In re: Dennis D. Windscheffel

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: April 3, 2017
• Docket: CC-16-1303-FLKu
• Status: Unpublished

Opinion

FILED 1 NOT FOR PUBLICATION APR 03 2017

2 SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT 3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. CC-16-1303-FLKu ) 6 DENNIS D. WINDSCHEFFEL, ) Bk. No. 2:15-bk-19933-SK ) 7 Debtor. ) _____________________________ ) 8 ) DENNIS D. WINDSCHEFFEL, ) 9 ) Appellant, ) 10 ) v. ) MEMORANDUM* 11 ) MONTEBELLO UNIFIED SCHOOL ) 12 DISTRICT, ) ) 13 Appellee. ) ______________________________) 14 15 Argued and Submitted on March 23, 2017 at Pasadena, California 16 Filed – April 3, 2017 17 Appeal from the United States Bankruptcy Court 18 for the Central District of California 19 Honorable Sandra R. Klein, Bankruptcy Judge, Presiding 20 21 Appearances: Evan L. Smith argued on behalf of appellant Dennis D. Windscheffel; Jeffrey T. Vanderveen argued on 22 behalf of appellee Montebello Unified School District. 23 24 Before: FARIS, LAFFERTY, and KURTZ, Bankruptcy Judges. 25 26 * This disposition is not appropriate for publication. 27 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 28 9th Cir. BAP Rule 8024-1. 1 INTRODUCTION 2 Debtor Dennis D. Windscheffel appeals from the bankruptcy 3 court’s order dismissing his chapter 111 case for bad faith. He 4 contends that the court erred by relying on judicially-created 5 bad faith tests, rather than the statutory factors in 6 § 1112(b)(4), in finding cause to dismiss. Mr. Windscheffel’s 7 argument is meritless and unsupported by any legal authority. 8 Accordingly, we AFFIRM. 9 FACTUAL BACKGROUND 10 A. Prepetition events 11 Mr. Windscheffel and his company, Fitness Profile, Inc. 12 (“FPI”), operated after-school programs for Appellee Montebello 13 Unified School District (“MUSD”). MUSD filed suit against 14 Mr. Windscheffel and FPI in the superior court of Los Angeles, 15 alleging that Mr. Windscheffel and FPI had breached certain 16 agreements with MUSD and committed fraud, breach of contract, and 17 conversion of public funds. 18 Following a bench trial, the state court found that 19 Mr. Windscheffel had converted over $400,000 in public school 20 funds and commingled or mismanaged money that the state and 21 federal governments had granted to MUSD to provide educational 22 services to needy children. The state court awarded MUSD damages 23 of $2,171,609 (including punitive damages of $802,000) and 24 attorneys fees and costs of $672,623.96, with interest at ten 25 percent per annum. 26 27 1 Unless specified otherwise, all chapter and section 28 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.

2 1 Mr. Windscheffel and FPI filed an appeal in the state court, 2 but he claimed that he was unable to post the required 3 supersedeas bond to stay enforcement of the judgment. He filed 4 bankruptcy to avoid posting the bond and to stay MUSD’s 5 collection efforts. 6 B. Mr. Windscheffel’s chapter 11 filing 7 On June 22, 2015, Mr. Windscheffel filed a voluntary 8 chapter 11 petition. His schedules included MUSD’s state 9 judgment claim for $2,171,609. (MUSD subsequently filed a claim 10 in the amount of $2,843,926.96.) He listed only two other 11 unsecured creditors with claims totaling approximately $500. 12 C. The Motion to Dismiss 13 On June 23, 2016, MUSD filed a motion to dismiss 14 Mr. Windscheffel’s chapter 11 case (“Motion to Dismiss”) for bad 15 faith. MUSD argued that Mr. Windscheffel only filed for 16 bankruptcy for the purpose of delaying collection of the state 17 court judgment without obtaining a supersedeas bond. It said 18 that his amended plan was a thinly veiled attempt to avoid the 19 state court’s award of punitive damages, attorneys’ fees, and 20 interest because it proposed to pay 49.22 percent of MUSD’s 21 claim, which was (not coincidentally) the approximate amount of 22 the state court judgment without punitive damages, attorneys’ 23 fees, and interest. 24 Before filing his opposition to the Motion to Dismiss, 25 Mr. Windscheffel filed his second amended plan. He proposed 26 that, “[i]n the event that the MUSD Judgment is not reversed upon 27 appeal, the Debtor will present MUSD with the best offer he is 28 able to obtain for the sale of Debtor’s real and personal

3 1 property. MUSD shall have the right to disapprove any sale 2 agreement that the Debtor presents.”2 According to the second 3 amended disclosure statement filed concurrently with the second 4 amended plan, Class 6(b) (general unsecured creditors) included 5 MUSD, the two unsecured creditors with minor claims, and, for the 6 first time, the law firm of Musick, Peeler & Garrett LLP, which 7 was handling Mr. Windscheffel’s state court appeal (although the 8 law firm did not file a proof of claim). 9 In opposition to the Motion to Dismiss, Mr. Windscheffel 10 argued that he sought bankruptcy relief because he could not 11 afford to obtain a supersedeas bond. He said that he filed for 12 bankruptcy protection to preserve and maximize his assets for the 13 benefit of MUSD and other unsecured creditors. He also contended 14 that his proposal to pay MUSD less than 100 percent of its claim 15 was not in bad faith, because “MUSD could not choke any more out 16 of Mr. Windscheffel in satisfaction of that judgment than it 17 could through Mr. Windscheffel’s Plan.” Importantly, 18 Mr. Windscheffel did not challenge MUSD’s recitation of the legal 19 standard for bad faith or discuss the factors enumerated in 20 § 1112(b)(4). 21 The bankruptcy court issued its tentative ruling that 22 indicated its intention to grant the Motion to Dismiss. In a 23 detailed, twenty-page memorandum, the court examined the various 24 25 2 In its tentative ruling, the bankruptcy court noted that 26 the first amended plan had proposed that each general unsecured creditor would be paid 49.22 percent and contained an addendum in 27 which Mr. Windscheffel proposed to pay MUSD $1.4 million. In contrast, the second amended plan did not include a proposal to 28 pay MUSD any particular percentage or amount.

4 1 tests for finding “cause” to dismiss a petition for bad faith. 2 It noted that a determination of bad faith requires a case-by- 3 case assessment of multiple factors and acknowledged that various 4 courts have considered different factors establishing bad faith, 5 including Marsch v. Marsch (In re Marsch), 36 F.3d 825 (9th Cir. 6 1994), In re Mense, 509 B.R. 269 (Bankr. C.D. Cal. 2014), Chu v. 7 Syntron Bioresearch, Inc. (In re Chu), 253 B.R. 92 (Bankr. S.D. 8 Cal. 2000), and In re Erkins, 253 B.R. 470 (Bankr. D. Idaho 9 2000). It undertook a detailed, point-by-point examination of 10 the various factors outlined in Erkins, Mense, and Chu and found 11 that the factors supported a finding of bad faith under all of 12 the tests. 13 The bankruptcy court also correctly noted that, if it finds 14 cause, it must decide whether dismissal or conversion is in the 15 best interest of the creditors and the estate. It stated that 16 dismissal was in the best interest of the creditors because it 17 would allow MUSD to resume collecting the judgment and prevent 18 Mr. Windscheffel from diminishing the estate’s assets. It 19 further stated that dismissal was preferable to conversion 20 because of the costs and fees associated with a chapter 7 case.3 21 At the hearing on the Motion to Dismiss, the bankruptcy 22 court primarily engaged in a colloquy with counsel for 23 Mr. Windscheffel regarding certain factors of the various tests: 24 Mr. Windscheffel’s intention to delay collection of the state 25 3 26 The court also correctly noted that, if it decided to dismiss the case, it would also have to consider whether to 27 dismiss the case with or without prejudice. Ultimately, the court dismissed the case without prejudice. No one challenges 28 this aspect of the court’s ruling.

5 1 court judgment; the value of his assets; his proposal to pay MUSD 2 only the compensatory damages award and not the punitive damages 3 or attorneys’ fees and costs; the late inclusion of the law firm 4 as an unsecured creditor; and his proposal to only pursue 5 liquidation and pay MUSD after the state court litigation had 6 concluded with a final, unappealable judgment. Critically, 7 Mr. Windscheffel did not take issue with the court’s reliance on 8 case law such as Erkins, Mense, and Chu in determining bad faith 9 and did not argue that the court was restricted to the enumerated 10 factors in § 1112(b)(4). 11 The court granted the Motion to Dismiss and entered its 12 order adopting its tentative ruling in whole and dismissing 13 Mr. Windscheffel’s chapter 11 case. Mr. Windscheffel timely 14 appealed. 15 JURISDICTION 16 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 17 §§ 1334 and 157(b)(1) and (2)(A). We have jurisdiction under 28 18 U.S.C. § 158. 19 ISSUE 20 Whether the bankruptcy court abused its discretion in 21 dismissing Mr. Windscheffel’s chapter 11 petition for bad faith. 22 STANDARDS OF REVIEW 23 “We review de novo whether the cause for dismissal of a 24 Chapter 11 case under 11 U.S.C. § 1112(b) is within the 25 contemplation of that section of the Code. We review for abuse 26 of discretion the bankruptcy court’s decision to dismiss a case 27 as a ‘bad faith’ filing.” In re Marsch, 36 F.3d at 828 (citing 28 Stolrow v. Stolrow’s, Inc. (In re Stolrow’s, Inc.), 84 B.R. 167,

6 1 170 (9th Cir. BAP 1988)); see Hutton v. Treiger (In re Owens), 2 552 F.3d 958, 960 (9th Cir. 2009); Sullivan v. Harnisch (In re 3 Sullivan), 522 B.R. 604, 611 (9th Cir. BAP 2014). 4 The Panel must apply a two-part test to determine whether 5 the bankruptcy court abused its discretion. United States v. 6 Hinkson, 585 F.3d 1247, 1261-62 (9th Cir. 2009) (en banc). 7 First, we consider de novo whether the bankruptcy court applied 8 the correct legal standard. Id. Then, we review the bankruptcy 9 court’s factual findings for clear error. Id. at 1262 & n.20; 10 see Eisen v. Curry (In re Eisen), 14 F.3d 469, 470 (9th Cir. 11 1994) (the bankruptcy court’s finding of “bad faith” is reviewed 12 for clear error). A bankruptcy court abuses its discretion if it 13 applied the wrong legal standard or its findings were illogical, 14 implausible, or without support in the record. See 15 TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 832 (9th 16 Cir. 2011). 17 DISCUSSION 18 A. The bankruptcy court did not err in determining that Mr. Windscheffel filed his petition in bad faith and 19 dismissing his case for cause. 20 Section 1112(b)(1) provides that “the court shall convert a 21 case under this chapter to a case under chapter 7 or dismiss a 22 case under this chapter, whichever is in the best interests of 23 creditors and the estate, for cause . . . .” § 1112(b)(1). 24 Mr. Windscheffel agrees that filing a chapter 11 in bad 25 faith can constitute “cause” under § 1112(b)(1). The Ninth 26 Circuit has so held. “Although section 1112(b) does not 27 explicitly require that cases be filed in ‘good faith,’ courts 28 have overwhelmingly held that a lack of good faith in filing a

7 1 Chapter 11 petition establishes cause for dismissal.” In re 2 Marsch, 36 F.3d at 828 (citations omitted). 3 Instead, Mr. Windscheffel contends that the court considered 4 impermissible factors in determining that he filed his petition 5 in bad faith. He points out that § 1112(b)(4)(A)-(P) list types 6 of “cause” warranting dismissal. He acknowledges that the list 7 of factors is not exhaustive, but argues that the courts’ 8 creation of other bases for “cause” exceeds authority granted by 9 Congress. 10 This contention is wrong for multiple reasons. 11 First, he never presented it to the bankruptcy court, and, 12 absent exceptional circumstances, this panel will not consider an 13 issue raised for the first time on appeal. See Yamada v. Nobel 14 Biocare Holding AG, 825 F.3d 536, 543 (9th Cir. 2016). 15 Mr. Windscheffel has not identified any exceptional 16 circumstances. 17 Second, Mr. Windscheffel’s brief in support of his 18 contention does not comply with Rule 8010(a)(1)(E) because it 19 does not include citations to any authority supporting this 20 proposition. See United Student Funds, Inc. v. Wylie (In re 21 Wylie), 349 B.R. 204, 215 (9th Cir. BAP 2006). 22 Third, he cannot reconcile his argument with the plain 23 language of the statute. Section 1112(b)(4) says that the term 24 “cause includes” the enumerated factors. (Emphasis added.) 25 Congress specifically provided that the terms “‘includes’ and 26 ‘including’ are not limiting.” § 102(3). This proves that 27 Congress did not intend to limit “cause” to the listed items and 28 deliberately empowered the courts to expand that list as

8 1 appropriate. 2 Fourth, he fails to offer any workable limiting principle. 3 We agree that the bankruptcy court’s power to define “cause” 4 under § 1112(b)(4) has limits. But Mr. Windscheffel fails to 5 explain where he thinks the limits should be placed or how a 6 court could determine whether it has transcended those limits.4 7 Fifth, the only specific reason he offers to limit the test 8 is specious. He argues that the bad faith analysis wastes court 9 time and resources. We doubt the sincerity of Mr. Windscheffel’s 10 concern for the judiciary’s time management.5 In any event, the 11 courts will not shy away from a necessary analysis merely because 12 it is complex, difficult, or time consuming. 13 We find no error in the bankruptcy court’s thorough and 14 careful analysis. We have said that the bankruptcy court must 15 consider the totality of the circumstances when determining 16 whether the debtor acted in bad faith. Courts have developed 17 helpful lists of circumstantial factors that might indicate bad 18 4 19 Mr. Windscheffel argues that using the established tests for a bad faith filing “is no more appropriate than the conduct 20 of 19th Century employers who posted signs stating ‘No Irish need apply.’” This argument is puzzling at best and offensive at 21 worst. We surely agree that the debtor’s national origin has no 22 place in the bad faith analysis. But there is no indication that the bankruptcy court in this case paid any attention to 23 Mr. Windscheffel’s national origin. 5 24 In fact, the bankruptcy court observed that Mr. Windscheffel made the court’s task more difficult by failing 25 to provide substantive analysis or competent evidence: “Again 26 it’s not the Court’s responsibility to dig through the record and try to infer what debtor may or may not have the ability to do 27 and in fact one of the cases goes into an analysis of the debtor’s efforts to post a bond but inability to do so and 28 there’s no evidence of that in the record.”

9 1 faith. The bankruptcy court does not have to consider all of the 2 factors, nor does it have to weigh them equally. A bankruptcy 3 court may find one factor dispositive or may find bad faith even 4 if none of the factors are present. See Mahmood v. Khatib (In re 5 Mahmood), BAP No. CC-16-1210-TaFC, 2017 WL 1032569, at *4 (9th 6 Cir. BAP Mar. 17, 2017). 7 In the present case, the bankruptcy court acknowledged that 8 there is no single test within the Ninth Circuit to determine 9 whether a debtor acts in bad faith when he files a bankruptcy 10 petition to stay appellate proceedings in state court and avoid a 11 supersedeas bond. We find no error in the court’s use of the 12 Erkins, Mense, and Chu tests. Those tests include factors that 13 this Panel has endorsed previously. In St. Paul Self Storage 14 Ltd. Partnership v. Port Authority of St. Paul (In re St. Paul 15 Self Storage Ltd. Partnership), 185 B.R. 580 (9th Cir. BAP 1995), 16 we said: 17 To determine whether a debtor has filed a petition in bad faith, courts weigh a variety of circumstantial 18 factors such as whether: 19 (1) the debtor has only one asset; (2) the debtor has an ongoing business to 20 reorganize; (3) there are any unsecured creditors; 21 (4) the debtor has any cash flow or sources of income to sustain a plan of reorganization or to 22 make adequate protection payments; and (5) the case is essentially a two party dispute 23 capable of prompt adjudication in state court. 24 185 B.R. at 582–83 (citations omitted). We have also utilized a 25 more expansive list of factors. See, e.g., In re Stolrow’s, 26 Inc., 84 B.R. at 171 (considering eight factors). In any event, 27 we recognize that there is no single test to determine bad faith, 28 and the bankruptcy court did not err in selecting the factors

10 1 relevant to this case. 2 Therefore, the bankruptcy court did not err in finding cause 3 to dismiss Mr. Windscheffel’s chapter 11 petition based on bad 4 faith. 5 B. Mr. Windscheffel’s performance of his duties as a debtor in possession does not overcome a bad faith determination. 6 7 Mr. Windscheffel contends that the bankruptcy court failed 8 to consider that he was faithfully performing all of his required 9 obligations as a debtor in possession. The bankruptcy court did 10 not err. 11 We rejected an almost identical argument in St. Paul, where 12 the debtor claimed that it did not file its bankruptcy petition 13 in bad faith. To “support this contention, [d]ebtor refers to 14 the fact that it filed a proposed disclosure statement and plan, 15 filed all monthly operating reports, and paid all quarterly fees 16 to the United States Trustee.” 185 B.R. at 583. We rejected 17 this argument: “notwithstanding Debtor’s reverence for form, the 18 substance of this case indicates that the bankruptcy court’s 19 finding of bad faith was not clearly erroneous nor did it abuse 20 its discretion when dismissing the case.” Id. 21 If a debtor’s timely filing of operating reports, compliance 22 with various reporting requirements, and work toward 23 reorganization rebutted a finding of bad faith, then every debtor 24 who complied with the bare minimum of procedural requirements 25 would be immunized from a bad faith finding. In re Mahmood, 2017 26 WL 1032569, at *5. This is not the law. Mr. Windscheffel’s 27 postbankruptcy compliance with the rules does not excuse his bad 28 faith commencement of the case.

11 1 C. The bankruptcy court properly considered the interests of other unsecured creditors. 2 3 Mr. Windscheffel contends that the bankruptcy court failed 4 to consider the interests of the other unsecured creditors. This 5 is a frivolous argument. 6 If a bankruptcy court determines that there is cause to 7 convert or dismiss, it must also: (1) decide whether dismissal, 8 conversion, or the appointment of a trustee or examiner is in the 9 best interests of creditors and the estate; and (2) identify 10 whether there are unusual circumstances that establish that 11 dismissal or conversion is not in the best interests of creditors 12 and the estate. §§ 1112(b)(1), (2); In re Sullivan, 522 B.R. at 13 612. This is a discretionary decision. In re Sullivan, 522 B.R. 14 at 612. 15 The bankruptcy court explicitly considered the interests of 16 the three other unsecured creditors. It declined to characterize 17 the law firm representing Mr. Windscheffel in the state court 18 action as an unsecured creditor in Class 6(b): the law firm did 19 not file a proof of claim; Mr. Windscheffel only added the law 20 firm as an unsecured creditor after MUSD filed its Motion to 21 Dismiss; and the law firm’s fees for postbankruptcy services were 22 not authorized by the court. The remaining unsecured creditors 23 held combined claims totaling about $500. The court noted that 24 their claims were negligible, especially in light of MUSD’s $2.1 25 million claim. It correctly focused on the interest of MUSD, the 26 predominant unsecured creditor. 27 Mr. Windscheffel also claims that, if he liquidates his 28 properties, the state and federal taxing agencies will receive

12 1 substantial tax revenue. Once again, we question the sincerity 2 of Mr. Windscheffel’s concern for the public fisc. In any event, 3 the taxing authorities would also benefit if Mr. Windscheffel’s 4 assets were liquidated outside of bankruptcy. 5 The court did not abuse its discretion in its consideration 6 of the interests of other creditors. 7 D. The allegedly deficient service on two federally insured deposit institutions does not void the dismissal order. 8 9 Finally, Mr. Windscheffel argues for the first time on 10 appeal that MUSD failed to properly serve the Motion to Dismiss 11 on two federally insured depository institutions.6 Essentially, 12 he argues that, because the two banks were not served properly, 13 the order on appeal is void. Mr. Windscheffel’s argument flies 14 in the face of binding precedent. 15 We have stated: 16 [P]ersonal jurisdiction is an individual right. Parsons v. Plotkin (In re Pac. Land Sales, Inc.), 187 17 B.R. 302, 309 (9th Cir. BAP 1995). In asserting that the bankruptcy court did not have personal jurisdiction 18 over the doctor participants due to defective service of process, [appellant] is attempting to assert the 19 doctors’ individual constitutional rights to due process. He has no standing to do so. Id. at 310. 20 21 Korneff v. Downey Reg’l Med. Ctr.-Hosp., Inc. (In re Downey Reg’l 22 Med. Ctr.-Hosp., Inc.), 441 B.R. 120, 128 (9th Cir. BAP 2010). 23 In other words, the dismissal order is not void, because 24 Mr. Windscheffel cannot assert the two banks’ rights on their 25 6 26 Mr. Windscheffel filed a request for judicial notice asking that we take judicial notice of two documents from the 27 FDIC website purporting to show that Synchrony Bank and Ally Financial are federally insured deposit institutions. We grant 28 the request for judicial notice.

13 1 behalf. 2 Moreover, Mr. Windscheffel did not raise the issue of 3 allegedly defective service with the bankruptcy court, either in 4 writing or at the hearing on the motion. As we stated above, we 5 will not consider new arguments for the first time on appeal. 6 See Yamada, 825 F.3d at 543. 7 Thus, Mr. Windscheffel cannot successfully challenge the 8 dismissal order on the basis that other parties were not properly 9 served. 10 CONCLUSION 11 For the reasons set forth above, the bankruptcy court did 12 not abuse its discretion in dismissing Mr. Windscheffel’s case. 13 Therefore, we AFFIRM. 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28