Silver v. PHH Mortg. Corp. (In re Silver)

In re: MARCUS DANIEL SILVER, Debtor.

MARCUS DANIEL SILVER, Appellant, v. PHH MORTGAGE CORPORATION; U.S. BANK NATIONAL ASSOCIATION, as Trustee for Greenpoint Mortgage Funding Trust Mortgage Pass-Through Certificates, Series 2006-AR7; WESTERN PROGRESSIVE LLC, Interested Parties.

BAP No. CC-22-1101-LFT

Bk. No. 2:21-bk-16492-ER

United States Bankruptcy Appellate Panel of the Ninth Circuit

December 19, 2022

NOT FOR PUBLICATION

Appeal from the United States Bankruptcy Court for the Central District of California Ernest M. Robles, Bankruptcy Judge Presiding

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

MEMORANDUM ^[*]

INTRODUCTION

Marcus Silver ("Debtor") appeals the bankruptcy court's order denying his motion to convert his case from chapter 7^[1] to chapter 13 and the order denying his motion to reconsider. By Debtor's own admission, the sole reason he sought conversion was to stave off foreclosure and to litigate his state law claims against his mortgage lender and others, even though the state court had already found that he would not succeed on the merits of those claims. The bankruptcy court therefore found that Debtor sought conversion in bad faith and denied the motion to convert. It also denied reconsideration, finding that Debtor had demonstrated no error in the court's initial ruling. Seeing no abuse of discretion in the bankruptcy court's rulings, we AFFIRM.

FACTS^[2]

In July 2021, Debtor filed a lawsuit in Los Angeles County Superior Court (the "State Court Action") against PHH Mortgage Corporation, U.S. Bank National Association ("U.S. Bank"), and Western Progressive, LLC (collectively, "Defendants"). The complaint asserted several state law claims and sought, among other things, to stop a pending foreclosure sale of Debtor's Los Angeles residence (the "Property") and to quiet title on the ground that the mortgage loan is void.^[3] On August 16, 2021, the state court denied Debtor's motion for a preliminary injunction, finding that although the balance of harms weighed in Debtor's favor, he had "not shown any likelihood of success on the merits."

That same day, Debtor, acting pro se, filed a chapter 7 petition. He scheduled a disputed claim for $2.2 million secured by the Property, a $205.31 priority unsecured debt, and $15,651.37 in nonpriority unsecured debts. Although the chapter 7 trustee filed a Report of No Distribution, no discharge has been entered: in November 2021, the bankruptcy court ordered that no discharge be entered until after the motion to convert has been adjudicated.

In October 2021, Debtor removed the State Court Action to the bankruptcy court. Defendants moved to remand, arguing that the bankruptcy court lacked jurisdiction, and if it had jurisdiction, it should remand on equitable grounds.

Debtor filed an opposition to the motion to remand and a motion to convert his case to chapter 13, which was unopposed. In his opposition to the motion to remand, Debtor stated that if the motion were granted, he would likely withdraw his state court complaint and refile in the bankruptcy court.

After a hearing, the bankruptcy court granted the motion to remand and denied the motion to convert. The bankruptcy court found that the conversion motion was brought in bad faith because Debtor filed it solely to defeat the motion to remand so he could have his state law claims adjudicated in the bankruptcy court. The court noted that Debtor removed the State Court Action shortly after suffering an adverse ruling and filed his motion to convert only after Defendants filed their remand motion, showing that forum shopping was the underlying motivation for conversion.

Debtor moved for reconsideration of the order denying the motion to convert, arguing that he did not act in bad faith because he was simply trying to save his home. He also stated that he had requested dismissal of the State Court Action and that his financial circumstances had changed so that he was now able to pay all his "legitimate" creditors.^[4] The bankruptcy court denied the motion, finding that Debtor had not shown error in the court's initial ruling.

Debtor timely appealed the denial of the motion to convert and motion for reconsideration.^[5] On the same day he filed his notice of appeal, Debtor filed an adversary proceeding against U.S. Bank (as Trustee for Greenpoint Mortgage Funding Trust Mortgage Pass-Through Certificates, Series 2006-AR7) asserting claims for fraud, conspiracy, slander of title, intentional infliction of emotional distress, violations of various California statutes, and violation of the automatic stay. The bankruptcy court has stayed that adversary proceeding pending resolution of this appeal.^[6]

JURISDICTION

The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and 157(b)(2)(A). We have jurisdiction under 28 U.S.C. § 158.^[7]

ISSUES

Did the bankruptcy court abuse its discretion in denying Debtor's motion to convert? Did the bankruptcy court abuse its discretion in denying Debtor's motion for reconsideration?

STANDARDS OF REVIEW

We review the bankruptcy court's denial of a motion to convert and denial of a motion for reconsideration for abuse of discretion. Levesque v. Shapiro (In re Levesque), 473 B.R. 331, 335 (9th Cir. BAP 2012) (conversion); Carruth v. Eutsler (In re Eutsler), 585 B.R. 231, 235 (9th Cir. BAP 2017) (reconsideration). A bankruptcy court abuses its discretion if it applies an incorrect legal standard or its factual findings are illogical, implausible, or without support in the record. TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 832 (9th Cir. 2011).

A bankruptcy court's finding of bad faith is reviewed for clear error. Khan v. Barton (In re Khan), 846 F.3d 1058, 1065 (9th Cir. 2017). Under the clearly erroneous standard of review, if the bankruptcy court's findings are plausible in light of the record viewed in its entirety, we may not reverse even if we would have weighed the evidence differently. "Where there are two permissible views of the evidence, the factfinder's choice between them cannot be clearly erroneous." Anderson v. City of Bessemer City, 470 U.S. 564, 574 (1985) (citations omitted).

We may affirm on any basis supported by the record. Caviata Attached Homes, LLC v. U.S. Bank, N.A. (In re Caviata Attached Homes, LLC), 481 B.R. 34, 44 (9th Cir. BAP 2012).

DISCUSSION

A. The bankruptcy court did not abuse its discretion in denying Debtor's motion to convert.

Section 706(a) of the Bankruptcy Code provides: "The debtor may convert a case under this chapter to a case under chapter 11, 12, or 13 of this title at any time, if the case has not been converted under section 1112, 1208, or 1307 of this title. . . ." Despite the seemingly unconditional language of this statute, the right to convert a chapter 7 case to one under chapter 13 is not absolute. See Marrama v. Citizens Bank of Mass., 549 U.S. 365, 372-74 (2007). There, the Court held that the right to convert is qualified by § 706(d), which provides: "Notwithstanding any other provision of this section, a case may not be converted to a case under another chapter of this title unless the debtor may be a debtor under such chapter." A debtor seeking conversion to chapter 13 does not qualify under that chapter if he or she has engaged in bad faith or fraudulent conduct or is otherwise ineligible for chapter 13 relief. Marrama, 549 U.S. at 372-74. This is because bad faith is routinely held to constitute "cause" for dismissal of a chapter 13 case under § 1307(c). Id. at 373.

Accordingly, the Court concluded, the bankruptcy courts' authority "to take any action that is necessary or appropriate 'to prevent an abuse of process' described in § 105(a) of the Code" justifies "immediate denial of a motion to convert filed under § 706 in lieu of a conversion order that merely postpones the allowance of equivalent relief and may provide a debtor with an opportunity to take action prejudicial to creditors." Id. at 375. In other words, if sufficient bad faith exists to justify dismissal of a potential chapter 13 case, the bankruptcy court need not engage in the pointless exercise of ordering conversion and then dismissing the converted case.

To determine the existence of bad faith sufficient to order dismissal of a chapter 13 case, the bankruptcy court must consider the totality of the circumstances. See Leavitt v. Soto (In re Leavitt), 171 F.3d 1219, 1224 (9th Cir. 1999). "A finding of bad faith does not require fraudulent intent by the debtor." Id. Factors to consider in determining the presence of bad faith include:

(1) whether the debtor misrepresented facts in his petition or plan, unfairly manipulated the Bankruptcy Code, or otherwise filed his Chapter 13 petition or plan in an inequitable manner;

(2) the debtor's history of filings and dismissals;

(3) whether the debtor only intended to defeat state court litigation; and,

(4) whether egregious behavior is present.

Id. (cleaned up).

These factors are "simply factors to consider[,]" and "not every one of them must be met. . . . [W]hat matters is the totality of the circumstances." In re Khan, 846 F.3d at 1066 (cleaned up). Filing a bankruptcy case to defeat or delay state court litigation, even if that is not the only purpose for the filing, constitutes bad faith. See id.; Eisen v. Curry (In re Eisen), 14 F.3d 469, 470-71 (9th Cir. 1994); Chinichian v. Campolongo (In re Chinichian), 784 F.2d 1440, 1445 (9th Cir. 1986).

As noted, the bankruptcy court found that Debtor's sole motivation for seeking conversion was forum shopping. This Panel has held that such a finding constitutes bad faith sufficient to warrant dismissal of a chapter 11 case. St Paul Self Storage Ltd. P'ship v. Port Authority of the City of St. Paul (In re St. Paul...