Lariat Cos. v. Wigley (In re Wigley), 16-6008

557 B.R. 671

In re: Michael Robert Wigley, Debtor

Lariat Companies, Inc. Creditor-Appellant

v.Michael Robert Wigley Debtor-Appellee

Barbara Wigley Interested party-Appellee

No. 16-6008

United States Bankruptcy Appellate Panel of the Eighth Circuit.

Submitted: August 12, 2016

Filed: September 21, 2016

Kurt Anderson, for Creditor-Appellant.

Joel David Nesset, Thomas Gregory Wallrich, for Debtor-Appellee.

Mychal A. Bruggeman, Jacqueline J. Williams, for Interested party-Appellee.

Before SCHERMER, NAIL and SHODEEN, Bankruptcy Judges.

SCHERMER, Bankruptcy Judge

Creditor, Lariat Companies, Inc. (Lariat), appeals from: (1) the bankruptcy court's¹ November 18, 2015 order denying Lariat's request to dismiss the Chapter 11 case of debtor, Michael Robert Wigley (Debtor), or to convert the case to Chapter 7, denying confirmation of the Debtor's second modified Chapter 11 plan, and establishing deadlines for the Debtor to file a modified plan and obtain confirmation of it (November 18 Order);² and (2) the bankruptcy court's February 18, 2016 order confirming the Debtor's fourth modified Chapter 11 plan. We have jurisdiction over this appeal from the final order of the bankruptcy court.³ See 28 U.S.C. § 158(b). For the reasons that follow, we affirm.

ISSUE

The main issue on appeal is whether the bankruptcy court properly denied Lariat's request to dismiss the Debtor's case or convert it to Chapter 7, resulting in the ultimate confirmation of the Debtor's fourth modified Chapter 11 plan. We see no error with the bankruptcy court's decisions.

BACKGROUND

This dispute arises in the Debtor's Chapter 11 bankruptcy case. An outline of the litigation leading to the Chapter 11 bankruptcy filing is relevant.

Events Prior to the Debtor's Bankruptcy Case

Pre-petition, the Debtor personally guaranteed the lease obligations of an LLC he had formed (Baja Sol Cantina EP, LLC). The lease was entered into by the LLC (as lessee) with Lariat (as lessor). After the LLC defaulted on the lease and Lariat evicted it from the premises, Lariat sued the LLC and the Debtor. The state court awarded Lariat summary judgment against both parties for an amount of over $2.2 million in damages. The state court of appeals affirmed the judgment.

Litigation also commenced in bankruptcy court. Lariat (along with other creditors) filed an involuntary Chapter 7 bankruptcy petition against the Debtor, which was dismissed by consent of the parties. Following the filing of the involuntary petition, Lariat and the other petitioning creditors commenced a fraudulent transfer action against the Debtor's wife in state court. They added the Debtor as a co-defendant after his involuntary bankruptcy case was dismissed. Ultimately, the Debtor and his wife were held jointly and severally liable to Lariat for fraudulent transfers totaling approximately $800,000.

The Debtor and his wife later moved in the state court for amended findings in the fraudulent transfer action. On the petition date of the Debtor's Chapter 11 case, the state court had not ruled on the motion for amended findings and the Debtor believed that the automatic stay applied to the fraudulent transfer proceeding.

The Debtor also initiated litigation. He filed a suit against Lariat in state court seeking relief from the judgment in the guarantee action. The state court granted Lariat's motion to dismiss the Debtor's complaint. The appeal of the state court's decision was stayed by the Debtor's filing of his Chapter 11 petition, and it remains pending.

One month prior to the Debtor's filing of his Chapter 11 bankruptcy petition, the Debtor's LLC filed its own Chapter 11 petition. In that case, the LLC commenced an adversary proceeding (which was ultimately dismissed) seeking to enjoin Lariat from enforcing its judgment in the guarantee action against the Debtor. On the motion of the United States Trustee, the LLC's Chapter 11 case was dismissed.

After attempts by the Debtor to avoid such a ruling, the state court in the guarantee action granted a motion by Lariat for application of assets to the judgment (Assets Order). The Assets Order required the Debtor to provide an updated accounting of his assets and mandated (upon the request of Lariat) the surrender of the Debtor's non-exempt property to Lariat. Lariat was authorized to liquidate the Debtor's non-exempt property to satisfy the judgment in the guarantee action, and any person or entity who owed money to the Debtor was ordered to pay the funds to Lariat instead.

The Debtor's Bankruptcy Case

On February 10, 2014, ten days after the entry of the Assets Order, the Debtor filed his Chapter 11 bankruptcy petition. On his schedules, the Debtor listed assets exceeding the amount of his liabilities. Lariat's guarantee judgment in the Debtor's bankruptcy case was capped under Bankruptcy Code § 502(b)(6).⁴

The Debtor filed his Second Modified Plan of Reorganization (Second Modified Plan), which proposed to release his wife, Barbara Wigley, from all claims held against her by the Debtor or the estate (eliminating Lariat's fraudulent transfer judgment against her) in exchange for her settlement payment. Lariat objected to the Second Modified Plan and filed a motion seeking dismissal or conversion of the Debtor's case to Chapter 7 (specifying a preference for dismissal over conversion) for bad faith. On November 18, 2015, the bankruptcy court denied Lariat's motion to dismiss or covert, denied confirmation of the Second Modified Plan, and established deadlines for the Debtor to file a modified plan and obtain confirmation of it.

We dismissed Lariat's original appeal from the November 18 Order because it is not a final order. Lariat appealed our decision to the Eighth Circuit Court of Appeals, where it remains pending.

The bankruptcy court ultimately confirmed the Debtor's Fourth Modified Plan of Reorganization (Fourth Modified Plan). Following confirmation of the Debtor's Fourth Amended Plan and upon Lariat's motion, the bankruptcy court granted relief from the automatic stay, allowing Lariat to continue the pending fraudulent transfer action against Barbara Wigley.

Lariat filed a new notice of appeal, this time from the November 18, 2015 Order and from the order confirming the Debtor's Fourth Modified Plan. Lariat states that it appeals the order confirming the Fourth Modified Plan to ensure that the November 18 Order denying its motion to dismiss or convert will be reviewed by us.

STANDARD OF REVIEW

The bankruptcy court's findings of fact are reviewed for clear error and its conclusions of law are reviewed de novo . Loop Corp. v. U.S. Trustee (In re Loop Corp.) , 379 F.3d 511, 515 (8th Cir.2004) (citing Cedar Shore Resort, Inc. v. Mueller (In re Cedar Shore Resort, Inc.) , 235 F.3d 375, 379 (8th Cir.2000) ). “Whether a bankruptcy case has been filed in bad faith is a question of fact, and a dismissal will only be reversed if the court abused its broad discretion.” Cedar Shore Resort, Inc. , 235 F.3d at 379.

DISCUSSION

The focus of this appeal is the bankruptcy court's denial of Lariat's request to dismiss or convert the Debtor's case to Chapter 7 for bad faith. Bankruptcy Code § 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 ....

11 U.S.C. § 1112(b)(1). Section 1112(b)(2) sets forth an exception to this rule in the case of unusual circumstances. 11 U.S.C. § 1112(b)(1). Although there is no explicit requirement in § 1112 that a case be filed in good faith, the Eighth Circuit has recognized that “a bad faith filing can be cause for dismissal.” Cedar Shore Resort, Inc. , 235 F.3d at 379 (citing First Nat'l Bank of Sioux City v. Kerr (In re Kerr) , 908 F.2d 400, 404 (8th Cir.1990) ) (recognizing a good faith requirement and collecting cases from other circuits with the same requirement). There is no single test for determining whether a Chapter 11 filing was made in bad faith. Id . at 379. To determine whether a case has been filed in bad faith, “courts consider the totality of the circumstances, including the court's evaluation of the debtor's financial condition, motives, and the local financial realities.” Id . (citing Little Creek Dev. Co. v. Commonwealth Mortgage Corp. (In re Little Creek Dev. Co.) , 779 F.2d 1068, 1072 (5th Cir.1986) ); see Kerr , 908 F.2d at 404 (“We ... must require a pattern of concealment, evasion, and direct violations of the Code or court order which clearly establishes an improper motive before allowing dismissals for bad faith.”) (citation omitted).

Lariat submitted its case only on exhibits admitted into evidence and provided its attorney's narrative summation of those documents. The Debtor's case was based mostly on his testimony. He testified and was examined by Lariat on cross examination.⁵ After reviewing the evidence, the bankruptcy court credited the Debtor's testimony in finding that the Chapter 11 petition was filed in good faith. The bankruptcy court evaluated the totality of the circumstances, viewing various factors, to determine that cause did not exist for dismissal of the Debtor's case. We see no error with its determinations that the filing served a valid bankruptcy purpose and was not filed merely to obtain a litigation advantage. The record supports the bankruptcy court's findings that the Debtor:

did not file to escape the Lariat judgments; he filed to maximize the value of his assets for the benefit of himself and all of his creditors including Lariat, and to avail himself of the protections of the Bankruptcy Code with respect to limiting Lariat's claim as provided and allowed by the Code and in a bankruptcy case.

On appeal, Lariat focuses on certain factors assessed by the bankruptcy court, claiming that the bankruptcy court's decision was made in error. Lariat's main argument is that the bankruptcy court erred...