Federal District Court Opinions
IN RE SULLIVAN, (E.D.Cal. 2006) In re: HAROLD V. SULLIVAN,
II, Debtor. HAROLD V. SULLIVAN, II, Appellant, v. JAVA OIL
LIMITED; and BRIGHTSIDE SERVICES LIMITED, Appellees. No.
CIV. S-06-20 LKK, Bk. Ct. No. 05-30713-A-13. United States
District Court, E.D. California. June 20, 2006
ORDER
LAWRENCE KARLTON, Senior District Judge
Pending before the court is Harold Sullivan II’s (“debtor”
or “Sullivan”) appeal of the bankruptcy court’s dismissal
of his Chapter 13 bankruptcy petition and its retroactive
annulment of an automatic stay sought by Java Oil Limited
and Brightside Services Page 2 Limited(“Java” or
“creditors”).[fn1]
I.
BACKGROUND[fn2]
A. THE GIBRALTAR PROCEEDINGS[fn3]
On October 22, 2003, Peter Laycock (“Laycock”) brought
suit against creditors for personal injuries in the Courts
of Gibraltar. That suit was dismissed because the Gibraltar
court concluded that Laycock’s complaint was
fraudulent.[fn4] ER at 277. Creditors then brought suit in
Gibraltar against Sullivan, who the court concluded acted
as Laycock’s attorney, to collect the costs of defending
the lawsuit because he “had a hand in the preparation of
the witness statements,” among other things. Id. Sullivan
challenged the court’s jurisdiction, but that challenge was
dismissed on February 17, 2005. The court then scheduled a
hearing relative to the suit Page 3 brought against
Sullivan for September 5, 2005. Id. at 277.
On August 31, 2005, five days before the hearing was to
commence in Gibraltar, debtor filed for Chapter 13
bankruptcy in the Eastern District of California. Debtor
filed a “face-sheet” petition in the Bankruptcy Court, the
bare minimum necessary to commence a bankruptcy case. ER
147-151. Because of debtor’s bankruptcy petition, the
automatic stay provision of 11 U.S.C. § 362(a) was
triggered and, as a result, any action on the pending suit
in Gibraltar would be void as a violation of the stay.
The Gibraltar court conducted hearings on September 5 and
6, 2005. Sullivan did not attend the hearings.[fn5] At the
end of the hearings, the Gibraltar court concluded that
debtor had participated in Laycock’s suit in bad faith, and
had submitted forged documents and false evidence to the
court. ER at 278, 291-292. Sullivan was found liable to
creditors for the cost of defending the fraudulent lawsuit,
an amount valued at more than $1 million U.S. dollars. The
Gibraltar court ordered Sullivan to pay the costs on an
indemnity basis. ER at 278. On September 7, 2005, creditors
filed an application requesting that Sullivan’s assets
Page 4 be frozen. The application was granted and the order
was served on Sullivan on October 6, 2005, along with an
additional application seeking sequestration of assets
purportedly belonging to Sullivan and located in the Cayman
islands. ER at 320.
B. CHAPTER 13 PROCEEDINGS
On October 6, 2005, debtor completed his schedules and
filed them with the bankruptcy court. ER at 11-32.
Creditors then filed a motion to dismiss or convert the
bankruptcy petition and to retroactively annul the
automatic stay. Judge McManus granted the motions on
November 28, 2005, dismissing the petition and annulling
the automatic stay.
II.
STANDARDS
This court has jurisdiction to review proceedings of the
bankruptcy court pursuant to 28 U.S.C. § 158. The
district court reviews de novo a bankruptcy court’s
conclusions of law. Matter of Lockard, 884 F.2d 1171, 1174
(9th Cir. 1989). Findings of fact by the bankruptcy judge
should not be disturbed unless they are clearly erroneous.
Fed.R.Bank.P. 8013; see In re Perez, 30 F.3d 1209, 1212
(9th Cir. 1994). That court’s determination of good faith
is a finding of fact reviewable for clear error. Smyrnos v.
Padilla (In re Padilla), 213 B.R. 349, 352 (9th Cir. BAP
1997).
Matters addressed to the discretion of the bankruptcy judge
are reviewed for abuse of discretion. Universal Life
Church, Inc. v. United States, 191 B.R. 433 (E.D. Cal.
1999) (Wanger, J.) (citing In re Wymer, 5 Bankr. 802, 807
(9th Cir. BAP 1980)). Among such Page 5 matters are
review of orders of dismissal, Sievers v. Green (In re
Green), 64 B.R. 530 (9th Cir. BAP 1986), and to
retroactively annul an automatic stay. In re National
Envtl. Waste Corp., 129 F.3d 1052, 1054 (9th Cir. 1997).
A bankruptcy court abuses its discretion if it applies the
law incorrectly or if it rests its decision on a clearly
erroneous finding of a material fact. United States v.
Peninsula Communications, Inc., 287 F.3d 832, 839 (9th Cir.
2002); Gonzales v. Gottlieb (In re Metro Fulfillment, Inc.
U), 294 B.R. 306, 309 (9th Cir. BAP 2003).
III.
ANALYSIS
In this appeal, I examine whether the bankruptcy court
abused its discretion in granting creditor’s motions to
dismiss Sullivan’s Chapter 13 petition and to annul the
retroactive stay.[fn6] Below, I explain why the bankruptcy
court did not abuse its discretion and why I must affirm
the bankruptcy court’s orders. Page 6
A. DISMISSAL OF THE BANKRUPTCY PETITION
Sullivan contends that he met the eligibility criteria and
thus the Bankruptcy Court erred in its dismissal. Creditors
respond that there were at least three bases upon which it
was proper to dismiss the case. Upon review of the record,
I conclude that Judge McManus carefully examined Sullivan’s
petition and did not err in dismissing it.
It is well-established that a bankruptcy court has the
inherent power to dismiss a case if the debtor is not
eligible for relief. In re Guastella, ___ B.R. ___, 2006 WL
1072050 *4 (9th Cir. BAP 2006) (citation omitted). Judge
McManus found that Sullivan lacked a regular income,
exceeded Chapter 13 debt limits, and filed his petition in
bad faith. Where, as I explain below, there is record
evidence to support those findings, there is no basis for
concluding that the Bankruptcy Court abused its discretion
in dismissing Sullivan’s case.
1. Regular Income
First, Section 109(e) requires a Chapter 13 debtor to be
an “individual with regular income.”[fn7] Judge McManus
emphasized that debtor failed to be candid concerning his
income by not disclosing his spouse’s income, not
disclosing his 2004 and 2005 income, and misstating the
nature, sources and regularity of his alleged income. ER at
324. The court explained that although Sullivan Page 7
listed in his schedules that he earns $7500 in monthly
gross income from his employer, he acknowledged at the
first meeting that “this income is only payable if the
debtor brings in sufficient business and only after
overhead costs . . . are paid.” Id. Judge McManus recalled
that Sullivan previously conceded that “his real income
will come from contingency fee cases.” This court’s review
of the record supports the bankruptcy court’s conclusion
that “[t]here appears, then, nothing regular about
[debtor’s] income.”[fn8] Id. On this basis alone, it was
well within the bankruptcy court’s discretion to dismiss
Sullivan’s Chapter 13 case for his inability to show that he
is “one whose income is sufficiently stable to make
payments under a Chapter 13 plan.” See 11 U.S.C. §
101(24).
2. Debts Allowed Under 11 U.S.C. § 109(e)
Judge McManus additionally held that Sullivan failed to
qualify for relief under Chapter 13 because his debts
exceed the amount allowed under 11 U.S.C. § 109(e),
which requires that a Chapter 13 debtor have less than
$307,675.00 of noncontingent, liquidated, unsecured debt.
The bankruptcy court explained that although Sullivan’s
schedules claimed $185,000 in unsecured and priority
unsecured claims further examination reveals that the
statements are inaccurate. As Judge McManus noted, a court
typically looks to the face of the petition to determine
the amount of debt owed, In re Scovis, 249 F.3d 975, 982
(9th Cir. 2001), but Page 8 the court is allowed to go
beyond the schedules when faced with a good faith objection
from creditors. ER at 322-23. See In re Guastella, ___ B.R.
___, 2006 WL 1072050 at *8.
Judge McManus took issue with Sullivan’s failure to “list
[creditor’s] million dollar plus claim,” especially since
debtor knew that the “fees and costs are readily calculable
by the court,” and because “they were subject to ready
determination.” ER at 323 (citation omitted). Judge McManus
relied primarily on Sullivan’s omission of Creditor’s
Gibraltar claim to hold that Sullivan’s case “exceed[s] the
debt limits of section 109(e).” ER at 323.
Sullivan maintains that the bankruptcy court erred because
he had a good faith basis for listing Java’s debt as
disputed and of zero value. Opening Br. at 7. He maintains
that he was “within the bounds of good faith to declare the
debt disputed and of zero value” because the claim is based
on a “complex tort theory” that is “at odds with the
American system of justice.” Id. at 8-9. He insists that
his omission is justified because the Gibraltar judgment,
“which was awarded under the English rule of redistribution
of attorney’s fees as litigation costs in order to chill
access to courts, is antithetical to the American rule” of
awarding attorneys’ fees and costs. Id. at 10-11. In other
words, Sullivan argues that because he disputes liability as
to Java’s claim, he was not required to list such a claim
in his schedules. The argument is without merit. Page 9
As Judge McManus noted, “[t]he fact that the debtor
disputes the amount of a debt does not make it
unliquidated,” citing Nicholes v. Johnny Appleseed of
Washington, 184 B.R. 82, 90 (9th Cir. BAP 1995). Indeed,
“if the amount of the creditor’s claim at the time of the
filing the petition is ascertainable with certainty, a
dispute regarding liability will not render a debt
unliquidated. Even if a debtor disputes the existence of
liability, if the amount of the debt is calculable with
certainty, then it is liquidated for the purposes of
? 109(e).” In re Scovis, 249 F.3d 975, 983-984 (9th
Cir. 2001) (citing In re Slack, 187 F.3d 1070, 1074-75 (9th
Cir. 2001)). Thus, even if Sullivan disputed liability on
creditors’ claim, the amount demanded and awarded by the
Gibraltar court was known by Sullivan at the time of his
bankruptcy filing, and thus, he was obligated to list it on
his schedules.
In sum, the bankruptcy court correctly applied the law and
had the discretion to dismiss the matter because Sullivan
lacked a regular income and because his debts exceed the
allowable amount.[fn9] Page 10
B. ANNULMENT OF THE AUTOMATIC STAY
Sullivan contends that Judge McManus “did something no
other Judge has ever done in any published decision within
the Ninth Circuit” by annulling the automatic stay and
validating an otherwise void judgment when debtor relied on
the stay and did not participate in the trial. Opening Br.
at 2, Repl. Br. at 1-2. Sullivan’s contention cannot lie.
Again, based on the court’s review of the record, Judge
McManus did not abuse his discretion in annulling the
automatic stay.
An automatic stay comes into effect whenever a debtor files
for bankruptcy. See 11 U.S.C. § 362(a). It is
designed to protect debtors from creditors while the debtor
places his financial affairs in order. In re Schwartz, 954
F.2d 569, 571 (9th Cir. 1992). Actions taken in violation
of the stay are void and unenforceable against the debtor.
Id. Section 362(d) of the bankruptcy code establishes the
grounds for relief from the stay. The court may grant
relief by, inter alia, terminating, annulling, modifying,
or conditioning the stay. Id. Provided there is a showing
of cause, a bankruptcy court is given “wide, latitude in
crafting relief” from the stay pursuant to 11 U.S.C.
§ 362(d)(1), including the power to grant retroactive
relief in the form of an annulment. In re Schwartz, 954
F.2d at 572. In order to enforce its judgment in Gibraltar,
creditors moved to annul the automatic stay.
Sullivan asserts that retroactive annulment should only be
granted in “extreme circumstances,” quoting In re Shamblin,
Page 11 890 F.2d 123, 126 (9th Cir. 1989), and argues that
Judge McManus failed to apply a narrow test in determining
whether annulment was appropriate.[fn10] Judge McManus
correctly acknowledged that “the standard for annulling the
automatic stay has been phrased differently by various
courts,” ER at 321, and that each court examines a number
of factors which are “guided by the particular
circumstances of each case.” Id. While Sullivan is correct
in arguing that the Ninth Circuit has, in the past,
utilized restrictive language when deciding whether to annul
a stay, see, e.g., Aheong v. Mellon Mortg. Co., 276 B.R.
233, 250 (9th Cir. BAP 2002) (utilized “extreme
circumstances language to affirm a stay of annulment);
Phoenix Bond & Indemn. Co. v. Shamblin, 890 F.2d 123, 126
(9th Cir. 1989) (same)), ultimately, the court applied a
balancing test to determine whether annulment is equitable
and concluded that no one fact or circumstance determines
the result. ER at 321. See Nat’l Envtl. Waste Corp., 129
F.3d at 1055.[fn11] Page 12
Judge McManus did not abuse his discretion in weighing the
equities in favor of creditors. The bankruptcy court
evaluated the particular facts of the case and balanced the
equities in light of such facts. See, e.g., In re National
Environmental Waste, 129 F.3d 1052, 1055-56 (9th Cir.
1997). In annulling the automatic stay, Judge McManus found
that: (1) Sullivan engaged in bad faith by submitting
untimely, incomplete and inaccurate schedules, masking his
ineligibility for Chapter 13 relief, ER at 322-23;[fn12]
(2) that the proceedings against debtor had been scheduled
for many months prior to the bankruptcy proceeding and were
to take place in another jurisdiction and that judicial
economy militated having the Gibraltar court resolve the
case as it would impact debtor’s eligibility for Chapter 13
relief, ER at 321;[fn13] and (3) that creditors were aware
of the pending bankruptcy case before Page 13 proceeding
in bankruptcy court.[fn14] Based on these factors, the
court determined that the equities weighed in favor of
creditors. Based on the bankruptcy court’s careful
consideration of the facts and its correct application of
the law, I conclude that the bankruptcy court did not abuse
its discretion in granting creditors’ motion for annulment
of the automatic stay.
IV.
CONCLUSION
The bankruptcy court’s dismissal of debtor’s bankruptcy
petition and its annulment of the automatic stay are
AFFIRMED.
IT IS SO ORDERED.
[fn1] See 11 U.S.C. § 362(a). The automatic stay
protects the bankruptcy debtor from all collection efforts
“while they attempt to regain their financial footing.” In
Re Schwartz, 954 F.2d 569, 571 (9th Cir. 1992).
[fn2] All facts are derived from the parties’ papers and
from the Excerpts of Record (“ER”).
[fn3] Gibraltar is an Overseas Territory of the United
Kingdom. It is located on the southern part of the Iberian
Peninsula at the Strait of Gibraltar that links the
Atlantic Ocean and Mediterranean Sea, placing it between
Europe and Africa.
[fn4] The details of the suit brought by Laycock are not
directly at issue in this appeal. Suffice it to say that
Laycock alleged that he suffered a blow to the head as a
gate surrounding a construction site was being opened. ER
at 269. Laycock maintained that the site was occupied by
creditors and that he had suffered severe injuries which
rendered him unable to carry on his business activities,
including running a Mexican recycling plant. Id. at 270.
His schedule of special damages came to just short of ?? 2
million. Id.
[fn5] The Gibraltar Supreme Court noted that it became aware
of the bankruptcy filing “in the week proceeding the
September 5, 2005 hearing.” It stated, however, that
Sullivan had notified the court that the filing “has the
effect of operating as a stay of all existing actions
against Mr. Sullivan.” ER at 278. Nevertheless, the court
proceeded to hear the case because it was “probable that
Mr. Sullivan filed for bankruptcy given the effects of the
proceedings in this claim.” Id. The court also stated that
it was surprised Sullivan had filed for bankruptcy because
at the June 16, 2005 case management conference Sullivan
represented that “he had had a good previous year in
practice.” Id.
[fn6] Creditors contend that the appeal is moot since
Sullivan filed no stay pending appeal, pursuant to
Fed.R.Bankr.P. 8005. The argument is unavailing. While
filing a stay pending appeal is good practice, it is not a
requirement, and failure to do so merely permits the
prevailing party to treat the bankruptcy court’s judgment
as final. “[A]n appeal is not moot if the court can fashion
some form of meaningful relief.” In re Cascade Rds., Inc.,
34 F.3d 756, 759 (9th Cir. 1994) (quotations omitted).
Here, the court can grant meaningful relief if it reversed
the bankruptcy court’s decision and ruled the Gibraltar
judgment void for violating the stay.
[fn7] An individual with regular income is defined as “one
whose income is sufficiently stable to make payments under
a Chapter 13 plan.” 11 U.S.C. § 101(24).
[fn8] During the hearing on November 28, 2005, Judge McManus
also noted that he was disturbed by Sullivan’s failure to
list as income “quite a few cases in process on contingency
that are valued not at all.” ER at 299.
[fn9] The court also appears to have dismissed the petition,
in large part, because the record strongly suggested that
Sullivan filed the petition in bad faith. The order stated,
as to debtor’s eligibility for Chapter 13 relief and the
court’s assessment of Sullivan’s income, that “[i]f the
court’s conclusions are erroneous, it is because the debtor
has chosen to conceal his true finances.” ER at 324. I
elaborate on Sullivan’s bad faith in the discussion on the
bankruptcy court’s annulment of the stay. See infra.
[fn10] Sullivan cites a number of cases from the First
Circuit where the court concluded that retroactive
annulment should only be granted in “extreme
circumstances.” While these cases are not binding on this
court, I note that they all hold that a debtor’s bad faith
constitutes a sufficient reason for granting retroactive
annulment. See In re Bright, 338 B.R. 530, 535 (1st Cir.
BAP 2006) (“In deciding whether to retroactively annul the
automatic stay, bankruptcy courts are especially concerned
with allegations of bad faith.”); In re Soares, 107 F.3d
969, 977 (1st Cir. 1997) (“debtors who act in bad faith may
create situations that are ripe for retroactive relief”).
[fn11] As the BAP recognized in In re Fjeldsted, 293 B.R.
12, 23 (9th Cir. BAP 2003), although the Ninth Circuit has
utilized the words “extreme circumstances,” “the
circumstances described in both cases were not
“extraordinary,” and that to the contrary, the courts
“simply balanced the equities, including prejudice to both
sides, the inequitable conduct of [debtor], the lack of
blame on the part of the creditors, and the inconvenience to
the courts and parties by not granting such practical
relief.”
[fn12] When a debtor files for bankruptcy in bad faith, a
modification of the stay — including annulment
— may be appropriate. See, e.g., In re Kissinger, 72
F.3d 107, 109 (9th Cir. 1995) (affirming annulment when
debtor filed for bankruptcy in bad faith during two day
recess in trial); In re Arnold, 806 F.2d 937, 939 (9th Cir.
1986) (“debtor’s lack of good faith in filing a bankruptcy
petition has often been used as cause for removing the
automatic stay”).
[fn13] Judicial economy has consistently been found to be
sufficient grounds for annulling a stay. See, e.g., In re
Beguelin, 220 B.R. 94, 98 (9th Cir. BAP 1998) (“stay may be
lifted as a matter of judicial economy”); In re Santa Clara
County Fair Ass’n Inc., 180 B.R. 564, (9th Cir. BAP 1995)
(affirming modification of stay to allow suit against debtor
for discrimination on grounds of judicial economy).
[fn14] While a creditor’s knowledge of a stay is a factor to
be considered, it is not dispositive and in balancing the
equities, other factors can warrant retroactive annulment.
In re National Envt’l Waste Corp., 129 F.3d at 1055
(affirming annulment despite non-debtor’s knowledge of
bankruptcy). Judge McManus acknowledged that creditors were
aware of the stay when they proceeded in the trial against
Sullivan in Gibraltar, and that this factor favored
Sullivan, but he correctly ruled that the equities favored
annulment because of debtor’s bad faith and judicial
economy concerns. Judge McManus explained that he did not
characterize creditors’ proceeding against Sullivan in
Gibraltar despite knowledge of the bankruptcy filing as
“unclean hands.” He explained that creditors were faced
with what to do once Sullivan filed for bankruptcy “in bad
faith.” ER at 304. He stressed that Sullivan is an attorney
and “chose to litigate in a foreign forum” and that
numerous witnesses were “being flown from foreign countries
to testify” and that logistics did not appear to be “a
simple thing.” Id. at 306. Page 1