In re: Prometheus Health Imaging, Inc.

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: August 2, 2016
• Docket: CC-15-1422-DKuF
• Status: Unpublished

Opinion

FILED AUG 03 2016 1 NOT FOR PUBLICATION 2 SUSAN M. SPRAUL, CLERK U.S. BKCY.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-15-1422-DKuF ) 6 PROMETHEUS HEALTH IMAGING, ) Bk. No. 14-10250-SC INC., ) 7 ) Debtor. ) 8 ______________________________) ) 9 PROMETHEUS HEALTH IMAGING, ) INC., ) 10 ) Appellant, ) 11 ) v. ) AMENDED MEMORANDUM1 12 ) UNITED STATES TRUSTEE, ) 13 ) Appellee. ) 14 ______________________________) 15 Argued and Submitted on July 28, 2016 at Pasadena, California 16 Originally Filed - August 2, 2016 17 Appeal from the United States Bankruptcy Court 18 for the Central District of California 19 Honorable Scott C. Clarkson, Bankruptcy Judge, Presiding 20 Appearances: Matthew D. Rifat argued for appellant. 21 22 Before: DUNN, KURTZ, and FARIS, Bankruptcy Judges. 23 24 25 26 1 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. 28 See 9th Cir. BAP Rule 8024-1. 1 For the second time, Appellant Prometheus Health Imaging, 2 Inc. (“Prometheus”) appeals from a bankruptcy court order 3 dismissing its chapter 112 bankruptcy petition for bad faith. In 4 the first appeal, the Panel vacated and remanded to the 5 bankruptcy court because the record lacked evidentiary support 6 for the factual findings on which the bankruptcy court’s bad 7 faith determination was based. (See Prometheus Health Imaging, 8 Inc. v. U.S. Trustee (In re Prometheus Health Imaging, Inc.), 9 BAP No. CC-14-1576-FKiKu, 2015 WL 6719804 (9th Cir. BAP 10 November 2, 2015) (“Prometheus I”). On remand, the bankruptcy 11 court conducted further proceedings, made detailed findings, and 12 again dismissed based on a determination that the bankruptcy 13 petition had been filed in bad faith.3 14 We AFFIRM. 15 I. BACKGROUND 16 In 2002, Prometheus ordered from General Electric Medical 17 Systems Europe (“GEM”) an imaging machine for delivery in Saudi 18 Arabia. A dispute arose regarding whether GEM fulfilled the 19 contract with an adequate machine. Ultimately, GEM obtained a 20 judgment in the principal amount of $951,000 against Prometheus 21 in the federal district court in Ohio. Thereafter, in 2010, 22 Prometheus commenced litigation against GEM in Paris, France, 23 where the court (“Paris Trial Court”) ruled against Prometheus. 24 2 25 Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101–1532, and 26 all “Rule” references are to the Federal Rules of Bankruptcy 27 Procedure, Rules 1001–9037. 3 28 On remand the case was reassigned to Judge Clarkson.

-2- 1 In 2012, Prometheus filed an appeal from the Paris Trial Court 2 decision. Prometheus contends that the French Appellate Court is 3 not bound by the rulings of the Paris Trial Court. However, 4 Prometheus had no assets from which to post the bond required to 5 proceed in the French Appellate Court, so Prometheus filed its 6 chapter 11 petition on January 14, 2014. At that time, 7 Prometheus was not operating a business. 8 On September 19, 2014, the bankruptcy court entered an order 9 to show cause (“Show Cause Order”), which required Prometheus’ 10 counsel to appear and which gave notice that the bankruptcy court 11 would be determining whether Prometheus’ bankruptcy case “should 12 be dismissed as a bad faith filing . . . .” In response, 13 Prometheus’ counsel filed a declaration that stated, inter alia: 14 8. The Debtor’s bankruptcy case should not be dismissed as a bad faith filing. As I previously 15 advised the Court, this case is the most unusual chapter 11 case I have ever handled. The Debtor ceased 16 business operations in 2004, and the Debtor’s primary asset is the Appeal of litigation pending in Paris. As 17 previously disclosed to the court, Frederic Jeannin, counsel for the Debtor for the Paris Appeal, advised me 18 that the Debtor had to file bankruptcy in order to proceed with the Appeal. As I advised the Court at one 19 of the initial status conferences, this was not a bad faith filing, a la Marsch v. Marsch (In re Marsch), 20 36 F.3d 825 (9th Cir. 1994), where the Ninth Circuit affirmed the ruling of the bankruptcy court that it was 21 bad faith for debtors to file a chapter 11 petition to obtain a stay of a pending appeal when the debtor had 22 the necessary funds to bond the appeal. Here, the Debtor has no funds, and the Appeal cannot proceed 23 unless the bankruptcy case remains active. 24 Prometheus’ sole officer and director, Wendee Luke, also provided 25 a declaration, which provided in relevant part: 26 6. The Debtor needed to file a chapter 11 case to proceed with the litigation in Paris against GEM. I 27 believed it was appropriate for the Debtor to file its chapter 11 case in Orange County because (I) the 28 Debtor’s principal place of business is in Orange

-3- 1 County; (ii) the Debtor’s sole officer and director lives in Orange County; and (iii) the Debtor’s agent 2 for service of process lives in Orange County. 3 After the show cause hearing was held, the bankruptcy court 4 entered its dismissal order and Prometheus filed its first 5 appeal, Prometheus I. The Prometheus I Panel vacated the 6 dismissal order and remanded to the bankruptcy court to, inter 7 alia, make appropriate findings of fact. 8 On remand, the bankruptcy court promptly entered an order 9 (“Order on Remand”) requiring Prometheus to bring its Monthly 10 Rule 2015 Reports current, to pay all outstanding United States 11 Trustee fees, to seek employment of its bankruptcy counsel, and 12 to provide a status report (“Status Report”) regarding all 13 activities Prometheus had engaged in during the pendency of the 14 Prometheus I appeal. The Order on Remand also mandated the 15 appearance both of Prometheus’ counsel and of Ms. Luke, as 16 Prometheus’ representative, at the hearing (“Hearing on Remand”) 17 scheduled for November 17, 2015. 18 At the Hearing on Remand, the bankruptcy court noted that 19 Prometheus appeared to have substantially complied with the Order 20 on Remand. The bankruptcy court engaged in an extended colloquy 21 with Prometheus’ counsel at the Hearing on Remand. Among the 22 primary issues explored were the following: 23 - Although Prometheus, through counsel and Ms. Luke, had 24 repeatedly represented to the bankruptcy court that the 25 bankruptcy case had been filed because it was the only way the 26 litigation in the French Appellate Court could proceed in the 27 absence of a bond, in fact a certificate of insolvency from a 28 certified public accountant would have served the same purpose.

-4- 1 - Despite the fact that the bankruptcy case had been used as the 2 substitute for a bond for the French Appellate Court proceedings, 3 after the first dismissal order was entered Prometheus neither 4 obtained a stay pending appeal of the dismissal order nor 5 informed the French Appellate Court that its substitute for the 6 bond no longer was in existence. As a consequence, the French 7 Appellate Court held the trial de novo in May 2015, and 8 Prometheus was awaiting news of the disposition of that 9 litigation. 10 - Prometheus had not been an operating business since 2004. It 11 had no funds with which to make the payments to the U.S. Trustee 12 under the Remand Order. Ms. Luke provided the funds to make the 13 payments on behalf of Prometheus. 14 At the conclusion of the Hearing on Remand, the bankruptcy 15 court made the following ruling on the record: 16 Okay. I’m dismissing this case. This case is dismissed. It is a bad faith filing. The reason it’s 17 a bad faith filing is because, one, the original description by your French counsel was that the only 18 reason this case should go forward is that they needed to avoid an appeal bond, but now we know that that’s 19 not the only reason. They could have simply filed a certificate of insolvency, and I have to tell you that 20 a company that hasn’t generated money in 10 years and doesn’t have any assets except for . . . $125 doesn’t 21 need to be in Chapter 11. 22 Now -- and that certificate would have been efficient. The other thing is this. The bad faith that’s been 23 demonstrated by having this case dismissed on November 26, 2014, not . . . obtaining a stay pending 24 appeal, and then going to French court and not getting a certificate of insolvency and not revealing prior to 25 that hearing -- and I -- and I’m only assuming that that didn’t happen because I have to assume and I’m 26 going to assume that they would have required you to get an appeal bond because you no longer had the 27 benefit of the bankruptcy. 28 So there’s bad faith toward the French court. As an

-5- 1 honor to courts both in America and to other courts in democratic societies and a nation such as France, which 2 has been the friend of America prior to the Revolution, I’m going to honor the -- the point that they should 3 have been informed that prior to the trial de novo, the bankruptcy was not in place, a stay was not in place, 4 and that no certificate of insolvency was in place. 5 I think that is very much bad faith and an abuse of the bankruptcy system, and now we have a Debtor that has no 6 assets, lots of liabilities, has lost I believe in Ohio on this matter with GE, has lost a court fight in 7 France and now has asked for a trial de novo in France and has had the hearing, and there’s nobody attacking 8 you, by the way. There’s no one out there seeking writs of execution or writs of possession against 9 Prometheus Health Imaging, and I know this because I’ve reviewed the statement of financial affairs, and I look 10 at the statement of financial affairs where it states that there are no pending actions that are occurring 11 with respect to collection of debt. 12 So with all of that -- and I guess I could go on, but I guess the final nail in the coffin is the Debtor 13 doesn’t even have enough money to pay for the U.S. Trustee quarterly fees. I’m dismissing the case. 14 So I would like you to -- no, I’ll do it. The chambers 15 will provide an order dismissing this case as a bad faith for the reasons -- based upon the reasons that 16 are stated on the record, and you can take that back up to the Bankruptcy Appellate Panel. 17 18 Hr'g Tr. (Nov. 17, 2015) 25:11-27:11. 19 After the Hearing on Remand, the bankruptcy court entered 20 its “Order Dismissing Chapter 11 Case on Remand From Ninth 21 Circuit B.A.P.” (“Second Dismissal Order”). The Second Dismissal 22 Order contained the bankruptcy court’s written findings of fact 23 and conclusions of law. The written findings provide a 24 significant additional basis upon which the bankruptcy court 25 ordered dismissal of Prometheus’ case: 26 When asked by the Court what the estate’s stake or interest in the French appeal consisted of, Mr. Broidy 27 advised that the Debtor may have counterclaims against GEM. If the Debtor prevailed in its appeal, assumed 28 Mr. Broidy, funds may come into the estate sufficient

-6- 1 to pay Debtor’s creditors. However, in light of the prior Chapter 7, it is unclear whether the Debtor’s 2 alleged claims against GEM are even property of this Chapter 11 estate. The Debtor had filed Chapter 7 on 3 November 4, 2004 (2:04-bk-33283-VZ), but did not disclose the presence of claims against GEM. The 4 Debtor’s principal states that the Debtor’s claim against GEM arose in 2002, when GEM delivered a “slower 5 machine that was not suitable for the Debtor’s needs. . . .” Declaration of Wendee Luke [Dk. 40 at 6 ¶ 3]. If the Debtor’s claims against GEM arose at any time prior to November 4, 2004, the date of the 7 Chapter 7 filing, those unscheduled claims would remain unadministered property of the Chapter 7 estate. See 8 11 U.S.C. § 541 (property of the estate); 11 U.S.C. § 544(d) (property not abandoned or administered 9 remains property of the estate); Lopez v. Specialty Rests. Corp. (In re Lopez), 283 B.R. 22, 28 (9th Cir. 10 BAP 2002) (An unscheduled claim “that is neither abandoned nor administered remains property of the 11 estate even after the case is closed.”). To the extent Debtor’s claims against GEM are unadministered assets 12 of the former Chapter 7 estate, the Debtor lacks standing to prosecute them. 11 U.S.C. § 323 (trustee 13 is the representative of the estate with capacity to sue and be sued); In re Edwards, 2011 WL 4485560, at *3 14 n.2 (9th Cir. BAP Aug. 26, 2011) (unpublished) (citations omitted). 15 16 Second Dismissal Order at 5:16-6:8. 17 The bankruptcy court made the following written conclusions 18 to support entry of the Second Dismissal Order dismissing the 19 bankruptcy case for cause pursuant to § 1112(b): 20 In light of these findings, the Court concludes that this Chapter 11 case was filed in bad faith. The 21 Debtor is not an operating business, and is not generating any income, but it is continuing to accrue 22 expenses. The only purported assets of the estate are claims which appear to have arisen prior to the 23 Debtor’s previous Chapter 7 case and may not even be property of this bankruptcy estate. The Debtor has 24 shown no evidence of abandonment of the claims by the Chapter 7 trustee to this estate. The Debtor has not 25 provided any evidence of a reasonable likelihood of reorganization. The Debtor admits that the purpose of 26 the bankruptcy was to avoid paying an appeal bond. Indeed, Mr. Broidy admits that the Debtor had other 27 avenues available to it to prosecute the French appeal, including the filing of a certificate of insolvency. 28 Instead of doing so, the Debtor invoked the time and

-7- 1 resources of the bankruptcy court system for the purpose of obtaining the automatic stay to allow it to 2 prosecute the French appeal. Neither the Debtor’s bankruptcy counsel nor the Debtor’s attorney in the 3 French court system were employed by the estate. The Debtor’s counsel only filed an application for 4 employment upon this Court’s order requiring him to do so. No such application has been filed for the French 5 attorney. Finally, the Debtor was unable to explain satisfactorily whether it gave any notice directly to 6 the French court or GEM about the dismissal of this case in November of 2014, which may involve a fraud on 7 the French court. 8 Second Dismissal Order at 7:23-8:15. 9 The Second Dismissal Order was entered December 2, 2015. 10 Prometheus once again filed a timely notice of appeal. 11 II. JURISDICTION 12 The bankruptcy court had jurisdiction under 28 U.S.C. 13 §§ 1334 and 157(1). We have jurisdiction under 28 U.S.C. § 158. 14 III. ISSUE 15 Whether the bankruptcy court abused its discretion when it 16 dismissed Prometheus’ chapter 11 petition. 17 IV. STANDARDS OF REVIEW 18 “We review de novo whether the cause for dismissal of a 19 Chapter 11 case under [§ 1112(b)] is within the 20 contemplation of that section of the [Bankruptcy] Code. We 21 review for abuse of discretion the bankruptcy court’s decision to 22 dismiss a case as a ‘bad faith’ filing.” Marsch v. Marsch 23 (In re Marsch), 36 F.3d 825, 828 (9th Cir. 1994) (citing Stolrow 24 v. Stolrow’s, Inc. (In re Stolrow’s, Inc.), 84 B.R. 167, 170 (9th 25 Cir. BAP 1988)). 26 We apply a two-part test to determine whether the bankruptcy 27 court abused its discretion. United States v. Hinkson, 585 F.3d 28 1247, 1261-62 (9th Cir. 2009) (en banc). First, we consider

-8- 1 de novo whether the bankruptcy court applied the correct legal 2 standard. Id. Then, we review the bankruptcy court’s factual 3 findings for clear error. Id. at 1262 & n.20; see Eisen v. Curry 4 (In re Eisen), 14 F.3d 469, 470 (9th Cir. 1994) (the bankruptcy 5 court’s finding of “bad faith” is reviewed for clear error). A 6 bankruptcy court abuses its discretion if it applied the wrong 7 legal standard or its findings were illogical, implausible or 8 without support in inferences that may be drawn from facts in the 9 record. TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 10 832 (9th Cir. 2011). 11 “We may affirm ‘on any ground supported by the record, 12 regardless of whether the [bankruptcy] court relied upon, 13 rejected, or even considered that ground.’” Fresno Motors, LLC 14 v. Mercedes Benz USA, LLC, 771 F.3d 1119, 1125 (9th Cir. 2014); 15 see also ASARCO, LLC v. Union Pac. R.R. Co., 765 F.3d 999, 1004 16 (9th Cir. 2014); Shanks v. Dressel, 540 F.3d 1082, 1086 (9th Cir. 17 2008). 18 V. DISCUSSION 19 The Prometheus I Panel determined that the bankruptcy court 20 could dismiss a chapter 11 case for bad faith under § 1112(b). 21 Thus, the only issue to be decided on this appeal is whether the 22 bankruptcy court abused its discretion when it entered the Second 23 Dismissal Order dismissing Prometheus’ case on the basis that the 24 petition had been filed in bad faith. 25 It is undisputed on the record before us that (1) the reason 26 Prometheus filed its chapter 11 case was to obtain a bankruptcy 27 stay as a substitute to posting a bond in the litigation in the 28 French Appellate Court; (2) Prometheus’ claim (“Litigation

-9- 1 Claim”) against GEM arose in 2002; (3) Prometheus did not 2 disclose the Litigation Claim as an asset in the chapter 7 case 3 it filed in 2004. The bankruptcy court correctly determined 4 that, as a matter of law, the Litigation Claim remained an 5 unadministered asset of Prometheus’ chapter 7 case when it was 6 closed. Prometheus has no standing to prosecute the Litigation 7 Claim, and certainly no basis for filing a chapter 11 case 8 ostensibly for the purpose of liquidating that claim and 9 administering it for the benefit of creditors. 10 Remarkably, in its brief on appeal, Prometheus ignores 11 completely the bankruptcy court’s findings of fact and 12 conclusions of law relating to whether Prometheus has any 13 interest in the Litigation Claim which could be protected in a 14 chapter 11 case. Prometheus makes no assertion that the 15 bankruptcy court’s fact findings in this context were clearly 16 erroneous. Prometheus makes no assertion that the bankruptcy 17 court erred as a matter of law when it concluded that Prometheus 18 had no cognizable interest in the Litigation Claim to protect in 19 the chapter 11 case. As a consequence, Prometheus has waived 20 these issues on appeal. See Branam v. Crowder (In re Branam), 21 226 B.R. 45, 55 (9th Cir. BAP 1998), aff'd, 205 F.3d 1350 (9th 22 Cir. 1999) (an issue not adequately addressed by appellant in its 23 opening brief is deemed abandoned). 24 In our reading of the Second Dismissal Order, the 25 nondisclosure of the existence of the Litigation Claim in the 26 prior chapter 7 case constitutes the bankruptcy court’s primary 27 basis for finding the petition was filed in bad faith. 28 While this is sufficient in and of itself to support the

-10- 1 dismissal of Prometheus’ case, we share the bankruptcy court’s 2 concerns that neither Prometheus’ bankruptcy counsel (until 3 responding to the Order on Remand) nor its counsel in the French 4 Appellate Court (ever) sought or obtained bankruptcy court 5 approval for representation of Prometheus during the pendency of 6 the chapter 11 case. 7 Further, that Ms. Luke, who has no disclosed monetary 8 relationship with Prometheus,4 provided the funds necessary for 9 Prometheus to meet its obligation to pay quarterly U.S. Trustee 10 fees, is also troubling. It is unlikely that Ms. Luke “gave” the 11 money to Prometheus. To the contrary, in her declaration filed 12 with the Status Report Ms. Luke states: 13 Since January 14, 2014, the Debtor has received a total of $775, all as set forth in the Debtor’s Monthly 14 Operating Reports. The source of those funds is money that I caused to be advanced to the Debtor. In 15 addition, I advanced $1,625 for payment of the fees due and owing to the Office of the United States Trustee 16 for the third quarter of 2014 through and including the third quarter of 2015. 17 18 To “advance” is “to supply or furnish in expectation of 19 repayment.” Merriam-Webster Collegiate Dictionary 18 (11th ed. 20 2005) (emphasis added). Because these funds were advanced to 21 Prometheus other than in the ordinary course of its business, 22 23 4 The monthly operating reports do not reflect that Prometheus pays Ms. Luke for the services she renders on its 24 behalf, and the amended disclosure statement explicitly stated 25 that “Wendee Luke shall manage the Debtor post-confirmation for no compensation.” Clearly, adequate disclosure of Prometheus’ 26 relationship with its insider, Ms. Luke, has not been made. 27 In addition, Prometheus’ two shareholders are located outside of the United States; neither has participated actively 28 in the bankruptcy case.

-11- 1 bankruptcy court approval was necessary. See § 364(b). There is 2 nothing in the record to suggest that Prometheus ever sought 3 approval from the bankruptcy court to borrow money from Ms. Luke 4 for the purpose of paying the U.S. Trustee quarterly fees. 5 Finally, it is undisputed in the record that Prometheus 6 actively continued the litigation against GEM in the French 7 Appellate Court notwithstanding that (1) no bankruptcy stay was 8 in effect and (2) it neither posted a bond nor provided a 9 certificate of insolvency. Taken together with Prometheus’ 10 failure to disclose the Litigation Claim in its chapter 7 case 11 and its demonstrated disregard for compliance with the Bankruptcy 12 Code in the chapter 11 case, it is clear that Prometheus is 13 playing fast and loose with the courts. 14 VI. CONCLUSION 15 The record establishes that Prometheus filed its chapter 11 16 petition in bad faith. 17 This appeal is frivolous. See DeWitt v. W. Pac. R.R. Co., 18 719 F.2d 1448, 1451 (9th Cir. 1983) (an appeal is frivolous if 19 the result is obvious and the arguments of error are wholly 20 without merit). Had there been an appellee participating in this 21 appeal we would not have hesitated to determine the appeal 22 frivolous and to award costs and fees as authorized by Rule 23 8020(a). 24 We AFFIRM the bankruptcy court’s Second Dismissal Order. 25 26 27 28

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