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The Crew Source: abdalla motion to convert tentative ruling

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The Crew Source: abdalla motion to convert tentative ruling

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The Crew Source: abdalla motion to convert tentative ruling

  1. 1. Before the Court is a “Motion by Creditor Video Tech Services to Convert Case to One Under Chapter 7 . . .” (Motion). Docket #118. In support of the Motion, Video Tech Services, Inc. (VTS) filed a 2/24/15 Declaration of Roberta Straub (Straub 2/24/15 Decl.). Docket #118. On 4/9/15, Edward Abdalla (Abdalla) filed an opposition (Opposition). Docket #134. In support of the Opposition, Abdalla filed evidentiary objections to the Straub 2/24/15 Decl. (Objections). Docket #135. On 4/16/15, VTS filed a reply (Reply). Docket #137. I. Facts a. State Court Action On 12/7/09, VTS filed a complaint in state court against Abdalla, David Santos (Santos), Timothy Rodriquez, Thomas Woolsey (Woolsey), and The Crew Source (12/7/09 Complaint), Video Tech Services, Inc. v. Abdalla et al., No. SC105947, Los Angeles County Superior Court (State Court Action and State Court). Straub 2/24/15 Decl. ¶ 2, Ex. A. The 12/7/09 Complaint contained the following causes of action: 1. Misappropriation of trade secrets; 2. Intentional interference with actual and prospective economic advantage; 3. Negligent interference with actual and prospective economic advantage; 4. Intentional interference with contractual relations; 5. Breach of fiduciary duty; 6. Breach of the duty of loyalty; 7. Breach of written contract; 8. Unfair competition (Bus. & Prof. Code § 17200 et seq.); 9. Unfair competition (common law); 10.Conspiracy; and 11.Constructive Trust. Id. On 8/12/11, the State Court entered an order appointing the Hon. William Sheffield, Ret. as a discovery referee. Id. ¶ 3, Ex. B. On 5/31/12, the State Court entered an “Order Adopting Discovery Referee’s Report and Recommendations” (5/31/12 Order). Id. ¶ 4, Ex. C. The 5/31/12 Order also included rulings on several discovery motions. Id. In particular, the State Court denied without prejudice VTS’s motion for monetary and/or terminating sanctions. Id. ¶ 4, Ex. C at 7. On 4/3/14, the State Court entered an order granting VTS’s “renewed” motion for terminating sanctions against Abdalla, Santos, Woolsey, and H.E. Woolsey Corporation, dba The Crew Source (4/3/14 State Court Order).1 Id. ¶ 5, Ex. D. 1 The 12/7/09 Complaint named “The Crew Source” as defendant, but the 4/3/14 State Court Order provides that “H.E. Woolsey Corporation, dba The Crew Source” is a defendant. Compare Straub 2/24/15 Decl. ¶ 2, Ex. A with Straub 2/24/15 Decl. ¶ 5, Ex. D. 1
  2. 2. On 8/18/14, the State Court entered a “Judgment” against Abdalla, Santos, Woolsey, and H.E. Woolsey Corporation dba The Crew Source jointly and severally for $2,000,754 in compensatory damages and against H.E. Woolsey Corporation dba The Crew Source for $500,000 in exemplary damages (8/18/14 Judgment). Id. ¶ 6, Ex. E. The State Court also awarded VTS fees and costs of $595,779.80, to be recovered jointly and severally from Abdalla, Santos, Woolsey, and H.E. Woolsey Corporation dba The Crew Source. Id. b. Bankruptcy On 8/22/14, Abdalla filed a chapter 11 petition, In re Abdalla, 14-26191-SK, Docket #1 (Case). On 9/5/14, Abdalla filed his schedules in which he provided the following information: 1. In “Schedule B – Personal Property,” Abdalla indicated that he owns 100% of “The Crew Source, LLC”2 and that the value of his interest is unknown (9/5/14 Schedule B). Docket #14-2 at 2. 2. In “Schedule E – Creditors Holding Unsecured Priority Claims,” Abdalla indicated that the Franchise Tax Board (FTB) has a claim for $27,733. Docket #14-5 at 2. 3. In “Schedule F – Creditors Holding Unsecured Nonpriority Claims,” Abdalla indicated that VTS has a disputed claim for $2,007,540, and he listed unsecured nonpriority claims totaling $2,037,625 (9/5/14 Schedule F). Docket #14-6 at 2. 4. In “Schedule H – Codebtors,” Abdalla listed Santos, H.E. Woolsey Corporation, and Woolsey as liable on debts owed to VTS. Docket #14-8. 5. In “Schedule I – Your Income,” Abdalla stated that he is employed by Crew Source, his monthly gross income is $7,000, his payroll deductions for taxes, Medicare, and social security are $2,388, and his monthly net income is $4,612 (9/5/14 Schedule I). Docket #14-9. 6. In “Schedule J – Your Expenses,” Abdalla stated that his monthly expenses are $4,500, and that his net monthly income is $112 (9/5/14 Schedule J). Docket #14-10. In his Statement of Financial Affairs, also filed on 9/5/14, Abdalla indicated the following: 2 Abdalla’s declaration indicates that he formed The Crew Source, LLC on 5/23/13. 11/5/14 Declaration of Edward Abdalla, Docket #58 (Abdalla 11/5/14 Decl.) ¶ 2 (“I am the 100% member of The Crew Source, LLC (“Crew Source”), which is the sole source of my income. I formed Crew Source on or about May 23, 2013.”). But, as discussed above, VTS named “The Crew Source” as a defendant in the 12/7/09 Complaint, and the 8/18/14 Judgment was entered against “H.E. Woolsey Corporation d/b/a Crew Source.” Therefore, it appears that Abdalla’s references to “Crew Source” in the bankruptcy are to The Crew Source, LLC, an entity distinct from H.E. Woolsey Corporation d/b/a Crew Source. For the purposes of this tentative ruling, references to the “Crew Source” are to “The Crew Source, LLC”. 2
  3. 3. 1. His 2014 year-to-date income is $56,000 from Crew Source; 2. A judgment had been entered in the State Court Action, and there is another pending action, Video Tech Services, Inc. v. Abdalla et al., 11-04308-JAK, Central District of California; 3. Crew Source paid Ervin, Cohen & Jessup LLP $50,000 in August 2014 on behalf of Abdalla for “consultation concerning debt consolidation, relief under the bankruptcy law or preparation of the petition in bankruptcy;” and 4. In response to Question #18 - “Nature, location and name of business,” Abdalla listed Crew Source, an audio visual services business, located in Burbank, CA, and Abdalla’s “Beginning and End Dates” were “June, 2013 to present.” Docket #14-12. On 9/26/14, Abdalla testified as follows at his § 341(a) creditor meeting (§ 341(a) Meeting): 1. In response to a question asking “[w]hy this [C]ase was filed,” Abdalla’s counsel responded that “[t]he [C]ase was filed as a result of a -- the entry of [the 8/18/14 Judgment]. [] Abdalla intends to appeal that judgment and a motion for relief from stay to file the appeal will be filed unless a stipulation can be obtained. That's primarily the reason why the case was filed.” Straub 2/24/15 Decl. ¶ 7, Ex. F at 4:17-5:2. 2. When asked “[d]o you know if a bond was posted for the underlying [8/18/14 Judgment],” Abdalla’s counsel responded that “[o]ne was not. The case was filed just a few days after entry of the judgment in the state court.” Id. ¶ 7, Ex. F at 5:3-7. 3. In response to a question “[c]an you tell me what [Crew Source] is” and “how long has it been in existence,” Abdalla responded “[t]here have been two versions. The first opened in 2009, fall of 2009, and that was owned by [Woolsey].” Id. ¶ 7, Ex. F at 7:18-8:6. Abdalla further stated that Woolsey “sold the company to me in June of 2013” and that he bought “the company” for $10,000. Id. ¶ 7, Ex. F at 8:7-13. 4. When asked to estimate “the value of the company,” Abdalla responded that “[i]t’s hard to know. It’s based on sales. It’s not a company that has gear or equipment or a lot of physical assets.” Id. ¶ 7, Ex. F at 8:20-24. 5. Abdalla stated that H.E. Woolsey Corporation was the prior owner of Crew Source, Woolsey was the owner of the H.E. Woolsey Corporation, and that H.E. Woolsey Corporation was paying for the defense of the State Court Action. Id. ¶ 7, Ex. F at 17:5-18:7. 3
  4. 4. 6. When asked about the source of funds to pay $10,000 to H.E. Woolsey Corporation to buy the Crew Source, Abdalla stated that the $10,000 was in Crew Source’s bank account, and that H.E. Woolsey Corporation “sold it for what was there that day and then . . . [subtracted] $10,000 as payment for [] Crew Source.” Id. ¶ 7, Ex. F at 23:23-24:10. Abdalla also stated that he did not pay anything other than the “$10,000 that was already in [Crew Source’s] bank account.” Id. ¶ 7, Ex. F at 25:7-13. 7. Abdalla stated that Crew Source loaned him $50,000 to pay his attorney’s retainer. Id. ¶ 7, Ex. F at 30:17-23. 8. Abdalla’s counsel indicated that Abdalla had not “look[ed] into the issue” of posting a bond to appeal the 8/18/14 Judgment. Id. ¶ 7, Ex. F at 36:5-9. 9. Responding to VTS’ question whether Abdalla gave “any other consideration” to Woolsey to purchase Crew Source besides the $10,000 in the Crew Source’s account, Abdalla indicated “[o]ther than paying the attorney’s fees for the continuation of the defense, no.” Id. ¶ 7, Ex. F at 46:4-19. When VTS asked “is that an ongoing obligation that you are going to have to pay for the attorney fees,” Abdalla responded “I would assume it is” and that he had a “formal agreement” with Woolsey “to continue to pay the defense, for all the defense, for the lawsuit.” Id. ¶ 7, Ex. F at 46:20-47:5. On 10/9/14, Abdalla filed amended schedules, in which he provided the following information: 1. In an amended “Schedule B – Personal Property,” Abdalla indicated that he owns 100% of Crew Source and that the value of his interest is unknown (10/9/14 Schedule B). Docket #26-1 at 2. In the 10/9/14 Schedule B, Abdalla also listed an “Interest in Fernwood Road Productions” with an unknown value. Id. 2. In an amended “Schedule E – Creditors Holding Unsecured Priority Claims,” Abdalla indicated that the FTB has a claim for $16,005,3 and that the Internal Revenue Service (IRS) has a claim for $137,360.4 Docket #26-2. 3 On 9/23/14, the FTB filed a $31,223.33 proof of claim for taxes and/or fees (9/23/14 FTB Claim). Claim No. 3-1. The 9/23/14 FTB Claim did not indicate that any amount was entitled to priority. Id. On 12/12/14, the FTB filed an amended proof of claim (12/12/14 FTB Claim), asserting a $17,397.76 claim, $14,091.50 of which is general unsecured and $3,306.26 of which is entitled to priority. Claim No. 3-2. At a 1/22/15 status conference, on Abdalla’s request, the Court extended the deadline to object to proofs of claim from 2/15/15 to 3/16/15. See Docket #53 (order dated 10/31/14 setting a 2/15/15 deadline to file objections to proofs of claim); Docket #128 (order dated 4/1/15 extending the 2/15/15 deadline to file objections to proof of claim to 3/16/15). As of 5/4/15, no objections to the 12/12/14 FTB Claim were filed. Therefore, the 12/12/14 FTB Claim is allowed in its entirety. 11 U.S.C. § 502(a). 4 On 9/8/14, the IRS filed a proof of claim for taxes (9/8/14 IRS Claim). Claim No. 1-1. The 9/8/14 IRS Claim indicates that the amount of the claim is $205,064.62, of which $79,600.06 is secured by all of Abdalla’s property, and $50,793.10 is entitled to priority. Id. On 11/17/14, the IRS filed an amended proof of claim (11/17/14 IRS Claim). Claim No. 1-2. The 11/17/14 IRS Claim indicates that the amount of 4
  5. 5. 3. In an amended “Schedule F – Creditors Holding Unsecured Nonpriority Claims,” Abdalla indicated that VTS has a disputed claim for $2,007,540,5 and he listed unsecured nonpriority claims totaling $2,087,625 (10/9/14 Schedule F).6 Docket #26-3. 4. In an amended “Schedule I – Your Income,” Abdalla stated that he is employed by Crew Source and that his monthly gross wages, salary, and commissions is $6,000 (10/9/14 Schedule I). Docket #26-5. Abdalla did not list any deductions for taxes, Medicare, and social security. Id. Abdalla also indicated that he receives $6,000/month as “Funds from Crew Source for payment of taxes,” for total monthly income of $12,000. Id. 7. In an amended “Schedule J – Your Expenses,” Abdalla stated that his monthly expenses are $10,717, and that his net monthly income is $1,283 (10/9/14 Schedule J). Docket #26-6. On 10/21/14, Abdalla filed a motion for relief from stay to appeal the 8/18/14 Judgment (Judgment RFS Motion). Docket #36. The Judgment RFS Motion was set for hearing on 12/3/14 (12/3/14 Hearing). Docket #37. No opposition was filed. The day before the 12/3/14 Hearing, the Court issued the following tentative ruling: 12/3/14 The motion is granted under 11 U.S.C. §362(d)(1). Pursuant to LBR 9021-1(b)(1)(B), movant must serve and lodge a proposed order via LOU within 7 days of the hearing. Appearances waived. No timely opposition has been filed. Accordingly, no court appearance by the movant is required. Should an opposing party file a late opposition or appear at the hearing, the Court will determine whether further hearing is required and movant will be so notified. the claim is $197,826.85, of which $79,600.06 is secured by all of Abdalla’s property, and $35,628.28 is entitled to priority. Id. On 3/25/15, the IRS filed another amended proof of claim (3/25/15 IRS Claim). Claim #1-3. The 3/25/15 IRS Claim indicates that the amount of the claim is $141,750.71, of which $58,053.59 is secured by all of Abdalla’s property, and $23,628.28 is entitled to priority. Id. 5 On 9/16/14, VTS filed a proof of claim based on the 8/18/14 Judgment, indicating that the amount of its claim is $3,096,533.80 (9/16/14 VTS Claim). Claim No. 2-1. Although Abdalla’s 9/5/14 Schedule F indicated that VTS has a disputed claim for $2,007,540, the 9/16/14 VTS Claim “supersede[s]” the 9/5/14 Schedule F. Federal Rule of Bankruptcy Procedure (FRBP) 3003(c)(4). And, Abdalla’s 10/9/14 Schedule F did not amend the 9/5/14 Schedule F regarding VTS’s claim. As discussed above, the deadline for filing objections to proofs of claim was 3/16/15. As of 5/4/15, no objections to the 9/16/14 VTS Claim were filed. Therefore, the 9/16/14 VTS Claim is allowed in its entirety. 11 U.S.C. § 502(a). 6 The only difference between the 9/5/14 Schedule F and the 10/9/14 Schedule F is that in the 10/9/14 Schedule F, Abdalla scheduled a $50,000 debt to Crew Source for “[l]oan for payment of retainer.” Docket #26-3 at 2. 5
  6. 6. There were no appearances at the 12/3/14 Hearing and the Court granted the Judgment RFS Motion. On 12/4/14, the Court entered an order granting the Judgment RFS Motion under § 362(d)(1). Docket #97. On 10/24/14, VTS filed a motion for relief from stay to add Crew Source as a judgment debtor in the State Court Action (Crew Source RFS Motion). Docket #41. The Crew Source RFS Motion was set for hearing on 11/19/14 (11/19/14 Hearing). Docket #49. Abdalla filed an opposition to the Crew Source RFS Motion. Docket #58. The day before the 11/19/14 Hearing, the Court emailed the parties a tentative ruling indicating its intent to grant the Crew Source RFS Motion and waiving appearances (11/19/14 Tentative Ruling). The 11/19/14 Tentative Ruling indicated that if any party intended to appear despite the 11/19/14 Tentative Ruling, that party must notify opposing counsel and be prepared to offer testimony regarding the efforts undertaken to notify opposing counsel. There were no appearances at the 11/19/14 Hearing, and the Court adopted the 11/19/14 Tentative Ruling as its final ruling. Docket #76. On 11/26/14, the Court entered an order granting the Crew Source RFS Motion. Docket #90. On 10/27/14, Abdalla filed an amended “Schedule J – Your Expenses,” stating that his monthly expenses are $11,825, and that his net monthly income is $175 (10/27/14 Schedule J). Docket #42 at 3. On 10/29/14, Abdalla filed a “Motion for Order Authorizing the Debtor to Obtain Unsecured Loan . . . ,” requesting authority to borrow up to $250,000 from Crew Source (§ 364(b) Motion). Docket #47. The § 364(b) Motion was set for hearing on 12/4/14 (12/4/14 Hearing). Docket #48. VTS filed an opposition and Abdalla filed a reply. Docket #s 72, 91. The day before the 12/4/14 Hearing, the Court emailed the parties a tentative ruling indicating its intent to deny the § 364(b) Motion (12/4/14 Tentative Ruling). Abdalla and VTS appeared at the 12/4/14 Hearing and were given an opportunity to be heard. At the conclusion of the hearing, the Court adopted the 12/4/14 Tentative Ruling as its final ruling. Docket #99. As of 5/4/15, an order denying the § 364(b) Motion has not been entered. Local Bankruptcy Rule (LBR) 9021-1(b) (providing that unless the Court orders otherwise, the prevailing party must file and serve a proposed order). On 11/25/14, VTS filed a complaint against Abdalla, initiating an adversary proceeding, Video Tech Services Inc. v. Edward Abdalla et al., 14-1769-SK (11/25/14 Complaint). Docket #88. The 11/25/14 Complaint contains the following causes of action: 1. Nondischargeability under § 523(a)(2)(A), (a)(4), and (a)(6) against Abdalla; 2. Objection to discharge under § 727(a)(3), (a)(4)(A), (a)(S), and (a)(7) against Abdalla; and 3. Setting aside fraudulent transfers under California Civil Code §§ 3439.04 and 34309.05 against Woolsey, H.E. Woolsey Corporation, and Abdalla. Docket #88. 6
  7. 7. II. Arguments a. Motion VTS argues that the Case should be converted to chapter 7 under § 1112(b) because it was filed in bad faith, there is no reasonable likelihood of rehabilitation, and Abdalla has filed false operating reports. Motion at 10. Regarding bad faith, VTS asserts that after the State Court entered the 8/18/14 Judgment, Abdalla wished to avoid VTS’ collection efforts and he did not want to post an appellate bond. Id. at 11. VTS further argues that the Case is unnecessary to resolve tax issues because Abdalla has either borrowed or proposed to borrow $300,000 from Crew Source, and the IRS’ and FTB’s combined claims total $236,287.95. Id. at 10. According to VTS, the transfer of “The Crew Source business from H.E. Woolsey Corporation to The Crew Source L.L.C.” was intended to “place the only thing of value owned by Abdalla and Woolsey beyond the reach of any judgment obtained by VTS.” Id. at 7. Regarding likelihood of rehabilitation, VTS argues that Abdalla’s only source of funds are “speculative future loans” from Crew Source that Abdalla has no ability to pay back. And, these loans, rather than enhancing the estate, increase the estate’s liability and diminish assets. Id. at 12. According to VTS, because the Court denied the § 364(b) Motion, Abdalla has no ability to continue with the Case. Motion at 12. Regarding operating reports, VTS argues that Abdalla has continued to pay legal fees for both himself and his co-defendants in the State Court Action, either directly or through Crew Source, but has not disclosed these payments in his monthly operating reports. Id. at 13. According to VTS, even if Crew Source made such payments, Abdalla should have reported any payments made by Crew Source on behalf of Abdalla as Abdalla’s income. Id. Further, VTS asserts that Abdalla failed to schedule his interest in Fernwood Road Production until he was “confronted with its existence” at the § 341(a) Meeting. Motion at 8. b. Opposition Abdalla responds that he did not file the Case in bad faith, but instead, to reorganize his financial affairs because he had no ability to pay the judgment or obtain a bond. Opposition at 3. According to Abdalla, he and VTS have participated in mediation and the Motion is an attempt to obtain leverage during negotiations. Id. Abdalla asserts that he has not filed misleading monthly operating reports. Id. at 4. Abdalla contends that it has been made clear to VTS that Crew Source is funding the litigation in the State Court Action. Id. According to Abdalla, because Crew Source is a not a debtor, its assets can be used to pay for litigation, and its income and assets need not be listed on his monthly operating reports. Id. Nor is there any evidence that Crew Source is Abdalla’s alter ego. Id. 7
  8. 8. Abdalla goes on to argue that “the mere filing of a bankruptcy case in order to avoid the requirement of an appellate bond is not in and of itself bad faith.” Id. at 5 (citing In re Dillon, 332 B.R. 353, 363 (Bankr. N.D. Ill. 2005)). Abdalla asserts that the Ninth Circuit has not yet ruled on whether a debtor may use the automatic stay to trump state law requirements for posting an appellate bond, courts evaluate several factors in determining whether to dismiss or convert a case, and that one of the factors is whether a debtor has the ability to pay the judgment or post a bond outside of a bankruptcy proceeding. Opposition at 5 (citing In re Mense, 509 B.R. 264, 279 (Bankr. C.D. Cal. 2014)). Abdalla argues that the estate is benefitting from the use of non-estate assets to fund the appeal “which will reduce or completely eliminate VTS’ claim.” Opposition at 5. And, Abdalla asserts that he had other financial problems on the petition date, pointing out that the IRS and the FTB are creditors. Id. at 5-6. Last, Abdalla argues that the Court must consider the best interests of creditors in determining whether to convert the Case, and that the interests of creditors are best served by Abdalla remaining in chapter 11. Id. at 7 (citing Sullivan v. Harnisch (In re Sullivan), 522 B.R. 604 (B.A.P. 9th Cir. 2014)). Abdalla contends that in a chapter 11 case, he will have to commit five years of projected net disposable income to a plan, but in a chapter 7 case, postpetition earnings would not be available to creditors. Opposition at 7. Abdalla also asserts that if converted, “money contributed by [Crew Source] would cease and all creditors of the estate (including the IRS and FTB) would suffer.” Id. c. Reply VTS replies that Abdalla has filed misleading operating reports because payments made by Crew Source on Abdalla’s behalf are income that must be reported. Reply at 7. VTS argues that Abdalla “personally agreed to pay for the legal defense of his codefendants, that obligation and the payments therein should have been revealed on Schedule F as a liability, as income on Schedule I, in the Statement of Financial Affairs, and in the Monthly Operating Reports.” Id. at 7-8. VTS asserts that Abdalla filed the case in bad faith. Id. at 8. According to VTS, there is no record that Abdalla made any attempts to obtain a bond, he had the ability to resolve all other financial issues except for the 8/18/14 Judgment without filing bankruptcy, and Abdalla cannot propose a reasonable plan of reorganization until the conclusion of the appeal. Id. at 10-11. VTS last argues that conversion to chapter 7 is in the best interests of creditors. Id. at 13. VTS highlights that Abdalla has “steadfastly refused to tell the court anything about” Crew Source, Abdalla’s “net income stream . . . is a miniscule $175.00”, and Abdalla “has persistently refused to place a value on his one true asset, [Crew Source].” Id. 8
  9. 9. III. Legal Standard Section 1112(b)(1) provides: [O]n request of a party in interest, and after notice and a hearing, the court shall convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause unless the court determines that the appointment under section 1104(a) of a trustee or an examiner is in the best interests of creditors and the estate. The moving party has the burden of demonstrating, by a preponderance of the evidence, that cause exists under § 1112(b). Matter of Woodbrook Assocs., 19 F.3d 312, 317 (7th Cir. 1994); In re Hoyle, 2013 WL 210254, at *8 (Bankr. D. Idaho 2013) (noting that the movant has the initial burden of establishing cause under § 1112(b)). A court need not hold an evidentiary hearing on a motion brought under § 1112(b) where the parties have placed the relevant facts before the Court, or where the relevant facts are already in the record. In re Bartle, 560 F.3d 724, 729 (7th Cir. 2009); Elmwood Dev. Co. v. Gen. Elec. Pension Trust (In re Elmwood Dev. Co.), 964 F.2d 508, 512 n.12 (5th Cir. 1992). a. Cause Although § 1112(b)(4) contains a non-exclusive list of conduct constituting cause, bankruptcy courts have broad discretion in determining what constitutes cause under § 1112(b). Marsch v. Marsch (In re Marsch), 36 F.3d 825 (9th Cir. 1994) (holding that court had discretion in considering factors not explicitly listed in § 1112(b)); Chu v. Syntron Biosearch, Inc. (In re Chu), 253 B.R. 92, 95 (B.A.P. 9th Cir. 2000) (holding that the list of causes in § 1112(b) is non-exclusive and bankruptcy court has broad discretion in determining cause). i. Bad Faith The lack of good faith, or bad faith, in filing bankruptcy constitutes cause under § 1112(b). In re Marsch, 36 F.3d at 828; In re Walter, 108 B.R. 244 (Bankr. C.D. Cal. 1989); see also In re 9281 Shore Road Owners Corp., 187 B.R. 837, 847-48 (Bankr. E.D.N.Y 1995) (“A Chapter 11 proceeding may be dismissed for cause pursuant to [§] 1112 of the Bankruptcy Code if the petition was not filed in good faith.”). “The existence of good faith depends on an amalgam of factors and not upon a specific fact. [Citation]. The test is whether a debtor is attempting to unreasonably deter and harass creditors or attempting to effect a speedy, efficient reorganization on a feasible basis.” In re Marsch, 36 F.3d at 828 (internal quotation marks and citations omitted); see In re St. Paul Self Storage Ltd. P’ship, 185 B.R. 580 (B.A.P. 9th Cir. 1995) (finding sufficient cause for dismissal under § 1112(b) because the debtor’s purpose in filing bankruptcy was to delay the completion of litigation—not to reorganize its debt). 9
  10. 10. Generally, to determine whether a debtor has filed a petition in good faith, courts weigh “a variety of circumstantial factors,” such as: 1. Whether the debtor has only one asset; 2. Whether the debtor has an ongoing business to reorganize; 3. Whether there are any unsecured creditors; 4. Whether the debtor has any cash flow or sources of income to sustain a plan of reorganization or to make adequate protection payments; and 5. Whether the case is essentially a two-party dispute capable of prompt adjudication in state court. In re Erkins, 253 B.R. 470, 474-75 (Bankr. D. Idaho 2000) (citing St. Paul Self Storage Ltd. P’ship v. Port Authority of City of St. Paul (In re St. Paul Self Storage Ltd. P’ship), 185 B.R. 580, 582-83 (B.A.P. 9th Cir. 1995)). In California, parties appealing from a money judgment must post a bond to stay enforcement of the judgment. See Cal. Civ. Proc. Code (CCP) § 917.1. CCP § 917.1 “is designed to protect the judgment won in the trial court from becoming uncollectible while the judgment is subjected to appellate review.” Grant v. Superior Court, 275 Cal. Rptr. 564, 568 (Ct. App. 1990). Although the Ninth Circuit has not yet decided “the specific issue of whether a debtor, who seeks to appeal an adverse state court judgment, can file a chapter 11 petition and use the automatic stay to trump state law requirements for an appeal bond,” the “majority of bankruptcy courts tackling this issue have held that the filing of a chapter 11 petition as a litigation tactic to circumvent the requirement of an appeal bond in state court litigation is in bad faith.” In re Mense, 509 B.R. 269, 279 (Bankr. C.D. Cal. 2014) (compiling cases). In this situation, a court’s determination of good faith “typically hinges” on the following factors: 1. “Whether the debtor is a viable business which would suffer severe disruption if enforcement of the judgment was not stayed; and the chapter 11 petition was filed to preserve its status as an ongoing concern and to protect its employees and creditors;[]” 2. “Whether the debtor had financial problems on the petition date, other than the adverse judgment;[]” 3. “Whether the debtor has relatively few unsecured creditors, other than the holder of the adverse judgment;[]” 4. “Whether the debtor has sufficient assets to post a bond to stay the judgment pending appeal;[]” 5. “Whether the debtor acted in good faith to exhaust all efforts to obtain a bond to stay the judgment pending appeal;[]” 10
  11. 11. 6. “Whether the debtor intends to pursue an effective reorganization within a reasonable period of time, or whether the debtor is unwilling or unable to propose a meaningful plan until the conclusion of the litigation;[]” and 7. “Whether assets of the estate are being diminished by the combined ongoing expenses of the debtor, the chapter 11 proceedings, and prosecution of the appeal.” Id. ii. Section 1112(b)(4)(A) Section 1112(b)(4)(A) provides that cause under § 1112(b) includes “substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation.” To establish cause under § 1112(b)(4)(A), the moving party must demonstrate both: 1. Substantial or continuing loss to or diminution of estate assets; and 2. Absence of reasonable likelihood of rehabilitation. In re Creekside Sr. Apartments, L.P., 489 B.R. 51, 61 (B.A.P 6th Cir. 2013). To satisfy the first prong, the moving party may show that the debtor continues to incur losses, maintains a negative cash-flow, or assets have declined in value since the case commenced. Id. “The loss may be substantial or continuing” but need not be both to constitute cause. Id. “All that need[s] to be found is that the estate has suffered some diminution in value.” In re East Coast Airways, Ltd., 146 B.R. 325, 336 (Bankr. E.D.N.Y. 1992). To satisfy the second prong, the movant must demonstrate that the debtor does not have a reasonable likelihood of rehabilitation. Id. The term “rehabilitation” is a different and “much more demanding standard than ‘reorganization.’” In re Brutsche, 476 B.R. 298, 301 (Bankr. D. N.M. 2012). “Rehabilitation contemplates the successful maintenance of the debtor’s business operations. A reasonable likelihood of rehabilitation is absent when the debtor’s business operations do not justify the continuance of the reorganization effort.” Mense, 509 B.R. at 284 (internal quotation marks and citations omitted). iii. False Operating Reports “Timely and accurate financial disclosure is the life blood of the Chapter 11 process. Monthly operating reports are much more than busy work imposed upon a Chapter 11 debtor for no reason other than to require it to do something. They are the means by which creditors can monitor a debtor's post-petition operations.” Matter of Berryhill, 127 B.R. 427, 433 (Bankr. N.D. Ind. 1991). Therefore, “the filing of materially inaccurate 11
  12. 12. monthly operating reports can represent a factor in a court’s finding of ‘cause’ under § 1112(b).” In re Cont’l Holdings, Inc., 170 B.R. 919, 929 (Bankr. N.D. Ohio 1994). b. Best Interests of Creditors and the Estate7 If the Court finds that there is cause under § 1112(b)(1), the Court must then determine whether dismissal, conversion, or appointment of a trustee is in the best interests of creditors and the estate. 11 U.S.C. § 1112(b)(1). This standard “implies a balancing test to be applied through case-by-case analysis.” Mense, 509 B.R. at 285. At a minimum, the Court must consider the Bankruptcy Code’s “fundamental policy of achieving equality among creditors,” and may not “merely tally[] the votes of the unsecured creditors and yield[] to the majority interest.” Sullivan, 522 B.R. at 613. IV. Analysis a. Objections Abdalla objects to Exhibits H and I of the Straub 2/24/15 Decl. Exhibit H is a partial transcript of a judgment-debtor examination of Santos in the State Court Action (2/11/15 Santos Exam). Straub 2/24/15 Decl. ¶ 9, Ex. H. Exhibit I is a partial transcript of a judgment-debtor examination of Woolsey in the State Court Action (2/11/15 Woolsey Exam). Straub 2/24/15 Decl. ¶ 10, Ex. I. Abdalla argues that the 2/11/15 Santos Exam and the 2/11/15 Woolsey Exam are inadmissible hearsay and that VTS has not complied with LBR 7030-1(b) regarding lodging deposition testimony. Objections at 2. Despite having an opportunity to do so, VTS did not respond to the Objections. See Reply. The Court agrees with Abdalla. The 2/11/15 Santos Exam and the 2/11/15 Woolsey Exam are inadmissible because they are out of court statements offered for the truth of the matter asserted. Federal Rule of Evidence (FRE) 801, 802. It does not appear that any of the hearsay exceptions apply. See FRE 803. And although under certain conditions, deposition testimony may be admissible under the Federal Rule of Civil Procedure (FRCP) 32(a), it does not appear that any of those conditions have been satisfied. FRBP 9014 (providing that FRBP 7032 applies in contested matters); FRBP 7032 (providing that FRCP 32 applies in adversary proceedings); FRCP 32(a) (providing that depositions may be used against a party only if certain conditions are satisfied). Therefore, the Court will not consider the 2/11/15 Santos Exam or the 2/11/15 Woolsey Exam. 7 The Court notes that VTS does not request that the Court dismiss the Case, but only requests that the Court convert the Case to chapter 7. 12
  13. 13. b. Cause i. Bad Faith VTS argues that Abdalla filed the Case in bad faith because Abdalla’s counsel stated at the § 341(a) Meeting that after the State Court entered the 8/8/14 Judgment, Abdalla wanted to avoid VTS’ collection efforts and he did not wish to post an appellate bond. Motion at 11. Abdalla responds that it is not per se bad faith to file bankruptcy if a debtor is unable to obtain an appellate bond. And, Abdalla contends that he also had other financial issues and therefore, did not file the Case in bad faith. Opposition at 5-6. Here, because VTS argues that Abdalla filed the Case to avoid collection efforts in the State Court Action, as well as to avoid posting an appellate bond, the Court believes that it is appropriate to consider the factors outlined in In re Erkins, 253 B.R. 470, 474- 75 (Bankr. D. Idaho 2000) (ruling on arguments that debtors filed bankruptcy in bad faith as a litigation tactic and seeking to utilize the automatic stay as a substitute for a supersedeas bond, and utilizing general bad faith factors) (Erkins Factors) as well as the factors outlined in In re Mense, 509 B.R. 269, 279 (Bankr. C.D. Cal. 2014) (finding that debtors filed bankruptcy in bad faith to avoid posting an appellate bond) (Mense Factors). 1. Erkins Factors – General Bad Faith Factors a. Whether the debtor has only one asset Abdalla’s 9/5/14 “Schedule A – Real Property” indicates that Abdalla owns no real property. Docket #14-1. Abdalla’s 10/9/14 Schedule B provides the following: Type of Property Description and Location of Property Current Value of Debtor’s Interest in Property, without Deducting any Secured Claim or Exemption 1. Cash on Hand Cash 1,000.00 2. Checking, savings or other financial accounts . . . Bank Account 1,000.00 3. Security deposits . . . Security Deposit with Landlord 5,600.00 4. Household foods and furnishings . . . Furniture 1,000.00 4. Household foods and furnishings . . . Computers and Electronics 900.00 6. Wearing apparel. Clothing 500.00 14. Interests in partnerships or joint ventures. Itemize. 100% of The Crew Source, LLC – Burbank, CA Unknown 14. Interests in partnerships or joint ventures. Itemize. Interest in Fernwood Road Productions Unknown 25. Automobiles . . . Toyota Prius 6,000.00 Docket #26-1. Although there is no evidence regarding the value of Fernwood Road Productions and the Crew Source, the total amount of assets Abdalla listed on his 10/9/14 Schedule B is $16,000. Regarding Crew Source, the record demonstrates: 13
  14. 14. 1. Crew Source loaned Abdalla $50,000 as a retainer for Abdalla’s bankruptcy counsel. Straub 2/24/15 Decl. ¶ 7, Ex. F at 30:17-23; 9/2/14 Declaration of Byron Moldo, Docket #15 (Moldo 9/2/14 Decl.) ¶ 8; 2. Abdalla requested authority to borrow up to $250,000 from Crew Source to pay for administrative expenses, § 364(b) Motion at 4, and stated that “I am the 100% member and manager of [Crew Source] and, as such, have the ability to obtain a loan for the funds needed to pay administrative expenses, as requested. 10/28/14 Declaration of Edward Abdalla, Docket #47 (Abdalla 10/28/14 Decl.) ¶ 6; and 3. At the § 341(a) Meeting, Abdalla stated that Crew Source normally holds anywhere from $10,000 to $50,000 per month in cash in its accounts and generates anywhere from $200,000 to $300,000 per month in gross sales. Straub 2/24/15 Decl. ¶ 7, Ex. F at 32:4-25. Although there is no evidence demonstrating the Crew Source’s exact value, it appears that the Crew Source had the ability to lend Abdalla up to $300,000.8 And, the value of all of Abdalla’s other assets total $16,000. Therefore, it appears that the value of Abdalla’s interest in Crew Source dwarfs the value of his interests in all other assets and this factor weighs in favor of finding bad faith. See In re Erkins, 253 B.R. 470, 474- 75 (Bankr. D. Idaho 2000) (finding that individual debtors filed a chapter 11 case in bad faith and noting that although the debtors had more than one asset, the debtors’ most significant assets were interests in certain real property and that although “not a precise fit, [the] case resemble[d] those where the debtor seeks to deny its principal creditor the right to foreclose on a single, significant asset”). b. Whether the debtor has an ongoing business to reorganize Abdalla is an individual debtor. Although it appears that Crew Source is Abdalla’s most significant asset, Crew Source is not a debtor, and it does not appear that Abdalla intends to reorganize Crew Source’s business through this bankruptcy. Therefore, this factor is inapplicable. See In re Wells, 227 B.R. 553, 563 (Bankr. M.D. Fla. 1998) (rejecting the argument that an individual debtor filed a case in bad faith based on the fact that the individual debtor is not a business, and explaining that individuals are authorized to file chapter 11 cases). 8 Crew Source loaned Abdalla $50,000 for his bankruptcy counsel’s retainer. Docket #26-3 at 2. Abdalla also proposed to borrow $250,000 from Crew Source to pay professionals to prosecute the appeal, prepare tax returns, and represent the Abdalla in the Case. Docket #47; Abdalla 10/28/14 Decl. ¶ 6 (“I am the 100% member and manager of [Crew Source] and, as such, have the ability to obtain a loan for the funds needed to pay administrative expenses, as requested.”). Therefore, it appears that Crew Source had the ability to lend Abdalla at least $300,000 ($50,000 + $250,000). 14
  15. 15. c. Whether there are any unsecured creditors The charts below summarize the scheduled and most recently filed claims, general unsecured claims (General Unsecured Claims) and total claims (Total Claims) in this Case: It is beyond dispute that there are few creditors other than VTS. The 9/16/14 VTS Claim represents 95.24% of General Unsecured Claims9 and 92.77% of Total Claims.10 Further, all claims other than the 9/16/14 VTS Claim total $241,399.35,11 which is less than the $300,000 Abdalla has borrowed or proposed to borrow from Crew Source to pay administrative expenses in this Case. Based on these facts, it appears that Abdalla had the ability to pay all creditors in full except for VTS without filing bankruptcy. See Docket #107 at 5 (12/31/14 status report in which Abdalla indicates that if mediation with VTS is successful, he may seek to dismiss the Case because he “believes he will be able to substantially resolve the outstanding IRS and FTB claims”). Therefore, this factor weighs in favor of finding bad faith. 9 $3,096,533.80/$3,251,371.34 = .9524 10 $3,096,533.80/$3,337,933.15= .9277 11 $3,337,933.15 - $3,096,533.80 = $241,399.35 Creditor Nature of Claim Amount Source IRS Taxes 58,053.59$ 3/25/15 IRS Claim Creditor Nature of Claim Amount Source IRS Taxes 23,628.28$ 3/25/15 IRS Claim FTB Taxes and/or fees 3,306.26$ 12/12/14 FTB Claim City of Los Angeles, Office of Finance Municipal Business Tax 1,573.68$ POC #4-1 Creditor Nature of Claim Amount Source Collection Bureau of America Time Warner consumer debt 431.00$ 10/9/14 Schedule F Enhanced Recovery Corporation Sprint - Telecommunications debt 205.00$ 10/9/14 Schedule F Midland Funding LLC Chase Bank credit card debt 29,241.00$ 10/9/14 Schedule F Pinnacle Credit Services Verizon - Telecommunications debt 139.00$ 10/9/14 Schedule F Sequoia Financial Service Cedars Sinai - Medical debt 69.00$ 10/9/14 Schedule F Crew Source Loan for payment of retainer 50,000.00$ 10/9/14 Schedule F IRS Taxes 60,068.84$ 3/25/15 IRS Claim FTB Taxes and/or fees 14,091.50$ 12/12/14 FTB Claim City of Los Angeles, Office of Finance Municipal Business Tax 592.20$ POC #4-1 VTS Judgment 3,096,533.80$ 9/16/14 VTS Claim Total Secured Claims 58,053.59$ Total Priority Unsecured Claims 28,508.22$ Total General Unsecured Claims 3,251,371.34$ Total Claims 3,337,933.15$ Secured Claims Priority Unsecured Claims General Unsecured Claims Total Claims 15
  16. 16. d. Whether the debtor has any cash flow or sources of income to sustain a plan of reorganization or to make adequate protection payments The following chart outlines the differences between Abdalla’s schedules I and J: Abdalla’s net monthly income purportedly varied from $112/month on 9/5/14, to $1,283/month on 10/9/14, to $175/month on 10/27/14. Assuming the most recent, $175/month figure to be true, it would be impossible for Abdalla to propose a confirmable plan. Section 1129(a)(9)(C) and (D) require that holders of § 507(a)(8) claims (priority tax claims) and secured claims otherwise meeting the requirements of § 507(a)(8) receive regular cash payments, of a total value equal to the allowed amount of such claim, over a five-year period. If Abdalla were to devote all $175/month in net monthly income to § 507(a)(8) claims, he would only pay $10,50012 over the life of a five year plan, but as indicated above, the secured portion of the 3/25/15 IRS Claim is 12 $175/month x 60 months = $10,500 9/5/14 Schedule I 10/9/14 Schedule I Monthly gross wages, salary, and commissions (begore all payroll deductions) $7,000 $6,000 Gross income $7,000 $6,000 Tax, Medicare, and Social Security Deductions $2,388 $0 Monthly take home pay $4,612 $6,000 Funds from Crew Source for payment of taxes N/A $6,000 Monthly income $4,612 $12,000 9/5/14 Schedule J 10/9/14 Schedule J 10/27/14 Schedule J Rent $2,800 $2,800 $2,800 Electricity, heat, natural gas $300 $300 $300 Water, sewer, garbage collection $100 $100 $100 Telephone, cell phone, Internet, satellite, cable services $200 $200 $200 Food and Housekeeping supplies $500 $500 $600 Clothing, Laundry, and Dry Cleaning N/A N/A $125 Personal care products and services $100 $100 $225 Medical and dental expenses $150 $150 $150 Transportation $150 $150 $300 Entertainment, clubs, recreation, newspapers, magazines, and books N/A N/A $100 Charitable contributions and religious donations N/A N/A $50 Vehicle insurance $150 $150 $150 Property/Renter Insurance N/A N/A $50 Income Tax Payments N/A $6,000 $6,000 Property, homeowner's, or renter's insurance $50 $50 $50 UST Quarterly Fees N/A $217 $325 Accountant N/A N/A $300 Monthly expenses $4,500 $10,717 $11,825 9/5/14 Schedule J 10/9/14 Schedule J 10/27/14 Schedule J Monthly income from Schedule I $4,612 $12,000 $12,000 Monthly expenses from Schedule J $4,500 $10,717 $11,825 Net monthly income $112 $1,283 $175 Schedule I Schedule J Net Monthly Income 16
  17. 17. $58,053.59, and all other Priority Unsecured Claims total $28,508.22. Based on these facts, Abdalla does not have sufficient income to fund a confirmable plan. Therefore, this factor weighs in favor of finding bad faith. e. Whether the case is essentially a two-party dispute capable of prompt adjudication in state court As discussed above, the 9/16/14 VTS Claim, which is based on the 8/18/14 Judgment, represents 95.24% of General Unsecured Claims and 92.77% of Total Claims in this Case. Abdalla filed bankruptcy on 8/22/14, four days after the 8/18/14 Judgment, and Abdalla’s counsel stated at the § 341(a) Meeting that: The [C]ase was filed as a result of a -- the entry of [the 8/18/14 Judgment] against [] Abdalla in the [State Court] in favor of a company called VTS for approximately two million dollars. [] Abdalla intends to appeal that judgment and a motion for relief from stay to file the appeal will be filed unless a stipulation can be obtained. That's primarily the reason why the case was filed. Straub 2/24/15 Decl. ¶ 7, Ex. F at 4:17-5:2. And, as discussed above, it appears that Abdalla, through Crew Source, had the ability to pay all claims in full—other than the 9/16/14 VTS Claim—with the funds he proposed to borrow to pay for bankruptcy administrative expenses. Further, after entry of the 8/18/14 Judgment, the only remaining issues in the State Court Action are on appeal. In a 12/31/14 status report, Abdalla indicated that he, VTS, and other judgment debtors in the State Court Action had scheduled a mediation for 2/5/15, and that “[s]uccess at mediation may result in [Abdalla] seeking to dismiss this bankruptcy case” because Abdalla “believes he will be able to substantially resolve the outstanding IRS and FTB claims.” Docket #107. These facts demonstrate that the Case is essentially a two-party dispute capable of prompt adjudication in State Court. This factor weighs in favor of finding bad faith. 2. Mense Factors – Filing a Chapter 11 to Avoid Posting an Appeal Bond a. Whether the debtor is a viable business which would suffer severe disruption if enforcement of the judgment was not stayed and the chapter 11 petition was filed to preserve its status as an ongoing concern and to protect its employees and creditors Abdalla is an individual debtor and the 100% member of Crew Source. Abdalla 10/28/14 Decl. ¶ 6. There is no evidence, however, that Crew Source’s business would have been severely disrupted, that the chapter 11 petition was necessary to preserve Crew Source’s status as a going concern, or that the chapter 11 petition was necessary to protect Crew Source’s employees and creditors. See In re Erkins, 253 B.R. 470, 474-75 (Bankr. D. Idaho 2000) (“[D]ebtors have simply not proven that they need 17
  18. 18. Chapter 11 relief to protect any on-going business they own.”); In re Holm, 75 B.R. 86, 87 (Bankr. N.D. Cal. 1987) (“[T]his court believes that a Chapter 11 filing is in good faith and may be used to replace an appeal bond if the judgment against the debtor is so large that the debtor faces severe disruption of his business if enforcement of the judgment is not stayed.”). Therefore, this factor weighs in favor of finding bad faith. b. Whether the debtor had financial problems on the petition date, other than the adverse judgment Although several tax claims have been filed in this Case, it appears that Abdalla had the ability to borrow enough from Crew Source to pay all claims other than the 9/16/14 VTS Claim. Further, Abdalla indicated that if mediation had been successful, it could have resulted in dismissal of the Case. Docket #107. Therefore, it does not appear that Abdalla had financial problems on the petition date, other than the 8/18/14 Judgment. See Erkins, 253 B.R. at 476 (“[T]here is no indication in the schedules or record that Debtors could not pay all their other creditors in full from their available assets.”); In re Karum Grp., Inc., 66 B.R. 436, 438 (Bankr. W.D. Wash. 1986) (“At the time of filing the debtor had no financial problems except for the Deacon Group’s judgment. . . . During oral argument, debtor’s counsel also remarked that if the debtor is successful in its appeal, the bankruptcy will be dismissed.”). This factor weighs in favor of finding bad faith. c. Whether the debtor has relatively few unsecured creditors, other than the holder of the adverse judgment As discussed above, the 9/16/14 VTS Claim, which is based on the 8/18/14 Judgment, represents 95.24% of General Unsecured Claims and 92.77% of Total Claims in this Case. See Erkins, 253 B.R. at 476 (finding bankruptcy case filed in bad faith where a creditor’s claim composes about 96% of the total debt); In re Sparklet Devices, Inc., 154 B.R. 544, 550 (Bankr. E.D. Mo. 1993) (finding that a petition was not filed in good faith and stating “[i]n fact, according to Debtor’s schedules, Debtor’s unsecured debts are approximately $50,000.00 while the obligation to Mr. Mueller is $750,000”). Therefore, this factor weighs in favor of finding bad faith. d. Whether the debtor has sufficient assets to post a bond to stay the judgment pending appeal CCP § 917.1(b) provides that the bond “shall be for double the amount of the judgment or order unless given by an admitted surety insurer in which event it shall be for one and one-half times the amount of the judgment or order.” The 8/18/14 Judgment found that Abdalla, Santos, Woolsey, and H.E. Woolsey Corporation dba Crew Source were jointly and severally liable for $2,000,754 in compensatory damages and $595,779.80 in costs. Straub 2/25/14 Decl. ¶ 6, Ex. E. The 8/18/14 Judgment also found that H.E. Woolsey 18
  19. 19. Corporation dba Crew Source was liable for $500,000 in exemplary damages. Id.13 Therefore, VTS’ damages against Abdalla under 8/18/14 Judgment totaled $2,596,533.8014 and an appellate bond must have totaled $5,193,067.60,15 or $3,894,800.7016 if provided by an admitted surety insurer. Abdalla argues, without providing evidence, that he does not have the ability to “meaningfully pay the judgment or to obtain a bond.” Opposition at 3. As an initial matter, argument is not evidence. Hurley v. Student Loan Acquisition Auth. of Ariz. (In re Hurley), 258 B.R. 15, 23 (Bankr. D. Mont. 2001). Regarding a bond, Abdalla scheduled $16,000 as well as interests of an “unknown” value in Crew Source and Fernwood Road Productions. Although it is likely that Crew Source’s value dwarfs the value of Abdalla’s other assets, it impossible to tell whether Crew Source’s value would be sufficient to post more than a $5,000,000 bond. Regarding ability to pay the 8/18/14 Judgment, the evidence indicates that Abdalla and Crew Source had the ability to pay the 8/18/14 Judgment. A declaration filed by Abdalla in the State Court Action attaches an asset purchase agreement (APA) signed by H.E. Woolsey Corporation, Abdalla, and Crew Source. Straub 4/16/15 Decl. ¶ 2, Ex. 1. The APA is dated 6/14/13 and provides for the sale of certain assets of the “The Crew Source” to Abdalla and Crew Source. APA, art. 1. The APA also refers to the State Court Action and provides: In the event [a motion for terminating sanctions] is granted which results in either or of [H.E. Woolsey Corporation] and Woolsey or [Abdalla and Crew Source] being the subject of a default judgment and/or subject to the entry of a judgment for money damages. [Abdalla and Crew Source] shall nevertheless be responsible for the payment or indemnification obligation to [[H.E. Woolsey Corporation] and Woolsey and for payment of any judgment imposed upon any of the parties and shall hold [H.E. Woolsey Corporation] and Woolsey harmless from such judgment. [Abdalla and Crew Source] represent[] and warrant[] as an inducement for [H.E. Woolsey Corporation] and Woolsey to enter into this transaction that [they have] after the [c]losing sufficient assets and funds to pay any such judgment and any attorney fees and costs awarded as part of such judgment, and it will pay such judgment promptly. 13 For the purposes of this Motion, the Court gives Abdalla the benefit of the doubt and will not consider the $500,000 in exemplary damages imposed against H.E. Woolsey Corporation dba Crew Source in calculating the amount of bond that Abdalla would be required to post. 14 $2,000,754 + $595,779.80 = $2,596,533.80. 15 $2,596,533.80 * 2 = $5,193,067.60. 16 $2,596,533.80 * 1.5 = $3,894,800.70. 19
  20. 20. APA, art. 8.2 (emphasis added). The APA was signed by Abdalla both individually and as manager of Crew Source. APA at 10. And, the APA was attached to a declaration signed by Abdalla under penalty of perjury. Therefore, it appears that Abdalla had the ability to pay the 8/18/14 Judgment, and this factor weighs in favor of finding bad faith. e. Whether the debtor acted in good faith to exhaust all efforts to obtain a bond to stay the judgment pending appeal The transcript of the § 341(a) Meeting provides: MS. LAW[17 ]: All right. So, counsel, could I just have a very brief history of why this case was filed. MR. MOLDO[18 ]: Absolutely. The case was filed as a result of a -- the entry of [the 8/18/14 Judgment] against [] Abdalla in the [State Court] in favor of a company called VTS for approximately two million dollars. [] Abdalla intends to appeal that judgment and a motion for relief from stay to file the appeal will be filed unless a stipulation can be obtained. That's primarily the reason why the case was filed. MS. LAW: Do you know if a bond was posted for the underlying state court judgment? MR. MOLDO: One was not. The case was filed just a few days after entry of the judgment in the [S]tate [C]ourt. MS. LAW: [] Abdalla, you have heard what your counsel has said. Is there anything that he said to be inaccurate that you would like to correct at this point? THE DEBTOR: No. . . . MS. LAW: Did you look into the issue of if you had to post a bond how much it would be? MR. MOLDO: I don't believe Mr. Abdalla and his state court counsel did. THE DEBTOR: No. 17 Dare Law represents the United States Trustee. Straub 2/24/15 Decl. ¶ 7, Ex. F at 1. 18 Byron Moldo represents Abdalla. Docket #s 15, 102 (employment application and order approving employment). 20
  21. 21. MS. LAW: Did you ever get to at that point? Would you be able to afford a bond if this case was dismissed? THE DEBTOR: I am not sure how much a bond would be. So I don't know. Straub 2/24/15 Decl. ¶ 7, Ex. F at 4:17-5:2, 36:5-14. Based on Abdalla’s testimony and Abdalla’s counsel’s statements, it does not appear that Abdalla made any attempt to obtain an appellate bond. Instead, he filed a chapter 11 petition. See In re Fox, 232 B.R. 229, 235 (Bankr. D. Kan. 1999) (“The Court finds that Debtor has shown that he was unable to obtain a supersedeas bond. Because Debtor was unable to obtain the bond, and was forced to file bankruptcy in order to preserve his companies as going concerns, the Court will not dismiss his bankruptcy for that reason alone.”). Therefore, this factor weighs in favor of finding bad faith. f. Whether the debtor intends to pursue an effective reorganization within a reasonable period of time, or whether the debtor is unwilling or unable to propose a meaningful plan until the conclusion of the litigation Abdalla filed the Case on 8/22/14, and the hearing on the Motion is set for 4/9/15, approximately eight months later. The deadline to object to claims was on 3/16/15, and no claim objections were filed. The Court has not yet set a deadline for filing a disclosure statement or plan. As discussed above, Abdalla indicated that if mediation had been successful, he may have sought dismissal of the Case because he believed he would be able to “substantially resolve the outstanding IRS and FTB Claims.” Docket #107 at 5. Therefore, it appears that Abdalla does not intend to pursue reorganization until VTS’ claim is resolved, and that Abdalla does not need bankruptcy to resolve other claims. See In re Karum Grp., Inc., 66 B.R. 436, 438 (Bankr. W.D. Wash. 1986) (“During oral argument, debtor’s counsel also remarked that if the debtor is successful in its appeal, the bankruptcy will be dismissed.”). This factor weighs in favor of finding bad faith. g. Whether assets of the estate are being diminished by the combined ongoing expenses of the debtor, the chapter 11 proceedings, and prosecution of the appeal Abdalla is incurring significant expenses paying for bankruptcy counsel. Docket #108 (professional fee statement indicating that from 8/22/14 to 10/31/14, Abdalla’s bankruptcy counsel had incurred $49,203.26 in fees). Although Abdalla’s counsel has not filed any additional fee applications, the case continues to be heavily litigated. The Court has also approved the employment of The Rocher Group, A.P.C. (Rocher) as Abdalla’s accountant, but there is no evidence indicating what fees Rocher has incurred in this Case. Abdalla has not filed an application to employ special counsel regarding the State Court Action. Therefore, this factor appears to weigh slightly in favor of finding bad faith based on the fees incurred by Abdalla’s counsel. 21
  22. 22. In summary, four of the Erkins factors weigh in favor of finding bad faith and one is inapplicable. Regarding the Mense factors, one factor weighs slightly in favor in finding bad faith, and six weigh in favor of finding bad faith. Based on the analysis, the Court believes that there is cause to dismiss or convert under § 1112(b) for bad faith. ii. Section 1112(b)(4)(A) VTS argues that there is a substantial or continuing loss to or diminution of estate assets and no reasonable likelihood of rehabilitation because Abdalla is funding the Case by loans from Crew Source, which he does not have the ability to repay. Motion at 12. Further, according to VTS, loans from Crew Source only increase estate liability, and following the Court’s denial of the § 364(b) Motion, Abdalla has “no ability to continue with this [C]ase.” Motion at 12. Abdalla counters that the estate is benefitting by the use of non-estate assets to fund the appeal, which will reduce or eliminate VTS’ claim. Opposition at 5. Here, the first element, substantial or continuing loss to or diminution of estate assets, is satisfied because Abdalla continues to incur professional fees, which will have to be paid from estate assets. The second element, no reasonable likelihood of rehabilitation, is also satisfied because the Court denied the § 364(b) Motion and Abdalla has stated that “I require the [$250,000 loan] from Crew Source to fund the ongoing administration of my bankruptcy estate because I do not have another source of funding to pay professionals.” 11/25/14 Declaration of Edward Abdalla, Docket #92, ¶ 3. Therefore, there is cause to dismiss or convert under § 1112(b)(4)(A). iii. False Operating Reports VTS argues that the Court should convert the Case because Abdalla has not indicated in his monthly operating reports that he is paying legal fees in the State Court Action for himself and his codefendants. And, even if Crew Source is paying those legal fees, any fees paid by Crew Source on Abdalla’s behalf should have been disclosed as income. Motion at 12-13. Abdalla contends that Crew Source is funding the appeal and because Crew Source is not a debtor, it is not required to disclose its assets and liabilities. Opposition at 4. The Court has reviewed Abdalla’s monthly operating reports, and they do not indicate that Abdalla has been paying any legal fees in the State Court Action. Docket #s 22, 33, 43, 77-79, 105, 111, 114, 121. And, as discussed above, the 2/11/15 Santos Exam and 2/11/15 Woolsey Exam are inadmissible hearsay. Therefore, there is no evidence indicating that the operating reports are false. Even if the 2/11/15 Santos Exam and 2/11/15 Woolsey were admissible, they do not demonstrate that any of the operating reports are false. Santos stated at the 2/11/15 Santos Exam that Crew Source has been paying his legal expenses. Straub 2/24/15 Decl. ¶ 9, Ex. H at 32:8-13. And, although Woolsey stated at the 2/11/15 Woolsey 22
  23. 23. Exam that Abdalla agreed to indemnify all judgments and fees regarding the State Court Action, id. ¶ 10, Ex. I at 131:15-19, there is no evidence that after filing the Case, Abdalla actually paid any of Woolsey’s legal fees. Therefore, the Court cannot find cause to dismiss or convert based on false operating reports. c. Best Interests of Creditors and the Estate VTS initially did not argue that the best interests of creditors favor conversion over dismissal. See Motion. Abdalla argued that the best interests of creditors would be served if the Case remained a chapter 11 because Abdalla must contribute postpetition income to a chapter 11 and payments from Crew Source would cease if the Case were converted. Opposition at 6-7. VTS responds that Abdalla’s net monthly income is miniscule and Abdalla has refused to value Crew Source. Reply at 13. Here, the Court finds that conversion of the Case is in the best interests of creditors. As VTS correctly points out, Abdalla’s 10/27/14 Schedule J indicates that his net monthly income is $175/month, and as discussed above, $175/month is insufficient to pay priority tax claims in full over the life of a plan. See 11 U.S.C. § 1129(a)(9)(C), (D). Further, Abdalla’s schedules do not indicate that he has sufficient cash on hand to pay priority tax claims in full on the effective date of any plan. These facts demonstrate that it is unlikely that Abdalla will be able to confirm a chapter 11 plan, and any efforts to confirm such a plan would diminish estate assets, at the expense of creditors. Further, it appears that conversion of the Case better suits creditors than dismissal. Upon conversion to chapter 7, an independent chapter 7 trustee will be appointed, who can value, and if necessary, sell all of Abdalla’s non-exempt assets, including Abdalla’s non-exempted interest in Crew Source, to satisfy creditor claims. As discussed above, it appears that Crew Source has at least $300,000 in available cash. Even if Abdalla’s interest in Crew Source is less than Crew Source’s available cash, it appears that conversion to chapter 7, and a subsequent liquidation of Abdalla’s interest in Crew Source, might result in full payment to priority tax claimants, and all creditors other than VTS. Further, it is possible that if the case is converted, VTS might also receive some distribution on account of its claim. V. Conclusion For the reasons stated above, the Motion is granted. The Case is converted to chapter 7. Pursuant to LBR 9021-1(b), VTS must file and serve a proposed order within seven days of the hearing. Appearances required. 23

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