Christopher Hamilton v. Elite of Los Angeles, Inc. ( 2020 )


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  •                                                                                FILED
    NOT FOR PUBLICATION
    MAR 16 2020
    UNITED STATES COURT OF APPEALS                       MOLLY C. DWYER, CLERK
    U.S. COURT OF APPEALS
    FOR THE NINTH CIRCUIT
    In re: CHRISTOPHER JOHN                          No.   18-60043
    HAMILTON; ELIZABETH LEIGH
    TESOLIN,                                         BAP No. 17-1273
    Debtors,
    MEMORANDUM*
    ------------------------------
    CHRISTOPHER JOHN HAMILTON;
    ELIZABETH LEIGH TESOLIN,
    Appellants,
    v.
    ELITE OF LOS ANGELES, INC.; SAN
    DIEGO TESTING SERVICES, INC.,
    Appellees.
    Appeal from the Ninth Circuit
    Bankruptcy Appellate Panel
    Lafferty III, Spraker, and Kurtz, Bankruptcy Judges, Presiding
    Argued and Submitted February 6, 2020
    Pasadena, California
    *
    This disposition is not appropriate for publication and is not precedent
    except as provided by Ninth Circuit Rule 36-3.
    Before: BOGGS,** IKUTA, and CHRISTEN, Circuit Judges.
    Appellants Christopher Hamilton and Elizabeth Tesolin obtained
    confirmation of their Sixth Amended Chapter 11 Plan of Reorganization over the
    objection of appellees Elite of Los Angeles, Inc. and San Diego Testing Services,
    Inc. (Elite). Elite appealed the bankruptcy court’s plan confirmation order to the
    Bankruptcy Appellate Panel, which reversed based on its conclusion that the Plan
    did not satisfy all statutory confirmation requirements and included an
    impermissible collection injunction. See Elite of L.A., Inc. v. Hamilton (In re
    Hamilton), No. SC-17-1273-LSKu, 
    2018 WL 3637905
    (B.A.P. 9th Cir. July 31,
    2018). Hamilton and Tesolin now appeal from the BAP order. We have
    jurisdiction pursuant to 28 U.S.C. §158(d)(1), review the BAP’s decision de novo,
    and apply the same standard of review that the BAP applied to the bankruptcy
    court’s ruling. In re Molasky, 
    843 F.3d 1179
    , 1183 (9th Cir. 2016). We affirm the
    BAP’s order reversing the bankruptcy court’s plan confirmation order.
    1. The bankruptcy court approved the Plan provision that enjoined creditors
    from collecting nondischargeable debt during the Plan period, including Elite’s
    **
    The Honorable Danny J. Boggs, United States Circuit Judge for the
    U.S. Court of Appeals for the Sixth Circuit, sitting by designation.
    2
    nondischargeable judgment against Hamilton.1 The bankruptcy court relied on two
    cases that held a court may exercise its equitable powers pursuant to 11 U.S.C. §
    105(a) to approve a Chapter 11 plan that enjoins collection of nondischargeable
    debt without running afoul of 11 U.S.C. § 1141(d)(2). See Computer Task Group,
    Inc. v. Brotby (In re Brotby), 
    303 B.R. 177
    , 190 (9th Cir. BAP 2003); In re
    Mercado, 
    124 B.R. 799
    , 801 (Bankr. C.D. Cal. 1991).
    Hamilton similarly relies on Brotby and Mercado on appeal, but both cases
    are distinguishable. In both, the plans contemplated that nondischargeable claims
    would be paid in full. See 
    Brotby, 303 B.R. at 190
    ; 
    Mercado, 124 B.R. at 801
    .
    Here, there was no finding or record evidence that Hamilton will be able to pay
    Elite’s nondischargeable judgment during the Plan term or thereafter. In fact, it is
    undisputed that the nondischargeable debt will significantly increase, to over $3
    million, by the end of the Plan period. We know of no case in which our court (or
    1
    After Hamilton left his job at Elite, a jury found Hamilton liable for breach
    of fiduciary duty, breach of duty of loyalty, intentional interference with
    prospective economic advantage, trade secret misappropriation, and punitive
    damages. In re Hamilton, 
    584 B.R. 310
    , 315 (B.A.P. 9th Cir. 2018). Hamilton and
    Tesolin filed their Chapter 11 petition after the state court entered a large judgment
    in Elite’s favor. We later affirmed the bankruptcy court’s determination that the
    judgment was nondischargeable under 11 U.S.C. § 523(a)(6) because of
    Hamilton’s willful and malicious conduct. See In re Hamilton, 785 F. App’x 438,
    439 (9th Cir. 2019).
    3
    the BAP) has approved a collection injunction in such circumstances.2 Hamilton
    and Tesolin also suggest the collection injunction is severable from the Plan, but
    the bankruptcy court determined that its inclusion was necessary for the Plan’s
    success.
    2. Section 1129(a)(11) requires a finding by the bankruptcy court that plan
    confirmation “is not likely to be followed by liquidation, or the need for further
    financial reorganization, of the debtor.” 11 U.S.C. § 1129(a)(11). To satisfy this
    section, known as the “feasibility requirement,” the debtor must demonstrate that
    the plan “has a reasonable probability of success.” First Southern Nat’l Bank v.
    Sunnyslope Hous. Ltd. P’ship (In re Sunnyslope Hous. Ltd. P’ship), 
    859 F.3d 637
    ,
    646–47 (9th Cir. 2017) (en banc) (quoting In re Acequia, Inc., 
    787 F.2d 1352
    , 1364
    (9th Cir. 1986)). “A bankruptcy court’s finding of feasibility is reviewed for abuse
    of discretion.” 
    Id. at 647.
    The record does not support the bankruptcy court’s finding that the Plan was
    not likely to be followed by liquidation or further financial reorganization.
    Because of the accruing interest on Elite’s nondischargeable judgment, Hamilton
    2
    The dissent relies on Copeland v. Fink (In re Copeland), 
    742 F.3d 811
    (8th
    Cir. 2014). But in that case, the Eighth Circuit assumed that the nondischargeable
    debt would be “paid in full regardless of the plan implemented in bankruptcy.” 
    Id. at 815
    (emphasis in original).
    4
    will owe more to Elite at the end of the Plan period than at the beginning, and his
    work life expectancy will be five years shorter. The bankruptcy court’s summary
    finding that Hamilton and Tesolin will be able to make the required payments
    under the Plan does not alone sustain a feasibility finding, and that court did not
    address whether they will need to seek liquidation or further reorganization at the
    end of the Plan period. Accordingly, we conclude that the bankruptcy court abused
    its discretion by determining that the Plan was feasible within the meaning of §
    1129(a)(11).
    3. Elite argues that Hamilton has improperly used Chapter 11 to delay
    enforcement of its nondischargeable judgment while he runs Hamilton College
    Consulting (HCC), a competitor business owned by his mother. Hamilton receives
    an annual salary of $199,000 and has incurred professional fees in excess of $2
    million, which HCC has agreed to pay.
    Section 1129(a)(3) requires that a plan be “proposed in good faith and not by
    any means forbidden by law” in order to be confirmed. 11 U.S.C. § 1129(a)(3). A
    plan is proposed in good faith if it achieves a result consistent with the purposes of
    the Bankruptcy Code. Platinum Capital, Inc. v. Sylmar Plaza, L.P. (In re Sylmar
    Plaza, L.P.), 
    314 F.3d 1070
    , 1074 (9th Cir. 2002). The primary purposes of
    Chapter 11 are to rehabilitate the debtor and maximize the value of the estate.
    5
    
    Sunnyslope, 859 F.3d at 645
    . The good-faith determination is based on the totality
    of the circumstances. Sylmar 
    Plaza, 314 F.3d at 1074
    . The proposed Plan fails to
    meet these objectives. It is not feasible, it appears likely that Hamilton will be
    unable to pay the ballooning nondischargeable debt at the end of the Plan period,
    there are unresolved issues concerning Hamilton’s degree of control over HCC,
    and there is no evidence that Hamilton made a demand for indemnification from
    HCC to pay Elite’s judgment.3 Accordingly, we conclude that the bankruptcy
    court clearly erred by finding that the Plan was proposed in good faith, as required
    by § 1129(a)(3).
    4. A bankruptcy court may confirm a Chapter 11 plan over the objections of
    an impaired creditor if the plan is “fair and equitable” to each creditor class
    pursuant to 11 U.S.C. § 1129(b)(1). Zachary v. California Bank & Tr., 
    811 F.3d 1191
    , 1194 (9th Cir. 2016). To be fair and equitable, the plan must satisfy either
    the “absolute priority rule,” codified at § 1129(b)(2)(B)(ii), see 
    Zachary, 811 F.3d at 1193
    –94, or an exception to the rule known as the “new value corollary,” Liberty
    Nat’l Enters. v. Ambanc La Mesa Ltd. Pshp. (In re Ambanc La Mesa Ltd. P’ship),
    
    115 F.3d 650
    , 654 (9th Cir. 1997). To satisfy the new value corollary, the debtor
    must offer new value under the Plan. 
    Id. Here, because
    the Plan provided that
    3
    See Cal. Civ. Code § 2778(1).
    6
    Hamilton and Tesolin would retain any nonexempt and unencumbered equity in a
    rental property they own, the bankruptcy court required that the Plan satisfy the
    new value corollary. Hamilton responded by securing a commitment from HCC to
    contribute, on the Plan’s effective date, $200,000 in cash for administrative
    expenses and a $380,000 promissory note to cover the balance of professional fees.
    The bankruptcy court found that HCC’s pledged contribution provided new value
    and met the other criteria for the new value corollary.
    Because HCC was already paying Hamilton’s and Tesolin’s professional
    fees pursuant to an indemnity agreement with Hamilton at the time HCC secured
    the effective date contribution, we conclude that the bankruptcy court erred by
    finding that HCC’s contribution was new.
    The BAP’s order reversing the bankruptcy court’s plan confirmation order is
    AFFIRMED.
    7
    FILED
    Hamilton v. Elite of Los Angeles, Inc., 18-60043
    MAR 16 2020
    IKUTA, Circuit Judge, dissenting:                                                MOLLY C. DWYER, CLERK
    U.S. COURT OF APPEALS
    Christopher Hamilton and Elizabeth Tesolin (referred to here collectively as
    Hamilton) owe Elite of Los Angeles, Inc. and San Diego Testing Services, Inc.
    (Elite) over $2 million. The bankruptcy court confirmed a plan under which all
    unsecured creditors, including Elite, would receive a pro rata share of their debt
    over a five-year period. At the end of the plan term, a large portion of Elite’s debt
    would remain. Because Elite’s debt is nondischargeable, Hamilton will have to
    continue to pay it, likely for the rest of his life. The majority reverses the
    bankruptcy court’s determination based solely on its own assessment of the
    equities. Because the Code bars Elite from pursuing collection efforts until the end
    of the plan, the bankruptcy court did not abuse its discretion in approving the
    plan’s collection injunction against Elite. Moreover, the bankruptcy court did not
    clearly err in determining that the plan is feasible and was proposed in good faith.
    Because I would affirm the bankruptcy court, I dissent.1
    1
    We review the bankruptcy court’s rulings independently, In re Salazar, 
    430 F.3d 992
    , 994 (9th Cir. 2005), and give no deference to the decision of the
    Bankruptcy Appellate Panel, In re Kadjevich, 
    220 F.3d 1016
    , 1019 (9th Cir. 2000).
    We review the bankruptcy court’s conclusions of law de novo, In re 
    Salazar, 430 F.3d at 994
    , its factual findings for clear error, 
    Id., and its
    confirmation of a
    reorganization plan for abuse of discretion, In re Marshall, 
    721 F.3d 1032
    , 1045
    (9th Cir. 2013).
    I
    The bankruptcy court did not abuse its discretion in approving the plan’s
    collection injunction, which precludes Elite from collecting its nondischargeable
    debt during the life of the plan, because the Code itself precludes Elite from doing
    so.
    Under § 362 of the Code, the filing of a petition under Chapter 11 “operates
    as a stay, applicable to all entities, of . . . the enforcement, against the debtor or
    against property of the estate, of a judgment obtained before the commencement of
    the case under this title.” 11 U.S.C. § 362(a)(2). This automatic stay “continues
    until . . . the time a discharge is granted or denied.” § 362(c)(2)(C). By default,
    “the confirmation of a plan . . . discharges the debtor from any debt that arose
    before the date of such confirmation” and is dischargeable. § 1141(d)(1)(A).
    Individual debtors are governed by a different provision. In 2005, Congress
    enacted the Bankruptcy Abuse Prevention and Consumer Protection Act
    (BAPCPA), which amended § 1141 to include the following provision: “In a case
    in which the debtor is an individual . . . confirmation of the plan does not discharge
    any debt provided for in the plan until the court grants a discharge on completion
    of all payments under the plan.” Pub. L. No. 109–8, 119 Stat. 23 (2005) (codified
    at 11 U.S.C. § 1141(d)(5)(A). In sum, when an individual debtor files a petition
    2
    under Chapter 11, the automatic stay under § 362(a) continues until “the court
    grants a discharge on completion of all payments under the plan.”
    § 1141(d)(5)(A). Put differently, the stay continues until the plan ends. Because
    Hamilton is an individual, § 362 bars Elite from enforcing the pre-petition
    judgment against him until the “completion of all payments under the plan.”
    § 1141(d)(5)(A).
    No court has yet addressed how the BAPCPA changed the duration of the
    automatic stay for individual debtors. So Hamilton included a provision in the
    plan that would prevent Elite from enforcing the pre-petition judgment during the
    plan period. This so-called collection injunction is functionally equivalent to the
    Code’s automatic stay, as amended by the BAPCPA.
    The majority disapproves of the collection injunction because “there was no
    finding or record evidence that Hamilton will be able to pay Elite’s
    nondischargeable judgment during the Plan term or thereafter.” Maj. Op. at 3. But
    the Code does not require full payment of nondischargeable debt during the life of
    a plan. Instead, a “debtor need only formulate a plan which pays the
    nondischargeable debts pro rata with other unsecured creditors during the life of
    the plan.” In re Copeland, 
    742 F.3d 811
    , 814 (8th Cir. 2014) (alterations and
    citation omitted). Indeed, “it is hardly remarkable that a nondischargeable debt
    3
    may remain after a debtor has emerged from bankruptcy; that is precisely what
    ‘nondischargeable’ means.”2 
    Id. Given the
    BAPCPA, the collection injunction is unnecessary. But because
    the collection injunction does the work of the Code’s automatic stay, and nothing
    more, the bankruptcy court did not abuse its discretion in approving it.
    II
    Nor did the bankruptcy court clearly err in concluding that the plan was
    feasible. As the Code explains the feasibility requirement, a “court shall confirm a
    plan only if . . . [c]onfirmation of the plan is not likely to be followed by the
    liquidation, or the need for further financial reorganization, of the debtor or any
    successor to the debtor under the plan, unless such liquidation or reorganization is
    proposed in the plan.” 11 U.S.C. § 1129(a)(11). The feasibility analysis is focused
    on the debtor’s ability to fulfill its obligations under the plan. See, e.g., In re Loop
    2
    The majority attempts to distinguish Copeland on the ground that the
    Eighth Circuit assumed that the nondischargeable debt would be “paid in full
    regardless of the plan implemented in bankruptcy.” Maj. Op. at 4 n.2. But the
    Eighth Circuit does not explain its basis for this assumption; it could have
    reasonably concluded that the holders of nondischargeable debt would be paid in
    full regardless of the plan because the debt was nondischargeable, just as in this
    case. More significant, Copeland refused to allow the debtors to prioritize
    payment of nondischargeable debt over payment to unsecured creditors, the
    approach the bankruptcy court approved—and the majority disapproves—in this
    case. See In re 
    Copeland, 742 F.3d at 814
    –15.
    4
    76, LLC 
    465 B.R. 525
    , 544 (B.A.P. 9th Cir. 2012). Though it is not entirely clear
    what “liquidation or reorganization” means as applied to individual debtors, it is
    generally agreed that a debtor must demonstrate that the plan has a “reasonable
    probability of success.” In re Acequia, Inc., 
    787 F.2d 1352
    , 1364 (9th Cir. 1986).
    Here, the bankruptcy court determined that Hamilton could make the
    payments under the confirmed plan. Neither Elite nor the majority disagree.
    Nevertheless, the majority holds that the bankruptcy court abused its discretion
    because Hamilton “will owe more to Elite at the end of the Plan period than at the
    beginning” and the court “did not address whether [Hamilton] will need to seek
    liquidation or further reorganization at the end of the Plan period.” Maj. Op. at 5.
    This ruling is erroneous, because feasibility does not hinge on whether a debtor
    will be able to make certain payments after the plan has ended. Instead, feasibility
    turns on the debtor’s ability to live up to the terms of the plan. See In re Loop 76,
    
    LLC, 465 B.R. at 544
    .
    There is no dispute that Elite’s nondischargeable debt will grow during the
    plan period due to the accrual of interest. But under the Code, that fact has no
    bearing on feasibility. The district court did not clearly err.
    III
    Finally, the bankruptcy court did not clearly err in concluding that the plan
    5
    was proposed in good faith. See 11 U.S.C. § 1129(a)(3) (providing that a
    reorganization plan must have been “proposed in good faith and not by any means
    forbidden by law”). The good faith determination is based on the totality of the
    circumstances, and the requirement is satisfied when the plan “achieves a result
    consistent with the objectives and purposes of the Code.” In re Sylmar Plaza, L.P.,
    
    314 F.3d 1070
    , 1074 (9th Cir. 2002). “While the protection of creditors’ interests
    is an important purpose under Chapter 11, the Supreme Court has made clear that
    successful debtor reorganization and maximization of the value of the estate are the
    primary purposes.” In re Sunnyslope Hous. Ltd. P’ship, 
    859 F.3d 637
    , 645 (9th
    Cir. 2017) (en banc) (alteration omitted) (quoting In re Bonner Mall P’ship, 
    2 F.3d 899
    , 916 (9th Cir. 1993), abrogated on other grounds by Bullard v. Blue Hills
    Bank, 
    575 U.S. 496
    (2015)). The mere fact “that a debtor proposes a plan in which
    it avails itself of an applicable Code provision does not constitute evidence of bad
    faith.” In re Sylmar 
    Plaza, 314 F.3d at 1075
    (alteration and citation omitted).
    There must be more.
    There is no evidence that Hamilton submitted the plan in bad faith. Nothing
    in the Code or our precedent suggests that a debtor proposes a plan in bad faith
    merely because the debtor will only partially pay an unsecured creditor’s
    nondischargeable debt during the life of a plan, and the debt will increase due to
    6
    the accrual of interest. Here, under the confirmed plan, Hamilton will be free of all
    dischargeable debt in five years, and from that point on will be able to allocate
    available funds to paying off Elite’s debt. The bankruptcy court determined that
    this strategy was an efficient and legitimate way to resolve the outstanding debt of
    Hamilton’s creditors. This factual determination is not clearly erroneous.3
    ***
    The majority implies that Hamilton is a bad actor, and therefore was not
    entitled to have his plan confirmed. The majority notes that in Elite’s state court
    action against Hamilton, the jury awarded Elite punitive damages, and that in
    bankruptcy proceedings, Elite’s state award was deemed nondischargeable due to
    “Hamilton’s willful and malicious conduct.” The majority also seems to accept
    Elite’s argument that Hamilton improperly used Chapter 11 to delay payment
    “while he runs Hamilton College Consulting (HCC), a competitor business.” Maj.
    Op. at 3 n.1, 5.
    Debtors who failed to cure their debts would face harsh punishment in
    3
    I would remand with respect to the bankruptcy court’s determination that
    the plan satisfied the new value corollary rule. Although Hamilton previously
    informed the bankruptcy court that he would retain “at least $66,000 in equity in
    the Pasadena Property,” it is unclear what the projected value of the Pasadena
    Property will be in five years. Therefore, we cannot determine whether the
    $200,000 contribution is “reasonably equivalent” to Hamilton’s retained equity
    interest. In re Ambanc La Mesa Ltd. P’ship, 
    115 F.3d 650
    , 654 (9th Cir. 1997).
    7
    earlier times. If this were ancient Rome, a debtor could be cut into pieces and
    distributed among the creditors. See 2 W. Blackstone, Commentaries on the Laws
    of England 472 (1766). Were this 13th century England, a debtor could be
    imprisoned. Sturges v. Crowninshield, 
    17 U.S. 122
    , 140–41 (1819). But today in
    our country, all debtors may avail themselves of the Bankruptcy Code, bad actors
    included. While Elite’s nondischargeable debt is sizeable, the Code provides relief
    even for debtors who carry a near insurmountable amount of debt. I dissent.
    8