The Bankruptcy Appellate Panel for the United States Court of Appeals for the Ninth Circuit held that a bankruptcy court correctly found cause to convert a chapter 11 case when it found that the debtors would be unable to effectuate a confirmable plan. In re Bronson, No. AZ-12-1320-MkDJu (9th Cir. BAP 2013).
To read the full decision: http://cdn.ca9.uscourts.gov/datastore/bap/2013/05/29/Bronson%2012-1320%20Memo.pdf
Factual Background and Procedural History
In 2001, the Bronsons purchased an office building from Thomas Thompson (“TMT”) for $170,000, paying $25,000 at the closing and delivering a promissory note for the balance.
The Bronsons defaulted on the note in September 2007, and TMT proceeded with a nonjudicial foreclosure. The Bronsons filed for chapter 11 in January 2008, the day before the scheduled foreclosure sale. The Bronsons original plan of reorganization was to be funded through a sale of the office building. This idea died, however, when TMT obtained relief from the automatic stay and purchased the building with a credit bid in July 2009.
In October 2009, TMT filed an adversary complaint asserting a deficiency claim resulting from the foreclosure of the office building. Throughout the case, the Bronsons argued that defeating TMT’s deficiency lawsuit would remove all barriers to plan confirmation, as it would fully satisfy TMT’s claims and strip TMT of his standing to object to the Bronsons’ plan.
But TMT’s deficiency claim was not the only litigation regarding the office building. In 2007, the Bronsons sued TMT in state court, alleging that TMT failed to disclose asbestos contamination in the office building. In June 2010 the state court entered summary judgment in favor of TMT with respect to all of the Bronsons’ claims, and awarded TMT $26,426 in attorneys’ fees. The bankruptcy court allowed these fees as an unsecured claim.
The Bronsons proposed an amended plan which was to be funded by recoveries from unrelated litigation against TMT and others. TMT was the only party to object, arguing that the proposed means of funding the plan were insufficient and that the plan was not proposed in good faith. The court sustained most of TMT’s objections to plan confirmation. Even though the Bronsons’ bankruptcy case remained in chapter 11 for another fourteen months before conversion, the Bronsons never filed a new plan addressing the defects the court had identified in their amended plan.
At an April 2012 hearing on a long-pending motion to convert filed by TMT, the bankruptcy court found cause to convert the case under Section 1112. The court noted that the case had been pending for over four years without confirmation of a plan, and the debtors were still unable to demonstrate any tangible progress toward proposing and funding a new confirmable plan, including meeting over $100,000 in administrative expenses and $375,000 in general unsecured claims.
The Bronsons promptly filed a motion for reconsideration. The motion included a fresh appraisal valuing the office building, as of the date of TMT’s foreclosure three years prior, at $640,000, far in excess of the $200,000 credit bid made by TMT. Based on this new appraisal, the Bronsons argued that they now had a clear defense against TMT’s deficiency claim, and that they could assert a new cause of action against TMT for unjust enrichment. The bankruptcy court denied the motion to reconsider, holding that the new appraisal would not have changed the court’s ruling to convert the case. The Bronsons timely appealed.
The BAP Ruling and Reasoning
The BAP upheld the bankruptcy court’s conversion of the case, ruling that conversion had been proper under Section 1112(b)(1), and that the court could properly have ruled on the conversion motion without first addressing the deficiency lawsuit. As the Bronsons had failed to remedy the remaining defects in their proposed plan, the court had an independent duty to deny plan confirmation, and could properly convert the case when it found no hope of a successful reorganization.
The BAP approved of the court’s “two-step” test for conversion under Section 1112(b): first finding “cause” under Section 1112(b), and then determining whether conversion or dismissal is in the best interest of creditors.
The BAP noted that types of cause listed in Section 1112(b)(4) are not exhaustive, and that that bankruptcy courts enjoy “wide latitude in determining whether the facts of a particular case constitute cause for conversion or dismissal.” Op. at 19 (citing Pioneer Liquidating Corp. v. U.S. Trustee (In re Consol. Pioneer Mortg. Entities), 248 B.R. 368, 275 (BAP 9th Cir. 2000), aff’d, 264 F.3d 803 (9th Cir. 2001); In re Greenfield Drive Storage Park, 207 B.R. 913, 916 (BAP 9th Cir. 1997)). Because the court is familiar with the parties and issues of the case, it is the best position to determine whether cause exists under Section 1112 to convert or dismiss.