In re Bailey and Associates APC, No. 8:2010cv01856 - Document 44 (C.D. Cal. 2011)

Court Description: ORDER AFFIRMING THE BANKRUPTCY COURT'S ORDER GRANTING RELIEF UNDER 11 U.S.C. 362(d)(1)by Judge Virginia A. Phillips: For the foregoing reasons, the Court AFFIRMS the Bankruptcy Court's Order granting Brown relief from the automatic stay under 11 U.S.C. § 362(d)(1). The Court DENIES all other pending motions as moot. (Made JS-6. Case Terminated.) (am)

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In re Bailey and Associates APC Doc. 44 1 2 3 4 5 JS-6 6 7 8 UNITED STATES DISTRICT COURT 9 CENTRAL DISTRICT OF CALIFORNIA 10 11 IN RE: 12 13 14 15 16 17 18 19 ) ) BAILEY & ASSOCIATES, APC ) DEBTOR, ) ) ) Bailey & Associates APC ) ) Appellant, ) ) v. ) ) Brown and Charbonneau ) LLP, ) ) Appellee. ) ________________________ ) Case No. SACV 10-01856-VAP USBC Case No. SA 10-23758-ES ORDER AFFIRMING THE BANKRUPTCY COURT'S ORDER GRANTING RELIEF UNDER 11 U.S.C. § 362(d)(1) 20 21 I. BACKGROUND 22 In 2006, Appellant Bailey & Associates ("Bailey") 23 hired Appellee Brown & Charbonneau ("Brown") to represent 24 Bailey in a collection action brought against Bailey by 25 one of Bailey's former clients. (Doc. No. 7 (Ex Parte 26 Application to Staying Pending Appeal), Ex. 4 at 5.) A 27 dispute later arose between Bailey and Brown regarding 28 attorney's fees related to Brown's representation of Dockets.Justia.com 1 Bailey. (Id. at 5-6.) 2 (Id. at 6.) In 2008, Bailey was dissolved. That same year, Brown brought an arbitration 3 action against Bailey and received a default against 4 Bailey. (Id.) On September 11, 2009, Brown brought suit 5 in the California Superior Court for the County of Orange 6 ("Superior Court") asserting five claims related to 7 Bailey's default ("State Action"): (1) breach of 8 personal guarantee; (2) violation of uniform fraudulent 9 transfers act; (3) successor liability; and (4) liability 10 for violation of bulk sales notice requirements. (In re: 11 Bailey & Assoc., APC, Case No. 8:10-bk-23758-ES, Doc. No. 12 ("Bankr. Doc. No.") 1 at 8-17.) 13 14 On September 28, 2010, Bailey filed a voluntary 15 bankruptcy petition under Chapter 7 in the United States 16 Bankruptcy Court for the Central District of California. 17 (Bankr. Doc. No. 1.) On October 12, 2010, Brown filed a 18 "Motion for Relief From Automatic Stay" ("Mot. for 19 Relief"). (Bankr. Doc. No. 4.) On November 2, 2011, 20 Bailey filed an opposition to the Motion for Relief 21 ("Opp'n to Relief"). (Bankr. Doc. No. 7.) On November 22 8, 2010, Brown filed a reply ("Reply for Relief"). 23 (Bankr. Doc. No. 8.) On November 16, 2010, following a 24 hearing, the Bankruptcy Court granted Brown relief from 25 the automatic stay under 11 U.S.C. § 362(d)(1) ("Order"), 26 which was entered on December 8, 2010. 27 17.) (Bankr. Doc. No. The Bankruptcy Court's Order found Bailey filed its 28 2 1 bankruptcy action in "bad faith," and Brown's state 2 claims against Bailey arose under non-bankruptcy law and 3 accordingly could be "most expeditiously resolved" in a 4 non-bankruptcy forum. (Id.) 5 6 On December 3, 2010, Bailey filed a Notice of Appeal 7 of the Bankruptcy Court's Order in this Court. 8 1.) (Doc. No. On February 18, 2011, Bailey filed a motion to stay 9 pending appeal ("Motion to Stay"). (Doc. No. 15), and on 10 March 13, 2011, Brown filed an opposition ("Motion to 11 Stay Opposition") to the Motion to stay (Doc. No. 16). 12 On April 1, 2011, Bailey filed its opening brief 13 ("Opening Br.") (Doc. No. 25) and an Appendix ("Bailey 14 App.") (Doc. No. 26). On April 15, 2011, Brown filed a 15 "reply brief" ("Brown Br.") (Doc. No. 30) and an 16 Appendix ("Brown App.") (Doc. No. 30-1). On April 29, 17 2011, Bailey filed a motion to strike portions of Brown's 18 Appendix. (Doc. No. 31.) On April 29, 2011, Bailey 19 filed its reply brief ("Bailey Reply"). (Doc. No. 32.) 20 21 II. JURISDICTION AND STANDARD OF REVIEW 22 Title 28 U.S.C. § 158(a) confers jurisdiction on 23 federal district court to entertain an appeal from a 24 bankruptcy court; it provides in pertinent part: "The 25 district courts of the United States shall have 26 jurisdiction to hear appeals . . . from final judgments, 27 orders, and decrees." 28 3 1 A district court reviews a bankruptcy court's order 2 to list an automatic stay under 11 U.S.C. § 362 for an 3 abuse of discretion. See In re Mac Donald, 755 F.2d 715, 4 716 (9th Cir. 1985) ("A decision to lift the automatic 5 stay under 11 U.S.C. § 362 is within the discretion of 6 the bankruptcy judge and reviewed for an abuse of 7 discretion."). The bankruptcy court's legal conclusions 8 are subject to de novo review, see In re Taylor, 884 F.2d 9 478, 480 (9th Cir. 1989), while its factual findings are 10 reviewed under a "clearly erroneous" standard. Fed. R. 11 Bankr. P. 2013; In re Irwin, 338 B.R. 839, 844 (E.D. Cal. 12 2006) (quoting In re Blackwell, 162 B.R. 117, 119 (E.D. 13 Pa. 1993)). Finally, "[i]f reasonable men could differ 14 as to the propriety of the action taken by the trial 15 court, then it cannot be said that the trial court abused 16 its discretion." Id. 17 18 19 III. DISCUSSION After filing a Chapter 7 bankruptcy, the debtor is 20 granted an automatic stay. 11 U.S.C. § 362(a). The 21 bankruptcy court, however, may grant a creditor relief 22 from the automatic stay "for cause." 11 U.S.C. § 23 362(d)(1) ("On request of a party in interest and after 24 notice and a hearing, the [bankruptcy court] shall grant 25 relief from [a] stay . . . for cause, including the lack 26 of adequate protection of an interest in property of such 27 party in interest."). "Cause" is determined on a case- 28 4 1 by-case basis. In re Tucson Estates, Inc., 912 F.2d 2 1162, 1166 (9th Cir. 1990). Here, Bailey appeals the 3 Bankruptcy Court's Order granting relief from the 4 automatic stay to Brown under 11 U.S.C. § 362(d)(1), on 5 the basis of bad faith. (Opening Br. at 3.) For the 6 reasons set forth below, the Court finds the Bankruptcy 7 did not abuse its discretion in lifting the stay and 8 accordingly AFFIRMS the Bankruptcy Court's Order. 9 10 A. The Bankruptcy Court's Factual Findings Were Not 11 "Clearly Erroneous" 12 Bailey appeals the Bankruptcy Court's factual finding 13 that Bailey filed its bankruptcy petition in bad faith. 14 A factual finding of bad faith is reviewed for "clear 15 error." In re Eisen, 14 F.3d 469, 470 (9th Cir. 1994); 16 In re Mallas Enter., Inc., 37 B.R. 964, 967 (9th Cir. BAP 17 1984) ("Whether or not a case has been filed in bad faith 18 involves questions of fact. . . ."). Under the clearly 19 erroneous standard, "the court must accept the bankruptcy 20 court's findings of fact unless, upon review, the court 21 is 'left with the definite and firm conviction that a 22 mistake has been committed' by the bankruptcy judge." In 23 re Greene, 583 F.3d 614, 618 (9th Cir. 2009) (citing 24 Latman v. Burdette, 366 F.3d 774, 781 (9th Cir. 2004) 25 (quoting United States v. United States Gypsum Co., 333 26 U.S. 364, 395 (1948))). Thus, the test for clear error 27 is not whether the reviewing court would make the same 28 5 1 findings, but whether the reviewing court, based on all 2 of the evidence, has a definite and firm conviction that 3 a mistake has been made. Anderson v. City of Bessemer 4 City, 470 U.S. 564, 573 (1985). A reviewing court may 5 not overturn a decision, even if it would have weighed 6 the evidence in a different manner, so long as the trial 7 court's view of the evidence is plausible in light of the 8 entire record. Id. at 573–74. Moreover, in applying the 9 clearly erroneous standard, the appellate court views the 10 evidence in the light most favorable to the party that 11 prevailed below. Lozier v. Auto Owners Ins. Co., 951 12 F.2d 251, 253 (9th Cir. 1991). 13 14 At the hearing on the Motion for Relief, the 15 Bankruptcy Court made a factual finding that Bailey filed 16 the bankruptcy to avoid the State Action, based upon the 17 timing of Bailey's filing of the petition and the 18 existence of only two creditors – Brown and "insider 19 creditor" ClintonBailey – on the bankruptcy petition and 20 schedules. (See Doc. No. 26 at 124 (Transcript of 21 Hearing re: Motion for Relief from Automatic Stay ("Hr'g 22 Tr.")) 9:13-15).) The evidence in the record confirms 23 there were only two creditors listed on Bailey's original 24 petition and schedules. (See Brown App. at 151 (Schedule 25 F - Creditors Holding Unsecured Nonpriority Claims).) 26 Examining the timing of Bailey's filing of the bankruptcy 27 petition, as well as the contents of the petition and 28 6 1 schedule, the Bankruptcy Court held, "[G]iven the 2 representation made in the petition and in the schedules 3 that there were no other creditors that were owed any 4 money," (id. at 10:4-6), Bailey's "bankruptcy was filed 5 for an improper purpose, and that is solely to avoid 6 litigation with the debtor's primary creditor," Brown. 7 (Hr'g Tr. 9:21-25-10:1.) Viewing the evidence in the 8 light most favorable to Brown, Lozier, 951 F.2d at 253, 9 the Bankruptcy Court's view of the evidence was plausible 10 in light of the entire record. 11 573–74. Anderson, 470 U.S. at The evidence in the record supported the 12 Bankruptcy Court's factual finding of "bad faith"1 and 13 accordingly was not clearly erroneous. 14 15 B. The Bankruptcy Court Did Not Err In Lifting the Stay 16 Following a Factual Finding of Bad Faith 17 "The existence of bad faith in commencing a 18 bankruptcy case constitutes cause for granting relief 19 20 21 22 23 24 25 26 27 28 1 Bailey's argument that the Bankruptcy Court based its finding of bad faith upon evidence first raised in Brown's Reply for Relief lacks merit; on the contrary, the Bankruptcy Court repeatedly stated that it primarily relied upon the timing of the bankruptcy petition's filing and the contents of the petition and bankruptcy schedules in making its determination of bad faith. (See Hr'g Tr. 4: 21-22 (Bankruptcy Court: "I relied on the schedules that were actually filed."); 5:15-16 (Bankruptcy Court: "At the time [Bailey] filed its papers, [it] apparently [was] under the impression that there was no debt owed to [creditors other than Brown] . . . . Otherwise, the bankruptcy schedules would have reflected all the other creditors . . . ."); 9:13-15 ("At the time the bankruptcy was filed, the debtor did not list any debt being owed to any other creditor other than an insider.").) 7 1 from the stay pursuant to § 362(d)." In re Duvar Apt., 2 Inc., 205 B.R. 196, 200 (9th Cir. BAP 1996) (citing In re 3 Walter, 108 B.R. 244, 247 (Bankr. C.D. Cal. 1989)). 4 5 "[B]ad faith exists where the debtor only intended to 6 defeat state court litigation." In re Eisen, 14 F.3d 7 469, 470 (9th Cir. 1994) (citing In re Chinichian, 784 8 F.2d 1440, 1445-46 (9th Cir. 1986)); see also In re 9 Silberkraus, 253 B.R. 890, 903 (Bankr. C.D. Cal. 2000) 10 ("[B]ankruptcy is not supposed to be like a '7-11' 11 convenience store, where the debtor merely drops in and 12 picks up that which the debtor wants (here, obstruction 13 and delay of the state court litigation).") 14 15 The Bankruptcy Court granted Brown's Motion for 16 Relief "under [11 U.S.C. §] 362(d)(1) for cause and the 17 cause being that [Brown's] bankruptcy was filed for the 18 purpose . . . of avoiding litigation with the moving 19 party." (Hr'g Tr. 9:4-7.) After making a factual 20 finding of bad faith, the Bankruptcy Court's legal 21 conclusion that such a finding warranted lifting the stay 22 was correct, because a "bad faith" bankruptcy constitutes 23 "cause" to lift an automatic stay under 11 U.S.C. § 24 362(d)(1). Thus, the Bankruptcy Court's Order lifting 25 the automatic stay survives a de novo review. 26 27 28 8 1 C. Brown Had Standing to Bring the State Action Claims 2 Brown sought relief from the automatic stay under 11 3 U.S.C. § 362(d)(1) in part because Brown's State Action 4 contained claims that did not implicate bankruptcy law 5 and could be "most expeditiously" resolved in state 6 court. (Brown Br. at 3-4.) Bailey contends Brown did 7 not have standing to bring the State Action claims in the 8 Superior Court. (Opening Br. at 23-24.) Bailey argues 9 Brown's State Action claims were "general claims, not 10 particularized ones," which belonged to the Chapter 7 11 trustee. 12 standing. (Id.) Bailey thus argues Brown lacked (Id.) 13 14 Although the Bankruptcy Court's decision did not 15 address standing in detail, the Court nevertheless 16 examines the question here. See D'Lil v. Best W. Encina 17 Lodge & Suites, 538 F.3d 1031, 1035 (9th Cir. 2008) 18 ("Federal courts are required sua sponte to examine 19 jurisdictional issues such as standing."). For the 20 reasons below, the Court finds Brown had standing to 21 bring its State Action claims. 22 23 In bankruptcy proceedings, the bankruptcy trustee 24 brings general claims, while any injured parties may 25 bring particularized or personal claims. 26 211 B.R. 378, 387 (9th Cir. BAP 1997). In re Folks, "A cause of 27 action is 'personal' if the claimant himself is harmed 28 9 1 and no other claimant or creditor has an interest in the 2 cause." Id. (quoting Koch Refining v. Farmers Union 3 Cent. Exch., Inc., 831 F.2d 1339, 1348-49 (7th Cir. 4 1987)). "If [the] claim could be brought by any creditor 5 of the debtor, the trustee is the proper person to assert 6 the claim, and the creditors are bound by the outcome of 7 the trustee's action." In re Folks, 211 B.R. at 387 8 (citing Kalb, Voorhis & Co. v. Am. Fin. Corp., 8 F.3d 9 130, 132 (2d Cir. 1993)). 10 11 The record here does not support Bailey's assertion 12 that Brown's claims in the State Action were general, and 13 not particularized. Brown filed the State Action on 14 September 11, 2009. (Bankr. Doc. No. 4 at 8-17.) On 15 September 3, 2009, Mark Bailey testified under oath that 16 Bailey did not have any creditors other than Brown. 17 (Doc. No. 16., Ex. 8 at 21-22.) Bailey later amended its 18 bankruptcy petition to include additional creditors. 19 (Doc. No. 15, Ex. 2.) When Brown brought the State 20 Action claims, however, there were no other known 21 claimants or creditors, let alone other claimants or 22 creditors who could bring the same claims. Bailey has 23 not provided any additional evidence or legal authority 24 to support its contention that the "state law case 25 brought by Brown & Charbonneau is problematic because the 26 claims being asserted against the debtor are . . . claims 27 which are general to all creditors of Bailey & 28 10 1 Associates, APC." (Opening Br. at 23.) Thus, Bailey has 2 failed to establish that Brown lacked standing to bring 3 the State Action claims. 4 5 D. The Bankruptcy Court's "Notice and Hearing" Did Not 6 Abuse Its Discretion 7 Bailey argues the Bankruptcy Court violated its due 8 process rights in the Order granting relief from the 9 automatic stay. "The Fifth Amendment's requirement of 10 due process applies to bankruptcy proceedings." See In 11 re Nicholson, 435 B.R. 622, 635 (9th Cir. BAP 2010). A 12 bankruptcy court's order granting relief from an 13 automatic stay may be granted only after a "notice and a 14 hearing." 11 U.S.C. § 362(d)(1). The phrase "notice and 15 a hearing" is defined by Section 102(1)(A) of the 16 Bankruptcy Code as "such notice as is appropriate in the 17 particular circumstances, and such opportunity for a 18 hearing as is appropriate in the particular 19 circumstances." 11 U.S.C. § 102(1)(A). Accordingly, 20 "[t]he concept of 'notice and a hearing' is a flexible 21 one." In re Nicholson, 435 B.R. at 635 (citations and 22 internal quotations omitted). "The bankruptcy judge has 23 considerable, albeit not unlimited, discretion in 24 determining if the notice and a hearing requirement has 25 been satisfied." Id. (quotation and citation omitted). 26 27 28 11 1 Bailey argues the Bankruptcy Court violated its due 2 process rights because Brown's Motion for Relief was 3 submitted on a form pleading. To support its contention 4 that form pleadings violate due process, Bailey cites In 5 re Ingersoll, 238 B.R. 202, 204 (D. Co. 1999). (See 6 Opening Br. at 16 n.4 (citing In re Ingersoll, 238 B.R. 7 at 204 (stating that when the material issues to be 8 resolved are factual questions, a bankruptcy court's 9 boilerplate forms do not give adequate notice)).) This 10 authority is not binding on this court and is inapposite 11 to Bailey's contention that the Bankruptcy Court violated 12 its due process rights. Brown's attorney of record for 13 the Motion for Relief, included a declaration within that 14 motion, stating the following factual basis: 15 16 17 18 19 20 21 22 [Bailey's] bankruptcy petition was filed after [Baily was] ordered [in the State Action] to produce records and respond to discovery showing that all of the assets of Bailey . . . were transferred to Mark Bailey and ClintonBailey, APC to avoid the debt owed to its only creditor[, Brown]. A motion for terminating sanctions was filed . . . just when the [bankruptcy] petition was filed. [Bailey] had dissolved nearly two years ago and it has stated repeatedly under other that its only creditor is [Brown]. This is a two party dispute and the filing was done as a method of delay and forum shopping. 23 (Mot. for Relief at 7; Harter Decl. at 2.) Moreover, 24 Brown attached additional information to the Motion for 25 Relief. Thus, Brown's Motion for Relief, although 26 submitted in boilerplate form, provided sufficient notice 27 28 12 1 to Bailey of the basis for Brown's contention that 2 Bailey's bankruptcy petition was filed in bad faith. 3 4 Moreover, Bailey had an opportunity to respond, and 5 did so, both in writing and at the hearing. 6 Specifically, Bailey submitted a seven-page written 7 opposition to the Motion for Relief, along with two 8 declarations and an exhibit. 9 Opp'n.) (See generally Relief The Bankruptcy Court also conducted a hearing on 10 November 15, 2010, and heard argument from Bailey's 11 counsel. (See generally Hr'g Tr.) After considering the 12 papers filed in support of, and in opposition to, the 13 Motion for Relief, as well as the arguments of counsel at 14 the hearing, the Bankruptcy Court granted the Motion for 15 Relief under section 362(d)(1) for cause, finding 16 Bailey's bankruptcy petition "was filed for the purpose . 17 . . of avoiding litigation with [Brown]." 18 11.) (Hr'g Tr. 9:8- The Bankruptcy Court noted, "This is essentially a 19 two-party dispute, notwithstanding the argument of 20 counsel" (id. 9:11-13), and concluded, "[G]iven the 21 representation made in the petition and in the schedules 22 that there were no other creditors that were owed any 23 money," (id. at 10:4-6), Bailey's "bankruptcy was filed 24 for an improper purpose, . . . 25 26 27 28 13 solely to avoid 1 litigation with the debtor's primary creditor," Brown 2 (id. 9:21-25-10:1).2 3 4 The Bankruptcy Court accordingly did not violate 5 Bailey's due process rights because the Court provided 6 sufficient "notice and a hearing." 7 362(d)(1). 11 U.S.C. § Specifically, Brown's Motion for Relief gave 8 sufficient notice to Bailey of the factual basis upon 9 which Brown sought relief from the automatic stay. 10 Moreover, before reaching its decision, the Bankruptcy 11 Court conducted a hearing and allowed Bailey an 12 opportunity to voice opposition to the Motion for Relief. 13 Thus, the Bankruptcy Court did not abuse its discretion. 14 15 16 17 18 19 3 Despite Bailey's contention otherwise, the 20 Bankruptcy Court repeatedly stated it relied on 21 Bailey's bankruptcy petition and schedules in finding Bailey acted in bad faith. (See Hr'g Tr. 4: 21-22 22 (Bankruptcy Court: "I relied on the schedules that 23 were actually filed."); 5:15-16 (Bankruptcy Court: "At the time [Bailey] filed its papers, [it] 24 apparently [was] under the impression that there was 25 no debt owed to [creditors other than Brown] . . . . Otherwise, the bankruptcy schedules would have 26 reflected all the other creditors . . . ."); 9:13-15 ("At the time the bankruptcy was filed, the debtor 27 did not list any debt being owed to any other 28 creditor other than an insider.").) 14 1 IV. CONCLUSION 2 For the foregoing reasons, the Court AFFIRMS the 3 Bankruptcy Court's Order granting Brown relief from the 4 automatic stay under 11 U.S.C. § 362(d)(1). The Court 5 DENIES all other pending motions as moot. 6 7 8 9 Dated: September 6, 2011 10 VIRGINIA A. PHILLIPS United States District Judge 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 15

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