In Re: Wvsv Holdings, LLC v. 10k, LLC ( 2023 )

NOT FOR PUBLICATION FILED
UNITED STATES COURT OF APPEALS AUG 29 2023
FOR THE NINTH CIRCUIT MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
In re: WVSV HOLDINGS, LLC, No. 21-16874
Debtor, D.C. No. 2:20-cv-01927-JJT
______________________________
WVSV HOLDINGS, LLC, MEMORANDUM*
Plaintiff-Appellant,
v.
10K, LLC; LEO R. BEUS; ANNETTE
BEUS; PAUL GILBERT; SUSAN
GILBERT; RANDY STOLWORTHY;
KARI STOLWORTHY,
Defendants-Appellees.
In re: WVSV HOLDINGS, LLC, No. 21-16952
Debtor, D.C. No. 2:20-cv-01927-JJT
______________________________
WVSV HOLDINGS, LLC,
Plaintiff-Appellee,
v.
10K, LLC; LEO R. BEUS; ANNETTE
BEUS; PAUL GILBERT; SUSAN
GILBERT; RANDY STOLWORTHY;
KARI STOLWORTHY,
Defendants-Appellants.
*
This disposition is not appropriate for publication and is not precedent except as
provided by Ninth Circuit Rule 36-3.
Appeal from the United States District Court
for the District of Arizona
John Joseph Tuchi, District Judge, Presiding
Argued and Submitted November 16, 2022
Phoenix, Arizona
Before: BYBEE, OWENS, and COLLINS, Circuit Judges.
Dissent by Judge COLLINS
This case is the latest in a protracted litigation between two real-estate
companies over a 13,000-acre tract in Arizona. Defendant 10K, LLC contracted to
sell the land in 2002. The deal collapsed, and 10K’s manager—a separate firm—
sold the plot to Plaintiff WVSV Holdings, LLC. 10K’s members challenged that
sale in state court, precipitating a 16-year quagmire. In 2012, nine years after the
inception of 10K’s suit, WVSV filed Chapter 11 bankruptcy. 10K was by far its
largest creditor. WVSV’s reorganization plan was confirmed two years later,
providing in part for the preservation of “all claims of 10K against the Debtor . . .
[and vice versa] brought in the State Court Litigation.”
In 2019, judgment was entered for WVSV on the land sale. A little over a
year later, it sued Defendants in state court, claiming, inter alia, wrongful
institution of civil proceedings (“WICP”).1 WVSV asserted that 10K’s members,
1
WVSV’s complaint also includes two declaratory relief claims (which the
parties jointly move to dismiss, and which we grant); a slander of title claim
(absent from its opening brief, and which we deem waived); and a claim for aiding
and abetting tortious conduct. The latter claim rests on WICP, so we analyze both
together.
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indignant over losing the contract, embroiled it in a decade and a half of sham
litigation. Since Arizona law makes winning the wrongful suit a condition of
pleading WICP, WVSV’s 2020 action was the earliest that it could file.
Bradshaw v. State Farm Mut. Auto. Ins. Co., 758 P.2d 1313, 1319 (Ariz. 1988).
Defendants removed to bankruptcy court, 28 U.S.C. § 1452, and sought dismissal
and attorneys’ fees. Claiming jurisdiction to determine whether WVSV’s suit
flouted its confirmed plan, the bankruptcy court held that it did, dismissed, and
awarded Defendants their fees. WVSV appealed to the district court, which
affirmed the dismissal but reversed the fee award. Both sides cross-appeal from
that judgment. We have jurisdiction under 28 U.S.C. § 158(d) and affirm.
1. Based on its authority to interpret WVSV’s plan, the bankruptcy court
asserted jurisdiction to verify whether the WICP claim was property of the estate,
which should have been scheduled as an asset and was now waived. Reviewing de
novo, we agree. “Bankruptcy courts have subject matter jurisdiction over
proceedings ‘arising under title 11 . . . or related to cases under title 11.’” Wilshire
Courtyard v. Cal. Franchise Tax Bd. (In re Wilshire Courtyard), 729 F.3d 1279,
1285 (9th Cir. 2013) (quoting 28 U.S.C. § 1334(b)). In determining whether a
post-confirmation proceeding is sufficiently “related to” a bankruptcy case to
confer jurisdiction, we ask if it “affect[s] the interpretation, implementation,
consummation, execution, or administration of the confirmed plan.” Id. at 1289
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(citation omitted) (alteration in original).
Here, as the bankruptcy court explained, the central issues are whether
WVSV’s WICP claim was property of the estate and, if so, whether failure to
schedule it operates as a waiver. These issues raise a “substantial question of
bankruptcy law” that “requir[es] interpretation of the confirmed plan” and a
determination of what constitutes “property” under the Bankruptcy Code. Cnty. of
San Mateo v. Chevron Corp., 32 F.4th 733, 762 (9th Cir. 2022) (citation omitted).
Considering these factors and taking a “holistic look at ‘the whole picture,’” we
hold that the bankruptcy court had jurisdiction under Section 1334(b) to decide the
limited issues that it did. Id. (quoting Wilshire Courtyard, 729 F.3d at 1289).
2. That brings us to the merits. “We review de novo the district court’s
decision on appeal from a bankruptcy court,” United States v. Warfield (In re
Tillman), 53 F.4th 1160, 1166 (9th Cir. 2022), and the bankruptcy court’s
application of judicial estoppel for abuse of discretion, Ah Quin v. Cnty. of Kauai
Dep’t of Transp., 733 F.3d 267, 270 (9th Cir. 2013). The bankruptcy court abuses
its discretion if, inter alia, it applies the wrong legal standard. Id. We find the
bankruptcy court did not err in defining estate property as it did and so affirm.
Determining what qualifies as property for bankruptcy purposes requires
navigating a delicate intersection of state and federal law. “Property interests are
created and defined by state law.” Butner v. United States, 440 U.S. 48, 55 (1979).
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Thus, in examining causes of action as property, we have “look[ed] to state law” to
establish the elements of a claim and when it accrues. Cusano v. Klein, 264 F.3d
936, 947 (9th Cir. 2001). But that is not the whole story. “[The] definition of
property of the estate has been broadly construed to encompass a debtor’s
contingent interest . . ., even if that interest is reliant on future contingencies that
have not occurred as of the filing date.” Anderson v. Rainsdon (In re Anderson),
572 B.R. 743, 747 (B.A.P. 9th Cir. 2017). To decide whether to treat post-petition
claims as estate property, the Supreme Court has instructed us to determine
whether such claims are “sufficiently rooted in the pre-bankruptcy past.” Segal v.
Rochelle, 382 U.S. 375, 380 (1966); see also Jess v. Carey (In re Jess), 169 F.3d
1204, 1208 (9th Cir. 1999).
Under Arizona law, WVSV could not have sued 10K for WICP until 2019.
Frey v. Stoneman, 722 P.2d 274, 278 (Ariz. 1986). At that point, WVSV could
assert all the elements of WICP, including a favorable judgment in the allegedly
abusive litigation. But it is a question of bankruptcy law whether the unmatured
claim was “sufficiently rooted” in pre-petition events to come into the estate.
Segal, 382 U.S. at 380. We think that it was. At its bankruptcy, WVSV had
satisfied all conditions to plead WICP, save for victory in the predicate suit. The
conduct yielding this claim had been known to WVSV for a decade. And even if
the state-court suit had terminated in its favor before the petition, the resulting
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WICP claim would still have depended on winning some future action. The
unmatured claim that WVSV knew of, no different from the counterfactual
matured claim, was a contingent interest. Under Section 541, it should have been
disclosed on WVSV’s schedules. Based on its sound finding that WVSV’s WICP
claim was estate property, the bankruptcy court did not abuse its discretion by
holding the unscheduled claim waived. Ah Quin, 733 F.3d at 271.
3. Finally, we agree with the district court that the bankruptcy court abused
its discretion in granting 10K attorneys’ fees. The award was granted under Ariz.
Rev. Stat. § 12-341.01(A), which allows the victor to obtain fees in “any . . . action
arising out of a contract.” Here, 10K argues that the relevant contract was the land
sale to WVSV. But the basis for the WICP claim sounded in tort, not contract.
WVSV’s claim was based on 10K’s litigation conduct, and the Supreme Court of
Arizona has held it is insufficient for Section 12-341.01(A) purposes that a contract
exists “somewhere in the transaction.” Marcus v. Fox, 723 P.2d 682, 684 (Ariz.
1986). Since the bankruptcy court’s fee award rested on an erroneous reading of
Arizona law, it was properly reversed by the district court.
AFFIRMED.
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FILED
WVSV Holdings, LLC v 10K, LLC, Nos. 21-16874 & 21-16952
AUG 29 2023
COLLINS, Circuit Judge, dissenting: MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
I agree with the majority that, under the applicable “close nexus” test, see
Wilshire Courtyard v. Cal. Franchise Tax Bd. (In re Wilshire Courtyard), 729 F.3d
1279, 1287 (9th Cir. 2013), the bankruptcy court properly exercised jurisdiction to
decide the limited issues that it did. But I disagree with the majority’s resolution
of the merits of those issues.
The central question is whether WVSV Holdings, LLC (“WVSV”) is barred
from asserting its state law claim for “wrongful institution of civil proceedings”
against Defendants due to the fact that no such claim was listed in WVSV’s
schedules during its bankruptcy proceedings. The answer to that question is no.
Ordinarily, “[i]f a plaintiff-debtor omits a pending (or soon-to-be filed)
lawsuit from the bankruptcy schedules and obtains a discharge (or plan
confirmation), judicial estoppel bars the action.” Ah Quin v. County of Kauai
Dep’t of Transp., 733 F.3d 267, 271 (9th Cir. 2013). However, “generally, a
debtor has no duty to schedule a cause of action that did not accrue prior to
bankruptcy.” Cusano v. Klein, 264 F.3d 936, 947 (9th Cir. 2001); see also
11 U.S.C. § 541(a)(1) (stating that the estate’s property generally includes, inter
alia, “all legal or equitable interests of the debtor in property as of the
commencement of the [bankruptcy] case”). “To determine when a cause of action
accrues, we look to state law.” Cusano, 264 F.3d at 947; see also Butner v. United
States, 440 U.S. 48, 55 (1979) (holding that, for bankruptcy purposes, “[p]roperty
interests are created and defined by state law”). In examining state law for this
purpose, what matters is when “accrual has occurred for purposes of ownership,”
and not when the statute of limitations begins to run under “principles of discovery
and tolling.” Cusano, 264 F.3d at 947.
Only two claims in WVSV’s removed complaint remain relevant here—
WVSV’s claim for “wrongful institution of civil proceedings” and its claim for
aiding and abetting tortious conduct. See Mem. Dispo. at 2 n.1. A claim for
“wrongful institution of civil proceedings” is the more technical name for a
“malicious prosecution” claim based on an underlying civil matter, and for
simplicity and convenience, I will use the latter term. See Giles v. Hill Lewis
Marce, 988 P.2d 143, 145 n.1 (Ariz. Ct. App. 1999). As WVSV notes in its
opening brief, its aiding and abetting claim is predicated on its malicious
prosecution claim, and the accrual of the former claim therefore turns on the
accrual of the latter claim.
Under Arizona law, “an essential element of a malicious prosecution claim
is that the proceedings must have terminated in favor of the person against whom
they were brought.” Nataros v. Superior Ct. of Maricopa Cnty., 557 P.2d 1055,
1057 (Ariz. 1976) (en banc) (footnote omitted). Accordingly, a “malicious
2
prosecution claim accrues when the prior proceedings have terminated in the
defendant’s favor.” Id. Prior to that point, “there [is] no cause of action.” Id. In
this case, the relevant “prior proceedings” that are the subject of WVSV’s
malicious prosecution claim did not terminate in WVSV’s favor until the mandate
was issued in January 2019 with respect to the November 2018 final decision of
the Arizona Court of Appeals. See 10K, LLC v. WVSV Holdings, LLC, 2018 WL
5904513 (Ariz. Ct. App. 2018). Thus, under Arizona law, the earliest that WVSV
possessed its chose in action for malicious prosecution (and its related action for
aiding and abetting) was January 2019.
The majority does not—and cannot—dispute that, under Arizona law,
WVSV did not have any cause of action prior to January 2019. It follows from
that premise that “accrual . . . occurred for purposes of ownership” in January
2019. Cusano, 264 F.3d at 947. Under our controlling decision in Cusano, that
means that WVSV had no obligation to list these claims on its initial disclosure
schedules. Id. And because these causes of action did not exist until well after
WVSV’s plan was confirmed, it is of no consequence that WVSV did not amend
its schedules to list such claims prior to the confirmation of the plan. Moreover, it
follows that, in not listing these claims in its disclosure schedules, WVSV did not
make a representation that is inconsistent with its current assertion of the claims.
There is thus no ground for finding that WVSV is judicially estopped on that basis,
3
see New Hampshire v. Maine, 532 U.S. 742, 750 (2001), and the bankruptcy court
abused its discretion in concluding otherwise. And, for the same reason, the
bankruptcy court erred in holding that WVSV is limited to those claims that were
preserved in the terms of the confirmation order.
The majority disregards our decision in Cusano, which requires us to give
controlling weight to Arizona law on this point, and instead relies on a novel,
overriding rule of federal bankruptcy law that the majority erroneously derives
from Segal v. Rochelle, 382 U.S. 375 (1966). Segal recognized that there may be
certain “interests” that, while still contingent in some respects at the time of the
bankruptcy petition, are “sufficiently rooted in the pre-bankruptcy past” to count as
“property” of the bankruptcy estate at the time of the bankruptcy petition. Id. at
380. But nothing in Segal or in our other cases applying it authorizes us to do what
the majority has done here, which is to recognize, under federal law, property
interests that simply do not exist under state law. See id. (holding that debtor’s
interest in tax refunds was “property” of estate even though refunds could not be
claimed “until the end of the year,” after the petition was filed; the core facts
creating a contingent entitlement to the refunds had occurred before bankruptcy);
Jess v. Carey (In re Jess), 169 F.3d 1204, 1207–08 (9th Cir. 1999) (holding that
attorney’s interest in contingency fees for pre-petition work was a property interest
because it was rooted in contract rights that had value on the day the petition was
4
filed); Rau v. Ryerson (In re Ryerson), 739 F.2d 1423, 1425 & n.1 (9th Cir. 1984)
(holding that insurance district manager’s contractual right to “accumulated value
to which he was entitled upon termination or cancellation” of his appointment was
“property” as of the filing of the bankruptcy petition; although termination
occurred later, the contractual right had value and, in addition, “termination or
cancellation of the appointment is an event certain to occur” at some point).
The majority contends that, under Segal, potential lawsuits that may or may
not come into existence in the future are no more contingent or uncertain than
success in a lawsuit that has come into existence. See Mem. Dispo. at 5–6. But
the majority’s analogy overlooks what, under Cusano, is a critical difference: the
speculative future cause of action that has not yet accrued is not a property interest
recognized under state law, while a cause of action that has accrued is a recognized
property interest (despite the contingent risk and uncertainty as to its ultimate
actual value). Here, the problem is not that the value of the property interest was
contingent or uncertain at the filing of the petition; rather, it is that there was no
property interest at all.
In addition to being contrary to Cusano, the majority’s position is contrary to
an overwhelming body of precedent that has explicitly rejected the view that un-
accrued malicious prosecution claims belong to the bankruptcy estate. See McAtee
v. Morrison & Frampton, PLLP, 512 P.3d 235, 239 (Mont. 2021) (rejecting
5
comparable judicial estoppel claim, holding that “McAtee’s malicious prosecution
claim, as premised on the civil fraud action, had not yet accrued at the time she
filed her bankruptcy petition and cannot be deemed rooted in her pre-bankruptcy
conduct”); Vojnovic v. Brants, 612 S.E.2d 621, 624 (Ga. Ct. App. 2005) (rejecting
comparable judicial estoppel argument, because the debtor, who “filed for Chapter
7 bankruptcy on September 15, 1999,” “did not have a viable malicious
prosecution claim until January 2000, when the criminal case against her was
ultimately dismissed”); Jenkins v. A.T. Massey Coal Co. (In re Jenkins), 410 B.R.
182, 193–94 (Bankr. W.D. Va. 2008) (rejecting a comparable judicial estoppel
claim with respect to a malicious prosecution action, holding that, “[u]ndoubtedly,
the interests considered property of the estate are expansive under § 541; however,
this Court cannot support any position which would bring into the bankruptcy
estate causes of action not existing as of the commencement of the case”); Carroll
v. Henry Cnty., 336 B.R. 578, 584 (N.D. Ga. 2006) (“The plaintiff’s state law
claims for false arrest and malicious prosecution are, likewise, not barred by
judicial estoppel since those causes of action did not accrue until the termination of
his criminal trial.”); Brunswick Bank & Trust Co. (In re Atanasov), 221 B.R. 113,
117 (D.N.J. 1998) (“In the current case, the indictment was dismissed on May 10,
1993. Accordingly, as the bankruptcy petition was filed on February 2, 1993, the
cause of action for malicious prosecution arose post-petition. The claim—brought
6
on May 9, 1995—simply was not an asset at the time the petition was filed. The
analysis is that straightforward.”). The one case cited by the parties that reaches a
contrary conclusion, Cole v. Pulley, 468 N.E.2d 652 (Mass. App. Ct. 1984), is
distinguishable, because it places dispositive weight on its state-law
characterization of the “[s]uccessful termination” element of a malicious
prosecution claim as being “in the nature of a threshold requirement” for filing suit
and only “technically an element of the tort.” Id. at 653. Arizona law does not
follow that view: as explained earlier, Arizona law is clear that, prior to a
successful termination of the predicate suit, “there [is] no cause of action” for
malicious prosecution. Nataros, 557 P.2d at 1057.
Accordingly, I dissent from the majority’s conclusion that federal law
dictates that we deem a potential cause of action that does not yet exist under state
law to be a “contingent interest” that, notwithstanding state law, counts as a
sufficient property interest that must be listed on the debtor’s schedules and that
passes to the bankruptcy estate under § 541(a)(1) of the Bankruptcy Code.
Because in my view the claims at issue here were not property of the bankruptcy
estate, there was no obligation for WVSV to list them on its disclosure schedules.
And because there was no obligation to disclose the claims, judicial estoppel does
not attach from the failure to do so. As a result, the bankruptcy court erred in
holding that WVSV was barred from litigating its claims.
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Because I would reverse the district court’s judgment in favor of
Defendants, I would dismiss as moot Defendants’ cross-appeal regarding the
district court’s ruling on their request for attorneys’ fees. See Sutter Home Winery,
Inc. v. Vintage Selections, Ltd., 971 F.2d 401, 409 (9th Cir. 1992). Under my
resolution of the case, the limited jurisdiction that the bankruptcy court correctly
asserted would be exhausted. I would then leave it to the district court to
determine on remand whether the case should be remanded back to state court.
Because the majority instead affirms the judgment, I respectfully dissent.
8