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In Re v. Pacifica L 22

UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT


June 8, 2012

IN RE:
SERRON INVESTMENTS, INC.,
DEBTOR.
SERRON INVESTMENTS, INC., APPELLANT,
v.
PACIFICA L 22, LLC, APPELLEE.

Appeal from the United States Bankruptcy Court for the Central District of California Bankr. No. 11-12566-MT Honorable Maureen Tighe, Bankruptcy Judge, Presiding

SUSAN M SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT

MEMORANDUM*fn1

Argued and Submitted on May 17, 2012 at Pasadena, California

Filed - June 8, 2012

Before: PAPPAS, DUNN and HOLLOWELL, Bankruptcy Judges.

Chapter 11*fn2 debtor Serron Investments, Inc. ("Serron") appeals the bankruptcy court's order dismissing its bankruptcy case. We AFFIRM.

FACTS

Unless noted, the material facts in this case are undisputed.

Serron, a Delaware corporation engaged in the business of acquiring and selling interests in real property, acquired title to a property on Tryon Road in Los Angeles (the "Property") from Alejandro Elias Weissman ("Weissman") on January 26, 2009. At that time, the Property was already encumbered by a first deed of trust in the amount of $1,320,000, dated January 22, 2009, in favor of East-West Bank. The beneficial interest in this deed of trust was assigned to appellee Pacifica L 22, LLC ("Pacifica") on September 15, 2010.

Serron executed two other trust deeds on the Property: a second deed of trust for $265,000 in favor of First Yorkshire Holdings, Inc. ("First Yorkshire"); and a third deed of trust for $245,000 in favor of Durham Development Company, Inc. ("Durham Development").*fn3 Both the second and third trust deeds were dated April 9, 2010, executed April 13, 2010, and recorded on November 30, 2010.

On December 22, 2010, Serron executed a Grant Deed transferring a 25 percent interest in the Property to Weissman.

The Grant Deed bears the notation, "This is a bonafide gift and the grantor received nothing in return."

The next day, December 23, 2010, First Yorkshire, the beneficiary of the second deed of trust, filed a petition for relief under chapter 11. Bankr. C.D. Cal. Case no. 10-26058-AA. At that time, the monthly payments on the Pacifica first deed of trust were in default for seven payments totaling $9,116.92. Neither Serron nor First Yorkshire made any payments on the first trust deed after First Yorkshire filed for bankruptcy, so Pacifica filed a motion for stay relief on January 31, 2011. After a hearing on March 2, 2011, the motion for relief from stay was granted under § 362(d)(2) and (d)(4) by order entered on March 28, 2011, in which the First Yorkshire bankruptcy court noted that "the filing of the [First Yorkshire] petition was part of a scheme to delay, hinder and defraud creditors that involved either [] transfer of all or part ownership of, or other interest in the Property without the consent of the secured creditor or court approval." First Yorkshire appealed the stay relief to the Panel, and on May 10, 2012, the Panel entered its Opinion vacating the stay relief order. First Yorkshire Holdings, Inc. v. Pacifica L 22, LLC (In re First Yorkshire Holdings, Inc.), ___ B.R. ___, 2012 WL 1658250 (9th Cir. BAP 2012).*fn4

The day before the stay relief hearing in the First Yorkshire bankruptcy case, on March 1, 2011, Serron filed a chapter 11 petition. Serron's schedules listed the first deed of trust in favor of Pacifica as a disputed debt for $1,386,326.00, and undisputed deeds of trust in favor of First Yorkshire for $265,000 and Durham Development for $245,000. The only asset listed in Serron's schedules was the Property, other than an unknown amount of cash.*fn5

The bankruptcy court entered an Order Setting Scheduling and Case Management Conference on March 15, 2011. That order informed Serron and other interested parties "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: 1. Dismiss the case[.]" A copy of that order was electronically served on the attorney for Serron.

The U.S. Trustee ("UST") moved to dismiss, or to convert the Serron chapter 11 case to a chapter 7 case, on June 13, 2011. The UST alleged that Serron had failed to file a variety of documents, including monthly reports, tax returns, and sales receipts, among others. After Serron substantially complied with the UST's demands, the UST withdrew its motion to dismiss or convert on July 15, 2011.

Pacifica filed a motion for relief from stay in the Serron bankruptcy case on August 26, 2011. Pacifica alleged cause for relief existed under § 362(d)(1) (alleging as "cause," lack of an adequate equity cushion, declining fair market value, and lack of 1 payments), § 362(d)(2)(A) (alleging that Serron lacked equity in 2 the Property), § 362(d)(3) (alleging that Serron had failed to 3 file a confirmable plan in the single asset real estate case, or 4 to commence payments, within 90 days of the bankruptcy filing), 5 and § 362(d)(4) (alleging that the bankruptcy filing was part of 6 scheme to defraud creditors). At that time, the payments on the 7 Pacifica first deed of trust had been in default for fifteen 8 months.

9 The bankruptcy court conducted a continuing status conference 10 and hearing on Pacifica's motion for relief from stay on 11 September 22, 2011. Tr. Hr'g I-ii, September 22, 2011. Counsel 12 for Serron, Pacifica, and the UST were present and heard. After 13 reviewing the evidence and hearing from counsel, the bankruptcy 14 court granted relief from stay to Pacifica. As to § 362(d)(2), 15 the court ruled that the appraisals submitted into evidence "are 16 insufficient to show adequate value or any equity to protect 17 [Pacifica]." Tr. Hr'g 10:8-10, September 22, 2010. As to 18 § 362(d)(4), the court ruled "the transfer of [a] fractional 19 interest [by Serron to Weissman] prepetition indicates that this 20 is an abusive case solely for delay purposes in bad faith." Tr. 21 Hr'g 10:21-23.

22 And as to § 362(d)(3), the bankruptcy court observed that 23 Serron had failed to contest that cause for stay relief existed 24 under this Code provision in its opposition or briefing. The 25 court presumed that Serron's case was a single asset real estate 26 case, and thus, its failure to submit a plan within 90 days, or 27 begin payments to Pacifica, was grounds for relief from stay under § 362(d)(3).*fn6 But the court went on to note that "even if that were not the case," Serron had presented "absolutely no plan and [made] no progress towards reorganization in nine months[.]" Tr. Hr'g 9:17-19. Finally, the bankruptcy court noted that the UST had advised the court that Serron was again failing to provide requested documents, and the court expressed concern that if relief from the stay were granted to Pacifica concerning Serron's only asset, there would be nothing to reorganize and the bankruptcy case should not go forward. For these reasons, the bankruptcy court therefore granted Pacifica relief from stay under § 362(d)(2),(3) and (4). However, it also decided that the bankruptcy case should be dismissed.

An order granting Pacifica relief from stay was entered on October 19, 2011. An order dismissing the bankruptcy case was entered a few days later, on October 24, 2011. In the dismissal order, the bankruptcy court amplified its grounds: "The Debtor has failed to confirm a plan of reorganization and it appeared as if the Debtor was not going to be able to reorganize its debts based on the fact that the Court granted relief to the secured creditor to pursue its state court remedies against the Debtor's sole asset. In addition, the Debtor was not in compliance with the 1 United States Trustee Chapter 11 Notices and Guides." 2 Serron filed a notice of appeal regarding the order to 3 dismiss the bankruptcy case on November 7, 2011. This is the 4 appeal now before the Panel, No. CC-11-1625. On the same day, 5 Serron filed a notice of appeal concerning the order granting stay 6 relief to Pacifica, No. CC-11-1626. This was nineteen days after 7 entry of the stay relief order. Because Rule 8002(a) requires 8 that a notice of appeal be filed within fourteen days of entry of 9 the order on appeal, Serron's failure to timely appeal the stay 10 relief order divested the Panel of jurisdiction to hear the 11 appeal. Preblich v. Battley, 181 F.3d 1048, 1056 (9th Cir. 1999).

12 See also Disabled Rights Action Comm. v. Las Vegas Events, Inc., 13 375 F.3d 861, 869 (9th Cir. 2004)(filing of effective notice of 14 appeal is a non-waivable jurisdictional requirement). After notice 15 to Serron, on April 26, 2012, the Panel entered an order 16 dismissing the stay relief appeal as untimely. As a result, this 17 decision addresses only the bankruptcy court's order dismissing 18 Serron's bankruptcy case.

19 JURISDICTION

20 The bankruptcy court had subject matter jurisdiction under 21 28 U.S.C. §§ 1334 and 157(b)(2)(A). The Panel has jurisdiction 22 under 28 U.S.C. § 158.

23 ISSUE

24 Whether the bankruptcy court abused its discretion in 25 dismissing Serron's bankruptcy case.

26 STANDARD OF REVIEW

27 We review the bankruptcy court's order dismissing a 28 chapter 11 case under § 1112(b) for abuse of discretion. Marsch 1 v. Marsch (In re Marsch), 36 F.3d 825, 828 (9th Cir. 1994); St. 2 Paul Self Storage Ltd. P'ship v. The Port Authority of the City of 3 St. Paul (In re St. Paul Self Storage), 185 B.R. 580, 582 (9th 4 Cir. BAP 1995).

5 In applying an abuse of discretion test, we first "determine 6 de novo whether the [bankruptcy] court identified the correct 7 legal rule to apply to the relief requested." United States v. 8 Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc). If the 9 bankruptcy court identified the correct legal rule, we then 10 determine whether its "application of the correct legal standard 11 [to the facts] was (1) illogical, (2)implausible, or (3) without 12 support in inferences that may be drawn from the facts in the 13 record." Id. (internal quotation marks omitted). If the 14 bankruptcy court did not identify the correct legal rule, or its 15 application of the correct legal standard to the facts was 16 illogical, implausible, or without support in inferences that may 17 be drawn from the facts in the record, then the bankruptcy court 18 has abused its discretion. Id.

19 DISCUSSION

20 As discussed above, this appeal focuses solely on the 21 bankruptcy court's order dismissing Serron's bankruptcy case. In 22 that respect, the procedural status of this appeal is problematic 23 for Serron. 24 Although, with the Panel's permission, the parties filed 25 joint briefs in Serron's two appeals of the stay relief and 26 dismissal orders, Serron's briefs address only its position 27 concerning the order granting Pacifica relief from stay. Except 28 for a cryptic reference to the order dismissing the case in its -8- 1 statement of issues in its opening brief, Serron's Op. Br. at 2, 2 Serron's briefs offer no discussion or analysis of its position 3 that the bankruptcy court erred in dismissing its chapter 11 case. 4 As the Ninth Circuit recently pointed out, as an appellate 5 tribunal, "[w]e review only issues which are argued specifically 6 and distinctly in a party's opening brief." Leigh v. Salazar, 7 677 F.3d 892, 897 (9th Cir. 2012) (quoting Greenwood v. Fed. 8 Aviation Admin., 28 F.3d 971, 977 (9th Cir. 1994)). Moreover, an 9 argument will not be saved by a mere summary mention in a party's 10 opening brief. UMG Recordings, Inc. v. Shelter Capital Partners, 11 LLC, 667 F.3d 1022, 1031 (9th Cir. 2011).

12 After Pacifica observed in its brief that Serron had failed 13 to argue grounds for its appeal of the dismissal order, Serron 14 inexplicably compounded its error by failing to provide arguments 15 concerning the dismissal order in its reply brief, making but a 16 single conclusory observation: "Dismissal was plainly based on the 17 fact that the estate, after a finding for relief, had been 18 divested of its largest asset." Serron Reply Br. at 7. Simply 19 put, nowhere in Serron's briefs is there any developed argument or 20 authority that the bankruptcy court abused its discretion in 21 dismissing the bankruptcy case.

22 On the other hand, the record discloses the existence of 23 ample cause to justify the bankruptcy court's decision to dismiss. 24 In its comments on the record, and in its formal order, the 25 bankruptcy court expressed a variety of reasons why it should 26 exercise its discretion to dismiss -- that Serron had failed to 27 propose a confirmable plan; that it appeared Serron would be 28 unable to reorganize because Pacifica had been given permission to 1 foreclose its trust deed on Serron's sole asset; and that Serron 2 had not complied with the UST's operating guidelines. The Code 3 and case law make clear that these concerns constitute adequate 4 cause for dismissal of a bankruptcy case. 5 The statutory authority for dismissal of a chapter 11 case, 6 § 1112(b), provides that "the court shall convert a case under 7 this chapter to a case under chapter 7 or dismiss a case under 8 this chapter, whichever is in the best interests of creditors and 9 the estate, for cause unless the court determines that the 10 appointment . . . of a trustee or examiner is in the best interest 11 of the creditors and the estate." § 1112(b)(1). Thus, if cause 12 is present, the court must grant relief and determine whether 13 dismissal, conversion, or appointment of a trustee or examiner is 14 in the best interest of creditors and the estate. Once cause has 15 been established, under § 1112(b)(2), the burden shifts to the 16 party opposing conversion, dismissal, or appointment of a trustee 17 or examiner. Explaining the operation of this provision, the 18 bankruptcy court in In re Orbit Petroleum, Inc., 395 B.R. 145, 148 19 (Bankr. D.N.M. 2008), noted:

20 Once "cause" has been demonstrated, the Court must convert or dismiss, unless the Court specifically 21 identifies "unusual circumstances . . . that establish that such relief is not in the best interest of 22 creditors and the estate." 11 U.S.C. § 1112(b)(1).

However, absent unusual circumstances, the court must 23 not convert or dismiss a case if (1) there is a reasonable likelihood that a plan will be confirmed 24 within a reasonable time, (2) the "cause" for dismissal or conversion is something other than a continuing loss 25 or diminution of the estate coupled with a lack of reasonable likelihood of rehabilitation; and (3) there 26 is reasonable justification or excuse for a debtor's act or omission and the act or omission will be cured in a 27 reasonable time. 28 "Cause" for dismissal is not defined in the Code; instead, -10- 1 the Code contains a non-exclusive list of examples of cause in 2 § 1112(b)(4). In re Marsch, 36 F.3d at 828. Among the reasons 3 listed providing an adequate basis for dismissal of a chapter 11 4 case are: "substantial or continuing loss to or diminution of the 5 estate and the absence of a reasonable likelihood of 6 rehabilitation", § 1112(b)(4)(A); and "failure timely to provide 7 information or attend meetings reasonably requested by the United 8 States trustee (or the bankruptcy administrator, if any)," 9 § 1112(b)(4)(H). Fairly interpreting the comments and order of 10 the bankruptcy court, the record demonstrates these two causes for 11 dismissal were present in Serron's case.

12 Section 1112(b)(4)(A) "provides the bankruptcy court with the 13 requisite authority to terminate a chapter 11 case based on a 14 showing of unreasonable delay, or continuing losses coupled with 15 the absence of a reasonable likelihood of rehabilitation, or 16 inability to effectuate a plan of reorganization." United Sav. 17 Ass'n of Tex. v. Timbers of Inwood Forest Assocs., Ltd. (In re 18 Timbers of Inwood Forest Assocs., Ltd.), 808 F.2d 363, 371 (5th 19 Cir. 1987) (en banc), aff'd 484 U.S. 365 (1988); Sun Valley 20 Newspapers v. Sun World Corp. (In re Sun Valley Newspapers), 21 171 B.R. 71, 74 (9th Cir. BAP 1994) (citing Timbers of Inwood 22 Forest Assocs. for the proposition that there must be "a 23 reasonable possibility of a successful reorganization within a 24 reasonable time."). In connection with this statutory provision, 25 the bankruptcy court must "evaluate each debtor's viability and 26 rate of progress in light of the 'best interest of creditors and 27 the estate.'" Timbers of Inwood Forest Assocs., 808 F.2d at 372. 28 Section 1112(b)(4) is often invoked by bankruptcy courts when -11- 1 a chapter 11 debtor's assets are swiftly being reduced. Here, 2 however, in one stroke, the bankruptcy court potentially reduced 3 the assets of Serron's bankruptcy estate available for 4 reorganization to zero. Allowing the major secured creditor to 5 foreclose on Serron's one and only significant asset constitutes a 6 classic cause for dismissal of a reorganization case. In re 7 Jer/Jameson Mezz Borrower II, LLC, 461 B.R. 293, 302 (Bankr. D. 8 Del. 2011) (where chapter 11 debtor is not operating and sole 9 asset is fully encumbered, dismissal under § 1112(b)(4) is 10 mandatory); see Kenneth N. Klee, One Size Fits All: Single Asset 11 Real Estate Bankruptcy Cases, 87 CORNELL L. REV. 1285, 1308 12 (September 2002) ("If . . . the mortgage holder gets relief from 13 the automatic stay and the right to foreclose on the property 14 . . . the Chapter 11 case is over. Although this might be good 15 news for the mortgage holder, it is bad news for the property 16 owner who loses the opportunity to reorganize.").

17 Under the facts of this case, the bankruptcy court did not 18 abuse its discretion when it found that, because it had granted 19 stay relief to Pacifica, Serron's ability to propose and confirm a 20 plan of reorganization was lost. Continuing the bankruptcy case 21 where there is no possibility of reorganization cannot be in the 22 best interest of the creditors.

23 The UST had, earlier in the bankruptcy case, moved for 24 dismissal because Serron had failed to comply with its duty to 25 file documents and reports about its operations. The UST has a 26 statutory duty and authority to require, monitor and seek court 27 enforcement of a chapter 11 debtor's compliance with the UST's 28 guidelines and reports. 28 U.S.C. § 586(a)(3)(D). Although the -12- 1 UST withdrew its motion when Serron complied with its demands, at 2 the hearing on September 22, 2011, the UST informed the bankruptcy 3 court that Serron again was in arrears on its obligations to 4 provide information. It is of no moment that there was no current 5 motion from the UST to dismiss the case. The Panel long ago 6 recognized that a bankruptcy court has the authority, sua sponte, 7 to dismiss a bankruptcy case for cause. Tennant v. Rojas (In re 8 Tennant), 318 B.R. 860, 869 (9th Cir. BAP 2004) ("Section 105(a) 9 makes 'crystal clear' the court's power to act sua sponte where no 10 party in interest or the United States trustee has filed a motion 11 to dismiss a bankruptcy case."); see also C-TC 9th Ave. P'ship v. 12 Norton Co. (In re C-TC 9th Ave. P'ship), 113 F.3d 1304, 1312 (2d 13 Cir. 1997) ("When the record is sufficiently well developed to 14 allow the bankruptcy court to draw the necessary inferences to 15 dismiss a Chapter 11 case for cause, the bankruptcy court may do 16 so."). Serron was offered an opportunity at the September 22, 17 2011 hearing to respond to the UST's allegation about its failure 18 to comply with reporting requirements, but did not challenge the 19 UST's assertion or request more time to comply. The bankruptcy 20 court could therefore properly conclude that, under 21 § 1112(b)(4)(H), cause also existed to dismiss the bankruptcy case 22 for Serron's failure to comply with the UST's information 23 requests.

24 In sum, Serron has not provided any argument or authority to 25 support its challenge to the bankruptcy court's order dismissing 26 the case. Moreover, the bankruptcy court's order is consistent 27 with the statutory provisions governing dismissals in chapter 11, 28 § 1112(b), and the court's findings and conclusions in this case -13- 1 were not illogical, implausible, or without support in the 2 inferences that may be drawn from the facts in the record.

3 CONCLUSION

4 The bankruptcy court did not abuse its discretion in 5 dismissing Serron's chapter 11 bankruptcy case. We AFFIRM.


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