In re Serapio Venegas

Case Type:
Consumer
Case Status:
Affirmed
Citation:
CC-20-1077-GLS (9th Circuit, Dec 04,2020) Not Published
Tag(s):
Ruling:
The Bankruptcy Appellate Panel of the Ninth Circuit (BAP) affirmed the denial by the United States Bankruptcy Court for the Central District of California (BC) of the dispositive motion (Motion), filed by appellant, Alliance United Insurance Company (Alliance), that sought the dismissal of the involuntary Chapter 7 case of Serapio Venegas (Debtor or Venegas), due to Alliance’s lack of standing and the absence of the requisite “cause” under § 707(a).
Procedural context:
Before the BC, Alliance had sought the dismissal of the Debtor’s involuntary Chapter 7 case (Case). It argued that the petition creditor—Stephan Wood (Wood), a man injured by the Debtor’s car at a time in which Alliance had insured the Debtor who had won a jury judgment against the Debtor—had filed the involuntary petition (Petition) solely as a judgment enforcement mechanism in a two-party dispute. Brad D. Krasnoff (Trustee), the Case’s Chapter 7 trustee, opposed the Motion for two independent reasons: (1) Alliance was not a creditor and had no interest in the outcome of the case, it lacked standing to seek dismissal; and (2) 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. Ultimately, the BC 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 BC entered a written order denying the motion to dismiss, and Alliance timely appealed the order denying its motion to dismiss. The BC subsequently remanded the bad faith case against Alliance inaugurated by the Trustee in state court but removed to the BC by the Trustee (Bad Faith Action).
Facts:
It was the Debtors’ shockingly gruesome prepetition act that portended his future involuntary bankruptcy case. In 2015, the Debtor caused serious injuries to Wood when his vehicle struck the bicycle Wood was riding. Rather than stopping, the Debtor sought to flee; he ended up dragging Wood under the vehicle for more than a quarter mile. Upon his later apprehension and criminal conviction, the Debtor made a written demand to his insurer, Alliance, for payment of the policy limits subject to specific terms and conditions. While Alliance purported to accept the settlement offer and tender payment, its ultimate release was inconsistent with the terms and conditions of Wood’s offer. Subsequently, a California superior court determined that Alliance had not validly accepted this offer. Thwarted, Wood turned to one of these trial courts, only to be stymied once more by the Debtor’s strained finances. There, he 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’s subsequent efforts to collect on this judgment proved fruitless because, as Wood’s team of investigators discovered, the Debtor owned assets of limited value other than his potential rights against Alliance for its alleged bad faith in failing to accept a reasonable settlement offer. The Debtor, however, refused not only to pursue such an action against Alliance but to assign his rights to Wood. Turning to the Code, Wood commenced the Case with the filing of the Petition. Wood further tendered a unilateral status report stating that the Debtor had few creditors and few assets of value other than his rights against Alliance. With the Debtor opting not to respond to the involuntary petition, the BC entered an order for relief and appointed the Trustee. When the Debtor failed to file schedules and statements or appear at thirteen § 341 meetings, the Trustee submitted schedules and statements on the Debtor’s behalf after consulting with Wood. 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. After these documents’ submission, the Trustee filed a complaint to deny the Debtor’s discharge under § 727(c). In the midst of the Case, the Trustee launched the Bad Faith Action against Alliance. The Trustee primarily alleged that Alliance had breached the covenant of good faith and fair dealing by failing to accept a reasonable settlement offer within policy limits. Alliance responded with a notice of removal to the BC. In the BC, Alliance and the Trustee now joined the duel that the BAP was compelled to address. Upon removal, Alliance filed an answer denying the foregoing allegations. As an affirmative defense, Alliance also attacked the involuntary bankruptcy as being filed for an “improper purpose” and contended that, upon the Case’s dismissal, the Trustee’s standing would evaporate. In counter, the Trustee moved to remand the Bad Faith Action on the basis 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 Case.
Judge(s):
Scott H. Gan; William Lafferty; and Gary A. Spraker

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