36 F.4th 958
9th Cir.2022Background
- Debtor Allana Baroni filed bankruptcy (converted from Chapter 13 to Chapter 11) and proposed a confirmed Chapter 11 plan that required disputed mortgage payments to be placed in Reserve Accounts pending adversary proceedings; if a creditor’s claim was allowed the Reserve funds and future payments would be directed to that creditor.
- Baroni litigated lien challenges against Wells Fargo and Bank of New York Mellon (Bank of NYM); after losing to Wells Fargo she initially refused to transfer reserves but later paid; after losing to Bank of NYM she again refused to transfer reserves or make loan payments, citing IRS 1099-C forms she received and disputing the remaining balance.
- Six months after the Plan required transfer to Bank of NYM (and with at least ~$200,000 past due), Bank of NYM moved under 11 U.S.C. § 1112 to convert the Chapter 11 case to Chapter 7; the bankruptcy court granted conversion as a material default and the district court affirmed.
- After conversion the Chapter 7 Trustee sought turnover of undistributed sale and rental proceeds; Baroni argued those assets had revested in her at confirmation and thus were not part of the Chapter 7 estate.
- The bankruptcy court (and the district court on appeal) applied this court’s precedent (Hillis Motors / Pioneer) and concluded the Plan’s language and purpose kept the income/proceeds subject to the Plan, so unadministered proceeds revested in the Chapter 7 estate and had to be turned over; this court affirmed both conversion and turnover orders.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether failure to transfer Reserve funds and make payments constituted "cause" (material default) under 11 U.S.C. § 1112 | Baroni: not a material default because she otherwise performed the Plan and could cure immediately | Bank of NYM: refusal to transfer funds and make payments after losing adversary, six-month default and large past-due amount is a material default | Court: material default; cause existed and conversion permissible |
| Which party bears the burden to establish "cause" for conversion | Baroni: (challenged conversion but did not contest burden) | Bank of NYM: as movant must prove cause | Court: movant seeking relief under § 1112(b)(1) bears initial burden to establish cause |
| Whether "unusual circumstances" or ability to cure foreclose relief under § 1112(b)(2) (1099‑C issue) | Baroni: IRS 1099‑Cs created unique confusion and she could cure immediately, so conversion was not in creditors’ best interests | Bank of NYM: 1099‑C dispute was litigated late and is not an "unusual" circumstance; creditors’ interests favor conversion | Court: § 1112(b)(2) exception not met; cure ability alone insufficient; conversion in creditors’ and estate’s best interests |
| Whether unadministered sale/rental proceeds revest in debtor at confirmation or become part of Chapter 7 estate upon conversion | Baroni: § 1141 vesting at confirmation revested property in debtor so Chapter 7 estate had no assets | Trustee/Bank: Plan’s language, purpose, and continued court oversight kept proceeds subject to the Plan; upon conversion unadministered proceeds revert to Chapter 7 estate | Court: applying Hillis/Pioneer holistic analysis, proceeds did not fully revest in debtor and reverted to Chapter 7 estate; turnover required |
Key Cases Cited
- Hillis Motors, Inc. v. Haw. Auto. Dealers’ Ass’n, 997 F.2d 581 (9th Cir.) (post-confirmation plan language/purpose can keep assets in the estate)
- Pioneer Liquidating Corp. v. United States Trustee (In re Consol. Pioneer Mortg. Entities), 264 F.3d 803 (9th Cir.) (unadministered assets may revest in Chapter 7 estate when plan contemplates future distributions and court oversight)
- U.S. v. Whiting Pools, Inc., 462 U.S. 198 (Sup. Ct.) (Chapter 11’s purpose to enable reorganization and operation as a going concern)
- In re Owens (Shulkin Hutton, Inc. v. Treiger), 552 F.3d 958 (9th Cir.) (bankruptcy court must consider interests of all creditors when deciding conversion)
- AMC Mortg. Co. v. Tenn. Dep’t of Rev. (In re AMC Mortg. Co., Inc.), 213 F.3d 917 (6th Cir.) (failure to make plan payments can constitute material default)
- Saxman v. Educ. Credit Mgmt. Corp. (In re Saxman), 325 F.3d 1168 (9th Cir.) (standard of appellate review of bankruptcy court decisions)