FILED MAR 14 2022 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY.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. NC-21-1130-SGB PATRICK JOSEPH GAVIN, Debtor. Bk. No. 3:21-bk-30260
NIMER MASSIS; JENNIFER NUSHWAT, Appellants, v. MEMORANDUM* PATRICK JOSEPH GAVIN, Appellee.
Appeal from the United States Bankruptcy Court for the Northern District of California Dennis Montali, Bankruptcy Judge, Presiding
Before: SPRAKER, GAN, and BRAND, Bankruptcy Judges.
INTRODUCTION
Debtor Patrick Joseph Gavin retained bankruptcy counsel over a
weekend after receiving an adverse tentative ruling in a state court
judgment enforcement action brought by creditors Nimer Massis and
Jennifer Nushwat (“Creditors”). Gavin filed for chapter 131 relief to stay
* 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. 1 Unless specified otherwise, chapter and section references are to the Bankruptcy
1 that proceeding and to prevent the tentative ruling from becoming a final
decision. However, Gavin did not qualify for chapter 13, so he quickly
sought to convert the case to chapter 11. Creditors opposed conversion,
sought dismissal, and moved for sanctions against Gavin and his counsel.
The bankruptcy court denied the motions to dismiss and for sanctions and
converted the case. Creditors appeal those decisions.
None of Creditors’ arguments persuade us that any of the
bankruptcy court’s rulings should be reversed. Therefore, we AFFIRM.
FACTS2
In 2019, Creditors were granted a state court default judgment for
$77,778.25 against Gavin and his son for breach of contract. Creditors
struggled to enforce the judgment and contend that Gavin actively resisted
their collection efforts. 3 In furtherance of their collection efforts, Creditors
in late 2020 and early 2021 sought to compel the sale of Gavin’s real
property located in Burlingame, California (“Burlingame Property”). Gavin
Code, 11 U.S.C. §§ 101–1532. “Rule” references are to the Federal Rules of Bankruptcy Procedure, and “Civil Rule” references are to the Federal Rules of Civil Procedure. 2 We exercise our discretion to take judicial notice of documents electronically
filed in Gavin’s bankruptcy case. See Atwood v. Chase Manhattan Mortg. Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003). 3 By way of example, Creditors obtained an assignment of rents order entitling
them to collect rents from Gavin’s rental properties, but they only managed to collect $4,600 before his bankruptcy filing. Creditors contend that in 2020 Gavin collected $99,480 in rents in violation of the state court’s assignment of rents order. But Creditors did not present these allegations as part of their court papers in any of the three matters before the bankruptcy court, so we decline to consider them. 2 opposed Creditors’ effort and commenced a new lawsuit to challenge the
default judgment and the underlying transaction alleging fraud.
On Friday, April 2, 2021, the state court issued a tentative ruling
proposing to enter an order for the sale of the Burlingame Property. The
hearing on the sale order application was set for the following Monday,
April 5, 2021. Over the weekend, Gavin retained Arasto Farsad to file an
emergency “skeletal” chapter 13 bankruptcy petition on Gavin’s behalf.
According to Farsad, Gavin had contacted him at the “last minute.”
Consequently, in order to protect and preserve Gavin’s rights, and given
the limited financial information he had received from Gavin at the time,
he determined that filing the chapter 13 petition was the best course of
action. Farsad filed Gavin’s bankruptcy petition on Easter Sunday, April 4,
2021. As Farsad further explained:
I had little to no possibility of access to the Debtor that weekend due to the holiday and also because the Debtor was / still is recovering from a recent surgery. It was quite difficult to both obtain and review the necessary documents in a careful manner in order to determine the Debtor’s eligibility for a Chapter 13.
Farsad Decl. (April 9, 2021) at ¶ 2.
The state court received notice of the bankruptcy filing. On Monday,
April 5, 2021, the state court acknowledged the automatic stay and
declined to enter an order for the sale of the Burlingame Property.
Less than a week after Gavin commenced his bankruptcy case, he
moved to convert the case from chapter 13 to chapter 11. Farsad stated in
3 his declaration in support of the motion that he filed the chapter 13 petition
based on the exigent circumstances and limited information he was
confronted with over the preceding weekend. With the opportunity to
further review Gavin’s financial situation over the next few days Farsad
explained that he had determined Gavin exceeded the chapter 13 debt
eligibility limits set forth in § 109(e). Accordingly, Gavin sought to convert
his case to chapter 11 for the purpose of reorganizing his debts. Gavin
noticed the conversion motion and provided the opportunity to request a
hearing to the mailing matrix, which included Creditors’ counsel.
Creditors opposed the conversion motion. They argued that Gavin’s
ineligibility for chapter 13 in violation of § 109(e) resulted in a void
bankruptcy filing. Creditors considered Gavin’s petition to be a nullity and
of no legal effect. As a result, Creditors insisted that there was no pending
bankruptcy case to convert. Creditors further maintained that the
unauthorized emergency filing of a skeletal chapter 13 petition constituted
an abuse of process.
Based on the opposition, Gavin noticed a hearing on the conversion
motion for May 19, 2021.
On April 20, 2021, Creditors moved to dismiss the bankruptcy case
and for annulment of the automatic stay. They simultaneously moved for
sanctions under Rule 9011 against both Farsad and Gavin. Based on
Farsad’s admissions in his declaration in support of the conversion motion,
Creditors argued that the skeletal filing of the chapter 13 petition for which
4 Gavin was not eligible was done solely to stay the state court from issuing
the sale order. Creditors maintained this constituted an abuse of process.
They argued that this conduct justified dismissal of the bankruptcy case
under § 1307(c), annulment of the automatic stay, and imposition of Rule
9011 sanctions.4
In further support of the sanctions motion, Creditors presented
emails exchanged between their counsel, George Wynns, and Farsad on
April 5 and 6, 2021, discussing the bankruptcy filing. Wynns advised
Farsad in the first email that Gavin’s secured debt greatly exceeded the
§ 109(e) limit and asserted that the bankruptcy case needed to be dismissed
because Gavin was not eligible for chapter 13. Wynn also complained that
the estimate of assets set forth in the petition as between “0 and $50,000”
was obviously incorrect given the several encumbered parcels of real
property Gavin owned. Farsad responded that because of the emergency
nature of the filing he had not had the opportunity to follow his usual
intake procedures and financial review. But he also stated that if Wynns
was correct that Gavin exceeded the chapter 13 debt limits, he intended to
move to convert the case to chapter 11.
In the final email exchanged during that time, Wynns opined that
there is no provision of the Bankruptcy Code permitting an emergency
chapter 13 petition filing when the debtor is not qualified to file a chapter
4 Because Creditors’ appeal does not concern denial of stay annulment, there is no need for us to address that issue. 5 13 petition under § 109(e). Wynns also provided specific information
regarding Gavin’s real property and the liens encumbering that property.
According to Wynns, the secured debt exceeded $2,000,000.
Wynns further disagreed that the pending sale order qualified as an
emergency. He pointed out that even if the sale order had been entered on
April 5, 2021, no actual sale was imminent. Wynns stated his belief that any
such sale would not have occurred for at least another one or two months
because the Sheriff would have needed to receive the signed sale order and
issue proper notice.
Wynns also executed a declaration in support of the sanctions
motion. Wynns’ declaration provided detailed information regarding the
four parcels of real property Gavin owned and the numerous liens against
those properties. He also detailed his efforts to enforce the Creditors’
judgment against Gavin and how those judgment enforcement efforts
directly led to the chapter 13 petition filing.
The motions to dismiss and for sanctions were scheduled to be heard
together with Gavin’s conversion motion on May 19, 2021.
On May 4, 2021, Gavin filed his schedules and statement of financial
affairs (“SOFA”) and a proposed chapter 13 plan. According to the
schedules, Gavin had $6,687,280 in real property assets and $91,602 in
personal property assets. He also listed $4,432,187 in secured debt, and
$183,358 in general unsecured claims. His Schedule I listed $23,382 in
monthly income and $6,280 in monthly expenses.
6 Gavin also opposed Creditors’ motions. Gavin emphasized that he
had no history of prior bankruptcy filings. And as soon as his counsel
confirmed that his secured debt exceeded the eligibility limits for chapter
13, his counsel filed the motion to convert the case to chapter 11 within five
days of his Easter Sunday emergency bankruptcy filing. Under these
circumstances, Gavin maintained that he did not file for bankruptcy relief
in bad faith and there was no cause for dismissal within the meaning of
§ 1307(c). According to Gavin, none of the traditional indicia of bad faith
were present.
As for his opposition to the Rule 9011 sanctions motion, Gavin
maintained that his emergency chapter 13 petition was neither frivolous
nor filed for an improper purpose. Gavin insisted that given the time
constraints, his counsel did the best he could with the limited financial
information before him to file his bankruptcy petition under an appropriate
chapter. Though the information included with the petition significantly
undervalued Gavin’s assets, he explained that his counsel did not
intentionally underrepresent the value of his assets. According to Gavin,
the petition preparation program automatically ticked the box for “0-
$50,000” in assets because of the skeletal nature of his initial petition filing.
Gavin observed that in the interim he had filed his schedules and SOFA,
which contained more complete and more accurate financial information.
On May 18, 2021, the bankruptcy court entered an order taking all
three matters off calendar and disposing of them without a hearing. The
7 court granted the motion to convert and denied the motions to dismiss and
for sanctions. According to the bankruptcy court, § 1307(d) specifically
contemplated conversion to chapter 11 when debtors who initially file
chapter 13 do not fall within § 109(e)’s debt limits.
As for the motions to dismiss and for sanctions, the bankruptcy court
denied them because the chapter 13 petition was filed under “pressing
circumstances” — on the eve of the state court sale order hearing. The court
rejected the argument that counsel’s selection of the wrong chapter to file
under was grounds for dismissal of the case or for sanctions given that
counsel acted promptly to correct his error. The court also pointed out that
Gavin made the corrections before Creditors suffered any prejudice or
acted to their detriment. The court found particularly significant Creditors’
inability to explain how they would have been in any more favorable
situation if Gavin had originally filed a chapter 11 petition instead of
mistakenly seeking relief under chapter 13.
On May 28, 2021, Creditors timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(A). We have jurisdiction under 28 U.S.C. § 158.5
5 Arguably, all three rulings on appeal are interlocutory. To the extent they are, we hereby grant leave to appeal under Rule 8004(d) and the standards for granting leave to appeal enunciated in Roderick v. Levy (In re Roderick Timber Co.), 185 B.R. 601, 604-05 (9th Cir. BAP 1995).
8 ISSUES
1. Did the bankruptcy court abuse its discretion when it denied
Creditors’ dismissal motion?
2. Did the bankruptcy court abuse its discretion when it granted
Gavin’s conversion motion?
3. Did the bankruptcy court abuse its discretion when it denied
Creditors’ sanctions motion?
4. Did the bankruptcy court commit reversible error by deciding the
matters on appeal without holding a hearing?
STANDARDS OF REVIEW
We review the bankruptcy court’s order denying the dismissal
motion for an abuse of discretion. See Ellsworth v. Lifescape Med. Assocs., P.C.
(In re Ellsworth), 455 B.R. 904, 914 (9th Cir. BAP 2011). We also review for an
abuse of discretion the bankruptcy court’s decision on Gavin’s § 1307(d)
motion to convert to chapter 11. See In re Lester, 409 B.R. 364, 371–72 (Bankr.
W.D. Va. 2009). Orders regarding Rule 9011 sanctions likewise are
reviewed for an abuse of discretion. Fjeldsted v. Lien (In re Fjeldsted), 293
B.R. 12, 18 (9th Cir. BAP 2003); see also Cooter & Gell v. Hartmarx Corp., 496
U.S. 384, 405 (1990) (“an appellate court should apply an abuse of
discretion standard in reviewing all aspects of a district court's [Civil] Rule
11 determination.”).
The bankruptcy court abuses its discretion if it applies an incorrect
legal rule or its factual findings are illogical, implausible, or without
9 support in the record. United States v. Hinkson, 585 F.3d 1247, 1261–62 (9th
Cir. 2009) (en banc).
Ordinarily, the bankruptcy court’s assessment of the debtor’s good
faith or bad faith in filing a petition is a question of fact reviewed under the
clearly erroneous standard. Ho v. Dowell (In re Ho), 274 B.R. 867, 870 (9th
Cir. BAP 2002). However, when the historical facts are undisputed and the
bankruptcy court is called upon merely to determine whether the debtor’s
conduct amounts to good faith or bad faith, this Panel reviews the matter
de novo as a mixed question of law and fact. See Mendoza v. Curry (In re
Duque), BAP No. CC-05-1069-MaMcB, 2005 WL 6960181, at *3 n.8 (9th Cir.
BAP Dec. 30, 2005) (citing Villanueva v. Dowell (In re Villanueva), 274 B.R.
836, 840 (9th Cir. BAP 2002)).
DISCUSSION
A. The bankruptcy court did not abuse its discretion when it denied Creditors’ motion to dismiss.
Creditors first argue that the bankruptcy court should have granted
their motion to dismiss. The dismissal motion focused almost exclusively
on Farsad’s Easter Sunday petition filing and his admission within days
that Gavin’s secured debt exceeded § 109(e)’s eligibility limit. At the time of
the filing, debtors could reorganize under chapter 13 only if they had less
than $1,257,850 in secured debt. Because Gavin’s secured debt substantially
exceeded the allowed limit in chapter 13, Gavin had to file a motion to
convert or dismiss. According to Creditors, these facts established that
10 Gavin’s petition filing was an abuse of the bankruptcy process and
constituted cause for dismissal as a bad faith bankruptcy filing.
A chapter 13 petition which is filed in bad faith may constitute
“cause” for dismissal under § 1307(c). Leavitt v. Soto (In re Leavitt), 171 F.3d
1219, 1224 (9th Cir. 1999); Eisen v. Curry (In re Eisen), 14 F.3d 469, 470 (9th
Cir. 1994). “To determine if a petition has been filed in bad faith courts are
guided by the standards used to evaluate whether a plan has been
proposed in bad faith.” In re Eisen, 14 F.3d at 470. In making both
determinations, a bankruptcy court needs to review the “totality of the
circumstances.” Id. However, cause under § 1307(c) does not mandate
dismissal. Rather, courts still are required to consider whether dismissal or
conversion is in the best interests of the creditors and the estate. See Nelson
v. Meyer (In re Nelson), 343 B.R. 671, 675 (9th Cir. BAP 2006). And though
courts may not compel chapter 13 debtors to convert to chapter 11,
§ 1307(d) expressly provides such a right.
In Leavitt, the Ninth Circuit held that, when considering whether a
chapter 13 case should be dismissed because it was filed in bad faith, the
bankruptcy court should consider, among other factors:
(1) whether the debtor misrepresented facts in his petition or plan, unfairly manipulated the Bankruptcy Code, or otherwise filed his chapter 13 petition or plan in an inequitable manner; (2) the debtor’s history of filings and dismissals; (3) whether the debtor intended to defeat state court litigation; and (4) whether egregious behavior is present.
11 In re Leavitt, 171 F.3d at 1224 (cleaned up).
Creditors, here, contend that all of the Leavitt factors except for a
history of bankruptcy filings and dismissals are met by Gavin’s and
Farsad’s conduct. According to them, it is “obvious” from the course of
events that the sole purpose of the bankruptcy filing was to defeat or
impede Creditors’ judgment collection efforts. As evidence, they point to
the eleventh-hour bankruptcy filing, the decision to seek relief under
chapter 13, Gavin’s ineligibility for relief under that chapter, and the
resulting motion to convert the case to chapter 11. From this, Creditors
conclude that Gavin and Farsad unfairly manipulated the Bankruptcy
Code, intended to defeat state court litigation, and engaged in egregious
conduct. We disagree.
An eleventh-hour bankruptcy filing on the eve of a potentially
decisive hearing in state court is not by itself sufficient to find bad faith. See
In re Ho, 274 B.R. at 876 (bankruptcy court inappropriately dismissed
chapter 13 case based on “the timing of Debtor’s filing, just prior to the
establishment of a trial date by the state court for the litigation”). Many
bankruptcy cases are filed on the eve of adverse events such as foreclosure
or the imminent entry of a judgment. Debtors do so for the financial
breathing space that bankruptcy provides. This inherently delays the
payment of creditors and alone is insufficient to sustain a finding of bad
faith. As one bankruptcy court has explained:
12 Filing a bankruptcy petition with the intent to frustrate creditors does not by itself establish an absence of intent to seek rehabilitation. Indeed, because a major purpose behind our bankruptcy laws is to afford a debtor some breathing room from creditors, it is almost inevitable that creditors will, in some sense, be “frustrated” when their debtor files a bankruptcy petition. In reality, there is a considerable gap between delaying creditors, on the eve of foreclosure, and the concept of abuse of judicial purpose.
In re Marshall, 298 B.R. 670, 681 (Bankr. C.D. Cal. 2003) (quoting Baker v.
Latham Sparrowbush Assocs. (In re Cohoes Indus. Terminal, Inc.), 931 F.2d 222,
228 (2d Cir. 1991)). In other words, “[n]ot every ‘litigation strategy’ or delay
caused by the filing of a Chapter 13 case constitutes cause for dismissal
when the debtor demonstrates legitimate rehabilitative intent or
underlying interests of creditors that might be served through the Chapter
13 case.” Keith M. Lundin, Lundin on Chapter 13, § 152.5, at ¶ [7],
LundinOnChapter13.com (last visited March 10, 2022) (“Lundin”).
Nor is the mistaken filing of the bankruptcy petition under chapter 13
specifically probative of bad faith under the totality of circumstances
presented here. Contrary to Creditors’ argument, Gavin was qualified to
file for bankruptcy relief — just not under chapter 13. Creditors
nonetheless insist that he misrepresented his eligibility for chapter 13. But
for what purpose? There are degrees of misrepresentations. The
bankruptcy court viewed Farsad’s filing under the wrong chapter as an
“innocent mistake.” Not every mistake is nefarious.
13 Here, the court’s finding that Farsad mistakenly placed Gavin into
the wrong chapter is supported by the record. On a holiday weekend,
Gavin represented to Farsad that pressing circumstances necessitated a
bankruptcy filing without any meaningful opportunity for Farsad to
review his financial situation. Additionally, Farsad corrected the mistaken
filing within five days by filing the motion to convert the case to chapter 11.
Finally, as the bankruptcy court observed, there is no evidence that Gavin
gained any advantage by initially filing the petition under chapter 13, nor
were Creditors harmed in any way by the filing under the wrong chapter.
Significantly, Creditors have never explained why they would have been in
any different or better position if Farsad had originally filed Gavin’s
skeletal petition as a chapter 11 petition.
We agree with the bankruptcy court that neither the timing of the
filing of the petition, nor the mistaken decision to seek relief under chapter
13, are indicative in this instance of unfair manipulation of the Bankruptcy
Code, an intention to defeat state court litigation, or egregious
circumstances.6 Creditors have not effectively challenged the underlying
6 During oral argument, the parties confirmed that Gavin has currently proposed a plan that anticipates payment of all his creditors’ claims in full, with interest, to which Creditors have not objected. As has been stated, “perhaps the best indicator of [a] Debtor’s good faith” is his or her willingness to propose a plan that will treat his or her creditors fairly and equitably. In re James, 260 B.R. 498, 516 (Bankr. D. Idaho 2001); see also In re Brown, Case No. 05-49114, 2009 WL 565032, at *4-5 (Bankr. E.D. Tex. Mar. 5, 2009) (making similar observation); In re Privitera, Case No. 03-14601DWS, 2003 WL 21460027, at *1 n.8 (Bankr. E.D. Pa. June 12, 2003) (“The Debtor's performance in this bankruptcy case is the best evidence of his good faith in filing this petition.”). 14 circumstances as found by the bankruptcy court. They simply attach
deeper and sinister significance to these facts. But the prism through which
they see these facts does not render the court’s findings and inferences
erroneous. Indeed, they are well supported by the record. Accordingly, we
are not persuaded that the bankruptcy court abused its discretion by
denying Creditors’ motion to dismiss.
B. The bankruptcy court did not abuse its discretion when it granted Gavin’s motion to convert.
Creditors next argue that because Gavin was ineligible to be a
chapter 13 debtor, his bankruptcy petition was null and void. Thus, they
believe that the bankruptcy court “lacked jurisdiction” over the matter.
They argue that because Gavin did not qualify for chapter 13, there was no
valid bankruptcy case to convert.
Several decisions have held that § 109(e) is jurisdictional. See, e.g.,
Ekeke v. United States, 133 B.R. 450, 452 (S.D. Ill. 1991); In re Wulf, 62 B.R.
155, 158 (Bankr. D. Neb. 1986), overruled by Rudd v. Laughlin, 866 F.2d 1040,
1041 (8th Cir. 1989). These cases would seemingly support Creditors’
argument. But the vast majority of decisions addressing the issue —
including two from this panel — have concluded that § 109(e) is not
jurisdictional. See, e.g., Duplessis v. Valenti (In re Valenti), 310 B.R. 138, 147–
48 (9th Cir. BAP 2004) (citing FDIC v. Wenberg (In re Wenberg), 94 B.R. 631,
637 (9th Cir. BAP 1988), aff'd, 902 F.2d 768 (9th Cir. 1990)); see also In re Bello,
609 B.R. 695, 703 (Bankr. E.D. Mich. 2019) (stating that when the chapter 13
15 debtor is determined to be ineligible under § 109(e), court still has the
power either to dismiss the case or convert it to another chapter under the
Code); Lundin, § 9.5, at ¶ [5] & n.10; § 146.1, at ¶ [5] & nn.9, 10 & 11 (listing
additional cases). We view ourselves as bound by our prior decisions.
Salomon N. Am. v. Knupfer (In re Wind N' Wave), 328 B.R. 176, 181 (9th Cir.
BAP 2005). Following Valenti and Wenberg, we hold that § 109(e) is not
jurisdictional and that Gavin’s ineligibility to be a chapter 13 debtor did not
bar the bankruptcy court from converting the case to chapter 11.
As a practical matter, prohibiting a bankruptcy court from exercising
subject matter jurisdiction in a case where a debtor’s eligibility is at issue
would be unworkable in any chapter. More importantly, the non-
jurisdictional nature of § 109(e) makes sense because the problem here is
not with the bankruptcy filing but with the applicable chapter. 7
In sum, the Code, the relevant case law, and common sense, militate
against Creditors’ argument that the bankruptcy court lacked jurisdiction
to convert Gavin’s chapter 13 case to chapter 11. Consequently, we are not
7The bankruptcy court’s subject matter jurisdiction derives from title 28 and not from any provision of title 11. And the plain language of title 28 specifically grants bankruptcy jurisdiction over all cases under title 11. 28 U.S.C. § 1334(a). This is so regardless of whether the debtor is eligible for relief under the particular chapter the petition is filed. Generally speaking, the appropriate remedy for a debtor’s ineligibility under chapter 13 is dismissal or conversion, whichever is in the best interests of the creditors and the estate. See generally § 1307(c) (providing for dismissal or conversion to chapter 7 for “cause”). Alternately, § 1307(d) permits debtors such as Gavin to voluntarily convert their chapter 13 case to chapter 11 at their election. 16 persuaded that the bankruptcy court abused its discretion by granting
Gavin’s conversion motion.
C. The bankruptcy court did not abuse its discretion when it denied Creditors’ Rule 9011 sanctions motion.
Creditors additionally argue that the bankruptcy court erred when it
denied their Rule 9011 sanctions motion. They claim that Farsad knew or
should have known that Gavin did not qualify for chapter 13 based on his
secured debt. Again, Creditors rely on Farsad’s admission that he did not
investigate Gavin’s finances before deciding to file his chapter 13 case.
By filing the chapter 13 petition on Gavin’s behalf, Farsad was
certifying under Rule 9011(b): (1) that it was not filed for an improper
purpose; (2) that the petition’s legal contentions were warranted by
existing law or by a nonfrivolous argument for a change to existing law;
and (3) that the factual allegations in the petition had evidentiary support
or were likely to have evidentiary support after a reasonable opportunity
for investigation or discovery. See Rule 9011(b)(1)-(3); see also Dressler v. The
Seeley Co. (In re Silberkraus), 336 F.3d 864, 870 (9th Cir. 2003) (describing
nature of certifications).
When a party’s Rule 9011 certifications turn out to be false, the
bankruptcy court may impose sanctions, including reasonable attorney’s
fees and costs in bringing the sanctions motion. But the moving party must
present evidence as to both frivolousness and improper purpose. See Rule
9011(c)(2); In re Silberkraus, 336 F.3d at 870 & n.5 (citing Marsch v. Marsch (In
17 re Marsch), 36 F.3d 825, 830 (9th Cir. 1994)). A filing is frivolous if it is “both
baseless and made without a reasonable and competent inquiry.” Townsend
v. Holman Consulting Corp., 929 F.2d 1358, 1362 (9th Cir. 1990) (en banc). A
bankruptcy filing is made for an improper purpose if it is filed “to harass
or to cause unnecessary delay or needless increase in the cost of litigation.”
In re Silberkraus, 336 F.3d at 870 (quoting Rule 9011(b)). The assessment of
these two factors is considered on a sliding scale “where the more
compelling the showing as to one element, the less decisive need be the
showing as to the other.” Id. (quoting In re Marsch, 36 F.3d at 830).
The bankruptcy court denied the motion for sanctions for the same
reasons it overruled the objections to conversion: Gavin erroneously chose
chapter 13 when he filed bankruptcy but promptly remedied that mistake
without harm to Creditors. On appeal, Creditors again maintain that
Gavin’s admitted mistake compels reversal. In short, they focus on the
baseless selection of chapter 13 while ignoring the other requirements for
sanctions under Rule 9011.
As discussed above, Gavin did not file the bankruptcy in bad faith.
Rather, he mistakenly selected chapter 13 when he was not qualified for
that chapter. The prompt motion to convert to chapter 11 acknowledged
and remedied that mistake. This is substantial evidence that it was a
mistake resulting from the need to file the bankruptcy over a holiday
weekend. An innocent mistake does not equate to an improper purpose.
18 Creditors’ sanctions motion failed wholly to establish an improper
purpose.
The question regarding the propriety of Farsad’s failure to select the
appropriate chapter became a central issue, in large part, because Farsad
quickly and candidly acknowledged that Gavin did not qualify for chapter
13. While Creditors established that Farsad’s selection of chapter 13 was
baseless, they also were required to prove that the filing was “made
without a reasonable and competent inquiry.” Townsend, 929 F.2d at 1362.
As the plain language of Rule 9011(b) provides, a filer’s certifications are
made “to the best of the person’s knowledge, information, and belief,
formed after an inquiry reasonable under the circumstances.” (Emphasis
added.)
The reasonableness of Farsad’s pre-filing inquiry must be measured
against what a competent attorney hypothetically would have learned at
the same time from a reasonable inquiry. See Valley Nat’l Bank of Ariz v.
Needler (In re Grantham Bros.), 922 F.2d 1438, 1442 (9th Cir. 1991); see also
Townsend, 929 F.2d at 1364 (“whether a pleading is sanctionable must be
based on an assessment of the knowledge that reasonably could have been
acquired at the time the pleading was filed.”). When an attorney must
decide whether to file a paper but is confronted with significant time
constraints, those time constraints must be considered in determining what
constitutes a reasonable inquiry into the facts and the law. See Homer v.
19 Halbritter, 158 F.R.D. 236, 238 (N.D.N.Y. 1994) (citing Cooter & Gell, 496 U.S.
at 401–02).
Not all bankruptcy cases are created equally. As this case illustrates,
debtors may wait until the last minute before contacting counsel to file
bankruptcy. And debtors are allowed to file for bankruptcy with minimal
documentation that must later be supplemented. See Rule 1007(a) and
accompanying Advisory Committee Notes. Thus, in the context of
bankruptcies filed under exigent circumstances, we have generally focused
on showings of improper purpose in affirming sanctions orders under Rule
9011. See McCandless v. U.S. Tr. (In re Carrera), BAP No. NC-15-1383-KiTaJu,
2016 WL 4400652, at *8 (9th Cir. BAP Aug. 16, 2016), aff'd sub nom. Vizconde
v. Burchard (In re Vizconde), 715 F. App’x 630 (9th Cir. 2017) (affirming
sanctions orders where bankruptcy court found that emergency chapter 13
bankruptcy petitions were filed solely for the purpose of delay and with no
intent to reorganize the debtors). Imposing Rule 9011 sanctions when
debtors or their counsel file a bankruptcy petition without an improper
purpose under exigent circumstances can carry with it the risk of chilling
effective representation and zealous advocacy. Cf. Radakovich v. Wilson (In
re Radakovich), BAP No. WW–13–1254–KuPaJu, 2014 WL 4676009, at *5 (9th
Cir. BAP Sept. 19, 2014).
Creditors do not contest that courts must take into consideration the
circumstances surrounding the filing when evaluating the reasonableness
of counsel’s inquiry under Rule 9011. Instead, they argue that there was no
20 emergency. They believe that even if entry of the state court’s sale order
was imminent, the anticipated sale of the Burlingame Property was not.
Creditors apply an unduly strict reading of the exigent circumstances
Farsad faced on Easter weekend in 2021. That Friday, the state court had
advised it intended to enter an order to compel the sale of the Burlingame
Property at the hearing on the sale motion set for that Monday. After
receiving the tentative decision, Gavin contacted Farsad over the weekend
to file bankruptcy before the hearing to stay that matter. The bankruptcy
court found that the state court matter was pressing and treated it as
exigent circumstances. The record supports this finding. Based on Gavin’s
desire to stay the state court action prior to entry of the order compelling
the sale of the Burlingame Property, the court further found that Farsad
“did not have sufficient time to obtain and review Debtor’s financial
documents before then.” The record also supports these inferences. Indeed,
one of Creditors’ first emails to Farsad recognized that “Mr. Gavin was
seeking to avoid an imminent court order by the San Mateo County
Superior Court that would have ordered the sale of his real property … in
satisfaction of the judgment debt.”
To be clear, we do not condone the filing of any case without
sufficient investigation into a debtor’s finances. But the Ninth Circuit has
instructed that sanctions under Rule 9011 are measured using a sliding
scale. In this instance there is no evidence that Gavin filed his bankruptcy,
or selected chapter 13, for an improper purpose. On the other hand, he did
21 not qualify for chapter 13. And the record is unclear as to exactly what
investigation, if any, Farsad conducted before filing the petition with
respect to Gavin’s eligibility for chapter 13. Ordinarily, this would be
substantial evidence supporting frivolousness and imposition of sanctions.
But here, the bankruptcy court discounted that evidence in light of the
pressing need to file the bankruptcy over the weekend and the evidence
that Gavin was recovering from surgery.
It also bears comment that as the bankruptcy court found, Creditors
were not harmed by the initial selection of chapter 13. Gavin and Farsad
promptly acknowledged the mistake, converted the case to chapter 11, and
have proceeded to reorganize. As Judge Jury noted in her concurrence in
Radakovich, Rule 9011 states that a court may impose sanctions for a Rule
violation, but it is not required to do so. In re Radakovich, 2014 WL 4676009,
at *8 (Jury, J. concurring). The bankruptcy court had considerable
discretion to consider the circumstances surrounding that mistake. Despite
Farsad’s error in filing Gavin’s bankruptcy under chapter 13, the
bankruptcy court found the absence of improper purpose sufficient to deny
sanctions given the circumstances surrounding the failure to realize
Gavin’s ineligibility. This is not error or an abuse of discretion.
D. The bankruptcy court did not commit reversible error by not holding a hearing on the matters on appeal.
Finally, Creditors argue that the bankruptcy court should have held a
hearing on the conversion, dismissal, and sanctions motions. They point
22 out that the relevant Code sections governing the conversion and dismissal
motions require “notice and a hearing.” See § 1307(c), (d). Additionally,
Rule 9011 motions qualify as contested matters and thus similarly require
“reasonable notice and opportunity for hearing.” See Rule 9014(a).
Creditors believe that these notice requirements are jurisdictional and that
the bankruptcy court’s decision to decide the three motions without a
hearing deprived them of due process. They are incorrect.
In bankruptcy cases, adequate notice and adequate opportunity for
hearing generally are flexible concepts that depend on the circumstances of
the particular case. See § 102(1)(A).8 This flexible approach to determining
adequate notice and opportunity for hearing is consistent with the
constitutional requirements of due process:
[a]n elementary and fundamental requirement of due process in any proceeding which is to be accorded finality is notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections. The notice must be of such nature as reasonably to convey the required information and it must afford a reasonable time for those interested to make their appearance.
Mullane v. Cent. Hanover Bank & Tr. Co., 339 U.S. 306, 314 (1950) (citations
omitted); see also Mathews v. Eldridge, 424 U.S. 319, 333 (1976) (“The
8 In relevant part § 102(1)(A) (1) provides: “’after notice and a hearing’, or a similar phrase . . . means after such notice as is appropriate in the particular circumstances, and such opportunity for a hearing as is appropriate in the particular circumstances . . . .” 23 fundamental requirement of due process is the opportunity to be heard at a
meaningful time and in a meaningful manner.”).
Notwithstanding Creditors’ arguments to the contrary, the standard
for what amounts to constitutionally adequate notice is relatively minimal.
Notice is constitutionally sufficient as long as it apprises the interested
parties of the pending matter and affords them a reasonable opportunity to
present their position. Espinosa v. United Student Aid Funds, Inc., 553 F.3d
1193, 1202 (9th Cir. 2008) (citing Mullane, 339 U.S. at 314, 70 S. Ct. 652), aff'd,
559 U.S. 260 (2010).
Here, Creditors clearly had notice of Gavin’s conversion motion and
the opportunity to respond and file their own motions. In short, they
complain that they were denied the opportunity to appear for oral
argument. There is no indication that they sought an evidentiary hearing.9
Nor have Creditors argued that there were any disputed material facts.
Where the material facts are undisputed, no evidentiary hearing is
required. Caviata Attached Homes, LLC v. U.S. Bank, Nat’l Ass’n, (In re Caviata
Attached Homes, LLC), 481 B.R. 34, 45-46 (9th Cir. BAP 2012) (bankruptcy
9 When asked at oral argument on the appeal, Creditors’ counsel candidly conceded that he did not know whether they would have attempted to provide additional evidence. As the bankruptcy court took the hearings off calendar the day before they were scheduled for argument, this rings hollow. Regardless, Creditors have not identified any evidence that they were prevented from presenting to the bankruptcy court on any motion.
24 court properly dismissed chapter 11 case without conducting an
evidentiary hearing where there were no disputed material facts).
Creditors fail to explain or demonstrate how the bankruptcy court’s
reliance on the parties’ papers deprived them of a full and fair opportunity
to be heard. Absent from the record is any indication of what they might
have done differently. Creditors have not said what would have changed if
the bankruptcy court had not disposed of the matters by its May 18, 2021
order but instead had waited until after the hearing scheduled for the next
day to issue the same order.
When, as here, there is no indication in the record that the absence of
additional process prejudiced the litigants or otherwise deprived them of a
fair opportunity to be heard, the decision on appeal cannot be reversed on
due process grounds. See Rosson v. Fitzgerald (In re Rosson), 545 F.3d 764,
776 (9th Cir. 2008), partially abrogated on other grounds as recognized in Nichols
v. Marana Stockyard & Livestock Mkt., Inc. (In re Nichols), 10 F.4th 956, 962
(9th Cir. 2021).
Accordingly, we reject as meritless Creditors’ argument challenging
the order on appeal based on an alleged lack of due process.
CONCLUSION
For the reasons set forth above, we AFFIRM the bankruptcy court’s
order granting Gavin’s conversion motion and denying Creditors’
dismissal and sanctions motions.