Intracoastal Capital, LLC v. Bradley Sharp ( 2020 )

NOT FOR PUBLICATION FILED
UNITED STATES COURT OF APPEALS DEC 21 2020
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
In re: BLUE EARTH, INC., No. 19-60054
Debtor, BAP No. 18-1232
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MEMORANDUM*
INTRACOASTAL CAPITAL, LLC,
Appellants,
v.
BRADLEY D. SHARP, Chapter 11 Trustee,
Appellee.
In re: BLUE EARTH, INC., No. 19-60064
Debtor, BAP No. 18-1232
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ANSON INVESTMENTS MASTER
FUND, LLP,
Appellants,
v.
*
This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
BRADLEY D. SHARP, Chapter 11 Trustee,
Appellee.
Appeal from the Ninth Circuit
Bankruptcy Appellate Panel
Brand, Spraker, and Taylor, Bankruptcy Judges, Presiding
Argued and Submitted December 7, 2020
Pasadena, California
Before: KELLY,** GOULD, and R. NELSON, Circuit Judges.
Intracoastal Capital, LLC (Intracoastal) appeals from the Bankruptcy
Appellate Panel’s (BAP’s) decision reversing the bankruptcy court’s denial of
leave to amend Bradley D. Sharp, Chapter 11 Litigation Trustee’s (Trustee’s) First
Amended Complaint (FAC). Both the bankruptcy court and the BAP determined
that Trustee had not sufficiently alleged fraudulent transfer claims in his first
amended complaint. Trustee has not cross-appealed that issue.
Because the parties are familiar with the facts and procedural background, we
need not restate them. Intracoastal argues that the bankruptcy court did not abuse
its discretion in denying leave to amend and urges us to reverse the BAP’s
judgment on this issue and affirm the bankruptcy court’s order. Trustee argues that
the BAP was correct in deciding that the bankruptcy court abused its discretion
**
The Honorable Paul J. Kelly, Jr., United States Circuit Judge for the
U.S. Court of Appeals for the Tenth Circuit, sitting by designation.
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because an amendment would not have been futile. We have jurisdiction under 28
U.S.C. § 158(d)(1) and we reverse the BAP’s judgment with respect to leave to
amend and affirm the bankruptcy court’s order denying leave to amend.
STANDARD OF REVIEW
We review the BAP’s decisions de novo and review the bankruptcy court’s
decisions with the same standard of review applied by the BAP. In re Tracht Gut,
LLC, 836 F.3d 1146, 1150 (9th Cir. 2016). We review a bankruptcy court’s
dismissal without leave to amend for abuse of discretion. Id. A trial court abuses
its discretion if it applies the wrong legal standard or if its factual findings were
clearly erroneous. United States v. Hinkson, 585 F.3d 1247, 1263 (9th Cir. 2009).
DISCUSSION
The bankruptcy court did not abuse its discretion in denying leave to amend
on grounds of futility. A trial court does not abuse its discretion in denying leave
to amend where further amendment would be futile. See In re Tracht Gut, 836
F.3d at 1155. As noted, the bankruptcy court dismissed the FAC for failure to
state a claim and the BAP affirmed. Trustee does not propose factual allegations
in addition to those already pleaded in the deficient FAC to plausibly allege that
Blue Earth, Inc. (BEI) was insolvent under 11 U.S.C. § 548(a)(1)(B).
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Trustee argues that BEI’s intangible assets were fraudulently overstated.
However, at the hearing on a motion to reconsider, Trustee could not assert
sufficient factual allegations to plead that liabilities exceeded assets on this basis.
Trustee also concedes that his first two complaints did not have specific
factual allegations because he did not know “the details of how overstated and
false the” financial statements were until learning about them from an SEC
complaint filed against BEI for financial fraud on June 28, 2019.
Trustee argues he was misled by the bankruptcy court’s statements during
the motion to dismiss on the initial complaint that left Trustee with the impression
that he only needed to make minor additions to the FAC. However, the
bankruptcy court also gave Trustee specific details on which complaint
paragraphs were deficient and stated that Trustee needed to allege more facts.
Despite notice that the FAC is still deficient, Trustee has not pleaded sufficient
factual allegations regarding unreasonably small capital to include in a second
amended complaint.
Trustee argues that the bankruptcy court erred when it failed to consider the
unreasonably small capital test in denying Trustee’s motion to reconsider.
However, Trustee never addressed the unreasonably small capital test in the
motion to reconsider and insufficiently addressed it in his complaints. It is a
plaintiff’s responsibility to sufficiently plead its own case. See Ashcroft v. Iqbal,
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556 U.S. 662, 678 (2009).
Trustee also argues BEI was left with unreasonably small capital as
evidenced by the fact that it was forced to borrow funds from its shareholder,
Jackson Investment Group. However, the “ability to borrow money” to remain
operational for five months does not suggest insolvency. See Moody v. Sec. Pac.
Bus. Credit, Inc., 971 F.2d 1056, 1070, 1073 (3d Cir. 1992).
Trustee contends that he should be allowed to amend his complaint with
facts contained in the above-mentioned SEC complaint. However, these “facts
had been available to” Trustee. See Chodos v. W. Publ’g Co., 292 F.3d 992, 1003
(9th Cir. 2002). Trustee had access to pre-complaint discovery through Federal
Rule of Bankruptcy Procedure 2004 and had conducted depositions of Intracoastal
and issued requests for production. See In re Blue Earth, Inc., No. 16-30296
(Bankr. N.D. Cal. Mar. 21, 2016), ECF Nos. 303, 348, and 391. Trustee also had
access to BEI’s books and records throughout this litigation.
Trustee also argues that he only had one opportunity to amend the
complaint. However, there is no automatic right to amend a complaint a second
time. See, e.g., Curry v. Yelp Inc., 875 F.3d 1219, 1228 (9th Cir. 2017).
The judgment of the BAP as to leave to amend is REVERSED and the
bankruptcy court’s order denying leave to amend is AFFIRMED. We DENY the
motion for judicial notice of the SEC complaint as moot.
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