Nichols v. Marana Stockyard & Livestock Mkt., Inc. (In re Nichols)

618 B.R. 1

IN RE: Donald Hugh NICHOLS and Jane Ann Nichols, Debtors.

Donald Hugh Nichols; Jane Ann Nichols, Appellants,

v.Marana Stockyard & Livestock Market, Inc. ; The Parsons Company; Clay Parsons; Karen Parsons ; Arizona Department of Revenue ; Jill H. Ford, Chapter 7 Trustee, Appellees.

BAP No. AZ-20-1032-TaLB

Bk. No. 4:18-bk-09638-BMW

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Signed August 12, 2020

German Yusufov argued for appellants; D. Alexander Winkelman argued for appellees Marana Stockyard & Livestock Market, Inc., The Parsons Company, Clay Parsons, and Karen Parsons

Before: TAYLOR, LAFFERTY, and BRAND, Bankruptcy Judges.

OPINION

TAYLOR, Bankruptcy Judge:

INTRODUCTION

Chapter 13¹ debtors Donald Hugh Nichols and Jane Ann Nichols appeal from the bankruptcy court's order denying their § 1307(b) dismissal motion and granting a § 1307(c) and (e) conversion motion. Debtors contend that the bankruptcy court abused its discretion in doing so, arguing that: (1) their right to dismiss is absolute; and (2) even if the right is not absolute, there were no grounds for conversion. We disagree with their arguments and perceive no abuse of discretion. We AFFIRM.

FACTS

Prepetition, Debtors' son, Seth Nichols, pled guilty to bank fraud under 18 U.S.C. § 1344. His victims, Marana Stockyard & Livestock Market, Inc. ("Marana") and its owners, Clay and Karen Parsons (the "Parsons" and, together with Marana, "Creditors"), received an 18 U.S.C. § 3663A restitution award. The plea agreement provides that Debtors would pay partial restitution on behalf of their son through transfer or liquidation of their home and other real property ("Properties"). Indeed, they transferred title to the Properties to the Creditors almost six months before Seth Nichols signed the plea agreement.

But Debtors were not signatories to the plea agreement; they alleged that the Parsons fraudulently induced them to transfer their Properties. And the Creditors did not agree that Seth Nichols acted alone; they alleged that Debtors were involved in their son's criminal activity. The plea agreement was not the end of litigation.

Marana and The Parsons Company filed a state court complaint against Debtors and related entities seeking recovery based on fraud, conversion, and aiding and abetting tortious acts related to the bank fraud ("Civil Case"). Debtors then: (1) filed a third party complaint against the Parsons in which they sought rescission for fraud in the inducement of the transfers of the Properties; (2) filed a notice of lis pendens; and (3) recorded the lis pendens against the Properties. The Parsons demanded its immediate expungement.

Debtors did not meet the demand; instead they filed a chapter 13 petition and a chapter 13 plan ("Plan"). Having obtained the safe harbor provided by a bankruptcy case and the automatic stay, they then dawdled for over seventeen months. They took no steps towards plan confirmation or Bankruptcy Code compliance. Their only affirmative steps engendered delay in both the bankruptcy and Civil Case proceedings.²

Despite a Plan objection filed by the chapter 13 trustee raising several impediments to confirmation, including: (1) Debtors' failure to file tax returns for 2014 through 2017; (2) Debtors' failure to provide information regarding their business operations; (3) Debtors' failure to file business operating reports; and (4) the Plan's failure to provide for priority claims and to satisfy the liquidation analysis, feasibility, and projected disposable income requirements of chapter 13, Debtors never amended their facially non-confirmable Plan.

Debtors ultimately attempted to justify their sloth by reference to federal criminal charges filed post-petition against Hugh Nichols for bank fraud and conspiracy to commit bank fraud ("Criminal Case")³ and alleged advice of their criminal and bankruptcy counsel. And the Trustee did not immediately press the point; she continued the § 341(a) meeting of creditors numerous times. But the case went nowhere, and an even potentially confirmable plan, one that paid creditors the minimum required by the evidence in the Debtors' schedules, was never proposed.

Debtors also stalled the Civil Action. They opposed Creditors' stay relief motion requesting liquidation of claims in the Civil Case, and Debtors' co-defendants—most of which are entities Debtors own and control—obtained a six-month stay from the state court.

So, nine months into the chapter 13 case, Debtors still had not filed required tax returns or otherwise made a meaningful effort to confirm a plan. Creditors, thus, sought conversion to chapter 7 ("Conversion Motion") under § 1307(c) and (e), alleging, inter alia , undue delay, ineligibility for chapter 13 relief, and bad faith conduct.

The Trustee joined the Conversion Motion on the bases that: (1) Debtors had not addressed most of the issues raised in her Plan objection; (2) Debtors had not advanced the case; (3) Debtors had not proposed a confirmable plan; (4) Debtors had not filed required tax returns; (5) Debtors had not provided information needed to analyze the feasibility or propriety of the Plan; (6) Debtors had not met their obligations to creditors and the estate; and (7) creditors were being prejudiced by case stagnation.

Debtors broadly opposed the Conversion Motion; the defenses to their obvious inaction included the assertion that case delays were attributable to their Criminal Case rather than bad faith conduct. Concurrently, they filed a motion making the extraordinary request that the bankruptcy court stay or abstain from all bankruptcy proceedings pending the outcome of the Criminal Case ("Motion for Stay"). Creditors filed an opposition.

The bankruptcy court held a hearing on the Motion for Stay and Conversion Motion and denied the Motion for Stay. In addition, it conditionally granted the Conversion Motion: (1) finding cause for conversion under § 1307(c), including unreasonable delay that is prejudicial to creditors; (2) finding that conversion was in the best interest of creditors and was required under § 1307(e) given Debtors' failure to file tax returns; (3) at Debtors' counsel's request, giving Debtors thirty days to submit tax returns and a stipulated order of confirmation ("SOC") to avoid conversion; and (4) authorizing the Trustee to upload an order converting the case if Debtors failed to complete such tasks.

Debtors appealed the bankruptcy court's denial of the Motion for Stay to the United States District Court for the District of Arizona. While the district court appeal was pending, Debtors filed a motion to dismiss their chapter 13 case under § 1307(b) ("Dismissal Motion") "as a matter of precaution, to prevent any potential claim of waiver of the right to dismiss." But they did not request a hearing until after the district court denied their motion for a stay pending appeal.⁴

Creditors and the Arizona Department of Revenue opposed the Dismissal Motion and urged conversion. They argued that case dismissal would cause a manifest injustice and substantial harm to creditors and that Debtors had been acting in bad faith.

The bankruptcy court then held a joint hearing on the Conversion Motion and Dismissal Motion. As of the hearing date, Debtors still had not: (1) amended the Plan or submitted a proposed SOC to the Trustee, despite the bankruptcy court delaying entry of a conversion order, at Debtors' counsel's request, to allow them time to do so; (2) filed their delinquent tax returns; (3) filed operating reports for their businesses; (4) provided the Trustee with her requested disclosures; and (5) filed outstanding Transaction Privilege Tax or withholding returns for their businesses.

Following the hearing, the bankruptcy court entered its order denying the Dismissal Motion and granting the Conversion Motion ("Order"). Citing Rosson v. Fitzgerald (In re Rosson) , 545 F.3d 764 (9th Cir. 2008), the bankruptcy court found that Debtors' § 1307(b) right to dismiss is not absolute and does not supersede the conversion options available under § 1307(c) or (e). Here, the bankruptcy court concluded, Debtors' delays were not excused by the concurrently pending Criminal Case. While fighting to stay in chapter 13, they did nothing more than inject delay in the bankruptcy and Civil Case. Further, they failed to file numerous tax returns by the § 1308(a) deadline. Thus, the bankruptcy court found that "[t]he Debtors have essentially used Chapter 13 to hide from creditors during the pendency of the criminal proceedings. Such conduct constitutes an abuse of the bankruptcy process, justifying denial of the Debtors' Motion to Dismiss under § 1307(b)." It concluded that conversion was in the best interest of creditors and appropriate under §§ 1307(c) and (e).

Debtors timely appealed.

JURISDICTION

The bankruptcy court had jurisdiction to determine the Conversion Motion and Dismissal Motion under 28 U.S.C. §§ 1334 and 157(b)(2)(A) and (O). See Beatty v. Traub (In re Beatty) , 162 B.R. 853, 857-58 (9th Cir. BAP 1994) (holding conversion is not effective on oral ruling; rather it is effective and operative on the date of entry on the docket), overruling recognized on other grounds by In re Rosson , 545 F.3d 764. We have jurisdiction under 28 U.S.C. § 158.

ISSUE

Did the bankruptcy court abuse its discretion when it granted Creditors' Conversion Motion and denied Debtors' Dismissal Motion?

STANDARDS OF REVIEW

We review the bankruptcy court's decision to deny a § 1307(b) request for dismissal of a chapter 13 case and to convert the case to chapter 7 for an abuse of discretion. In re Rosson , 545 F.3d at 771. The bankruptcy court abuses its discretion if it fails to identify or apply the correct legal rule to the relief requested or if its application of the correct legal standard was illogical, implausible, or without support in the record. Father M v. Various Tort Claimants (In re Roman Catholic Archbishop of Portland in Or.) , 661 F.3d 417, 424 (9th Cir. 2011).

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