Grego v. U.S. Trustee (In re Grego)

BAP No. EC-14-1067-KuPaJu/Bk. No. 14-20064 (not appropriate for publication)
The Ninth Circuit BAP vacated the Bankruptcy Court's order converting the chapter 11 case to chapter 7 and remanded the case to the Bankruptcy Court to consider whether, as an alternative to conversion, the case should be dismissed.
Procedural context:
At the initial case status conference scheduled shortly after the debtor filed his individual chapter 11 petition, the Bankruptcy Court, sua sponte, converted the case to chapter 7 based on the Court’s findings that the debtor filed the petition in bad faith or as a result of gross incompetence. Debtor appealed the Court’s ruling. The Ninth Circuit BAP vacated the order based on its determination that the Bankruptcy Court failed to consider whether the case should have been dismissed, and remanded the case to the Bankruptcy Court for further proceedings.
The debtor filed his individual chapter 11 petition to stay a pending foreclosure on certain real property. Prior to the initial status conference in the case, the Bankruptcy Court issued a tentative ruling expressing concern over a number of deficiencies and inaccuracies in the debtor’s schedules and statement of financial affairs, as well as the debtor’s status conference report. Shortly thereafter, the debtor filed amended schedules and statement of affairs, addressing some, but not all, of the identified deficiencies. At the status conference, the Bankruptcy Court restated its concerns, only increased by the debtor’s recent amendments, including the debtor’s failure to disclose prior related cases, one of which was then just recently dismissed, a reported negative income of over $13,000 per month, and debtor’s complete disregard to file complete and accurate schedules under oath (which the Court determined “egregious”). Finding the debtor filed his petition in “bad faith” or the result of “gross incompetence,” the Court converted the case to chapter 7. On appeal, the BAP construed the Bankruptcy Court’s finding of “gross incompetence” (which is not among the enumerated grounds for dismissal or conversion under Section 1112(b)(4)) to mean “gross mismanagement of the estate.” Given the chapter 11 case was only recently filed (one month) and a record absent of any evidence to make material findings of gross mismanagement, the BAP determined that the Bankruptcy Court could not base its ruling on “gross mismanagement.” Turning to the Bankruptcy Court’s finding that the debtor filed the petition in “bad faith,” the BAP found that the debtor’s prior and current bankruptcy filings “patently demonstrate” a number of bad faith factors, including debtor’s failure to disclose earlier bankruptcy filings, virtually little or no unsecured debt (all of which was discharged in debtor’s earlier bankruptcy case), slim prospect for reorganization given the substantial negative income each month, minimal (if any) unencumbered, non-exempt assets, and debtor’s “egregious” conduct in filing, under oath, materially deficient and inaccurate schedules and statement of affairs. Notwithstanding such findings, the BAP determined that the Bankruptcy Court committed reversible error in not considering whether a dismissal of the case would better serve the interests of the estate’s creditors. Accordingly, the BAP vacated the Bankruptcy Court’s order converting the case and remanded the case to the Bankruptcy Court for its consideration of dismissal or conversion.
KURTZ, PAPPAS and JURY, Bankruptcy Judges

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