In re Little

657 B.R. 873

IN RE: James A. LITTLE and Jan R. Little, Debtors.

Case No. 23-00352-NGH

United States Bankruptcy Court, D. Idaho

Signed February 9, 2024

Brett R. Cahoon, DOJ-UST, Boise, ID, for U.S. Trustee.

Matthew T. Christensen, Johnson May, PLLC, Boise, ID, for Debtors.

MEMORANDUM OF DECISION

NOAH G. HILLEN, Chief United State Bankruptcy Judge

Before the Court are motions to dismiss or convert filed by the United States Trustee and the creditors Rochelle and Robert Oxarango. Doc. Nos. 33 & 45. An evidentiary hearing was held on November 28 and 29, 2023, after which the Court took the matter under advisement. After considering the record, arguments of the parties, and applicable law, the following constitutes the Court's findings, conclusions, and disposition of the issues.

BACKGROUND

James and Jan Little ("Debtors") owned and operated a farming and ranch business through several different entities, collectively referred to as the "Ranch". These entities include (1) V Dot Cattle Co., LLLP ("V Dot"); (2) David Little Family LLLP, and (3) Van Deusen Ranch, Inc ("Van Deusen"). In 2009, Mr. Little began facing serious health issues, having been diagnosed with chronic obstructive pulmonary disease (COPD) and later with Parkinson's disease, and he began exploring the idea of transitioning the business to the Oxarangos. Rochelle Oxarango is one of Debtors' daughters and Robert Oxarango is her husband. Robert Oxarango had been involved in ranching since 1999 and operated a large commercial sheep ranch in eastern Idaho. The Oxarangos sold their eastern Idaho ranch so they could move to the Ranch and begin transitioning the operations of the Ranch to the Oxarangos.

With the aid of a certified public accountant, Mr. Little created a plan and set the price for the Oxarangos to purchase the Ranch. In March 2012, two of Debtors' daughters sold their interests in V Dot and Van Deusen to the Oxarangos. Ex. 104. This left Mr. Little as the majority general partner of V Dot, with Rochelle and Robert both owning minority shares.

Since 2012, the Oxarangos have actively operated the Ranch, putting both money and labor into the business. In April 2015, the parties executed a purchase and sale agreement of Debtors' 493 shares of Van Deusen for approximately $579,000. Further, around the same time, the Oxarangos and Mr. Little entered into two separate option agreements for the purchase of Mr. Little's shares of V Dot and the David Little Family LLLP. Exs. 105 & 106. These agreements provided the Oxarangos the opportunity, either individually or through the Oxarango Family Trust, to purchase Mr. Little's remaining shares upon or after his death at a price of $10/share.¹

At some point, the relationship between Debtors and the Oxarangos broke down and Debtors filed a lawsuit against the Oxarangos in the Third Judicial District of Idaho, asserting claims of (1) constructive fraud; (2) undue influence; (3) lack of mental capacity to contract; (4) constructive trust; and (5) accounting. Ex. 303. The facts underlying the state court litigation concern the circumstances that led to the Oxarangos' involvement in Debtors' business and their subsequent operation of the business—in summary, Debtors' claim the Oxarangos coerced Mr. Little into selling them the Ranch.

In December 2022, the Oxarangos suggested Debtors dismiss the case and both parties walk away from the state court litigation bearing their own costs, but Debtors declined. Subsequently, the Oxarangos filed a motion for summary judgment in the state court litigation, which was fully briefed, argued, and submitted to the court as of May 1, 2023. See Ex. 305. However, at this point, Debtors proposed to voluntarily dismiss the entire action and advised the state court as such at a pretrial conference. Ex. 308 at 4-5.² Based on Debtors' representations, the state court stayed the decision on summary judgment and vacated the trial set to commence on July 10, 2023. Id. at 5.

However, Debtors ultimately did not dismiss their state court complaint, and instead hired new attorneys. On June 30, 2023, Debtors, through their attorney, sent the Oxarangos a letter, purporting to revoke the April 2015 option agreements which offered the Oxarangos the opportunity to purchase Mr. Little's interests in V Dot and the David Little Family LLLP upon his death. Subsequently, on July 14, 2023, Debtors filed a voluntary chapter 11 bankruptcy case.³ Doc. No. 1. On Debtors' schedules, Debtors list over $6 million in assets. Id. at 8. Further, Debtors list a monthly income of $11,492, with monthly expenses of approximately $7,303, leaving a monthly net income of $4,189. Ex. 203 at 13. Debtors list no secured or priority unsecured claims and scheduled general unsecured claims of only $132,926.98. A significant amount of the debt scheduled is owed to entities owned by Debtors' family members—$80,00 is owed to Highland Livestock, a corporation operated by Adam Little, Mr. Little's nephew. Ex. 201 at 27. Further, another $3,000 is owed to Wade Reaney Training Stables, LLC, an entity owned by Debtors' son-in-law. Ex. 201 at 28.

On September 5, 2023, Debtors initiated an adversary action against the Oxarangos, as well as Oxarango Ranch, LLC. Case No. 23-06029-NGH, Doc. No. 1. In the adversary action, Debtors seek a declaratory judgment that the revocation of the option agreements between Debtors and the Oxarangos was effective, and Debtors continue to be the majority owners of the David Little Family LLLP and V Dot. Debtors also seek to avoid the transfer of a piece of property from Debtors to the Oxarangos made in November 2020.

On September 19, 2023, the United States Trustee filed a motion to dismiss or convert Debtors' bankruptcy pursuant to § 1112(b). Doc. No. 33. The Oxarangos likewise filed a motion to dismiss and joined in the United States Trustee's motion on October 24, 2023. Doc. No. 45. Creditor AgWest Farm Credit Services joined in the Oxarangos' motion on November 8, 2023. Doc. No. 67.

ANALYSIS

A. Motion to Dismiss

The United States Trustee and the Oxarangos have both brought motions to dismiss or convert pursuant to § 1112. Section 1112(b)(1) provides that

on request of a party in interest, and after notice and a hearing, the court shall convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause unless the court determines that the appointment under section 1104(a) of a trustee or an examiner is in the best interests of creditors and the estate.

The moving party must first establish cause. In re McKay, 2013 WL 66263, at *2 (Bankr. D. Idaho Jan. 4, 2013).

1. Confirmability of Chapter 11 Plan

First, the United States Trustee argues cause exists to dismiss the bankruptcy because Debtors will likely not be able to successfully confirm a plan of reorganization. The inability to confirm a plan can constitute cause for dismissal or conversion under § 1112(b). In re Jacobs, 644 B.R. 883 (Bankr. D.N.M. 2022). [W]here there is no reasonable possibility of an effective reorganization, the bankruptcy court is not compelled to wait a certain period of time, to the detriment of creditors, before ordering conversion of the case." Johnston v. Jem Dev. Co. (In re Johnston), 149 B.R. 158, 162 (9th Cir. BAP 1992). Conversely, the Ninth Circuit has noted that "[p]erhaps the most compelling grounds for denying a motion to dismiss grounded on bad faith is the determination that a reorganization plan qualifies for confirmation." In re Marshall, 721 F.3d 1032, 1049 (9th Cir. 2013).

Here, given the Oxarangos' significant unsecured claim for attorneys' fees as well as their opposition to Debtors' bankruptcy filing, it appears unlikely that Debtors will be able to confirm a plan without the Oxarangos' consent. The U.S. Trustee does acknowledge that there is a possibility that Debtors could confirm a plan without the approval of the Oxarangos, depending upon the treatment of the AgWest claims.⁴ However, the Court need not determine whether Debtors could ultimately confirm a plan, because the Court finds that Debtors filed this bankruptcy in bad faith.

2. Bad Faith as Cause

Though § 1112(b)(4) provides many potential grounds for dismissal or conversion, it is not an exclusive list, and courts have held many other factors may constitute cause to convert or dismiss a case under § 1112(b), including a debtor's bad faith. Though a movant generally bears the burden of establishing cause under § 1112(b), once bad faith is put at issue, the debtor bears the burden of establishing that the petition was filed in good faith. Marshall, 721 F.3d at 1048.

Bad faith is determined on a case-by-case-basis, meaning "there is no list of factors which must be present in each case to make the finding, and the weight given to any factor depends on the circumstances of the individual case." Legal Serv. Bureau, Inc. v. Orange Cty. Bail Bonds, Inc. (In re Orange Cty. Bail Bonds, Inc.), 638 B.R. 137, 149 (9th Cir. BAP 2022). However, courts have looked to a variety of factors when considering the bad faith of a debtor, including:

(1) the debtor has only one asset;

(2) the debtor has an ongoing business to reorganize;

(3) there are any unsecured creditors;

(4) the debtor has any cash flow or sources of income to sustain a plan of reorganization or to make adequate protection payments; and

(5) the case is essentially a two-party dispute capable of prompt adjudication in state court.

St. Paul Self Storage Ltd. P'Ship v. Port Authority of St. Paul (In re St. Paul Self Storage Ltd. P'ship), 185 B.R. 580, 582-83 (9th Cir. BAP 1995).

Both the United States Trustee and the Oxarangos argue that Debtors are engaged in a two-party dispute with the Oxarangos and that Debtors filed this bankruptcy primarily as a litigation tactic. Of course, "all debtors file for bankruptcy in order to delay creditor action." In re Marshall, 721 F.3d at 1049. It is well recognized...