Judge Arthur Spatt

Debtor Clear Blue Water owned three properties, including a Cold Spring Harbor property, and had borrowed $1.08 million from Washington Mutual Bank in 2008 for their purchase. Appellee Oyster Bay Management Co. is assignee of the note and mortgage secured by the Cold Spring Harbor property. Clear Blue appealed a bankruptcy court’s dismissal of its voluntary petition for Chapter 11 reorganization filed by its managing member Katsaros. District court affirmed dismissal under 11 USC §1112(b), finding the bankruptcy judge’s finding of bad faith not clearly erroneous. In addition to observing that it was undisputed that mortgage fraud had occurred, the court noted that although Katsaros claims current ownership of all of Clear Blue’s interests, the chain of ownership is unclear. District court concluded that there was sufficient circumstantial evidence before the bankruptcy court to determine that Clear Blue was not an “honest but unfortunate debtor” but rather was a debtor whose principals or agents had, in some capacity, engaged in fraudulent conduct. The court concluded that it was reasonably certain the Chapter 11 petition could merely have been a vehicle for Clear Blue to further the fraud.