In re: Ashley Susan Aarons

FILED
NOT FOR PUBLICATION JUN 8 2023
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT
OF THE NINTH CIRCUIT
In re: BAP No. CC-22-1170-SGF
Ashley Susan Aarons,
Debtor. Bk. No. 2:19-bk-18316-NB
Ashley Susan Aarons, Adv. No. 2:22-ap-01008-NB
Appellant,
v. MEMORANDUM*
Patch of Land Lending, LLC; FCI Lender
Services, Inc.; California TD Specialists;
Versus Residential LoanCo, LLC,
Appellees.
Appeal from the United States Bankruptcy Court
for the Central District of California
Neil W. Bason, Bankruptcy Judge, Presiding
Before: SPRAKER, GAN, and FARIS, Bankruptcy Judges.
INTRODUCTION
Ashley Susan Aarons believed that her secured creditor improperly
calculated the balance owed on its secured loan and pursued foreclosure in
violation of federal and state law. Aarons filed for chapter 11 1 relief and
*
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.
1
Unless specified otherwise, all chapter and section references are to the
settled her claims with the secured creditor. She incorporated the
settlement into her confirmed chapter 11 plan. Post-confirmation the
bankruptcy court converted her case to chapter 7. Aarons then sued the
secured lender in state court to quiet title, cancel the recorded documents
setting the foreclosure in motion, and recover damages for wrongful
foreclosure. The lender removed the action to the bankruptcy court and
moved to dismiss it under Civil Rule 12(b)(6), made applicable by Rule
7012. The bankruptcy court granted the lender’s dismissal motion without
leave to amend. We agree with the bankruptcy court that the settlement
precluded any claims based on the lender’s pre-confirmation conduct, and
any potentially surviving claims belonged to the bankruptcy estate, not to
Aarons. Therefore, we AFFIRM.
FACTS2
A. The parties and their roles in the loan transaction.
Patch of Land Lending, LLC (“Patch”) loaned Aarons’ family trust
$3,000,000, evidenced by a promissory note requiring interest-only
payments and maturing on April 1, 2020. Aarons, on behalf of the trust,
executed a deed of trust to secure the loan, which encumbered real
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.
2
We exercise our discretion to take judicial notice of documents electronically
filed in the underlying bankruptcy case and adversary proceeding. See Atwood v. Chase
Manhattan Mortg. Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003).
2
property located on Bel Air Road in Los Angeles (”Bel Air Property”).
Aarons personally guaranteed the loan. Patch thereafter sold and assigned
its loan and lien rights to Wilmington Savings Fund Society, as trustee for a
mortgage pool trust owned or controlled by Invictus Residential Pooler
Trust 3A. In turn, Invictus sold and assigned its rights to the Verus
Securitization Trust 2020-NPL1. Notwithstanding these assignments, Patch
retained the servicing rights for the loan, and FCI Lender Services became
the sub-servicer.
B. Default, bankruptcy, and burgeoning disputes between the parties.
By January 2019, the loan was in default, with payments in arrears of
$73,168. Aarons alleges that she tendered $73,200 to pay the delinquency
but Patch refused to apply the payment and placed it in a suspense account
instead. Aarons contends that as a result Patch wrongfully calculated the
balance of the loan and improperly charged interest and other fees. On
February 1, 2019, Patch issued a notice of default.
Aarons filed her chapter 11 petition in June 2019. Through various
filings in the bankruptcy court, Aarons and Patch skirmished over their
respective rights and duties. In November 2019, Aarons filed a motion
challenging the validity and amount of Patch’s secured claim and
contended that the lender had applied an improper interest rate, charged
improper interest and late charges, had violated multiple consumer finance
and usury laws, wrongfully interfered with Aarons’ attempts to refinance
the Bel Air Property, incorrectly accounted for the loan, and improperly
3
failed to credit her for the $73,200 payment.
In December 2019, Patch timely filed a proof of claim for
$3,354,858.00 due and owing as of the petition date. In addition, in
February 2020, Wilmington on behalf of Invictus filed a motion for relief
from stay. Among other things, Wilmington obtained partial relief from
stay permitting it to issue a new notice of default (collectively, “NODs”)
and a notice of trustee’s sale (“NOTS”) against the Bel Air Property.
California TD Specialists is identified as the successor trustee in the NOD
recorded in June 2020 against the Bel Air Property.
C. Settlement and plan confirmation.
In the spring and summer of 2020, the parties negotiated a tentative
settlement resolving the issues relating to the loan and Patch’s secured
claim. The settlement was executed in September 2020 and attached to the
brief Aarons filed in support of confirmation of her proposed plan. This
agreement was supplemented and amended by four addenda, though none
of the addenda terms are pertinent to this appeal.
The settlement treated Aarons’ November 2019 motion as an
objection to Patch’s December 2019 proof of secured claim. According to
Patch, by the time the original settlement was executed, Aarons owed it
over $4,000,000 (including all interest, fees, and charges). The key terms of
the settlement included the following:
• Reduction of Patch’s secured claim from $4,006,291.07 (as of June 1,
2020) to a “New Principal Balance” of $3,432,916.07.
4
• Reinstatement of the loan as “current” with a 7.5% nondefault
interest rate as specified in the note and a default rate of 18% as
specified in the note.
• Extension of the loan’s maturity date to April 1, 2021, at which point
the entire outstanding loan balance would be due.
• Monthly interest-only payments of $21,455.73, to be paid until full
satisfaction of the debt.
• Treatment of Aarons’ 2019 $73,200 payment as a reserve to be applied
to satisfy the first three months of interest only payments, plus
estimated real property taxes and part of the fourth monthly interest
payment.
• A $60,000 fee for extension of the new maturity date for up to six
months, subject to waiver under certain conditions.
In exchange for these new loan terms, Aarons granted Patch, FCI,
Wilmington, and their successors, assigns, agents, and other
representatives a very broad release of all then-existing claims she held
against them.
In her own words, Aarons stated, “the settlement reached will result
in substantial benefit for my bankruptcy estate and its creditors.”
According to Aarons, the settlement gave her breathing room from the
secured debt obligations she owed to Patch and enabled her to refinance or
sell the Bel Air Property to help fund her plan. She further predicted: “[i]f
the Plan is not approved, I will lose this favorable opportunity to generate
5
funds from the Bel Air Property and more importantly, I will lose the Bel
Air Property to a foreclosure sale.”
The final version of the settlement, with all addenda, was made a
part of Aarons’ plan and was approved under Rule 9019 during the
confirmation proceedings. The settlement became effective in February
2021—shortly after the bankruptcy court entered its order confirming
Aarons’ plan. By the time Aarons confirmed her plan and the settlement
became effective, she had two months remaining before the note matured
under the settlement.
On April 13, 2021, Aarons requested a six-month extension of the
maturity date. The record does not include any response to the request for
extension, but Aarons’ subsequent request for forbearance was denied, and
on August 11, 2021(more than six months after the maturity date under the
settlement), a notice of default was recorded.
D. Plan default, conversion to chapter 7, and Aarons’ complaint.
Aarons neither sold nor refinanced the Bel Air Property, and her case
was converted to chapter 7 on October 18, 2021. In accordance with the
terms of the plan and the conversion order, her property as the reorganized
debtor vested in the chapter 7 estate, except for property that would have
been excluded from the estate if the case always had been under chapter 7.
Several months after the conversion of the bankruptcy to chapter 7,
Aarons filed a complaint in state court to quiet title to the Bel Air Property,
for cancellation of the recorded NODs and NOTS, and for wrongful
6
foreclosure.3 The complaint named Patch, FCI, TD, and Verus as
defendants (collectively, the “Patch Defendants”). Though the foreclosure
had not yet occurred, many allegations read as if it had. The allegations are
wide ranging and span the years from 2019 to 2022, including the alleged
refusal to credit her loan account for the $73,200 she had paid to bring her
loan current. Many of these allegations complain about events that were
prior to, and the subject of, the settlement. Some of the allegations,
however, occurred after confirmation and prior to conversion of the
bankruptcy. Aarons also included in her allegations the post-conversion
NOTS and stated that she requested a loan modification after the post-
conversion NOTS. The complaint, however, omits any reference to the
settlement, the release of Aarons’ claims, or the revesting of her property in
the bankruptcy estate upon conversion.
E. Removal of the complaint and the motion to dismiss.
The Patch Defendants removed the state court complaint to the
bankruptcy court and moved to dismiss it under Civil Rule 12(b)(6).
According to the Patch Defendants, the causes of action in the complaint
belonged to Aarons’ chapter 7 estate and only could be pursued by the
3In her cause of action to quiet title, Aarons essentially alleged that the Patch
Defendants’ misconduct entitled her to consequential damages and to have title to the
Bel Air Property quieted in the name of the Ashley S. Aarons 2015 Trust Dated May 15,
2015. In her cause of action for cancellation of instrument(s), Aarons further alleged that
the recorded NODs and NOTS were invalid and should be cancelled. Based on the
same allegations of misconduct and defective instruments, Aarons maintained in her
cause of action for wrongful foreclosure that she was entitled to recover damages.
7
chapter 7 trustee. As for Aarons’ key allegations, the Patch Defendants
asserted that they were precluded by the plain and unambiguous terms of
the settlement because it released all causes of action that had accrued
before confirmation. With respect to the merits of Aarons’ assertions of
post-confirmation malfeasance, the Patch Defendants maintained that they
properly calculated the amounts stated consistent with the settlement
terms so the amounts were neither false nor fraudulent.
Meanwhile, Aarons unsuccessfully sought a temporary restraining
order. The foreclosure occurred on March 30, 2022.
Aarons opposed the motion to dismiss. In response to the Patch
Defendants’ arguments, she maintained that under the “person aggrieved”
standard historically applied by the Ninth Circuit in relation to bankruptcy
appeals, she had standing to pursue the causes of action based on her
pecuniary interest in the proceeds and equity in the Bel Air Property. As
for the contention that she had released the claims stated in her complaint,
she insisted that the terms of the settlement and the plan were ineffective
because the plan never was fully consummated. In other words, because
she failed to perform her plan obligations and the case was converted to
chapter 7, she maintained that the settlement and the chapter 11 plan were
ineffective and non-binding. 4
4
Aarons also stated in her opposition that she was fraudulently induced to enter
into the settlement and plan. The bankruptcy court rejected this argument, and she has
abandoned it on appeal.
8
F. The bankruptcy court’s ruling.
The bankruptcy court ruled that dismissal was appropriate and leave
to amend would be futile. It agreed that any claims belonging to Aarons
that arose before confirmation of the plan were released by the settlement
incorporated into the plan. The court rejected Aarons’ argument that the
settlement and plan were ineffective, noting that she had failed to obtain
financing or make the monthly payments required under the settlement.
Nor was there any authority to support her contention that she could, by
her own breach, render the settlement and plan ineffective. As the court
aptly observed: “Such a conclusion would make all settlements and all
resolutions of disputed issues in any chapter 11 plan meaningless because
they would be terminable at will by the settling party, simply by choosing
not to perform.”
The court additionally held that the claims asserted were assets of the
chapter 7 estate. This result was dictated by the express provisions of the
court’s confirmation order and its order converting the case to chapter 7.
Both orders stated that any property belonging to the reorganized debtor
(except possibly for any property subject to valid exemption) would
become property of the estate upon conversion. This included any post-
confirmation claims that existed prior to conversion. Because the chapter 7
estate owned the Bel Air Property, and all claims related to it, the court
held that Aarons lacked standing to pursue the claims against the Patch
Defendants.
9
The bankruptcy court also concluded that leave to amend was futile. 5
It reasoned that Aarons could not plead around the release of claims or the
estate’s ownership of any post-confirmation claims. For these reasons, the
court dismissed the claims with prejudice.
The bankruptcy court entered its judgment of dismissal with
prejudice on August 8, 2022. Aarons timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(A) and (C). We have jurisdiction under 28 U.S.C. § 158.
ISSUES
1. Did the bankruptcy court commit reversible error when it dismissed
Aarons’ claims for relief?
2. Did the bankruptcy court abuse its discretion when it denied Aarons
leave to amend?
STANDARDS OF REVIEW
We review de novo the bankruptcy court’s order granting a Civil
5
The bankruptcy court also held that dismissal was appropriate because the
complaint failed to state claims for which relief could be granted. It noted that the
complaint failed to explain what balances or calculations were incorrect, or why they
were so material as to justify the relief she sought. The bankruptcy court repeatedly
noted that the debt matured prior to conversion and Aarons failed to meet her
obligations under the plan. Because we agree with the bankruptcy court that all claims
based on pre-confirmation activity have been released and the estate owns any claims
related to the Bel Air Property, we need not address the alternate basis adopted by the
bankruptcy court and whether the complaint could have been amended to address
those deficiencies.
10
Rule 12(b)(6) motion to dismiss. See Camacho v. Bridgeport Fin. Inc., 430 F.3d
1078, 1079 (9th Cir. 2005). When we review a matter de novo, we consider
the matter anew, as if it were not previously decided by the bankruptcy
court. Mele v. Mele (In re Mele), 501 B.R. 357, 362 (9th Cir. BAP 2013).
Generally, we review the bankruptcy court’s denial of leave to amend
for an abuse of discretion. See Reddy v. Litton Indus., Inc., 912 F.2d 291, 296
(9th Cir. 1990). The bankruptcy court abused its discretion if it applied an
incorrect legal rule or its factual findings were illogical, implausible, or
without support in the record. TrafficSchool.com v. Edriver Inc., 653 F.3d 820,
832 (9th Cir. 2011).
DISCUSSION
A. Civil Rule 12(b)(6) standards.
When we review an order granting a Civil Rule 12(b)(6) motion, we
consider the legal sufficiency of the plaintiff’s complaint. See Johnson v.
Riverside Healthcare Sys., LP, 534 F.3d 1116, 1121–22 (9th Cir. 2008). This
means that we must assess whether the complaint presents a cognizable
legal theory and whether it contains sufficient factual allegations to
support that theory. Id. Thus, “for a complaint to survive a motion to
dismiss, the non-conclusory ‘factual content,’ and reasonable inferences
from that content, must be plausibly suggestive of a claim entitling the
plaintiff to relief.” Moss v. U.S. Secret Serv., 572 F.3d 962, 969 (9th Cir. 2009)
(citing Ashcroft v. Iqbal, 556 U.S. 662, 677-78 (2009)).
A claim is facially plausible when it contains factual allegations that,
11
if taken as true, would allow the court to reasonably infer that the
defendant is liable to the plaintiff. Iqbal, 556 U.S. at 678. “Threadbare
recitals of the elements of a cause of action, supported by mere conclusory
statements, do not suffice.” Id. Additionally, we do not accept as true mere
legal conclusions because they cannot by themselves establish a plausible
claim for relief. Id.Though our review generally is limited to the allegations of the
complaint, Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir.),
opinion amended on denial of reh'g, 275 F.3d 1187 (9th Cir. 2001), we also may
consider matters properly subject to judicial notice, including other papers
filed in the adversary proceeding and the underlying bankruptcy case, see
Est. of Blue v. Cnty. of L.A., 120 F.3d 982, 984 (9th Cir. 1997); Barron v. Reich,
13 F.3d 1370, 1377 (9th Cir. 1994). In fact, we need not accept as true factual
allegations that contradict judicially noticed matters or exhibits attached to
and incorporated into the complaint. Sprewell, 266 F.3d at 988.
B. Aarons’ arguments.
What Aarons does not argue on appeal is as important as what she
does argue. On appeal, she does not claim that the bankruptcy court
misconstrued the terms of the settlement or the plan, including the
reversion of her property to the chapter 7 bankruptcy estate upon
conversion. Similarly, she does not deny that the release covered her claims
based on the Patch Defendants’ pre-confirmation conduct, including the
alleged misapplication of the $73,200. Nor does she contest that she failed
12
to obtain financing or make the monthly payments required under the
settlement.
Instead, Aarons now argues that the conversion of her bankruptcy to
chapter 7 “rescinded” the settlement and plan or rendered them ineffective
because it frustrated her purpose of retaining the Bel Air Property. She
makes only one other relevant argument in her appeal brief. She claims
that she had standing to file the complaint for her individual benefit by
virtue of her $600,000 homestead exemption. We address each of these
arguments in turn.
1. The conversion of the case did not rescind the settlement or
the plan.
Aarons stated claims for quiet title, cancellation of the NODs and
NOTS, and wrongful foreclosure. She does not deny that to the extent these
claims were based on pre-confirmation actions, the claims were within the
scope of the release in the settlement, which was approved and
incorporated into her confirmed plan. The Patch Defendants moved to
dismiss on this basis, arguing that Aarons was bound by that release
pursuant to § 1141(a), and the doctrine of claim preclusion. Aarons
opposed dismissal based on her belief that the approved settlement was
not enforceable because the plan was not consummated and that she was
fraudulently induced into making the settlement. She does not press either
argument on appeal. Rather, she now argues that the settlement cannot be
enforced because conversion of her case frustrated her purpose in settling
13
her claims. She reasons that under the “frustration of purpose doctrine”
any contract whose purpose is frustrated is immediately terminated.
Frustration of purpose is an affirmative defense that may be applied
in a breach of contract action when the defendant shows: “(1) the purpose
of the contract that has been frustrated was contemplated by both parties in
entering the contract; (2) the risk of the event was not reasonably
foreseeable and the party claiming frustration did not assume the risk
under the contract; and (3) the value of counter-performance is totally or
nearly totally destroyed.” SVAP III Poway Crossings, LLC v. Fitness Int'l,
LLC, 87 Cal. App. 5th 882, 895 (2023). Aarons contends that conversion of
her bankruptcy has frustrated the purpose of the settlement, which was to
save her property from foreclosure.
This argument is without merit. Nothing in the settlement, in the
confirmed plan, or even in the complaint, spoke of any guaranty that
Aarons would retain her property. Rather, the settlement and plan gave
Aarons the opportunity to save the property by paying Patch on
renegotiated terms. Through the settlement, Aarons resolved her existing
claim dispute with Patch, including the alleged 2019 misapplication of her
$73,200 payment. Aarons also received a substantial reduction in the
amount owed, and an extension of a matured loan that offered her the
opportunity to refinance or sell the Bel Air Property. The settlement
permitted Aarons to proceed with confirmation of her plan. Aarons fails to
state any basis for frustration of purpose. Rather, she received the
14
opportunity that she bargained for; it was her failure to make the loan
payments as modified by the settlement that caused the foreclosure.
Similarly, Aarons fails completely to allege or explain how the risk of
foreclosure for nonpayment of her loan was neither foreseeable nor
assumed in this instance. She failed to plead the elements of the defense in
her complaint and has similarly failed to detail any basis to suggest that
she would be able to address this requirement on amendment.
Moreover, Aarons may not simply discard the plan she negotiated
and confirmed. Under § 1141(a), “the provisions of a confirmed plan bind
the debtor” and other interested parties, such as creditors and equity
interest holders. The statute recognizes two exceptions to this rule related
to the discharge of the debtor, see § 1141(d)(2), (3), but neither are relevant
here. Thus, once her plan was confirmed and the confirmation order
became final and unappealable, the unambiguous terms of her plan and
the confirmation order bound her and the other plan constituents. See J.J.
Re-Bar Corp. v. United States (In re J.J. Re-Bar Corp.), 420 B.R. 496, 503 (9th
Cir. BAP 2009), aff'd, 644 F.3d 952 (9th Cir. 2011). Aarons was bound by the
terms of her confirmed plan, and conversion had no effect on her
settlement. See In re Oakhurst Lodge, Inc., 582 B.R. 784, 792 (Bankr. E.D. Cal.
2018) (“Moreover, conversion of a chapter 11 case to chapter 7 does not
vacate the order confirming the plan. See 11 U.S.C. § 348 (omitting any
reference to §§ 1129 and 1141).”); see also In re Space Bldg. Corp., 206 B.R. 269,
274 (D. Mass. 1996) (“[C]ourts which have considered whether dismissal or
15
conversion of a Chapter 11 case revokes a confirmed Plan, consistently
have determined that it does not.”).
Aarons cites two Ninth Circuit decisions for the unremarkable
proposition that confirmed chapter 11 plans—and settlements incorporated
into plans—are “construed basically as a contract.” But neither case helps
Aarons. In Baroni v. Seror (In re Baroni), 36 F.4th 958, 967-68 (9th Cir. 2022),
the Ninth Circuit analogized the confirmed plan to a contract for purposes
of determining whether a particular payment default by the reorganized
debtor qualified as a material default under the plan. And in Hillis Motors,
Inc. v. Hawaii Automobile Dealers' Ass'n, 997 F.2d 581, 588 (9th Cir. 1993), the
Ninth Circuit analogized the confirmed plan to a contract for purposes of
determining whether the plan contemplated that Hillis’ corporate assets
would continue to be property of the estate after confirmation. In short,
both cases used traditional rules of contract interpretation to construe and
effectuate the provisions of confirmed plans. Neither case addressed the
effect of conversion on a confirmed chapter 11 plan.
Contrary to her argument, nothing in either Baroni or Hillis Motors
suggests that she has pled or could plead a plausible basis to conclude that
either her settlement or her confirmed plan are subject to the doctrine of
frustration of purpose. Under these circumstances, the bankruptcy court
correctly determined that the Patch Defendants’ Civil Rule 12(b)(6) motion
should be granted as to any pre-confirmation claims she stated in her
complaint.
16
2. Only the chapter 7 trustee had authority to pursue the post-
confirmation causes of action stated in the complaint.
Though the settlement released any claims that existed prior to
approval of the settlement at confirmation, Aarons alleged certain conduct
that occurred after plan confirmation. The bankruptcy court alternately
held that to the extent that any of Aarons’ claims were not released by the
settlement, she lacked standing to pursue those claims. It held that under
the terms of the confirmed plan and conversion order, all property held by
the debtor at the time of conversion to chapter 7 became property of the
bankruptcy estate. Aarons does not dispute this. Instead, she contends that
because she claimed certain exemptions, she had pecuniary interests that
gave her standing to bring her action against the Patch Defendants.
In her complaint, Aarons alleged that she had a homestead interest in
the Bel Air Property.6 Aarons argues that her exemption provided her with
a concrete and specific injury sufficient to establish injury in fact for
constitutional standing and that she is a person aggrieved for purposes of
prudential standing. We agree that her exemptions gave Aarons a
pecuniary interest in the administration of the Bel Air Property. But she
6
Aarons originally claimed a homestead exemption but amended her
exemptions after her case was converted and the Bel Air Property foreclosed. She
deleted the homestead exemption and exempted $10,275 in the claims she brought
against the Patch Defendants. Nonetheless, on appeal Aarons relies on her homestead
exemption to establish her pecuniary interest for purposes of standing. As further
explained in this discussion, the exact exemption applied is immaterial to our analysis.
17
neither owned nor controlled the property or the causes of action related to
it.
As the bankruptcy court explained, and Aarons does not challenge,
the confirmation and conversion orders provided that all property of the
debtor vested in the chapter 7 trustee upon conversion of Aarons’ case to
chapter 7. See, e.g., In re Baroni, 36 F.4th at 971–73; Pioneer Liquidating Corp.
v. U.S. Tr. (In re Consol. Pioneer Mortg. Entities), 264 F.3d 803, 807-08 (9th Cir.
2001). The Patch Defendants had not foreclosed the deed of trust against
the Bel Air Property prior to conversion of the bankruptcy case to chapter
7. Consequently, the Bel Air Property became property of the chapter 7
bankruptcy estate upon conversion. Moreover, any causes of action that
existed at the time of conversion became property of Aarons’ bankruptcy
estate as well.7 See generally Cusano v. Klein, 264 F.3d 936, 947-48 (9th
Cir.2001) (assets of the plaintiff’s bankruptcy estate included prepetition
causes of action for unpaid royalties); Runaj v. Wells Fargo Bank, 667 F.
Supp. 2d 1199, 1206 (S.D. Cal. 2009) (“It is well settled that prepetition
causes of action, including TILA claims, are assets included within the
meaning of property of the estate.”). Aarons does not argue otherwise.
Citing Estate of Spirtos v. One San Bernardino County Superior Court
7
At oral argument counsel for Aarons argued that she owned causes of action
that accrued post-conversion. This makes no sense as the causes of action arise from the
ownership of the Bel Air Property which was property of the estate. Accordingly, any
causes of action that arose post-conversion from the foreclosure are property of the
bankruptcy estate as well.
18
Case Numbered SPR 02211, 443 F.3d 1172, 1175-76 (9th Cir. 2006), the
bankruptcy court properly recognized that only the chapter 7 trustee has
authority to bring claims on behalf of the bankruptcy estate. Id. (citing
§ 323); see also § 704. 8 Spirtos amply supports the bankruptcy court’s
dismissal of Aarons’ complaint. See Est. of Spirtos, 443 F.3d at 1175-76; see
also Runaj, 667 F. Supp. 2d at 1206. Pursuant to Civil Rule 17(a)(1), made
applicable by Rule 7017, “[a]n action must be prosecuted in the name of the
real party in interest.” That party was the chapter 7 trustee, not Aarons.9
Aarons misunderstands the significance of her exemptions. Both the
original homestead exemption and the subsequent exemption in the claims
against the Patch Defendants implicitly recognize that the underlying
assets are property of the estate. Aarons’ exemptions gave her only a right
to receive proceeds if those assets were successfully liquidated. As the
Supreme Court explained in Schwab v. Reilly, 560 U.S. 770, 792 (2010), when
8
Admittedly, there are limited instances when others may pursue causes of
action held by a chapter 7 estate. See, e.g., Simantob v. Claims Prosecutor, LLC (In re
Lahijani), 325 B.R. 282, 288 n.10 (9th Cir. BAP 2005); § 522(h). Aarons does not argue that
she was authorized by either the trustee or court to file her complaint.
9 Civil Rule 17(a)(3) provides that “[t]he court may not dismiss an action for
failure to prosecute in the name of the real party in interest until, after an objection, a
reasonable time has been allowed for the real party in interest to ratify, join, or be
substituted in the action.” The trustee was allowed to participate in the adversary
proceeding and elected not to oppose the motion to dismiss though he requested that
the case be dismissed without prejudice. The court ultimately dismissed the case with
prejudice, but the trustee has not appealed. Though the trustee was never formally
substituted into the case, he participated in the case as the real party in interest.
Whatever Civil Rule 17(a)(3) may mean in this instance, and we express no opinion on
the subject, that issue has not been presented by this appeal.
19
examining the effect of a bankruptcy exemption, “[i]f an interested party
does not object to the claimed interest by the time the Rule 4003 period
expires, title to the asset will remain with the estate pursuant to § 541, and
the debtor will be guaranteed a payment in the dollar amount of the
exemption.” See also Hyman v. Plotkin (In re Hyman), 967 F.2d 1316, 1321 (9th
Cir. 1992) (holding that the California homestead exemption is a limited
and conditional right to receive a portion of the proceeds if the exempted
homestead is sold rather than an interest in the homestead itself); see also
Morgan-Busby v. Gladstone (In re Morgan-Busby), 272 B.R. 257, 265 (9th Cir.
BAP 2002) (expanding Hyman to other California exemptions and stating
that “California’s exemption laws do not provide Debtors with an
unassailable ownership interest in exempt property . . . . Rather, it restricts
Debtors’ exemption to the proceeds [of the exempt property], up to the
statutory maximum.”) Aarons’ exemptions did not remove the assets as
property of the bankruptcy estate subject to the exclusive administration by
the trustee.10 See generally Est. of Spirtos, 443 F.3d at 1175-76. Again, she has
not argued otherwise.
10 The Supreme Court in Schwab explained how a debtor could exempt the
entirety of an asset: “Where, as here, it is important to the debtor to exempt the full
market value of the asset or the asset itself, our decision will encourage the debtor to
declare the value of her claimed exemption in a manner that makes the scope of the
exemption clear, for example, by listing the exempt value as ‘full fair market value
(FMV)’ or ‘100% of FMV.’” Schwab, 560 U.S. at 792-93 (emphasis added). See also
Masingale v. Munding (In re Masingale), 644 B.R. 530, 540-41 (9th Cir. BAP 2022). Aarons
did not attempt to exempt the full fair market value of either the Bel Air Property or the
causes of action.
20
Both the Bel Air Property, and the causes of action related to it, were
property of the chapter 7 estate when Aarons filed her lawsuit against the
Patch Defendants.11 Despite her potential pecuniary interest in the causes
of action based on her exemption, she was not the real party in interest.
Accordingly, she could not prosecute the estate’s causes of action. The
record demonstrates that the court and the parties recognized this
fundamental fact and allowed the trustee to participate in the adversary
proceeding as the real party in interest. Ultimately, after two hearings on
the motion to dismiss in which the trustee participated, the court
concluded: “The Chapter 7 Trustee has elected not to oppose the MTD so
he has waived and forfeited any defenses to dismissal on the merits.” The
trustee did not appeal the court’s decision.
While Aarons held some pecuniary interests in the Bel Air Property
and the causes of action she filed against the Patch Defendants by virtue of
her exemptions, those assets belonged to the bankruptcy estate. She is not
the real party in interest and cannot bring or prosecute the causes of action
she filed against the Patch Defendants. As a matter of law, her exemptions
11 Property of the estate may also be returned to a debtor by abandonment under
§ 554. Runaj, 667 F. Supp. 2d at 1206-07. The record reflects that the trustee originally
attempted to abandon the Bel Air Property, but not the causes of action. However, the
bankruptcy court denied abandonment as moot because the Patch Defendants had
already foreclosed. No motion was ever made to abandon the causes of action and the
trustee’s participation in the adversary proceeding, including the two hearings on the
motions to dismiss, further emphasize that the estate did not abandon the causes of
action before the court dismissed the complaint.
21
did not confer on her any property interest in the Bel Air Property, or any
related causes of action, and the court properly dismissed her complaint.
3. The court did not err in dismissing the adversary proceeding
with prejudice.
Civil Rule 15 is made applicable in adversary proceedings by Rule
7015. Under Civil Rule 15, a bankruptcy court should grant leave to amend
when dismissing under Civil Rule 12(b)(6) unless amendment would be
futile. Ebner v. Fresh, Inc., 838 F.3d 958, 968 (9th Cir. 2016) (citing Doe v.
United States, 58 F.3d 494, 497 (9th Cir. 1995)); see also Lopez v. Smith, 203
F.3d 1122, 1130 (9th Cir. 2000) (en banc). This is true even when leave to
amend was not requested in the trial court. Lopez, 203 F.3d at 1127; Cook,
Perkiss & Liehe, Inc. v. N. Cal. Collection Serv., Inc., 911 F.2d 242, 247 (9th Cir.
1990).
While devoting little time and effort to the issue, Aarons mentions in
passing that she should have been granted leave to amend because she
believes that some of the shortcomings identified by the bankruptcy court
could have been fixed by amendment. But nothing she said in her
complaint, in her opposition to the dismissal motion, or on appeal
sufficiently addressed the deficiencies in her pleadings arising from her
release of pre-confirmation claims and the estate’s exclusive right to bring
the post-confirmation claims. Nor are we aware of any allegations
consistent with her existing pleadings that could cure these deficiencies in
her complaint. As a result, any attempt by Aarons to amend the complaint
22
would have been futile, and the bankruptcy court did not err when it
dismissed it with prejudice. See Garmon v. Cnty. of L.A., 828 F.3d 837, 846
(9th Cir. 2016); Intri-Plex Techs., Inc. v. Crest Grp., Inc., 499 F.3d 1048, 1056
(9th Cir. 2007).
CONCLUSION
For the reasons set forth above, we AFFIRM.
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