Case Type:
Case Status:
BAP No. CC-22-1055-TSG (9th Circuit, Oct 18,2022) Not Published
The Bankruptcy Appellate Panel of the Ninth Circuit dismissed an appeal of a bankruptcy court's order denying a creditor's motion to convert the debtors' chapter 11 cases to chapter 7 or, alternatively, to appoint a chapter 11 trustee. The Panel concluded (1) it lacked jurisdiction to review the order on the merits as it was not final, and (2) granting leave to proceed with an interlocutory appeal was unwarranted.
Procedural context:
After the U.S. Bankruptcy Court for the Central District of California denied a creditor's motion to convert two chapter 11 cases to chapter 7 or appoint a chapter 11 trustee, the creditor appealed the decision to the Panel. The creditor contended the order on appeal was final pursuant to Ritzen Group, Inc. v. Jackson Masonry, LLC, 140 S. Ct. 582 (2020). The Panel disagreed because (1) the creditor's motion "did not begin a discreet proceeding before and apart from the bankruptcy cases" or "end the litigation on the merits and leave nothing for the court to do but execute the judgment[,]" (2) the order on appeal did "not seriously affect any parties' substantive rights[,]" and (3) "§ 1112(b) will continue to apply" to the debtors' bankruptcy cases, such that the creditor could file another motion under § 1112(b). The Panel also rejected the creditor's contention that the order should be deemed final because, otherwise, it would have to incur legal fees to participate in the ongoing bankruptcy cases. The Panel then held it would be inapt to grant the creditor leave to proceed with an interlocutory appeal pursuant to Fed. R. Bankr. P. 8003(c). The Panel concluded no controlling question of law existed to support interlocutory review, the creditor had not identified a substantial ground for a difference of opinion, and an immediate appeal would not materially advance the litigation. In reaching each conclusion, the Panel specifically rejected the creditor's argument that the bankruptcy court had found the debtors' prepetition conduct irrelevant to a motion under § 1112(b); rather, the Panel explained, the bankruptcy court concluded that the prepetition conduct standing alone did not warrant the relief the creditor requested.
Prepetition, appellant/creditor Southwestern Research, Inc. obtained substantial default judgments against debtors Southern California Research LLC (SCR) and Darrell Maag based, at least in part, on their negligent and intentional breach of fiduciary duties. The debtors appealed the judgments but did not obtain a bond, and the creditor aggressively pursued collection efforts. According to the creditor, before the debtors filed their chapter 11 petitions, fraudulent transfers and preferential payments to insiders were made. Shortly after the debtors filed their petitions, the creditor moved to convert the debtors’ cases to chapter 7 or, alternatively, to have the bankruptcy court appoint a chapter 11 trustee, raising arguments about the debtors' alleged prepetition bad faith conduct and inability to confirm a plan or reorganize (as to SCR). The debtors opposed the motion, arguing (among other things) that their prepetition conduct was irrelevant. The bankruptcy court denied the motion after hearing argument on the relevant § 1112(b) factors and pertinent case law.

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