Case Type:
Case Status:
BAP NOS. NC-22-1135-GBS; NC22-1136-GBS; NC22-1138GBS; Bk. No. 21-30726 (9th Circuit, Dec 12,2022) Not Published
The court acted within its discretion to remove the debtor as debtor in possession of its chapter 11 Subchapter V case for cause and allow the trustee to convert the case to one under chapter 7 when the debtor failed to comply with certain filing requirements. Accordingly, the trustee's fees were approved.
Procedural context:
Debtor filed chapter 11 Subchapter V, and a trustee ("Trustee") was appointed pursuant to § 1183(a). Debtor indicated ownership of several residential rental properties on his A/B schedules. Subsequently, the court learned that the Debtor had failed to maintain insurance on the properties, file basic first-day motions, and had issues employing qualified counsel. The court issued a show cause order to show why the Debtor should continue as debtor in possession. In response, the Debtor failed to show proof of insurance for most of the properties and failed to account for post petition rents, which led to the removal under § 1185(a) and replacement with the trustee. Trustee determined that the rental properties had equity and moved from stay in order to sell the property. Then the Trustee sought to convert the case to chapter 7 for cause under § 1112(b) due to the Debtor's lack of means to reorganize, failure to propose a plan within the deadline required by § 1189(b), and unlikelihood of rehabilitation. Over Debtor's objection pursuant to BLR 9014-1(c) for improper service, the court entered the conversion order. After entry of the order, Debtor filed motions under F.R.C.P. 60(b)(6) for relief from the removal order and conversion order. Debtor argued that the removal for the Trustee was akin to appointing a receiver, which is prohibited by § 105(b) as interpreted by the definition of receiver in FTC v. World Wide Factors, Ltd., 882 F.2d 344, 348 (9th Cir. 1989). The Debtor also argued that BLR 9014-1(c) entitled it to 28 days notice rather than the 21 days notice that it received. After a hearing, the court rejected the Debtor's procedural arguments and, finding no substantive arguments, ruled in favor of the Trustee. The court granted the Trustee voluntarily reduced fees of $18,000 for her Subchapter V services, which the Debtor opposed because "there was no good reason" to sell the house for $100,000 less than its true value. The Debtor timely appealed the denial of his Rule 60(b)(6) motions.
On appeal, the BAP reviewed whether the bankruptcy court abused its discretion by 1) denying Debtor's motion for relief from the Removal Order, 2) converting the case to one under chapter 7, and 3) approving the trustee's fee application. The BAP notes that Rule 60(b)(6) should be applied sparingly to prevent manifest injustice, not as a substitute for an appeal. The Debtor failed to demonstrate extraordinary circumstances that called for use of Rule 60(b)(6) because the Debtor did not appeal the underlying removal, only the denial of the Rule 60(b)(6) motion. In addition, the BAP rejected the Debtor's argument on the merits as baseless that the trustee was a receiver because she was appointed by the U.S. Trustee pursuant to § 1183(a) and subject to the duties and loyalties defined in the code such as 11 U.S.C. §§ 1183, 323(a). Next, the Debtor failed to demonstrate that the court's consideration of his argument under 9014-1(c)(1) was in error because Debtor did not provide the transcript of that hearing for the BAP to review. In addition, the Debtor relied on a local rule for the 28 days notice he claimed, but the bankruptcy court had discretion under Nunez v. Nunez (In re Nunez), 196 B.R. 150, 157 (9th Cir. BAP 1996) in applying that rule because the Debtor had sufficient notice in satisfaction of due process. Finally, the fees awarded the trustee under 11 U.S.C. § 330(a)(3) were "reasonable compensation for actual, necessary services rendered by the trustee and actual reimbursement for actual, necessary expenses" because the trustee acted within her statutory mandate pursuant to § 1183(b)(5), and the Debtor did not demonstrate that the actions were not necessary or reasonably likely to benefit the estate.

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