Prometheus Health Imaging, Inc. v. U.S. Tr. (In re Prometheus Health Imaging, Inc.)

In re: PROMETHEUS HEALTH IMAGING, INC., Debtor.

PROMETHEUS HEALTH IMAGING, INC., Appellant, v. UNITED STATES TRUSTEE, Appellee.

BAP No. CC-14-1576-FKiKu

UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT

Argued and Submitted: October 22, 2015

November 2, 2015

NOT FOR PUBLICATION

Bk. No. 8:14-bk-10250-CB

MEMORANDUM^*

Argued and Submitted on October 22, 2015 at Los Angeles, California

Appeal from the United States Bankruptcy Court for the Central District of California

Honorable Catherine E. Bauer, Bankruptcy Judge, Presiding

Appearances: Alan F. Broidy argued for appellant Prometheus Health Imaging, Inc.

Before: FARIS, KIRSCHER, and KURTZ, Bankruptcy Judges.

INTRODUCTION

Appellant Prometheus Health Imaging, Inc. appeals from the bankruptcy court's order dismissing its chapter 11¹ bankruptcy petition for bad faith. While dismissal may be appropriate in this case, we are unable to find any evidentiary support for the factual findings supporting the court's bad faith determination. Accordingly, we VACATE the bankruptcy court's order and REMAND this case to the bankruptcy court for further proceedings.

FACTS

On January 14, 2014, Prometheus filed a petition under chapter 11.² Wendee Luke signed the petition as Prometheus's president. In its Schedule B, it listed its sole asset as a "[c]laim for damages and lost profits against General Electric Medical Systems Europa, which damages are at least $10,000,000." In its Schedule F, it identified six creditors claiming a total of $5,980,000 in unsecured, nonpriority claims.

Ms. Luke filed a declaration in which, among other things, she advised the court that Prometheus is prosecuting an appeal in France and filed for chapter 11 bankruptcy so that it may proceed with that appeal. In her declaration, she stated:

[2a.] The Debtor does not currently operate a business. The focus of the bankruptcy is the Debtor's litigation with General Electric Medical Systems Europe ("GEM") regarding an imaging machine that was wrongfully delivered to Saudi Arabia in 2002. TheDebtor had requested a specific, high quality machine, but GEM sent a different, slower machine that was not suitable for the Debtor's needs in Saudi Arabia. Litigation ensued in the District Court in Ohio, and GEM obtained a judgment against the Debtor for the principal sum of $951,000. In 2010, the Debtor brought action against GEM in Paris, where the court also ruled against the Debtor. In 2012, the Debtor filed an appeal of the Paris court decision, and that appeal is currently pending. It is my understanding that an appeal in Paris is a new matter and that the court is not bound by the lower court ruling. However, the Debtor has no assets to post a bond, and filing a bankruptcy is the only way that the appeal can proceed. If the Debtor prevails on its appeal and recovers sums from GEM, there will be some recovery for creditors. If the Debtor loses on the appeal, there will be no distribution to any creditors.

. . . .

bl. The bankruptcy had to be filed in order to proceed with the Debtor's appeal in Paris.

On June 10, 2014, Prometheus filed its chapter 11 reorganization plan and disclosure statement. Ms. Luke's declaration attached to the disclosure statement advised the court that the appeal was to be heard on February 5, 2015, with a decision expected within thirty to sixty days thereafter.

Prometheus also filed a declaration by Frederic Jeannin, its counsel in the French proceedings. He explained that, under French law, the appellate court would decide the case de novo. He also explained that:

GEM sought to stay the Appeal on the ground that the Debtor had not paid the Judgment, which is a prerequisite for the Appeal to be heard under French law. Since the Debtor had no money to pay the Judgment, the only way to proceed with the Appeal was for the Debtor to demonstrate that it was prevented to pay the Judgment and file a chapter 11 petition and seek to reinstate the appeal.

On September 3, 2014, Appellee United States Trustee for

Region 16³ objected to the disclosure statement ("Objection"). The U.S. Trustee argued generally that "[t]he disclosure statement filed in this case [Docket No. 45] does not contain sufficient information to allow for the formation of an informed judgment and the Court is urged to deny approval absent amendment or supplement." In response, Prometheus filed its First Amended Disclosure Statement Describing Original Chapter 11 Plan. The hearing to approve the disclosure statement was set for October 22, 2014.

On September 19, 2014, the bankruptcy court issued its Order to Show Cause Whether Case is Properly Filed in this Court ("OSC"). The court set a hearing for October 15 and ordered Prometheus's counsel to show cause:

(1) why venue is proper in this division, (2) why this case should not be transferred to the United States Bankruptcy Court, Central District, Los Angeles Division, (3) why this case should not be dismissed for failure to comply with Section 2.1(a)(5)(A) of the Central District Court Manual, (4) as to Counsel's potential conflict of interest in representing Debtor and creditor Munir Uwaydah, (5) why Counsel failed to disclose debtor's involvement in an ongoing adversary proceeding, case # 2:12-ap-02042-TD in the Central District, Los Angeles Division, and (6) why sanctions should not be imposed and/or this case dismissed for what appears to be an improper filing.

The court additionally stated that it "will determine whether the above entitled bankruptcy case should be dismissed as a bad faith filing . . . ."

Prometheus's counsel filed a declaration in response to the OSC, addressing each of the court's concerns. Regarding thefinal issue of an improper filing, counsel stated:

8. The Debtor's bankruptcy case should not be dismissed as a bad faith filing. As I previously advised the Court, this case is the most unusual chapter 11 case I have ever handled. The Debtor ceased business operations in 2004, and the Debtor's primary asset is the Appeal of litigation pending in Paris. As previously disclosed to the court, Frederic Jeannin, counsel for the Debtor for the Paris Appeal, advised me that the Debtor had to file bankruptcy in order to proceed with the Appeal. As I advised the Court at one of the initial status conferences, this was not a bad faith filing, a la Marsch v. Marsch (In re Marsch), 36 F.3d 825 (9th Cir. 1994), where the Ninth Circuit affirmed the ruling of the bankruptcy court that it was bad faith for debtors to file a chapter 11 petition to obtain a stay of a pending appeal when the debtor had the necessary funds to bond the appeal. Here, the Debtor has no funds, and the Appeal cannot proceed unless the bankruptcy case remains active.

Similarly, Ms. Luke, as the sole officer and director of Prometheus, stated:

6. The Debtor needed to file a chapter 11 case to proceed with the litigation in Paris against GEM. I believed it was appropriate for the Debtor to file its chapter 11 case in Orange County because (i) the Debtor's principal place of business is in Orange County; (ii) the Debtor's sole officer and director lives in Orange County; and (iii) the Debtor's agent for service of process lives in Orange County.

The bankruptcy court held the hearing on its OSC on October 15, 2014. According to the hearing transcript, the hearing lasted roughly four minutes. Excluding the introductions and discussion concerning fees, the entirety of the hearing consisted of a short exchange between the court and Prometheus's counsel, culminating in the court's dismissal of Prometheus's chapter 11 petition:

THE COURT: So I saw the information from the person who I guess is the president of Prometheus or what is her role?

MR. BROIDY: She is the sole - she is thepresident, the sole officer and director of Prometheus.

THE COURT: Okay. And it's said that she does - I left the paperwork on my desk, unfortunately, but works out of Orange County. And I did - it's a tax prep bill. It's a stip mall with - she's a tax prep -preparer.

MR. BROIDY: That's where she works out of, Your Honor. That's where her building is. But if Your Honor is concerned about the proper jurisdiction here before this court, we will consent that the matter goes - is referred to the district - to the Bankruptcy Court in Los Angeles -

THE COURT: Well, I'm -

MR. BROIDY: - before Judge Donovan.

THE COURT: Prometheus is a Delaware corporation. Is that -

MR. BROIDY: Yes, it is, Your Honor.

THE COURT: Thank you so much. It's a Delaware corporation and this whole thing just looks so fraudulent to me. I'm sorry. It's an attempt to get an automatic stay so he can relitigate in a French court what you've already lost here and already lost in France. And this strip mall tax preparer person seems to be a front for somebody else.

I mean, let's brass tacks here. I'm not buying it, you know. This is not - there is - there's somebody in the background and I know who it is and this woman is not that person, and I'm not happy about this at all. And from day one I wanted to dismiss this case and I'm going to dismiss it because this is not real.

This fellow in the background, who I believe is a fugitive at this point in time, he's using this woman, paying her to work out of the strip mall to file this bankruptcy, to continue to litigate what has been decided in two different countries already and I'm not going to let it go on anymore. I'm not. They bought time. They bought more time than I ever should have given them, but we're not stupid. [We] know what's really going on.

MR. BROIDY: I understand, Your Honor. I'll prepare the order of dismissal.

On or around November 26, 2014, the bankruptcy court enteredits Order Dismissing Chapter 11 Case. Prometheus timely filed its notice of appeal on December 10, 2014.

JURISDICTION

The bankruptcy court had jurisdiction pursuant to 28 U.S.C. §§ 1334 and 157(b)(1). We have jurisdiction under 28 U.S.C. § 158.

ISSUE

Whether the bankruptcy court abused its discretion in dismissing Prometheus's chapter 11 bankruptcy...