Debtor Files Chapter 11 to Avoid Posting Bond; Dismissal of Case Affirmed
Oct. 9 –An individual Chapter 11 debtor’s case was properly dismissed when a bankruptcy court found the debtor had filed for bankruptcy in order to pursue a state court appeal without having to post a supersedeas bond, the U.S. District Court for the Eastern District of Texas held Sept. 23 (BOT Real Estate LLC v. Anderton (In re Anderton), 2013 BL 254750, E.D. Tex., No. 6:12-cv-00332-MHS, 9/23/13).
Judge Michael H. Schneider found that the bankruptcy court did not abuse its discretion in finding that the debtor had not initiated the bankruptcy for a legitimate purpose and that the case was essentially a dispute between two former business partners that belonged in state court.
$8.4 Million Deficiency
In 2002, debtor Lewie Carl Anderton formed two partnerships, Cascades Properties Ltd. and Bellwood Lake Partnership Ltd., with business partner William Cawley. The partnerships were created in order to develop a residential community and golf course in Texas. The partnerships borrowed millions of dollars from Park Cities Bank, where Cawley was a 10 percent shareholder, director, and on the loan committee.
Cawley established BOT Real Estate LLC, which purchased the debt Bellwood owed to Park Cities. After Bellwood’s debt was accelerated, BOT purchased the Bellwood property at foreclosure for less than was owed. The deficiency was nearly $8.4 million, which was personally guaranteed by Anderton. In May 2008, Anderton sued Cawley and BOT, among others, in state court for breach of fiduciary duty and civil conspiracy relating to the handling of the Bellwood debt. BOT counterclaimed seeking to recover the deficiency. In April 2010, the state court granted summary judgment in favor of BOT, resulting in an $8.617 million judgment.
Failure to Post Bond
Anderton appealed the judgment, but the state court ordered him to post a supersedeas bond equal to half of his net worth. Anderton did not post the bond and on June 8, 2011, he filed for Chapter 11 protection. After Anderton failed to propose a reorganization plan, BOT and the Chapter 11 trustee jointly proposed a plan, which Anderton opposed.
While the confirmation of the plan was pending, the trustee filed an adversary proceeding against Anderton and his wife regarding the transfer of certain assets to trusts Anderton created in late 2008. Also while the confirmation was pending, one of Anderton’s creditors, Andrews & Barth PC, moved to abate consideration of BOT’s proposed plan pending the resolution of the adversary proceeding and the state court appeal.
At a March 22, 2012, hearing on the proposed plan, the bankruptcy court denied confirmation of the plan, the bankruptcy case was abated, and the parties were ordered to show cause why the case should not be dismissed with prejudice. Anderton supported the dismissal, while BOT and the trustee argued the case should be converted to a Chapter 7 case. Before the bankruptcy court ruled on the dismissal, the state appellate court reversed the summary judgment granted to BOT and remanded the case back to the trial court. On June 21, 2012, the bankruptcy court dismissed Anderton’s bankruptcy with prejudice. BOT appealed both the rejection of the plan and the dismissal.
‘Failed Miserably’ to Reorganize
Under Section 1112(b)(1), a bankruptcy court may dismiss a Chapter 11 case for “cause.” The district court said that whether cause exists is based on the “totality of the circumstances” and that if a court finds cause, then it must determine if dismissal is in the “best interest of the creditors.”
BOT argued on appeal that the bankruptcy court erred in finding there was cause for dismissal because the court did not hold an evidentiary hearing on the issue and that dismissing the case was not supported by the evidence on the record. BOT claimed that it was prevented from presenting evidence that Anderton was genuinely seeking to reorganize under Chapter 11.
The district court found that while the bankruptcy court did not explicitly state a statutory basis for dismissal, the bankruptcy court made several findings in its order and incorporated findings made on the record that supported dismissal. The bankruptcy court found that Anderton filed for bankruptcy for the improper purpose of using the automatic stay to avoid posting the supersedeas bond. The bankruptcy court also found that Anderton had “failed miserably” to make a genuine effort to reorganize by failing to file a plan and by opposing the BOT plan.
The district court said that BOT’s contention on appeal that Anderton had filed bankruptcy for a proper purpose was “egregiously inconsistent with its own position.” The court said that throughout the bankruptcy proceeding, BOT had advanced the argument that Anderton had filed for bankruptcy in bad faith and did not genuinely intend to reorganize. Also, the court found that BOT had been given the opportunity to produce evidence to the contrary because the bankruptcy court had invited briefing after it provided notice of its intent to dismiss. Furthermore, the court said that on appeal BOT had not specified what evidence it would have proffered to the bankruptcy court.
The district court also agreed with the bankruptcy court’s conclusion that the case was improperly filed because it “boils down to a dispute between former business partners and their attempt to recover for alleged financial transgressions.” The district court agreed that the dispute between Anderton and BOT was a matter “squarely before the state court” and did not belong in the bankruptcy court. Therefore, the district court found that the bankruptcy court did not abuse its discretion in finding that cause existed to dismiss the bankruptcy because it had not been filed for a legitimate purpose.
Creditors’ Interests Considered
The district court also disagreed with BOT’s contention that the bankruptcy court did not consider the best interests of the creditors. The court found that the bankruptcy court “clearly considered and admittedly struggled with the question of the creditors’ best interests” and ultimately found that given the uncertain status of the various other proceedings, it could not determine what would be in the best interests of the creditors.
The court said that the plan proposed by BOT would “essentially prevent review of the state court’s summary judgment ruling,” which the court said would allow BOT to benefit from a victory it might not ultimately deserve to the detriment of other creditors. The court also noted that none of the other creditors opposed the dismissal.
Therefore, the court found that the bankruptcy court had considered the creditors’ best interests and did not abuse its discretion in dismissing Anderton’s bankruptcy. Accordingly, the bankruptcy court’s order of dismissal was affirmed.
To contact the reporter on this story: Stephanie M. Acree in Washington at email@example.com
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