In re: Jack C. Pryor
CC-16-1049-McTaF
| 9th Cir. BAP | Nov 18, 2016Background
- Debtor Jack C. Pryor filed an individual Chapter 11 in Oct. 2015 after two prior bankruptcy filings within the previous year; he owned 100% of two companies (Diversified Product Industries (DPI) and Access Solar) and various real property.
- At an initial U.S. Trustee (UST) interview (Oct. 27, 2015), the UST auditor advised Pryor to provide a 7-day package of documents, including proof of liability insurance for the two businesses; Pryor did not timely deliver the package.
- The UST filed a Motion to Dismiss or Convert (Nov. 4, 2015) listing missing items (including proof of insurance and other documents). Several continuances followed; the court warned Pryor the Feb. 9, 2016 hearing was his "last shot."
- On Feb. 2 the UST emailed a supplemental list of outstanding compliance items (including proof of insurance for DPI and Access Solar and payment of quarterly UST fees). Pryor’s counsel filed a late opposition on Feb. 9 asserting the businesses were inactive and uninsured.
- At the Feb. 9 hearing the UST’s auditor testified that Pryor had indicated the businesses were operating at the initial interview; Pryor did not appear. The bankruptcy court found cause (failure to maintain insurance, failure to timely provide requested information, and failure to timely pay UST fees) and converted the case to Chapter 7.
Issues
| Issue | Plaintiff's Argument (Pryor) | Defendant's Argument (UST) | Held |
|---|---|---|---|
| Whether conversion to Chapter 7 was proper under § 1112(b) | Pryor: lacked adequate notice and opportunity to be heard re: insurance requirement and evidentiary hearing procedure | UST: gave statutory and constitutionally sufficient notice (audit interview, motion, Feb. 2 email); Pryor failed to comply with multiple requirements including insurance and fees | Affirmed: court did not abuse discretion; notice and opportunity to be heard were adequate; multiple grounds supported conversion |
| Whether lack of insurance on debtor-owned operating entities constitutes "cause" under § 1112(b) | Pryor: businesses were inactive so insurance was unnecessary; insufficient notice of that basis | UST: failure to maintain liability insurance that risks estate/public is cause; debtor had represented entities were operating | Held: court reasonably found failure to maintain insurance was cause (debtor did not challenge the merits on appeal) |
| Whether procedural due process was violated by taking live testimony and limiting some questioning | Pryor: court denied continuance so debtor could testify and improperly curtailed questioning of UST witness | UST: testimony arose from late-filed factual assertion; parties had waived notice; no prejudice from limited questioning | Held: no due process violation—debtor’s counsel did not timely request continuance or request debtor’s testimony; no prejudice shown |
| Whether conversion could be affirmed on alternative grounds | Pryor: argues conversion was harsh and should be scrutinized | UST: timely payment of UST quarterly fees and delinquent operating reports support cause under § 1112(b) | Held: alternative grounds (delinquent UST fees, failure to timely provide information and operating reports, prior failed cases) independently support conversion |
Key Cases Cited
- Pioneer Liquidating Corp. v. U.S. Trustee (In re Consolidated Pioneer Mortgage Entities), 264 F.3d 803 (9th Cir.) (standard of abuse of discretion for conversion decisions)
- United States v. Hinkson, 585 F.3d 1247 (9th Cir.) (definition of abuse of discretion)
- Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306 (U.S. 1950) (due process notice standard)
- Rosson v. Fitzgerald (In re Rosson), 545 F.3d 764 (9th Cir.) (prejudice required to show due process violation in bankruptcy proceedings)
- Beneficial California, Inc. v. Villar (In re Villar), 317 B.R. 88 (9th Cir. BAP) (notice/hearing analysis)
- Nelson v. Meyer (In re Nelson), 343 B.R. 671 (9th Cir. BAP) (two-step § 1112(b) analysis: cause then balancing)