In re: Homesite Holdings LLC ( 2023 )

FILED
NOT FOR PUBLICATION JUN 6 2023
SUSAN M. SPRAUL, CLERK
UNITED STATES BANKRUPTCY APPELLATE PANEL U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
OF THE NINTH CIRCUIT
In re: BAP Nos. SC-22-1112-BSG
HOMESITE HOLDINGS LLC, SC-22-1113-BSG
Debtor. (Related Appeals)
HOMESITE HOLDINGS LLC, Bk. No. 20-03216-MM7
Appellant,
v. MEMORANDUM∗
RONALD E. STADTMUELLER, Chapter 7
Trustee; HOUSHANG AFRAMIAN;
SMDL, LLC; T2, LLC; TIFFANY L.
CARROLL, Acting United States Trustee,
Appellees.
Appeal from the United States Bankruptcy Court
for the Southern District of California
Margaret M. Mann, Bankruptcy Judge, Presiding
Before: BRAND, SPRAKER, and GAN, Bankruptcy Judges.
INTRODUCTION
Appellant, chapter 7 1 debtor Homesite Holdings LLC ("Homesite"),
appeals an order denying its motion to convert its case to chapter 11 under
§ 706(a). The bankruptcy court denied conversion on the basis of bad faith.
∗ 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.
1 Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532, and all "Rule" references are to the Federal Rules
1
The underlying motions and appeals2 were brought by Michael R.
Cartwright II, Homesite's sole member and manager, on behalf of Homesite.
Appellees Houshang Aframian and chapter 7 trustee Ronald Stadtmueller
("Trustee") have moved to dismiss the appeals, arguing that Cartwright had
no authority to bring them on Homesite's behalf. They argue that only
Trustee, as Homesite's representative, could bring them. In an effort to
remedy this issue, Cartwright has moved to intervene.
We conclude that any argument as to Cartwright's authority to bring
the appeals on behalf of Homesite has been waived. We further conclude that
the bankruptcy court did not abuse its discretion in denying the motion to
convert. Accordingly, the motion to dismiss is DENIED, the motion to
intervene is DENIED as moot, and the order denying conversion is
AFFIRMED.3
FACTS
Homesite, a New Mexico limited liability company, was formed in
2014. Cartwright became the sole member and manager of Homesite in
November 2019.
Cartwright, as managing member, filed Homesite's chapter 7
of Bankruptcy Procedure.
2 Homesite has also appealed the order denying reconsideration of the conversion
order, but since we are affirming the conversion order, we need not address whether the
bankruptcy court abused its discretion in denying reconsideration.
3 Trustee's request for judicial notice filed on January 17, 2023, is DENIED. The
documents submitted are not relevant to the resolution of the appeal. See Santa Monica
Food Not Bombs v. City of Santa Monica, 450 F.3d 1022, 1025 n.2 (9th Cir. 2006).
2
bankruptcy case on June 25, 2020. At the time, Homesite owned four vacant
lots in Pacific Palisades, California. The lots were subject to liens held by
Aframian and Big A Rancho Santa Fe LLC ("Big A"). Prior to the bankruptcy,
Aframian had scheduled a foreclosure sale for three of the lots. Homesite's
request for a temporary restraining order ("TRO") and injunction to stop the
Aframian sale was denied. According to Cartwright, Homesite had no
alternative but to file for bankruptcy to prevent the sale.
Eighteen months into the chapter 7 case, Trustee discovered that the
amount Big A loaned to Homesite was potentially far less than the amount
stated in the bankruptcy schedules and that Big A's lien might be avoidable.
Trustee also discovered that the loan disbursements were not made by Big A
but by its principal, and they were not made to Homesite but to one of
Cartwright's other entities before he acquired an interest in Homesite. To
pursue the Big A matter, Trustee sought approval of loans to fund the
litigation to be provided by two unsecured creditors of Homesite.
Before the bankruptcy court ruled on Trustee's borrowing motion,
Homesite moved to convert its case to chapter 11 under § 706(a).4 Citing
Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365 (2007), Homesite
argued that it should be allowed to convert its case to chapter 11. No one had
accused it of acting in bad faith or of misconduct in its bankruptcy case, nor
had anyone alleged any ground that would warrant reconversion to chapter 7
4
Section 706(a) provides, in relevant part: "The debtor may convert a case under
this chapter to a case under chapter 11 . . . at any time, if the case has not been converted
under section 1112 . . . ."
3
under § 1112(b) after conversion to chapter 11.
Homesite argued that conversion would be in the best interests of
creditors and the estate. The case was more complex than anticipated,
particularly given unexpected, multimillion dollar claims and litigation from
two unsecured creditors. Cartwright agreed to pay all administrative
expenses to date and to fund the examination of all claims, not just Big A's.
Homesite would also explore whether financing could be obtained to develop
the lots. If not, then its plan would be to sell them and distribute the proceeds
to holders of allowed claims. Homesite argued that a liquidation plan would
avoid the additional administrative compensation to Trustee.
Several parties objected to conversion, including Aframian and Trustee.
Aframian argued that conversion should be denied because Homesite and
Cartwright had engaged in bad faith. For example, Aframian discovered the
existence of an undisclosed, confidential settlement agreement between
Cartwright (and his entities) and Firooz Payan, a former member of Homesite
who owed Cartwright money from a prior judgment. The settlement
agreement, executed one month after Cartwright filed Homesite's bankruptcy
case, provided that the Cartwright entities would pursue litigation against
Aframian regarding Homesite's property and that the parties would share
equally in any proceeds should the Cartwright entities prevail. Aframian
argued that Homesite's property was property of the bankruptcy estate and
that Cartwright knew any attempt to transfer it required court approval. He
further argued that, because this was an agreement "relating to property of
4
the estate," Cartwright was required to disclose it under § 521(a)(4). Aframian
also argued that the Big A lien was fraudulent and that Cartwright was not
cooperating with Trustee in providing documentation concerning it.
Trustee also opposed conversion citing Homesite's bad faith. Trustee
argued that the Cartwright settlement agreement, drafted without his
knowledge, consent, or permission from the court, impermissibly disposed of
estate property. There was also the Big A lien, which Trustee maintained was
an avoidable fraudulent transfer. Finally, argued Trustee, Homesite's efforts
to convert to chapter 11 nearly two years after filing its chapter 7 case, and on
the heels of his Big A lien investigation, evidenced more bad faith.
In reply, Homesite argued that the Cartwright settlement agreement
neither affected nor disposed of estate property; rather, it allowed the
Cartwright entities to pursue their own fraudulent transfer claims against
Aframian. Further, argued Homesite, the settlement agreement stated that it
was "conditional" and applied only to the extent the Cartwright entities
received any of Homesite's property, which could not happen until the
bankruptcy case was resolved and the creditors' claims addressed.
After a hearing, the bankruptcy court denied the motion to convert
("Conversion Order"). It determined that Homesite was ineligible to be a
chapter 11 debtor due to Homesite and Cartwright's bad faith. The court's
finding was limited to the undisputed facts, namely, the contents and effect of
the undisclosed Cartwright settlement agreement and its related litigation,
and Homesite's lack of disclosure and transparency about the Big A lien.
5
Because of these issues, the court said it lacked confidence in Cartwright to
comply with his fiduciary duties if he were in control of Homesite as a
chapter 11 debtor-in-possession.5 Homesite timely appealed the Conversion
Order and the bankruptcy court's denial of its motion for reconsideration.
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
1. Have appellees waived the argument that Cartwright had no authority
to bring the appeals on behalf of Homesite?
2. Did the bankruptcy court abuse its discretion in denying the motion to
convert?
STANDARDS OF REVIEW
Whether an appellant has prudential standing is a question of law we
review de novo. See Motor Vehicle Cas. Co. v. Thorpe Insulation Co. (In re Thorpe
Insulation Co.), 677 F.3d 869, 879 (9th Cir. 2012).
We review the bankruptcy court's denial of a motion to convert for
abuse of discretion. Levesque v. Shapiro (In re Levesque), 473 B.R. 331, 335 (9th
Cir. BAP 2012). A bankruptcy court abuses its discretion if it applies an
incorrect legal standard or its factual findings are illogical, implausible, or
without support in the record. See TrafficSchool.com, Inc. v. Edriver Inc., 653
5
Because Homesite had filed an amended petition for a case under chapter 11 just
before the conversion hearing, the Conversion Order, to the extent necessary, also
reconverted the case to chapter 7 and reappointed Trustee.
6
F.3d 820, 832 (9th Cir. 2011).
A bankruptcy court's finding of bad faith is reviewed for clear error.
Khan v. Barton (In re Khan), 846 F.3d 1058, 1063 (9th Cir. 2017). Factual
findings are clearly erroneous if they are illogical, implausible, or without
support in the record. Retz v. Samson (In re Retz), 606 F.3d 1189, 1196 (9th Cir.
2010). "Where there are two permissible views of the evidence, the factfinder's
choice between them cannot be clearly erroneous." Anderson v. City of
Bessemer City, 470 U.S. 564, 574 (1985).
"We may affirm on any ground supported by the record, regardless of
whether the bankruptcy court relied upon, rejected, or even considered that
ground." Fresno Motors, LLC v. Mercedes Benz USA, LLC, 771 F.3d 1119, 1125
(9th Cir. 2014) (cleaned up).
DISCUSSION
A. Appellees waived the argument that Cartwright had no authority to
bring the appeals on Homesite's behalf.
Aframian and Trustee have moved to dismiss Homesite's appeal of the
Conversion Order. They argue that Cartwright had no authority to seek
conversion or appeal the adverse order on Homesite's behalf; only Trustee
could do so. Relying on C.W. Mining Co. v. Aquila, Inc. (In re C.W. Mining Co.),
636 F.3d 1257, 1263 (10th Cir. 2011), and Bear Creek Trail, LLC v. BOKF, N.A.,
f/k/a Bank of Texas (In re Bear Creek Trail, LLC), 35 F.4th 1277, 1281-82 (10th Cir.
2022), they argue that once a chapter 7 trustee has been appointed in a
corporate debtor's case, the debtor's former management, corporate officers,
7
directors and shareholders are completely ousted; the only person with
authority to act on behalf of the debtor or to bring an appeal on the debtor's
behalf is the trustee, and Trustee in this case wants to dismiss the appeal.6
One aspect of the prudential standing doctrine for purposes of
bankruptcy appellate standing is that the appellant has been "directly and
adversely affected pecuniarily" by the bankruptcy court's decision. Palmdale
Hills Prop., LLC v. Lehman Com. Paper, Inc. (In re Palmdale Hills Prop., LLC), 654
F.3d 868, 874 (9th Cir. 2011); Fondiller v. Robertson (In re Fondiller), 707 F.2d
441, 442-43 (9th Cir. 1983). Another aspect of prudential standing is that the
appellant demonstrate that it is asserting its own legal rights and not those
belonging to others. Veal v. Am. Home Mortg. Servicing, Inc. (In re Veal), 450
6
In C.W. Mining, an involuntary corporate chapter 11 case was converted to chapter
7 on a creditor's motion. Debtor, through its former managers, opposed the motion and
filed an appeal on behalf of debtor following conversion. The chapter 7 trustee moved to
dismiss the appeal, arguing that the former managers no longer had authority to act on
debtor's behalf. 636 F.3d at 1259.
The Tenth Circuit Court of Appeals held that former managers of a chapter 7
corporate debtor lack authority to bring an appeal on behalf of the debtor corporation over
the objection of the chapter 7 trustee. Id. at 1265. The circuit court said the question was not
whether the debtor had standing as a "person aggrieved," but whether debtor's former
managers had authority to appeal on debtor's behalf in light of the trustee's appointment.
Id. at 1261. The circuit court carved out three exceptions to its ruling. First, corporate
managers in a chapter 11 case being converted to chapter 7 may file an appeal on the
debtor's behalf prior to the appointment of the trustee. Second, the rule does not apply to
individual chapter 7 debtors because corporate law is not applicable in such cases. Third,
former managers can appeal a bankruptcy court order "in their own right" if they qualify
as "persons aggrieved." Id. at 1265-66.
The Tenth Circuit reaffirmed its C.W. Mining holding in Bear Creek, an involuntary
corporate chapter 7 case. 35 F.4th at 1281-82. There, the circuit court affirmed the district
court's ruling that only the chapter 7 trustee could appeal the conversion order on behalf
of debtor and it dismissed debtor's appeal brought by its former managers and attorney.
8
B.R. 897, 907 (9th Cir. BAP 2011).
Although Aframian and Trustee do not dispute Homesite's right to seek
conversion under § 706(a) or argue that Homesite is not a "person aggrieved"
by the Conversion Order with standing to appeal, they do contest
Cartwright's authority to seek conversion or to appeal the adverse order on
Homesite's behalf. 7 Following the logic of their argument, if Cartwright lacks
authority to bring the appeals on behalf of Homesite as its managing
member, he must have also lacked authority to file the motion to convert on
Homesite's behalf since he was divested of his management powers the
moment the bankruptcy case was filed. Homesite counters that the argument
of whether Cartwright lacked authority or standing to act on Homesite's
behalf has been waived because Aframian and Trustee failed to raise it before
the bankruptcy court. We agree.
No one challenged Cartwright's authority to seek conversion of
Homesite's case to chapter 11 under § 706(a) at any point before the
bankruptcy court. A party waives an argument relating to statutory or
prudential standing if the argument was not raised in the bankruptcy court.
7
We are mindful of the recent decision by the Ninth Circuit Court of Appeals in
Clifton Capital Group, LLC v. Sharp (In re East Coast Foods, Inc.), ___ F.4th ___, 2023 WL
3296746 (9th Cir. May 8, 2023), which casts doubt on use of the "person aggrieved" test, a
prudential standing concept long-utilized in this circuit for bankruptcy appellate standing,
in favor of the Article III standard of "injury in fact." We conclude that East Coast Foods is
not applicable here. Homesite's Article III standing is not in question; it clearly suffered an
injury in fact by the bankruptcy court's decision denying conversion. Rather, the issue is
whether Homesite's principal had the authority to file the motion to convert and the
subsequent appeal on behalf of Homesite, which does not implicate Article III standing.
9
See City of Almaty v. Khrapunov, 956 F.3d 1129, 1134 (9th Cir. 2020). Prudential
standing is not jurisdictional and "can be deemed waived if not raised in the
[bankruptcy] court." See Bd. of Nat. Res. v. Brown, 992 F.2d 937, 946 (9th Cir.
1993); see also 461 7th Ave. Mkt., Inc. v. Delshah 461 Seventh Ave., LLC (In re 461
7th Ave. Mkt., Inc.), No. 20-3555, 2021 WL 5917775, at *1 (2d. Cir. Dec. 15, 2021)
(because the question of whether debtor's former management lacked
standing to seek a stay pending appeal on corporate debtor's behalf for an
order converting case to chapter 7 was not a jurisdictional question but one of
real-party-in-interest, and because the conversion order could be affirmed on
other grounds, the court would not decide the issue of who had authority to
seek a stay on debtor's behalf).
As a result, the argument challenging Cartwright's prudential standing
for the first time on appeal has been waived, and the motion to dismiss is
denied. Consequently, the motion to intervene is denied as moot. Therefore,
we now review the merits of the bankruptcy court's decision with respect to
the Conversion Order.
B. The bankruptcy court did not abuse its discretion in denying the
motion to convert.
1. Legal standards for conversion from chapter 7 to chapter 11
Homesite sought to convert its case to chapter 11 under § 706(a), which
allows a debtor to convert from chapter 7 to another chapter if the case has
not previously been converted, and the debtor is eligible to be a debtor under
10
the chapter to which it is to be converted. See § 706(a), (d). 8 The right to
convert, however, is not absolute. Marrama, 549 U.S. at 372. In Marrama, the
Supreme Court concluded that a debtor's right to convert a chapter 7 case to
chapter 13 is specifically limited by § 706(d). A debtor may not be eligible to
be a debtor under the proposed chapter of conversion if "cause" exists to
immediately dismiss the case or reconvert the case back to the chapter under
which it was initially pending. Id. at 373-74. Bad faith is routinely held to
constitute "cause" for conversion or dismissal of a chapter 13 case under
§ 1307(c). Id. at 373. "[A] debtor who acts in bad faith prior to, or in the course
of, filing a Chapter 13 petition by, for example, fraudulently concealing
significant assets, thereby forfeits his right to obtain Chapter 13 relief." Id. at
367, 373-74.9
Although Marrama involved an attempted conversion from chapter 7 to
chapter 13, it applies equally to cases in which a debtor seeks to convert from
chapter 7 to chapter 11. In re Levesque, 473 B.R. at 339. Thus, if "cause" exists to
convert a hypothetical chapter 11 case under § 1112(b), the chapter 7 debtor
seeking to convert to chapter 11 is ineligible for relief under that chapter
within the meaning of § 706(d). "Cause" to convert or dismiss a chapter 11
8
Section 706(d) provides: "Notwithstanding any other provision of this section, a
case may not be converted to a case under another chapter of this title unless the debtor
may be a debtor under such chapter."
9 We recently opined that Marrama is still good law after Law v. Siegel, 571 U.S. 415(2014) and Nichols v. Marana Stockyard & Livestock Market, Inc. (In re Nichols), 10 F.4th 956(9th Cir. 2021). See Richards v. Marshack (In re Richards), BAP No. CC-21-1178-LTF, 2022 WL
884593, at *5 (9th Cir. BAP Mar. 24, 2022), appeal filed June 15, 2022.
11
case includes the factors expressly listed in § 1112(b)(4), or if the debtor has
engaged in "bad faith" conduct. See Marrama, 549 U.S. at 373-74; Marsch v.
Marsch (In re Marsch), 36 F.3d 825, 828 (9th Cir. 1994) (chapter 11 case, holding
that filing a bankruptcy petition in bad faith constitutes cause for dismissal);
St. Paul Self Storage Ltd. P'ship v. Port Auth. of St. Paul (In re St. Paul Self Storage
Ltd. P'ship), 185 B.R. 580, 582 (9th Cir. BAP 1995) (same).
With respect to conversion, bankruptcy courts enjoy broad discretion in
determining what factual circumstances constitute "cause" under § 1112(b).
Sullivan v. Harnisch (In re Sullivan), 522 B.R. 604, 614 (9th Cir. BAP 2014). The
test for a bad faith filing is "whether a debtor is attempting to unreasonably
deter and harass creditors or attempting to effect a speedy, efficient
reorganization on a feasible basis." In re Marsch, 36 F.3d at 828 (citing Idaho
Dep't of Lands v. Arnold (In re Arnold), 806 F.2d 937, 939 (9th Cir. 1986)).
The court may consider a number of factors when determining bad
faith. Arnold adopted as indicia of a bad faith filing those factors earlier
articulated in Little Creek Development Co. v. Commonwealth Mortgage Co. (In re
Little Creek Development Co.), 779 F.2d 1068 (5th Cir. 1986):
(1) debtor has only one asset, such as a tract of undeveloped or developed
real property;
(2) the secured creditors' lien encumbers this tract;
(3) there are generally no employees except for the principals;
(4) there is little or no cash flow, and no available sources of income to sustain
a plan of reorganization or to make adequate protection payments;
(5) there are few, if any, unsecured creditors whose claims are relatively
small;
(6) the property has usually been posted for foreclosure because of arrearages
12
on the debt and the debtor has been unsuccessful in defending actions
against the foreclosure in state court;
(7) there are allegations of wrongdoing by the debtor or its principals;
(8) debtor is afflicted with the "new debtor syndrome" in which a one-asset
entity has been created or revitalized on the eve of foreclosure to isolate the
insolvent property and its creditors;
(9) bankruptcy offers the only possibility of forestalling loss of the property.
Id. at 1072-73; see also In re St. Paul Self Storage Ltd. P'ship, 185 B.R. at 582-83(applying a five-factor good faith test for filing a chapter 11 plan which
includes some of the same factors as Arnold/Little Creek); Stolrow v. Stolrow's,
Inc. (In re Stolrow's Inc.), 84 B.R. 167, 171 (9th Cir. BAP 1988) (discussing the
Little Creek factors for determining chapter 11 dismissal for cause).
2. The bankruptcy court's finding of bad faith was not clearly
erroneous.
The bankruptcy court cited Little Creek in its decision, but proceeded to
apply Leavitt v. Soto (In re Leavitt), 171 F.3d 1219 (1999), as stated in Drummond
v. Welsh (In re Welsh), 711 F.3d 1120 (9th Cir. 2013), which concerned chapter
13 and set forth a four-factor test for determining bad faith:
(1) whether the debtor misrepresented facts in the petition or plan, unfairly
manipulated the Bankruptcy Code, or filed the chapter 13 petition or plan in
an inequitable manner;
(2) the debtor's history of filings and dismissals;
(3) whether the debtor only intended to defeat state court litigation;
(4) whether egregious behavior is present.
In re Welsh, 711 F.3d at 1129 n.45 (citing In re Leavitt, 171 F.3d at 1224).
After considering these factors, the bankruptcy court determined that
certain undisputed facts "overwhelmingly" supported a finding that
13
Homesite and Cartwright's bad faith rendered Homesite ineligible to be a
chapter 11 debtor. Accordingly, conversion was denied. The court's finding of
bad faith hinged on the Big A lien and the Cartwright settlement agreement.10
The Big A lien evidenced Homesite's manipulation. The court noted
that the disclosures kept changing and were still incorrect regarding the
amount of the debt, the payments made, and the consideration received by
Homesite as opposed to other Cartwright entities. Cartwright had also
engaged in "gamesmanship" during his Rule 2004 examination declining to
answer Trustee's questions. The court found that the Cartwright entities' use
of Homesite's equity to pay their individual debts was also egregious
behavior.
The Cartwright settlement agreement was another example of
manipulation. The court found that concealing litigation that involved estate
property and resulted in a settlement that divided the property outside of the
bankruptcy court was also egregious behavior. Additionally, the court found
that Homesite had engaged in forum shopping. Homesite filed its bankruptcy
case to avoid the denial of the TRO in the state court litigation that
precipitated the bankruptcy filing. Cartwright's undisclosed litigation and
resulting settlement corroborated the forum shopping finding.
Homesite argues that the bankruptcy court misapplied the Leavitt
factors and that the record does not support a finding of bad faith as a basis
10
Arguably, had the bankruptcy court applied the Arnold/Little Creek factors, the
record supports a finding that nearly all of them were met.
14
to deny the motion to convert. 11 Specifically, Homesite argues that the
bankruptcy court misapplied the first Leavitt factor when it found that
Cartwright's act of encumbering Homesite's equity with the Big A lien was
evidence of bad faith because it was a "manipulation of Homesite," and not a
"manipulation of the Bankruptcy Code" as required by Leavitt. Homesite
argues that, because the cross-collateralization of the Big A loan with
Homesite's lots occurred before the bankruptcy, it could not have constituted
a manipulation of the Bankruptcy Code. Regardless of when the cross-
collateralization occurred or for what purpose, Cartwright scheduled the Big
A lien as a secured debt of Homesite yet failed to provide any documentation
to Trustee showing how much, if any, of the proceeds went to Homesite, and
he scheduled debt owed by other entities on the loan as part of Homesite's
bankruptcy. These acts were clearly a manipulation of the Bankruptcy Code.
In addition, the disclosures in the schedules kept changing and still
contained incorrect information. Homesite argues there was no bad faith
because the amendments were made at Trustee's insistence that they reflect
11
Homesite does not argue that the bankruptcy court erred by applying the bad
faith test in Leavitt as opposed to the bad faith test in Arnold/Little Creek. As long as the
bankruptcy court applies a totality-of-the-circumstances test for deciding bad faith in a
chapter 11 case, whether it is Leavitt or Arnold/Little Creek or another similar test, we will
not reverse if its finding of bad faith is supported by the record. See Prometheus Health
Imaging, Inc. v. U.S. Tr. (In re Prometheus Health Imaging, Inc.), BAP No. CC-14-1576-FKiKu,
2015 WL 6719804, at *4 n.4 (9th Cir. BAP Nov. 2, 2015) (citing In re Mitchell, 357 B.R. 142,
154 (Bankr. C.D. Cal. 2006) and noting that courts applying chapter 11 and chapter 13 bad
faith tests generally consider a variety of nonexclusive factors). "The bankruptcy court is
not required to find that each factor is satisfied or even to weigh each factor equally.
Rather, the factors are simply tools that the bankruptcy court employs in considering the
totality of the circumstances." Id. at *4 (cleaned up).
15
the value Homesite actually received from Big A. But Trustee disputed that
contention when Homesite made it before the bankruptcy court. He wanted
Homesite's Schedule D amended to reflect the proper allocation of the
amount of encumbrance on each lot since it was not clear in the initial
Schedule D.
Moreover, the first Leavitt factor is also satisfied where the debtor
misrepresented facts in the petition or plan. The record reflects that facts were
misrepresented in the petition. Homesite also fails to mention the bankruptcy
court's additional finding that there was evidence that the Big A lien was a
fraudulent transfer. And no amended Schedule H was ever filed to list the
codebtors on the Big A loan. The bankruptcy court's finding that the Big A
lien supported a finding of bad faith was not illogical, implausible, or without
support in the record.
Homesite next argues that the bankruptcy court incorrectly interpreted
the Cartwright settlement agreement as disposing of Homesite's property or
property of the bankruptcy estate in violation of the automatic stay. Homesite
argues that the settlement was a legitimate attempt to divide Cartwright's net
gains from any chapter 7 distribution between Cartwright and Payan, not an
attempt to exercise control over and divvy up the estate's property in
violation of the automatic stay. We disagree.
The Cartwright settlement agreement says that Cartwright will
"attempt to litigate an action" against Aframian regarding Homesite's
property. It further says that if Cartwright should prevail, "any proceeds from
16
any such action" are subject to distribution between Cartwright and Payan.
Contrary to Homesite's position, the agreement is not premised on Homesite
being out of bankruptcy, and it is not limited to mere equity transfers or net
recoveries from the estate. Instead, it provides for a sharing of gross proceeds
if Cartwright prevails. There is no reference to "net" proceeds after payments
of creditors which could support an intent to affect only equity interests.
Thus, the undisclosed, postpetition Cartwright settlement agreement
which attempted to exercise control over estate property and violated the
automatic stay under § 362(a)(3) was both a manipulation of the Bankruptcy
Code and egregious. The bankruptcy court's finding that it supported a
finding of bad faith was not illogical, implausible, or without support in the
record.
Next, Homesite takes issue with the bankruptcy court's finding that
Cartwright filed Homesite's bankruptcy case to avoid denial of the TRO and
argues that pending litigation affected by a bankruptcy filing is insufficient,
without more, to support a finding of bad faith. First, we disagree with
Homesite's statement of the law in the Ninth Circuit. Filing a bankruptcy case
to defeat or delay state court litigation, even if that is not the only purpose for
the filing, can constitute bad faith. See In re Khan, 846 F.3d at 1066; Eisen v.
Curry (In re Eisen), 14 F.3d 469, 470-71 (9th Cir. 1994); Chinichian v. Campolongo
(In re Chinichian), 784 F.2d 1440, 1445 (9th Cir. 1986). Second, Cartwright
admitted that he filed Homesite's bankruptcy case to avoid the consequences
of denial of the TRO. The bankruptcy court rejected as "sophistry"
17
Cartwright's later assertion that he filed the case to protect the equity in
Homesite's lots for creditors.
In any case, the bankruptcy court's finding of forum shopping was
supported by more than the desire to avoid denial of the TRO. The court also
found that Cartwright's undisclosed litigation resolved by application of
Homesite's equity also evidenced forum shopping. The implication here is
that the bankruptcy case was filed to take advantage of the automatic stay
while Cartwright pursued his and Homesite's interests in another court. See
In re St. Paul Self Storage Ltd. P'ship, 185 B.R. at 583 (forum shopping
constitutes bad faith).
The remainder of Homesite's arguments challenge what it argues are
other "bad faith findings" the bankruptcy court made to support denial of the
motion to convert. These include: (1) Homesite's earlier bankruptcy filing and
use of a different EIN in that case; (2) Cartwright might not be the legal
managing member of Homesite; (3) Homesite would not investigate and
object to the Aframian lien; (4) whether Homesite has an accountant or any
bank accounts; and (5) the value of the lots. Homesite's argument as to these
other alleged bad faith findings was raised at the conversion hearing while
discussing the bankruptcy court's tentative ruling. The bankruptcy court
stated repeatedly that it did not rely on any of these facts for its finding of
bad faith; they were simply background, and some of them were undisputed.
The court made this statement again in its order denying reconsideration. The
court was clear that its bad faith finding was limited to the contents and effect
18
of the undisclosed Cartwright settlement agreement and its related litigation,
and Homesite's lack of disclosure and transparency about the Big A lien.
Therefore, we need not review facts that were not part of, nor material to, the
bankruptcy court's finding of bad faith.
Homesite and Cartwright's conduct supports the bankruptcy court's
finding that such acts, taken together, revealed bad faith, and therefore
Homesite was ineligible for chapter 11. Accordingly, the bankruptcy court
did not abuse its discretion in denying the motion to convert.
CONCLUSION
For the reasons stated above, the motion to dismiss is DENIED, the
motion to intervene is DENIED as moot, and the Conversion Order is
AFFIRMED.
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