Clark v. Devries et al

Filing 35

MEMORANDUM DECISION AND ORDER. NOW THEREFORE IT IS HEREBY ORDERED that the Bankruptcy Courts decision denying Debtors Motion to Dismiss and granting Creditors Motion to Covert, issued on 5/31/2013, is AFFIRMED. Signed by Judge Edward J. Lodge. (caused to be mailed to non Registered Participants at the addresses listed on the Notice of Electronic Filing (NEF) by (cjm)(Emailed to TLM, sh, and ar at the Bankruptcy Court.)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF IDAHO

In re:
Bk. Case No. 13-01278
JAY P. CLARK, dba,
CRYSTAL SPRINGS RANCH,
Debtor.

JAY P. CLARK, dba,
CRYSTAL SPRINGS RANCH,
Appellant,

MEMORANDUM DECISION
AND ORDER

vs.
Case No. 1:13-cv-00305-EJL
TOM DEVRIES, DEVRIES FAMILY
FARMS, LLC., SIMPLOT GROWER
SOLUTIONS, MURPHY LAND
COMPANY, LLC.,
Appellees.

Pending before the Court in the above-entitled matter is Debtor-Appellant Jay P.
Clark’s, d/b/a Crystal Springs Ranch, appeal from the decision of Bankruptcy Judge Jim
D. Pappas granting the Appellee Tom DeVries and the DeVries Family Farm, LLC’s
Motion to Convert the bankruptcy from a Chapter 12 to a Chapter 7 bankruptcy case.
The parties have submitted their responsive briefing and the matter is now ripe for the
Court’s review. Having fully reviewed the record herein, the Court finds that the facts
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and legal arguments are adequately presented in the briefs and record. Accordingly, in
the interest of avoiding further delay, and because the Court conclusively finds that the
decisional process would not be significantly aided by oral argument, this matter shall
be decided on the record before this Court without oral argument.
FACTUAL BACKGROUND
On March 27, 2012, Debtor-Appellant Jay P. Clark’s, d/b/a Crystal Springs
Ranch, filed a voluntary petition for Chapter 12 bankruptcy. Thereafter, on April 4,
2012, Appellee Tom DeVries and the DeVries Family Farm, LLC entered into a contract
to purchase 1500 tons of alfalfa hay for $180 per ton from “Crystal Springs Ranch – Jay
Clark.” (Dkt. 30-4, ER at 553.) Mr. DeVries signed the written agreement and sent it to
Mr. Clark along with a check for $135,000 as a down payment on the hay. The hay has
never been delivered.
On April 18, 2012, Mr. Clark sent Mr. DeVries a letter indicating that Mr. Clark
was in the midst of state court proceedings and the hay comprising the subject matter of
their contract was potentially in jeopardy. The state court proceeding had been instituted
by Appellees Murphy Land Company, LLC (“Murphy Land”) who owned the land upon
which Mr. Clark operated Crystal Springs Ranch and had grown the hay that is the
subject of his contract with Mr. DeVries. Murphy Land’s state court case sought to evict
Mr. Clark from the land.

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In the state proceeding, on March 20, 2012, the state court judge had orally
granted Murphy Land’s motion for partial summary judgment and ruled that Mr. Clark’s
crop share lease was “void ab initio.”1 A written order formalizing that ruling was issued
on March 26, 2012. (Dkt. 30-4, ER at 563.) The next day Mr. Clark filed his bankruptcy
petition in this case. Mr. DeVries then filed a Motion to Convert the bankruptcy from a
Chapter 12 to a Chapter 7. Bankruptcy Judge Pappas held a two-day hearing on the
matter and, on May 31, 2013, ruled that the Motion to Convert should be granted
pursuant to 11 U.S.C. § 1208(b) because Mr. Clark had committed fraud “in connection
with the case.”2 It is this May 31, 2013 Order that is the subject of Mr. Clark’s appeal.
STANDARD OF REVIEW
A federal District Court has jurisdiction to entertain an appeal from the
Bankruptcy Court under 28 U.S.C. § 158(a), which provides: “The district courts of the
United States shall have jurisdiction to hear appeals ... from final judgments, orders, and
decrees[ ] of bankruptcy judges[.]” On appeal, the Bankruptcy Court’s conclusions of
law are reviewed de novo and the factual findings for clear error. In re Greene, 583 F.3d
614, 618 (9th Cir. 2009) (citation omitted); see also Fed. R. Bankr. P. 8013 (“Findings
of fact, whether based on oral or documentary evidence, shall not be set aside unless
clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy
1

The term ab initio is defined as from the beginning. Black’s Law Dictionary, 5 (9th ed. 2009).

2

The hearing before the Bankruptcy Court was held on May 24 and 31, 2013. (Dkt. 9, 10.) On
the final day of the hearing, the Bankruptcy Judge made an oral ruling granting the Motion to Convert.
(Dkt. 10.) On that same day, the Bankruptcy Court entered a short written Order denying the Motion to
Dismiss and granting the Motion to Covert which formally adopted the Bankruptcy Judge’s oral findings
of fact and conclusions of law as stated on the record at the hearing. (Dkt. 1-4 and Dkt. 10.)
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court to judge the credibility of the witnesses.”). Questions of statutory interpretation are
subject to de novo review. In re MacIntyre, 74 F.3d 186, 187 (9th Cir. 1996).
A Bankruptcy Court’s decision that is made within its discretion under the
Bankruptcy Code will not be set aside unless there is plain error or abuse of discretion.
See In re Rosson, 545 F.3d 764 (9th Cir. 2008) (explaining that a bankruptcy court’s
decision to deny debtor’s request for dismissal of his Chapter 13 case and to convert the
case from Chapter 13 to Chapter 7 was reviewed for an abuse of discretion); In Re
Sherman, 491 F.3d 948, 969 (9th Cir. 2007) (“[W]e review a bankruptcy court’s decision
to grant or deny a motion to dismiss for misconduct that constitutes ‘cause’ for abuse of
discretion.”).
Where, as here, the Bankruptcy Court’s decision is in regard to a motion for
conversion of a case, that decision is reviewed for abuse of discretion. See In re
Levesque, 473 B.R. 331, 335 (B.A.P. 9th Cir. 2012) (citations omitted). A two-part test
applies to determine whether the bankruptcy court abused its discretion. Id. (citation
omitted). First, the court must “determine de novo whether the [bankruptcy] court
identified the correct legal rule to apply to the relief requested.” Id. Second, the court
examines the Bankruptcy Court’s factual findings for clear error. Id. The Bankruptcy
Court’s factual findings are affirmed unless those findings are “(1) ‘illogical,’ (2)
‘implausible,’ or (3) without ‘support in inferences that may be drawn from the facts in
the record.’” Id.

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ANALYSIS
1.

Did the Bankruptcy Court apply the correct legal rule
The question before the Bankruptcy Court in this case centered on whether to

dismiss or convert the case under 11 U.S.C. § 1208(d) which states: “On request of a
party in interest, and after notice and a hearing, the court may dismiss a case under this
chapter or convert a case under this chapter to a case under chapter 7 of this title upon
a showing that the debtor has committed fraud in connection with the case.” 11 U.S.C.
§ 1208(d).
Section 1208(b), however, states that a debtor may at any time request that a case
be dismissed. 11 U.S.C. § 1208(b). A debtor’s right to dismiss under § 1208(b) is not
absolute but is instead subject to an exception allowing a creditor to convert a
bankruptcy where the debtor has abused the legal process through fraud. See In re Kahle,
No. 11-61359-13, 2013 WL 492465, at *7 (Bankr. D. Mont. Feb. 8, 2013); Rossen, 545
F.3d at 771 (Chapter 13 Bankruptcy case). This exception accounts for the circumstance
where the purposes of the Bankruptcy Code to protect the “honest but unfortunate
debtor” are thwarted by a debtor who commits fraud in connection with the case and then
seeks to use section 1208(b) to avoid the consequences. In such instances, the debtor’s
power to dismiss should yield to the creditor’s motion to convert.
In this case, the Court finds that the Bankruptcy Court applied the correct rule of
law in concluding that Mr. Clark had committed fraud in connection to the case and,
therefore, ruled that the case should be converted from a Chapter 12 to a Chapter 7

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bankruptcy. The Bankruptcy Court correctly noted that § 1208(d) applied to the case,
applied the appropriate burden of proof, and correctly stated and applied the definition
for fraud. (Dkt. 10 at 177-79.) Notably, the Bankruptcy Court used the broader definition
of fraud applicable to § 1208(d) but also went on to conclude that the evidence
established fraud even under the state common-law fraud principles. (Dkt. 10 at 182-87.)
As to the burden of proof, the Bankruptcy Court employed the correct preponderance of
the evidence standard but also found that fraud had been shown even under the clear and
convincing evidence standard. See In re Massie, 231 B.R. 249, 251 (E.D.Va. March 26,
1999) (The burden of proof on a motion to convert under § 1208(d) is upon the movant
to show fraud by a preponderance of the evidence); see also (Dkt. 10 at 176-77.) Having
reviewed the record in this case de novo, the Court finds the Bankruptcy Court identified
and applied the correct rule of law to the relief requested.
2.

Review of the Bankruptcy Court’s factual findings for clear error
The Court next looks to determine whether the Bankruptcy Court committed clear

error in its factual findings; i.e. whether the factual findings are (1) illogical, (2)
implausible, or (3) without support in inferences that may be drawn from the facts in the
record.
The Bankruptcy Court’s conclusion that Mr. Clark had committed fraud in
connection with the case is based on the record which established that Mr. Clark failed
to inform Mr. DeVries about the state court proceedings and rulings that had been
entered before the two entered into the contract for the sale of hay. Prior to Mr. DeVries

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signing the contract and sending the down payment, the state court had ordered as
follows:
1)

Murphy Land Company’s Motion for Partial Summary Judgment
as to the claims for unlawful detainer, trespass, and quiet title be
granted;

2)

A lease Mr. Clark claimed entitled him to possession of Crystal
Springs Farm was deemed void ab initio and was null and void;
and

3)

Murphy Land Company was ordered to immediate restitution of
possession of Crystal Springs Farm.

(Dkt. 30-4, ER at 563.) These state court orders were material to the hay buyers as they
clearly invalidated Mr. Clark’s claim to possession of Crystal Springs Farm prior to his
contracting with Mr. DeVries to sell the hay that was grown on the land. (Dkt. 10 at
185.) The Bankruptcy Court noted that Mr. Clark is a lawyer who could appreciate and
understand the ramifications of the state court’s rulings – that he had lost his argument
before the state court and was legally and practically incapable of satisfying the
contractual obligations he entered into with the hay contract. (Dkt. 10 at 178-80, 18486.) The Bankruptcy Court went on to note that Mr. Clark did not contest that the state
court had entered the orders cited to by the Bankruptcy Court or that he did not disclose
the same to Mr. DeVries prior to entering into the contract. (Dkt. 10 at 181-82.)
This Court finds that the Bankruptcy Court’s finding of fraud based on Mr. Clark
failure to disclose this material information to Mr. DeVries is sound, well reasoned, and
entirely logical. The state court’s rulings concerning the Crystal Springs Farm were

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material and should have been disclosed to Mr. DeVries before entering into a contract
and accepting the down payment.
Mr. Clark argues that the Bankruptcy Court’s factual findings are in error because
it failed to: define the terms of the contract, identify evidence of breach or that the
contract required delivery of the hay, determine whether or not Mr. Clark was reasonable
in believing he could sell the hay, and find the fraud was intentional. (Dkt. 15.) These
arguments are irrelevant and fail to address the Bankruptcy Court’s clear basis for its
findings – Mr. Clark’s failure to disclose the state court’s orders to Mr. DeVries. Instead,
Mr. Clark’s appellate brief argues the Bankruptcy Court failed to address what was
reasonable for him to have believed or known in terms of his ownership of the hay and
the ownership over the lease. (Dkt. 15.) Again, those arguments are not relevant to the
determination that was before the Bankruptcy Judge. The Bankruptcy Court noted that
Mr. Clark’s actions here were not just “sharp business dealings” but were fraudulent in
that he “failed to disclose material facts to his customers that they were entitled to
know.” (Dkt. 10 at 182.) The Court finds no clear error in the Bankruptcy Court’s
findings.
The Appellees’ both argue that this Court could alternatively find fraud based on
the inaccuracies and errors in Mr. Clark’s bankruptcy schedules. (Dkt. 25 at 11) (Dkt.
26 at 9, 17-22.)The Bankruptcy Court explicitly declined to make any factual findings
in this regard. (Dkt. 10 at 187.) This Court too will not address this alternative argument.

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The Bankruptcy Court did not make any findings on this issue and this Court finds it
unnecessary to do so on appeal given the clear record of fraud that exists in this case.
3.

Attorney Fees
Mr. DeVries also seeks costs and attorney fees incurred in connection with this

appeal pursuant to Federal Rule of Appellate Procedure 38 and Bankruptcy Rule of
Procedure 8020. (Dkt. 26 at 39.) Both rules specify that such a request should be made
in a separately filed motion. See Fed. R. App. P. 38; Bankr. R. P. 8020. Accordingly, the
Court finds the request included in the Appellee’s response to be premature. Counsel
may file a separate motion in accordance with the rules that the Court will take up in due
course.
ORDER
NOW THEREFORE IT IS HEREBY ORDERED that the Bankruptcy Court’s
decision denying Debtor’s Motion to Dismiss and granting Creditors’ Motion to Covert,
issued on May 31, 2013, is AFFIRMED.
DATED: March 4, 2014

Honorable Edward J. Lodge
U. S. District Judge

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