Allana Baroni v. David Seror ( 2022 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
IN RE ALLANA BARONI, No. 21-55076
Debtor,
D.C. No.
2:20-cv-04338-
ALLANA BARONI, MWF
Appellant,
v. OPINION
DAVID SEROR, Chapter 7 Trustee,
Appellee.
IN RE ALLANA BARONI, No. 21-55150
Debtor,
D.C. No.
2:19-cv-07548-
ALLANA BARONI, MWF
Appellant,
v.
DAVID SEROR, Chapter 7 Trustee;
BANK OF NEW YORK MELLON;
WELLS FARGO BANK, N.A., as
Trustee for Structured Adjustable
Rate Mortgage Loan Trust Mortgage
2 IN RE BARONI
Pass-Through Certificates, Series
2005-17,
Appellees,
v.
NATIONSTAR MORTGAGE LLC,
Movant.
Appeal from the United States District Court
for the Central District of California
Michael W. Fitzgerald, District Judge, Presiding
Argued and Submitted December 7, 2021
Pasadena, California
Filed June 8, 2022
Before: Paul J. Kelly, Jr., * Milan D. Smith, Jr., and
Danielle J. Forrest, Circuit Judges.
Opinion by Judge Forrest
*
The Honorable Paul J. Kelly, Jr., United States Circuit Judge for
the U.S. Court of Appeals for the Tenth Circuit, sitting by designation.
IN RE BARONI 3
SUMMARY **
Bankruptcy
The panel affirmed the bankruptcy court’s orders
converting Allana Baroni’s bankruptcy case from Chapter
11 to Chapter 7 and ordering Baroni to turn over
undistributed assets in her possession to the Chapter 7
bankruptcy estate.
The panel held that the bankruptcy court properly
exercised its discretion in converting the case to Chapter 7
for cause under 11 U.S.C. § 1112(b)(1). The panel held that
the party seeking relief under § 1112(b)(1) has the initial
burden of persuasion to establish that cause exists for
granting such relief. The panel held that failing to make
required payments can be a material default of a Chapter 11
plan, even if the debtor has made payments for an extended
period before the default or taken other significant steps to
perform the plan. The panel concluded that the bankruptcy
court did not err in finding that Baroni’s default in paying
Bank of New York Mellon’s secured claim was cause for
conversion because both the amount and duration of this
default were significant. In addition, conversion to Chapter
7 was in the best interests of the creditors and the bankruptcy
estate, and Baroni’s ability to immediately cure her default
was not an unusual circumstance indicating that the
creditors’ and the estate’s interests were best served by not
granting relief under § 1112(b)(1).
**
This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
4 IN RE BARONI
The panel further held that the bankruptcy court did not
err in requiring Baroni to turn over the rent and sale proceeds
from her rental properties to the Chapter 7 trustee. Upon the
confirmation of a Chapter 11 plan, the property of the
bankruptcy estate vests in the debtor under 11 U.S.C. § 1141.
In determining whether assets revest in the Chapter 7 estate
upon conversion, courts consider whether there is an explicit
plan provision regarding the distribution of future proceeds
of an asset to creditors and whether the plan retains broad
powers in the bankruptcy court to oversee implementation of
the plan. The panel concluded that under Baroni’s Chapter
11 plan, she did not receive the rental properties free and
clear of all claims and interest of creditors at confirmation,
but rather the income from the rental properties remained
subject to the plan because the premise of the plan was to
pay creditors with the ongoing income stream from those
properties. The panel concluded that to hold that the
unadministered rent and sale proceeds did not revest in the
bankruptcy estate upon conversion to Chapter 7 would
frustrate the intent of the plan and would be contrary to many
of its provisions.
COUNSEL
M. Jonathan Hayes (argued) and Matthew D. Resnik, Resnik
Hayes Moradi LLP, Encino, California, for Appellant.
Jessica L. Bagdanov (argued), Steven T. Gubner, and Susan
K. Seflin, Brutzkus Gubner, Woodland Hills, California, for
Appellee David Seror.
Justin D. Balser and Preston K. Ascherin, Akerman LLP,
Los Angeles, California, for Appellee Bank of New York
Mellon.
IN RE BARONI 5
OPINION
FORREST, Circuit Judge:
Appellant Allana Baroni defaulted under her Chapter 11
bankruptcy plan by refusing to pay Appellee Bank of New
York Mellon 1 (Bank of NYM) after she lost her adversary
proceeding challenging the bank’s secured claim. This was
not the first time that Baroni had refused to pay a secured
creditor as required under her plan. As a result, the
bankruptcy court granted Bank of NYM’s motion to convert
the bankruptcy case from Chapter 11 to Chapter 7 and
ordered Baroni to turn over undistributed assets in her
possession to the Chapter 7 bankruptcy estate. Baroni
challenged these two decisions in separate appeals. We have
jurisdiction under 28 U.S.C. § 158(d), and we affirm both
orders.
I. BACKGROUND
A. Baroni files for bankruptcy
Baroni filed for bankruptcy after defaulting on several
mortgage loans that she received to purchase rental
properties. She initially filed under Chapter 13, but her case
was converted to Chapter 11. Bank of NYM and Wells
Fargo, 2 which is not a party in these appeals, filed several
1
Bank of NYM’s full name of record is “The Bank of New York
Mellon f/k/a The Bank of New York, as Successor Trustee to JP Morgan
Chase Bank, N.A., as Trustee for the Holders of SAMI II Trust 2006-
AR6, Mortgage Pass Through Certificates, Series 2006-AR6.”
2
Wells Fargo’s full name is “Wells Fargo Bank, N.A. As Trustee
For Structured Adjustable Rate Mortgage Loan Trust Mortgage Pass-
Through Certificates, Series 2005-17.”
6 IN RE BARONI
proofs of claim asserting secured claims based on the deeds
of trust that Baroni signed. Baroni disputed these secured
claims asserting that Bank of NYM and Wells Fargo were
not authorized to enforce her loan obligations for various
reasons. Consequently, she proposed a Chapter 11 plan
(Plan) that would allow her to continue renting the properties
and to make her loan payments into separate Reserve
Accounts while she pursued adversary proceedings against
Bank of NYM and Wells Fargo. Under the terms of her Plan,
if her challenges failed and these creditors’ secured claims
were allowed, she was required to transfer the funds held in
the relevant Reserve Account “within 10 business days of
entry of an order identifying the allowed claim holder” and
to make all future loan payments directly to the lender. But
if a lender’s claim was disallowed, the relevant reserve funds
would revert to Baroni. The bankruptcy court confirmed
Baroni’s proposed Chapter 11 Plan over objection from
creditors.
B. Baroni challenges Bank of NYM’s secured claim
Baroni began making her installment payments into the
Reserve Accounts and initiated adversary proceedings
against Bank of NYM and Wells Fargo challenging their
secured claims. Three years later, Baroni lost her challenge
against Wells Fargo. That is when the trouble that led to this
litigation started. Despite the Plan requirement that she
transfer to Wells Fargo the funds in the Reserve Account
associated with its loan and start making her loan payments
directly to Wells Fargo, she refused. In response, Wells
Fargo moved to convert Baroni’s bankruptcy case to Chapter
7 so that a trustee would be appointed to preserve and
administer the estate and ensure ongoing payments were
made. After several hearings, Baroni ultimately paid Wells
IN RE BARONI 7
Fargo as required, and the bankruptcy court denied Wells
Fargo’s conversion motion as moot.
A year later, Baroni also lost her adversary proceeding
against Bank of NYM when the bankruptcy court
determined that Bank of NYM was the holder of Baroni’s
promissory note and was authorized to enforce her loan
contract. Once again, Baroni refused to transfer the reserve
funds to Bank of NYM or to start making loan payments
directly to the bank.
As justification for her refusal to comply with the Plan,
Baroni stated that she and her husband had each received a
1099-C from the Internal Revenue Service (IRS) indicating
that a company named Specialized Loan Services had
written off $305,977.12 of the subject loan balance. Baroni
contends that because both her and her husband received a
1099-C, her loan was reduced by a total of $611,954.24 and
that Bank of NYM had not properly calculated her remaining
balance. She demanded that Bank of NYM explain the
impact of the write-off before she would transfer the Reserve
Account funds. After making multiple requests for Baroni to
provide a copy of the 1099-Cs, Bank of NYM explained that
only $305,977.12 was written off the loan balance after part
of the balance was rendered unsecured under the bankruptcy
Plan, and the bank continued to insist that Baroni transfer the
Reserve Account funds. Baroni did not accept this
explanation and refused to make payment until the 1099-C
issue was “resolved.”
C. Bank of NYM moves to convert to Chapter 7
After a few months of back and forth without resolution,
Bank of NYM filed its own conversion motion asking for
Baroni’s case to be converted to Chapter 7. This motion was
filed approximately six months after the Plan required
8 IN RE BARONI
Baroni to transfer the reserve funds to Bank of NYM. The
bankruptcy court held a hearing and granted this motion,
concluding that Baroni had materially defaulted under the
Plan by refusing to transfer the reserve funds to Bank of
NYM and by not making her ongoing loan payments directly
to the bank.
Baroni moved for reconsideration arguing that she could
cure her default immediately. She also argued for the first
time that Bank of NYM failed to give proper notice of its
conversion motion to all creditors. The bankruptcy court
denied her motion for reconsideration. Baroni appealed to
the district court, which affirmed the bankruptcy court.
D. Baroni refuses to turn over assets to the bankruptcy
estate
After Baroni’s case was converted to Chapter 7, the
Chapter 7 Trustee requested that Baroni transfer all Reserve
Account funds to the bankruptcy estate. The Trustee also
requested turnover of the sale proceeds from the rental
property for which Wells Fargo had submitted a secured
claim and the rental proceeds from the rental property for
which Bank of NYM submitted a secured claim. Baroni
transferred the Reserve Account funds (while also protesting
that the funds were not part of the Chapter 7 estate) but
refused to transfer the rental and sale proceeds, arguing that
they were not part of the bankruptcy estate because these
assets revested in her when her Chapter 11 Plan was
confirmed. The Trustee filed a motion for turnover of these
assets.
The bankruptcy court determined that neither the Plan
nor the Bankruptcy Code addressed what would happen to
the assets of the Chapter 11 estate upon conversion to
Chapter 7 after plan confirmation. Therefore, the bankruptcy
IN RE BARONI 9
court held that the Local Bankruptcy Rules for the Central
District of California applied by default, which provided that
unadministered assets revert to the bankruptcy estate upon
conversion unless the plan provides otherwise.
The bankruptcy court also rejected Baroni’s argument
that the sale and rental proceeds were not property of the
bankruptcy estate under our caselaw. Specifically, the
bankruptcy court held that Pioneer Liquidating Corp. v.
United States Trustee (In re Consol. Pioneer Mortg.
Entities), 264 F.3d 803 (9th Cir. 2001), established that
unadministered property of a confirmed Chapter 11 plan
revests in the Chapter 7 estate upon conversion if (1) the
“plan provides for the distribution of future proceeds of an
asset to creditors” and (2) “the bankruptcy court retains
broad powers to supervise the implementation of the plan.”
The bankruptcy court found that the Plan contemplated
Baroni would pay future rent proceeds to her creditors and
required the bankruptcy court to oversee implementation of
its provisions. Consequently, it held that the assets passed
into the Chapter 7 estate upon conversion.
On appeal, the district court disagreed with the
bankruptcy court’s analysis of Pioneer but affirmed its
decision requiring Baroni to turn over the subject assets to
the Chapter 7 estate under Local Rule 3020-1.
II. DISCUSSION
“We independently review the bankruptcy court’s
decision and do not give deference to the district court’s
determinations.” Saxman v. Educ. Credit Mgmt. Corp. (In re
Saxman), 325 F.3d 1168, 1172 (9th Cir. 2003) (citation
omitted). We review the bankruptcy court’s conclusions of
law de novo, and its findings of fact for clear error. Nichols
v. Birdsell, 491 F.3d 987, 989 (9th Cir. 2007).
10 IN RE BARONI
As previously stated, Baroni filed two separate appeals.
One challenging the bankruptcy court’s order converting her
Chapter 11 case into Chapter 7 for materially defaulting on
the confirmed Chapter 11 plan (conversion appeal). And one
challenging the bankruptcy court’s order requiring that she
turn over assets in her possession to the Chapter 7 Trustee so
that they become part of the bankruptcy estate (turnover
appeal). As these issues relate to each other, we address them
together, analyzing the conversion order first and then the
turnover order.
A. Chapter 7 Conversion
“The decision to convert [a] case to Chapter 7 is within
the bankruptcy court’s discretion.” Pioneer, 264 F.3d at 806.
We will reverse the bankruptcy court only if its decision was
“based on an erroneous conclusion of law or when the record
contains no evidence on which [the bankruptcy court]
rationally could have based [its] decision.” Id. at 806–07
(first alteration in original) (quoting Benedor Corp. v.
Conejo Enters., Inc. (In re Conejo Enters., Inc.), 96 F.3d
346, 351 (9th Cir. 1996)).
The standard for converting a Chapter 11 case to Chapter
7 is set out in 11 U.S.C. § 1112. This statute provides that
the bankruptcy court “shall convert a case under this chapter
to a case under chapter 7 or dismiss a case under this chapter,
whichever is in the best interests of creditors and the estate,
for cause.” 11 U.S.C. § 1112(b)(1). However, even if cause
is established, Section 1112(b)(2) prohibits a bankruptcy
court from granting relief under Section 1112(b)(1) if the
bankruptcy “court finds and specifically identifies unusual
circumstances establishing that converting or dismissing the
case is not in the best interests of creditors and the estate,
and the debtor or any other party in interest establishes [one
of two enumerated circumstances].” Id. § 1112(b)(2)
IN RE BARONI 11
(emphasis added). Thus, depending on the arguments
advanced by the parties, there are three primary inquiries:
(1) whether cause exists for granting relief under Section
1112(b)(1); (2) whether granting relief is in the creditors’
and the estate’s best interests; and (3) if so, which form of
relief best serves the creditors’ and the estate’s interests. We
address each in turn.
1. Cause
We first address where the burden for establishing cause
lies. Although the Ninth Circuit Bankruptcy Appellate Panel
(BAP) has addressed this issue, Sullivan v. Harnisch (In re
Sullivan), 522 B.R. 604, 614 (B.A.P. 9th Cir. 2014) (“The
movant bears the burden of establishing by a preponderance
of the evidence that cause exists.”), we have not. The parties
here do not dispute that Bank of NYM, as the party seeking
conversion, has the burden of establishing cause for granting
conversion. And there is significant authority supporting this
view. See, e.g., Loop Corp. v. U.S. Tr., 379 F.3d 511, 517–
18 (8th Cir. 2004); In re Woodbrook Assocs., 19 F.3d 312,
317 (7th Cir. 1994); In re Sullivan, 522 B.R. at 614; In re
Rosenblum, 609 B.R. 854, 863 (Bankr. D. Nev. 2019);
7 ALAN J. RESNICK & HENRY J. SOMMER, Collier on
Bankruptcy ¶ 1112.04[4] (16th ed. 2012) [hereinafter Collier
on Bankruptcy]. We take this opportunity to likewise
establish that the party seeking relief under Section
1112(b)(1) has the initial burden of persuasion to establish
that cause exists for granting such relief. Establishing cause
is not definitive, of course, because the statute makes clear
that even where cause is established, the bankruptcy court
must still consider the best interests of creditors and the
estate. 11 U.S.C. § 1112(b). It is also well established that
bankruptcy courts have broad discretion in deciding whether
12 IN RE BARONI
to grant relief under Section 1112(b)(1), even where cause is
established. Pioneer, 264 F.3d at 806–07.
We now turn to whether cause was shown in this case.
“Cause” is a defined term, and it includes a “material default
by the debtor with respect to a confirmed plan.” 11 U.S.C.
§ 1112(b)(4)(N). The statute does not further define what
constitutes a “material default,” and we have not previously
construed this term in the context of Section 1112(b). The
Sixth Circuit has held that “[a] failure to make a payment
required under the plan is a material default and is cause for
dismissal.” AMC Mortg. Co. v. Tenn. Dep’t of Rev. (In re
AMC Mortg. Co., Inc.), 213 F.3d 917, 921 (6th Cir. 2000);
see also Collier on Bankruptcy ¶ 1112.04[6][n] (“Although
the Code does not define the term material, the failure to
make payments when due under the plan can constitute a
material default.”).
Bankruptcy courts in the Ninth Circuit have followed
this rule. See, e.g., Kenny G Enters., LLC v. Casey (In re
Kenny G Enters., LLC), No. BAP CC-13-1527, 2014 WL
4100429, at *13–14 (B.A.P. 9th Cir. Aug. 20, 2014)
(unpublished) (holding that a “failure to pay creditors
pursuant to the Plan certainly was” a material default
constituting cause for conversion); Warren v. Young (In re
Warren), No. BAP EC-14-1390, 2015 WL 3407244, at *5
(B.A.P. 9th Cir. May 28, 2015) (unpublished) (holding that
“failure to make any payments to several unsecured creditors
for more than four years in contravention of the Plan
amounted to a material default and constituted cause to
convert or dismiss the bankruptcy case”); In re Red Door
Lounge, Inc., 559 B.R. 728, 733 (Bankr. D. Mont. 2016)
(failure to make monthly loan payments and pay property
taxes was material default); cf. Pryor v. U.S. Tr. (In re
Pryor), No. 15-BK-19998, 2016 WL 6835372, at *8–9
IN RE BARONI 13
(B.A.P. 9th Cir. Nov. 18, 2016) (unpublished) (failure to
make required quarterly fee payments to trustee was “cause
for dismissal or conversion”). We agree with this view in
principle.
One of the primary purposes of Chapter 11 is to allow a
debtor facing financial hardships to continue business
operations so that it “may be restructured to enable it to
operate successfully in the future” because the business may
be “more valuable” as a going concern than if it were
liquidated. U.S. v. Whiting Pools, Inc., 462 U.S. 198, 203
(1983). This purpose is reflected in Baroni’s confirmed Plan
that sought to restructure the debt underlying her troubled
rental properties. And given the substantial effect that a
confirmed Chapter 11 plan may have on creditors, an
individual debtor generally may not receive a discharge
under Chapter 11—even after a plan is confirmed—until the
debtor has made all creditor payments contemplated in the
confirmed Chapter 11 plan. 11 U.S.C. § 1141(d)(5)(A).
Ensuring that payments to creditors are made is essential to
effectuating the reorganization plan and accomplishing
Chapter 11’s policy objectives. Thus, we agree that failing
to make required plan payments can be a material default of
the plan, even if the debtor has made payments for an
extended period before the default or taken other significant
steps to perform the plan. See Greenfield Drive Storage Park
v. Cal. Para-Professional Servs., Inc. (In re Greenfield
Drive Storage Park), 207 B.R. 913, 916–17 (B.A.P. 9th Cir.
1997) (finding material default where debtor ceased making
plan payments after doing so for several years and rejecting
debtor’s argument that “there could be no material default
because there was a ‘substantial consummation’ under the
plan”); see also Warren, 2015 WL 3407244, at *3, *5
(finding material default where debtors paid some but not all
creditors and rejecting debtors’ argument that they had
14 IN RE BARONI
“substantially complied with the payment terms of the
Plan”); Collier on Bankruptcy ¶ 1112.04[6][n] (“[A] default
may occur long after the plan becomes effective and long
after substantial consummation.”).
However, that does not mean that every missed payment
is a material default. There can be situations, for example,
where the defaulted payment or the period of default is so
minimal in context that it cannot fairly be characterized as a
material default. As a general matter, “material” means
something that is “significant” or “essential.” BLACK’S LAW
DICTIONARY (11th ed. 2019). Furthermore, a Chapter 11
plan is “construed basically as a contract.” Hillis Motors,
Inc. v. Haw. Auto. Dealers’ Ass’n, 997 F.2d 581, 588 (9th
Cir. 1993). And under general contract principles, whether a
breach is material depends on the “extent” of the deprivation
from the benefit reasonably expected. Restatement (Second)
of Contracts § 241 (Am. L. Inst. 1981). Therefore, factors
relevant to determining whether missed payments are a
material default of the plan include the number of missed
payments, the number of aggrieved creditors, and how long
the default occurred.
Here, Baroni’s Plan required that if Bank of NYM’s
secured claim was allowed, she transfer the funds that she
paid into the Reserve Account to Bank of NYM. The Plan
also required that she start making her outstanding loan
payments directly to Bank of NYM. As the bankruptcy court
found, Baroni’s payment obligations to Bank of NYM were
triggered under the Plan, at the latest, when Baroni
exhausted her appellate remedies in her adversary
proceeding. This means that when the bankruptcy court
granted conversion, Baroni had been in default under the
Plan for at least six months with a past due amount of “at
least $200,000, if not more.” This balance did not represent
IN RE BARONI 15
a single payment; it included five years’ worth of installment
payments paid into the Reserve Account, of which Bank of
NYM had yet to see a dollar.
Baroni does not dispute that she failed to pay Bank of
NYM as required under the Plan, but she argues that her
failures were not “material” because she had “otherwise
fully executed and performed [the] Plan” by making
payments to other creditors and making payments into the
Reserve Accounts while her adversary proceeding was
pending. The bankruptcy court rejected this argument, and
so do we. Even though Baroni properly performed other
obligations imposed by the Plan, she defaulted on her
obligations related to Bank of NYM’s secured claim. And
both the amount and the length of time of this default were
significant. Therefore, we conclude that the bankruptcy
court did not err in finding cause for conversion in this case.
2. Best Interests of the Creditors and the Estate
Before the bankruptcy court can grant conversion, it
must consider whether this relief, as opposed to some other
remedy, is in best interests of the creditors and the estate.
11 U.S.C. § 1112(b)(1). And when raised, it must also
consider whether there are unusual circumstances that
indicate that the creditors’ and the estate’s interests are best
served by not granting relief under Section 1112(b) and
allowing the Chapter 11 proceeding to continue. Id.§ 1112(b)(2). In analyzing these issues, the bankruptcy court
“must consider the interests of all of the creditors.” Shulkin
Hutton, Inc., P.S. v. Treiger (In re Owens), 552 F.3d 958,
961 (9th Cir. 2009) (citation omitted). Baroni has argued that
there are unusual circumstances counseling against
awarding Section 1112(b) relief. Therefore, we address that
question first and then we address whether the form of relief
the bankruptcy court granted was within its discretion.
16 IN RE BARONI
a. Is any relief warranted?
The bankruptcy court may not grant relief if it “finds and
specifically identifies unusual circumstances” establishing
that granting Section 1112(b) relief “is not in the best
interests of the creditors and the estate” and that the debtor’s
conduct triggering the request for relief was reasonably
justified and curable within a reasonable time. 11 U.S.C.
§ 1112(b)(2). The BAP has reasoned that the term “unusual
circumstance” “contemplates conditions that are not
common in chapter 11 cases.” Mahmood v. Khatib (In re
Mahmood), No. 15-BK-25281, 2017 WL 1032569, at *8
(B.A.P. 9th Cir. Mar. 17, 2017) (unpublished) (quoting In re
Prod. Int’l Co., 395 B.R. 101, 109 (Bankr. D. Ariz. 2008));
see also Collier on Bankruptcy ¶ 1112.05[2] (“[T]he word
‘unusual’ contemplates facts that are not common to chapter
11 cases generally.”). Accordingly, courts have held that
difficulty making plan payments, disputes regarding the
validity and amounts of claims, and other similar issues are
not “unusual circumstances.” E.g., In re Mahmood, 2017
WL 1032569, at *8 (“[D]isputes over liens and their
respective priority are not ‘unusual circumstances.’”); Green
v. Howard Fam. Tr. (In re Green), No. BR 14-15981-ABL,
2016 WL 6699311, at *10–11 (B.A.P. 9th Cir. Nov. 9, 2016)
(unpublished) (concluding existence of default judgment
and “pending dischargeability actions or claim objections”
are not unusual circumstances); In re Wallace, No. 09-
20496-TLM, 2010 WL 378351, at *7 (Bankr. D. Idaho Jan.
26, 2010) (unreported) (a “contentious dispute over a
creditor’s claim is not an unusual circumstance in a chapter
11 case”); see also In re Fisher, No. 07-61338-11, 2008 WL
1775123, at *5 (Bankr. D. Mont. Apr. 15, 2008) (unreported)
(unusual circumstances are those that “demonstrate that the
purposes of [C]hapter 11 would be better served by
maintaining the case as a chapter 11 proceeding”).
IN RE BARONI 17
Conversely, courts have found that unusual
circumstances counseling against granting relief exist where
continuing the case in Chapter 11 will likely yield a higher
recovery for creditors without the usual risks of failure
associated with a Chapter 11 plan. See, e.g., In re Orbit
Petroleum, Inc., 395 B.R. 145, 149 (Bankr. D.N.M. 2008)
(continuing in Chapter 11 would leave “[c]reditors and the
estate . . . far better off” than dismissal or conversion
because the proposed plan provided for a significant capital
infusion that would pay all creditors in full as of the effective
date of the plan); In re Costa Bonita Beach Resort Inc.,
479 B.R. 14, 43 (Bankr. D.P.R. 2012) (unusual
circumstances existed where Chapter 11 plan was more
protective of unsecured creditors than other options); In re
Melendez Concrete Inc., 11-09-12334 JA, 2009 WL
2997920, at *7 (Bankr. D.N.M. Sept. 15, 2009)
(unpublished) (finding unusual circumstances where
debtor’s assets were three times more valuable than its
secured debt and various circumstances, including an
economic recission, established that creditors were likely to
recover more in Chapter 11 than liquidation).
We agree that circumstances inherently present in
bankruptcy, such as disputes regarding the validity and
amount of a creditor’s claim, are not “unusual” for purposes
of Section 1112(b)(2). To meet this standard, there must be
something beyond the inherent financial pressures and
adversarial differences involved in a bankruptcy case to
establish that the purposes of Chapter 11 or the creditors’
interests are better served by continuing under that chapter.
Baroni argues that the bankruptcy court should not have
converted her case to Chapter 7 because her ability to
immediately cure her default by paying the bank the Reserve
Account funds was an unusual circumstance given the
18 IN RE BARONI
confusion caused by the two 1099-Cs that she and her
husband received. Baroni misunderstands the law. The
statute makes clear that the ability to cure a default is not
itself an unusual circumstance because unusual
circumstances and the ability to cure are two separate aspects
of what must be shown to establish that no Section 1112(b)
relief should be granted even though cause for granting such
relief was established. 11 U.S.C. § 1112(b)(2).
Moreover, Baroni’s arguments as to why allowing her to
immediately cure her default demonstrate only why granting
relief was not in her best interests. But the ultimate question
is the best interests of the creditors and the estate. Id.; see
Khan v. Rund (In re Khan), No. BAP CC-11-1542-HPAD,
2012 WL 2043074, at *8 (B.A.P. 9th Cir. June 6, 2012)
(unpublished). She does not explain why allowing her to
transfer the reserve funds, as she should have done long
before, was in the best interests of the creditors or the estate,
particularly where she had an ongoing payment obligation
and a track record of not making payments voluntarily.
We note further that even if the asserted IRS form
confusion was a unique circumstance, Baroni’s reliance on
this as justification for not paying Bank of NYM as required
under the Plan is just a continuation of her challenge to the
bank’s secured claim, which she had already litigated
unsuccessfully. And as the bankruptcy court noted, Baroni
failed to raise her 1099-C argument until after she lost her
adversary proceeding against Bank of NYM.
For these reasons, we conclude that the bankruptcy court
did not abuse its discretion in concluding that Section
1112(b)(2)’s unusual-circumstances exception to granting
relief does not apply.
IN RE BARONI 19
b. Does conversion best serve the creditors and the
estate?
Baroni also argues that the bankruptcy court did not
adequately consider which remedy—dismissal or
conversion—was warranted. We are unpersuaded. The
bankruptcy court considered the effect of the administration
fees that would be incurred under Chapter 7 and determined
that they did not substantially detract from the estate. As for
creditor interests, Bank of NYM and Wells Fargo
specifically explained to the bankruptcy court during both
the conversion hearing and the subsequent reconsideration
hearing why they preferred to “take [their] chances with [a
Chapter 7 trustee]” given the difficulties Baroni had created
as a debtor-in-possession. 3 And while a court must consider
the best interests of all creditors, In re Owens, 552 F.3d
at 960–61, the bankruptcy court had no basis to find that any
creditor received less in Chapter 7 than in Chapter 11.
First, no creditor objected to Bank of NYM’s motion for
conversion. 4 See Renewable Energy, Inc. v. U.S. Tr. (In re
3
Baroni argues, and Bank of NYM admits, that conversion may not
have been in the best interest of creditors if the assets and sale and rental
proceeds at issue in the turnover order did not revest in the Chapter 7
estate, which is the issue raised in the second appeal. As we hold the
assets did revest in the estate, we do not address this point.
4
Baroni argues that Bank of NYM failed to give proper notice of its
conversion motion to post-petition, post-confirmation creditors.
However, she did not raise this argument until her motion for
reconsideration, and as a result the bankruptcy court deemed the issue
waived. Even overlooking that Baroni did not directly appeal the
bankruptcy court’s order on reconsideration, a court “‘does not abuse its
discretion when it disregards legal arguments made for the first time’ on
a motion to alter or amend a judgment.” United Nat’l Ins. Co. v.
20 IN RE BARONI
Renewable Energy, Inc.), No. BAP WW–15-1089–KuJuTa,
2016 WL 7188656, at *5 (B.A.P. 9th Cir. Dec. 9, 2016)
(unpublished) (finding no error in bankruptcy court decision
to choose conversion over dismissal when no creditor
objected). And second, the bankruptcy court determined that
conversion would bring a quicker resolution because
dismissal would require the creditors to freshly pursue their
claims against Baroni who had “been litigating now for six
years,” longer than the five years contemplated in the Plan
itself. 5 See In re Red Door Lounge, 559 B.R. at 737. Again,
the record establishes that the bankruptcy court conducted
the proper analysis in assessing which remedy to select, and
we find no abuse of discretion in its decision to convert
Baroni’s case to Chapter 7.
For all these reasons, we affirm the bankruptcy court’s
order granting Bank of NYM’s motion to convert Baroni’s
bankruptcy from Chapter 11 to Chapter 7.
B. Asset Turnover
In Baroni’s second appeal, she challenges the bankruptcy
court’s order requiring her to turn over the rent and sale
proceeds from her rental properties to the Chapter 7 Trustee.
Whether property is included in a bankruptcy estate is a
question of law subject to de novo review. Klein v. Anderson
(In re Anderson), 988 F.3d 1210, 1213 (9th Cir. 2021) (per
curiam). We also review issues of statutory interpretation de
Spectrum Worldwide, Inc., 555 F.3d 772, 780 (9th Cir. 2009) (quoting
Zimmerman v. City of Oakland, 255 F.3d 734, 740 (9th Cir. 2001)).
5
Indeed, Baroni had filed another adversary proceeding raising the
1099-C issues.
IN RE BARONI 21
novo. Connell v. Lima Corp., 988 F.3d 1089, 1097 (9th Cir.
2021).
We start with the bedrock principle that filing a
bankruptcy petition creates a bankruptcy estate consisting of
“all legal or equitable interests of the debtor in property as
of the commencement of the case.” 11 U.S.C. § 541(a)(1).
Under Chapter 11, “the confirmation of a plan vests all of
the property of the estate in the debtor” and “the property
dealt with by the plan is free and clear of all claims and
interests of creditors.” Id. § 1141(b), (c); see Hillis Motors,
997 F.2d at 587. Baroni argues that when her Plan was
confirmed, this vesting provision vested all property of the
Chapter 11 estate in her, leaving the Chapter 11 estate
terminated or empty. Consequently, when the bankruptcy
court converted the case to Chapter 7, six years after the Plan
was confirmed, the Chapter 7 estate had no assets.
The Bankruptcy Code is silent as to what constitutes the
bankruptcy estate when a Chapter 11 case is converted to
Chapter 7 after plan confirmation. Relying on our caselaw
and the Central District of California’s local bankruptcy
rules, the bankruptcy court concluded that the undistributed
rental property proceeds reverted to the bankruptcy estate
upon conversion to Chapter 7. Because we conclude that our
caselaw answers this question, we do not address the Central
District’s local bankruptcy rule.
Given Congress’s silence, courts have varied in their
approach to what happens with the bankruptcy estate upon
conversion from Chapter 11 to Chapter 7. See, e.g., Hagan
v. Hughes (In re Hughes), 279 B.R. 826, 829–30 (Bankr.
S.D. Ill. 2002) (listing differing approaches); In re Sundale,
Ltd., 471 B.R. 300, 305–06 (Bankr. S.D. Fla. 2012) (same).
We have addressed this issue and have emphasized that the
vesting provisions in 11 U.S.C. § 1141 are “explicitly
22 IN RE BARONI
subject to the provisions of the plan.” Pioneer, 264 F.3d at
807 (quoting Hillis Motors, 997 F.2d at 587). We have also
made clear that the plan does not need to explicitly state that
assets revest in a converted Chapter 7 estate for this to
happen. Pioneer, 264 F.3d at 807.
Although not a conversion case, our decision in Hillis
Motors is instructive. There, we analyzed whether estate
property in a Chapter 11 case remained subject to the
automatic stay after confirmation in the context of
determining whether a stay violation had occurred. Hillis
Motors, 997 F.2d at 586–89. We concluded that there was a
post-confirmation estate, the assets at issue were part of the
estate, and the assets were subject to the stay due to several
“atypical” provisions in the plan. Id. at 589–90. For example,
the plan required payment of post-confirmation profits into
the estate for later distribution; it protected the estate from
post-confirmation claims through a post-confirmation stay;
it contemplated that any debt discharge would occur in the
future; and it required that the debtor’s business be
“conducted under court supervision via the trustee until all
. . . creditors were paid,” depriving the debtor of the freedom
“to deal with its property and the world as it would have been
[able to] if it had not been subject to the jurisdiction of the
bankruptcy court.” Id. at 587–90. Together, these provisions
indicated that “[a]lthough there was a confirmed plan, the
reorganization process continued post-confirmation.” Id. at
589. Thus the “language, purposes, and context” of the plan
caused the property to remain part of the estate and thus
protected by the stay, post-confirmation because the
property “did not revest in the debtor at confirmation.” Id.
at 590.
Subsequent cases addressing conversion have relied on
Hillis Motors. In Pioneer, several beneficiaries of a
IN RE BARONI 23
confirmed Chapter 11 plan complained that a liquidation
corporation, formed under the plan to take “possession of
and liquidate[] property of a debtor for distribution to
creditors,” was producing insufficient proceeds and refusing
to provide financial information. 264 F.3d at 804–08. The
bankruptcy court converted the case to Chapter 7 and held,
despite plan confirmation, that the unadministered assets had
revested in the Chapter 7 estate. Id. at 806. The BAP
affirmed.
On appeal to this court, the debtor argued that “the
Chapter 11 estate vanished upon confirmation,” and thus “no
estate existed to be converted to Chapter 7 for administration
by a Chapter 7 trustee.” Id. at 807. We rejected this
argument, holding that “[u]nder these circumstances” the
“language and purpose of the [plan] demonstrate[d] that
assets that vested in [the liquidation corporation] upon
confirmation revested in the estate when the bankruptcy
court converted the case to Chapter 7.” Id. at 807–08. Citing
Hillis Motors, we reasoned that although the plan did not
expressly contemplate the effect of conversion, it
“(1) contain[ed] explicit provisions regarding the
distribution of liquidation proceeds to the [creditors], the
plan’s primary beneficiaries, and (2) g[ave] the bankruptcy
court broad powers to oversee implementation of the plan.”
Id. at 807. Thus, the “assets held by [the liquidation
corporation] for the benefit of the [plan beneficiaries]
bec[a]me assets of the estate upon conversion to Chapter 7.”
Id. at 808.
Based on this authority, the BAP has applied the so-
called “two prongs” of Pioneer in determining whether
assets revest in the Chapter 7 estate upon conversion:
(1) whether there is “an explicit provision regarding the
distribution of future proceeds of an asset to creditors,” and
24 IN RE BARONI
(2) whether the plan retains “broad powers in the bankruptcy
court to oversee implementation of the plan.” Captain
Blythers, Inc. v. Thompson (In re Captain Blythers, Inc.),
311 B.R. 530, 535–36 (B.A.P. 9th Cir. 2004); see United
States v. Villalobos (In re Villalobos), No. BAP NV-13-
1179, 2014 WL 930495, at *8–9 (B.A.P. 9th Cir. Mar. 10,
2014) (unpublished). Pioneer does not create “prongs,” or
separate elements that are necessary to a finding that assets
revest in a Chapter 7 estate. This analysis derives from Hillis
Motors, which found myriad plan provisions indicated that
“the reorganization process continued post-confirmation”
and thus the property “did not revest in the debtor at
confirmation.” Hillis Motors, 997 F.2d at 589–90.
The central question is whether the Plan’s “language,
purposes, and context” changed the effect of the general
vesting provisions in 11 U.S.C. § 1141 after conversion to
Chapter 7. Id. at 590. This was the question presented in
Pioneer, where we considered the “prongs” as just two
“circumstances” in determining the plan’s purpose and
requirements. 264 F.3d at 808. Pioneer did not limit courts
to considering only these two “circumstances” when
deciding whether assets revest in a Chapter 7 estate after
conversion. See id. Thus, we clarify that a bankruptcy court
should undertake a holistic analysis of the plan to determine
whether its provisions deviate from the default vesting rule
in 11 U.S.C. § 1141(b). 6 Hillis Motors, 997 F.2d at 590;
Pioneer, 264 F.3d at 808.
Indeed, as the BAP has reasoned, the second so-called “prong”
6
may not add much to the analysis anyway, as the bankruptcy court’s
ongoing jurisdiction is likely satisfied in most Chapter 11 cases. In re
Captain Blythers, 311 B.R. at 535.
IN RE BARONI 25
Turning to the language, purposes, and context of
Baroni’s Plan, it has no express provision dealing with post-
confirmation conversion and states that confirmation of the
Plan “vests all property of the estate in the Debtor” and that
Baroni “will retain all assets.” Indeed, Baroni points out that,
under the terms of the Plan, she was able to rent out the
properties as she saw fit. But that is only one piece of the
analysis.
The Plan also provides that Baroni’s rental properties
were subject to disputed proofs of claim which, at plan
confirmation, remained unresolved and required resolution
by the bankruptcy court before any type of distribution could
happen. The Plan required Baroni to make regular
installment payments into Reserve Accounts which would
revert to her creditors if her challenges to their claims were
unsuccessful. Furthermore, a significant portion of the future
Plan payments came from the “monthly rental income
[Baroni] receive[s] from the rental properties,” which was a
“source[] of money earmarked to pay creditors.” The
“Future Financial Outlook” section of the Plan has several
paragraphs discussing the properties and how they were
intended to assist in paying for the Plan, and the Plan
describes each property in detail including how much rent
each was generating. Taken together, these provisions do not
establish that Baroni received the properties “free and clear
of all claims and interest of creditors” at confirmation, as
would be the case under the general vesting provisions in
11 U.S.C. § 1141. Instead, the income from the properties
remained subject to the Plan because the premise of the Plan
was to pay creditors with the ongoing income stream from
the rental properties. This was how the Plan accomplished
the Chapter 11 reorganization.
26 IN RE BARONI
Baroni disputes this reading of the Plan and asserts that
the Plan gave her creditors the right to foreclose on their liens
against the rental properties when she defaulted on her Plan
payments, which she argues indicates that the Plan did not
contemplate future distributions. This argument is not
persuasive. The Plan prohibited Baroni’s creditors from
enforcing their “pre-petition claims against the Debtor or the
Debtor’s property until the date the Debtor receives a
discharge.” This means that the Plan required Baroni’s
creditors to return to bankruptcy court to seek relief from the
stay before taking any enforcement action against Baroni.
That the Plan provided ongoing stay benefits indicates that
the assets did not revest in Baroni at plan confirmation
because those assets were still subject to litigation;
otherwise, she would not need ongoing stay protection. See
Hillis Motors, 997 F.2d at 589–90 (holding because the
debtor remained protected by the automatic stay during
administration of the plan, her assets remained in the estate).
To hold that the unadministered rent and sale proceeds did
not revest in the bankruptcy estate upon conversion to
Chapter 7 would frustrate the intent of the Plan and is
contrary to many of its provisions.
III. CONCLUSION
We find no error in the bankruptcy court’s order at issue
in Baroni v. Seror, No. 21-55150, which concluded that
Baroni’s failure to comply with the payment terms set out in
her Plan was a material default and that conversion of her
case from Chapter 11 to Chapter 7 was warranted. Likewise,
we find no error in the bankruptcy court’s turnover order at
issue in Baroni v. Seror, No. 21-55076, which required
IN RE BARONI 27
Baroni to turn over the undistributed proceeds from the sale
and rental of the rental properties to the Chapter 7 Trustee. 7
AFFIRMED.
7
The stay pending appeal entered in this case is lifted.