FILED JUN 06 2016 1 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL 2 OF THE NINTH CIRCUIT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. NV-14-1593-FBD ) 6 PAUL A. MORABITO, ) Bk. No. 13-51237-GWZ ) 7 Debtor. ) _____________________________ ) 8 ) PAUL A. MORABITO, ) 9 ) Appellant, ) 10 ) v. ) MEMORANDUM* 11 ) JH, INC.; JERRY HERBST; ) 12 BERRY-HINCKLEY INDUSTRIES, ) ) 13 Appellees. ) ______________________________) 14 Submitted Without Oral Argument on May 19, 2016 15 Filed – June 6, 2016 16 Appeal from the United States Bankruptcy Court 17 for the District of Nevada 18 Honorable Gregg W. Zive, Bankruptcy Judge, Presiding 19 Appearances: Cecilia Lee and Elizabeth High of Lee & High, Ltd. 20 on brief for Appellant Paul A. Morabito; Gerald M. Gordon, Brian R. Irvine, Gabrielle A. Hamm, and 21 Mark M. Weisenmiller of Gordon Silver on brief for Appellees JH, Inc., Jerry Herbst, and Berry- 22 Hinckley Industries. 23 24 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 Before: FARIS, BARASH,** and DUNN, Bankruptcy Judges. 2 INTRODUCTION 3 Appellees JH, Inc., Jerry Herbst, and Berry-Hinckley 4 Industries filed an involuntary chapter 71 petition against 5 Appellant Paul A. Morabito in the United States Bankruptcy Court 6 for the District of Nevada. Mr. Morabito appeals the bankruptcy 7 court’s decisions to (1) decline to dismiss the involuntary 8 petition and instead suspend the case; (2) lift the suspension of 9 the involuntary petition; and (3) grant summary judgment in favor 10 of Appellees and enter an order for relief. We AFFIRM. 11 FACTUAL BACKGROUND 12 A. The underlying dispute 13 This case arises from a business dispute between Appellees 14 and Mr. Morabito and his associated entities. In 2007, JH, Inc. 15 agreed to purchase the stock of Berry-Hinckley Industries from 16 P.A. Morabito & Co. Ltd. Mr. Herbst guaranteed JH, Inc.’s 17 obligations, and Mr. Morabito was the guarantor for P.A. Morabito 18 & Co. 19 Thereafter, a dispute arose between the parties, and the 20 Morabito parties filed suit against the Herbst parties in Nevada 21 state court. The Herbst parties filed numerous counterclaims 22 against the Morabito parties. 23 24 ** Hon. Martin R. Barash, United States Bankruptcy Judge for the Central District of California, sitting by designation. 25 1 26 Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, all 27 “Rule” references are to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037, and all “Civil Rule” references are 28 to the Federal Rules of Civil Procedure, Rules 1-86.
2 1 After a bench trial in 2010, the state court found that the 2 Morabito parties breached the stock sale agreement and engaged in 3 fraud in the inducement and misrepresentation regarding the 4 transaction. It awarded the Herbst parties $149,444,777.80 in 5 compensatory and punitive damages. The Morabito parties filed an 6 appeal with the Nevada Supreme Court, and the Herbst parties 7 filed counter-appeals. 8 While the case was on appeal, the parties executed a 9 settlement agreement in November 2011. The parties agreed to 10 dismiss the state court action with prejudice, and the Herbst 11 parties agreed to accept (1) $13,000,000 in cash; (2) assumption 12 by the Morabito parties of obligations of a commercial lease and 13 a $4,500,000 note; (3) indemnification in related litigation; and 14 (4) proceeds from the sale of Mr. Morabito’s residence. 15 Additionally, the Morabito parties agreed to execute a 16 Confession of Judgment in the amount of $85,000,000 and 17 Stipulation to Confession of Judgment. Therein, Mr. Morabito 18 admitted that he had acted in bad faith and committed fraud, 19 including fraudulently inducing JH, Inc. to purchase Berry- 20 Hinckley Industries. If the Morabito parties breached the 21 settlement agreement, the Herbst parties could file the 22 Confession of Judgment in state court. 23 The Morabito parties defaulted under the settlement 24 agreement by failing to make timely payments. The parties then 25 entered into a forbearance agreement in which the Morabito 26 parties admitted that they defaulted on various provisions of the 27 settlement agreement and agreed to make payments to the Herbst 28 parties totaling $875,000. However, the Morabito parties
3 1 defaulted on the forebearance agreement. The Herbst parties 2 filed the Confession of Judgment in the state court. 3 B. The involuntary petition and motion to dismiss 4 Appellees filed an involuntary chapter 7 petition against 5 Mr. Morabito. Relying on the Confession of Judgment and the 6 Stipulation to Confession of Judgment, Appellees asserted that 7 they held claims against Mr. Morabito totaling $77,000,000. 8 In response, Mr. Morabito filed a Motion to Dismiss 9 Involuntary Chapter 7 Petition (“Motion to Dismiss”). He 10 essentially argued that: (1) the case did not satisfy § 303(b); 11 (2) the petition was filed in bad faith; and (3) the court should 12 abstain under § 305(a). He stated that he had “no significant 13 debts on the Petition Date other than credit card debt and the 14 obligation to [Appellees,]” but admitted that he had more than 15 twelve creditors. He represented that “[w]ith the exception of 16 the obligations to [Appellees] . . . the obligations to all of 17 Morabito’s creditors were paid as they came due.” He provided a 18 list of creditors pursuant to Rule 1003(b) that allegedly listed 19 all of his creditors and corresponding debt, including a 20 promissory note for $600,000 held by Edward Bayuk. 21 C. Suspension of the involuntary petition 22 After a hearing, the court denied the Motion to Dismiss, but 23 suspended the case pursuant to § 305(a)(1). The court said that 24 it “stated its findings of fact and conclusions of law on the 25 record in open court”2 and held that the allegations in the 26 2 27 Although the Order Denying Motion to Dismiss Involuntary Chapter 7 Petition and Suspending Proceedings Pursuant to 28 (continued...)
4 1 involuntary complaint were sufficient to overcome the Motion to 2 Dismiss. Among other things, it found sufficient the allegation 3 that Mr. Morabito was generally not paying his debts as they 4 became due. Nevertheless, the court held that there was no 5 evidence that there were other significant creditors, so the case 6 was a two-party collection action; the court was not the proper 7 forum for the collection action; and “the best interests of the 8 creditors and the debtor would be better served by suspension of 9 this case, and the Court will at this time abstain from hearing 10 this case pursuant to 11 U.S.C. § 305(a)(1).” The court 11 suspended the bankruptcy proceedings and lifted the automatic 12 stay. 13 D. Discovery disputes and additional lawsuits 14 Appellees sought to depose Mr. Morabito in the original 15 state court action. The state court repeatedly required 16 Mr. Morabito to appear for his deposition. Mr. Morabito refused 17 to submit to a deposition because of “inconvenience.” 18 Mr. Morabito filed a petition for writ of prohibition in the 19 Nevada Supreme Court, but the supreme court rejected the 20 petition. Nevertheless, Mr. Morabito still refused to appear for 21 his deposition until the state court threatened to sanction him. 22 Also during this period, a number of other lawsuits with 23 creditors holding potential claims against Mr. Morabito came to 24 light: (1) a state court case entitled Desi Moreno, et al. v. 25 2 26 (...continued) 11 U.S.C. § 305(a)(1) (“Suspension Order”) is in the record, 27 neither party has provided the Panel with a copy of the hearing transcript. Moreover, the transcript does not appear on the 28 bankruptcy court’s docket.
5 1 Berry-Hinckley Industries, et al., in which Mr. Morabito was a 2 defendant; (2) a federal action in the United States District 3 Court for the Northern District of California brought by Electric 4 Properties East, LLC against Mr. Morabito under the Racketeer 5 Influenced and Corrupt Organizations Act and state law; (3) one 6 or more arbitration proceedings in California; and (4) a Nevada 7 state court action initiated by The Hartford Fire Insurance 8 Company, which was seeking indemnification and payment on 9 guarantees from Mr. Morabito and others. 10 E. Lifting of the suspension 11 In February 2014, the Moreno parties, Appellees, and 12 Mr. Morabito filed a stipulation in bankruptcy court, whereby the 13 parties stipulated “that the lift of the automatic stay set forth 14 in the Court’s Suspension Order applies to the [Moreno] State 15 Court case, and allows the State Court case to proceed in its 16 normal course . . . .” The court approved the stipulation. 17 In March 2014, the Moreno parties and Mr. Morabito entered 18 into a settlement agreement. Appellees’ counsel then sent a 19 letter to Mr. Morabito and the Moreno parties, warning that the 20 settlement would violate the automatic stay. Nevertheless, the 21 parties to the Moreno litigation stipulated to dismiss the case 22 pursuant to the confidential settlement agreement. 23 Eight days later, Mr. Morabito filed a Motion for 24 Clarification of Order (“Clarification Motion”), seeking to 25 clarify that the automatic stay did not bar the Moreno 26 settlement. In response, Appellees filed a combined status 27 report and opposition to the Clarification Motion. Appellees 28 apprised the bankruptcy court of the various undisclosed lawsuits
6 1 against Mr. Morabito and his alleged hindering and delay of 2 discovery and collection efforts. Appellees argued that 3 Mr. Morabito misled the court by swearing under oath that 4 Appellees were his only significant creditors. They alleged that 5 Mr. Morabito had demonstrated bad faith and fraudulent conduct by 6 resisting discovery. Appellees also contended that they require 7 the protections of the bankruptcy court. 8 Mr. Morabito then filed an Amended Rule 1003(b) List of 9 Creditors that disclosed two additional creditors. He 10 concurrently filed a declaration in which he admitted that he was 11 a defendant in three lawsuits that he had “inadvertently omitted” 12 from his original Rule 1003(b) list. 13 On June 26, 2014, the court held a hearing on the 14 Clarification Motion and a status conference. It concluded that 15 the Moreno settlement agreement did not violate the automatic 16 stay. 17 The bankruptcy court further concluded, however, that the 18 Suspension Order “was not premised upon an adequate factual 19 foundation.” The court noted Mr. Morabito’s failure to disclose 20 all of the lawsuits and stated that the court had a “difficult 21 time accepting” the argument that the omission was a mere 22 oversight. The bankruptcy court further noted that the state 23 court found Mr. Morabito in contempt for refusing to appear at 24 his deposition and obstructing Appellees’ attempts to exercise 25 their rights under state law. On July 10, 2014, the court 26 entered its written order lifting the suspension (“Status 27 Conference Order”). 28
7 1 F. The motion for summary judgment 2 Appellees moved for summary judgment, arguing that 3 Mr. Morabito was generally not paying his debts as they became 4 due. They noted that Mr. Morabito was not paying Appellees under 5 the Confessed Judgment, which amounted to over 98% of his debts; 6 that Mr. Morabito systematically divested himself of estate 7 assets through preferential and fraudulent transfers; and that 8 Mr. Morabito has “played fast and loose with his obligation to 9 fully disclose his assets, creditors, and the claims asserted 10 against him.” 11 Appellees also cited portions of Mr. Morabito’s deposition 12 testimony concerning the $600,000 note held by Mr. Bayuk. 13 Mr. Bayuk, who is Mr. Morabito’s former companion, has continued 14 to pay Mr. Morabito’s debts for “living expenses” totaling 15 $50,000 to $75,000 per month. The expenses include $11,000 per 16 month in rent, $2,700 per month for lease of a Bentley, and seven 17 credit card balances that include Mr. Morabito’s legal expenses. 18 Mr. Morabito argued that he was generally paying his debts 19 when due, the involuntary petition implicated only a two-party 20 dispute, and dismissal or abstention was in the best interest of 21 the creditors and the debtor.3 He attached the declarations of 22 various creditors who stated that Mr. Morabito was current with 23 payments and that they did not desire to participate in 24 bankruptcy proceedings. Mr. Bayuk, the holder of the $600,000 25 note, submitted a declaration in which he stated that, although 26 27 3 Prior to filing his opposition, Mr. Morabito also filed a 28 second amended Rule 1003(b) list.
8 1 he was a creditor prior to September 1, 2014, he has since made a 2 gift to Mr. Morabito in the amount of the promissory note and 3 destroyed the note. He further stated that he intended to 4 continue gifting Mr. Morabito money in the future. 5 After a hearing,4 the court granted Appellees’ Motion for 6 Summary Judgment and entered its Order Granting Summary Judgment 7 and Judgment (“Summary Judgment Order”) and Amended Findings of 8 Fact and Conclusions of Law in Support of Order Granting Summary 9 Judgment and Judgment (“FOF/COL”). The court found that: 10 f. There is no genuine dispute that Morabito was not paying at least 98% of his debt[s] on the Petition 11 Date. 12 g. The Involuntary Proceeding is not a one- creditor dispute. 13 h. Special circumstances exist that would permit 14 the Court to enter an order for relief even if the Involuntary Proceeding is a one-creditor dispute. 15 i. Even if the Involuntary Proceeding was a 16 one-creditor dispute, it is because Morabito and Bayuk sought to isolate the Petitioning Creditors by paying 17 all of Morabito’s other debts. 18 j. The materiality of the debt owned to the Petitioning Creditors swamped Morabito’s other debt. 19 k. The conduct of Morabito before the State 20 Court and the bankruptcy court was gamesmanship. 21 l. [Bayuk’s declaration] demonstrates that, on the Petition Date, Morabito was not paying his debts 22 himself, but that Bayuk was paying Morabito’s debts. 23 . . . . 24 o. The Bayuk Declaration establishes that Bayuk expected, as of the Petition Date, to be repaid by 25 Morabito the amounts due under the Bayuk Note 26 4 27 The transcript of the hearing on the Motion for Summary Judgment is not included in the record on appeal. Moreover, the 28 transcript is not included on the bankruptcy court’s docket.
9 1 [$600,000]. 2 p. Bayuk was a creditor of Morabito on the Petition Date and, as a result, the Involuntary 3 Proceeding was not a one-creditor dispute on the Petition Date. 4 . . . . 5 r. Morabito was not paying the amounts due and 6 owing to Bayuk under the Bayuk Note in addition to failing to pay the Petitioning Creditors under the 7 Confessed Judgment. 8 . . . . 9 t. The amount of delinquency, the materiality of debt and nonpayment, the nature of the conduct of 10 Morabito’s affairs, and the inconsistent positions taken by Morabito and Bayuk before the Court by 11 declarations, pleadings and Morabito’s testimony in deposition demonstrate that, under a totality of 12 circumstances, Morabito was not generally paying his debts as they became due on the Petition Date. 13 14 The court concluded that no evidence could be presented at 15 trial to vary the undisputed facts, so “there is no question that 16 the Court would render a directed verdict in favor of the 17 Petitioning Creditors at trial.” 18 The court also entered its amended Order for Relief Under 19 Chapter 7 (“Order for Relief”), wherein it held that the 20 requirements under § 303 had been satisfied. 21 Mr. Morabito timely filed his notice of appeal from the 22 (1) Suspension Order, (2) Status Conference Order, (3) Summary 23 Judgment Order, (4) FOF/COL, and (5) Order for Relief. 24 JURISDICTION 25 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 26 §§ 1334 and 157(b)(1). We have jurisdiction under 28 U.S.C. 27 § 158. 28
10 1 ISSUES 2 (1) Whether the bankruptcy court erred in denying the 3 Motion to Dismiss and instead suspending the case. 4 (2) Whether the bankruptcy court erred in lifting the 5 suspension. 6 (3) Whether the bankruptcy court erred in granting summary 7 judgment in favor of Appellees and issuing the Order for Relief. 8 STANDARDS OF REVIEW 9 We review for an abuse of discretion a bankruptcy court’s 10 decision to suspend proceedings under § 305(a). See Marciano v. 11 Fahs (In re Marciano), 459 B.R. 27, 45 (9th Cir. BAP 2011), 12 aff’d, 708 F.3d 1123 (9th Cir. 2013) (holding that the court did 13 not abuse its discretion in declining to stay proceedings). 14 To determine whether the bankruptcy court abused its 15 discretion, we conduct a two-step inquiry: (1) we review de novo 16 whether the bankruptcy court “identified the correct legal rule 17 to apply to the relief requested” and (2) if it did, whether the 18 bankruptcy court’s application of the legal standard was 19 illogical, implausible, or “without support in inferences that 20 may be drawn from the facts in the record.” United States v. 21 Hinkson, 585 F.3d 1247, 1261–62 & n.21 (9th Cir. 2009) (en banc). 22 “If the bankruptcy court did not identify the correct legal rule, 23 or its application of the correct legal standard to the facts was 24 illogical, implausible, or without support in inferences that may 25 be drawn from the facts in the record, then the bankruptcy court 26 has abused its discretion.” USAA Fed. Sav. Bank v. Thacker 27 (In re Taylor), 599 F.3d 880, 887–88 (9th Cir. 2010) (citing 28 Hinkson, 585 F.3d at 1261–62).
11 1 “[W]e review de novo a bankruptcy court’s decision to grant 2 summary judgment.” In re Marciano, 459 B.R. at 35. “De novo 3 review requires that we consider a matter anew, as if no decision 4 had been made previously.” Francis v. Wallace (In re Francis), 5 505 B.R. 914, 917 (9th Cir. BAP 2014) (citations omitted). 6 DISCUSSION 7 A. Mr. Morabito fails to provide the Panel with a sufficient record to review the bankruptcy court’s decision to suspend 8 the proceedings. 9 Mr. Morabito argues that the court erred in suspending the 10 involuntary proceedings and that it should have dismissed the 11 petition outright. Because Mr. Morabito fails to provide us with 12 a complete record, we cannot review the court’s ruling, and we 13 affirm the bankruptcy court’s Suspension Order. 14 To dismiss or suspend a case under § 305(a)(1), the court 15 needs to determine that “the interests of creditors and the 16 debtor would be better served by such dismissal or suspension[.]” 17 See Eastman v. Eastman (In re Eastman), 188 B.R. 621, 624 (9th 18 Cir. BAP 1995) (“abstention in a properly filed bankruptcy case 19 is an extraordinary remedy, and . . . dismissal is appropriate 20 under § 305(a)(1) only in the situation where the court finds 21 that both ‘creditors and the debtor’ would be ‘better served’ by 22 a dismissal”). The BAP has adopted the multi-factor test set 23 forth in In re Monitor Single Lift I, Ltd., 381 B.R. 455, 464–65 24 (Bankr. S.D.N.Y. 2008), to determine the best interests of the 25 creditors and the debtor: 26 (1) the economy and efficiency of administration; (2) whether another forum is available to protect the 27 interests of both parties or there is already a pending proceeding in state court; (3) whether federal 28 proceedings are necessary to reach a just and equitable
12 1 solution; (4) whether there is an alternative means of achieving an equitable distribution of assets; 2 (5) whether the debtor and the creditors are able to work out a less expensive out-of-court arrangement 3 which better serves all interests in the case; (6) whether a non-federal insolvency has proceeded so 4 far in those proceedings that it would be costly and time consuming to start afresh with the federal 5 bankruptcy process; and (7) the purpose for which bankruptcy jurisdiction has been sought. 6 7 In re Marciano, 459 B.R. at 46-47. The analysis is “based on the 8 totality of the circumstances.” Id. at 48. The bankruptcy court 9 “must make specific and substantiated findings that the interests 10 of the creditors and the debtor will be better served by 11 dismissal or suspension.” Id. at 46 (quoting Wechsler v. Macke 12 Int’l Trade, Inc. (In re Macke Int’l Trade, Inc.), 370 B.R. 236, 13 247 (9th Cir. BAP 2007)). 14 In determining whether dismissal or suspension is 15 appropriate, the bankruptcy court must adhere to a two-step 16 analysis. We analogized the analysis under § 305(a) to § 1112(b) 17 and stated: 18 We believe this two-step process also is appropriate in the context of deciding a § 305(a) 19 motion with respect to a pending Involuntary Petition. The bankruptcy court first must make findings that 20 continuing the adjudication of the Involuntary Petition is or is not appropriate. While no specific statutory 21 cause is stated to guide a bankruptcy court, the development of the case law has provided guidance as to 22 the factors to consider. Those were the factors identified in the Monitor Single Lift case . . . . 23 Only if the bankruptcy court had determined that adjudication of the Involuntary Petition should not go 24 forward at the time of its decision would it need to consider whether it should dismiss the Involuntary 25 Petition outright or simply “stay” the adjudication of the Involuntary Petition, for instance, until the state 26 court appeals had concluded. 27 Id. at 48 (emphases added). 28 In the present case, the bankruptcy court held a hearing on
13 1 the Motion to Dismiss on October 22, 2013 and denied the Motion 2 to Dismiss, but suspended the involuntary proceedings pursuant to 3 § 305(a)(1). The Suspension Order does not indicate that the 4 bankruptcy court engaged in the analysis required by Marciano. 5 But the written order also says that the court “stated its 6 findings of fact and conclusions of law on the record in open 7 court . . . .” We cannot review the oral ruling because 8 Mr. Morabito has not provided a transcript. 9 Without the benefit of the hearing transcript, we are unable 10 to discern (1) whether the bankruptcy court identified the proper 11 legal standard and (2) whether the bankruptcy court’s application 12 of the legal standard was illogical, implausible, or “without 13 support in inferences that may be drawn from the facts in the 14 record.” Hinkson, 585 F.3d at 1261–62. 15 It is Mr. Morabito’s duty to provide the Panel with a 16 complete record on appeal. See Welther v. Donell (In re Oakmore 17 Ranch Mgmt.), 337 B.R. 222, 226 (9th Cir. BAP 2006) (the 18 appellant “bears the burden of presenting a complete record”) 19 (citing Kritt v. Kritt (In re Kritt), 190 B.R. 382, 387 (9th Cir. 20 BAP 1995)). “The settled rule on transcripts in particular is 21 that failure to provide a sufficient transcript may, but need 22 not, result in dismissal or summary affirmance and that the 23 appellate court has discretion to disregard the defect and decide 24 the appeal on the merits.” Kyle v. Dye (In re Kyle), 317 B.R. 25 390, 393 (9th Cir. BAP 2004), aff’d, 170 F. App’x 457 (9th Cir. 26 2006) (citations omitted). But see Ehrenberg v. Cal. State. 27 Univ. (In re Beachport Entm’t), 396 F.3d 1083, 1087 (9th Cir. 28 2005) (“Although summary dismissal is within the BAP’s
14 1 discretion, it ‘should first consider whether informed review is 2 possible in light of what record has been provided.’”). 3 Mr. Morabito’s failure to present us with a complete record 4 prevents us from conducting an “informed review” to determine 5 whether the court abused its discretion. Therefore, we affirm 6 the Suspension Order. 7 B. The bankruptcy court did not err in lifting the suspension. 8 Mr. Morabito argues that the court erred in lifting the 9 suspension. We disagree. 10 The bankruptcy court was free to reconsider the Suspension 11 Order, especially given the newly-discovered facts raised by 12 Appellees. The Ninth Circuit has stated that “bankruptcy courts, 13 as courts of equity, have the power to reconsider, modify or 14 vacate their previous orders so long as no intervening rights 15 have become vested in reliance on the orders.” Meyer v. Lenox 16 (In re Lenox), 902 F.2d 737, 739-40 (9th Cir. 1990) (citations 17 omitted). In other words, a bankruptcy court has “power to 18 reconsider any of its previous orders when equity so requires.” 19 Id. at 740 (citations omitted). 20 The court previously found that Appellees established 21 sufficient grounds for filing the involuntary petition; however, 22 it invoked § 305(a)(1) to suspend the proceedings, because 23 (1) there was no other significant creditor and the case was 24 essentially a two-party collection action, and (2) Appellees 25 cannot use the bankruptcy court and Bankruptcy Code merely to 26 collect on a judgment. At the status conference and hearing on 27 the Clarification Motion, the bankruptcy court focused on 28 Mr. Morabito’s failure to disclose multiple ongoing litigation
15 1 and his disregard of the state court’s orders. It stated that 2 its initial ruling “was not premised upon an adequate factual 3 foundation” and that it would correct its mistake by lifting the 4 suspension. 5 We find no error in the court’s determination that 6 Mr. Morabito misled the court into believing that he had no other 7 significant creditors. We also find no error in the court’s 8 determination that Mr. Morabito has willfully disobeyed the state 9 court’s orders. The court did not abuse its discretion when it 10 determined that Mr. Morabito’s misrepresentations and defiance of 11 the state court warranted resumption of the bankruptcy 12 proceedings. 13 In sum, the court decided that the factual basis for its 14 suspension of the case was false. Given that the court had 15 discretion to impose the suspension in the first place, it was 16 not an error for the court to lift the suspension. 17 C. The bankruptcy court did not err in granting summary judgment and issuing the Order for Relief. 18 19 Mr. Morabito contends that the court erred in granting 20 summary judgment in favor of Appellees. He argues that the court 21 erred by concluding that (1) he was generally not paying his 22 debts as they came due and (2) his debt to Bayuk was due and 23 owing. We disagree. 24 In order to prevail on summary judgment, the petitioning 25 creditors “must establish that (1) three or more creditors 26 (2) hold claims against the alleged debtor that are not 27 contingent as to liability and (3) are not the subject of a bona 28 fide dispute as to liability or amount (4) in the aggregate
16 1 amount of at least [$15,325], and (5) that the alleged debtor is 2 generally not paying such debtor’s debts as such debts become 3 due.” In re Marciano, 446 B.R. 407, 420 (Bankr. C.D. Cal. 2010), 4 aff’d, 459 B.R. 27 (9th Cir. BAP 2011), aff’d, 708 F.3d 1123 (9th 5 Cir. 2013) (citing 11 U.S.C. § 303(b), (h)). 6 Appellees hold undisputed, non-contingent claims against 7 Mr. Morabito that exceed the threshold amount, as memorialized in 8 the Confession of Judgment. The only dispute is whether Mr. 9 Morabito is generally not paying his debts as they become due. 10 1. Summary judgment standard 11 Under Civil Rule 56, made applicable through Rule 7056, “the 12 court shall grant summary judgment if the movant shows that there 13 is no genuine dispute as to any material fact and the movant is 14 entitled to judgment as a matter of law.” The party moving for 15 summary judgment must identify “those portions of ‘the pleadings, 16 depositions, answers to interrogatories, and admissions on file, 17 together with the affidavits, if any,’ which it believes 18 demonstrate the absence of a genuine issue of material fact.” 19 Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Once the 20 moving party meets its burden, the non-moving party must “set out 21 specific facts showing a genuine issue for trial.” Civil 22 Rule 56(e)(2). 23 In reviewing an order granting summary judgment, the Panel 24 “must view the evidence in the light most favorable to the 25 non-moving party and ‘determine whether there are any genuine 26 issues of material fact and whether the bankruptcy court 27 correctly applied the substantive law.’” Caneva v. Sun 28 Communities Operating Ltd. P’ship (In re Caneva), 550 F.3d 755,
17 1 760 (9th Cir. 2008) (citation omitted). A genuine issue of 2 material fact exists when the evidence is such that a reasonable 3 jury could return a verdict for the non-moving party. Id. at 761 4 (citation omitted). Findings of fact made in summary judgment 5 proceedings are not subject to the “clearly erroneous” standard 6 of review, because the trial court has not weighed the evidence 7 in the conventional sense. In re Marciano, 459 B.R. at 35 8 (citations omitted). 9 The bankruptcy court found that there was no genuine dispute 10 of material fact. We agree that summary judgment was warranted 11 on this record. There was no conflict in the evidence about what 12 had happened in the real world, and the only dispute concerned 13 the application of the legal standard to the facts. Summary 14 judgment was a proper way to resolve this purely legal dispute. 15 2. Whether Mr. Morabito was generally not paying his debts as they became due 16 17 The crux of the Motion for Summary Judgment was whether 18 Mr. Morabito was “generally not paying his debts as such debts 19 become due.” § 303(h)(1). 20 The Ninth Circuit has “adopted a ‘totality of the 21 circumstances’ test for determining whether a debtor is generally 22 not paying its debts under 11 U.S.C. § 303(h).” Liberty Tool & 23 Mfg. v. Vortex Fishing Sys., Inc. (In re Vortex Fishing Sys., 24 Inc.), 277 F.3d 1057, 1072 (9th Cir. 2002) (quoting Hayes v. 25 Rewald (In re Bishop, Baldwin, Rewald, Dillingham & Wong, Inc.), 26 779 F.2d 471, 475 (9th Cir. 1985)). “A finding that a debtor is 27 generally not paying its debts ‘requires a more general showing 28 of the debtor’s financial condition and debt structure than
18 1 merely establishing the existence of a few unpaid debts.’” Id. 2 (quoting In re Dill, 731 F.2d 629, 632 (9th Cir. 1984)). 3 The “totality of the circumstances test” is not a rigid, 4 mathematic analysis: “The authority of the court is triggered and 5 guided by the totality of the circumstances existing when the 6 petition is filed. Congress intended to provide a flexibility 7 which is not reducible to a simplistic formula.” In re Bishop, 8 Baldwin, Rewald, Dillingham & Wong, Inc., 779 F.2d at 475. “[I]t 9 is not possible to lay down guidelines that fit all cases . . . . 10 It is intended that the court consider both the number and amount 11 [of debts] in determining whether the inability or failure is 12 general.” 2 Collier on Bankruptcy ¶ 303.31 (16th ed.) (quoting 13 Report of the Commission on the Bankruptcy Laws of the United 14 States, H.R. Doc. No. 137, 93d Cong., 1st Sess. Pt. II, 75 n.5 15 (1973)). 16 The Ninth Circuit has cited with approval an Eleventh 17 Circuit decision holding that, “[i]n determining whether a debtor 18 is generally paying its debts as they become due, courts ‘compare 19 the number of debts unpaid each month to those paid, the amount 20 of the delinquency, the materiality of the non-payment, and the 21 nature of the [d]ebtor’s conduct of its financial affairs.’” 22 In re Vortex Fishing Sys., Inc., 277 F.3d at 1072 (quoting Gen. 23 Trading Inc. v. Yale Materials Handling Corp., 119 F.3d 1485, 24 1504 n.41 (11th Cir. 1997)).5 25 5 26 Courts around the country have considered: the number of debts; the amount of the delinquency; the materiality of the 27 nonpayment; the nature and conduct of the debtor’s business; the debtor’s ability to satisfy only small periodic payments, not 28 (continued...)
19 1 In the present case, the bankruptcy court found that there 2 was no dispute of material fact that Mr. Morabito was generally 3 not paying his debts as they became due. It so held because he 4 was not paying at least 98% of his debts; the size of the debt 5 owed to Appellees swamped his other debt; and he and Mr. Bayuk 6 were paying off all other debts to isolate Appellees. It 7 concluded that “[t]he amount of delinquency, the materiality of 8 debt and nonpayment, the nature of the conduct of Morabito’s 9 affairs, and the inconsistent positions taken by Morabito and 10 Bayuk before the Court by declarations, pleadings and Morabito’s 11 testimony in deposition demonstrate that, under a totality of 12 circumstances, Morabito was not generally paying his debts as 13 they became due on the Petition Date.” The bankruptcy court did 14 not err. 15 a. Amount of delinquency 16 While it may be true that Mr. Morabito was current on all 17 other debt payments thanks to Mr. Bayuk’s largess, it is 18 undisputed that he was not making payments on Appellees’ claim. 19 It is also not disputed that his debt to Appellees constituted at 20 21 5 (...continued) long-term obligations; the debtor’s making regular payments only 22 on small, recurring obligations, not on larger debts; the rapid 23 decline in the value of the debtor’s assets resulting from asset sales rather than profit-generating activities; the amount of the 24 debtor’s debts compared to the debtor’s yearly income; payments made by third parties or a waiver of claims by a third party; the 25 debtor’s liquidation of assets; the fact that debtor’s defaults 26 are only on extraordinary debts; and the fact that the due and unpaid debts are made up entirely of the claims of the 27 petitioning creditors while other non-petitioning creditors are all paid. 2 Collier on Bankruptcy ¶ 303.31[2] (citations 28 omitted).
20 1 least 98% of his outstanding debt. We find no error in the 2 court’s consideration of the unpaid debt as a percentage of 3 Mr. Morabito’s overall debt. See Focus Media, Inc. v. Nat’l 4 Broadcasting Co., Inc. (In re Focus Media, Inc.), 378 F.3d 916, 5 929 (9th Cir. 2004) (agreeing that, under the totality of the 6 circumstances, “[h]aving 80% of your debts over 90 days old is 7 not paying debts as they come due”). 8 b. Number of unpaid debts 9 We also find no error with the bankruptcy court’s holding 10 that, in this situation, the fact that Appellees’ claim 11 represents a single debt does not mean Mr. Morabito was 12 “generally paying” his debts. Mr. Morabito and Mr. Bayuk were 13 selectively making payments to other creditors while defaulting 14 only on the debt to Appellees. In other words, it is by 15 Mr. Morabito’s own design that he was not paying only one debt, 16 and he was “isolating” Appellees so that it appeared as though he 17 was paying the majority of his debts. We agree that “there is 18 ‘substantial authority for the proposition that even though an 19 alleged debtor may owe only one debt, or very few debts, an order 20 for relief may be granted where such debt or debts are 21 sufficiently substantial to establish the generality of the 22 alleged debtor’s default.’ For example, courts have entered an 23 order for relief ‘where the creditors were few in number but a 24 large amount was owed to them.’” In re Marciano, 446 B.R. at 421 25 (quoting Crown Heights Jewish Cmty. Council, Inc. v. Fischer 26 (In re Fischer), 202 B.R. 341, 350, 351 (Bankr. E.D.N.Y. 1996)). 27 Mr. Morabito argues extensively that the involuntary 28 petition was deficient because Mr. Bayuk was not a creditor to
21 1 whom a debt was due and owing at the time Appellees filed the 2 involuntary petition.6 He contends that Mr. Bayuk had never made 3 a demand on the note, and there was no timeline for him to repay 4 Mr. Bayuk; thus, the involuntary petition was a two-party 5 collection action. 6 Whether Mr. Bayuk was a creditor of Mr. Morabito is not 7 dispositive. As discussed above, the comparative number of paid 8 and unpaid creditors may be relevant to the “totality of the 9 circumstances” test to determine whether a debtor is “generally 10 not paying” his debts under § 303(h)(1). Even if Mr. Bayuk were 11 not a creditor, the bankruptcy court did not err in considering 12 the “totality of the circumstances” and granting summary 13 judgment. 14 c. Efforts to thwart collection attempts 15 The bankruptcy court properly considered, in its evaluation 16 of the totality of the circumstances, the exceptional 17 circumstances of this case. Those “exceptional” circumstances 18 include: “(1) an exceptional case of a debtor with a sole 19 creditor who would otherwise be without an adequate remedy under 20 State or Federal law (other than bankruptcy law) if denied an 21 order for relief or (2) a showing of special circumstances 22 amounting to fraud, trick, artifice or scam.” In re 7H Land & 23 Cattle Co., 6 B.R. 29, 34 (Bankr. D. Nev. 1980); see In re Cent. 24 Hobron Assocs., 41 B.R. 444, 449 (D. Haw. 1984) (“An exception to 25 26 6 Mr. Morabito also argues that Mr. Bayuk later tore up the 27 note and forgave the $600,000 debt. However, it is undisputed that this event occurred post-petition and the note was valid as 28 of the petition date.
22 1 the rule that one unpaid debt will not merit relief is that a 2 single creditor may get relief if it can show that it has a 3 special need for bankruptcy court relief and that state-law 4 remedies would not be adequate, or that the debtor has engaged in 5 trick, sham, artifice or fraud.”); see also 2 Collier on 6 Bankruptcy ¶ 303.31[5] (“Examples of ‘exceptional’ circumstances 7 include when the sole creditor has no other available remedy 8 under federal or state law, recovery of a preference that is 9 unavoidable under state law, the transfer of assets to insiders 10 and third parties or ‘there are [other] circumstances amounting 11 to fraud, trick, artifice, or scam on the part of the debtor.’ A 12 further example of an exceptional circumstance is when the debtor 13 has paid all of its small creditors, leaving only one large 14 creditor.” (citations omitted)). 15 In the present case, Appellees have provided evidence of 16 fraud, artifice, or a scam. The record supports the bankruptcy 17 court’s findings that Mr. Morabito schemed to isolate Appellees 18 by paying all debts but those owed to Appellees, in an attempt to 19 thwart Appellees’ efforts to bring Mr. Morabito into bankruptcy. 20 Further, the record also shows a pattern of wilful disregard of 21 state court discovery orders and false representations to the 22 bankruptcy court. Mr. Morabito’s conduct amounts to 23 gamesmanship, fraud, and artifice that constitute exceptional 24 circumstances. 25 d. The debtor’s ability to pay 26 Mr. Morabito’s ability or plan to pay creditors is also 27 important. See In re Focus Media, 378 F.3d at 929 (order for 28 relief was appropriate where the debtor was “a company that had
23 1 substantial amounts of unpaid bills and no plans or ability to 2 pay them”). He has admitted that he has no means or plan to 3 satisfy his debt to Appellees, and indeed has no way to pay any 4 of his debts other than through Mr. Bayuk’s generosity. 5 e. The debtor’s conduct of his financial affairs 6 Lastly, the court did not err in faulting Mr. Morabito for 7 his conduct of his financial matters. “The court may examine the 8 Debtor’s overall contemporaneous handling of its affairs in 9 evaluating whether to order relief. If the Debtor is conducting 10 his financial affairs in a manner inconsistent with good faith 11 and outside the ordinary course of business, it may affect the 12 court’s determination.” In re Bishop, Baldwin, Rewald, 13 Dillingham & Wong, Inc., 779 F.2d at 475 (quoting In re Reed, 14 11 B.R. 755, 760 (Bankr. S.D.W.Va. 1981)). There is no dispute 15 that Mr. Morabito only defaulted on payments to Appellees. As a 16 result, he was able to claim that the involuntary proceeding is 17 merely a one-creditor dispute outside of the Bankruptcy Code. 18 Mr. Morabito’s purposeful isolation of Appellees evidences a lack 19 of good faith that supports summary judgment. 20 Accordingly, considering the totality of the circumstances, 21 the court did not err in determining that Mr. Morabito was 22 generally not paying his debts and granting summary judgment and 23 relief against Mr. Morabito. 24 CONCLUSION 25 For the foregoing reasons, we AFFIRM. 26 27 28