FILED JUN 06 2012 1 SUSAN M SPRAUL, CLERK U.S. BKCY. APP. PANEL 2 OF THE NINTH CIRCUIT UNITED STATES BANKRUPTCY APPELLATE PANEL 3 OF THE NINTH CIRCUIT 4 5 In re: ) BAP No. CC-11-1542-HPaD ) 6 TATIANA KHAN, ) Bk. No. 11-36527 ) 7 Debtor. ) ______________________________) 8 ) TATIANA KHAN, ) 9 ) Appellant, ) M E M O R A N D U M1 10 ) v. ) 11 ) JASON M. RUND, Chapter 7 ) 12 Trustee; UNITED STATES ) TRUSTEE, ) 13 ) Appellees. ) 14 ______________________________) 15 Argued and Submitted on May 17, 2012 at Pasadena, California 16 Filed - June 6, 2012 17 Appeal from the United States Bankruptcy Court 18 for the Central District of California 19 Honorable Sandra P. Klein, Bankruptcy Judge, Presiding 20 Appearances: Joseph Scott Klapach of Klapach & Klapach argued 21 for Appellant Tatiana Khan; Brad D. Krasnoff of Lewis Brisbois Bisgaard & Smith LLP argued for 22 Appellee Jason M. Rund, Chapter 7 Trustee. 23 24 Before: HOLLOWELL, PAPPAS, and DUNN, Bankruptcy Judges. 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 8013-1. 1 The debtor appeals the order of the bankruptcy court 2 converting her chapter 11 bankruptcy case to chapter 7. We 3 AFFIRM. 4 I. FACTS 5 Tatiana Khan (the Debtor) is an interior designer. Her 6 business, Chateau Allegre, specializes in offering clients rare 7 and valuable antiques and artwork. The Debtor houses her 8 collection of antiques and artwork (the Inventory) at her 9 commercial business property in West Hollywood, California (the 10 Property). The Property also serves as the Debtor’s residence. 11 In 2010, the Debtor was indicted for fraud after selling a 12 drawing to Victor Sands (Sands) for $2,000,000. She represented 13 that the drawing was an original Picasso; instead, it had been 14 forged by an art restorer at her direction. As part of a plea 15 agreement, the Debtor stipulated that she “persuaded clients 16 . . . to purchase art, antiques, and decorative objects by making 17 false representations and material omissions of fact about their 18 origins and their values.” The Debtor agreed to pay restitution 19 to Sands, including giving him the rights to any property 20 acquired as a result of her illegal activities, namely, a 21 painting by Willem de Kooning that she bought with the proceeds 22 of the fake Picasso. The Debtor’s obligation to Sands was 23 secured by a deed of trust on the Property. 24 The Debtor also had been involved in a dispute with Calvin 25 and Joyce Brack (the Bracks). The Bracks alleged that the Debtor 26 sold them over $1,500,000 in improperly attributed antiques. To 27 settle the matter, the Debtor agreed to repurchase the antiques 28 for the original purchase price. However, the Debtor did not
2 1 have the funds available to purchase them without a committed 2 buyer. Consequently, the Bracks hold a claim against the Debtor 3 for $1,569,225; the Bracks continue to possess the antiques until 4 the debt is paid. 5 On April 28, 2011, Sands scheduled a foreclosure on the 6 Property. The same day, the Debtor filed a chapter 11 bankruptcy 7 petition, but the case was dismissed when the Debtor failed to 8 file required schedules and documents. Sands rescheduled the 9 foreclosure to June 30, 2011. The Debtor filed this chapter 11 10 case on June 20, 2011. 11 According to the Debtor’s bankruptcy schedules, the 12 Inventory was valued at $4,219,045. The Property was listed with 13 a value of $5,000,000 with Sands’ secured claim against it in the 14 amount of $2,400,057. The Debtor listed the Bracks and the 15 Internal Revenue Service (IRS), which held a priority tax lien in 16 the amount of $742,810,2 as her primary creditors. The bulk of 17 the Debtor’s other debts were unsecured claims related to unpaid 18 medical bills.3 19 On July 1, 2011, Sands filed a motion for relief from stay 20 in order to foreclose on the Property. Sands alleged that the 21 Property had been appraised for only $1,820,000, and that there 22 23 2 The IRS filed an amended proof of claim on July 29, 2011, 24 in the secured amount of $863,864.18 for the 2006 and 2007 tax period. However, by November 2011, the IRS had corrected errors 25 in the Debtor’s 2007 tax return and adjusted its claim to 26 $450,025.11. 3 27 The Debtor suffered a heart attack in 2005, and has since undergone heart surgery. She is 71 years old and in relatively 28 poor health.
3 1 were 16 liens (mostly tax liens) against the Property totaling 2 over $1,000,000.4 Sands’ unopposed motion was granted, and on 3 July 28, 2011, Sands foreclosed on the Property. 4 On July 27, 2011, a representative from the Office of the 5 United States Trustee (UST) conducted a site visit of the 6 Property. He reviewed the Debtor’s books and records and 7 discussed the Debtor’s lack of compliance with UST requirements 8 for debtors-in-possession, including providing copies of 9 insurance declarations for all policies covering the Property and 10 the Inventory. He further noted that the Debtor appeared to be 11 in poor health and raised the issue of whether a trustee should 12 be appointed in the case. Later that day, the Debtor’s attorney 13 agreed to the appointment of a trustee. The bankruptcy court 14 approved the parties’ stipulation; Jason Rund was appointed as 15 the chapter 11 bankruptcy trustee (Trustee) on August 4, 2011. 16 The following day, the Trustee inspected the Property. He 17 brought with him an antiques auctioneer to look at the Inventory 18 and offer a preliminary assessment of its value and condition. 19 The auctioneer estimated that the value of the Inventory was 20 between $700,000 and $1,000,000, significantly less than the 21 value attributed to it by the Debtor. On August 9, 2011, the 22 Trustee inspected the Property again, bringing a second antiques 23 auctioneer to assess the Inventory. The second auctioneer made 24 an initial valuation of the Inventory in excess of $1,000,000, 25 however, both auctioneers emphasized that a full assessment could 26 4 27 Although never submitted to the bankruptcy court, the record on appeal reveals that the Debtor had the Property 28 appraised in July 2011, for $2,650,000.
4 1 only be made once the Inventory was removed from the Property, 2 itemized and inspected. 3 On August 8, 2011, the Trustee filed a motion to convert the 4 Debtor’s case from chapter 11 to chapter 7 (Conversion Motion). 5 The Trustee also filed, the same day, an ex-parte application for 6 an order shortening time for a hearing on the Conversion Motion. 7 The Trustee contended that the Property had been foreclosed 8 on by Sands and that the business was not operating – nor could 9 it operate since Sands was proceeding to evict the Debtor from 10 the Property. He asserted that the only foreseeable outcome in 11 the case was an orderly liquidation of the Inventory. The 12 Trustee argued that liquidation would be more efficient and 13 beneficial to the creditors of the estate under chapter 7 because 14 it would (1) save the cost of the plan confirmation process, and 15 (2) allow for the subordination of the IRS’s tax lien in favor of 16 the estate’s creditors pursuant to § 724(b). 17 The Trustee also sought conversion because he was concerned 18 the Inventory could be damaged or disappear if not liquidated 19 promptly. He noted that once removed to an auction house, the 20 Inventory would be secure and insured, which was not otherwise 21 the case. The bankruptcy court granted the ex-parte application 22 on August 9, 2011, and a hearing was set for August 24, 2011 23 (Hearing Date). 24 On August 11, 2011, the Trustee filed a motion for turnover 25 of the Inventory and to remove the Debtor from the Property 26 (Turnover Motion). Also the same day, the Trustee filed an ex- 27 parte application to hear the motion on shortened time. The 28 Trustee made similar arguments to those made in the Conversion
5 1 Motion. He contended that due to the foreclosure, there was an 2 enhanced risk of damage or disappearance of the Inventory, for 3 which the Debtor had not provided proof of insurance. The 4 Trustee sought access and turnover of the Inventory to move it to 5 a location where it could be held, evaluated, and auctioned. The 6 Trustee also requested the bankruptcy court to order the Debtor 7 to vacate the Property, using the U.S. Marshals Service to assist 8 with eviction if necessary. 9 The bankruptcy court granted the Trustee’s ex-parte 10 application to expedite the hearing on the Turnover Motion, 11 setting it for the Hearing Date. 12 On August 23, 2011, the Debtor’s current attorney was 13 substituted for her previous attorney. Also on that date, the 14 bankruptcy court posted a tentative ruling on the Conversion 15 Motion and the Turnover Motion, which was sent to the parties the 16 following day. In the tentative ruling, the bankruptcy court 17 determined that the IRS had not been properly served with the 18 motions and continued the Hearing Date to September 7, 2011, 19 providing that any objections to the motions be submitted by 20 August 31, 2011. 21 Crossing paths with the bankruptcy court’s decision to 22 continue the Hearing Date was the Debtor’s August 24, 2011, ex- 23 parte application and motion to continue the Hearing Date (Motion 24 to Continue). The Debtor asserted that her previous attorney did 25 not notify her of the Conversion Motion or even counsel her on 26 the ramifications of filing bankruptcy and the requirements of 27 chapter 11. Therefore, she requested a 30-day continuance of the 28 Hearing Date in order to fully respond to the Trustee’s
6 1 contentions. The Debtor contended that the Trustee’s assessment 2 of the Inventory’s value was grossly inaccurate and requested 3 time to demonstrate the true value of the Inventory. 4 The bankruptcy court entered an order denying the Motion to 5 Continue on August 29, 2011. On August 31, 2011, the Debtor 6 filed an opposition to the Conversion Motion. She did not file 7 an opposition to the Turnover Motion. 8 The Debtor argued against conversion on the basis that her 9 creditors would receive a greater payout if she were able to 10 liquidate the Inventory through the structure of her design 11 business rather than through an auction. The Debtor also argued 12 there was no cause to convert the case because her business was 13 operating and was not dependent on the Property, and because she 14 had the assets and future project commitments to successfully 15 reorganize. She supplied an “Inventory List” cataloging the 16 various items in her collection totaling over $6,000,000 to 17 demonstrate that the Trustee severely underestimated the value of 18 the Inventory. 19 Alternatively, the Debtor requested dismissal of her case on 20 the basis that her debts were less than what had been scheduled, 21 negating the need for bankruptcy relief. She submitted a 22 declaration from her accountant stating that after corrections to 23 the Debtor’s 2007 tax returns and negotiations with the IRS, her 24 tax obligation could be significantly reduced. Furthermore, the 25 Debtor alleged that the debt to Sands had already been 26 extinguished.5 27 28 5 The Debtor alleged the market value of the de Kooning (continued...)
7 1 Just prior to the September 7, 2011 hearing, the bankruptcy 2 court issued a ten-page written tentative ruling indicating that 3 the Conversion Motion would be granted and the Turnover Motion 4 partially granted (Tentative Ruling). The bankruptcy court 5 determined that there was a substantial or continuing loss to or 6 diminution of the estate because the Property had been lost to 7 foreclosure and, furthermore, given the value of the Inventory 8 (as stated by the Trustee and the auctioneers) and the amount of 9 the IRS’s claim, the IRS could seek relief from the stay and gain 10 possession of the Debtor’s personal property, including the 11 Inventory. 12 The bankruptcy court also determined that the Debtor failed 13 to provide admissible evidence establishing her ability to 14 rehabilitate or reorganize. As a result, the bankruptcy court 15 found that cause existed to convert the Debtor’s chapter 11 case 16 to chapter 7. It further found that it was in the best interest 17 of creditors to convert the case because the IRS’s tax lien could 18 be subordinated in a chapter 7. Finally, the bankruptcy court 19 agreed with the Trustee that the Inventory should be turned over 20 to an auction house so that it could be secure, insured, and 21 assessed. However, it declined to order the U.S. Marshals 22 Service to force the Debtor to vacate the Property. 23 The hearing on the Conversion Motion and the Turnover Motion 24 5 (...continued) 25 painting was $4,000,000-$7,000,000 and could “fetch a price 26 significantly above $11 million.” She alleged she had the right, for a limited time, to sell the painting, which was disregarded 27 by Sands, who sold it for $350,000. The Debtor therefore alleged that if Sands had not breached their agreement, the debt to him 28 would have been satisfied.
8 1 was held on September 7, 2011. At the close of the hearing, the 2 bankruptcy court announced that it would adopt its Tentative 3 Ruling. Before a final order was entered, the Debtor filed a 4 motion for reconsideration (Reconsideration Motion). The 5 Reconsideration Motion was filed September 14, 2011, along with 6 an ex-parte application to have the motion considered on 7 shortened time. 8 In the Reconsideration Motion, the Debtor asserted that she 9 had new evidence to establish that her business could reorganize, 10 including letters from clients substantiating future business 11 commitments and letters demonstrating the ability to rent 12 alternative warehouse space for the business. The bankruptcy 13 court denied the Reconsideration Motion on September 20, 2011. 14 Also on that date, the bankruptcy court entered the final orders 15 on the Conversion Motion and the Turnover Motion. The Debtor 16 filed this timely appeal.6 17 6 The Debtor’s notice of appeal (NOA) stated that the order 18 being appealed was the “Debtor’s Motion to Reconsider and Vacate 19 Court’s Order granting Trustee’s Motion in part to Convert Case Under Chapter 11 of the Bankruptcy Code to Case Under Chapter 7 20 of the Bankruptcy Code and Trustee’s Motion (a) Turnover of Certain Items of Personal Property and (b) to Remove Debtor.” 21 Attached to the NOA was the Order Denying Motion to Reconsider and the bankruptcy court’s order granting, in part, the Turnover 22 Motion. An Amended NOA was filed October 5, 2011, but it was the 23 same as the NOA. We construe the NOA as an appeal of the bankruptcy court’s 24 decision to convert the case because the Debtor never filed an objection to the Turnover Motion in the bankruptcy court. 25 Moreover, the arguments made by the Debtor in the Reconsideration 26 Motion challenged only the conversion. Furthermore, she does not address the Turnover Motion in her appellate brief. Accordingly, 27 she has waived any argument that the bankruptcy court abused its discretion in granting in part the Turnover Motion, and we do not 28 (continued...)
9 1 II. JURISDICTION 2 The bankruptcy court had jurisdiction under 28 U.S.C. 3 § 157(b)(2)(A) and § 1334(b). We have jurisdiction under 4 28 U.S.C. § 158(a)(3). 5 III. ISSUES 6 Did the bankruptcy court abuse its discretion in converting 7 the Debtor’s chapter 11 case to chapter 7? 8 Did the bankruptcy court abuse its discretion in denying the 9 Reconsideration Motion? 10 IV. STANDARDS OF REVIEW 11 The bankruptcy court’s decision to convert a chapter 11 case 12 to chapter 7 is reviewed for an abuse of discretion. Pioneer 13 Liquidating Corp. v. U.S. Trustee (In re Consol. Pioneer Mortg. 14 Entities), 264 F.3d 803, 806 (9th Cir. 2001); Johnston v. JEM 15 Dev. Co. (In re Johnston), 149 B.R. 158, 160 (9th Cir. BAP 1992). 16 A trial court’s decision to deny a continuance is reviewed for 17 abuse of discretion. Orr v. Bank of Am., 285 F.3d 764, 783 (9th 18 Cir. 2002). Additionally, the bankruptcy court’s denial of a 19 motion for reconsideration is reviewed for an abuse of 20 discretion. Arrow Elec., Inc. v. Justus (In re Kaypro), 218 F.3d 21 1070, 1073 (9th Cir. 2000); Sewell v. MGF Funding, Inc. (In re 22 Sewell), 345 B.R. 174, 178 (9th Cir. BAP 2006). 23 Under the abuse of discretion standard of review, we first 24 determine de novo whether the bankruptcy court identified the 25 6 26 (...continued) address the merits of that order in this Memorandum. Captain 27 Blythers, Inc. v. Thompson (In re Captain Blythers, Inc.), 311 B.R. 530, 539 (9th Cir. BAP 2004) (issue not adequately 28 addressed on appeal is deemed abandoned).
10 1 correct legal rule to apply to the relief requested. United 2 States v. Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc). 3 If the bankruptcy court identified the correct legal rule, we 4 then determine under the clearly erroneous standard whether its 5 factual findings and its application of the facts to the relevant 6 law were “(1) illogical, (2) implausible, or (3) without support 7 in inferences that may be drawn from the facts in the record." 8 Id. (internal quotation marks omitted). 9 V. DISCUSSION 10 A. Conversion Motion 11 1. There Must Be Cause To Convert 12 The statutory authority for conversion of a chapter 11 13 bankruptcy case is found in § 1112(b), which provides that the 14 bankruptcy court shall convert or dismiss a case, whichever is in 15 the best interests of creditors and the estate, for cause.7 16 11 U.S.C. § 1112(b)(1). Section 1112(b)(4) describes what 17 constitutes cause. However, the enumerated “causes” are not 18 exhaustive, and “the court will be able to consider other factors 19 as they arise, and to use its equitable powers to reach an 20 appropriate result in individual cases.” In re Consol. Pioneer 21 Mortg. Entities, 248 B.R. at 375. Thus, the bankruptcy court has 22 23 7 Section 1112(b)(1) provides: 24 Except as provided in paragraph (2) and subsection (c), on request of a party in interest, and after notice and a hearing, 25 the court shall convert a case under this chapter to a case under 26 chapter 7 or dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause unless 27 the court determines that the appointment under section 1104(a) of a trustee or an examiner is in the best interests of creditors 28 and the estate.
11 1 wide discretion in determining what constitutes cause adequate 2 for conversion under § 1112(b). Id.; Chu v. Syntron Bioresearch, 3 Inc. (In re Chu), 253 B.R. 92, 95 (S.D. Cal. 2000); Greenfield 4 Drive Storage Park v. Calif. Para-Prof’l Servs., Inc. (In re 5 Greenfield Drive Storage Park), 207 B.R. 913, 916 (9th Cir. BAP 6 1997). 7 Here, the bankruptcy court found that cause existed due to 8 the substantial or continuing loss to or diminution of the estate 9 and the absence of a reasonable likelihood of rehabilitation. 10 11 U.S.C. § 1112(b)(4)(A). Both elements must be met. The 11 bankruptcy court found there was substantial loss to the estate 12 because the Property, a scheduled $5,000,000 asset, had been lost 13 to foreclosure and that “[d]epending on the actual value of 14 Debtor’s personal property, the IRS may have a right to relief 15 from the stay to gain possession of the [Inventory].” Tentative 16 Ruling at 5. 17 In making its decision, the bankruptcy court accorded the 18 Debtor’s valuation of the Inventory no weight. It found that the 19 Debtor’s valuation of the Inventory was not credible given her 20 admission in the criminal case of misrepresenting the value of 21 antiques in her collection. We give special deference to a trial 22 court’s credibility determinations. Rule 8013; Anderson v. City 23 of Bessemer City, N.C., 470 U.S. 564, 573 (1985). In any event, 24 the Debtor’s evidence of the value of the Inventory was weak. 25 She provided only her own statement of the Inventory’s value and 26 a print-out, which listed the individual items comprising the 27 Inventory with an asserted total value of $6,000,000. 28 Although it was clear that the Inventory was the most
12 1 significant remaining asset of the Debtor’s bankruptcy estate, 2 and that any full appraisal of the Inventory required a fair 3 amount of time, the Debtor did not take steps to value the 4 Inventory prior to the Conversion Motion. Nor did the Debtor 5 provide information from a third party who may have offered a 6 limited assessment of the Inventory’s value or offered a limited 7 assessment or appraisal as to any particular pieces that the 8 Debtor believed had been significantly underestimated by the 9 Trustee’s auctioneers. Furthermore, the Debtor’s contention that 10 the Inventory was worth over $6,000,000 was inconsistent with the 11 Debtor’s bankruptcy schedules, which, two months earlier, valued 12 the Inventory at $4,200,000. 13 The bankruptcy court found that past sales of antique pieces 14 were of little use in assessing the value of the current 15 Inventory. The bankruptcy court was presented with rough 16 estimates from two auctioneers and the Debtor’s unsupported 17 statement regarding the value of the Inventory. We find no abuse 18 of discretion in the bankruptcy court’s adoption of the Trustee’s 19 evidence of the Inventory’s value, especially in light of the 20 bankruptcy court’s determination that the Debtor’s opinions of 21 value were not credible. See Anderson, 470 U.S. at 574 (“Where 22 there are two permissible views of the evidence, the factfinder’s 23 choice between them cannot be clearly erroneous.”). 24 Furthermore, the bankruptcy court found that it was 25 speculation on the part of the Debtor that the tax liability 26 would be significantly reduced. The Debtor submitted a 27 declaration from her accountant stating that errors for the 2006 28 and 2007 tax periods were recently corrected and that the
13 1 accountant believed the Debtor’s tax obligation could be reduced 2 to between $50,000 and $375,000. But there was no documentation 3 demonstrating the corrected liability figures or corresponding 4 documentation provided by the IRS that indicated it would 5 contemplate negotiating a reduction in the tax liability. 6 Because the auctioneers’ assessment of the Inventory’s value 7 was as low as $700,000, the bankruptcy court was concerned that 8 the IRS could successfully exercise its rights to the Inventory, 9 and the estate would lose the asset. Accordingly, the bankruptcy 10 court found there was substantial or continuing loss or 11 diminution of the estate due to the loss of the Property and the 12 potential loss of the Inventory. Given the facts in the record, 13 that finding was not clearly erroneous. 14 Section 1112(b)(4)(A) also requires the bankruptcy court to 15 find that there is an absence of a reasonable likelihood of 16 rehabilitation. The issue of rehabilitation for purposes of 17 § 1112(b)(4)(A) “is not the technical one of whether the debtor 18 can confirm a plan, but, rather, whether the debtor’s business 19 prospects justify continuance of the reorganization effort.” 20 In re Wallace, 2010 WL 378351 at *4 (Bankr. D. Idaho Jan. 26, 21 2010). 22 The bankruptcy court determined that it was “highly 23 unlikely” that the Debtor would be able to continue to buy and 24 sell antiques given the loss of the Property. Our review of the 25 record supports the bankruptcy court’s finding that there was 26 little likelihood that the Debtor could reorganize her business. 27 The record shows that the Debtor lacked the income and sales 28 to demonstrate a reasonable likelihood of rehabilitation. For
14 1 example, the Debtor’s evidence regarding her ability to 2 rehabilitate her business included her declaration, which stated: 3 My business is not dependant upon the [Property]. Truly, I do not want to move but if forced to move that 4 does not mean my business cannot continue. If my merchandise is not liquidated but rather I am allowed 5 to continue my business in another location, I believe my business can survive and thrive. 6 I say this because during the [sic] 2009 and 2010 while 7 I was recuperating from my heart surgery, my income was approximately $100,000.00 per year. . . . Given that my 8 health has improved I anticipate that if allowed to continue selling my merchandise I will be able to earn 9 significantly more than $100,000.00 per year. 10 Declaration of Tatiana Khan, August 31, 2011 at ¶ 15, 16. 11 Again, in her opening brief on appeal, the Debtor argues 12 that her business has “rebounded to their prior levels” after 13 “taking a hit from the economic recession.” However, the 14 documents submitted by the Debtor with her declaration indicate 15 that while the Debtor had gross sales of $4,062,558 and income of 16 $446,390 in 2006, and gross sales of $1,101,318 and income of 17 $212,282 in 2007 (even after suffering her heart attack), her 18 gross sales dropped to $82,323 with an income of $63,877 in 2009; 19 and, slid even further in 2010, with gross sales of only $55,000 20 and income of $50,040. 21 The Debtor asserted that she had clients who had committed 22 to design projects that would generate between $1,700,000 and 23 $2,200,000 in revenue in the coming year, but there was no 24 independent evidence such as declarations from the clients to 25 substantiate the design commitments.8 The Debtor also did not 26 present evidence to demonstrate that she could afford to rent or 27 28 8 The Debtor alleged that her clientele demanded anonymity.
15 1 move the Inventory and her business to another location. She 2 only presented evidence establishing that a warehouse space might 3 be available to her. Accordingly, the bankruptcy court’s finding 4 that the Debtor’s rehabilitation was unlikely was not clearly 5 erroneous. Therefore, we conclude that the bankruptcy court did 6 not err in finding that cause existed to warrant conversion or 7 dismissal pursuant to § 1112(b)(4)(A). 8 Moreover, there is a separate basis in the record to support 9 the bankruptcy court’s determination that cause existed. The 10 Debtor’s Schedule J indicates that she has no expenses for 11 insurance. She did not provide the Trustee with any 12 documentation indicating that the Property or the Inventory was 13 insured. Section 1112(b)(4)(C) provides that cause for 14 conversion exists when the debtor fails to maintain appropriate 15 insurance that poses a risk to the estate. Indeed, one of the 16 reasons the Trustee sought turnover of the Inventory was to 17 ensure its removal to an auction house that could provide 18 storage, security and insurance. 19 2. Conversion Requires An Absence Of Unusual Circumstances And That It Be In The Best Interests Of Creditors 20 21 Once a bankruptcy court determines that there is cause to 22 convert or dismiss, it must also: (1) decide whether dismissal, 23 conversion, or the appointment of a trustee or examiner is in the 24 best interests of creditors and the estate; and, (2) identify 25 whether there are unusual circumstances that establish that 26 dismissal or conversion is not in the best interests of creditors 27 28
16 1 and the estate.9 11 U.S.C. § 1112(b)(1), (b)(2); In re Prod. 2 Int’l Co., 395 B.R. 101, 107 (Bankr. D. Ariz. 2008). 3 The Debtor contended that if the Debtor could continue her 4 business of selling the Inventory to clients, creditors would 5 receive greater payment on their claims than they would under a 6 quick liquidation of the Inventory by the Trustee. Additionally, 7 she contended that she would lose her livelihood if the case were 8 converted. However, she never asserted that her reasons against 9 conversion constituted “unusual circumstances” under 10 § 1112(b)(2). Even if she had, she would also have been required 11 to demonstrate that she could confirm a plan within a reasonable 12 time, and we have already concluded that the bankruptcy court did 13 not err in finding that the Debtor was unable to demonstrate she 14 was ever likely to reorganize or rehabilitate successfully. 15 The Debtor does not assign error to the bankruptcy court’s 16 decision to convert, rather than to dismiss, her bankruptcy case. 17 9 Section 1112(b)(2) provides: 18 The court may not convert a case under this chapter to a 19 case under chapter 7 or dismiss a case under this chapter if the court finds and specifically identifies unusual circumstances 20 establishing that converting or dismissing the case is not in the best interests of creditors and the estate, and the debtor or any 21 other party in interest establishes that – (A) there is a reasonable likelihood that a plan will be 22 confirmed within the timeframes established in sections 23 1121(e) and 1129(e) of this title, or if such sections do not apply, within a reasonable period of time; and 24 (B) the grounds for converting or dismissing the case 25 include an act or omission of the debtor other than under 26 paragraph (4)(A) - (i) for which there exists a reasonable justification 27 for the act or omission; and (ii) that will be cured within a reasonable period of 28 time fixed by the court.
17 1 Since the Trustee had already been appointed in the case, once 2 cause was established under § 1112(b), the bankruptcy court was 3 not called upon to determine whether the estate’s creditors would 4 benefit from keeping the Trustee in place for a proposed 5 liquidation through a chapter 11 plan. It had to simply decide 6 whether to convert or dismiss the case. 7 To that end, the bankruptcy court correctly noted that it is 8 required to decide what is in the best interests of creditors of 9 the estate, not the best interest of the debtor. See Hr’g Tr. 10 (Sept. 7, 2011) at 21. The Trustee asserted that in his business 11 judgment a liquidation in chapter 7 was preferable to liquidation 12 in chapter 11 because the Trustee would have to propose a plan 13 (or respond to a plan proposed by the Debtor), which would 14 increase administrative expenses and reduce the amount of money 15 available to pay creditors. Significantly, none of the creditors 16 objected to conversion or argued for dismissal. Accordingly, the 17 record supports that conversion was in the best interests of the 18 estate’s creditors. 19 We note, however, that the bankruptcy court did err in 20 determining that § 724 provided a basis for conversion. The 21 bankruptcy court concluded that “in order for unsecured creditors 22 to benefit, the IRS’ lien must be subordinated, which is only 23 allowed in a chapter 7 case.” Tentative Ruling at 7. 24 Section 724(b) subordinates the interests of tax lienholders to 25 the interests of priority unsecured creditors, but any remaining 26 proceeds are distributed first to junior lien claimants, next to 27 the tax lienholders, and finally, to the debtor’s estate. 28 N. Slope Borough v. Barstow (In re Markair, Inc.), 308 F.3d 1057,
18 1 1061-62 (9th Cir. 2002); 11 U.S.C. § 724(b)(1)-(6). Therefore, 2 general unsecured creditors are unaffected by § 724(b). Id. at 3 1064; see also H.R. REP. NO. 595, 95th Cong., 1st Sess. 382 4 (1977). Since the Debtor’s schedules revealed a lack of priority 5 unsecured creditors, the tax subordination provision of § 724(b) 6 would not benefit the creditors of the estate. Nevertheless, the 7 bankruptcy court’s decision to convert the case is supported by 8 other inferences that can be drawn from the record. Therefore, 9 the bankruptcy court did not abuse its discretion in converting 10 the Debtor’s chapter 11 case to chapter 7. 11 3. The Debtor Must Demonstrate She Was Prejudiced By The Denial Of The Motion To Continue 12 13 The Debtor’s main argument on appeal is that the bankruptcy 14 court’s “rush to judgment” prevented the Debtor from defending 15 against conversion of her case. She frames the principal issue 16 in this case as whether a bankruptcy court abuses its discretion 17 when it sets a hearing on a conversion, which “turns on complex 18 valuations,” so quickly that the debtor is unable to obtain 19 documentation to present critical evidence in opposition. See 20 Rappaport v. Bittleman (In re Bittleman), 107 B.R. 230, 232 (9th 21 Cir. BAP 1988) (denial of continuance had effect of depriving 22 party of chance to present his case). She asserts that if she 23 had been given a continuance of the Hearing Date, then she could 24 have established that there was no cause to convert the 25 bankruptcy case. 26 There is no mechanical test for determining when a denial of 27 a continuance is a clear abuse of discretion; it involves a 28 case-by-case analysis. United States v. Kloehn, 620 F.3d 1122,
19 1 1127 (9th Cir. 2010). Four factors are considered when reviewing 2 denials of requests for continuances: (1) the extent of the 3 appellant’s diligence in her efforts to ready her defense prior 4 to the date set for hearing; (2) how likely it is that the need 5 for a continuance could have been met if the continuance had been 6 granted; (3) the extent to which granting the continuance would 7 have inconvenienced the court and the opposing party, including 8 its witnesses; and (4) the extent to which the appellant might 9 have suffered harm as a result of the denial of the continuance. 10 United States v. Flynt, 756 F.2d 1352, 1358-59 (9th Cir. 1985). 11 In order to obtain a reversal of the bankruptcy court’s denial of 12 the request for continuance, the Debtor must demonstrate that, at 13 a minimum, she suffered prejudice as a result of the denial. Id. 14 at 1359. 15 The Debtor sought the continuance so that she could provide 16 supporting documentation regarding the value of the Inventory and 17 regarding the reduction in her debts, particularly her debt to 18 the IRS. Additionally, the Debtor argued that she should be 19 allowed time “to explore and present” whether the business could 20 continue at the Property or whether it must move to another 21 location. 22 Allowing the Debtor additional time so that an expert could 23 conduct an appraisal of the Inventory would not have impacted the 24 bankruptcy court’s determination that there was a loss or 25 diminution to the estate and that it was unlikely the Debtor 26 would be able to rehabilitate. Even if the Debtor had been able 27 to have the Inventory appraised at a higher value than that 28 estimated by the Trustee’s appraisers, the bankruptcy court
20 1 determined that there had already been a substantial loss to the 2 estate by the loss of the Property. Moreover, if the Debtor’s 3 business was operational, as she contends, she would already have 4 considered and made plans for a new location for the business. 5 Thus, the bankruptcy court’s finding that cause existed would not 6 have been altered if the matter had been continued. 7 Motions for conversion under § 1112(b) are governed by 8 Rule 9014 and Local Rule 9013-1. Local Rule 9013-1(b) provides 9 that motions and hearings are set pursuant to the individual 10 judge’s calendaring instructions. Here, the bankruptcy judge 11 requires a minimum of 14 days notice before a hearing can be 12 calendared, with oppositions to be filed 7 days before the 13 hearing. Thus, it is standard practice for a party to have 14 7 days to oppose a motion. The bankruptcy court continued the 15 Hearing Date for 14 days when it discovered there was a service 16 error. Therefore, the bankruptcy court did not expedite or 17 “[insist] that the trustee’s motion to convert be heard on an 18 abbreviated time frame” as the Debtor contends. See, e.g., 19 Appellant’s Opening Brief at 2. Part of the reason the 20 bankruptcy court denied the Motion to Continue was that it had 21 provided the Debtor’s new attorney the requisite 7 days to file 22 an opposition. Hr’g Tr. (Sept. 7, 2011) at 17. Indeed, the 23 Debtor had 20 days to prepare an opposition.10 24 For these reasons, the Debtor has failed to demonstrate that 25 26 10 The original deadline for any opposition to the 27 Conversion Motion was August 11, 2011. After the bankruptcy court continued the Hearing Date to September 7, the deadline to 28 oppose was August 31, 2011.
21 1 she was prejudiced by the bankruptcy court’s denial of the Motion 2 to Continue. 3 B. Reconsideration Motion 4 If a motion for reconsideration is filed within 14 days 5 after entry of judgment, it is construed as a motion for relief 6 from judgment under Rule 9023, incorporating Civil Rule 59(e). 7 Am. Ironworks & Erectors, Inc. v. N. Am. Constr. Corp., 248 F.3d 8 892, 898-99 (9th Cir. 2001); In re Captain Bythers, Inc., 9 311 B.R. at 539. Although styled as a Civil Rule 60 motion for 10 reconsideration, the Debtor filed it, along with a request for 11 the motion to be considered on shortened time, within 14 days of 12 the bankruptcy court’s oral ruling on the Conversion Motion and 13 the Turnover Motion.11 Civil Rule 59(e) permits a court to 14 reconsider and amend a previous order, however, “the rule offers 15 an extraordinary remedy, to be used sparingly in the interests of 16 finality and conservation of judicial resources.” Kona Enter., 17 Inc. v. Estate of Bishop, 229 F.3d 877, 890 (9th Cir. 2000). 18 A motion for reconsideration should not be granted absent 19 “highly unusual circumstances,” unless the court is presented 20 with: (1) newly discovered evidence, (2) committed clear error, 21 or (3) there is an intervening change in the controlling law. 22 Marlyn Nutraceuticals, Inc. v. Mucos Pharma GmbH & Co., 571 F.3d 23 873, 880 (9th Cir. 2009). A Civil Rule 59(e) motion may not be 24 used to raise arguments or present evidence for the first time 25 26 11 The orders granting the Conversion Motion and granting, 27 in part, the Turnover Motion were entered September 20, 2011. The Debtor’s Reconsideration Motion was filed September 14, 2011, 28 7 days after the Hearing.
22 1 when they could reasonably have been raised earlier in the 2 litigation. Id. 3 The Debtor did not contend that there had been a change in 4 controlling law. Therefore, the Debtor was required to 5 demonstrate that new evidence established the viability of the 6 Debtor’s reorganization or that the bankruptcy court committed 7 clear error in deciding to convert the bankruptcy case. 8 For evidence to be “newly discovered” for purposes of Civil 9 Rule 59(e), it: (1) must have been discovered after judgment and 10 the movant must have been excusably ignorant of the facts at the 11 time of trial despite due diligence to learn about the facts of 12 the case; (2) the evidence discovered must be of a nature that 13 would probably change the outcome of the case; and (3) the 14 evidence must not be merely cumulative or impeaching. Jones v. 15 Aero/Chem Corp., 921 F.2d 875, 878 (9th Cir. 1990). 16 The Debtor’s new evidence included: (1) a letter from an 17 antiques appraiser stating that it would cost between $25,000- 18 $30,000 to evaluate the Inventory and take at least 3 weeks to 19 complete; (2) handwritten invoices for Inventory pieces that 20 presumably supported the Debtor’s contention that she had a 21 design commitment for a spa in San Diego; (3) a letter from a 22 couple stating they “hope that Tatiana Khan will remain available 23 to us, and supply those rare and special pieces which reflect her 24 unique personal taste” as they construct and furnish a new home 25 in New York; (4) a letter from a “loyal customer” of the Debtor 26 stating he anticipates purchasing $500,000-$1,000,000 in 27 furnishings and “hopes the Debtor will be a resource”; and 28 (5) letters from two entities stating that they had warehouse
23 1 rental space available for $8,000-$10,000 per month. 2 The bankruptcy court determined that none of this evidence 3 was properly authenticated and admissible, and, even if it was, 4 most of it was not new evidence. The bankruptcy court found that 5 the evidence would not have changed its decision. We agree that 6 the evidence submitted by the Debtor is not considered “new” 7 evidence. For example, the invoices submitted to support the San 8 Diego project were dated prior to the hearing on the Conversion 9 Motion. The letters from the other customers were created after 10 the hearing. In any event, they did not indicate that the 11 projects were firm commitments that would translate to 12 significant revenue for the Debtor. Accordingly, the Debtor did 13 not provide new evidence that established the bankruptcy court’s 14 finding of cause under § 1112(b)(4)(A) warranted reconsideration. 15 Consequently, the bankruptcy court did not abuse its discretion 16 in denying the Reconsideration Motion. 17 VI. CONCLUSION 18 For the foregoing reasons, we AFFIRM. 19 20 21 22 23 24 25 26 27 28