In re: Ryan S. O'Hara ( 2019 )

FILED
JUL 30 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NOT FOR PUBLICATION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-19-1041-KuTaS
RYAN S. O'HARA, Bk. No. 2:17-bk-20050-SK
Debtor.
RYAN S. O'HARA,
Appellant,
v. MEMORANDUM*
UNITED STATES TRUSTEE,
Appellee.
Argued and Submitted on July 18, 2019
at Pasadena, California
Filed – July 30, 2019
Appeal from the United States Bankruptcy Court
for the Central District of California
Honorable Sandra R. Klein, Bankruptcy Judge, Presiding
*
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.
Appearances: Mark T. Young of Donahoe & Young LLP argued for
appellant Ryan S. O'Hara.**
Before: KURTZ, TAYLOR, and SPRAKER, Bankruptcy Judges.
Chapter 111 debtor, Ryan S. O'Hara, appeals from the bankruptcy
court's order denying his motion for approval of his disclosure statement
and dismissing his case. We AFFIRM.
FACTS
A. Prepetition Events
1. The Restitution Judgment
In 2014, Mr. O'Hara was convicted in the Superior Court of Los
Angeles County of seven counts of grand theft under California Penal
Code § 487(a)2 and ordered to pay $4,594,315.96 in restitution to the victim,
Chapman Leonard Studio Equipment (Chapman). The amount of the
restitution included the value of property stolen or damaged. The Los
**
The United States Trustee (UST) has not participated in this appeal.
1
Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532.
2
Cal. Penal Code § 487 states in relevant part:
Grand theft is theft committed in any of the following cases:
(a) When the money, labor, or real or personal property
taken is of a value exceeding nine hundred fifty dollars
($950) . . . .
2
Angeles County District Attorney, on behalf of Chapman, obtained an
abstract of judgment (Abstract). In early 2015, Chapman recorded the
Abstract thereby creating a judgment lien (Lien) against Mr. and
Ms. O'Hara's real property located in Stevenson Ranch, California
(Property).
Between October 2014 and February 2017, Mr. O'Hara was
incarcerated at Owens Valley Fire Camp in Bishop, California.
2. Ms. O'Hara's Bankruptcy: Avoidance of Chapman's Lien
In December 2016, Ms. O'Hara filed a chapter 7 petition. At that time,
Mr. and Ms. O'Hara held title to the Property as trustees of the O'Hara
Family Trust dated March 19, 2003. The Property was encumbered by a
deed of trust held by PennyMac Loan Services and by the Lien.
In July 2017, Ms. O'Hara filed a motion seeking to avoid the Lien
under § 522(f) on the grounds that it impaired her $100,000 homestead
exemption. The bankruptcy court granted her motion and avoided the Lien
in the amount of $4,042,446.38, with the balance of $551,869.58 remaining
on the Property (Avoidance Order).
B. Mr. O'Hara's Bankruptcy
On August 16, 2017, Mr. O'Hara filed his chapter 11 case.
In June 2018, Mr. O'Hara filed a disclosure statement and plan and
motion to approve the disclosure statement. No timely objections were
filed, but the UST appeared at the hearing and argued that the disclosure
3
statement was inadequate as Mr. O'Hara had under reported his living
expenses. The bankruptcy court agreed but also noted that Mr. O'Hara's
average post-petition monthly net income was negative and that the debt
owed to Chapman appeared to be nondischargeable. The court requested
Mr. O'Hara's counsel to provide a chart showing what the monthly
operating reports (MORs) reflected from the beginning of the case to the
present. And, if the numbers had not changed by the time of the next
hearing, the bankruptcy court stated that the case would most likely be
dismissed. The matter was continued to November 29, 2018.
On October 2018, Mr. O'Hara filed an amended disclosure statement
and plan and sought approval of the disclosure statement. Under this
version of the plan, relying on the Avoidance Order, Mr. O'Hara proposed
to pay the secured portion of the Lien through his plan. He maintained,
however, that the unsecured portion of the Lien was dischargeable.
Therefore, he proposed to pay a small percentage of the unsecured portion
over twenty-five to thirty years without interest.
The UST objected to the disclosure statement on the grounds that
there were errors and ambiguities that needed to be addressed before a
determination could be made regarding the feasibility of Mr. O'Hara's plan.
At the November 29, 2018 hearing, the bankruptcy court found minor
issues, and what it called "deal breaker issues," with respect to the
disclosure statement and the plan. The minor issues included, among other
4
things, inconsistencies between the disclosure statement and the plan
concerning the payment of tax claims, and discrepancies between the
MORs and Mr. O'Hara's average monthly income set forth in the disclosure
statement. The court viewed as a "deal breaker," Mr. O'Hara's declaration
of post-petition income which did not indicate whether he was paying
property taxes or insurance on the Property or explain what kind of
consulting work he was doing or whether it was full or part time. In
addition, although Mr. O'Hara claimed he received $12,540 in monthly
income from his job as an accountant and consultant, he did not deduct any
payroll taxes or social security from his calculations of monthly net income.
The court also observed that Chapman's claim was $5.88 million and
that it appeared the plan was relying on the Avoidance Order in
Ms. O'Hara's case to provide for only the secured portion of the claim. The
bankruptcy court found that Mr. O'Hara could not rely on the Avoidance
Order because it had made no determination on whether Chapman's claim
was secured or unsecured. The bankruptcy court also noted that the
restitution debt, whether secured or unsecured, was a nondischargeable
debt under § 523(a)(7). After hearing further argument, the bankruptcy
court authorized additional briefing on the issues of whether (1) the
Avoidance Order was binding in Mr. O'Hara's case and (2) the full
restitution debt was dischargeable.
The bankruptcy court found that the disclosure statement and plan
5
were inadequate for the second time and stated that it would not go
through it a third time when the MORs said something different than the
plan. The court stated that it would dismiss Mr. O'Hara's case if it was not
bound by the Avoidance Order and if the full restitution debt was
nondischargeable.
Pursuant to a scheduling order, Mr. O'Hara submitted his
supplemental brief. First, he argued that issue preclusion3 applied to the
bankruptcy court's findings in connection with the Avoidance Order in
Ms. O'Hara's case. According to Mr. O'Hara, his plan of reorganization
proposed to pay off the secured portion of the Lien in full through the
length of the chapter 11 plan. The remaining voided portion of the Lien
would be treated as an unsecured claim. If the bankruptcy court decided
that issue preclusion was inapplicable, Mr. O'Hara requested an
opportunity to file a motion to avoid the Lien which impaired his
homestead exemption.
Second, Mr. O'Hara maintained that the unsecured portion of the
restitution debt was dischargeable. He argued that it was not a debt "for a
fine, penalty, or forfeiture" nor was it "payable to a governmental unit" or
"for the benefit of a governmental unit" since it was payable to Chapman.
Mr. O'Hara also asserted that the restitution was compensation for actual
3
Modern terminology, following the approach of the Restatement (Second),
replaces the term "collateral estoppel" with "issue preclusion."
6
pecuniary loss. According to Mr. O'Hara, even if the unsecured portion of
the restitution debt was nondischargeable, Chapman would not be able to
enforce its unsecured claim until all plan payments were completed.
Therefore, the possible nondischargeability of the unsecured portion of the
Lien was "not an issue" as to confirmation of the plan.
At the February 6, 2019 status conference, the bankruptcy court
found that issue preclusion did not apply to the Avoidance Order because
the issues in Ms. O'Hara's lien avoidance motion were not identical to those
in Mr. O'Hara's case. The court reasoned that the value of the Property and
Lien were determined on the petition date in Ms. O'Hara's case and would
have to be redetermined as of the petition date in Mr. O'Hara's case. The
bankruptcy court also found that the full amount of the restitution debt
was nondischargeable under § 523(a)(7). As a result, the court found that
Mr. O'Hara's plan of reorganization was not feasible. The bankruptcy court
dismissed Mr. O'Hara's case on feasibility grounds and under
§ 1112(b)(4)(A) on the basis that there was substantial or continuing loss to
or diminution of the bankruptcy estate and the absence of a reasonable
likelihood of rehabilitation.
The bankruptcy court entered an order denying Mr. O'Hara's motion
for approval of the disclosure statement and dismissed his case. This timely
appeal followed.
7
JURISDICTION
The bankruptcy court had jurisdiction pursuant to 28 U.S.C. §§ 1334and 157(b)(2) (A), (I) and (O). We have jurisdiction under 28 U.S.C. § 158.
ISSUES
Whether the bankruptcy court erred in determining that the doctrine
of issue preclusion did not apply to the Avoidance Order;
Whether the bankruptcy court erred in determining that the full
restitution debt was nondischargeable under § 523(a)(7); and
Whether the bankruptcy court abused its discretion by dismissing
Mr. O'Hara's bankruptcy case.
STANDARDS OF REVIEW
We review de novo the bankruptcy court's determination that issue
preclusion was available. Tomkow v. Barton (In re Tomkow), 563 B.R. 716, 722
(9th Cir. BAP 2017) (citing Black v. Bonnie Springs Family Ltd. P'Ship (In re
Black), 487 B.R. 202, 210 (9th Cir. BAP 2013). If issue preclusion was
available, we then review the bankruptcy court's application of issue
preclusion for an abuse of discretion. Id.A bankruptcy court abuses its discretion if it applies the wrong legal
standard or misapplies the correct legal standard, or if its factual findings
are illogical, implausible, or without support in inferences that may be
drawn from the facts in the record. Id. (citing TrafficSchool.com, Inc. v.
Edriver Inc., 653 F.3d 820, 832 (9th Cir. 2011) (citation omitted).
8
We review de novo a bankruptcy court's conclusions of law,
including statutory interpretations. Parks v. Drummond (In re Parks), 475
B.R. 703, 706 (9th Cir. BAP 2012) (citation omitted).
Whether a claim is nondischargeable presents mixed issues of law
and fact and is reviewed de novo. Carrillo v. Su (In re Su), 290 F.3d 1140,
1142 (9th Cir. 2002).
We review a bankruptcy court's decision to dismiss a chapter 11 case
under the abuse of discretion standard. Tennant v. Rojas (In re Tennant), 318
B.R. 860, 868-69 (9th Cir. BAP 2004).
DISCUSSION
A. Issue Preclusion: Avoidance Order
Mr. O'Hara contends that the bankruptcy court erred by finding issue
preclusion inapplicable to the Avoidance Order. However, in his opening
brief, Mr. O'Hara essentially concedes that issue preclusion is not
applicable to the value of the Property. He states that the value of the
Property "may have changed" during the eight month gap between his and
Mrs. O'Hara's bankruptcy filings and contends that the change in value
could easily be addressed by allowing him to submit an updated appraisal.
See Culver, LLC v. Chiu (In re Chiu), 266 B.R. 743, 751 (9th Cir. BAP 2001)
(value of property and lien determined as of the petition date).
Accordingly, while some of the issues for lien avoidance in Mr. O'Hara's
case were similar to those in Ms. O'Hara's case, they were not identical. See
9
McQuillion v. Schwarzenegger, 369 F.3d 1091, 1096 (9th Cir. 2004) (to apply
issue preclusion, the issue at stake must be identical to the one alleged in
the prior litigation); Fund for Animals, Inc. v. Lujan, 962 F.2d 1391, 1399 (9th
Cir. 1992) (issue preclusion applies only when the issues presented in each
matter are identical—the doctrine is inapplicable if the issues are merely
similar) (citation omitted).
B. Section 523(a)(7): Dischargeability of the Restitution Debt
Section 523(a)(7) states that a debtor may not discharge any debt (1)
to the extent such debt is for a fine, penalty, or forfeiture (2) payable to and
for the benefit of a governmental unit, and (3) is not compensation for
actual pecuniary loss.
On appeal, Mr. O'Hara argues that none of the three statutory
requirements for nondischargeability have been met. First, he contends that
the restitution order was not a debt "for a fine, penalty, or forfeiture,"
asserting that it is instead for "restitution." According to Mr. O'Hara,
restitution is statutorily defined in California Penal Code § 1202.4(f) as
"based on the amount of loss claimed by the victim." By contrast, he points
out, "forfeiture" is defined in California Penal Code § 186, et seq. as "a
means of punishing and deterring criminal activities of organized crime
and requires that a separate petition for forfeiture be filed by the
prosecuting agency (Penal Code § 186.4)." Since the definitions for
"forfeiture" and "restitution" are different, Mr. O'Hara concludes that the
10
first requirement for nondischargeability has not been met. Next, he
contends that the restitution is payable to Chapman, who is not a
government entity. Last, Mr. O'Hara points out that the compensation is for
actual pecuniary loss. In essence, Mr. O'Hara advocates a literal
interpretation of the plain language in the statute.
These arguments are squarely precluded by Kelly v. Robinson, 479 U.S.
36 (1986) and Ninth Circuit case law. In Kelly, the Supreme Court
interpreted the statutory language in § 523(a)(7) broadly, not literally, to
include criminal restitution debts. The Supreme Court construed § 523(a)(7)
as applying to all penal sanctions, including restitution debts, regardless of
whether they were denominated fines, penalties, or forfeitures, and despite
the fact that restitution is forwarded to the victim and may be calculated by
reference to the amount of harm the offender caused. The Court's broad
interpretation was due to concerns about federal interference with state
court criminal prosecutions, the history of bankruptcy court's deference to
criminal judgments, and the interests of the States in unfettered
administration of their criminal justice systems. Id. at 43–44. Because
Congress had not explicitly overruled the well-established judicial
exception exempting criminal restitution payments from dischargeability
statutes, the Court declined to read the statute as doing so. Id. at 47. In the
end, the Court held that "§ 523(a)(7) preserves from discharge any condition
a state criminal court imposes as part of a criminal sentence." Id. at 50.
11
The Ninth Circuit has commented on the Kelly Court's deviation from
the statutory language in § 523(a)(7), noting that it has led to "considerable
confusion among federal courts and practitioners about [§] 523(a)(7)'s
scope." Scheer v. The State Bar of Cal. (In re Scheer), 817 F.3d 1206, 1210 (9th
Cir. 2016). Nonetheless, in construing the scope of § 523(a)(7) in connection
with a debt owed by an attorney to her former client, the Ninth Circuit
reiterated Kelly's analysis that § 523(a)(7) must be interpreted in light of
historical deference to the states’ interests in administering their criminal
justice systems:
While restitution resembled a judgment 'for the benefit of' the
victim, the Court concluded that the overall role of restitution
in 'the State's interests in rehabilitation and punishment, rather
than the victim's desire for compensation,' meant that the
criminal restitution actually operated 'for the benefit of' the
state as far as section 523(a)(7) was concerned. The sentence
following a criminal conviction necessarily considers the penal
and rehabilitative interests of the State. Those interests are
sufficient to place restitution orders within the meaning of
§ 523(a)(7).
Id. at 1210 (citing Kelly, 479 U.S. at 52–53). Kelly's deviation from the
statutory language was justified by "unique concerns of state criminal
proceedings" and "pre-Code practices" that "reflected policy considerations
of great longevity and importance." Id. at 1211 (citing United States v. Ron
Pair Enters., Inc., 489 U.S. 235, 244–45 (1989)).
Scheer did not pay her former client the outstanding balance on an
12
arbitration award and was suspended from the practice of law by the
California State Bar Court until she paid back all the funds and the court
granted a motion to terminate her inactive status. Scheer then filed
bankruptcy and sought to discharge the debt. In applying Kelly, State Bar of
Cal. v. Findley (In re Findley), 593 F.3d 1048, 1054 (9th Cir. 2010), and the
plain language of the statute, the Ninth Circuit reversed the district court
and found the debt dischargeable. While not condoning the attorney's
conduct, the court reasoned that the amount Scheer owed to the former
client was not a fine or penalty, but compensation for actual loss, and also
was not disciplinary. Id. at 1211. Therefore, it did not fall within the scope
of § 523(a)(7).
In contrast to Scheer, there is nothing in the record that shows the
state court's order requiring Mr. O'Hara to pay restitution to Chapman was
anything other than a fine or penalty and disciplinary. Under California
law, "[a]lthough based in part on the harm caused to the victim ([Cal.] Pen.
Code, § 1202.4 (g)), restitution is imposed primarily for the benefit of the
state to promote the state's interests in rehabilitation and punishment."
People v. Moser, 50 Cal.App. 4th 130, 135 (1996) (citation omitted). The Moser
court further explained:
Restitution 'is an effective rehabilitative penalty because it
forces the defendant to confront, in concrete terms, the harm his
actions have caused. Such a penalty will affect the defendant
differently than a traditional fine, paid to the State as an
13
abstract and impersonal entity, and often calculated without
regard to the harm the defendant has caused. Similarly, the
direct relation between the harm and the punishment gives
restitution a more precise deterrent effect than a traditional
fine.' Id. at 135-36.
California law on restitution is thus consistent with Kelly.
The Ninth Circuit has addressed an argument similar to Mr. O'Hara's
in Armstrong v. Kaplon (In re Armstrong), 677 F. App'x 434 (9th Cir. 2017).
There, Armstrong contended that his criminal restitution was
dischargeable because, unlike the state statute at issue in Kelly, the
California Penal Code provides for both "restitution" and a "restitution
fine." Compare Cal. Penal Code § 1202.4(f) (“[I]n every case in which a
victim has suffered economic loss as a result of the defendant's conduct, the
court shall require that the defendant make restitution to the victim or
victims in an amount established by court order, based on the amount of
loss claimed by the victim or victims or any other showing to the court.”)
with Cal. Penal Code § 1202.4(b) (“In every case where a person is
convicted of a crime, the court shall impose a separate and additional
restitution fine, unless it finds compelling and extraordinary reasons for
not doing so and states those reasons on the record.”). Armstrong argued
that the holding of Kelly extended only to the "restitution fine," and not to a
restitution order issued under California Penal Code § 1202.4(f). Id. at 435.
The Ninth Circuit found that this argument was squarely precluded
14
by Kelly, which categorically held that criminal restitution orders are
nondischargeable. In re Armstrong, 677 F. App'x at 436 (citing Kelly, 479 U.S.
at 49–50).
[T]he Kelly Court's holding did not hinge upon the specific
language or structure of the state law at issue. Rather, it was
based upon the desire not to interfere with state courts'
'unfettered administration of their criminal justice systems.'
Here, Armstrong's restitution order served California's
penological interests and was imposed as a function of the
administration of that state's criminal justice system. It
therefore falls within the scope of Kelly, even though the
California penal statute also provides for the imposition of a
separate 'restitution fine.' To hold otherwise 'would hamper the
flexibility of state criminal judges in choosing the combination
of imprisonment, fines, and restitution most likely to further
the rehabilitative and deterrent goals of state criminal justice
systems.' Id. (citations omitted).
The Armstrong court observed that it had followed Kelly numerous
times and had no occasion to revisit or challenge its holding. Id. (citing State
Comp. Ins. Fund v. Zamora (In re Silverman), 616 F.3d 1001, 1008 (9th Cir.
2010) ("As Kelly made clear, criminal restitution payments are
nondischargeable."); State Bar of Cal. v. Taggart (In re Taggart), 249 F.3d 987,
994 n.9 (9th Cir. 2001) ("The Supreme Court has held that '§ 523(a)(7)
preserves from discharge any condition a state criminal court imposes as
part of a criminal sentence.'") (quoting Kelly, 479 U.S. at 50); Palmer v. Levy
(In re Levy), 951 F.2d 196, 198–99 (9th Cir. 1991) (Kelly "held that restitution
15
obligations imposed in state criminal proceedings are not dischargeable.")).
Contrary to Mr. O'Hara's assertions, the dischargeability of a
restitution debt does not depend upon who receives the actual benefits nor
does it matter that the restitution amount is equivalent to the victim's loss.
Kelly, 479 U.S. at 51-52; In re Armstrong, 677 F. A'ppx at 436 ("T]he fact that
restitution was based on the amount of loss 'claimed by the victim or
victims' is irrelevant, for 'such [is] the nature of restitution.'") (citing Steiger
v. Clark Cty., Wash. (In re Steiger), 159 B.R. 907, 912 (9th Cir. BAP 1993).
Mr. O'Hara relies on In re Towers, 162 F.3d 952 (7th Cir. 1998), in
support of his argument that § 523(a)(7) is inapplicable where the
restitution award is paid to a victim rather than the governmental unit.
Towers is distinguishable because it involved a civil restitution award, not a
criminal one, and is not binding authority.
Mr. O'Hara also contends, without citation to any authority, that only
the unavoided portion of the Lien would be nondischargeable and the
avoided unsecured portion would be dischargeable. Section 523(a)(7) does
not make any distinction between secured or unsecured debts. Further, a
chapter 11 plan may not operate to discharge an otherwise
nondischargeable debt. Computer Task Grp., Inc. v. Brotby (In re Brotby), 303
B.R. 177, 189 (9th Cir. BAP 2003); State of Cal., State Bd. of Equalization v.
Ward (In re Artisan Woodworkers), 225 B.R. 185, 190 (9th Cir. BAP 1998).
Accordingly, for all these reasons, the bankruptcy court did not err in
16
finding that the full amount of the restitution debt was nondischargeable
under § 523(a)(7).
C. Dismissal of Mr. O'Hara's Case
Mr. O'Hara assigns several errors to the bankruptcy court's decision
dismissing his case: (1) the dismissal of his case did not meet basic due
process requirements; (2) the court erred in its findings regarding "cause";
and (3) the court erred by failing to consider alternatives to dismissal and
which alternative was in the best interest of creditors.
1. Due Process
We find no violation of due process. Mr. O'Hara did not complain
about the lack of due process in the bankruptcy court and thus failed to
properly preserve the issue fo r appeal. See Rains v. Flinn (In re Rains), 428
F.3d 893, 902 (9th Cir. 2005); Campbell v. Verizon Wireless S–CA (In re
Campbell), 336 B.R. 430, 434 n. 6 (9th Cir. BAP 2005) (citing O'Rourke v.
Seaboard Sur. Co. (In re E.R. Fegert, Inc.), 887 F.2d 955, 957 (9th Cir. 1989)
("The rule in this circuit is that appellate courts will not consider arguments
that are not 'properly raise[d] in the trial courts.'")).
Even if we consider de novo whether Mr. O'Hara was given due
process before the bankruptcy court dismissed his case, we conclude that
he was. Section 1112(b)(1) provides that only "on request of a party in
interest, and after notice and a hearing" may a case be dismissed for cause.
Similarly, a sua sponte conversion or dismissal can only be ordered after
17
notice and an opportunity to be heard. Tennant v. Rojas (In re Tennant), 318
B.R. 860, 869–70 (9th Cir. BAP 2004) (holding that "notice and a hearing" are
required even where the bankruptcy court acts pursuant to "its general
powers under Section 105(a)"). Adequate notice and adequate opportunity
for hearing is a flexible concept that depends on the circumstances of the
particular case. Id. at 870–71. We thus consider whether the notice given to
Mr. O'Hara about the dismissal of his case was "reasonably calculated" to
give him a meaningful opportunity to oppose dismissal if he so desired.
The record shows that the bankruptcy court had made clear at least
two times during different hearings on the adequacy of Mr. O'Hara's
disclosure statement that his case may be dismissed. At the November 29,
2018 hearing, the bankruptcy court stated the history of the case on the
record noting that it had previously considered Mr. O'Hara's disclosure
statement and plan, but it did not go through all the issues with them since
both the disclosure statement and plan "needed to be totally redone." The
court noted: "So, I told O'Hara's counsel that I needed to see a chart of what
the MOR's reflected from the beginning of the case to the present. And if
the numbers had not changed by the time of the next hearing, which is
today, the case would most likely be dismissed."
Later during the November 29 hearing, the bankruptcy court warned
Mr. O'Hara's counsel that it would not be going through the numbers in
the disclosure statement and plan for a third time. "So, the next time we're
18
here, and I'm saying these numbers don't match up, that will just be
numbers don't match up[,]the case is dismissed." However, the court
observed that it would "not even get there because there are two hurdles";
i.e., the binding nature of the Avoidance Order and the nondischargeability
of the restitution debt. And then if restitution has to be provided for in full,
then the case will be dismissed because it just doesn't make sense to keep
this going any longer and to keep the creditors hanging and to keep the
debtor incurring additional expenses in proposing disclosure statements
and plan that just aren't going to be feasible." The matter was then set for
another hearing.
Under these circumstances, we conclude that Mr. O'Hara had more
than adequate notice that his case may be dismissed and more than
adequate time to make further arguments to avoid dismissal.
2. The bankruptcy court did not err in finding "cause" for
dismissal.
Section 1112(b)(4) sets forth a nonexhaustive list of what constitutes
"cause" to convert or dismiss a case under § 1112(b)(1). See Pioneer
Liquidating Corp. v. United States Tr. (In re Consolidated Pioneer Mortg.
Entities), 248 B.R. 368, 375 (9th Cir. BAP 2000). Included in the list of items
constituting "cause" to convert or dismiss is the "substantial or continuing
loss to or diminution of the estate and the absence of a reasonable
likelihood of rehabilitation." § 1112(b)(4)(A).
19
Mr. O'Hara contends that the bankruptcy court erred because it
never identified any "substantial" or "continuing" loss to the bankruptcy
estate. He also maintains that the court found "the absence of a reasonable
likelihood of rehabilitation" but made no findings on this point other than
saying that he must make "meaningful payments" on the Lien. These
contentions have no merit.
The bankruptcy court found that Mr. O'Hara had lost $15,000, and
averaged a $900 monthly loss, since the petition date. "A negative cash flow
situation alone is sufficient to establish continuing loss to or diminution of
the estate.” Loop Corp. v. U.S. Tr., 379 F.3d 511, 515–16 (8th Cir.2004)
(internal quotation marks omitted). According to Mr. O'Hara, his MORs
showed that once he had fulfilled his probation, his gross income nearly
doubled, and his net income also increased. However, "[t]o determine if
there is a continuing loss to or diminution of the estate, the court must look
beyond financial statements and fully evaluate the present condition of the
debtor's estate." In re 412 Boardwalk, Inc., 520 B.R. 126, 135 (Bankr. M.D. Fla.
2014). The record shows that the bankruptcy court properly evaluated the
present condition of Mr. O'Hara's estate, noting his negative monthly
income and the under reporting of his living expenses.
The court also found that there was no likelihood of rehabilitation
because Mr. O'Hara owed more than $5.88 million to Chapman and thus
his plan, as written, was infeasible. Mr. O'Hara's plan provided payment to
20
Chapman over thirty years. The bankruptcy court found that it was
impossible to make a finding that Mr. O'Hara could and would pay the
restitution judgment, or make any of his plan payments, because there was
no way of knowing what his financial situation would be in thirty years.
The court determined that Chapman would most likely be in a worse
position due to Mr. O'Hara's negative monthly net income, and the interest
accruing on the restitution judgment. According to the court, Mr. O'Hara
had not committed enough funds to paying the restitution judgment and
thus the plan imperiled payment of that judgment.
The bankruptcy court also observed that the case had been pending
for a year and a half, and Mr. O'Hara had filed two disclosure statements
and plans that were wholly inadequate because, among other things, they
undervalued his living expenses. They reflected figures for his monthly
income and expenses that were significantly different from those reflected
in the MORs and they did not (1) address adequately how Mr. O'Hara
intended to pay the Chapman claim, (2) provide adequate financial
projections, and (3) demonstrate that his plan or amended plan could be
feasible. Mr. O'Hara's contention that the bankruptcy court erred in finding
the plan infeasible due to his improper treatment of Chapman's claim is
simply not supported by the record.
In sum, we conclude that the bankruptcy court did not abuse its
discretion in dismissing Mr. O'Hara's case based on "substantial or
21
continuing loss to or diminution of the estate and the absence of a
reasonable likelihood of rehabilitation" under § 1112(b)(4)(A).
3. Conversion as an Alternative to Dismissal.
Finally, Mr. O'Hara argues on appeal that the bankruptcy court
should have considered conversion as an alternative to dismissal.
According to Mr. O'Hara, the record is devoid of any indication that the
bankruptcy court considered which option — dismissal, conversion,
appointment of a trustee or examiner, or simply denial of approval of the
disclosure statement — was in the best interests of the creditors and estate.
After determining whether cause exists, the bankruptcy court
ordinarily must consider whether dismissal or conversion would best serve
the interests of creditors. Woods & Erickson, LLP v. Leonard (In re AVI, Inc.),
389 B.R. 721, 729 (9th Cir. BAP 2008) (citing Nelson v. Meyer (In re Nelson),
343 B.R. 671, 675 (9th Cir. BAP 2006) ). The bankruptcy court here did not
explicitly consider conversion before it dismissed Mr. O'Hara's chapter 11
case. However, this does not amount to reversible error.
Neither the UST or Mr. O'Hara argued for conversion in lieu of
dismissal in the bankruptcy court. Indeed, there is nothing in the record
that shows Mr. O'Hara preferred conversion over dismissal. This argument
is waived on appeal. In re E.R. Fegert, Inc., 887 F.2d at 957. Nor is there any
evidence that demonstrates that conversion, rather than dismissal, would
benefit creditors.
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Under these circumstances, we decline to remand for further
considerations of conversion over dismissal. See Stinchfield v. Specialized
Loan Serv. (In re Stinchfield), CC-17-1209-STaF, 2018 WL 1354339, at *4 (9th
Cir. BAP March 13, 2018) (citing Dudley v. Simmons (In re Dudley), 2014 WL
764360, at *5 n.4 (Mem. Dec.) (9th Cir. BAP Feb. 26, 2014) (same result in
appeal from chapter 13 case dismissal).
CONCLUSION
For the reasons explained above, we AFFIRM.
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