Opinion
NOT FOR PUBLICATION
Argued and Submitted at Seattle, Washington: May 23, 2007
Appeal from the United States Bankruptcy Court for the Western District of Washington. Honorable Karen A. Overstreet, Chief bankruptcy Judge, Presiding. Bk. No. 06-13051.
Before: KLEIN, MONTALI and RIBLET, [ Bankruptcy Judges.
Hon. Robin L. Riblet, U.S. Bankruptcy Judge for the Central District of California, sitting by designation.
MEMORANDUM
Appellant, Shulkin Hutton Inc., counsel for the debtor in her first chapter 11 case, appeals the order dismissing her second chapter 11 case, which the bankruptcy court dismissed for cause as a bad faith filing. We AFFIRM.
FACTS
The debtor, J'Amy Owens, and appellee, Ken Treiger, were married in July 1997, separated in June 2000, filed for marital dissolution in February 2001, and received a final divorce decree as to status in June 2002. The state court reserved jurisdiction over debt and property issues until after completion of separate pending bankruptcy cases filed by each spouse in the Western District of Washington. Treiger had filed a chapter 13 case on January 30, 2002 (case no. 02-11124), and Owens had filed a chapter 11 case on February 19, 2002 (case no. 02-12018).
The reserved property distribution issues centered on two parcels of real property located in Seattle, Washington, purchased by Owens and Treiger in the interval between their separation and final divorce decree. Owens and Treiger obtained title to and financed the properties as husband and wife. Owens lived in the home located on Maplewood Place, and Treiger lived in the home located on First Avenue North. Trieger's annual earning capacity is approximately $60,000, whereas Owens' annual earning capacity is between $150,000 and $800,000.
On February 22, 2002, the bankruptcy court in Treiger's case ordered relief from stay to allow the state court divorce proceedings to continue.
Treiger's chapter 13 case was converted to chapter 7 on April 3, 2002. James Rigby was appointed as the case trustee.
On June 19, 2002, the state court entered a Decree of Dissolution, but expressly reserved resolution of property and debt issues until the conclusion of the Owens and Treiger bankruptcy cases.
Treiger's chapter 7 trustee filed an adversary proceeding against Owens (who was then a chapter 11 debtor in possession represented by the present appellant) on May 9, 2003, to establish the Maplewood property as community property of Owens and Treiger, and thus property of Treiger's bankruptcy estate (Adv. Proc. No. 03-01209).
After a trial, the bankruptcy court ruled that the Maplewood property was community property and therefore property of Treiger's chapter 7 bankruptcy estate pursuant to 11 U.S.C. § 541(a)(2). The bankruptcy court's ruling was affirmed on appeal by the United States District Court. While further appeal to the Ninth Circuit was pending, the case trustee and Owens entered into a settlement agreement.
The bankruptcy court approved a settlement according to which Owens paid the Treiger case trustee $215,000 in full satisfaction of all claims of the Treiger estate against Owens, including all claims the trustee asserted with respect to the Maplewood property. The trustee conveyed the estate's entire interest in the property to Owens by means of a quitclaim deed.
On March 21, 2005, Treiger's chapter 7 case was closed, and on July 5, 2005, Owens' chapter 11 case was dismissed.
Owens and Treiger then returned to state court to resume proceedings regarding the division of property between the parties. During the state court proceedings, Treiger's attorney took the position that the state court could include the Maplewood property in the division of property between the parties. Owens regarded this as an illegitimate circumvention of Treiger case trustee's settlement with Owens.
On March 19, 2006, Owens filed a motion to reopen Treiger's chapter 7 case to prevent any action by the state court to deal with the Maplewood property on the legal ground that the order of sale to her was res judicata. Treiger objected. The bankruptcy court denied the motion to reopen on May 12, 2006.
While the motion to reopen was pending, on April 17, 2006, the state court issued a ruling on the division and distribution of the remaining property and debt issues left unresolved by the final dissolution decree.
The state court ruled that it had subject-matter jurisdiction to try issues of property and debt distribution between Owens and Treiger. This included authority pursuant to Revised Code of Washington § 26.09.080 (" RCW") to make a just and equitable distribution of the property, whether community or separate, of the parties.
With respect to the Maplewood property, the state court took into account that Owens paid Treiger's chapter 7 trustee $215,000 for the estate's interest in the property. The state court then considered the source of the $215,000, which included $150,000 given or loaned to Owens from a friend that was thus her separate property. The remaining $65,000 consisted of proceeds from Owens' sale of community property.
Since the funds used to pay the trustee were both community and separate property, the state court concluded that the Maplewood property was " both separate and community property."
The court ordered the Maplewood property sold, with the mortgage satisfied and with the remaining proceeds distributed one-half to each party. It reasoned that Owens had a substantially greater earning capacity than Treiger and that Treiger is the primary residential custodian of their child.
The state court entered a supplemental dissolution decree, followed by findings of fact and conclusions of law on postdissolution division of property and financial issues. Owens' appeal to the Washington Court of Appeals was denied, as was an emergency effort to have the Ninth Circuit intervene.
The sale of the Maplewood property was scheduled for September 28, 2006. Owens filed a second chapter 11 case on September 7, 2006, in which she was represented by new counsel (Case No. 06-13501). Owens filed an adversary complaint against Treiger to set aside the transfer of the Maplewood property pursuant to 11 U.S.C. § § 544 and 548 (Adv. Proc. No. 06-01407), which was later dismissed for lack of prosecution.
On September 13, 2006, Treiger filed a motion to dismiss Owens' second chapter 11 case as a bad faith filing and/or approve the state court ordered sale of the Maplewood property. At a hearing on September 15, 2006, the motion to dismiss was heard by a judge substituting for the judge assigned to the case. The motion to dismiss was denied, but Treiger's oral motion for relief from stay to allow the sale of the Maplewood property to proceed was granted.
On September 29, 2006, Treiger filed a renewed motion to dismiss. Shulkin Hutton, asserting creditor status due to unpaid legal bills from the first Owens chapter 11 case, opposed dismissal (but has not included that opposition in its designated record). The bankruptcy judge to whom the case had been assigned from the outset issued a tentative ruling indicating that it was inclined to dismiss the case. After a hearing on October 26, 2006, the bankruptcy court issued its final order dismissing the chapter 11 case with prejudice. The court ruled that there was cause to act and that dismissal was in the best interests of creditors and the estate.
Owens filed a timely motion for reconsideration that was subsequently denied.
Shulkin Hutton appealed.
JURISDICTION
The bankruptcy court had subject-matter jurisdiction via 28 U.S.C. § 1334 over this core proceeding under 28 U.S.C. § 157(b)(2). We have jurisdiction under 28 U.S.C. § 158(a)(1).
ISSUE
Whether dismissal of the chapter 11 case was an abuse of discretion.
STANDARD OF REVIEW
Dismissal of a chapter 11 case and the denial of reconsideration are reviewed for abuse of discretion. Greenfield Drive Storage Park v. Cal. Para-Prof'l Servs., Inc. (In re Greenfield Drive Storage Park), 207 B.R. 913, 916 (9th Cir. BAP 1997); Capt. Blythers, Inc. v. Thompson (In re Capt. Blythers, Inc.), 311 B.R. 530, 534 (9th Cir. BAP 2004), aff'd mem., 182 F.App'x 708 (9th Cir. 2006). A court abuses its discretion if it bases its ruling on a clearly erroneous view of the facts or an incorrect rule of law. Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405, 110 S.Ct. 2447, 110 L.Ed.2d 359 (1990). A court also abuses discretion if the Panel is left with a definite and firm conviction that the court committed clear error of judgment in the conclusion it reached after weighing all the relevant factors. Wall St. Plaza, LLC v. JSJF Corp. (In re JSJF Corp.), 344 B.R. 94, 99 (9th Cir. BAP 2006).
DISCUSSION
The bankruptcy court dismissed Owens' chapter 11 case for cause, concluding that dismissal was in the best interests of creditors and the estate. The court found that Owens' filing lacked good faith and was made as a litigation tactic to avoid the state-court ordered sale of the Maplewood property.
I
The basic authority for dismissing a chapter 11 case is Bankruptcy Code § 1112(b), which authorizes a court, for cause, to dismiss or convert a chapter 11 case, " whichever is in the best interests of creditors and the estate." 11 U.S.C. § 1112(b)(2005 Supp.).
Section 1112(b) was amended in 2005 to substitute " court shall" in lieu of " court may" convert or dismiss upon a showing of " cause, " to impose a demonstrative burden on the opponent of conversion or dismissal, and to fix a statutory schedule for deciding the motion promptly. 11 U.S.C. § § 1112(b)(1)-(3). In effect, new § 1112(b) operates to establish a presumption that there will be either conversion or dismissal if " cause" is shown.
II
The first step in the analysis is whether there is " cause" for purposes of § 1112(b).
The bankruptcy court ruled that the dispute over the Maplewood property was a two-party dispute over which the state court had jurisdiction. The court also ruled that the case was not filed in good faith, but rather was filed as a litigation tactic to prevent the sale of the Maplewood property, stating " this is the classic acrimonious divorce where both parties refuse to move on."
Although the court did not put a finer point on its analysis, there are at least two adequate, independent bases for concluding that there was " cause" for purposes of § 1112(b).
A
The court's determination that the case was not filed in good faith and, under the circumstances, was merely a litigation tactic, is consistent with our decisions recognizing that bad faith filing can be " cause" for converting or dismissing a chapter 11 case. See Marsch v. Marsch (In re Marsch), 36 F.3d 825, 828 (9th Cir. 1994); St. Paul Self Storage Ltd. P'ship v. Port Authority (In re St. Paul Self Storage Ltd. P'Ship), 185 B.R. 580, 582 (9th Cir. BAP 1995) (" St. Paul").
In this context, the analysis of " cause" entails a balancing of " whether a debtor is attempting to unreasonably deter and harass creditors or attempting to effect a speedy, efficient reorganization on a feasible basis." Marsch, 36 F.3d at 828.
Evidence probative of the question includes consideration of the number of assets, ongoing economic activity, resources with which to make adequate protection payments and the nature and complexity of underlying nonbankruptcy litigation. St. Paul, 185 B.R. at 582-83.
Under that balancing, the court did not err in finding " cause" in accordance with the Marsch-St. Paul rationale.
This was the basis asserted by Treiger in his motion to dismiss. The court agreed it constituted " cause." We agree.
B
There is an adequate, independent basis to conclude there was § 1112(b) " cause."
Such " cause" exists were there is diminution of the estate and absence of a reasonable likelihood of rehabilitation. 11 U.S.C. § 1112(b)(4)(A).
The purpose of the chapter 11 filing was to block the sale of the Maplewood property as ordered by the state court. Delay, in the absence of a rising market, equates with a substantial risk of diminution of net value with respect to financed real estate on which taxes and loan interest payments accrue. Moreover, rehabilitation was not a purpose being pursued by the debtor. Hence, there is also " cause" under § 1112(b)(4)(A).
III
There being adequate, independent bases for concluding that there was § 1112(b) " cause, " the question becomes whether dismissal was in the best interest of creditors and the estate. 11 U.S.C. § 1112(b)(1).
Treiger's position in his motion was that he preferred that the case be dismissed. He is a creditor by virtue of his litigation posture with the debtor.
Another creditor, appellant's former attorney, preferred that the case not be dismissed and not be converted. Since the debtor has substantial earning capacity in the range of $150,000 to $800,000 per annum, the appellant would be better served by dismissal of the case without a discharge because there is no reason to suspect that he would be paid only if the case were to remain open. A discharge would wipe out appellant's claim in a case in which it is not apparent that the estate would be able to pay the obligation in full; dismissal leaves appellant with resort to the debtor's future income as a source of payment.
The interests of the estate also figure into the calculation. Here, there was not an estate that was being preserved or maximized for the benefit of standard reorganization constituencies. Relief from stay had been granted with respect to the Maplewood property. There was essentially nothing else that would be accomplished through chapter 11. Hence, the interests of the estate would not be harmed by dismissal.
In light of these considerations, we cannot say that the court abused its discretion by deciding that the best interests of creditors and the estate would be served by dismissal.
CONCLUSION
The bankruptcy court did not apply incorrect legal standards, rely on a clearly erroneous view of the facts, or otherwise leave us with a definite and firm impression that a mistake was committed. Hence, it did not abuse discretion when it dismissed Owens' chapter 11 case and subsequently denied reconsideration. AFFIRMED.
CONCUR
KLEIN, Bankruptcy Judge, concurring:
I join the majority analysis and write separately to note that there are two other adequate, independent bases for affirming an order dismissing the case: (1) abstention under 11 U.S.C. § 305(a) on the premise that the interests of creditors and the debtor would be better served by dismissal; and (2) discretionary abstention under 28 U.S.C. § 1334(c)(1).
Although the court invoked neither theory, we are permitted to affirm for any reason supported by the record. Dittman v. California, 191 F.3d 1020, 1027 n.3 (9th Cir. 1999); Donald v. Curry (In re Donald), 328 B.R. 192, 204 (9th Cir. BAP 2005).
I
We are confronted by what is fundamentally a two-party dispute regarding the division of property in a Washington marital dissolution that is subject to Washington law.
In the course of the parties' bankruptcy proceedings, the state court and the bankruptcy court followed the rule that state divorce court jurisdiction over the disposition of community property terminates upon the filing of bankruptcy if the bankruptcy is filed before a final state court judgment dividing the divorcing couple's property. Keller v. Keller (In re Keller), 185 B.R. 796, 800 (9th Cir. BAP 1995).
Once both Owens and Treiger filed bankruptcy, the state court proceedings were suspended until relief from stay was granted by the bankruptcy court to continue with the divorce proceedings in state court. The state court then proceeded to enter a judgment dissolving the marriage, but reserved the authority to decide the property and debt issues after the bankruptcy cases were closed.
The bankruptcy court then liquidated Treiger's non-exempt assets, paid creditors, and approved a settlement agreement between Treiger's case trustee and Owens with respect to the trustee's interest in the Maplewood property. The settlement allowed Owens to purchase the Treiger estate's community interest in the Maplewood property and thereby rendered it Owens' separate property. Treiger's bankruptcy case was subsequently closed, and Owens' first chapter 11 case was dismissed.
That did not, however, terminate the matter of division and distribution of property as between the divorcing spouses. Jurisdiction over the division and distribution of the parties' property as between themselves pursuant to the divorce then returned to the state court. Teel v. Teel (In re Teel), 34 B.R. 762, 764 (9th Cir. BAP 1983).
The state court was then obliged to complete the property and debt distribution that it deferred until the end of the bankruptcy cases. The state court, acting pursuant to RCW § 26.09.080, had jurisdiction to make a fair and equitable distribution of all parties' property - community and separate.
RCW § 26.09.080 provides:
Under Washington law, Owens' separate property, which included the Maplewood property she had acquired from Treiger's chapter 7 estate, was available for distribution. The state court examined the source of the funds Owens used to purchase the estate's interest in the Maplewood property and determined that the Maplewood property was both community and separate, and divided it amongst the parties pursuant to state law. Owens' appeals of the state court order were unsuccessful, and the order is now final.
The bankruptcy court concluded that the state court acted within its jurisdiction and ordered relief from stay to allow the sale to proceed. Any further dispute over the Maplewood property is between Owens and Treiger and must be resolved in state court.
We reject appellant's position that the state court lacked subject-matter jurisdiction to try issues of property and debt distribution attendant to a marital dissolution. The purchase by Owens of Treiger's community property interest in the Maplewood property from Treiger's bankruptcy estate did not extinguish Treiger's ability to argue under RCW § 26.09.080 that " just and equitable" distribution of separate property could take into account the separate property that Owens acquired by purchasing Treiger's community property interest from his bankruptcy estate. We agree with every other court that has considered this jurisdictional argument in the course of this prolonged divorce and bankruptcy litigation.
The Washington courts, both trial courts and appellate courts, have established that the sale of the Maplewood property is an appropriate feature of a " just and equitable" distribution of property pursuant to RCW § 26.09.080. Their jurisdiction to do so is beyond cavil.
The interests of creditors and the debtor are better served by respecting the integrity of the Washington judicial system.
Accordingly, the dismissal of this chapter 11 case can also be affirmed as an appropriate exercise of Bankruptcy Code § 305.
If the bankruptcy court had explicitly invoked § 305(a), our decision to affirm would be the end of review because further review by the court of appeals or the United States Supreme Court is not permitted under this section. 11 U.S.C. § 305(c).
II
Since the entire chapter 11 case is fundamentally a two-party marital dissolution dispute, one can also support dismissal on the basis of discretionary abstention in the interests of justice, comity with state courts, and respect for state law.
Judicial Code § 1334(c)(1) provides:
Except with respect to a case under chapter 15 of title 11, nothing in this section prevents a district court in the interest of justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11.
Thus, the bankruptcy court had the authority to abstain from hearing the divorce property distribution proceeding in the " interest of comity" with the Washington courts on matters purely pertaining to state law.
In view of the fact that this is the only real dispute involved in the chapter 11 case, the effect of a discretionary § 1334(c)(1) abstention would also necessitate dismissal of the chapter 11 case on the premise that there is no bankruptcy business to accomplish. As with Bankruptcy Code § 305, if the bankruptcy court had invoked § 1334(c)(1) abstention, all appellate review would have stopped here.
In a proceeding for dissolution of marriage, legal separation, declaration of invalidity, or in a proceeding for disposition of property following dissolution of the marriage by a court which lacked personal jurisdiction over the absent spouse or lacked jurisdiction to dispose of the property, the court shall, without regard to marital misconduct, make such disposition of the property and the liabilities of the parties, either community or separate, as shall appear just and equitable after considering all relevant factors including, but not limited to: (1) The nature and extent of the community property; (2) The nature and extent of the separate property; (3) The duration of the marriage; and (4) The economic circumstances of each spouse at the time the division of property is to become effective, including the desirability of awarding the family home or the right to live therein for reasonable periods to a spouse with whom the children reside the majority of the time.