In Re: Ghatanfard

Background

Davoud Ghatanfard appealed an April 11, 2024 order from the United States Bankruptcy Court for the Southern District of New York. That order converted his Chapter 11 Subchapter V bankruptcy case to a Chapter 7 case under 11 U.S.C. § 1112(b). In a Chapter 7 case, a trustee generally takes control of the bankruptcy estate and investigates and administers its assets.

Pavle Zivkovic was the lead plaintiff in a class action involving federal and New York labor-law claims. A judgment had been entered against Ghatanfard and related companies for $5,092,017.85 on the labor-law claims, along with a separate $202,500 discrimination award against Ghatanfard. That judgment remained involved in an appeal before the United States Court of Appeals for the Second Circuit.

The labor-law class creditors also pursued collection efforts involving transfers Ghatanfard allegedly made to Rosey Kalayjian, his “life partner.” The opinion states that Ghatanfard transferred substantial funds and ownership interests to Kalayjian, including funds from property and restaurant-related transactions. The district court had entered orders restricting transfers of assets and had granted an attachment during the collection proceedings.

Ghatanfard filed for bankruptcy on November 13, 2023. He reported assets of less than $50,000 and liabilities of almost $6 million. He later proposed a plan funded by monthly payments and $500,000 to be obtained from Kalayjian through a settlement of potential claims seeking to undo the transfers. The class creditors moved to convert the case to Chapter 7, arguing in part that Ghatanfard was acting in bad faith and had proposed an inadequate settlement of claims involving the transfers.

At the bankruptcy-court hearings, Ghatanfard’s counsel acknowledged a conflict of interest and proposed expanding the Subchapter V trustee’s powers. The bankruptcy court concluded that the trustee’s powers could not be expanded, over the creditor’s objection, enough to pursue the necessary asset-recovery litigation. It therefore converted the case to Chapter 7. A Chapter 7 trustee was appointed while Ghatanfard’s district-court appeal was pending.

Issues and arguments

Zivkovic argued that Ghatanfard lacked authority to continue the appeal after a Chapter 7 trustee was appointed. Ghatanfard argued that he remained directly affected because the conversion prevented confirmation of his Subchapter V plan and affected his bankruptcy status. The district court held that the usual rule limiting a Chapter 7 debtor’s ability to challenge orders concerning estate property did not resolve an individual debtor’s appeal from the conversion of a Chapter 11 case. The court assumed, for purposes of the appeal, that Ghatanfard was financially affected by the conversion and did not dismiss the appeal for lack of standing.

On the merits, Ghatanfard argued that the bankruptcy court had alternative ways to address the conflict, including expanding the Subchapter V trustee’s powers. He also argued that the bankruptcy court failed to consider the statutory exceptions to conversion, failed to account for his health and the pending appeal of the labor judgment, and failed to address alleged conflicts involving Zivkovic, the class, and the class’s law firm. Finally, he argued that the failure to file verified statements required by Bankruptcy Rule 2019 warranted delaying the conversion decision.

Court’s reasoning

Under 11 U.S.C. § 1112(b), a bankruptcy court may dismiss a Chapter 11 case or convert it to Chapter 7 for “cause.” The statute lists examples of cause but does not provide an exhaustive list. Once cause is shown, the bankruptcy court has broad discretion to choose between dismissal and conversion, subject to the best interests of the creditors and the estate.

The district court held that the bankruptcy court adequately identified cause. Ghatanfard’s apparent transfers of substantial assets to Kalayjian during the underlying litigation created a significant conflict because Ghatanfard would not be expected to vigorously pursue claims alleging that those transfers were fraudulent or otherwise could be undone for the benefit of creditors. A Chapter 7 trustee, unlike Ghatanfard, would have the power both to investigate and to act on those potential claims.

The district court also rejected Ghatanfard’s argument that unusual circumstances required avoiding conversion. His pending appeal, serious health issues, and the existence of a Subchapter V trustee did not, by themselves, show that conversion was not in the best interests of the creditors and the estate. The court also found that Ghatanfard had not shown a reasonable likelihood that a plan could be confirmed within a reasonable time given the conflict of interest.

The court ruled that the bankruptcy court was not required to expand the Subchapter V trustee’s powers instead of converting the case. The powers that the bankruptcy court could authorize without consent would allow investigation and reporting, but the record did not establish that the trustee could be authorized to bring the necessary avoidance actions—claims seeking to undo certain transfers—for the estate over a creditor’s objection. Ghatanfard therefore did not show that choosing conversion was an abuse of discretion.

The district court also rejected the Rule 2019 argument. That rule requires certain groups representing multiple creditors or equity holders in Chapter 9 or Chapter 11 cases to file verified statements containing specified information. The court held that the bankruptcy judge could proceed without those statements, particularly because the class had been certified and the proofs of claim supplied the relevant information. Ghatanfard had also sought to delay the conversion based on speculation about conflicts but had not shown how the alleged conflicts harmed the class or affected the conversion motion.

Disposition

Judge Cathy Seibel affirmed the bankruptcy court’s order converting Ghatanfard’s Chapter 11 case to Chapter 7. The district court directed the clerk to close the case.