Case Type:
Case Status:
21-1130 (9th Circuit, Mar 14,2022) Not Published
The Bankruptcy Appellate Panel of the Ninth Circuit (BAP) affirmed the decisions of the U.S. Bankruptcy Court for the Northern District of California (BC): (1) denying motions for a case's dismissal and sanctions against Patrick Gavin (DR) and his counsel, filed by creditors, Nimer Massis and Jennifer Nushwat (CRs), in response to the DR's motion to convert a case under a chapter-the Code's thirteenth-for which he was not eligible, launched hours before a tentative state court judgment in the CRs' favor was to be finalized, to a chapter 11 one; and (2) granting the DR's conversion motion.
Procedural context:
On Sunday, April 4, 2021 (the Petition Date), only hours before the arrival of the Monday on which a state court had scheduled a final hearing on the CRs' application for an order for the sale of the real property located in Burlingame, California, and owned by the DR (Burlingame Property) that it had tentatively granted on the Friday, the DR filed a "skeletal" chapter 13 petition (Petition). He did so upon the advice of the bankruptcy lawyer, Arasto Farsad (Farsad), to whom he had turned at the "last minute" so as "to protect and preserve ... [his] rights" and "given the limited financial information" that the attorney had received from the DR in that short timeframe. On Monday, April 5, 2021, as the DR had hoped, the state court acknowledged the Petition's filing and the resulting imposition of the automatic stay and therefore declined to enter the same sale order whose issue had been an almost foregone conclusion. Within a week of the Petition Date, the DR changed his plans-and thereby set in motion this appeal. As Farsad explained, the DR had turned to chapter 13 for relief based on lawyerly advice given in the midst of "exigent circumstances" and with the aid of only the "limited information he was confronted with over the preceding weekend." Further review, however, revealed that the DR exceeded the chapter 13 debt eligibility limits codified in § 109(e). Accordingly, with Farsad leading the charge, the DR sought to convert his case to chapter 11 for the purpose of reorganizing his debts. Consistent with the relevant procedures, the DR noticed the conversion motion and provided the opportunity to request a hearing to the mailing matrix, which included CRs' counsel. Of course, the CRs opposed this request. The heart of the CRs' argument was simple: because the DR had been barred from filing under the chapter he had, his petition was void, a nullity. As such, no pending bankruptcy case to convert actually existed. Additionally, the CRs maintained that the unauthorized emergency filing of a skeletal chapter 13 petition constituted an abuse of process. Upon receipt of this objection, the DR noticed a hearing on the conversion motion for May 19, 2021. The CRs thereafter raised the stakes. Specifically, on April 20, 2021, they moved to dismiss the bankruptcy case and for annulment of the automatic stay and for sanctions under Federal Rule of Bankruptcy Procedure 9011 (Rule 9011) against both Farsad and the DR. In this regard, the CRs claimed that the DR's decision to file under an impossible chapter was done solely to stay the state court from issuing the sale order, a clear abuse of process. This conduct justified dismissal under § 1307(c), annulment of the automatic stay, and sanctions under Rule 9011. In support, they cited to an email exchange between their counsel and Farsad from April 5 and 6, 2021, the days immediately after the Petition Date. During this back-and-forth, among other things, Farsad had admitted that he had lacked the time to follow his usual intake procedures and financial review when the CRs' attorney pointed to two fatal flaws in the Petition. First, the DR's stated secured debt greatly exceeded the limits in § 109 on its face; second, his estimate of assets at between "0 and $50,000" was obviously inconsistent with the acknowledged existence of several encumbered assets of real property. As Farsad conceded, assuming the CRs' attorney was correct as to the first of these, he intended to file a motion to convert on the DR's behalf. The CRs' counsel further rejected the notion that any provision of the Code authorized an emergency chapter 13 filing by an obviously unqualified debtor or that an emergency even existed, as he believed no sale could have taken place for at least two or three more months. The same attorney further provided documentation evidencing secured debtor in excess of $2,000,000. With these motions, he included a declaration containing detailed information regarding the DR's real property and the CRs' prepetition efforts to enforce a rightfully won default judgment. Later, after the DR had filed his schedules and his statement of financial affairs, he opposed the CRs' motions, stressing the absence of an improper purpose or frivolity, his good faith, and the time pressures under which the Petition was initially filed. While all of these papers-the DR's conversion motion, and the CRs' motions for sanctions and dismissal-were due to be heard on May 19, 2021, the BC disposed of all matters without hearing on May 18, 2021. It found the conversion due to ineligibility to be contemplated by § 1307(d), thus legitimizing the DR's substantive request, and the kind of "pressing circumstances" adduced by the DR to be sufficient to undercut any argument for dismissal and sanctions, thus dooming the CRs' requests. On May 28, 2021, the CRs timely appealed.
Here, as elsewhere, the relationship between debtor and creditor has been increasingly-and, perhaps, irretrievably-poisoned by events that, though relatively recent, had transpired years before the DR filed his original chapter 13 petition (Petition). In 2019, the CRs secured a state court default judgment for $77,778.25 against the DR and his son for breach of contract. Thereafter, the CRs struggled to enforce the judgment, allegedly due to the DR's recalcitrance. Whatever the veracity of this dark insinuation, in furtherance of their collection efforts, these two aligned persons sought to compel the sale of the Burlingame Property in late 2020 and early 2021. Naturally opposing this latest effort, the DR commenced a new lawsuit to challenge both the default judgment and the underlying transaction, all on the basis of his own dark insinuations,, his of verboten fraud rather than of unjustifiable stubbornness. On Friday, April 2, 2021, the state court assigned this new matter (SC)issued a tentative ruling proposing to enter an order for the sale of the Burlingame Property. Fatally, but as all courts must do, it scheduled a hearing on the CRs' application for this order for Monday, April 5, 2021, only one weekend (and two days) later.
Gary A. Spraker; Scott H. Gan; and Julia W. Brand

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