In re: Renewable Energy, Inc.

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: December 9, 2016
• Docket: WW-15-1089-KuJuTa
• Status: Unpublished

Opinion

FILED DEC 09 2016 1 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY.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. WW-15-1089-KuJuTa ) 6 RENEWABLE ENERGY, INC., ) Bk. No. 15-10421 ) 7 Debtor. ) ______________________________) 8 ) RENEWABLE ENERGY, INC., ) 9 ) Appellant, ) 10 ) v. ) MEMORANDUM* 11 ) UNITED STATES TRUSTEE, ) 12 ) Appellee. ) 13 ______________________________) 14 Argued and Submitted on November 17, 2016 at Pasadena, California 15 Filed – December 9, 2016 16 Appeal from the United States Bankruptcy Court 17 for the Western District of Washington 18 Honorable Marc L. Barreca, Bankruptcy Judge, Presiding 19 Appearances: Edward P Weigelt argued for appellant Renewable Energy, Inc.; Thomas Buford argued for appellee 20 United States Trustee. 21 Before: KURTZ, JURY and TAYLOR, Bankruptcy Judges. 22 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. 28 See 9th Cir. BAP Rule 8024-1. 1 INTRODUCTION 2 On the United States Trustee’s motion, the bankruptcy court 3 converted debtor Renewable Energy Inc.’s bankruptcy case from 4 chapter 11 to chapter 7.1 5 In the bankruptcy court, Renewable Energy conceded that 6 cause for conversion or dismissal existed under § 1112(b)(4)(C) 7 because it could not afford to purchase liquor liability 8 insurance covering its continued operation of a bar. But 9 Renewable Energy claimed that dismissal was a better option than 10 conversion because it might be able to retain possession of the 11 leased premises in which its businesses had operated and it might 12 be able to sell those businesses as going concerns. The 13 bankruptcy court disagreed, finding that the interests of 14 Renewable Energy’s creditors and the bankruptcy estate were 15 better served by conversion rather than dismissal. 16 Because the bankruptcy court’s finding regarding the 17 interests of creditors and the estate was not clearly erroneous, 18 we AFFIRM. 19 FACTS 20 Most of the relevant facts are not in dispute. Renewable 21 Energy occupied two units in a commercial building located in 22 Seattle, Washington. In one of these two units, Renewable Energy 23 operated a bar. In the other, Renewable Energy was supposed to 24 25 1 Unless specified otherwise, all chapter and section 26 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and all "Rule" references are to the Federal Rules of Bankruptcy 27 Procedure, Rules 1001-9037. All “Local Rule” references are to 28 the Local Bankruptcy Rules for the Western District of Washington.

2 1 operate a restaurant, but the restaurant was non-operational 2 during the time Renewable Energy’s chapter 11 case was pending. 3 Renewable Energy filed its chapter 11 petition shortly before 4 being evicted from the leased premises. The landlord’s successor 5 in interest, Wells Fargo Bank, as trustee for a commercial 6 mortgage pool securitization trust,2 asserted that Renewable 7 Energy’s leases had expired by their own terms and that Renewable 8 Energy also was in default under the leases for nonpayment of 9 rent and for not keeping the leased premises properly insured.3 10 For its part, Renewable Energy asserted that it did not owe the 11 alleged past-due rent to Wells Fargo and that Wells Fargo had 12 improperly interfered with its use and enjoyment of the leased 13 premises. According to Renewable Energy, it held a $500,000 14 claim against Wells Fargo for interfering with Renewable Energy’s 15 proposed sale of its restaurant business to a third party and for 16 its improper handling of the eviction proceedings. As reflected 17 in its schedules, Renewable Energy’s only other significant asset 18 was roughly $400,000 of unencumbered restaurant equipment. 19 Within one month of Renewable Energy’s chapter 11 petition 20 filing, the United States Trustee filed a motion to dismiss or 21 2 22 Wells Fargo’s full official designation in the underlying case was: “Wells Fargo Bank, N.A., as Trustee for the Registered 23 Holders of Credit Suisse First Boston Mortgage Securities Corp., Commercial Mortgage Pass-Through Certificates, Series 2007-C5.” 24 3 We can and do take judicial notice of the parties’ filings 25 in Renewable Energy’s bankruptcy case. See O'Rourke v. Seaboard 26 Sur. Co. (In re E.R. Fegert, Inc.), 887 F.2d 955, 957–58 (9th Cir. 1989). The record indicates that the bankruptcy court was 27 aware of and considered these filings when it entered the order on appeal. Additionally, the parties have referenced these 28 filings in their appeal briefs without objection.

3 1 convert the case under § 1112(b). The sole ground offered in 2 support of the motion was Renewable Energy’s failure to provide 3 to the United States Trustee proof that it held a liquor 4 liability insurance policy. The United States Trustee argued 5 that Renewable Energy’s lack of such insurance exposed its 6 bankruptcy estate to an unacceptable risk of postpetition liquor- 7 related liability and hence constituted cause for dismissal or 8 conversion under § 1112(b). 9 The United States Trustee noticed its motion to dismiss or 10 convert for hearing on March 6, 2015. According to the United 11 States Trustee, the roughly 16 days’ notice it provided was more 12 than sufficient because Local Rule 2015-1(c) only required seven 13 days notice when a lack of insurance was the basis for the 14 requested relief. 15 Renewable Energy filed a one-page response to the United 16 States Trustee’s motion. It did not oppose the timing of the 17 motion or the amount of notice given. Nor did it request a 18 continuance of the March 6, 2015 hearing. In fact, Renewable 19 Energy admitted in its response that liquor liability insurance 20 was prohibitively expensive and conceded that cause existed to 21 dismiss the case. 22 At the hearing on the motion to dismiss or convert, 23 Renewable Energy reiterated the admissions and concessions it had 24 made in its response. But it opposed conversion of the case from 25 chapter 11 to chapter 7. It pointed out to the court that the 26 amount of debt involved (as reflected in its schedules) was 27 relatively small and that its $400,000 in unencumbered restaurant 28 equipment was far more valuable if sold as part of a going

4 1 concern rather than piecemeal on a liquidation basis. Renewable 2 Energy expressed its hope that it could reach a deal with Wells 3 Fargo that would allow it to retain possession of the premises, 4 reopen the restaurant, sell it as a going concern, and pay 5 creditors in full. Therefore, Renewable Energy posited, its 6 bankruptcy case should be dismissed rather than converted. 7 The United States Trustee favored conversion over dismissal. 8 The United States Trustee urged that the creditors of the estate 9 would be fully, immediately and better served if the restaurant 10 equipment was liquidated in chapter 7. In making its argument 11 for conversion, the United States Trustee accepted as true the 12 accuracy of Renewable Energy’s representations in its schedules 13 regarding the value of its equipment and the amount of claims 14 held by its creditors. 15 Wells Fargo also appeared at the hearing and sided with the 16 United States Trustee. Wells Fargo further indicated that it had 17 no interest in attempting to continue to work with Renewable 18 Energy as tenant in the premises. 19 After acknowledging and accepting Renewable Energy’s 20 concession that its lack of liquor liability insurance 21 constituted cause for either conversion or dismissal, the 22 bankruptcy court proceeded to consider which of those two options 23 was in the best interests of creditors and the estate. The 24 bankruptcy court determined that the creditors and the estate 25 would be best served by conversion rather than dismissal. In 26 particular, the bankruptcy court focused on the undisputed fact 27 that Renewable Energy had a free and clear asset (the restaurant 28 equipment) which could be administered to pay off the debts owed

5 1 to Renewable Energy’s creditors. The bankruptcy court thus 2 ordered the bankruptcy case converted from chapter 11 to 3 chapter 7. The bankruptcy court entered the conversion order on 4 March 6, 2015, and Renewable Energy timely appealed. 5 JURISDICTION 6 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 7 §§ 1334 and 157(b)(2)(A), and we have jurisdiction under 8 28 U.S.C. § 158.4 9 ISSUE 10 Did the bankruptcy court abuse its discretion when it 11 converted Renewable Energy’s bankruptcy case from chapter 11 to 12 chapter 7? 13 STANDARDS OF REVIEW 14 We review the bankruptcy court's order converting Renewable 15 Energy's chapter 11 case to chapter 7 for an abuse of discretion. 16 Pioneer Liquidating Corp. v. U.S. Trustee (In re Consol. Pioneer 17 Mortg. Entities), 264 F.3d 803, 806 (9th Cir. 2001). 18 A bankruptcy court abuses its discretion if it applies an 19 incorrect legal standard or misapplies the correct legal 20 standard, or if its factual findings are illogical, implausible 21 or without support in the record. United States v. Hinkson, 22 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc). 23 24 4 This appeal is not moot. The parties represented at oral 25 argument that the chapter 7 trustee has been holding estate funds 26 from the sale of the restaurant equipment pending resolution of this appeal. If Renewable Energy were to prevail on appeal and 27 if its bankruptcy case were dismissed on remand, the funds currently held by the trustee presumably would be turned over to 28 Renewable Energy upon dismissal.

6 1 DISCUSSION 2 Section 1112 governs dismissal and conversion of chapter 11 3 cases. As set forth in § 1112(b), if the bankruptcy court finds 4 “cause” to dismiss or convert, the court is required to decide 5 which of several actions will best serve the interests of the 6 debtor’s creditors and the estate. It must: 7 (1) decide whether dismissal, conversion, or the appointment of a trustee or examiner is in the best 8 interests of creditors and the estate; and (2) identify whether there are unusual circumstances that establish 9 that dismissal or conversion is not in the best interests of creditors and the estate. 10 11 Sullivan v. Harnisch (In re Sullivan), 522 B.R. 604, 612 (9th 12 Cir. BAP 2014). The bankruptcy court has an independent duty to 13 consider the impact of dismissal and conversion and to decide 14 which alternative is in the best interest of all creditors. Id. 15 at 612-13. 16 Here, the bankruptcy court considered the impact of these 17 two alternatives and decided that Renewable Energy’s creditors 18 would be better served by conversion under the undisputed facts 19 of the case. Those facts established that Renewable Energy’s 20 creditors likely could be paid in full if the estate’s 21 unencumbered assets were liquidated by a chapter 7 trustee and 22 the proceeds distributed to creditors. 23 The bankruptcy court did not explicitly consider the 24 appointment of a trustee or an examiner, or the potential 25 existence of unusual circumstances that might have militated 26 against dismissal or conversion under § 1112(b)(2). Even so, 27 Renewable Energy did not seek in the bankruptcy court the 28 appointment of a trustee or examiner as an alternative to

7 1 conversion, nor has it discussed these alternatives in its appeal 2 brief. As a result, Renewable Energy has forfeited its right to 3 raise these alternatives on appeal. Kenny G Enters., LLC v. 4 Casey (In re Kenny G Enters., LLC), 2014 WL 4100429, *12 (Mem. 5 Dec.) (9th Cir. BAP Aug. 20, 2014); see also Christian Legal 6 Soc'y v. Wu, 626 F.3d 483, 487–88 (9th Cir. 2010) (stating that 7 appellate court would not consider matters not “specifically and 8 distinctly argued in appellant's opening brief.”). 9 As for the applicability of § 1112(b)(2)’s unusual 10 circumstances rule, that rule does not apply under the undisputed 11 facts of this case. Renewable Energy admitted to the bankruptcy 12 court that it had not purchased liquor liability insurance and 13 that it could not afford to do so. As a result, there was no way 14 Renewable Energy could have satisfied the unusual circumstances 15 rule’s cure requirement set forth in § 1112(b)(2)(B)(ii), and, 16 hence, the unusual circumstances rule indisputably was 17 inapplicable. 18 Renewable Energy argues on appeal that its admitted failure 19 to procure liquor liability insurance might not have constituted 20 “cause” under § 1112(b)(4)(C). As Renewable Energy puts it, 21 because Washington law does not require all bars to maintain 22 liquor liability insurance, the bankruptcy court should not have 23 viewed its failure to obtain such insurance as cause to dismiss 24 or convert. As a threshold matter, we are loathe to consider 25 this argument because the bankruptcy court relied upon Renewable 26 Energy’s concession that its failure to obtain liquor liability 27 insurance constituted “cause” under § 1112(b)(4)(C). See Mano–Y 28 & M, Ltd. v. Field (In re Mortg. Store, Inc.), 773 F.3d 990,

8 1 998–99 (9th Cir. 2014) (holding that issue not raised in the 2 bankruptcy court was forfeited); Barnes v. Belice (In re Belice), 3 461 B.R. 564, 569 n.4 (9th Cir. BAP 2011) (same). 4 Even if we were to consider this argument, it has no merit. 5 Whatever the position of the state of Washington might be 6 regarding bars such as Renewable Energy’s carrying liquor 7 liability insurance, Renewable Energy’s failure to carry such 8 insurance posed a genuine risk to both Renewable Energy’s 9 creditors and the public. The United States Trustee and the 10 bankruptcy court recognized this risk, and the bankruptcy court 11 correctly determined that liquor liability insurance was an 12 “appropriate” type of insurance for purposes of § 1112(b)(4)(C). 13 See In re Daniels, 362 B.R. 428, 435–36 (Bankr. S.D. Iowa 2007) 14 (holding that chapter 11 debtor attorney’s failure to obtain 15 legal malpractice liability insurance posed a risk both to the 16 estate and to the public); see also 7 Collier on Bankruptcy 17 ¶ 1112.04 [6][c] (16th ed. 2015) (stating that 1112(b)(4)(C) 18 requires the chapter 11 debtor to maintain the types of insurance 19 necessary to mitigate the risks to the estate and the public 20 arising from the debtor’s continued operations). 21 Renewable Energy’s bond argument similarly lacks merit. 22 According to Renewable Energy, the bond that Wells Fargo was 23 required to post in order to move forward with the eviction 24 proceedings sufficiently protected its creditors. Once again, 25 Renewable Energy could have raised this argument in the 26 bankruptcy court but failed to do so. Regardless, it is plain 27 that the bond did not sufficiently protect Renewable Energy’s 28 creditors. The bond only addressed one type of risk: the risk

9 1 that Renewable Energy ultimately would prevail in the eviction 2 proceedings but would incur compensable damages in the process. 3 Renewable Energy has not pointed to anything in the record 4 indicating that the bond would have protected its creditors or 5 the public from any other type of risk associated with Renewable 6 Energy’s continued operations. 7 Renewable Energy additionally argued that, in order for the 8 bankruptcy court to find cause under § 1112(b)(4), the United 9 States Trustee was required to demonstrate: (1) an ongoing and 10 continuing loss to or diminution of the estate; and (2) the 11 absence of a reasonable likelihood of reorganization. Renewable 12 Energy misconstrues the statute. Any of the factors individually 13 set forth in § 1112(b)(4) can, by themselves, constitute cause 14 for conversion or dismissal of a chapter 11 case. In re Products 15 Int'l Co., 395 B.R. 101, 110 (Bankr. D. Ariz. 2008) (holding that 16 the factors constituting cause set forth in the statute are meant 17 to be read in the disjunctive). Accord, 7 Collier on Bankruptcy, 18 supra, at ¶ 1112.04[6]. Thus, having established the existence 19 of one of the grounds for dismissal or conversion under 20 § 1112(b)(4) – a failure to maintain appropriate insurance – the 21 United States Trustee was not required to establish any 22 additional cause for the relief it requested in its motion to 23 dismiss or convert. 24 Renewable Energy further contends that the bankruptcy court, 25 in choosing conversion over dismissal, ignored the debtor’s 26 interests and all of the economic benefits its businesses as 27 going concerns could provide to suppliers, employees and the 28 community. There are two significant problems with this

10 1 contention. First, the statute necessarily requires the 2 bankruptcy court to focus on the interests of the estate’s 3 creditors and not on the debtor’s interests. See generally 4 Shulkin Hutton, Inc., P.S. v. Treiger (In re Owens), 552 F.3d 5 958, 961 (9th Cir. 2009) (“the court must consider the interests 6 of all of the creditors”). And second, Renewable Energy assumes 7 without any factual basis that it would have been able to 8 realize, going forward, the claimed benefits to itself, to its 9 suppliers, and to its employees. The record before the 10 bankruptcy court indicated otherwise. Renewable Energy’s 11 contention simply ignores the dire situation it was confronted 12 with at the time. It was forced to file bankruptcy shortly 13 before being evicted by Wells Fargo, and Wells Fargo appeared at 14 the hearing on the United States Trustee’s motion and made it 15 clear that it had no interest in consensually resolving its 16 battle with Renewable Energy for possession of the leased 17 premises. Under these circumstances, the bankruptcy court’s 18 finding that the interests of Renewable Energy’s creditors and 19 its bankruptcy estate were best served by conversion rather than 20 dismissal was not clearly erroneous. 21 Renewable Energy only makes one other comprehensible 22 argument on appeal. Renewable Energy maintains that it did not 23 have sufficient time or opportunity to present evidence 24 demonstrating that dismissal was a better option than conversion. 25 The bankruptcy court was required to ensure that the United 26 States Trustee gave Renewable Energy sufficient notice and 27 opportunity to respond to the motion as was appropriate under the 28 circumstances. §§ 102(1), 1112(b)(1); In re Kenny G Enters.,

11 1 LLC, 2014 WL 4100429, *9. Renewable Energy was given roughly 2 sixteen days advance notice of the hearing on the motion to 3 dismiss or convert, and it never asked the bankruptcy court for a 4 continuance. Thus, it is difficult to comprehend how Renewable 5 Energy credibly can claim that it was denied a sufficient 6 opportunity to present its case. 7 Moreover, the undisputed facts in the record amply supported 8 the bankruptcy court’s choice of conversion over dismissal, and 9 Renewable Energy has not on appeal pointed us to any other facts 10 that might have materially altered that choice. Nor are we 11 independently aware of any such facts. In the absence of any 12 indication of prejudice, any alleged lack of notice or due 13 process fails to justify reversal. Rosson v. Fitzgerald 14 (In re Rosson), 545 F.3d 764, 777 (9th Cir. 2008); see also 15 In re Bartle, 560 F.3d 724, 729–30 (7th Cir. 2009) 16 (“[appellant’s] substantial rights must have been affected by the 17 [notice] error, and that is true only if [the appellant] had a 18 response to the [appellee's] motion that might have altered the 19 court's decision.”). 20 To the extent Renewable Energy could have argued that the 21 governing procedural rules required a longer notice period than 22 was given, we disagree. While Rule 2002(a)(4) generally requires 23 twenty-one days advance notice of a hearing on a motion to 24 dismiss or convert, Rule 9006(c) permitted the bankruptcy court 25 to reduce that amount of time. In re Bartle, 560 F.3d at 728-29. 26 This is what the bankruptcy court did by way of its Local Rule 27 2015-1(c), which provides: 28 Insurance. If the debtor in possession fails timely to

12 1 provide the United States trustee with proof of insurance or insurance renewal, the United States 2 trustee may move to convert or dismiss the case on 7 days’ notice to the debtor, parties who have 3 requested notice, and any committee, unless the court allows a shorter period on a showing of exigent 4 circumstances. 5 In any event, if Renewable Energy took issue with the United 6 States Trustee’s compliance with Rule 2002(a)(4) or its reliance 7 on Local Rule 2015-1(c), it was incumbent upon Renewable Energy 8 to raise these issues both in the bankruptcy court and on appeal. 9 It did not do so, and thus it has forfeited these issues. 10 In re Mortg. Store, Inc., 773 F.3d at 998–99; Christian Legal 11 Soc'y, 626 F.3d at 487–88. 12 CONCLUSION 13 For the reasons set forth above, we AFFIRM the bankruptcy 14 court’s conversion of Renewable Energy’s bankruptcy case from 15 chapter 11 to chapter 7. 16 17 18 19 20 21 22 23 24 25 26 27 28