Alan N. Resnick &
2 Henry J. Sommer, eds., 16th ed. 2013).16
3
4 15
(...continued)
5 conversion or dismissal. In this appeal, conversion is the only
relevant alternative because the bankruptcy court found that
6 conversion was in the best interests of creditors and because the
Bronsons have not asserted on appeal that the bankruptcy court
7
instead should have selected one of the other two alternatives to
8 conversion.
16
9 Upon finding cause, the court’s obligation to dismiss,
convert or appoint a trustee or examiner is not absolute.
10 Section 1112(b) identifies certain exceptions to this general
requirement. The main exception is set forth in § 1112(b)(2),
11
which provides that the court “may not” convert or dismiss a
12 chapter 11 case notwithstanding the existence of cause if it
“finds and specifically identifies unusual circumstances
13 establishing that converting or dismissing the case is not in the
best interests of creditors and the estate,” and the following
14 additional circumstances are established:
15
(A) there is a reasonable likelihood that a plan will
16 be confirmed within the timeframes established in
Sections 1121(e) and 1129(e) of this title, or if such
17 sections do not apply, within a reasonable period of
time; and
18
19 (B) the grounds for converting or dismissing the case
include an act or omission of the debtor other than
20 under paragraph (4)(A)--
21 (i) for which there exists a reasonable justification
for the act or omission; and
22
23 (ii) that will be cured within a reasonable period of
time fixed by the court.
24
At the hearing on the Second Conversion/Dismissal Motion, the
25 bankruptcy court in essence found that there was not a
26 “reasonable likelihood” of plan confirmation “within a reasonable
period of time.” § 1112(b)(2)(A). We perceive no error in this
27 finding, nor have the Bronsons pointed us to any. Thus, the
exception set forth in § 1112(b)(2) does not apply under the
28 facts of this case.
18
1 Here, the bankruptcy court correctly identified the two-step
2 test it needed to consider in applying § 1112(b). As the court
3 put it, it first had to determine if cause existed to act
4 under § 1112(b); and second, if cause existed, it had to
5 determine which remedy, conversion or dismissal, was in the best
6 interest of creditors. See Nelson v. Meyer (In re Nelson),
7
343 B.R. 671, 675 (9th Cir. BAP 2006); see also In re Prods.
8 Int’l Co.,
395 B.R. at 108; 7 COLLIER ON BANKRUPTCY, supra, at
9 ¶ 1112.04[7].
10 In finding “cause” sufficient to satisfy the first step of
11 the two-step test, the bankruptcy court first noted that the
12 types of cause enumerated in § 1112(b)(4) are not exhaustive,
13 citing St. Paul Self Storage Ltd. P'ship v. Port Authority
14 (In re St. Paul Self Storage Ltd. P'Ship),
185 B.R. 580, 582 (9th
15 Cir. BAP 1995). Indeed, we have held that bankruptcy courts
16 enjoy wide latitude in determining whether the facts of a
17 particular case constitute cause for conversion or dismissal
18 under § 1112(b). See Pioneer Liquidating Corp. v. U.S. Trustee
19 (In re Consol. Pioneer Mortg. Entities),
248 B.R. 368, 375 (9th
20 Cir. BAP 2000), aff’d,
264 F.3d 803 (9th Cir. 2001); see also
21 In re Greenfield Drive Storage Park,
207 B.R. at 916. This wide
22 latitude is driven in part by common sense. Having presided over
23 the often lengthy and complex reorganization proceedings, the
24 bankruptcy court has a familiarity with the parties and the
25 issues that puts it in the best position to make the “cause”
26 determination under § 1112(b). In addition, the wide latitude
27 afforded to bankruptcy courts is consistent with the legislative
28 history accompanying § 1112(b): “‘the court will be able to
19
1 consider other factors as they arise, and to use its equitable
2 powers to reach an appropriate result in individual cases.’”
3 In re Consol. Pioneer Mortg. Entities,
248 B.R. at 375 (quoting
4 H. Rept. No. 95–595, 95th Cong., 1st Sess. 405–06 (1977),
5 reprinted in 1978 U.S.C.C.A.N. 6362).
6 In determining whether cause exists under § 1112(b), the
7 bankruptcy court must balance the debtor’s continuing desire to
8 remain in chapter 11 against the prospects for a successful
9 reorganization. Even before all confirmation-related litigation
10 has played out, when it becomes apparent to the court that the
11 debtor will not be able to confirm and effectuate a plan within
12 the foreseeable future, the bankruptcy court should exercise its
13 discretion under § 1112(b) to dismiss or convert. See 7 COLLIER
14 ON BANKRUPTCY, supra, at ¶ 1112.04[5].
15 This is precisely how the bankruptcy court here assessed the
16 Bronsons’ reorganization prospects. The bankruptcy court
17 essentially found that the Bronsons were fixated on the
18 Deficiency Lawsuit and had given no consideration to moving
19 forward with a new plan in the fourteen months since the court
20 had sustained TMT’s objections to their amended plan. Moreover,
21 the court noted that, even if the Bronsons ultimately were to
22 prevail in the Deficiency Lawsuit, such success in and of itself
23 would not enable the Bronsons to confirm and effectuate a plan.
24 The Bronsons have not disputed that they had over $300,000 in
25 general unsecured debt and over $100,000 in administrative
26 expenses. And yet, when the court asked the Bronsons to provide
27 information on the status and value of assets that potentially
28 could fund their plan, the Bronsons basically ignored the court’s
20
1 inquiry.
2 In sum, after four years in chapter 11 and over 14 months
3 since the Bronsons’ last attempt to confirm a plan, the Bronsons
4 demonstrated an inability or unwillingness to move forward with
5 the plan process without first resolving their disputes with TMT.
6 The bankruptcy court’s conclusion that this constituted “cause”
7 under § 1112(b) was not illogical, implausible or without support
8 in the record. See Hinkson,
585 F.3d at 1261-62. Accordingly,
9 the bankruptcy court did not err in finding cause to convert.
10 On appeal, the Bronsons insist that they ultimately would
11 have prevailed in the Deficiency Lawsuit, either by way of a
12 favorable ruling on the Fee Issues or a favorable ruling on the
13 FMV Issue, or both. According to the Bronsons, once they
14 prevailed, both TMT’s objection to their amended plan and TMT’s
15 motion to convert no longer would have been an obstacle to their
16 reorganization efforts.
17 For purposes of this appeal, we are willing to assume
18 without actually deciding that the Bronsons would have prevailed
19 in the Deficiency Lawsuit. But even if they would have prevailed
20 in that lawsuit, this would not establish that the chapter 11
21 issues – the plan defects and the Second Conversion/Dismissal
22 Motion – would have simply disappeared. The Bronsons apparently
23 believed that their success in the Deficiency Lawsuit would have
24 established that TMT lacked standing. We disagree. Regardless
25 of the outcome of the Deficiency Lawsuit, TMT already had an
26 allowed claim for over $25,000 in the Bronsons’ bankruptcy case.
27 The Bronsons never appealed either the Gila Judgment or the Gila
28
21
1 Judgment Claim Allowance, from which TMT’s allowed claim arose.17
2 By virtue of the Gila Judgment Claim Allowance, TMT was the
3 holder of an allowed unsecured claim with a concrete stake in the
4 outcome of the Bronsons’ chapter 11 case and had standing to be
5 heard on all aspects of the Bronsons’ chapter 11 case. See
6 § 1109(b). As a matter of law, the outcome of the Deficiency
7 Lawsuit would not have altered the Gila Judgment or the Gila
8 Judgment Claim Allowance because those were final judgments or
9 orders that the Bronsons never appealed. See generally United
10 Student Aid Funds, Inc. v. Espinosa,
130 S.Ct. 1367, 1376, 1380
11 (2010) (holding that bankruptcy court’s final order was binding
12 and that appellant could not later collaterally attack that order
13 when the appellant had notice of the proceedings leading up to
14 the entry of the order but never appealed the order). In short,
15
16
17
After the bankruptcy court granted the Gila Judgment Claim
17 Allowance, TMT filed a new proof of claim – Claim Number 20 –
with a copy of the Gila Judgment Claim Allowance attached.
18 Presumably, TMT filed Claim Number 20 to ensure that its allowed
19 claim would appear on the claims register and be properly
accounted for in the Bronsons’ bankruptcy case. Remember, the
20 Gila Judgment Claim Allowance arose not from a proof of claim but
rather from TMT’s motion for allowance of an administrative
21 expense. The Bronsons duly opposed TMT administrative expense
motion, but the bankruptcy court ultimately decided, after
22
holding a hearing on the motion, to deny the claim as an
23 administrative expense but allow it as a general unsecured claim.
Without TMT’s filing of Claim Number 20, TMT’s allowed unsecured
24 claim based on the Gila Judgment Claim Allowance would not have
shown up on the claims register. We acknowledge that the
25 Bronsons have filed an objection to Claim Number 20 and that the
26 bankruptcy court has not yet disposed of this claim objection.
Nonetheless, we know of no legal doctrine that would permit the
27 Bronsons to collaterally attack the Gila Judgment Claim
Allowance, a final order that was not appealed, by filing an
28 objection to Claim Number 20.
22
1 TMT would not have lost his standing to be heard in the Bronsons’
2 chapter 11 case even if the Bronsons had prevailed in the
3 Deficiency Lawsuit.
4 The Bronsons’ reliance on the Deficiency Lawsuit also is
5 misplaced for a second, independent reason. Prevailing in that
6 lawsuit might have freed the Bronsons from some of TMT’s claims,
7 but it would not have established their ability to fund or
8 effectuate a confirmable chapter 11 plan. Put another way, even
9 if the Bronsons successfully rid themselves of TMT’s deficiency
10 claim, the bankruptcy court had an independent duty to deny plan
11 confirmation unless the plan requirements set forth in § 1129(a)
12 were satisfied. Varela v. Dynamic Brokers, Inc. (In re Dynamic
13 Brokers, Inc.),
293 B.R. 489, 498–99 (9th Cir. BAP 2003) (stating
14 that bankruptcy courts have an independent duty to verify that
15 all confirmation requirements are satisfied, regardless of
16 whether a creditor objects). But the Bronsons had no answer for
17 the bankruptcy court’s questions and concerns regarding how they
18 were going to propose and effectuate a confirmable plan of
19 reorganization satisfying all of § 1129(a)’s requirements. At
20 the hearing on the Second Conversion/Dismissal Motion, the court
21 noted all of the defects that had prevented confirmation of the
22 Bronsons’ amended plan fourteen months prior, and the Bronsons
23 were unable to explain how those defects would be remedied. All
24 they did was point to their expectation that they ultimately
25 would prevail in the Deficiency Lawsuit. As indicated by our
26 discussion set forth above, the Bronsons’ response was wholly
27 inadequate to address the court’s questions and concerns.
28 In sum, the Bronsons’ expected outcome in the Deficiency
23
1 Lawsuit did not demonstrate that they were capable of confirming
2 a viable plan in the foreseeable future or that conversion to
3 chapter 7 was inappropriate.
4 The Bronsons only explicitly make one other argument in
5 their opening brief: that, if the bankruptcy court had honored
6 their evidentiary hearing requests, they would have been able to
7 demonstrate to the court that TMT and his counsel were guilty of
8 misconduct and concealment.
9 The Bronsons’ evidentiary hearing argument is difficult to
10 follow. The court did hold evidentiary hearings in the
11 Deficiency Lawsuit. As best we can tell from their appeal brief,
12 the Bronsons are upset because the bankruptcy court did not
13 convene separate hearings to address their allegations that TMT
14 and his counsel were guilty of misconduct and concealment.
15 Specifically, the Bronsons contend that TMT and his counsel
16 failed to make required disclosures under Civil Rule 26(a),
17 failed to respond to their informal discovery requests, and did
18 not have a legitimate factual basis for claiming that the FMV of
19 the Office Building was equal to or less than the amount of TMT’s
20 credit bid.
21 As a threshold matter, we note that the Bronsons have not
22 pointed us to, nor has our independent review of the record
23 revealed, that the Bronsons ever filed in the bankruptcy court a
24 discreet formal motion seeking sanctions under either Rule 9011
25 or under Rule 7037. In addition, it does not appear that the
26 Bronsons ever complied with the procedural requirements of
27 Rule 9011(b)(2).
28 But even if the Bronsons had satisfied the relevant
24
1 procedural requirements for relief under either Rule 7037 or
2 9011, they still have not explained how they thereby could have
3 overcome the fact that their amended plan did not satisfy the
4 requirements set forth in § 1129(a), or the fact that they did
5 not appeal and could not collaterally attack the Gila Judgment
6 Claim Allowance, which conclusively established TMT’s standing as
7 a creditor in the Bronsons’ chapter 11 case.
8 Furthermore, most of the Bronsons’ concealment/misconduct
9 allegations do not withstand scrutiny. For instance, the
10 Bronsons complain most about the alleged failure of TMT and his
11 counsel to disclose facts concerning TMT’s foreclosure and
12 subsequent resale of a parcel of commercial real property located
13 on Broad Street in Globe, Arizona (“Broad Property”). According
14 to the Bronsons, TMT purchased the Broad Property in June 2008 at
15 a foreclosure sale for a credit bid of $384,000 and resold the
16 Broad Property to a third party in 2009 for $420,000 (“Broad
17 Sale”). The Bronsons contend that the the Broad Sale established
18 the value of the Broad Property, which in turn established the
19 value of the Office Building, by “extrapolation.” Therefore, the
20 Bronsons conclude, TMT and his counsel should have disclosed the
21 Broad Property and its sale in the Deficiency Lawsuit and in
22 various relief from stay proceedings preceding the Deficiency
23 Lawsuit.
24 We disagree with the Bronsons’ analysis and conclusion for
25 at least three reasons. First, just because the Bronsons
26 believed that the Broad Property was comparable to the Office
27 Building does not necessarily make it so for valuation and
28 disclosure purposes. Second, relief from stay proceedings are
25
1 contested matters, and there is no Civil Rule 26(a) duty to
2 disclose in contested matters. See Rule 9014(c). And third, to
3 the extent TMT and his counsel generally had a duty to disclose
4 in the Deficiency Lawsuit under Civil Rule 26(a), the Bronsons
5 already were aware of the key facts regarding the Broad Property
6 and the Broad Sale by the time they filed their Civil
7 Rule 12(b)(6) motion to dismiss, as they recited those facts in
8 their dismissal motion. Consequently, that the bankruptcy court
9 did not enforce this supposed disclosure duty in the Deficiency
10 Lawsuit was at worst harmless error, when the Bronsons obviously
11 already knew the key facts regarding the Broad Property and the
12 Broad Sale by the time they filed their dismissal motion. As an
13 appellate court, we must ignore harmless error. See Litton Loan
14 Serv'g, LP v. Garvida (In re Garvida),
347 B.R. 697, 704 (9th
15 Cir. BAP 2006).
16 The Bronsons also suggest in their appeal brief that the
17 bankruptcy court “rushed to convert” their chapter 11 bankruptcy
18 case to chapter 7 while at the same time depriving them of an
19 evidentiary hearing on the FMV Issue in the Deficiency Lawsuit.
20 As we explained above, however, no aspect of the Deficiency
21 Lawsuit was going to resolve in the Bronsons’ favor the defects
22 in their amended plan or the apparent cause for conversion under
23 § 1112(b).
24 Moreover, the bankruptcy court record tells a much different
25 story regarding why the Second Conversion/Dismissal Motion was
26 heard before the FMV Issue. The Bronsons brought two motions in
27 the Deficiency Lawsuit that explicitly sought relief based on the
28 FMV Issue. The first was their Civil Rule 12(b)(6) motion filed
26
1 in November 2009. The court denied this dismissal motion, and
2 the Bronsons have not argued on appeal that the bankruptcy court
3 erred by denying their dismissal motion. Nor do we independently
4 perceive any error in this ruling. The Bronsons did not again
5 bring a motion focusing on the FMV Issue until March 2012, when
6 they filed a motion for a judgment on the pleadings. In the
7 interim between these two filings the litigants hotly contested
8 the Fee Issues and largely ignored the FMV Issue. Significantly,
9 in September 2010, when they were still represented by counsel,
10 the Bronsons filed their own summary judgment motion focusing on
11 the Fee Issues. If they were anxious to refocus attention on the
12 FMV Issue, we do not understand why they did not address the FMV
13 Issue in that motion. At a minimum, this would have forced TMT
14 to come forward and provide some evidentiary support for his
15 lower valuation of the Office Building.
16 Meanwhile, the Second Conversion/Dismissal Motion was filed
17 in October 2010, but the bankruptcy court did not hear it until
18 April 2012, roughly 18 months later. We cannot fathom how the
19 Bronsons can characterize this as a “rush to judgment” on the
20 motion to convert. In any event, the record reflects that the
21 setting of hearings on the FMV Issue and on the Second
22 Conversion/Dismissal Motion was not a unilateral decision of the
23 court governed by whim, but rather was a function of the parties’
24 conduct and how they chose to litigate their disputes.
25 The Bronsons devote none of their appellate brief to arguing
26 that the bankruptcy court erred in denying their Reconsideration
27 Motion or erred in denying the recusal request they made in their
28 reply in support of their Reconsideration Motion. We decline to
27
1 address these issues because the Bronsons chose not to argue them
2 on appeal.18 See Brownfield v. City of Yakima,
612 F.3d 1140,
3 1149 n.4 (9th Cir. 2010) (citing Greenwood v. F.A.A.,
28 F.3d
4 971, 977 (9th Cir. 1994)); Van Zandt v. Mbunda (In re Mbunda),
5
484 B.R. 344, 350 n.4 (9th Cir. BAP 2012).
6 CONCLUSION
7 For the reasons set forth above, we AFFIRM the bankruptcy
8 court’s conversion order and the bankruptcy court’s order denying
9 the Reconsideration Motion.
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
18
26 Nonetheless, we note that the bankruptcy court carefully
considered whether recusal was appropriate during the June 1,
27 2012 hearing on the Reconsideration Motion. Suffice it to say we
perceive no error in this recusal analysis or in the court’s
28 decision against recusal.
28
