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In re Benzeen, Inc. (9th Cir. BAP) Sua sponte dismissal order reversed where bankruptcy court did not provide debtor with sufficient notice to satisfy procedural due process.

The following is a case update analyzing a recent case of interest.

Summary

In Benzeen Inc. v. UST – United States Trustee, Woodland Hills, No. 18-1185, 2019 WL 1096334 (9th Cir. BAP Mar. 6, 2019), the United States Bankruptcy Appellate Panel of the Ninth Circuit reversed the bankruptcy court’s sua sponte order dismissing a debtor’s bankruptcy case at a status conference and hearing on debtor’s disclosure statement based on, among other reasons, procedural errors and due process concerns. To read the full published decision, click here.

Facts

On November 20, 2017, Benzeen Inc. filed a chapter 11 petition and listed an ownership interest in a commercial property and an interest in a residential property in Southern California. Deeds of trust were recorded against each property by separate lenders.

In December 2017, the bankruptcy court entered an Order Setting Scheduling and Case Management Conference and Filing of Monthly Reports. The order provided:

PLEASE TAKE FURTHER NOTICE that, based upon the Court’s records and evidence presented at the status conference, the Court may take any of the following actions at the status conference (or at any continued hearing) without
further notice:

1. Dismiss the case;
2. Convert the case to another chapter . . . .

The debtor then timely filed its proposed disclosure statement and proposed chapter 11 plan. One of the lenders objected to the disclosure statement on several grounds, including that the disclosure statement failed to provide adequate information about the plan’s feasibility. A hearing on the disclosure statement and a case status conference were scheduled for June 6, 2018. The day before the June 6 hearing, the bankruptcy court issued its tentative ruling, which stated: “APPROVAL DENIED. APPEARANCE REQUIRED.” The bankruptcy court did not mention the possibility of dismissal in its tentative ruling.

At the June 6 hearing and status conference, only the debtor’s counsel appeared and agreed that the disclosure statement needed to be more specific and detailed. Near the end of the hearing, the bankruptcy court raised the notion of dismissal for the first time and, after some pointed comments by the court, it dismissed the debtor’s case. The bankruptcy court’s order dismissing the debtor’s case did not provide detailed findings of fact and conclusions of law but noted that the court had held the hearing and status conference, and referenced the “findings of fact and conclusions of law stated orally and recorded in open court pursuant to F.R.Civ.P 52(a) . . .”

Appeal

The debtor appealed the dismissal order to the BAP. The issue on appeal was “[w]hether the bankruptcy court erred in sua sponte dismissing [the debtor’s] case at the hearing on [its lender’s] objection to the disclosure statement.”

In its analysis, the BAP first found that the bankruptcy court committed reversible error by failing to give the debtor notice of the court’s intention to dismiss the case. The BAP cited to In re Tennant for the proposition that “a court must give sufficient notice of its intention to dismiss a case and the opportunity for interested parties to be heard.” Tennant v. Rojas (In re Tennant),318 B.R. 860, 870 (9th Cir. BAP 2004). The BAP also cited to Section 1112(b), which provides that, “after notice and a hearing,” a court may dismiss a chapter 11 case “for cause.” The BAP found that the bankruptcy court did not provide the debtor with adequate notice of the possibility of dismissal of the case at the hearing. The BAP pointed out that there was no pending motion to dismiss, and that the bankruptcy court’s tentative ruling issued a day before the hearing indicated only that it was inclined to disapprove the disclosure statement, not that it intended to dismiss the case. At the hearing, the court made abundantly clear that it was displeased with the debtor’s conduct, as evidenced by the court’s pointed comments, but it did not raise the possibility of dismissal until nearly the end of the hearing. The BAP found that the bankruptcy court had committed reversible error.

The BAP then analyzed whether the bankruptcy court erred by failing to consider the best interests of the estate and creditors. The bankruptcy court cited Section 1112(b) as the basis for dismissal. Section 1112(b) provides that the bankruptcy court may dismiss a case “for cause” and although the statute does not define “for cause,” it identifies a nonexclusive list of factors that may constitute “cause.” See 11 U.S.C. § 1112(b)(4). If the bankruptcy court finds that “cause” exists under Section 1112, it has an “independent obligation” to “(1) decide whether dismissal, conversion, or the appointment of a trustee or examiner is in the best interests of creditors and the estate; and (2) identify whether there are unusual circumstances that establish that dismissal or conversion is not in the best interests of creditors and the estate.” Sullivan v. Harnisch (In re Sullivan), 522 B.R. 604, 612 (9th Cir. BAP 2014) (citing Section 1112(b)(1)-(b)(2)). Failure to consider these options is an abuse of discretion. Id. In this instance, the BAP found that the record was devoid of any indication that the bankruptcy court considered which option was in the best interest of creditors and the estate. The BAP further found that this was an additional instance of reversible error by the bankruptcy court.

Author’s Commentary

This case highlights that debtors, and indeed all parties, must be afforded the requisite due process and procedural safeguards when it comes to dismissing a case.

These materials were written by ILC co-chair and member Marcus O. Colabianchi of Duane Morris LLP in San Francisco, California (mcolabianchi@duanemorris.com). 

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