In re: Selim Aykiran

FILED
JAN 25 2022
NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. NC-21-1134-TFG
SELIM AYKIRAN,
Debtor. Bk. No. 19-42425
TERRY KWONG, Adv. No. 19-4068
Appellant,
v. MEMORANDUM1
SELIM AYKIRAN,
Appellee.
Appeal from the United States Bankruptcy Court
for the Northern District of California
Roger L. Efremsky, Bankruptcy Judge, Presiding
Before: TAYLOR, FARIS, and GAN, Bankruptcy Judges
INTRODUCTION
Creditor Terry Kwong appeals from the bankruptcy court's dismissal
with prejudice of his §§ 523 and 727 2 claims against debtor Selim Aykiran
and the resulting judgment. We AFFIRM the dismissal of the
1 This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
2 Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532, all "Rule" references are to the Federal Rules of
Bankruptcy Procedure, and all "Civil Rule" references are to the Federal Rules of Civil
Procedure.
§§ 523(a)(2)(A), 523(a)(6), and 727(a)(2)(B) claims, VACATE the judgment
and the dismissal of the §§ 727(a)(2)(A), (a)(3), (a)(4)(a), and (a)(5) claims,
and REMAND with instructions to dismiss the §§ 727(a)(2)(A), (a)(3),
(a)(4)(a), and (a)(5) claims with leave to amend.
FACTS 3
A. The business venture
Prepetition, Aykiran manufactured towels and related products
("Turkish Towels") in Turkey and then sold them in the United States. He
conducted this business using several corporate forms, including a Turkish
company—Turkish Towel Classic Tekstil Kolleksiyon Ltd. ("Classic")—and
three California limited liability companies—Turkish Towel Collection-
Classic S.A., LLC ("Collection"), Turkish Towel Collection S.A., LLC ("TT
Collection"), and Turkish Towel Classic Textile LLC ("Textile") (collectively
the "Entities").
In 2014, after discussing joint business opportunities, Kwong paid
Aykiran $537,140.50 to fund Aykiran's business. He did so based on
Aykiran's allegedly false representations that: (1) Aykiran was Classic's
sole owner; (2) Classic owned a factory; (3) the factory could manufacture
large quantities of high-quality Turkish Towels; (4) Classic qualified for
3
The factual recitation is derived generally from Kwong's complaints, documents
attached to his complaints, and matters of which we may take judicial notice. We
exercise our discretion to take judicial notice of documents filed in the underlying
adversary proceeding, where appropriate. See Atwood v. Chase Manhattan Mortg. Co. (In
re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003).
2
expense reimbursements from the Turkish government; (5) he was an
established businessman; and (6) he had the intent and ability to repay any
funds advanced (collectively, the "Misrepresentations").
B. The written Agreement
Later that year, the parties executed a written agreement (the
"Agreement"), which granted Kwong and his then-owned 4 company, First
Son Trading Ltd. ("First Son"), substantial control over Aykiran's business.
Under the Agreement, First Son would be the sole buyer of Turkish Towels
from Classic and its affiliates and would dictate Turkish Towels
production. Further, all Turkish Towels sales by Aykiran or Classic would
require Kwong's approval.
The Agreement also provided that Kwong's $537,140.50 payment
would be treated as a loan (the "Loan"), repayable from gross revenues of
Turkish Towels sales. Related, it provided that, after repayment of the
Loan, net profits for First Son, Classic, and TT Collection would be split
between First Son, on the one hand, and Aykiran, Classic, or TT Collection,
on the other hand.
C. Aykiran's post-Agreement actions
Aykiran did not repay the Loan. Instead, he took various actions and
made various post-Agreement transfers with the alleged intent to hinder,
delay, or defraud Kwong and his collection efforts.
First, Aykiran allegedly failed to provide Turkish Towels to First Son.
3
Second, he allegedly prevented Kwong's agent from observing
factory operations.
Third, after Aykiran married Sharon D. Block, he allegedly
transferred to Block and her company, SD Block Tekstil ("SD Block"),
"rights and control" in the Entities ("Control") despite the previous grants
to Kwong under the Agreement. For example, Block eventually became
sole registered owner of the "Turkish Towel Collection" fictitious business
name. In addition, Block allegedly used Classic to import her own line of
Turkish products.
Fourth, Aykiran allegedly ceased operations and formally cancelled
TT Collection so its net profits could not be split with First Son after
repayment of the Loan and then registered Textile to conduct sales in the
United States.5
And fifth, Block established SD Block with the alleged intent and
purpose of hindering and defrauding Aykiran's creditors. SD Block sells its
own line of Turkish Towels from Textile's location.
Kwong claims that through these actions Aykiran diverted and
dissolved the means and sources from which he could repay the Loan,
diverted business profits, and put assets and profits out of the reach of his
creditors.
4
It is unclear whether Kwong still owns First Son.
5
It is unclear whether Textile ever sold Turkish Towels.
4
D. The state court action, bankruptcy, and adversary proceeding
Kwong sued Aykiran in state court for damages related to Aykiran's
failure to repay the Loan. Trial was set for January 2020, but Aykiran filed
his chapter 7 petition before trial commenced.
Kwong responded with an adversary complaint against Aykiran,
which he amended under Civil Rule 15(a), made applicable by Rule 7015,
before effecting service. The first amended complaint (the "FAC") included
claims to except debt from Aykiran's discharge under §§ 523(a)(2)(A) and
(a)(6) and to deny him a discharge under §§ 727(a)(2)(A), (a)(2)(B), (a)(3),
(a)(4)(a), and (a)(5).6
1. The nondischargeability claims
The FAC included two § 523(a)(2)(A) claims—one alleging that
Aykiran obtained the Loan through the Misrepresentations (the
"523(a)(2)(A) Loan claim") and the other alleging that Aykiran created
debts to Kwong through his fraudulent transfer of Control in the Entities to
Block and SD Block (the "523(a)(2)(A) Control claim"). And the FAC had
two § 523(a)(6) claims—one alleging that the failure to repay the Loan
caused willful and malicious injury to Kwong (the "523(a)(6) Loan claim")
and the other alleging that Aykiran's transfer of Control in the Entities to
Block and SD Block willfully and maliciously injured Kwong (the "523(a)(6)
Control claim").
6
The FAC also included claims against the Entities, Block, and SD Block and a
§ 523(a)(4) claim against Aykiran. Kwong eventually dismissed these claims.
5
2. The denial of discharge claims
Regarding the denial of discharge claims, the FAC claimed that
Aykiran failed to disclose assets and liabilities in his bankruptcy schedules,
made false statements in connection with the bankruptcy case, and failed to
provide adequate books and records to the chapter 7 trustee.
3. The dismissal of claims
Aykiran filed a motion to dismiss the FAC for failure to state a claim
for relief, citing Civil Rule 12(b)(6), made applicable by Rule 7012. Kwong
opposed. At the hearing, the bankruptcy court dismissed all claims and
granted Kwong leave to amend only the 523(a)(2)(A) Loan claim, the
523(a)(6) Loan claim, and the 523(a)(6) Control claim.
Kwong filed his second amended complaint (the "SAC"), which
reasserted and supplemented his three remaining claims. Aykiran moved
to dismiss the SAC under Civil Rule 12(b)(6). Following briefing and a
hearing, the bankruptcy court dismissed the claims and granted Kwong
leave to amend only the 523(a)(2)(A) Loan claim. Kwong later dismissed
this claim with prejudice.
The bankruptcy court then entered judgment for Aykiran. Kwong
appealed.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(I) and (J). We have jurisdiction under 28 U.S.C. § 158.
6
ISSUES
1. Whether the bankruptcy court erred in dismissing Kwong's claims.
2. Whether the bankruptcy court abused its discretion in denying
Kwong leave to amend.
STANDARDS OF REVIEW
We review a bankruptcy court's grant of a Civil Rule 12(b)(6) motion
to dismiss de novo. Movsesian v. Victoria Versicherung AG, 670 F.3d 1067,
1071 (9th Cir. 2012). De novo review requires us to look at the matter anew,
giving no deference to the bankruptcy court's determinations. Francis v.
Wallace (In re Francis), 505 B.R. 914, 917 (9th Cir. BAP 2014).
A dismissal without leave to amend is reviewed for abuse of
discretion. Willard v. Lockhart-Johnson (In re Lockhart-Johnson), 631 B.R. 38, 44
(9th Cir. BAP 2021). A bankruptcy court abuses its discretion if it applies an
incorrect legal standard or misapplies the correct legal standard or its
factual findings are illogical, implausible, or without support from
evidence in the record. United States v. Hinkson, 585 F.3d 1247, 1262 (9th Cir.
2009) (en banc).
We may affirm on any ground fairly supported by the record.
Leavitt v. Soto (In re Leavitt), 171 F.3d 1219, 1223 (9th Cir. 1999).
DISCUSSION
Only the dismissals of the 523(a)(2)(A) and (a)(6) Control claims and
7
the §§ 727(a)(2)(A), (a)(3), (a)(4)(a), and (a)(5) claims are at issue. 7 As
explained below, the bankruptcy court properly dismissed the claims, but
it abused its discretion in denying leave to amend the § 727 claims.
A. Dismissal of the 523(a)(2)(A) Control claim
Dismissal under Civil Rule 12(b)(6) is proper if the complaint fails to
allege adequate facts to state a claim to relief that is facially plausible. Bell
Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A motion to dismiss "may be
based on either a lack of a cognizable legal theory or the absence of
sufficient facts alleged under a cognizable legal theory." Johnson v. Riverside
Healthcare Sys., LP, 534 F.3d 1116, 1121 (9th Cir. 2008) (quotation omitted).
Section 523(a)(2)(A) exempts from a debtor's discharge "any debt . . .
for money, property, services, or . . . credit, to the extent obtained by . . . false
pretenses, a false representation, or actual fraud." § 523(a)(2)(A) (emphasis
added). That is, "it prevents discharge of any debt respecting money,
property, services, or credit that the debtor has fraudulently obtained."
Cohen v. de la Cruz, 523 U.S. 213, 218 (1998) (cleaned up).
The 523(a)(2)(A) Control claim seeks to except from Aykiran's
7 Kwong's statement of issues asserted error in the dismissals of these additional
claims: (1) the 523(a)(2)(A) Loan claim to the extent that it alleges fraudulent transfers of
Control in the Entities to Block and SD Block; (2) the 523(a)(6) Loan claim; and (3) the
§ 727(a)(2)(B) claim. We do not address these dismissals because the 523(a)(2)(A) Loan
claim issues he articulates on appeal are identical to the 523(a)(2)(A) Control claim
issues discussed below and because Kwong failed to provide any argument for error in
the dismissal of his 523(a)(6) Loan claim and § 727(a)(2)(B) claim. See Resorts Int'l, Inc. v.
Lowenschuss (In re Lowenschuss), 67 F.3d 1394, 1402 (9th Cir. 1995) (issue included in
statement of issues but not discussed in brief is considered waived).
8
discharge: (1) the Loan debt; and (2) nonspecific debt for lost profits. The
claim fails because Kwong cannot possibly show that Aykiran fraudulently
created these debts through his transfer of Control in the Entities to Block
and SD Block.8 We discuss each debt separately.
1. The Loan debt
Kwong relies heavily on Husky International Electronics, Inc. v. Ritz,
578 U.S. 356 (2016), to argue that the Loan debt is nondischargeable. In
Husky, the Supreme Court reversed the Fifth Circuit's ruling that the
"obtained by . . . actual fraud" language in § 523(a)(2)(A) requires a fraud
that "involves a false representation to a creditor." 578 U.S. at 357. The
Supreme Court held that "[t]he term 'actual fraud' in § 523(a)(2)(A)
encompasses forms of fraud, like fraudulent conveyance schemes, that can
be effected without a false representation." Id. at 359. While Kwong alleges
Aykiran fraudulently transferred assets and that under Husky this suffices
to save his § 523 claims from dismissal, he is wrong; Husky is
distinguishable.
Husky is factually distinguishable because the bankruptcy debtor,
unlike Aykiran, did not originally owe the debt at issue. Rather, a
8 Aykiran argues that the 523(a)(2)(A) Control claim fails because it does not
allege a transfer of property. Though unartfully plead, the claim seems to be alleging
that he transferred intangible assets, such as books of business and ongoing business
concerns, when he ceded Control in the Entities to Block and SD Block. Such assets may
be the subject of fraudulent transfer claims. See Exec. Benefits Ins. Agency v. Arkison (In re
Bellingham Ins. Agency, Inc.), 702 F.3d 553, 571 (9th Cir. 2012). Thus, while Aykiran
argues we need not decide whether he obtained a debt by his transfer of Control, we do.
9
corporation did. The bankruptcy debtor only later became potentially and
partially liable for the debt under an applicable Texas veil-piercing statute
when he "drained [the corporation] of assets it could have used to pay its
debts to creditors[.]" Id. at 358.
And Husky's holding is not nearly as broad as Kwong contends. The
Supreme Court did not eliminate § 523(a)(2)(A)'s requirement that the
money or property giving rise to the debt must have been "obtained by"
false pretenses, a false representation, or actual fraud. Instead, it held that
fraudulent schemes effected without misrepresentations—including
fraudulent transfers of assets to hinder, delay, or defraud creditors—may
satisfy the "obtained by" requirement in some cases. Id. at 365 (noting that
"fraudulent conveyances are not wholly incompatible with the 'obtained
by' requirement" of § 523(a)(2)(A), though "[s]uch circumstances may be
rare"). It then remanded for a determination of whether the alleged
fraudulent scheme satisfied the "obtained by" requirement. Id. at 365 n.3.
Thus, in Husky, fraudulent acts potentially created the debt at issue.
See id. at 357. In contrast, Kwong alleges that Aykiran's fraudulent transfer
of Control in the Entities to Block and SD Block somehow transformed
Aykiran's preexisting Loan debt into a nondischargeable debt. Kwong's
523(a)(2)(A) Control claim, as to the Loan debt, fails regardless of whether
Aykiran engaged in "actual fraud" because the Loan was not "obtained by"
the alleged subsequent transfer of Control fraud.
10
2. The lost profits debt
Neither can the nonspecific lost profits debt arising from Aykiran's
breach of the Agreement be said to be "obtained by" fraud. As the Supreme
Court observed in Husky:
[T]he transferor does not obtain debts in a fraudulent
conveyance. But the recipient of the transfer—who, with the
requisite intent, also commits fraud—can obtain assets by his or
her participation in the fraud. If that recipient later files for
bankruptcy, any debts traceable to the fraudulent conveyance
will be nondischargeable under § 523(a)(2)(A).
Id. at 365 (cleaned up); see also Quarré v. Saylor (In re Saylor), 178 B.R. 209,
213 (9th Cir. BAP 1995), aff'd, 108 F.3d 219 (9th Cir. 1997) (observing that it
is unclear how a creditor's remedies for fraudulent transfer could create a
right to payment from the transferor for purposes of nondischargeability,
citing Cal. Civ. Code § 3439.07 (West 1994)). In this case, Aykiran was the
transferor, but not the transferee, of the alleged fraudulent transfers. Thus,
he did not obtain or create a lost profits debt by fraud as required by
§ 523(a)(2)(A).
Moreover, the 523(a)(2)(A) Control claim would fail even if a
fraudulent transfer could create a right to payment against a transferor
because Kwong would lack standing to pursue such payment. The lost
profits debt would be owed to First Son—and not Kwong—under the
terms of the Agreement, which provides that "[n]et profits for [Classic]
shall be divided between First Son and [Classic]. Net profits for
11
[TT Collection] shall be divided between First Son and [TT Collection]."
(emphasis added).
Furthermore, as the bankruptcy court properly determined, Kwong
did not allege any factual matter to plausibly suggest that Aykiran's actions
and "schemes" amounted to fraud. While Aykiran and Kwong's business
venture failed, Kwong asserts no facts to suggest that Aykiran harbored ill
intent or set out to harm Kwong. In fact, Kwong alleges that Aykiran spent
the Loan funds on the Entities' business expenses. Such expenditures are
inconsistent with an intent to hinder, delay, or defraud Kwong.
And finally, the 523(a)(2)(A) Control claim fails to plausibly assert
lost profit damages. The damages are too speculative. Kwong does not
attempt to allege any amount of profits that he could have reasonably
expected to receive had he obtained Control in the Entities. It is implausible
that he would have received any profit after repayment of the $537,140.50
Loan debt based on his allegations that: (1) Aykiran misrepresented
ownership interests in the Entities and the factory, the factory's
manufacturing capabilities, and his ability to obtain business expense
reimbursements; and (2) Kwong would not have made the Loan had he
known Aykiran's representations were false.
For the foregoing reasons, the bankruptcy court properly dismissed
the 523(a)(2)(A) Control claim.
B. Dismissal of the 523(a)(6) Control claim
The 523(a)(6) Control claim likewise seeks to except a lost profit debt
12
from Aykiran's discharge based on his transfer of Control in the Entities to
Block and SD Block. It, too, fails.
The lost profit debt is a breach of contract debt. Debts resulting from
intentional breaches of contract are not actionable under § 523(a)(6) unless
the breaches were accompanied by tortious conduct that resulted in willful
and malicious injury. Petralia v. Jercich (In re Jercich), 238 F.3d 1202, 1205
(9th Cir. 2001). To determine whether a breach of contract renders debt
nondischargeable, a bankruptcy court employs a two-part test: first, it must
determine if the debtor's conduct was tortious under state law, then it must
determine if the debtor's conduct was also willful and malicious. Lockerby v.
Sierra, 535 F.3d 1038, 1040-41 (9th Cir. 2008).
The 523(a)(6) Control claim does not satisfy the tortious conduct
requirement. Fraud is unquestionably an intentional tort under California
law. Engalla v. Permanente Med. Grp., Inc., 15 Cal. 4th 951, 974-75 (1997).
Kwong, however, did not plausibly suggest that Aykiran's alleged actions
rose above intentional breaches of the Agreement to the level of fraud.
Thus, the bankruptcy court did not err in dismissing the claim.
C. Dismissal of the § 727 claims
The bankruptcy court duly dismissed the § 727 claims as well. As we
explain, they were too vague, scattershot, and contradictory to raise a right
to relief above the speculative level on the assumption that all the
allegations in the FAC were true.
13
1. Transfers underlying the 523(a)(2)(A) and (a)(6) Control claims
Kwong claims that the fraudulent transfers forming the basis of his
523(a)(2)(A) and (a)(6) Control claims justify a denial of discharge under
§ 727(a)(2)(A). 9 He is wrong. First, many of the transfers occurred well
outside the one-year period. And second, for the reasons discussed above,
he failed to plead sufficient plausible facts to establish fraud as to the
activities.
2. Nondisclosure of assets
Kwong also claims Aykiran should be denied a discharge under
§§ 727(a)(2)(A), 727(a)(4)(A),10 and 727(a)(5)11 based on alleged false
statements and omissions in his bankruptcy schedules and statements.
But Kwong's factual allegations regarding Aykiran's business
dealings undermine his § 727 claims. Specifically, Kwong alleges that
Aykiran conducted his business through his Entities. If this is true, then the
bulk of the assets allegedly omitted from the schedules—including
inventory, equipment, machinery, website domain(s), business goodwill,
investments, profits, PayPal accounts, a lawsuit against a Turkish
individual, Block's investments, a vehicle lease, and rental deposits—
9 Section 727(a)(2)(A) provides that a debtor may be denied a discharge if he,
"with intent to hinder, delay, or defraud a creditor or [the bankruptcy trustee],"
transferred or concealed his property during the year preceding the petition date.
10 Section 727(a)(4)(A) provides that a debtor may be denied a discharge if he
"knowingly and fraudulently, in or in connection with the case . . . made a false oath[.]"
11 Section 727(a)(5) provides that a debtor may be denied a discharge if he "failed
to explain satisfactorily, before determination of denial of discharge under this
14
would likely be the Entities' assets. And Aykiran's scheduling of an
ownership interest in the Entities would sufficiently disclose his interests.
Consistent with this observation, Aykiran asserts that these assets
were subsumed into his business valuations included in his Schedule B,
line 19. Therein, he listed 100 percent and 70 percent ownership interests in
Textile and Towel Classic Tekstil, respectively, valuing such interests at $0
and "unknown," respectively. He explained in his motion to dismiss the
FAC, that the value of these businesses are $0 and "unknown" because
either their liabilities exceed their assets or because their value is unknown.
Kwong fails to sufficiently allege that these valuations are false or that
Aykiran should have separately reported his business assets in his
schedules.
The alleged undisclosed assets also include refunds and
reimbursements from the Turkish government, which are presumably the
Entities' assets, not Aykiran's assets. Kwong does not allege to the contrary.
Further, it appears unlikely that these assets even exist, as Kwong alleges in
the FAC that refunds and reimbursement requests were denied.
Even if any of the alleged undisclosed assets are Aykiran's personal
assets, Kwong fails to allege what value, if any, they have. Such allegations
are necessary to draw a reasonable inference that Aykiran should have
scheduled the assets. Many of the assets are likely valueless. For example,
Kwong vaguely alleges that Aykiran did not disclose "clothing." Likewise,
paragraph, any loss of assets or deficiency of assets to meet the debtor's liabilities[.]"
15
he alleges that Aykiran did not disclose his interest in TT Collection. But
elsewhere in the FAC, he alleges that Aykiran "cancelled" TT Collection
over two years before filing bankruptcy. The FAC contains no allegations
indicating that TT Collection or the clothing have any value and should
have been disclosed because the omissions are material.
3. Nondisclosure of liabilities
As for liabilities, Kwong alleges that Aykiran failed to disclose debt
to the Turkish government. But Kwong also alleges that businesses in
Turkey are exposed to expensive long-term financial obligations. Such
debt, then, logically belongs to the Entities and not Aykiran. There are
insufficient allegations to suggest otherwise.
Similarly, while Kwong alleges that Aykiran did not disclose a
promissory note in connection with his store's location and debts to his
accountant/CPA, Block, and a third party, no details of the note or debts
are given. It is thus unknown whether the note or debts belong to Aykiran
individually or to his Entities.
4. Inadequate records
In addition, Kwong sought a discharge denial under § 727(a)(3) based
on his allegations that Aykiran failed to produce records explaining why he
stated a $0 value for Textile and only draws $1,000 per month from it. But
again, Schedule B, line 19 discloses that Textile's liabilities exceed its assets.
As such, it presumably has no value and cannot make distributions greater
than $1,000. Kwong does not allege to the contrary.
16
5. False oaths
The alleged false statements forming the basis of Kwong's § 727(a)(5)
claim include the above-described deficiencies in Aykiran's schedules.
They also include Aykiran's § 341(a) meeting of creditors testimony that he
stopped manufacturing Turkish Towels in 2014. Kwong alleges that this
testimony is false and that Aykiran in fact ceased manufacturing Turkish
Towels in 2018 or later. Kwong does not explain how the misrepresentation
would merit a denial of discharge.
Based on the foregoing, the bankruptcy court properly dismissed
Kwong's § 727 claims.
D. Denial of leave to amend
We now address the bankruptcy court's denial of leave to amend.
Under Civil Rule 15, made applicable by Rule 7015, a bankruptcy
court should grant leave to amend when justice so requires. It should grant
leave to amend "unless it determines that the pleading could not possibly
be cured by the allegation of other facts." Lopez v. Smith, 203 F.3d 1122, 1130
(9th Cir. 2000) (quotation omitted).
In determining whether to grant a plaintiff leave to amend, a
bankruptcy court should consider: (1) undue delay; (2) bad faith or dilatory
motive by the plaintiff; (3) repeated failure to cure deficiencies by previous
amendments; (4) undue prejudice to the defendant; and (5) futility of
amendment ("Foman factors"). Foman v. Davis, 371 U.S. 178, 182 (1962). The
consideration of prejudice to the defendant is paramount. Eminence Cap.,
17
LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003). "Absent prejudice, or
a strong showing of any of the remaining Foman factors, there exists a
presumption under Rule 15(a) in favor of granting leave to amend." Id.
1. Denial of leave to amend the § 523 Control claims
The bankruptcy court properly denied Kwong leave to amend the
523(a)(2)(A) Control claim because the problems with it are incurable. As
we explained above, the claim is not just factually implausible. Rather, it
suffers from legal impossibility; Kwong cannot prove under any set of facts
that the alleged debts were obtained (created) by fraud.
Curiously, while the bankruptcy court properly denied leave to
amend the 523(a)(2)(A) Control claim in the FAC, it granted Kwong leave
to amend the 523(a)(6) Control claim. Kwong thereby had an opportunity
to attempt to cure the deficiencies that pervaded his overlapping
523(a)(2)(A) and (a)(6) Control claims in his SAC. But the SAC was met
with another successful motion to dismiss. The bankruptcy court properly
denied Kwong a second opportunity to amend the 523(a)(6) Control claim
because he could not prove that Aykiran's breach of the Agreement was
accompanied by the tortious conduct alleged, fraud.
2. Denial of leave to amend the § 727 claims
But unlike the § 523 Control claims, we cannot conclude with
certainty that the § 727 claims were doomed by legal impossibility to the
extent that they were based on allegations other than the fraudulent
transfer of Control in the Entities to Block and SD Block. The bankruptcy
18
court notably did not find that an amendment to the § 727 claims in the
FAC would be futile, would cause undue delay, or would unduly prejudice
Aykiran. Nor did it determine that Kwong asserted the § 727 claims in bad
faith. As explained above, the § 727 claims could potentially be saved by
amendment to the extent that they neither rely on the alleged fraudulent
transfer of Control in the Entities to Block and SD Block nor relate to non-
disclosure of non-estate assets. While the § 727 claims are undoubtably
improbable, amendment would not necessarily be futile. Kwong should be
afforded at least one opportunity to amend the claims to make them
plausible. Thus, the bankruptcy court abused its discretion by denying
leave to amend the § 727 claims.
CONCLUSION
Thus, we AFFIRM the dismissal of the §§ 523(a)(2)(A), 523(a)(6), and
727(a)(2)(B) claims with prejudice, VACATE the judgment and the
dismissal of the §§ 727(a)(2)(A), (a)(3), (a)(4)(a), and (a)(5) claims with
prejudice, and REMAND with instructions to dismiss the §§ 727(a)(2)(A),
(a)(3), (a)(4)(a), and (a)(5) claims with leave to amend.
19