Sullivan v. Harnisch (In Re Sullivan), 522 B.R. 604

Sullivan filed a Chapter 11 petition on Feb 4, 2014, followed by an eight-day status report detailing ongoing New York litigation with Peconic entities and proposed plan goals.
Appellees held a large judgment and related liens and moved to dismiss the case as bad faith and nonconfirmable, arguing a two‑party dispute with no reasonable plan.
The bankruptcy court granted the motion, dismissed the case for bad faith without considering whether dismissal or conversion would best serve creditors and the estate.
The United States Trustee did not join the motion; Debtor opposed it with evidence and declarations.
The BAP reversed, holding the court failed to assess best interests and that bad faith findings were not adequately supported on this record; conversion remained a viable option.
Record showed six years of litigation, a judgment lien within the preference period, and significant prepetition insolvency considerations enabling a breathing spell and estate leveling

Issue	Plaintiff's Argument	Defendant's Argument	Held
Did the bankruptcy court abuse discretion by dismissing rather than considering conversion?	Sullivan argues §1112(b) requires weighing dismissal vs. conversion in the estate's best interests.	Appellees contend dismissal was in creditors' best interests due to lack of plan viability.	Yes; court abused discretion by not considering conversion and best interests of all creditors.
Was the debtor's bad faith finding supported by the record?	Sullivan contends proceeding was to enable reorganization and protect assets; not an improper purpose.	Appellees claim the filing was to halt collection and harass creditors based on two-party dispute indicators.	No; factual record did not establish bad faith; conclusory findings were not supported.
Is conversion to Chapter 7 a viable alternative given §707(b) considerations?	Debtor relied on potential solvency and post-petition income to propose a plan; conversion possible.	Appellees urged that §707(b) would bar conversion due to consumer-debt emphasis.	Yes; conversion was a viable option and error to foreclose it based on §707(b) on this record.

In re Arnold, 806 F.2d 939 (9th Cir. 1986) (good faith assessed by an amalgam of factors; debtor status and motives matter)
In re Owens, 552 F.3d 958 (9th Cir. 2009) (court must consider interests of all creditors in §1112(b) dismissal vs conversion)
In re Superior Siding & Window, Inc., 14 F.3d 243 (4th Cir. 1994) (balance of creditors' interests governs whether dismissal or conversion is better)
In re Marshall, 721 F.3d 1032 (9th Cir. 2013) (bad faith factors may evidence intent to abuse bankruptcy process)