Karamoussayan v. Mass. Dep't of Revenue (In re Karamoussayan)

656 B.R. 652

Serge Ohannes KARAMOUSSAYAN, Debtor.

Serge Ohannes Karamoussayan, Appellant, v. Massachusetts Department of Revenue, Appellee.

BAP NO. MB 23-007

Bankruptcy Case No. 22-11302-JEB

United States Bankruptcy Appellate Panel of the First Circuit

February 12, 2024

Appeal from the United States Bankruptcy Court for the District of Massachusetts, (Janet E. Bostwick, U.S. Bankruptcy Judge)

David G. Baker, Esq., Boston, MA, on brief for Appellant.

Stephen G. Murphy, Esq., on brief for Appellee.

Before Finkle, Chief U.S. Bankruptcy Appellate Panel Judge; Harwood and González, U.S. Bankruptcy Appellate Panel Judges.

Finkle, Chief United State Bankruptcy Appellate Panel Judge.

Serge Ohannes Karamoussayan (the "Debtor"), who owned and operated a jewelry store in Boston, Massachusetts, appeals from the bankruptcy court's order converting his chapter 13 bankruptcy case to one under chapter 7 for cause under § 1307(c) (the "Conversion Order").¹ For the reasons set forth below, we AFFIRM.

BACKGROUND

I. The Cash Collateral Proceedings

The Debtor filed the chapter 13 bankruptcy case from which this appeal arises in September 2022.² Shortly after the filing, the Massachusetts Department of Revenue (the "MDOR") filed a proof of claim in the amount of $24,031 for unpaid taxes, partially secured by tax liens on all the Debtor's property, including cash and other business assets associated with operating a retail jewelry and repair store.³ The bankruptcy court's conversion of the Debtor's case to chapter 7 stems from his unauthorized use of the cash collateral subject to the MDOR's tax lien.

A. The October 2022 Order Denying Use of Cash Collateral

On October 7, 2022, the Debtor filed an emergency motion for interim and final orders under §§ 105 and 363 approving his use of cash collateral (the "Cash Collateral Motion"). After a hearing on October 13, 2022, the bankruptcy court entered an order denying the interim use of cash collateral and scheduled a final hearing on the Cash Collateral Motion for November 9, 2022 (the "October Order Denying Use of Cash Collateral"). The bankruptcy court also ordered that by October 26, 2022, the Debtor was to "file any supplement to the Motion including any budget projections or offer of adequate protection."

B. The November 2022 Order Denying Use of Cash Collateral

On October 26, 2022, the Debtor filed a supplemental memorandum in support of the Cash Collateral Motion, asserting there was a "reasonable dispute" as to whether the MDOR was a secured creditor entitled to adequate protection and that interim use of cash collateral should be allowed until the issue was resolved. The Debtor did not provide any "budget projections" or offers of adequate protection as instructed by the bankruptcy court.

The MDOR objected to the Cash Collateral Motion, contending it held perfected and enforceable statutory liens on all the Debtor's assets, and the Debtor should be prohibited from using cash collateral unless the MDOR's interests were adequately protected. The MDOR stated it would accept adequate protection payments if offered, but it was "not pressing for adequate protection payments" at that time. Instead, the MDOR sought replacement liens on the Debtor's post-petition assets.

After a second cash collateral hearing on November 9, 2022, the bankruptcy court again denied the Debtor's request because of his failure to submit budget projections and to offer adequate protection to the MDOR. The bankruptcy court's order (the "November Order Denying Use of Cash Collateral") unambiguously stated: "The Debtor is not authorized to use cash collateral without further order of this court or written assent of the lienholder . . . ." The Debtor did not seek reconsideration or appeal the November Order Denying Use of Cash Collateral.

C. The December 2022 Cash Collateral Order

A few weeks later, the Debtor filed a "renewed" emergency motion for permission to use cash collateral (the "Renewed Cash Collateral Motion"), along with a budget of estimated operating income and expenses (the "Budget"). The MDOR again objected, reiterating it would not consent to the Debtor's use of cash collateral unless its interests were adequately protected.

After a hearing on December 15, 2022, the bankruptcy court entered an order authorizing the Debtor's use of cash collateral, on an interim basis, until the day after a final hearing to be held on February 23, 2023 (the "December Cash Collateral Order"). In that order, the court expressly limited the Debtor's use of cash collateral to payment of those business expenses listed in the Budget, "subject to a variance of no more than [10%] on any expense." The bankruptcy court also: (1) granted the MDOR replacement liens on the Debtor's post-petition assets; (2) ordered the Debtor to timely file sales tax returns and pay post-petition sales taxes; and (3) directed the Debtor to file, by January 15, 2023, a report comparing budgeted to actual expenses incurred through December 31, 2022. The Debtor did not seek reconsideration or appeal the December Cash Collateral Order.

D. The January 2023 Budget to Actual Report

On January 23, 2023, the Debtor filed an "Affirmation of Debtor Regar[d]ing Monthly Report" (the "Affirmation"), in which he admitted that some of his actual expenses exceeded the 10% variance restriction, but argued the limitation was "neither practical nor sound business judgment, because some time periods will have higher or lower amounts for the respective categories." The Debtor also filed a report which compared budgeted expenses with actual expenses incurred in October, November, and December 2022 (the "Budget Report"). Although the Debtor was not authorized to use cash collateral to operate his business until mid-December, the Budget Report reflected actual "retail sales" of $17,074 for October, $14,034 for November, and $47,192 for December, and payment of operating expenses during those months. Further, the Budget Report showed the Debtor spent significantly more than the budgeted amounts for certain expenses and paid some expenses which were not included in the Budget. It also listed a sales tax payment of $937 in October but none for November or December.

Upon receipt of the Affirmation and the Budget Report, the bankruptcy court scheduled an emergency hearing for January 26, 2023.

E. The January 2023 Cash Collateral Order

After the January 26, 2023 emergency hearing on the Renewed Cash Collateral Motion, Affirmation, and Budget Report, the bankruptcy court entered an order (the "January Cash Collateral Order") reiterating that the Debtor was only authorized to use cash collateral in accordance with the terms of the December Cash Collateral Order. The court also stated it would issue a separate order on "the issue of whether the Debtor violated the order, and, if so, determination of an appropriate remedy, including dismissal of the case." The Debtor did not seek reconsideration or appeal the January Cash Collateral Order.

F. Debtor's Initial Sales Tax Returns

During these ongoing cash collateral proceedings, the Debtor filed with the MDOR his October and November 2022 Massachusetts sales tax returns for the jewelry business, reporting no income for those months, despite the Budget Report listing significant sales income. Then, on January 30, 2023 (after filing the Budget Report reflecting sales income of $47,192 for December), the Debtor filed a sales tax return for December 2022 reporting only $4,500 in sales income.

II. Order to Show Cause and Conversion to Chapter 7

A. The Order to Show Cause

On February 1, 2023, the bankruptcy court issued an Order to Show Cause, directing the Debtor to demonstrate why his case should not be converted to one under chapter 7 or dismissed "for cause under [§] 1307(c), including for failure to comply with orders of the Court, for the unauthorized use of cash collateral, and for failure to pay postpetition taxes and file accurate and complete sales tax returns." In the Order to Show Cause, the court detailed the objectionable conduct underlying its issuance, explaining:

By order dated November 9, 2022, the Debtor was "not authorized to use cash collateral without further order of this court or written assent of the lienholder . . . ." On December 15, 2022, the Court authorized the Debtor to use cash collateral but only on certain terms and conditions ("Cash Collateral Order"). As more fully set forth in the Cash Collateral Order, the Debtor was only authorized to use cash collateral for the expenses set forth in the monthly budget, subject to a 10 percent variance per expense.

The Debtor also was required to timely prepare and file sales and use tax returns and to pay sales tax timely.

On January 23, 2023, the Debtor filed an Affirmation & Report ("Report") that shows, although expressly prohibited, the Debtor used cash collateral during October and November 2022. In addition, the Report also shows that the Debtor used cash collateral for expenses not authorized by the Cash Collateral Order. For example, although the Debtor was only authorized to pay himself $4,800.00 as payroll on a monthly basis, the Report shows that he instead paid $14,650.00 to himself as a payroll expense in December 2022. The Report also shows $10,000.00 as an "Other" expense in December 2022 that was not authorized.

The Debtor also appears to have failed to timely pay sales tax as required by the Court. The Report lists sales income of $17,074.00 in October 2022, $14,034.44 in November 2022, and $47,192.78 in December 2022, but it lists a sales tax payment only in October. At a hearing on January 26, 2023, counsel to the [MDOR] also noted discrepancies between the Report and the Debtor's sales tax returns which were stated to have shown no sales in October 2022 and November 2022 and only $4,500.00 in December 2022.

B. Debtor's Responses to Order to Show Cause

Apparently in response to the Order to Show Cause, on February 3, 2023, the Debtor filed with the MDOR...