Friday, January 2, 2009

Ninth Circuit Panel Affirms Dismissal of Chapter 11 Case Instead of Conversion to Chapter 7

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

Shulkin Hutton v. Treiger (In re Owens)
Ninth Circuit Case No. 07-35634
December 31, 2008

In this case from the bankruptcy court of the Western District of Washington, in its last bankruptcy case of 2008 the Ninth Circuit upheld that court's decision to dismiss a personal Chapter 11 case instead of convert it to Chapter 7.

The Facts and the Case Below
Owens and Treiger divorced in 2002, but before the divorce decree was entered Treiger filed a Chapter 13 which was converted to Chapter 7. The trustee in that case filed an adversary proceeding against Owens for the estate's interest in a residence purchased by Owens and Treiger during their marriage, which was settled with Owens paying $215,000 in full satisfaction of the estate's claim against her and the trustee quit claiming the estate's interest to her. After Treiger's Chapter 7 case was closed, the divorce case proceeded and concluded with the state court ordering that same residence to be sold and the proceeds divided equally between Owens and Treiger. Shortly before its sale, Owens filed a Chapter 11 case with her interest in the residence as the case's primary asset. Treiger filed a motion under § 1112(b) to dismiss that case as being filed in bad faith, which the bankruptcy court granted, "ruling that the bankruptcy was filed in bad faith as a litigation tactic intended to delay [the residence's] sale." An unsecured creditor, a law firm to whom Owens owed attorney fees, appealed the dismissal to the BAP, which upheld the bankruptcy court's dismissal.

Dismissal or Conversion?
§ 1112(b) states in part that "the 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, if the movant establishes cause."

The creditor's argument was that the bankruptcy court should have converted the case to Chapter 7 instead of dismissing it, because conversion would be "in the best interests of creditors and the estate." But the Ninth Circuit panel looked to a Fourth Circuit opinion holding that the statute requires the court to "consider the interests of all of the creditors," and held that the creditor had "not shown that conversion would be in the best interests of Owens’ other creditors." (Emphasis in original.)

Interestingly, the Ninth Circuit panel focused on a finding of fact NOT by the bankruptcy court but rather by the BAP, that "Owens has substantial future earning capacity," specifically "an annual earning capacity between $150,000 and $800,000." "Consequently, Owens’ other creditors would fare worse under Chapter 7 because the accompanying discharge would deny them access to Owens’ future income." Since the standard of appellate review for findings of fact by the BAP is "clear error" and "the record contained sufficient evidence for the court to decide that the best interests of creditors and the estate would favor dismissal over conversion," the Ninth Circuit found no clear error and affirmed the bankruptcy court's decision to dismiss the Chapter 11 case.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
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