Summary
In Askri v. Fitzgerald, 612 B.R. 500, 503-04 (E.D. Va. 2020), this Court affirmed a finding by the bankruptcy judge that a debtor and his spouse brought a chapter 11 bankruptcy case in bad faith under that chapter's analogous dismissal provision.
Summary of this case from Palsata Tr. v. FitzgeraldOpinion
Civil No. 1:19-cv-1196 Bankruptcy No. 18-13031-KHK
2020-02-18
Syed ASKRI, Appellant, v. John P. FITZGERALD, III, United States Bankruptcy Trustee Appellee.
Syed Askri, Sterling, VA, pro se. Jack Ira Frankel, Office of the U.S. Trustee, Alexandria, VA, for Appellee.
Syed Askri, Sterling, VA, pro se.
Jack Ira Frankel, Office of the U.S. Trustee, Alexandria, VA, for Appellee.
ORDER
T.S Ellis, III, United States District Judge
Syed Askri ("Debtor"), proceeding pro se, appeals two orders entered by the Bankruptcy Court: (i) an August 30, 2019 order, which ordered conversion of the case from Chapter 11 to Chapter 7 (the "Conversion Order"), and (ii) a September 3, 2019 order, which denied approval of Debtor's disclosure statement (the "Disclosure Statement Order").
Debtor has appealed the Conversion Order because he argues that his bankruptcy petition was filed in good faith, and therefore should be converted to Chapter 13 not Chapter 7. The U.S. Trustee disagrees with Debtor and argues that the Bankruptcy Court's Conversion Order should be affirmed because cause existed to convert the case pursuant to 11 U.S.C. § 1112(b). With respect to the Disclosure Statement Order, the U.S. Trustee argues that Debtor's appeal must be dismissed for lack of jurisdiction because the Disclosure Statement Order is interlocutory, and Debtor has not obtained the requisite leave to appeal.
For the reasons that follow, Debtor's appeal of the Conversion Order must be denied, and that order must be affirmed. Debtor's appeal of the Disclosure Statement Order must be dismissed for lack of jurisdiction.
I .
Title 28 U.S.C. § 158(a) provides jurisdiction for district courts to hear appeals from a bankruptcy court. District courts have jurisdiction to hear timely appeals from final bankruptcy court orders and judgments pursuant to 28 U.S.C. § 158(a)(1). There is no appeal as of right from a bankruptcy court's interlocutory orders, but an appeal may be permitted with leave of court in certain circumstances. See 28 U.S.C. § 158(a)(3).
II .
Debtor has appealed the Bankruptcy Court's Conversion Order, which converted Debtor's case from Chapter 11 to Chapter 7. Debtor argues that his Chapter 11 case was filed in good faith, and therefore should be converted to Chapter 13 and not Chapter 7.
Generally, an individual who files for bankruptcy chooses between two types of bankruptcy: liquidation (under Chapter 7) or reorganization (under Chapter 11 or Chapter 13). See Harris v. Viegelahn, 575 U.S. 510, 135 S.Ct. 1829, 1835, 191 L.Ed.2d 783 (2015).
The Conversion Order is a final order that Debtor has appealed as of right. See In re A & F Enters., Inc. II , 742 F.3d 763, 769 (7th Cir. 2014) ; see also In re Fraidin , No. 92-2922, 1997 WL 153826, at *1 (4th Cir. April 3, 1997) (explaining that order converting case from Chapter 11 to Chapter 7 is immediately appealable as a final order or under the collateral order doctrine). On appeal, the district court reviews the bankruptcy court's factual findings for clear error and its legal conclusions de novo. In re Harford Sands Inc., 372 F.3d 637, 639 (4th Cir. 2004). A finding of fact is clearly erroneous when, "although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." In re Mosko , 515 F.3d 319, 324 (4th Cir. 2008) (quoting United States v. U.S. Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746 (1948) ).
Title 11 U.S.C. § 1112(b) provides: "[T]he [bankruptcy] court shall convert a case under this chapter [Chapter 11] to a case under chapter 7 or dismiss a case under this chapter, whichever is in the best interest of creditors and the estate, for cause ..." 11 U.S.C. § 1112(b). The Fourth Circuit has set forth a two-step analysis for motions filed pursuant to this section. See In re Superior Siding & Window, Inc., 14 F.3d 240, 242 (4th Cir. 1994). First, the bankruptcy court must determine whether "cause" exists either to dismiss or to convert the Chapter 11 proceeding to a Chapter 7 proceeding, and second, the bankruptcy court must determine which option is in "the best interest of creditors and the estate." Id.
Here, the Bankruptcy Court made factual findings with respect to both steps of the § 1112(b) analysis, those factual findings are not clearly erroneous, and thus the Bankruptcy Court's Conversion Order must be affirmed. Cause to dismiss or to convert pursuant to § 1112(b) exists if the debtor filed the case in bad faith or if he or she cannot propose a feasible reorganization plan. See In re Carolin Corp ., 886 F.2d 693, 699-700 (4th Cir. 1989). Here, the Bankruptcy Court found that Debtor was a repeat filer of bankruptcy petitions who filed the instant case in bad faith as part of a scheme to hinder or delay his creditors from foreclosing on his property. Specifically, Debtor and his wife have filed six bankruptcies over seven years, four of which were filed within one week of a scheduled foreclosure sale of their property. Accordingly, the Bankruptcy Court did not commit error in its determination that Debtor filed his bankruptcy petition in bad faith. See, e.g., In re Carter , 500 B.R. 739, 744 (Bankr. D. Md. 2013) (finding bad faith where debtor filed four bankruptcy cases in six years, three of which were filed immediately prior to a foreclosure sale).
A bankruptcy court's ultimate finding that a filing was not made in good faith is one of fact subject to the clearly erroneous standard. In re Carolin Corp., 886 F.2d 693, 702 (4th Cir. 1989).
See In re Askri, No. 18-13031-KHK, Dkt. 42 (Bankr. E.D. Va. Feb. 15, 2019) (order granting U.S. Bank's motion for in rem relief from the automatic stay on Debtor's real property). Debtor appealed this lift stay order, and by Order dated February 15, 2019, it was determined that the Bankruptcy Court did not err in finding that the six bankruptcy petitions filed by Debtor and his wife, four of which were filed within one week of a scheduled foreclosure sale of their property, constituted a scheme to hinder or delay their creditors such that in rem relief from the automatic stay must be granted pursuant to 11 U.S.C. § 362(d)(4). See In re Askri, Civ. No. 19-cv-228, Dkt. 10 (E.D. Va. Feb. 18, 2020).
Moreover, Debtor has not demonstrated that he can propose a feasible plan for reorganization. Debtor has not made a mortgage payment in more than seven years and is more than $500,000 in arrears. Debtor has submitted no evidence of income sufficient to pay his expenses as Debtor's monthly operating reports indicate the majority of his reported cash receipts were from sources other than his own regular income, including significant contributions from family members. Thus, the Bankruptcy Court concluded that there was "no proof of income that was verifiable." See In re Hockenberry , 457 B.R. 646, 659-60 (Bankr. S.D. Ohio 2011) (explaining that a plan that requires contributions from family members under no legal obligation to make such contributions is subject to denial). In addition, the Bankruptcy Court found that Debtor's monthly reports stated all bills had been paid, but Debtor's homeowners association represented that Debtor had not been making his monthly assessment payments. On this record, there is no meaningful likelihood of rehabilitation, and the Bankruptcy Court's finding of such is not clear error. See In re Carolin Corp ., 886 F.2d 693, 701-02 (4th Cir. 1989).
See February 6, 2019 Bankruptcy Court Hearing Transcript, Dkt. 9-1 at UST 157.
See Dkt. 9-1 and 9-2 at UST 87, 95, 105, 120, 131, 166, 180, 193, 215,280.
See August 27, 2019 Bankruptcy Court Hearing Transcript, Dkt. 9-2 at UST 300.
See In re Askri , No. 18-13031-KHK, Dkt. 69 at ¶ 7, Ex. 1.
Finally, the Bankruptcy Court did not err in determining that conversion to Chapter 7, rather than dismissal, was in the best interest of the creditors and the estate. The Bankruptcy Court noted that there may be equity in Debtor's property sufficient to satisfy his debts. A conversion to Chapter 7 would allow for an expeditious determination of whether there is equity in Debtor's property. If there is no equity in Debtor's property, the case can be dismissed at that point, as the Bankruptcy Court correctly noted.
Debtor has requested a conversion from Chapter 11 to Chapter 13, but that is not an available remedy under § 1112(b). A court may only convert a case from Chapter 11 to Chapter 13 on the voluntary request of the debtor, and here Debtor did not make such a request until after the Bankruptcy Court had already entered its September 3, 2019 Order converting this case from Chapter 11 to Chapter 7. The Bankruptcy Court denied Debtor's request to convert the case to Chapter 13 on December 6, 2019. No opinion as to that Order is expressed here because Debtor has not appealed that Order.
Debtor has raised the argument that he is not eligible for Chapter 7 discharge because he received a Chapter 7 discharge in Case No. 11-18773-RGM, which was filed on December 8, 2011, and Title 11 U.S.C. § 727(a)(8) requires eight years between Chapter 7 discharges. Debtor is correct that the Chapter 7 discharge in his earlier case precludes Chapter 7 discharge in this case. That Debtor is not eligible for a Chapter 7 discharge in this case, however, does not preclude conversion of his case from Chapter 11 to Chapter 7. See In re Shockley, 197 B.R. 677, 680 (Bankr. D. Mont. 1996) (holding that a debtor's position that his inability to receive a Chapter 7 discharge precluded conversion from Chapter 11 to Chapter 7 "ignores the plain language of § 1112(b)" and ordering conversion because it was in the best interests of the creditors and the estate). Thus, conversion from Chapter 11 to Chapter 7 is appropriate pursuant to § 1112(b), and to the extent there is not equity in Debtor's property, the bankruptcy case may be dismissed pursuant to 11 U.S.C. § 707 rather than Debtor receiving a discharge.
Although the Bankruptcy Code does not identify factors for a bankruptcy court to consider when determining the remedy under § 1112(b) that is in the "best interests of creditors and the estate," the authoritative bankruptcy treatise Collier on Bankruptcy ("Colliers") provides some guidance. At least one of the ten factors that Colliers' lists for a bankruptcy court to consider weighs strongly in favor of conversion to Chapter 7 rather than dismissal, namely whether the debtor would simply file a further case upon dismissal. See Lakefront Inv'rs LLC v. Clarkson , 484 B.R. 72, 83 (D. Md. 2012), aff'd sub nom. Lakefront Inv'rs, LLC v. Sydnor , 520 F. App'x 221 (4th Cir. 2013) (citing 7 Collier on Bankruptcy § 1112.04[7] ). In this respect, Debtor and his wife filed six bankruptcy cases between December 2011 and September 2018 regarding this real property, and thus, it is abundantly clear that Debtor or his wife may file a further bankruptcy case if the instant case were to be dismissed. Accordingly, the Bankruptcy Court's Conversion Order, which converted this case from Chapter 11 to Chapter 7, is correct and must be affirmed.
The ten factors that Colliers lists as criteria that a court may consider are: "(1) whether some creditors received preferential payments, and whether equality of distribution would be better served by conversion rather than dismissal; (2) whether there would be a loss of rights granted in the case if it were dismissed rather than converted; (3) whether the debtor would simply file a further case upon dismissal; (4) the ability of the trustee in a chapter 7 case to reach assets for the benefit of the creditors; (5) in assessing the interests of the estate, whether conversion or dismissal would maximize the estate's value as an economic enterprise; (6) whether any remaining issues would be better resolved outside the bankruptcy forum; (7) whether the estate consists of a ‘single asset;’ (8) whether the debtor had engaged in misconduct and whether creditors are in need of a chapter 7 case to protect their interests; (9) whether a plan had been confirmed and whether any property remains in the estate to be administered; and (10) whether the appointment of a trustee is desirable to supervise the estate and address possible environmental and safety concerns." Lakefront Inv'rs LLC v. Clarkson , 484 B.R. 72, 83 (D. Md. 2012), aff'd sub nom. Lakefront Inv'rs, LLC v. Sydnor , 520 F. App'x 221 (4th Cir. 2013).
III.
Debtor has also appealed the Bankruptcy Court's Disclosure Statement Order, which denied approval of the disclosure statement that Debtor filed in his Chapter 11 case prior to the conversion to Chapter 7 because the Bankruptcy Court found the disclosure statement inadequate. There is no doubt that a bankruptcy court order denying approval of a disclosure statement is interlocutory. See In re Wallace & Gale Co., 72 F.3d 21, 25 (4th Cir. 1995) ("The bankruptcy court's order denying approval of the disclosure statement was interlocutory.").
See also In re First Fin. Dev. Corp., 960 F.2d 23, 26 (5th Cir. 1992) (holding that an order sustaining objections to a disclosure statement was not a final, appealable order).
Because the Disclosure Statement Order is interlocutory, the next question to address is whether leave to appeal should be granted. In determining whether to grant leave for an interlocutory appeal, district courts have routinely looked by analogy to the standard set forth in 28 U.S.C. § 1292(b), which governs interlocutory appeals in non-bankruptcy cases. See First Owners' Ass'n of Forty Six Hundred v. Gordon Properties, LLC , 470 B.R. 364, 371 (E.D. Va. 2012). Pursuant to § 1292(b), leave to file an interlocutory appeal should be granted only where (i) the order involves a controlling question of law, (ii) as to which there is substantial ground for difference of opinion, and (iii) immediate appeal would materially advance the termination of the litigation. 28 U.S.C. § 1292(b). Because § 1292(b) is contrary to the general rule that appeals may be had only after a final judgment, it should be used sparingly, and its requirements strictly construed. See Myles v. Laffitte , 881 F.2d 125, 127 (4th Cir. 1989).
Rule 8004(d), Fed. R. Bankr. P., provides that "[i]f an appellant timely files a notice of appeal ... but does not include a motion for leave, the district court ...may order the appellant to file a motion for leave, or treat the notice of appeal as a motion for leave and either grant or deny it." Rule 8004(d), Fed. R. Bankr. Pr. (emphasis added). In the interest of judicial economy, Debtor's notice of appeal will be treated as a motion for leave to appeal the interlocutory order.
Title 28 U.S.C. § 158(a)(3) offers no guidance as to when a district court should grant leave to appeal an interlocutory order, but § 158(c)(2) provides that bankruptcy appeals "shall be taken in the same manner as appeals in civil proceedings generally are taken to the courts of appeals from the district courts." 28 U.S.C. § 158(c)(2).
Here, the appealed order denied approval of Debtor's disclosure statement because the Bankruptcy Court found it inadequate. It is clear that this denial of Debtor's disclosure statement does not involve a controlling question of law, let alone one as to which there is substantial ground for difference of opinion. Moreover, there is no indication that consideration of this order would materially advance the termination of the underlying bankruptcy proceedings. To the contrary, Debtor's bankruptcy case has been converted from Chapter 11 to Chapter 7, and disclosure statements intended to solicit approval for a Chapter 11 plan play no role in a Chapter 7 case. Thus, the appealed interlocutory order does not meet the requirements of § 1292(b), and the appeal must be dismissed for lack of jurisdiction.
Debtor has not even addressed his appeal of the Disclosure Statement Order anywhere in his brief, let alone how consideration of the order would materially advance the termination of the underlying bankruptcy proceedings.
See In re Acme Holding Co., No. 2:14-bk-71315, 2015 WL 13035103, at *11 (Bankr. W.D. Ark. July 23, 2015) (holding that conversion from Chapter 11 to Chapter 7 rendered moot the objections to the Chapter 11 disclosure statement).
Accordingly,
It is hereby ORDERED that Debtor's appeal (Dkt. 1) of the Bankruptcy Court's August 30, 2019 Conversion Order is DENIED . The Bankruptcy Court's August 30, 2019 Order is AFFIRMED.
It is further ORDERED that Debtor's appeal (Dkt. 1) of the Bankruptcy Court's September 3, 2019 Disclosure Statement Order is DISMISSED for lack of jurisdiction because it is an interlocutory appeal that does not meet the requirements of 28 U.S.C. § 1292(b).
Should Debtor wish to appeal this Order, he must do so by filing a notice of appeal with the Clerk of this court within thirty (30) days after entry of this Order, pursuant to Rules 4, 5 and 6 Fed. R. App. P. Failure to file a timely notice of appeal waives the right to appeal.