Massis v. Gavin (In re Gavin)

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In re: PATRICK JOSEPH GAVIN, Debtor.

NIMER MASSIS; JENNIFER NUSHWAT, Appellants, v. PATRICK JOSEPH GAVIN, Appellee.

BAP No. NC-21-1130-SGB

Bk. No. 3:21-bk-30260

United States Bankruptcy Appellate Panel of the Ninth Circuit

March 14, 2022

NOT FOR PUBLICATION

Appeal from the United States Bankruptcy Court for the Northern District of California Dennis Montali, Bankruptcy Judge Presiding

Before: SPRAKER, GAN, and BRAND, Bankruptcy Judges.

MEMORANDUM ^[*]

INTRODUCTION

Debtor Patrick Joseph Gavin retained bankruptcy counsel over a weekend after receiving an adverse tentative ruling in a state court judgment enforcement action brought by creditors Nimer Massis and Jennifer Nushwat ("Creditors"). Gavin filed for chapter 13^[1] relief to stay that proceeding and to prevent the tentative ruling from becoming a final decision. However, Gavin did not qualify for chapter 13, so he quickly sought to convert the case to chapter 11. Creditors opposed conversion, sought dismissal and moved for sanctions against Gavin and his counsel. The bankruptcy court denied the motions to dismiss and for sanctions and converted the case. Creditors appeal those decisions.

None of Creditors' arguments persuade us that any of the bankruptcy court's rulings should be reversed. Therefore we AFFIRM.

FACTS^[2]

In 2019, Creditors were granted a state court default judgment for $77, 778.25 against Gavin and his son for breach of contract. Creditors struggled to enforce the judgment and contend that Gavin actively resisted their collection efforts.^[3] In furtherance of their collection efforts, Creditors in late 2020 and early 2021 sought to compel the sale of Gavin's real property located in Burlingame, California ("Burlingame Property"). Gavin opposed Creditors' effort and commenced a new lawsuit to challenge the default judgment and the underlying transaction alleging fraud.

On Friday, April 2, 2021, the state court issued a tentative ruling proposing to enter an order for the sale of the Burlingame Property. The hearing on the sale order application was set for the following Monday, April 5, 2021. Over the weekend, Gavin retained Arasto Farsad to file an emergency "skeletal" chapter 13 bankruptcy petition on Gavin's behalf. According to Farsad, Gavin had contacted him at the "last minute." Consequently, in order to protect and preserve Gavin's rights, and given the limited financial information he had received from Gavin at the time, he determined that filing the chapter 13 petition was the best course of action. Farsad filed Gavin's bankruptcy petition on Easter Sunday, April 4, 2021. As Farsad further explained:

I had little to no possibility of access to the Debtor that weekend due to the holiday and also because the Debtor was / still is recovering from a recent surgery. It was quite difficult to both obtain and review the necessary documents in a careful manner in order to determine the Debtor's eligibility for a Chapter 13.

Farsad Decl. (April 9, 2021) at ¶ 2.

The state court received notice of the bankruptcy filing. On Monday, April 5, 2021, the state court acknowledged the automatic stay and declined to enter an order for the sale of the Burlingame Property.

Less than a week after Gavin commenced his bankruptcy case, he moved to convert the case from chapter 13 to chapter 11. Farsad stated in his declaration in support of the motion that he filed the chapter 13 petition based on the exigent circumstances and limited information he was confronted with over the preceding weekend. With the opportunity to further review Gavin's financial situation over the next few days Farsad explained that he had determined Gavin exceeded the chapter 13 debt eligibility limits set forth in § 109(e). Accordingly, Gavin sought to convert his case to chapter 11 for the purpose of reorganizing his debts. Gavin noticed the conversion motion and provided the opportunity to request a hearing to the mailing matrix, which included Creditors' counsel.

Creditors opposed the conversion motion. They argued that Gavin's ineligibility for chapter 13 in violation of § 109(e) resulted in a void bankruptcy filing. Creditors considered Gavin's petition to be a nullity and of no legal effect. As a result, Creditors insisted that there was no pending bankruptcy case to convert. Creditors further maintained that the unauthorized emergency filing of a skeletal chapter 13 petition constituted an abuse of process.

Based on the opposition, Gavin noticed a hearing on the conversion motion for May 19, 2021.

On April 20, 2021, Creditors moved to dismiss the bankruptcy case and for annulment of the automatic stay. They simultaneously moved for sanctions under Rule 9011 against both Farsad and Gavin. Based on Farsad's admissions in his declaration in support of the conversion motion, Creditors argued that the skeletal filing of the chapter 13 petition for which Gavin was not eligible was done solely to stay the state court from issuing the sale order. Creditors maintained this constituted an abuse of process. They argued that this conduct justified dismissal of the bankruptcy case under § 1307(c), annulment of the automatic stay, and imposition of Rule 9011 sanctions.^[4]

In further support of the sanctions motion, Creditors presented emails exchanged between their counsel, George Wynns, and Farsad on April 5 and 6, 2021, discussing the bankruptcy filing. Wynns advised Farsad in the first email that Gavin's secured debt greatly exceeded the § 109(e) limit and asserted that the bankruptcy case needed to be dismissed because Gavin was not eligible for chapter 13. Wynn also complained that the estimate of assets set forth in the petition as between "0 and $50, 000" was obviously incorrect given the several encumbered parcels of real property Gavin owned. Farsad responded that because of the emergency nature of the filing he had not had the opportunity to follow his usual intake procedures and financial review. But he also stated that if Wynns was correct that Gavin exceeded the chapter 13 debt limits, he intended to move to convert the case to chapter 11.

In the final email exchanged during that time, Wynns opined that there is no provision of the Bankruptcy Code permitting an emergency chapter 13 petition filing when the debtor is not qualified to file a chapter 13 petition under § 109(e). Wynns also provided specific information regarding Gavin's real property and the liens encumbering that property. According to Wynns, the secured debt exceeded $2, 000, 000.

Wynns further disagreed that the pending sale order qualified as an emergency. He pointed out that even if the sale order had been entered on April 5, 2021, no actual sale was imminent. Wynns stated his belief that any such sale would not have occurred for at least another one or two months because the Sheriff would have needed to receive the signed sale order and issue proper notice.

Wynns also executed a declaration in support of the sanctions motion. Wynns' declaration provided detailed information regarding the four parcels of real property Gavin owned and the numerous liens against those properties. He also detailed his efforts to enforce the Creditors' judgment against Gavin and how those judgment enforcement efforts directly led to the chapter 13 petition filing.

The motions to dismiss and for sanctions were scheduled to be heard together with Gavin's conversion motion on May 19, 2021.

On May 4, 2021, Gavin filed his schedules and statement of financial affairs ("SOFA") and a proposed chapter 13 plan. According to the schedules, Gavin had $6, 687, 280 in real property assets and $91, 602 in personal property assets. He also listed $4, 432, 187 in secured debt, and $183, 358 in general unsecured claims. His Schedule I listed $23, 382 in monthly income and $6, 280 in monthly expenses.

Gavin also opposed Creditors' motions. Gavin emphasized that he had no history of prior bankruptcy filings. And as soon as his counsel confirmed that his secured debt exceeded the eligibility limits for chapter 13, his counsel filed the motion to convert the case to chapter 11 within five days of his Easter Sunday emergency bankruptcy filing. Under these circumstances, Gavin maintained that he did not file for bankruptcy relief in bad faith and there was no cause for dismissal within the meaning of § 1307(c). According to Gavin, none of the traditional indicia of bad faith were present.

As for his opposition to the Rule 9011 sanctions motion, Gavin maintained that his emergency chapter 13 petition was neither frivolous nor filed for an improper purpose. Gavin insisted that given the time constraints, his counsel did the best he could with the limited financial information before him to file his bankruptcy petition under an appropriate chapter. Though the information included with the petition significantly undervalued Gavin's assets, he explained that his counsel did not intentionally underrepresent the value of his assets. According to Gavin, the petition preparation program automatically ticked the box for "0-$50, 000" in assets because of the skeletal nature of his initial petition filing. Gavin observed that in the interim he had filed his schedules and SOFA, which contained more complete and more accurate financial information.

On May 18, 2021, the bankruptcy court entered an order taking all three matters off calendar and disposing of them without a hearing. The court granted the motion to convert and denied the motions to dismiss and for sanctions. According to the bankruptcy court, § 1307(d) specifically contemplated conversion to chapter 11 when debtors who initially file chapter 13 do not fall within § 109(e)'s debt limits.

As for the motions to dismiss and for sanctions, the bankruptcy court...