District Court Affirms Bankruptcy Court Conversion of Subchapter V Case to Chapter 7

Background

In 2017, former restaurant worker Pavle Zivkovic, on behalf of himself and his fellow employees (the class action creditors), sued his former employer, Laura Christy Midtown LLC (Laura Christy) and its owner, David Ghatanfard (Ghatanfard). On June 22, 2022, Zivkovic was awarded $650,000 in punitive and compensatory damages for his individual claims and the class action creditors were awarded $4.5 million in damages.
However, just as trial was commencing, Laura Christy ceased operating, and a new restaurant opened. This new restaurant had similar corporate ownership and staff, and opened just blocks away from Laura Christy’s former location. The class action creditors commenced another action (i.e., an alter-ego action) against this new restaurant, Valbella at the Park LLC, and, in this new lawsuit, the class action creditors alleged that Valbella at the Park LLC was the successor in interest to Laura Christy and that the closing and reopening of the restaurants was just an attempt to avoid paying the $5 million class action judgment.
In their post-judgment collection efforts, the class action creditors discovered that Ghatanfard had rendered himself insolvent as a result of various transactions and transfers to his “life partner,” Rosey Kalayjian, with whom he lived and shared a bank account, and who has worked in several restaurants owned by him. In particular, the class action creditors discovered that Ghatanfard transferred to Kalayjian the sum of: $1.2 million from the sale of a home he owned; $675,000 he had received from Laura Christy; $600,000 from the sale of another restaurant; and $1.4 million from the refinancing of another one of his houses located in Southampton, New York. In addition, Ghatanfard also recorded a deed transferring title to the Southampton home from his individual ownership to a joint ownership with Kalayjian. Furthermore, right before the class action judgment was entered, Ghatanfard transferred to Kalayjian 90% of his ownership in a limited liability company called Oak Grove Road LLC that owned a 50% stake in Valbella at the Park LLC.
On Nov. 13, 2023, Ghatanfard filed a Subchapter V bankruptcy case in the bankruptcy court. On his schedules, Ghatanfard estimated his assets at less than $50,000, and his liabilities as almost $6 million. On Nov. 14, 2023, Laura Christy also filed a Subchapter V bankruptcy case in the bankruptcy court.
On Feb. 12, 2024, Ghatanfard filed his Subchapter V plan of reorganization, in which he proposed to fund the plan by paying $1,700 monthly payments along with a lump sum payment of $500,000 to be obtained from Kalayjian in settlement of any and all claims against her, including, without limitation, the fraudulent transfer claims.
On March 5, 2024, the class action creditors filed a motion to convert Ghatanfard’s case to a Chapter 7 case. In their motion, the class action creditors alleged that Ghatanfard misrepresented his assets and liabilities, that he had a significant conflict of interest with Kalayjian and that the proposed settlement embodied in his Subchapter V plan was not reasonable as he proposed to settle $6.7 million in fraudulent transfer claims for the $500,000 payment from Kalayjian.
On April 11, 2024, after oral argument on the motion to convert, the bankruptcy court entered an order converting the case, stating that it had found cause for dismissal or conversion, including the Ghatanfard’s conflicts of interest in pursuing potential fraudulent transfer claims and other claims of the estate to his “life partner” Kalayjian. Given the class action creditors’ opposition to expanding the powers of the Subchapter V trustee, a decision in which the bankruptcy court expressed disappointment in since with their consent, the Subchapter V trustee would have had the power to pursue avoidance actions, the bankruptcy court concluded that conversion to Chapter 7 was the only appropriate remedy. Ghatanfard filed a notice of appeal on April 12, 2024.

Analysis

Initially, the district court found that it had standing to hear the appeal in light of a Chapter 7 trustee having already been appointed in the bankruptcy case during the pendency of the appeal. The district court denied Ghatanfard’s argument that he was an “aggrieved” person because he has stage IV cancer, had been denied confirmation of his Subchapter V plan, and was forced to spend “what could be his final days” in bankruptcy and litigation involving his longtime partner. However, rather than directly addressing whether the debtor had standing, the district court turned to the merits of the case.
Upon review, the district court’s standard of review was under an abuse of discretion standard and, as such, found that the bankruptcy court’s decision to convert the case due to the significant conflicts of interest was not a reversible error, despite the fact that the bankruptcy court did not list any of the additional factors under Section 1104 of the Bankruptcy Code for converting the case. In point of fact, the district court found that there clearly was cause for conversion due to the “irreconcilable conflict of interest in terms of assessing where various assets had gone and whether they were appropriately transferred from Ghatanfard to other parties,” and that conversion to Chapter 7 would allow for a trustee with “both the ability to investigate and the ability to act” as opposed to the limited powers of a Subchapter V trustee.
The district court also rejected Ghatanfard’s argument that it was reversible error for the bankruptcy court to convert the case rather than expand the powers of the Subchapter V trustee. In particular, Ghatanfard argued that the bankruptcy court committed reversible error in converting his case instead of expanding the Subchapter V trustee’s powers. As noted by the district court, under Section 1112(b) of the Bankruptcy Code, a court is not required to expand the Subchapter V trustee’s powers. Furthermore, expansion of the Subchapter V trustee’s powers, in this case, would have only permitted the Subchapter V trustee to investigate and report on the debtor’s pre-petition actions and transfers, but, absent creditor consent, the Subchapter V trustee (unlike a Chapter 7 trustee) lacked standing to bring the requisite avoidance actions against Kalayjian.
As a consequence, the district court found that the bankruptcy court’s decision that the expansion of the Subchapter V trustee’s powers would be insufficient in light of the facts and circumstances of the case was not an abuse of discretion.
Finally, the district court also rejected Ghatanfard’s argument that “unusual circumstances” existed in his bankruptcy case which, among other things, should have precluded conversion. While it is true that once “cause” is established under Section 1112(b) of the Bankruptcy Code, a debtor may demonstrate “unusual circumstances” that would preclude a finding that conversion is in the best interest of creditors and the estate, the district court found that none of the circumstances articulated by Ghatanfard were unusual or demonstrated that conversion was not in the best interest of creditors of the estate.
For example, in light of the asserted impediments to the confirmation of his Subchapter V plan, Ghatanfard failed to show there was a reasonable likelihood that his plan would be confirmed within a reasonable amount of time. In point of fact, the district court found just the opposite, namely, that in light of the significant conflicts of interest and the fraudulent transfer claims, it was highly unlikely that Ghatanfard would have confirmed his plan, let alone within a reasonable time. Rather, the district court observed that the facts of the case were so sufficiently egregious that the bankruptcy court had no choice but to appoint a trustee who could not only investigate the allegedly fraudulent transfers, but also take action to rectify them.
In light of the foregoing, the district court affirmed the bankruptcy court’s order converting Ghatanfard’s case to a case proceeding under Chapter 7.