FILED
MAR 6 2019
NOT FOR PUBLICATION
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. CC-18-1185-FLS
BENZEEN INC., Bk. No. 1:17-bk-13113-MT
Debtor.
BENZEEN INC.,
Appellant,
v. MEMORANDUM*
UST - UNITED STATES TRUSTEE,
WOODLAND HILLS,
Appellee.
Argued and Submitted on February 21, 2019
at Pasadena, California
Filed – March 6, 2019
Appeal from the United States Bankruptcy Court
for the Central District of California
*
This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
Honorable Maureen A. Tighe, Chief Bankruptcy Judge, Presiding
Appearances: Michael R. Sment argued for appellant Benzeen Inc.
Before: FARIS, LAFFERTY, and SPRAKER, Bankruptcy Judges.
INTRODUCTION
Chapter 111 debtor Benzeen Inc. appeals from the bankruptcy court’s
order sua sponte dismissing its case at a status conference and hearing on
Benzeen’s disclosure statement. Benzeen argues that the bankruptcy court
deprived it of due process by dismissing the case without proper notice
and erred by failing to make specific findings of the factors warranting
dismissal.
While the circumstances of the case are suspicious, we agree with
Benzeen that the bankruptcy court committed procedural errors.
Accordingly, we VACATE and REMAND.
1
Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code,
11 U.S.C. §§ 101-1532.
2
FACTUAL BACKGROUND2
A. Benzeen’s chapter 11 petition
On November 20, 2017, Benzeen filed a chapter 11 petition signed by
its president, Roman Preys. It scheduled real property located on Appian
Way in Los Angeles, California (“Property”) in which Benzeen claimed a
twenty-five percent interest. It valued the entirety of the Property at $3.6
million. Bayview Loan Servicing LLC (“Bayview”) was the servicer for
Bank of New York Mellon, which held the first deed of trust against the
Property in the original principal amount of $1.5 million.
Benzeen also scheduled residential real property located on Iredell
Lane in Studio City, California valued at $5.9 million. JPMorgan Chase
Bank held a $3.2 million first-position lien against that property.
In December 2017, the bankruptcy court entered its Order Setting
Scheduling and Case Management Conference and Filing of Monthly
Reports. The order appeared to be a form document and provided:
PLEASE TAKE FURTHER NOTICE that, based upon the
Court’s records and evidence presented at the status
conference, the Court may take any of the following actions at
the status conference (or at any continued hearing) without
further notice:
2
We exercise our discretion to review the bankruptcy court’s docket, as
appropriate. See Woods & Erickson, LLP v. Leonard (In re AVI, Inc.),
389 B.R. 721, 725 n.2
(9th Cir. BAP 2008).
3
1. Dismiss the case;
2. Convert the case to another chapter . . . .
Benzeen timely filed its proposed disclosure statement and proposed
chapter 11 plan. In relevant part, the disclosure statement provided that
Bayview “will receive 0 payments but [it] shall retain all State rights.”
However, the plan indicated without explanation that Bayview’s claim
would not be impaired and that it would be paid 100 percent.
The disclosure statement also provided that the plan would initially
be funded by a $500,000 loan from Mr. Preys. Mr. Preys would procure the
funds by selling “real property not owned by the Bankruptcy estate.”
Benzeen would then use the loan proceeds to renovate and sell the real
property located on Iredell Lane to fund the plan.
B. Objection to disclosure statement
Bayview objected to approval of Benzeen’s disclosure statement. It
alleged that the mortgage loan secured by the Property was twelve years in
arrears. It contended that the original borrowers had executed an
unauthorized grant deed in 2013 that transferred a twenty-five percent
interest in the Property to Benzeen; they only recorded the grant deed
postpetition in March 2018. Bayview alleged that the Property had been
involved in five bankruptcy cases by four debtors in the past three years.3
3
The prior bankruptcy cases were filed on August 19, 2015 (dismissed October
(continued...)
4
Bayview objected that the disclosure statement falsely claimed that
Benzeen owned the Property. It argued that the deed of trust “specifically
precluded [the original borrowers] from transferring any interest in the
subject property without [Bayview’s] prior written approval.”
Bayview also objected that the disclosure statement was vague as to
the treatment of its claim. The plan provided that Bayview would receive
no money but would “retain all State rights.” Bayview argued that Benzeen
failed to explain the supposed “rights” it would retain. It also pointed out
that the proposed plan contradicted the disclosure statement and provided
that Bayview’s claim would be paid in full.
Finally, Bayview objected because the disclosure statement failed to
provide adequate information about the plan’s feasibility. The plan
proposed to sell two pieces of real property to raise $7.8 million, but the
disclosure statement did not adequately identify what property would be
sold or provide any details of the proposed sale.
C. Hearing on Bayview’s objection
A hearing on the disclosure statement and a case status conference
were scheduled for June 6, 2018. The day before the hearing, the
3
(...continued)
19, 2015), October 28, 2015 (dismissed November 16, 2015), March 2, 2016 (dismissed
May 2, 2016), and November 6, 2017 (dismissed January 9, 2018). The court dismissed
the cases for either failure to appear at the § 341(a) meeting of creditors or failure to file
schedules. In each case, the debtor claimed an interest in the Property by way of an
allegedly unauthorized grant deed.
5
bankruptcy court issued a tentative ruling on the objection to the disclosure
statement. The tentative ruling concluded, “APPROVAL DENIED.
APPEARANCE REQUIRED.” The bankruptcy court did not mention the
possibility of dismissal.
At the hearing and status conference, only counsel for Benzeen
appeared. He agreed that the disclosure statement needed to be more
specific and detailed. But the court interjected, “Well, that’s fine, but it
doesn’t address this phenomenal history of game playing and transfers and
fractional interest. I mean, this is – this is just – . . . a fraud scheme.” In
response to counsel’s offer to amend the plan, the court expressed
frustration: “[T]his is coming up every time there’s a problem, ‘Okay. We’ll
deal with that. We’ll deal with that,’ with no explanation of what kind of
business Benzeen’s been in playing these kind of games for years.” It stated
that Benzeen’s plan was unrealistic and that “you’re going to make up
whatever you need to make up because [Mr. Preys] plays with all of these
different corporations . . . .”
Near the end of the hearing, the bankruptcy court raised the notion of
dismissal for the first time. It said:
I’m denying the disclosure statement, but I’m dismissing
the case. I’m not going to give this another chance to revise it.
You’ve had since last year. This kind of case appears
abusive. . . . The activity has been very suspicious leading up to
the case, and I don’t want to be part of being a place for him to
play these games. Come in with proper disclosure and activity
6
at the beginning of the case if you’ve got that kind of money
lying around instead of coming in and hiding all of this stuff
until you get caught on it, and you could have had it in the
disclosure.
The court concluded, “I’m not going to allow Mr. [Preys] to use the Court
this way. Go out and straighten it out and then do it a different way. You
had your one chance. It’s over. So that’s dismissed.”
The bankruptcy court’s order dismissing Benzeen’s case did not
provide detailed findings of fact and conclusions of law, but only noted
that the court had held a status conference and stated:
The court, finding cause for dismissal of the case under
11
U.S.C. § 1112(b) based on findings of fact and conclusions of
law stated orally and recorded in open court pursuant to
F.R.Civ.P. 52(a) . . . ,
IT IS HEREBY ORDERED that the above referenced case
be, and the same is hereby, dismissed.
Benzeen timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction pursuant to
28 U.S.C. §§ 1334
and 157(b)(2)(A). We have jurisdiction under
28 U.S.C. § 158.
ISSUE
Whether the bankruptcy court erred in sua sponte dismissing
Benzeen’s case at the hearing on Bayview’s objection to the disclosure
7
statement.
STANDARDS OF REVIEW
We review de novo the bankruptcy court’s interpretation of the
Bankruptcy Code. Shapiro v. Henson,
739 F.3d 1198, 1200 (9th Cir. 2014).
Similarly, “[w]hether an appellant’s due process rights were violated is
a question of law we review de novo.” DeLuca v. Seare (In re Seare),
515 B.R.
599, 615 (9th Cir. BAP 2014) (citing Miller v. Cardinale (In re DeVille),
280
B.R. 483, 492 (9th Cir. BAP 2002), aff’d,
361 F.3d 539 (9th Cir. 2004)).
“De novo review requires that we consider a matter anew, as if no
decision had been made previously.” Francis v. Wallace (In re Francis),
505
B.R. 914, 917 (9th Cir. BAP 2014) (citations omitted).
We review for abuse of discretion the bankruptcy court’s decision to
dismiss a case under § 1112(b). See Sullivan v. Harnisch (In re Sullivan),
522
B.R. 604, 611 (9th Cir. BAP 2014) (citing Leavitt v. Soto (In re Leavitt),
171
F.3d 1219, 1223 (9th Cir. 1999)).
We apply a two-part test to determine whether the bankruptcy court
abused its discretion. First, we consider de novo whether the bankruptcy
court applied the correct legal standard. Then, we review the bankruptcy
court’s factual findings for clear error.
Id. (citing United States v. Hinkson,
585 F.3d 1247, 1261-62 (9th Cir. 2009) (en banc)). We must affirm the
bankruptcy court’s factual findings unless we conclude that they are
illogical, implausible, or without support in the record.
Id. at 612 (citing
8
Hinkson,
585 F.3d at 1262).
DISCUSSION
A. The bankruptcy court committed reversible error by failing to give
Benzeen notice of its intention to dismiss its case.
Benzeen argues on appeal that it was caught off guard by the
bankruptcy court’s ruling. There was no pending motion to dismiss, and
the bankruptcy court did not give it notice that it was contemplating
dismissal. We hold that the bankruptcy court denied Benzeen due process.
Generally speaking, a court must give sufficient notice of its intention
to dismiss a case and the opportunity for interested parties to be heard. See
Tennant v. Rojas (In re Tennant),
318 B.R. 860, 870 (9th Cir. BAP 2004) (“the
concept of procedural due process requires a notice and an opportunity to
be heard” (citing Muessel v. Pappalardo (In re Muessel),
292 B.R. 712, 717 (1st
Cir. BAP 2003))). According to the United States Supreme Court:
An elementary and fundamental requirement of due process in
any proceeding which is to be accorded finality is notice
reasonably calculated, under all the circumstances, to apprise
interested parties of the pendency of the action and afford them
an opportunity to present their objections. The notice must be
of such nature as reasonably to convey the required
information, . . . and it must afford a reasonable time for those
interested to make their appearance[.]
Mullane v. Cent. Hanover Bank & Tr. Co.,
339 U.S. 306, 314 (1950) (internal
citations omitted).
9
Section 1112(b) provides that, “after notice and a hearing,” a court
may dismiss a chapter 11 case “for cause.” Section 102(1) defines the phrase
“after notice and a hearing”:
(1) “after notice and a hearing”, or a similar phrase -
(A) means after such notice as is appropriate in the
particular circumstances, and such opportunity for a
hearing as is appropriate in the particular circumstances;
but
(B) authorizes an act without an actual hearing if such
notice is given properly and if -
(I) such a hearing is not requested timely by a party
in interest; or
(ii) there is insufficient time for a hearing to be
commenced before such act must be done, and the
court authorizes such act[.]
§ 102(1).
“[T]he concept of notice and a hearing is flexible and depends on
what is appropriate in the particular circumstance.” In re Tennant,
318 B.R.
at 870 (citing Great Pac. Money Markets, Inc. v. Krueger (In re Krueger),
88 B.R.
238, 241 (9th Cir. BAP 1988)). A procedure may be “perfectly appropriate”
if it “notifies the debtor of the deficiencies of his petition and dismisses the
case sua sponte without further notice and a hearing when the debtor fails
to file the required forms within a deadline.”
Id. at 870-71 (citing Minkes v.
10
LaBarge (In re Minkes),
237 B.R. 476, 478-79 (8th Cir. BAP 1999)). However,
we have acknowledged that the “flexible” notice and hearing requirement
does not allow a bankruptcy court to steamroll over a party’s due process
rights.
Id. at 871 (citing Dinova v. Harris (In re Dinova),
212 B.R. 437, 443-44
(2d Cir. BAP 1997)).
In the present case, the bankruptcy court did not provide Benzeen
adequate prior notice of the contemplated dismissal. There was no motion
to dismiss, and the bankruptcy court’s tentative ruling issued a day before
the hearing only indicated that it was inclined to disapprove the disclosure
statement. At the hearing, the court made abundantly clear that it was
displeased with Benzeen’s conduct, but it did not raise the possibility of
dismissal until nearly the end of the hearing.
The bankruptcy court’s initial order setting the status conference
stated that dismissal was a possibility. But the boilerplate language
referencing dismissal as one of twelve possible actions that the court might
take “at any continued hearing” did not notify Benzeen of any problem
with its disclosure statement or its good faith. The form order did not give
the court blanket license to dismiss the case (or to take any of the twelve
actions) at any time. The order was not reasonably calculated to provide
Benzeen with notice that the bankruptcy court was contemplating
dismissal based on bad faith or deficiencies in the disclosure statement.
Under these circumstances, the bankruptcy court failed “to apprise
11
interested parties of the pendency of the action and to afford them an
opportunity to present their objections.” Mullane,
339 U.S. at 314. “We
acknowledge that the dismissal of [the debtor’s] chapter 11 case may have
been inevitable. . . . Nevertheless, a court may not ‘cut to the chase’ in a
manner that deprives a party of due process.” Sanders v. U.S. Tr. (In re
Sanders), BAP No. CC-15-1344-FKiKu,
2016 WL 3971324, at *3 (9th Cir. BAP
July 15, 2016). The bankruptcy court committed reversible error when it
denied Benzeen due process.
B. The bankruptcy court erred by failing to consider the best interests
of the estate and creditors.
The bankruptcy court cited § 1112(b) as the basis for dismissal.
Section 1112(b) provides that the bankruptcy court may dismiss a case “for
cause.” Although the statute does not define “for cause,” it identifies a
nonexclusive list of factors that may constitute “cause.” See § 1112(b)(4).
“The bankruptcy court has broad discretion in determining what
constitutes ‘cause’ under section 1112(b).” In re Sullivan, 522 B.R. at 614
(citing Chu v. Syntron Bioresearch, Inc. (In re Chu),
253 B.R. 92, 95 (S.D. Cal.
2000)).
If the bankruptcy court finds that “cause” exists under § 1112, it has
an “independent obligation” to “(1) decide whether dismissal, conversion,
or the appointment of a trustee or examiner is in the best interests of
creditors and the estate; and (2) identify whether there are unusual
12
circumstances that establish that dismissal or conversion is not in the best
interests of creditors and the estate.” In re Sullivan, 522 B.R. at 612 (citing
§ 1112(b)(1), (b)(2)). Failure to consider these options is an abuse of
discretion. Id.
The record is devoid of any indication that the bankruptcy court
considered which option – dismissal, conversion, appointment of a trustee,
or no action – was in the best interests of the creditors and the estate. This
was error.4
CONCLUSION
The bankruptcy erred when it sua sponte dismissed Benzeen’s
chapter 11 case without providing Benzeen with proper notice prior to
dismissing its case or considering the best interests of the estate and
creditors. We express no opinion as to the merits of dismissal. We VACATE
and REMAND.
4
We need not consider Benzeen’s argument that the bankruptcy court failed to
make adequate findings.
13
