In re: Orange County Bail Bonds, Inc.
GAN, Bankruptcy Judge:
In these related appeals, we consider whether the bankruptcy court abused its discretion by confirming the chapter 111 plan of debtor Orange County Bail Bonds, Inc. (“Debtor“) and by denying a motion to convert or dismiss filed by creditor Legal Service Bureau, Inc., dba Global Fugitive Recovery (“Global“). We find no abuse of discretion and AFFIRM both orders. We publish to explain the unique role of the bankruptcy court, in a case under subchapter V, to set the commitment period in which a debtor must pay its projected disposable income or its value.
FACTS2
A. Prepetition Events
Debtor is a small bail bond company that has operated primarily in Orange County, California since 1997. Global is a bail fugitive recovery business that contracts with bail bond companies to capture and arrest fugitives who forfeit bail and flee.
In 2014, Debtor entered into a surety bail bond agreement with Parwin Saddozai and Imron Saddozai as bail bond agent for their imprisoned son Shikeb Saddozai (the “Defendant“). As security for the
Global invoiced Debtor $300,000 and Debtor in turn invoiced Ms. Saddozai $326,412.29 for Global‘s fee, legal fees, and a past due balance on the bond premium. Debtor advised Ms. Saddozai that it would initiate foreclosure proceedings within 30 days if she did not pay the amount due.
Ms. Saddozai disputed the obligation and filed suit in California Superior Court seeking a release of the deed of trust. The state court stayed the pending foreclosure and later consolidated the case with a separate suit filed by Global against Debtor.
In 2018, the state court entered judgment in favor of Global, and against Debtor, in the amount of $327,750,3 and it entered judgment in favor of Debtor, and against Ms. Saddozai, in the amount of $326,000. The state court denied Ms. Saddozai‘s request for a permanent injunction to prevent foreclosure.
Debtor appealed the judgment, and Ms. Saddozai cross-appealed. Ms. Saddozai was subsequently dismissed from the appeal, and she filed a chapter 13 bankruptcy petition, staying Debtor‘s ability to foreclose.
B. The Bankruptcy, Amended Petition, And Motion To Convert Or Dismiss
Debtor‘s principal asset consisted of its judgment against Ms. Saddozai and its deed of trust on the Saddozai Property, which it valued at $550,000. Debtor‘s claims consisted primarily of Global‘s unsecured claim in the amount of $542,506.03 and unsecured insider claims totaling $721,926.90.4
Debtor filed its chapter 11 plan and disclosure statement in December 2019. Prior to the final hearing on approval of the disclosure statement, Debtor filed an amended petition, electing to proceed as a small business debtor under subchapter V.5
In response, Global filed a motion to convert or dismiss the case and objected to Debtor‘s amended petition (“Dismissal Motion“). Global argued that the case was filed in bad faith as a litigation tactic to forestall Global‘s collection efforts and to gain a litigation advantage in the state6
Global argued that Debtor‘s revenue would be insufficient to fund a plan of reorganization because California had recently enacted bail reform legislation (“SB10“) which threatened to severely impact the bail bond industry. It maintained that although SB10 was stayed by a pending referendum, voters were not likely to repeal the law, and it would be implemented after the November 2020 referendum. Finally, Global objected to the amended petition and argued that allowing Debtor to change course several months into the case would create a procedural quagmire and would constitute cause to dismiss or convert because statutory deadlines under subchapter V had already passed.6
Debtor opposed the Dismissal Motion and argued that the case was filed in good faith to preserve an ongoing business and to pursue the estate‘s largest asset, the Saddozai judgment. Debtor rejected the notion that its election to proceed under subchapter V established cause to convert or dismiss because the deadlines could be extended by the court. Debtor
While the Dismissal Motion was pending, the bankruptcy court held the initial subchapter V status conference and set deadlines for Debtor to file an amended plan and disclosure statement. The court continued the status conference and set a hearing for July 16, 2020, on approval of Debtor‘s amended disclosure statement.
Prior to the hearing on the Dismissal Motion, the bankruptcy court issued a tentative decision stating its intent to continue the hearing to July 2020 to allow the court to consider the motion in the context of an amended plan and disclosure statement and to hear from subchapter V trustee Mark M. Sharf (“Trustee“) about the prospects for reorganization. The parties did not oppose the tentative decision, and the court continued the hearing to July 16, 2020.
At that hearing, Debtor, Global, and Trustee agreed that Debtor‘s ability to reorganize depended on the outcome of the referendum and recovery from the Saddozai Property. The bankruptcy court continued the hearing on the Dismissal Motion and on Debtor‘s disclosure statement to November 19, 2020, and it stated that if the results of the November 3, 2020 referendum proved unfavorable to Debtor, it would likely dismiss or convert the case.
Prior to the December 2020 hearing, the bankruptcy court issued a tentative decision stating its intent to deny the Dismissal Motion. The bankruptcy court indicated that Global had not satisfied its burden to demonstrate Debtor‘s bad faith. At the hearing, Global argued that, rather than deny the Dismissal Motion, the court should continue the matter to the date set for confirmation. The bankruptcy court set a confirmation hearing for March 4, 2021, and it continued the hearing on the Dismissal Motion to coincide with confirmation.
C. Debtor‘s Amended Plans And The Court‘s Orders
On January 5, 2021, Debtor filed a Second Amended Disclosure Statement and Plan (“SAP“). Debtor proposed to pay allowed claims from the proceeds of the Saddozai Property and from Debtor‘s future earnings. Debtor stated that it foreclosed on the Saddozai Property in August 2020 and had obtained a buyer at $900,000. The bankruptcy court subsequently approved the sale, resulting in net proceeds to the estate of $432,972.95 (the “Saddozai Proceeds“).
In the SAP, Debtor separately classified Global‘s unsecured claim, and proposed to pay it $100,000 from the Saddozai Proceeds and the remainder from actual disposable income produced up to five years post-
Global objected to the SAP, arguing that it was not fair and equitable because Debtor‘s projections were unsubstantiated and Debtor operated at a loss throughout the bankruptcy. It also objected that the SAP was not feasible and not proposed in good faith.
Trustee objected and argued that pursuant to
At the March 4, 2021 hearing, the bankruptcy court determined that the Plan, as amended and with modifications agreed to at the hearing,
In April 2021, the bankruptcy court entered an order confirming the Plan. The court held that Debtor‘s payment of actual disposable income, in an amount not less than $181,000, would satisfy
JURISDICTION
The bankruptcy court had jurisdiction under
ISSUES
Did the bankruptcy court abuse its discretion by confirming the Debtor‘s Plan?
Did the bankruptcy court abuse its discretion by denying the Dismissal Motion?
STANDARDS OF REVIEW
We review the bankruptcy court‘s decision to confirm a chapter 11 plan for abuse of discretion. Marshall v. Marshall (In re Marshall), 721 F.3d 1032, 1045 (9th Cir. 2013). We also review the bankruptcy court‘s denial of a motion to dismiss or convert for abuse of discretion. Id. at 1049.
We review the bankruptcy court‘s factual findings regarding whether a plan satisfies confirmation requirements for clear error. See Comput. Task Grp., Inc. v. Brotby (In re Brotby), 303 B.R. 177, 184 (9th Cir. BAP 2003). Factual findings are clearly erroneous if they are illogical, implausible, or without support in the record. Retz v. Samson (In re Retz), 606 F.3d 1189, 1196 (9th Cir. 2010).
DISCUSSION
A. The Bankruptcy Court Did Not Abuse Its Discretion By Confirming Debtor‘s Chapter 11 Plan.
Because Global did not accept the Plan, the bankruptcy court considered confirmation under the “cramdown” provision of
1. The Plan Is Fair And Equitable To Global.
Whether a chapter 11 plan is “fair and equitable” is a factual determination that we review for clear error. First S. Nat‘l Bank v. Sunnyslope Hous. Ltd. P‘ship (In re Sunnyslope Hous. Ltd. P‘ship), 859 F.3d 637, 646 (9th Cir. 2017) (en banc), as amended (June 23, 2017) (citing Acequia, Inc. v. Clinton (In re Acequia, Inc.), 787 F.2d 1352, 1358 (9th Cir. 1986)).
Section 1191(c)(2) defines the fair and equitable requirement under subchapter V to include:
(A) the plan provides that all of the projected disposable income of the debtor to be received in the 3-year period, or such longer period not to exceed 5 years as the court may fix . . . will be applied to make payments under the plan; or
(B) the value of the property to be distributed under the plan in the 3-year period, or such longer period not to exceed 5 years as the court may fix . . . is not less than the projected disposable income of the debtor.
The Plan does not provide for payment of Debtor‘s projected disposable income. Instead, it provides for an effective date payment of
However, Debtor argues that we should affirm the court‘s decision because the record is clear that the Plan satisfies
But we agree that the Plan satisfies
Congress enacted subchapter V as an “expedited process for small business debtors to reorganize quickly, inexpensively, and efficiently . . .” In re Seven Stars on the Hudson Corp., 618 B.R. 333, 336 (Bankr. S.D. Fla. 2020); see also In re Progressive Sols., Inc., 615 B.R. 894, 900 (Bankr. C.D. Cal. 2020) (“[T]he primary purpose of [subchapter V] is to promote successful reorganizations using the tools that are now available under current law.“).
As part of the streamlined, flexible process under subchapter V, the Bankruptcy Code sets a baseline requirement that a debtor commit three
The court‘s role in setting a longer commitment period is unique to subchapter V. Under chapter 13, the “applicable commitment period” is set by statute.
Here, the record does not indicate that the bankruptcy court set a longer commitment period for purposes of
2. The Plan Was Proposed In Good Faith.
Pursuant to
Section 1129(a)(3) directs courts to look only to the proposal of a plan, not its terms. Garvin v. Cook Invs. NW, SPNWY, LLC, 922 F.3d 1031, 1035 (9th Cir. 2019). Whether a plan is proposed in good faith is a factual finding based on the totality of the circumstances. Todeschi v. Juarez (In re Juarez), 603 B.R. 610, 626 (9th Cir. BAP 2019) (citations omitted); Franklin High Yield Tax-Free Income Fund v. City of Stockton (In re City of Stockton), 542 B.R. 261, 279 (9th Cir. BAP 2015).
Global offers no argument why Debtor‘s proposal of the plan was not in good faith or why the bankruptcy court clearly erred in its finding. Global‘s arguments relate to good faith in filing the petition and prosecuting the case, not to Debtor‘s proposal of its Plan. And because the Plan achieves a result consistent with the objectives and purposes of the Code, we discern no error in the bankruptcy court‘s finding that the Plan satisfies
3. The Plan Is Feasible.
Global argues that the Plan is not feasible because Debtor had continual loses throughout the case and Debtor‘s projected future income is unsubstantiated.
Section 1129(a)(11) requires the court to determine that “[c]onfirmation of the plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor . . . .” The purpose of the requirement is to “prevent confirmation of visionary schemes which promise creditors . . . more under a proposed plan than the debtor can possibly attain after confirmation.” Pizza of Hawaii, Inc. v. Shakey‘s, Inc. (In re Pizza of Hawaii, Inc.), 761 F.2d 1374, 1382 (9th Cir. 1985).
To demonstrate feasibility, a plan proponent must show a “reasonable probability” of success. In re Acequia, 787 F.2d at 1364. So long
The bankruptcy court determined that the Plan had a reasonable probability of success based on Debtor‘s projections. It reasoned that Debtor‘s performance during the period of uncertainty surrounding SB10 was not relevant to Debtor‘s ability to successfully reorganize after SB10 was repealed. The court determined that Debtor‘s projections, though optimistic, were based on its historical performance prior to enactment of SB10 and the COVID-19 pandemic. The bankruptcy court‘s findings are not clearly erroneous.
Additionally, the Plan does not require Debtor to meet its projections to succeed. As discussed above, the effective date payment satisfies the minimum fair and equitable requirement. The Plan provides for payments of actual disposable income and conditions Debtor‘s discharge on those payments totaling at least $181,000. But the Plan specifically provides that if Debtor does not generate actual disposable income no payments will be due to creditors. In other words, if Debtor‘s projections are as fanciful as Global argues, Debtor may not receive a discharge, but it will comply with Plan requirements.
The bankruptcy court did not err in finding the Plan feasible, and it did not abuse its discretion by confirming the Plan.
Global argues that the court should have granted the Dismissal Motion because cause existed under
Global also contends that, under
The bankruptcy court denied the Dismissal Motion as moot after it confirmed Debtor‘s Plan. Although the court did not make express findings, we apply the clear error standard to implied as well as express factual findings, Roth v. Educational Credit Management Corp. (In re Roth), 490 B.R. 908, 915 (9th Cir. BAP 2013), and we do not substitute our judgment for that of the bankruptcy court. Smith v. James Irvine Found., 402 F.2d 772, 774 (9th Cir. 1968).
1. Bad Faith
Filing a bankruptcy petition in bad faith constitutes “cause” for dismissal or conversion under
Bad faith depends on an amalgam of factors and no specific factor is determinative. Idaho Dep‘t of Lands v. Arnold (In re Arnold), 806 F.2d 937, 939 (9th Cir. 1986). A finding of bad faith is made on a case-by-case basis; there is no list of factors which must be present in each case to make the finding, and the weight given to any factor depends on the circumstances of the individual case. Can-Alta Props., Ltd v. State Sav. Mortg. Co. (In re Can-Alta Props., Ltd.), 87 B.R. 89, 91 (9th Cir. 1988); Meadowbrook Invs.’ Grp. v. Thirtieth Place, Inc. (In re Thirtieth Place, Inc.), 30 B.R. 503, 506 (9th Cir. BAP 1983).
“Perhaps the most compelling grounds for denying a motion to dismiss grounded on bad faith is the determination that a reorganization plan qualifies for confirmation . . . because a debtor‘s showing that a plan of reorganization is ready for confirmation essentially refutes a contention that the case is filed or prosecuted in bad faith.” In re Marshall, 721 F.3d at 1049 (cleaned up).
Global argues that the bankruptcy court erred because several factors weighed in favor of finding bad faith, including that Debtor filed the case to avoid posting a bond in the state court appeal, the case is essentially a two-party dispute, and Debtor incurred significant administrative claims to the detriment of its unsecured creditors.
But the bankruptcy court considered the factors argued by Global and rejected its claim that the petition was filed in bad faith. The court‘s finding is neither illogical nor implausible, and it is supported by the record. Although Global held a considerable portion of the debt in this case, Debtor had other creditors and legitimate reasons for filing the
2. Subchapter V Deadlines
On appeal, Global concedes that Debtor could amend its petition to proceed under subchapter V. But Global argues that Debtor‘s amendment created cause to dismiss or convert under
Section 1189(b) requires a debtor under subchapter V to file its plan within 90 days of the order for relief but permits the court to extend the deadline “if the need for an extension is attributable to circumstances for which the debtor should not justly be held accountable.” The bankruptcy court implicitly did so when it set, and later extended, the deadline for Debtor to file its amended disclosure statement and plan after Debtor amended its petition. Section 1189(b) does not limit the court‘s ability to extend the deadline prior to its expiration. See In re Tibbens, No. 19-80964, 2021 WL 1087260 (Bankr. M.D.N.C. Mar. 19, 2021). And Debtor amended its petition within weeks of subchapter V becoming effective. Global provides no argument why the court‘s extensions were an abuse of
3. Section 1112(b)(4)(A)
Global‘s argument that there was cause to dismiss or convert under
The first element may be established by demonstrating that a debtor maintained a negative cash flow position after the petition date or incurred a loss that would (1) negatively impact the estate and interest of creditors; or (2) result in unpaid postpetition debts and administrative expenses that take priority over prepetition claims. Id. The second element requires the bankruptcy court to determine whether the continuing losses can be corrected and whether Debtor is capable of rehabilitation. 7 COLLIER ON BANKRUPTCY ¶ 1112.04 [6][a][ii] (Alan N. Resnick & Henry J. Sommer, eds. 16th ed. rev. 2021). “In almost every case, the debtor‘s prospects will depend on whether the debtor has formulated, or can formulate within a reasonable amount of time, a reasonably detailed business plan.” Id.
Debtor‘s ability to rehabilitate depended largely on whether it could recover the Saddozai Property and whether SB10 would be repealed by the referendum. Global specifically argued in the Dismissal Motion that Debtor would be unable to rehabilitate because of the effect of SB10 and the likelihood that voters would not repeal SB10 in the referendum.
Even at the time Global filed the Dismissal Motion, there was not an absence of a reasonable likelihood of rehabilitation because foreclosure efforts and the referendum were pending, and it was reasonable they could prove favorable to Debtor‘s reorganization. The court appropriately continued the hearing. After the referendum results and recovery of the Saddozai Property, Debtor‘s ability to rehabilitate became clear, and Debtor proposed a confirmable plan of reorganization. The bankruptcy court did not abuse its discretion by denying the Dismissal Motion.
C. We Do Not Apply The Doctrine Of Equitable Mootness.
Debtor urges us to dismiss the appeal from the confirmation order as equitably moot. Equitable mootness is “a judge-made abstention doctrine unrelated to the constitutional prohibition against hearing moot appeals.” Rev Op Grp. v. ML Manager LLC (In re Mortgs. Ltd.), 771 F.3d 1211, 1214 (9th Cir. 2014) (internal quotation marks omitted). We have discretion to dismiss an appeal as equitably moot “when a comprehensive change of
CONCLUSION
Based on the foregoing, we AFFIRM the bankruptcy court‘s order confirming Debtor‘s Plan and AFFIRM its order denying Global‘s Dismissal Motion.