ALLANA BARONI V. DAVID SEROR, No. 21-55076 (9th Cir. 2022)
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Appellant defaulted under her Chapter 11 bankruptcy plan by refusing to pay Appellee Bank of New York Mellon (Bank of NYM) after she lost her adversary proceeding challenging the bank’s secured claim. As a result, the bankruptcy court granted Bank of NYM’s motion to convert the bankruptcy case from Chapter 11 to Chapter 7 and ordered Appellant to turn over undistributed assets in her possession to the Chapter 7 bankruptcy estate. Appellant challenged these two decisions in separate appeals.
The Ninth Circuit affirmed the bankruptcy court’s orders converting Appellant’s bankruptcy case from Chapter 11 to Chapter 7 and ordering her to turn over undistributed assets in her possession to the Chapter 7 bankruptcy estate. The court held the bankruptcy court properly exercised its discretion in converting the case to Chapter 7 for cause under 11 U.S.C. Section 1112(b)(1). The court held that the party seeking relief under Section 1112(b)(1) has the initial burden of persuasion to establish that cause exists for granting such relief. The court held that failing to make required payments can be a material default of a Chapter 11 plan, even if the debtor has made payments for an extended period before the default or taken other significant steps to perform the plan. The court concluded that the bankruptcy court did not err in finding that Appellant’s default in paying Bank of New York Mellon’s secured claim was cause for conversion because both the amount and duration of this default were significant.
Court Description: Bankruptcy. The panel affirmed the bankruptcy court’s orders converting Allana Baroni’s bankruptcy case from Chapter 11 to Chapter 7 and ordering Baroni to turn over undistributed assets in her possession to the Chapter 7 bankruptcy estate. The panel held that the bankruptcy court properly exercised its discretion in converting the case to Chapter 7 for cause under 11 U.S.C. § 1112(b)(1). The panel held that the party seeking relief under § 1112(b)(1) has the initial burden of persuasion to establish that cause exists for granting such relief. The panel held that failing to make required payments can be a material default of a Chapter 11 plan, even if the debtor has made payments for an extended period before the default or taken other significant steps to perform the plan. The panel concluded that the bankruptcy court did not err in finding that Baroni’s default in paying Bank of New York Mellon’s secured claim was cause for conversion because both the amount and duration of this default were significant. In addition, conversion to Chapter 7 was in the best interests of the creditors and the bankruptcy estate, and Baroni’s ability to immediately cure her default was not an unusual circumstance indicating that the creditors’ and the estate’s interests were best served by not granting relief under § 1112(b)(1). 4 IN RE BARONI The panel further held that the bankruptcy court did not err in requiring Baroni to turn over the rent and sale proceeds from her rental properties to the Chapter 7 trustee. Upon the confirmation of a Chapter 11 plan, the property of the bankruptcy estate vests in the debtor under 11 U.S.C. § 1141. In determining whether assets revest in the Chapter 7 estate upon conversion, courts consider whether there is an explicit plan provision regarding the distribution of future proceeds of an asset to creditors and whether the plan retains broad powers in the bankruptcy court to oversee implementation of the plan. The panel concluded that under Baroni’s Chapter 11 plan, she did not receive the rental properties free and clear of all claims and interest of creditors at confirmation, but rather the income from the rental properties remained subject to the plan because the premise of the plan was to pay creditors with the ongoing income stream from those properties. The panel concluded that to hold that the unadministered rent and sale proceeds did not revest in the bankruptcy estate upon conversion to Chapter 7 would frustrate the intent of the plan and would be contrary to many of its provisions.
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