In re: Iqbal Mahmood
CC-16-1210-TaFC
| 9th Cir. BAP | Mar 17, 2017Background
- Debtor Iqbal Mahmood owned a mixed-use property in Cerritos that was the subject of longstanding state litigation with judgment creditor Adnan Khatib dating back to the 1990s (fraudulent conveyance, appeals, renewals, writs of execution).
- Khatib obtained judgments, recorded abstracts, renewed the judgment multiple times, and pursued writs of execution to sell the Property; competing claims (including from the Sharifs) arose over lien priority.
- On October 4, 2015, two days before a state-court hearing on sale of the Property, Mahmood filed a voluntary Chapter 11 petition and proposed a plan to preserve homestead exemption and pay secured claim holders over 7 years with small dividends to unsecured creditors.
- Mahmood filed an adversary action to determine lien validity/priority and submitted a disclosure statement estimating postpetition income and plan feasibility; the bankruptcy court valued the Property at $550,000.
- Khatib moved to dismiss under 11 U.S.C. § 1112(b) as a bad-faith filing; the bankruptcy court applied five St. Paul factors and dismissed the case as a bad-faith one-asset, two/three-party dispute lacking feasible cash flow.
- The Bankruptcy Appellate Panel affirmed, concluding the court applied the correct legal standard, its factual findings were not clearly erroneous, and any failure to treat lien-priority issues as "unusual circumstances" was harmless.
Issues
| Issue | Mahmood's Argument | Khatib's Argument | Held |
|---|---|---|---|
| Whether dismissal under §1112(b) for bad faith was proper | Filing was a legitimate attempt to reorganize, preserve homestead exemption, and resolve lien-priority issues; disclosure statement and plan show good-faith efforts | Petition was a litigation tactic to delay/enjoin enforcement of a long-standing judgment and sale of the Property | Court affirmed dismissal: petition filed in bad faith; §1112(b) cause established |
| Whether the bankruptcy court applied correct legal standard (totality of circumstances) | Court failed to consider all relevant circumstances (insolvency, ongoing reorganization efforts) | Court applied recognized St. Paul factors and need not consider every possible factor | Court applied correct standard; considering the listed factors satisfied totality-of-circumstances review |
| Whether factual findings (one-asset case, lack of unsecured creditors, insufficient cash flow, two-party dispute) were clearly erroneous | Mahmood disputed each factual finding (other assets, postpetition income, potential lien challenges by Sharifs) | Findings supported by schedules, disclosure statement, plan feasibility analysis, long litigation history | Findings were not clearly erroneous; dismissal was within discretion |
| Whether bankruptcy court erred in not appointing trustee/examiner or finding "unusual circumstances" to avoid dismissal/conversion | Lien-priority dispute (Sharifs potentially senior) is an unusual circumstance favoring bankruptcy jurisdiction and preserving estate | Lien disputes are not unusual and state court can adequately resolve priority; debtor waived arguments favoring conversion or appointment | Any error was harmless; lien-priority issue did not constitute unusual circumstances and dismissal was appropriate |
Key Cases Cited
- In re Marsch, 36 F.3d 825 (9th Cir. 1994) (bad-faith filing constitutes cause under § 1112(b))
- Hutton v. Treiger (In re Owens), 552 F.3d 958 (9th Cir. 2009) (dismissal for bad faith reviewed for abuse of discretion)
- In re Sullivan, 522 B.R. 604 (9th Cir. BAP 2014) (two-step review: legal standard de novo, factual findings for clear error; discussion of unusual circumstances and best interests inquiry)
- In re St. Paul Self Storage Ltd. P’ship, 185 B.R. 580 (9th Cir. BAP 1995) (factors for assessing bad-faith Chapter 11 filings)
- In re Stolrow’s, Inc., 84 B.R. 167 (9th Cir. BAP 1988) (earlier list of circumstantial factors indicating bad faith)
- United States v. Hinkson, 585 F.3d 1247 (9th Cir. 2009) (en banc) (standard for applying two-step abuse-of-discretion review)
- In re Prod. Int’l Co., 395 B.R. 101 (Bankr. D. Ariz. 2008) (lien-priority disputes are not the sort of "unusual circumstances" that preclude dismissal under § 1112(b))