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In re Angelo

United States District Court, W.D. Washington, Seattle

November 14, 2017

In re JAMES ALLEN ANGELO, Debtor.
v.
TOUCH WORLDWIDE HOLDINGS LIMITED, and TOUCH WORLDWIDE LLC, Appellees / Cross-Appellants. JAMES ALLEN ANGELO, Appellant / Cross-Appellee,

          ORDER AFFIRMING BANKRUPTCY COURT

          JOHN C. COUGHENOUR UNITED STATES DISTRICT JUDGE

         This matter comes before the Court on Appellant / Cross-Appellee James Angelo's Opening Brief, Response Brief, and Reply Brief (Dkt. Nos. 9, 11, 14) and Appellees / Cross-Appellant Touch Worldwide Holdings Limited's and Touch Worldwide LLC's (“Touch”) Opening Brief, Response Brief, and Reply Brief (Dkt. Nos. 10, 13, 15). Having considered the briefs and exhibits submitted by the parties, the Court AFFIRMS the decision of the bankruptcy court dismissing Angelo's Chapter 13 bankruptcy petition.

         I. BACKGROUND

         Angelo's Chapter 13 bankruptcy petition followed an arbitration proceeding between Touch and Angelo, Touch's former CEO. (Dkt. No. 9 at 8.) Angelo received a merits judgment in that proceeding. (Id.) But following the judgment, the arbitrator learned that Angelo violated a protective order entered during the proceeding. (Dkt. No. 13 at 8-9.) Angelo used proprietary information attained during discovery and in violation of the protective order to compete with Touch and acquire a multi-year services contract with Microsoft. (Id.) The arbitrator concluded that under controlling law, the misconduct was not a basis to reverse the merits judgment, but warranted sanctions. (Dkt. No. 10-1 at 125.) During a resulting sanctions hearing, Angelo actively concealed evidence of the violations, perjured himself, and manufactured and presented false evidence in an effort to avoid sanctions. (Id.)[1] The arbitrator learned of this misconduct and levied sanctions against Angelo including payment of Touch's attorney fees and a five year disgorgement of a percentage of the profits attributable to the business Angelo acquired through his violation of the protective order. (Id. at 137-142.)

         In the midst of the sanctions proceedings, Angelo filed for Chapter 13 bankruptcy relief. (Id. at 6.) Angelo made his initial bankruptcy filing less than a month before a scheduled hearing before the arbitrator. (Id. at 310.) The purpose of the hearing was for the arbitrator to rule on a method to estimate the amount of profits subject to disgorgement, to consider the reasonableness of attorney fees and costs awarded to Touch, and to finally determine how much Touch owed Angelo under the merits judgment. (Id. at 253-55, 310.) The bankruptcy filing was also days before Angelo was to appear in a deposition in preparation for the arbitration hearing. (Id. at 258.) Angelo's bankruptcy filing effectively stayed the arbitration. (Dkt. No. 10-2 at 315.)

         Angelo's initial bankruptcy filing was a bare bones petition followed by a full filing approximately two weeks later. (Dkt. No. 10-1 at 6, 14, 63.) Angelo disclosed assets of approximately $2.75 million, liabilities of approximately $1 million, and current monthly income of $23, 772. (Id. at 14.) Angelo initially scheduled the following liquidated[2] unsecured claims: $13, 225 to the arbitrator, $75, 000 to his business partner as a debt owed by his company, $75, 000 to his spouse as a loan to the marital estate from her separate property, $67, 220 to the attorney who rendered services in his arbitration proceeding, and an “unknown” amount to Touch. (Id. at 29-31.) He later amended the filing to include $7, 000 of credit card debt and to increase the debt to his spouse to $85, 163. (Dkt. No. 9-9 at 4.) Angelo's full filing was accompanied by a Chapter 13 plan. But the plan was unconfirmable. (Id. at 97.) The bankruptcy court directed Angelo to file an amended plan by a date certain. (Id.) Before that date arrived, Touch moved to dismiss Angelo's petition. (Id. at 99.)

         In its motion to dismiss, Touch asserted that the $484, 226 in attorney fees Angelo owed it as a result of the arbitration sanctions was not “unknown, ” and on this basis his noncontingent liquidated unsecured debts exceeded the statutory cap for a Chapter 13 filing of $394, 725.[3] (Id. at 110). Therefore, according to Touch, Angelo did not qualify as a Chapter 13 debtor. (Id. at 111.) Touch further alleged that even if Angelo did qualify, his bankruptcy filing was in bad faith and should be dismissed for cause because of Angelo's admitted pre-petition conduct, along with allegations that Angelo filed his petition to impede, delay, and forum shop his arbitration dispute, and that Angelo misrepresented facts in his petition. (Id. at 106-09.)

         Angelo filed an amended bankruptcy plan following Touch's motion to dismiss but before argument was heard on the motion. (Id. at 187.) Angelo's amended plan proposed monthly payments of $2, 000 against an asserted liquidated value for the bankruptcy estate of $564, 807. (Id. at 187, 190.) The plan identified no other mechanism to repay the estate, save the $2, 000 monthly payments and 50% of the net proceeds from any legal malpractice suit between Angelo and his arbitration attorney. (Id. at 191.)

         The bankruptcy court took briefing and heard lengthy oral argument on the motion to dismiss. (Dkt. No. 10-2 at 304.) It requested additional briefing from both parties and documentation from Angelo that the debt he claimed the marital estate owed to his spouse arose from her separate property. (Id. at 343-45, 349.) In an oral ruling granting Touch's motion to dismiss, the bankruptcy court found that the attorney fees owing to Touch were not liquidated and, therefore, Angelo qualified as a Chapter 13 debtor because his noncontingent liquidated unsecured debts amounted to less than the statutory cap of $394, 725. (Dkt. No. 10-1 at 382). But the court ruled that Angelo's filing was in bad faith and dismissed the matter for cause. (Id.) Angelo appeals the bankruptcy court's dismissal. (Dkt. No. 9.) Touch cross-appeals the court's determination that Angelo qualified as a Chapter 13 debtor. (Dkt. No. 10)

         II. DISCUSSION

         A. Standard of Review

         This Court may review the bankruptcy court's decision. 9 U.S.C. § 16(a)(1)(A)-(B); 28 U.S.C. § 158(a)(1). The standard of review is “abuse of discretion.” In re Leavitt, 171 F.3d 1219, 1223 (9th Cir. 1999). Whether the bankruptcy court applied the correct legal standard is reviewed de novo. United States v. Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc). Factual findings are reviewed for clear error. Id. Clearly erroneous factual findings are illogical, implausible, or without support in the record. Id.

         B. Dismissal for Cause

         Upon motion of an interested party, a petitioner's Chapter 13 bankruptcy case can be dismissed for cause. 11 U.S.C. § 1307(c). A “bad faith” filing is sufficient to dismiss for cause. Leavitt, 171 F.3d at 1224. Bad faith is determined based upon the “totality of the circumstances.” In re Tucker, 989 F.2d 328, 330 (9th Cir. 1993). While not an exhaustive list, relevant factors include (1) “whether the debtor misrepresented facts in his [petition or] plan, unfairly manipulated the Bankruptcy Code, or otherwise [filed] his Chapter 13 [petition or] plan in an inequitable manner; (2) the debtor's history of filings and dismissals; (3) whether the ...


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