FILED DEC 4 2020 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY.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. CC-20-1077-GLS SERAPIO VENEGAS, Debtor. Bk. No. 2:19-bk-13181-RK
ALLIANCE UNITED INSURANCE COMPANY, Appellant, v. MEMORANDUM* BRAD D. KRASNOFF, Chapter 7 Trustee, Appellee.
Appeal from the United States Bankruptcy Court for the Central District of California Robert N. Kwan, Bankruptcy Judge, Presiding
Before: GAN, LAFFERTY, and SPRAKER, Bankruptcy Judges.
INTRODUCTION
Alliance United Insurance Company (“Alliance”) appeals the
bankruptcy court’s order denying its motion to dismiss the involuntary
* 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. chapter 71 case filed against Serapio Venegas (“Debtor”). Alliance argues
that the involuntary petition was filed by a single judgment creditor for the
improper purpose of circumventing state law collection limitations. The
bankruptcy court determined that Alliance lacked standing to file the
motion to dismiss and that cause did not exist to dismiss the case under
§ 707(a). Alliance has not established that it had standing to seek dismissal
and has not shown that the bankruptcy petition was filed for an improper
purpose. We AFFIRM.
FACTS
A. Prepetition Events
In 2015, Debtor caused serious injuries to Stephan Wood (“Wood”)
when his vehicle struck the bicycle Wood was riding. Debtor attempted to
flee, dragging Wood under the vehicle for more than a quarter mile. Debtor
was later apprehended and criminally convicted. At the time of the injury
Debtor was insured by Alliance.
In February 2016, Wood made a written demand to Alliance for
payment of the policy limits subject to specific terms and conditions.
Alliance purported to accept the settlement offer and tender payment, but
provided a release that was inconsistent with the terms and conditions of
Wood’s offer. The state court later determined that Alliance did not validly
1 Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.
2 accept the settlement offer.
In July 2016, Wood filed suit against Debtor in state court (the
“Personal Injury Action”). The Personal Injury Action proceeded to trial
and resulted in a jury verdict against Debtor, and in favor of Wood, in the
amount of $13,832,242, including costs. As part of its verdict, the jury
determined that Debtor acted with “malice, oppression, or fraud.”
Wood was unable to collect on the judgment. Through the assistance
of investigators, he determined that Debtor had assets of limited value
other than his potential rights against Alliance for its alleged bad faith in
failing to accept a reasonable settlement offer. However, Debtor did not
pursue such an action against Alliance and steadfastly refused to assign his
rights to Wood.
B. The Involuntary Petition
In March 2019, Wood filed an involuntary chapter 7 petition against
Debtor. Wood filed a unilateral status report stating that Debtor had few
creditors and few assets of value other than his rights against Alliance.
Debtor did not respond to the involuntary petition, and the bankruptcy
court entered an order for relief in April 2019. Brad D. Krasnoff (“Trustee”)
was appointed as chapter 7 trustee.
Debtor failed to file schedules and statements pursuant to the order
for relief and failed to appear at the initial § 341 meeting of creditors or any
of the twelve continued § 341 meetings. Trustee obtained court authority to
3 file the schedules and statements on Debtor’s behalf, and ultimately filed a
complaint to deny Debtor’s discharge under § 727(c). The bankruptcy court
entered a default judgment denying Debtor’s discharge in August 2020.
After consulting with Wood, Trustee filed schedules and statements.
The schedules listed assets consisting of a parcel of land, valued at $17,000,
and the estate’s claims against Alliance, valued at $14,164,610. In addition
to Wood, the schedules listed only one other creditor, which held a claim
for $769.
C. The State Court Action
In September 2019, Trustee filed suit against Alliance in state court
(the “Bad Faith Action”). Trustee alleged that Alliance breached the
covenant of good faith and fair dealing by failing to accept a reasonable
settlement offer within policy limits. Alliance filed a notice of removal to
the bankruptcy court and filed its answer denying the allegations. As an
affirmative defense, Alliance claimed that the involuntary bankruptcy was
filed for an improper purpose, and upon dismissal of the case, Trustee
would lack standing.
Trustee moved to remand the Bad Faith Action, arguing that the suit
was a non-core proceeding involving only state law claims. Alliance
responded by filing a combined opposition to the motion to remand and a
motion to dismiss the bankruptcy case.
4 D. The Motion To Dismiss And The Court’s Ruling
Alliance argued that cause existed to dismiss the case under § 707(a)
because Wood filed the involuntary petition solely as a judgment
enforcement mechanism in a two-party dispute. Alliance asserted that the
petition served no legitimate bankruptcy purpose because there were no
competing creditors, no need for pro rata distribution, and no need for any
bankruptcy-specific avoidance powers. It argued that Wood had adequate
collection remedies under state law and Debtor had no need for a
bankruptcy discharge given that the judgment would likely be
nondischargeable based on the jury’s finding of malice, oppression, or
fraud. Alliance cited In re Murray, 543 B.R. 484 (Bankr. S.D.N.Y. 2016), aff’d,
565 B.R. 527 (S.D.N.Y. 2017), aff’d, 900 F.3d 53 (2d Cir. 2018), for the
proposition that an involuntary bankruptcy filed as a collection mechanism
should be dismissed for cause under § 707(a).
Trustee opposed the motion to dismiss and argued that because
Alliance was not a creditor and had no interest in the outcome of the case,
it lacked standing to seek dismissal. Trustee also argued that Alliance
failed to show that cause existed to dismiss the case in light of the totality
of the circumstances and dismissal would prejudice Wood, the estate, and
the administrative claimants. Trustee distinguished Murray on the basis
that it involved a debtor’s challenge to the involuntary petition prior to the
order for relief and asserted that the factors cited in Murray did not favor
5 dismissal of Debtor’s case.
Alliance filed a reply, arguing that Wood’s ability to sue Alliance
directly was restricted by state law, and the bankruptcy was part of a
scheme to circumvent that limitation. Alliance contended that it had
standing to file the motion to dismiss by virtue of its affirmative defense
raised in the Bad Faith Action. It further argued that the issues raised in the
motion were structural and related to the integrity of the bankruptcy
system, such that the court should dismiss the case regardless of whether
Alliance had standing. Finally, Alliance argued that Trustee’s attempts to
distinguish Murray were unavailing, and because state law determined the
remedies available to Wood, neither he nor the administrative
professionals would be prejudiced by dismissal.
The bankruptcy court determined that Alliance lacked standing to
seek dismissal under § 707(a) and cause did not exist because dismissal
would prejudice Wood, the estate, and the administrative claimants. The
court entered a written order denying the motion to dismiss, and later
remanded the Bad Faith Action to state court. Alliance timely appealed the
order denying its motion to dismiss.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(A). An order denying a motion to dismiss is typically
interlocutory. Sherman v. SEC (In re Sherman), 491 F.3d 948, 967 n.24 (9th
6 Cir. 2007). We granted leave to appeal the interlocutory order and
expedited the briefing schedule. We therefore have jurisdiction under
28 U.S.C. § 158(a)(3).
ISSUES
Whether Alliance had standing to file the motion to dismiss the
bankruptcy case.
Whether the bankruptcy court erred by denying Alliance’s motion to
dismiss.
STANDARDS OF REVIEW
Standing is a question of law which we review de novo. Hughes v.
Tower Park Props., LLC (In re Tower Park Props. LLC), 803 F.3d 450 n.5 (9th
Cir. 2015) (quoting Palmdale Hills Prop., LLC v. Lehman Commercial Paper, Inc.
(In re Palmdale Hills Prop. LLC), 654 F.3d 868, 873 (9th Cir. 2011)).
With regard to a motion to dismiss, “we review de novo whether a
type of misconduct can constitute ‘cause ‘ under § 707(a).” In re Sherman,
491 F.3d at 969. We then review the bankruptcy court’s decision to grant or
deny the motion to dismiss for “cause” for abuse of discretion. Id.
Under de novo review, we look at the matter anew, giving no
deference to the bankruptcy court’s determinations. Barnes v. Belice (In re
Belice), 461 B.R. 564, 572 (9th Cir. BAP 2011). A bankruptcy court abuses its
discretion if it applies the wrong legal standard, or misapplies the correct
legal standard, or if its factual findings are clearly erroneous.
7 TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 832 (9th Cir. 2011) (citing
United States v. Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc)). We
may affirm the bankruptcy court’s order on any basis supported by the
record. Fresno Motors, LLC v. Mercedes-Benz USA, LLC, 771 F.3d 1119, 1125
(9th Cir. 2014); Arnot v. Endresen (In re Endresen), 548 B.R. 258, 268 (9th Cir.
BAP 2016).
DISCUSSION
Alliance argues that the bankruptcy court erred because: (1) Trustee
could not have filed the Bad Faith Action without the bankruptcy petition
and therefore Alliance had constitutional standing; and (2) the involuntary
petition was an improper use of the bankruptcy process which constituted
“cause” to dismiss under § 707(a).
A. Alliance Did Not Have Standing To File The Motion To Dismiss
Alliance argues that it satisfied the requirements of constitutional
standing and also argues that because it is an insurer, it had standing as a
party in interest in any case involving its insured under the holdings of
Motor Vehicle Casualty Company v. Thorpe Insulation Company (In re Thorpe
Insulation Company), 677 F.3d 869 (9th Cir. 2012) and In re Global Industrial
Technologies, Inc., 645 F.3d 201 (3d Cir. 2011) (“GIT”). In both Thorpe and
GIT, the insurers had standing to object to confirmation of chapter 11 plans
because the proposed plans directly affected their liability and contractual
rights and therefore, were not “insurance neutral.” 677 F.3d at 885-87; 645
8 F.3d at 212. Neither case stands for the proposition that insurers always
have standing in bankruptcy cases involving their insureds. Standing must
be determined on a “case by case basis.” In re Thorpe Insulation Co., 677 F.3d
at 885 (quoting In re Amatex Corp., 755 F.2d 1034, 1042 (3d Cir. 1985)).
To establish constitutional standing, Alliance must demonstrate “(1)
an injury in fact, (2) a causal connection between the injury and the conduct
complained of, and (3) a likelihood that the injury will be redressed by a
favorable decision.” In re Sisk, 962 F.3d 1133, 1141 (9th Cir. 2020) (citing
Lujan v. Defs. of Wildlife, 504 U.S. 555, 561 (1992)). “These requirements are
the ‘irreducible constitutional minimum of standing.’” Id. (citing Lujan, 504
U.S. at 560-61). “The party invoking federal jurisdiction bears the burden of
establishing these elements.” Lujan, 504 U.S. at 561.
1. Injury In Fact
Alliance contends that the bankruptcy filing caused an injury in fact
because it allowed Trustee to file the Bad Faith Action which could not
have been filed but for the bankruptcy case.
An injury in fact is “the ‘first and foremost’ of standing’s three
elements.” In re Sisk, 962 F.3d at 1142 (quoting Steel Co. v. Citizens for Better
Env’t, 523 U.S. 83, 103 (1998)). It requires “an invasion of a legally protected
interest which is (a) concrete and particularized and (b) actual or imminent,
not conjectural or hypothetical.” Bishop Paiute Tribe v. Inyo Cnty., 863 F.3d
1144, 1153 (9th Cir. 2017) (citing Lujan, 504 U.S. at 560). A “concrete” injury
9 is one which actually exists and is not “abstract,” “remote,” or
“speculative.” In re Sisk, 962 F.3d at 1141 (citations omitted).
The bankruptcy filing did not cause an injury in fact to Alliance
because Alliance had no interest in the outcome of the bankruptcy case. It
is not a creditor. See In re Sherman, 491 F.3d at 965 (holding that creditors
have standing to seek dismissal under § 707(a) because a bankruptcy filing
necessarily affects creditors’ rights to enforce debts). And, unlike the
insurers in Thorpe and GIT, Alliance’s litigation rights and potential
liabilities are unaffected by the bankruptcy case. See 677 F.3d at 887; 645
F.3d at 212.
Furthermore, the bankruptcy petition did not affect state law
limitations regarding Alliance’s potential liability for an unreasonable
failure to settle a claim. Under state law, Wood was not permitted to sue
Alliance directly for its alleged breach of duty to settle the claim within
policy limits. Murphy v. Allstate Ins. Co., 17 Cal. 3d 937, 946 (1976).
But, Trustee does not assert the Bad Faith Action on behalf of Wood.
The cause of action belonged to Debtor and became property of the estate
under § 541(a). See United States v. Whiting Pools, Inc., 462 U.S. 198, 205 n.9
(1983) (“The scope of [§ 541(a)(1)] is broad. It includes all kinds of property,
including . . . causes of action.”). It is Debtor’s cause of action which
Trustee asserts, not Wood’s. See Smith v. Arthur Andersen LLP, 421 F.3d 989,
1002 (9th Cir. 2005) (“[U]nder the Bankruptcy Code the trustee stands in
10 the shoes of [the debtor] and has standing to bring any suit that [the
debtor] could have instituted had it not petitioned for bankruptcy . . . a
bankruptcy trustee has no standing generally to sue third parties on behalf
of the estate’s creditors.”) (citations omitted)).
The filing of the bankruptcy petition and the entry of the order for
relief did not alter Alliance’s potential liability or legal rights under state
law. It merely placed Debtor’s cause of action under the control of an
independent trustee. Because the petition did not invade any legally
protected interest in a concrete and particularized way, the bankruptcy
filing does not constitute an injury in fact sufficient to confer standing on
Alliance to seek dismissal of the case under § 707(a).
2. Causal Connection
Establishing a causal connection requires Alliance to show that its
injury was fairly traceable to the challenged action, and not “th[e] result
[of] the independent action of some third party not before the court.” Lujan,
504 U.S. at 560-61 (quoting Simon v. E. Ky. Welfare Rights Org., 426 U.S. 26,
41-42 (1976)).
Because the bankruptcy petition did not alter Alliance’s potential
liability or rights under state law, any injury caused by the Bad Faith
Action is not causally connected to the bankruptcy petition. The Bad Faith
Action is not dependent on any bankruptcy-specific cause of action. The
source of Alliance’s potential liability is state law and the factual
11 circumstances which occurred at the time of Wood’s settlement offer.
Alliance argues that but for the bankruptcy filing, Trustee would not
have been able to file the Bad Faith Action. We agree, but this does not
mean that the Trustee’s suit is “fairly traceable” to the petition.
Although Wood filed the involuntary petition with the expectation
that a trustee would be appointed and pursue the cause of action against
Alliance, the Bankruptcy Code imposes a duty on a chapter 7 trustee to
only pursue causes of action which, in the trustee’s business judgment, will
be of value to the estate. See Koch Ref. v. Farmers Union Cent. Exch., Inc., 831
F.2d 1339, 1346-47 (7th Cir. 1987) (“a trustee has the authority to prosecute
or to decline to bring an action on behalf of the estate”); In re Carvalho, 578
B.R. 1, 12-13 (Bankr. D.D.C. 2017) (“a trustee is granted wide authority and
discretion regarding . . . whether litigation is worth pursuing”); In re Consol.
Indus. Corp., 330 B.R. 712, 715 (Bankr. N.D. Ind. 2005) (“A bankruptcy
trustee is not required to prosecute every cause of action belonging to the
bankruptcy estate. Instead, the trustee is given a substantial degree of
discretion in deciding how best to administer the estate committed to his
care and his actions are measured by a business judgment standard.”).
In other words, Trustee had to make an independent evaluation of
the claim against Alliance and exercise his independent business judgment
before filing the Bad Faith Action. Any injury to Alliance is fairly traceable
to Trustee’s business judgment and his obligations under the Code, but not
12 to the petition itself.
The involuntary petition did not cause Trustee to file the Bad Faith
Action, and as a result, any injury caused by the Bad Faith Action is not
fairly traceable to the challenged action.
3. Redressability
The final element of constitutional standing requires Alliance to
demonstrate that it is “likely,” as opposed to merely “speculative,” that the
injury would be redressed by dismissal of the case. Lujan, 504 U.S. at 561.
“[R]edressability analyzes the connection between the alleged injury and
requested judicial relief. [It] does not require certainty, but only a
substantial likelihood that the injury will be redressed by a favorable
judicial decision.” Hooshim v. Wolkowitz (In re Kim), BAP No. CC-15-1273-
TaKuF, 2016 WL 2654350, at *3 (9th Cir. BAP May 2, 2016), aff’d, 700
F.Appx. 710 (9th Cir. 2017) (quoting Nw. Requirements Utils. v. FERC, 798
F.3d 796, 806 (9th Cir. 2015)).
Alliance argues that dismissal of the bankruptcy case would deprive
Trustee of standing and would therefore redress the injury. But, as
discussed above, dismissal of the case will not change Alliance’s potential
liability because the source of that liability is not the bankruptcy case or the
Bankruptcy Code, it is the factual circumstances surrounding Alliance’s
alleged failure to settle the personal injury claims within policy limits.
If the case were dismissed, the cause of action would not be
13 eliminated. It would revest in Debtor pursuant to § 349, and Debtor would
again be free to pursue the action or assign it to Wood. Therefore, Alliance
cannot show that there is a substantial likelihood that dismissal of the case
would provide redress.2
Because we find that Alliance lacks constitutional standing, we do
not consider whether prudential or statutory standing requirements are
applicable in this case. The bankruptcy court did not err by determining
that Alliance lacked standing to seek dismissal of the case.
B. Even If Alliance Had Standing, The Bankruptcy Court Did Not Err By Denying The Motion To Dismiss
Alliance argues that Wood filed the involuntary petition, which arose
from a two-party dispute, for the improper purpose of contravening state
law limitations in his effort to enforce the judgment. Alliance also argues
that the bankruptcy court erred by focusing its analysis on prejudice to
creditors and the estate.
“Under § 707(a), a court may dismiss [a chapter 7 case] only after
notice and hearing and only for cause, including three enumerated causes.”
In re Sherman, 491 F.3d at 970 (internal quotation marks and citations
2 We are aware that Debtor refused to pursue Alliance or assign his rights prepetition, but we cannot speculate that he would continue to do so if the case were dismissed, especially in light of the bankruptcy court’s denial of discharge. We can conceive of no reasonable basis, economic or otherwise, why Debtor would not assign the cause of action to Wood upon dismissal.
14 omitted). When the asserted “cause” is not one of the enumerated
examples in § 707(a), we first determine whether the asserted “cause” is
contemplated by a specific provision of the Bankruptcy Code. Id. If so, then
there is no “cause” under § 707(a). Id.
But, “[i]f there is no specific Bankruptcy Code provision that
addresses the asserted ‘cause,’ the question becomes whether the totality of
circumstances amount to § 707(a) ‘cause.’” Hickman v. Hana (In re Hickman),
384 B.R. 832, 840 (9th Cir. BAP 2008) (citing In re Sherman, 491 F.3d at 970;
Leach v. United States (In re Leach), 130 B.R. 855, 856 (9th Cir. BAP 1991)); see
also Marciano v. Fahs (In re Marciano), 459 B.R. 27, 50 (9th Cir. BAP 2011),
aff’d 708 F.3d 1123 (9th Cir. 2013) (“The filing of an involuntary bankruptcy
petition is always a ‘litigation tactic.’ Whether the filing is inappropriate is
a fact-dependent determination.”).
We agree that under appropriate factual circumstances, filing an
involuntary petition for reasons inconsistent with the purposes of the
Bankruptcy Code may constitute “cause” for dismissal under § 707(a).
However, the totality of circumstances here supports the bankruptcy
court’s ruling.
The bankruptcy filing did not circumvent or contravene state law as
Alliance argues. State law prohibited Wood from directly suing Alliance
for a breach of the duty to settle, but the bankruptcy filing did not alter that
limitation. Trustee asserts Debtor’s cause of action, not Wood’s.
15 Additionally, the purpose of the state law limitation is to protect the
insured, not the insurer. Murphy, 17 Cal.3d at 946 (“the courts imposed the
duty to settle to protect the insured”). An insurer’s failure to settle within
policy limits can subject an insured to excess liability, but by limiting the
cause of action against the insurer for the breach, state law allows the
insured to control the cause of action and bargain with the injured party for
a release from liability in excess of coverage. Id. The insurer has no ability
to prevent the insured from assigning his claims. Id. at 942 (“The insured
may assign his cause of action for breach of the duty to settle without
consent of the insurance carrier, even when the policy provisions provide
the contrary.”).
Unlike Murray, which involved the threat of potential sale of a
debtor’s and a non-debtor’s interests under § 363(h), the bankruptcy filing
here did not impose any means of recovery unavailable under state law.
543 B.R. at 488. And, unlike the creditor in Murray, Wood did not file the
involuntary petition to obtain a personal tactical advantage against Debtor
in collecting his judgment. Id. at 493.
Wood filed the petition to allow Trustee to evaluate and pursue a
potentially valuable asset which Debtor was threatening to waste. This is a
legitimate use of the bankruptcy process. See Marciano v. Chapnick (In re
Marciano), 708 F.3d 1123, 1128 (9th Cir. 2013) (noting that “a central
purpose of the involuntary bankruptcy laws [is] to ‘protect the threatened
16 depletion of assets’”) (quoting In re Manhattan Indus., Inc., 224 B.R. 195, 200
(Bankr. M.D. Fla. 1997)). The involuntary petition was not a judgment
enforcement mechanism as Alliance suggests, but rather an asset
preservation mechanism.
Finally, Alliance argues that the bankruptcy court erred by focusing
its “cause” analysis on prejudice to creditors and the estate. Although the
cases cited by Trustee in support of this analysis pertain to voluntary
dismissals by debtors under § 707(a), it was not improper for the
bankruptcy court to consider prejudice as part of the totality of
circumstances. More importantly, the record demonstrates that the
involuntary petition was filed for a legitimate bankruptcy purpose. The
bankruptcy court did not abuse its discretion by determining that the
petition was not filed for an improper purpose and that cause did not exist
to dismiss the case.
CONCLUSION
For the reasons set forth above, we AFFIRM the bankruptcy court’s
order denying Alliance’s motion to dismiss.