FILED
MAY 25 2012
SUSAN M SPRAUL, CLERK
1 U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
2
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5 In re: ) BAP No. CC-11-1322-KiMkH
)
6 JEFFREY A. CLARK and ) Bk. No. 00-11061-VK
JODENE M. CLARK, )
7 )
Debtors. )
8 )
)
9 MARTIN STRAND; GABRIELLE )
STRAND, )
10 )
Appellants, )
11 )
v. ) M E M O R A N D U M1
12 )
JEFFREY A. CLARK; JODENE M. )
13 CLARK, )
)
14 Appellees. )
______________________________)
15
Submitted Without Oral Argument
16 on February 24, 20122
17 Filed - May 25, 2012
18 Appeal from the United States Bankruptcy Court
for the Central District of California
19
Honorable Victoria S. Kaufman, Bankruptcy Judge, Presiding
20
Appearances: Christopher C. Gautschi, Esq. on brief for
21 Appellants Martin Strand and Gabrielle Strand;
Frank J. Lozoya of Law Offices of Lozoya & Lozoya
22 on brief for Appellees Jeffery A. Clark and Jodene
M. Clark.
23
24
1
This disposition is not appropriate for publication.
25 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
26 Cir. BAP Rule 8013-1.
27 2
In an order dated February 16, 2012, the Panel determined
that based on the parties’ stipulation to submit on the briefs
28 this matter was suitable for disposition without oral argument.
Fed. R. Bankr. P. 8012; 9th Cir. BAP R. 8012-1.
1
Before: KIRSCHER, MARKELL, and HOLLOWELL, Bankruptcy Judges.
2
3
Appellants, Martin and Gabrielle Strand (“Strands”), appeal
4
an order from the bankruptcy court denying their motion to reopen
5
the chapter 73 bankruptcy case of appellees, Jeffrey and Jodene
6
Clark (“Clarks”). We conclude the bankruptcy court applied an
7
incorrect standard of law by going beyond the scope of the motion
8
to reopen and reviewing the merits of the underlying claims
9
Strands wish to bring. Therefore, we must REVERSE and REMAND with
10
instruction to reopen the case.
11
I. FACTUAL AND PROCEDURAL BACKGROUND
12
A. Events leading up to the Motion to Reopen.
13
This case has a long, litigious history, but little of it was
14
included in the record.4 In 1990, Strands owned a rental house in
15
Simi Valley, California, which they had been renting to the Clarks
16
for several years (the “Property”).
17
On November 6, 1990, the parties executed a written agreement
18
for the Property entitled “Equity-Share Partnership Agreement with
19
20
21 3
Unless otherwise indicated, all chapter, section and rule
references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
22 to the Federal Rules of Bankruptcy Procedure, Rules 1001-9036, as
enacted and promulgated prior to the effective date of The
23 Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,
Pub. L. 109-8, 119 Stat. 23.
24
4
Because important portions of the record were missing, we
25 reviewed the Ventura County Court docket (“VCC”), case no.
SC044691, to determine the facts and procedural history of this
26 case. The Panel can take judicial notice of relevant proceedings
in other courts. See Kowalski v. Gagne, 914 F.2d 299, 305 (1st
27 Cir. 1990)(“It is well-accepted that federal courts may take
judicial notice of proceedings in other courts if those
28 proceedings have relevance to the matters at hand.”).
-2-
1 Right-to-Purchase Option” (“Partnership Agreement”). In the
2 Partnership Agreement, Clarks agreed to purchase the Property from
3 Strands for $192,200. Specifically, Clarks were to make a $1,200
4 down payment, and the balance of the purchase price was to be
5 financed by a $131,250 conventional loan secured by a first deed
6 of trust and by a $59,750 loan from Strands secured by a second
7 deed of trust. The parties further agreed to share, on a 60/40
8 basis, the appreciation in the Property above $192,200, if any,
9 “from the date of this agreement until the agreement is concluded
10 and satisfied.” The Partnership Agreement would be “concluded and
11 satisfied” when the parties received their respective “percentage
12 share amount(s) . . ., and the pay-off of the remaining balance of
13 the second deed of trust to [the Strands].” Strands’ 40% share in
14 the Property’s appreciation was to be inclusive of any interest
15 payment portions and exclusive of any principal payment portions
16 paid toward the $59,750 second deed of trust. The Partnership
17 Agreement gave Strands the option to purchase the Property under
18 certain conditions. No copy of a promissory note or a second deed
19 of trust is in the record. It is uncertain whether these
20 documents were ever created and/or recorded.5
21 Several days prior to the execution of the Partnership
22 Agreement, Strands executed a grant deed conveying the Property
23 without reservation to Clarks as joint tenants on October 24,
24 1990. The grant deed, recorded on November 2, 1990, in Ventura
25 County, does not refer to any partnership or partnership interest.
26
27 5
In an appeal to the BAP regarding the granting of a stay
relief motion filed by Strands (discussed infra), Clarks alleged
28 that a second deed of trust was drafted but never recorded.
-3-
1 The escrow instructions, dated October 24, 1990, are also silent
2 as to any partnership and state that the grant deed was being
3 recorded to establish the Property in the name of “Clarks only.”
4 On September 30, 1998, Strands executed a Notice of Lien in
5 Ventura County claiming a contractual ownership interest in the
6 Property. For reasons unknown, the Notice was not recorded until
7 March 30, 1999.
8 Clarks filed a chapter 7 bankruptcy case on February 1, 2000.
9 In their Schedule A, Clarks listed the Property with a market
10 value of $183,000 and a secured claim against it for $172,495, but
11 they failed to list the nature of their interest in it.
12 Schedule F reflects an unsecured “personal loan” of $59,750 owed
13 to Mr. Strand, whose address was “unknown.” Mrs. Strand was not
14 named anywhere in Clarks’ schedules. Clarks have alleged that
15 they were unable to contact Strands because Strands had moved out
16 of state. Clarks did not schedule an interest in any partnership
17 in their Schedule B. They also did not disclose their cross-
18 claims against Strands in their Schedule B or their Statement of
19 Financial Affairs. The chapter 7 trustee administered Clarks’
20 case as a “no asset” case, and Clarks received their discharge in
21 May 2000. Their bankruptcy case was closed that same month.
22 In November 2005 and unaware of the bankruptcy, Strands sued
23 Clarks in state court alleging claims premised on the
24 partnership’s ownership of the Property (“Partnership Case”).
25 Specifically, Strands alleged that the Property was the sole asset
26 of the partnership. They sought dissolution of the partnership,
27 an accounting, and the appointment of a receiver to wind up the
28 partnership’s affairs and to sell the Property. Strands further
-4-
1 sought declaratory relief to ascertain their interest in the
2 Property and to receive their 40% share of the Property’s equity.
3 In their answer, Clarks contended that Strands’ suit was
4 barred in light of the discharge in 2000. Clarks further
5 contended that the alleged partnership dissolved by its own terms
6 in 2000. Clarks filed a cross-complaint, alleging claims for
7 slander of title and abuse of process.
8 In September 2006, Strands filed a motion to reopen Clarks’
9 bankruptcy case which was granted on November 30, 2006.6 In
10 August 2007, Strands moved for relief from stay to continue
11 prosecuting the Partnership Case in state court.7 In October
12 2007, the bankruptcy court entered an order granting the motion,
13 which states:
14 The parties may return to the state court and litigate
all issues regarding the existence if any and the
15 effect if any of the alleged partnership, including a
determination of what the partnership assets are if any,
16 dissolution of the partnership and disposition of the
partnership assets and the rights and obligations of the
17 partners.
18 There shall be no personal liability of the debtors. The
rights of contribution, reimbursement, and satisfaction
19 of claims against the partnership property may be
determined, including if necessary the determination of
20 the existence and if necessary the status of any liens
against the partnership assets, if any.
21
22
23
6
None of the moving papers were provided in the record, and
24 they are not available on the bankruptcy court’s electronic
docket.
25
7
We were also not provided a copy of these moving papers,
26 and they are not available on the bankruptcy court’s electronic
docket. However, in reviewing the Panel’s Memorandum regarding
27 Clarks’ appeal of this matter (CC-07-1393), Strands had argued
that Clarks’ interest in the alleged partnership remained property
28 of the estate because it had not been scheduled.
-5-
1 Clarks appealed the stay relief order to the BAP (CC-07-1393).
2 The Panel affirmed, reasoning that if the partnership did exist,
3 Clarks’ interest in it was still property of the estate because it
4 was not disclosed. As such, it did not revert to Clarks upon
5 discharge. Mem. (Apr. 4, 2008) at 8. Nothing suggests that
6 Clarks at that time disputed Strands’ status as a creditor in
7 their bankruptcy case.
8 The parties returned to state court to litigate the
9 Partnership Case in 2008. Strands later moved for summary
10 judgment on Clarks’ cross-complaint and for summary adjudication
11 of their first cause of action (dissolution, accounting, and sale
12 of partnership property); the request was denied on March 5, 2009.
13 In the state court’s opinion, triable issues of material fact
14 remained as to whether a partnership existed regarding the
15 Property, who owned the Property (Clarks or the partnership), the
16 significance of listing the Strands’ debt as unsecured in Schedule
17 F, and whether an interest in the alleged partnership, if it
18 existed, remained an asset of the bankruptcy estate. The matter
19 was set for a 5-day jury trial.
20 Trial took place on the Partnership Case in or about July
21 2009. VCC dkt. nos. 77-82. The state court granted Clarks’
22 motion in limine to exclude the Partnership Agreement and their
23 oral motion for nonsuit. Strands appealed to the California Court
24 of Appeals, Second District. See case no. B218861.8 The
25 appellate court held that the state court erred in determining the
26
8
We found a copy of the appellate court’s Memorandum
27 Decision dated June 22, 2010, at: http://www.leagle.com/xml
Result.aspx?xmldoc=in%20caco%2020100622034.xml&docbase=cslwar3-200
28 7-curr.
-6-
1 Partnership Agreement should be excluded from evidence based on
2 the parol evidence rule and reversed. The appellate court
3 reasoned that the parol evidence rule did not apply in this case
4 because the grant deed was not integrated and did not serve as the
5 exclusive embodiment of the parties’ agreement.9 The reversal of
6 the decision on Clarks’ motion in limine led the appellate court
7 also to reverse the state court’s decision granting their motion
8 for nonsuit. The Partnership Case was remanded for a new trial.
9 The parties continued litigating the Partnership Case in
10 state court. A trial was set for January 10, 2011. For reasons
11 not evident in the record, on December 27, 2010, just days before
12 trial, Strands voluntarily dismissed the Partnership Case without
13 prejudice. On January 10, 2011, the parties appeared and informed
14 the state court that the complaint had been dismissed. Counsel
15 for Clarks, however, advised the court that their cross-complaint
16 remained. Trial was continued to January 18, 2011. On
17 January 18, counsel for Strands advised the state court that he
18 was filing a motion to vacate the trial, which Clarks opposed.
19 The trial was repeatedly continued until May 24, 2011. See VCC
20 dkt. nos. 154, 163, 169, 176. Just prior to the May 24 trial
21 date, Clarks dismissed, without prejudice, their cross-complaint.
22
9
In the Memorandum, the California Court of Appeals also
23 stated:
24 The partnership agreement was meant to be part of the
bargain by which the residence was deeded to the Clarks.
25 The partnership agreement does not directly contradict the
express terms of the grant deed. Pursuant to the
26 partnership agreement, the Clarks agreed to purchase the
residence from the Strands. The grant deed effectuated
27 that purchase. The partnership agreement does not state
that title to the residence shall be held in the name of
28 the partnership.
-7-
1 Id. at dkt. no. 177.10
2 B. The Motion to Reopen.
3 Claiming ignorance of the second closing of Clarks’
4 bankruptcy case in September 2008, Strands on April 16, 2011 moved
5 to again reopen the case under § 350(b). Strands wished to do the
6 following upon reopening: (1) appoint a chapter 7 trustee to
7 administer estate assets that Strands alleged were concealed by
8 Clarks; (2) enjoin Clarks from personally prosecuting undisclosed
9 causes of action that belonged to the estate; (3) file an
10 adversary proceeding to determine the validity, extent, or
11 priority of a lien or other interest in property; (4) pursuant to
12 § 523(a)(3)(B), file a nondischargeability action under
13 § 523(a)(2)(A), (4), or (6); and (5) obtain declaratory relief
14 relating to the foregoing.
15 Strands contended that Clarks had failed to disclose their
16 ownership interest in the partnership or that Strands held an
17 interest in the Property. Strands further contended that Clarks
18 failed to disclose the existence of Strands’ lien on the Property,
19 the Partnership Agreement, the promissory note, the second deed of
20 trust, or the recording of these lien rights in March 1999.
21 Finally, Strands contended that Clarks were unlawfully prosecuting
22 cross-claims that belonged to the estate and the chapter 7 trustee
23 due to Clarks’ failure to disclose them.
24 Clarks opposed the motion, contending that Strands lacked
25
10
While the state court litigation was pending, the
26 bankruptcy court closed Clarks’ case for the second time on
September 11, 2008. Under Local Rule 5010-1(g), if no motion or
27 adversary proceeding is pending 30 days after the case is reopened
and if no trustee has been ordered appointed, the case may be
28 closed without further notice.
-8-
1 standing to bring it as they were not creditors or a party in
2 interest due to their dismissal of the Partnership Case.
3 Alternatively, even if Strands had standing, Clarks argued that
4 the motion should be denied because: (1) Strands had already
5 obtained relief to litigate the same claims in state court, which
6 they lost when they dismissed them; (2) Strands’ alleged claims
7 were the same partnership claims they litigated in state court and
8 were therefore barred due to the dismissal; (3) the statute of
9 limitations had run long ago on Strands’ alleged partnership
10 claims that arose in 1990; (4) the grant deed and escrow
11 instructions showed no partnership interest or intent to grant a
12 partnership interest in the Property; and (5) laches and unclean
13 hands prevented Strands from reopening the case.11
14 A hearing on the motion was held on May 17, 2011. The
15 bankruptcy court was initially inclined to deny the motion
16 because: (1) Strands lacked standing due to the dismissal of their
17 complaint; and (2) because they failed to raise any deficiency
18 issues in Clarks’ schedules when they reopened the case the first
19 time in 2006. Hr’g Tr. (May 17, 2011) at 1:10-2:5. In a colloquy
20 with Strands’ counsel, the bankruptcy court noted that Strands
21 knew about, but did not raise, any potential standing issues of
22 Clarks in their cross-claims when Strands moved to reopen the
23 bankruptcy case in 2006. Id. at 5:5-14. Counsel for Clarks
24 contended that the cross-claims for slander of title and abuse of
25
26 11
At the time the motion to reopen had been filed and heard,
the trial on Clarks’ cross-claims in the Partnership Case was
27 pending in state court. However, Clarks dismissed their cross-
claims, without prejudice, on May 23, 2011, about a week after the
28 hearing on the motion to reopen.
-9-
1 process arose in 2003, and therefore were postpetition claims
2 belonging to Clarks. Id. at 12:16-20. After hearing argument
3 from the parties, the bankruptcy court denied the motion to
4 reopen:
5 The Court’s going to deny the motion to reopen on the
basis that the movants don’t have standing and that they
6 delayed inappropriately in trying to get this relief
since they knew about any alleged claims that the debtors
7 had when they sought relief from the automatic stay and
obtained relief from the automatic stay to litigate
8 issues in -- the state court, and that it appears that
they’re now trying to preclude the debtors from pursuing
9 their cross claims by getting a trustee involved in an
untimely way when they could have done it years ago.
10
11 Id. at 15:25-16:10.
12 On June 9, 2011, the bankruptcy court entered an order
13 denying the motion to reopen, which states that it was denied “for
14 the reasons stated in Debtors’ Opposition papers and for the
15 reasons expressed on the record.” Strands timely appealed.
16 II. JURISDICTION
17 The bankruptcy court had jurisdiction under 28 U.S.C.
18 §§ 157(b)(2)(A) and 1334. We have jurisdiction under 28 U.S.C.
19 § 158.
20 III. ISSUE
21 Did the bankruptcy court abuse its discretion in denying the
22 motion to reopen?
23 IV. STANDARD OF REVIEW
24 Denial of a motion to reopen a bankruptcy case is reviewed
25 for an abuse of discretion. Lopez v. Specialty Rest. Corp. (In re
26 Lopez), 283 B.R. 22, 26 (9th Cir. BAP 2002). To determine whether
27 the bankruptcy court abused its discretion, we conduct a two-step
28 inquiry: (1) we review de novo whether the bankruptcy court
-10-
1 “identified the correct legal rule to apply to the relief
2 requested” and (2) if it did, we review under the clearly
3 erroneous standard whether the bankruptcy court’s application of
4 the legal standard was illogical, implausible or “without support
5 in inferences that may be drawn from the facts in the record.”
6 United States v. Hinkson, 585 F.3d 1247, 1261-62 (9th Cir.
7 2009)(en banc).
8 V. DISCUSSION
9 A. Section 350(b) and Rule 5010.
10 A motion to reopen a bankruptcy case is governed by § 350(b)
11 and Rule 5010. “A case may be reopened in the court in which such
12 case was closed to administer assets, to accord relief to the
13 debtor, or for other cause.” § 350(b). Motions to reopen can be
14 made by the debtor or any party in interest. Rule 5010. The
15 decision whether to permit a case to be reopened is discretionary
16 with the court. In re Lopez, 283 B.R. at 27.
17 B. The bankruptcy court applied an erroneous standard of law
when it denied the motion to reopen.
18
1. Strands had standing.
19
20 One of the reasons the bankruptcy court denied the motion to
21 reopen was because Strands lacked standing. Unfortunately, the
22 court did not fully articulate how or why it reached this
23 conclusion, other than its statement at the beginning of the
24 hearing that Strands lacked standing because they dismissed their
25 Partnership Case. Hr’g Tr. at 1:10-23. We disagree. Any
26 potential partnership claims exist whether or not Strands have a
27 complaint pending in state court.
28 If the bankruptcy court was applying the doctrines of issue
-11-
1 or claim preclusion to find that Strands lacked standing - i.e.,
2 that Strands’ claims were precluded from being heard due to the
3 dismissal of their Partnership Case in state court - this was
4 erroneous. Under California law, a voluntary dismissal without
5 prejudice is not a final judgment on the merits. Syufy Enters. v.
6 City of Oakland, 128 Cal. Rptr. 2d 808, 816 (Cal. Ct. App. 2002)
7 (citing Associated Convalescent Enters. v. Carl Marks & Co., Inc.,
8 108 Cal. Rptr. 782 (Cal. Ct. App. 1973)). Under CCP § 581(b)(1),
9 an action may be dismissed with or without prejudice upon written
10 request of the plaintiff to the clerk at any time before the
11 actual commencement of trial. CCP § 581(c) further provides that
12 a plaintiff may dismiss his or her complaint, or any cause of
13 action asserted in it, in its entirety, or as to any defendant or
14 defendants, with or without prejudice prior to the actual
15 commencement of trial.
16 Here, the Partnership Case was dismissed prior to the actual
17 commencement of trial, at least the new trial ordered by the
18 California Court of Appeals, and Strands obtained a voluntary
19 dismissal without prejudice. Therefore, Strands’ voluntary
20 dismissal without prejudice fails to satisfy one of the
21 requirements of both preclusion doctrines - a final judgment on
22 the merits. As a result, neither doctrine prevented Strands from
23 bringing their claims in the bankruptcy court or the state court.
24 However, this error aside, if Strands are not a “party in
25 interest” under Rule 5010 they lacked standing to bring the motion
26 to reopen. We could not locate, and the parties have not cited,
27 any controlling authority regarding “who” qualifies as a “party in
28 interest” under the Rule. The Tenth Circuit has held that,
-12-
1 notwithstanding the expansive definition of “party in interest” in
2 § 1109(b),12 for purposes of reopening a bankruptcy case the
3 concept of standing is “implicitly confined to debtors, creditors,
4 or trustees, each with a particular and direct stake in reopening
5 cognizable under the Bankruptcy Code.” Nintendo Co. v. Patten
6 (In re Alpex Computer Corp.), 71 F.3d 353, 356-57 (10th Cir. 1995)
7 (but also recognizing that certain circumstances may qualify a
8 “debtor of a debtor” as a party in interest with standing to
9 reopen).
10 Clarks argued in their opposition that Strands were no longer
11 a creditor and therefore lacked standing. As a chapter 7 no-asset
12 case with no bar date, if the prepetition debt to Strands
13 constituted an unsecured debt (not excepted under § 523) it was
14 discharged in 2000, even if Clarks failed to schedule it. Beezley
15 v. Cal. Land Title Co. (In re Beezley), 994 F.2d 1433, 1435 (9th
16 Cir. 1993); § 727. The record reflects that the second deed of
17 trust necessary to secure Strands’ loan to Clarks, if one ever
18 existed, was never recorded; hence, the need to file the Notice of
19 Lien. As a result, the $59,750 loan was never secured and any
20 personal liability Clarks had to Strands was discharged. Thus, it
21 would seem that Strands are not creditors.
22 On the other hand, Strands did file, prepetition, the Notice
23 of Lien against the Property based upon a contractual ownership
24
25 12
Section 1109(b) provides:
26 A party in interest, including the debtor, the trustee, a
creditors' committee, an equity security holders' committee,
27 a creditor, an equity security holder, or any indenture
trustee, may raise and may appear and be heard on any issue
28 in a case under this chapter.
-13-
1 interest, i.e., the Partnership Agreement, for which Clarks have
2 pursued a slander of title/abuse of process action. Strands could
3 pursue the property interest claim pursuant to the Notice of Lien
4 in a nonbankruptcy forum, but face Clarks’ cross-claims that
5 appear to be property of the estate given nondisclosure and the
6 lack of abandonment by the trustee of any estate interest in those
7 claims. Consequently, Strands were attempting to determine
8 through the reopening of this case if the alleged cross-claims by
9 Clarks remained property of the estate requiring trustee
10 involvement.
11 Thus, at minimum, the cross-claims gave Strands a pecuniary
12 interest in the case, which we conclude conferred standing. Under
13 Ninth Circuit authority, “the court has the duty to reopen an
14 estate whenever prima facie proof is made that it has not been
15 fully administered.” In re Lopez, 283 B.R. at 27 (citing Kozman
16 v. Herzig (In re Herzig), 96 B.R. 264, 266 (9th Cir. BAP 1989)).
17 Further, a court can reopen a case sua sponte. Mullendore v.
18 United States (In re Mullendore), 741 F.2d 306 (10th Cir. 1984)
19 (construing former Rule 515); In re Searles, 70 B.R. 266 (D. R.I.
20 1987); In re Tall, 79 B.R. 291 (Bankr. S.D. Ohio 1987); In re
21 Warren, 24 B.R. 846 (Bankr. W.D. Ky. 1982). Therefore, even if
22 Strands lacked standing, the bankruptcy court could have reopened
23 the case sua sponte based on the prima facie proof that estate
24 assets have not been administered.
25 2. Any partnership interest held by Clarks and their cross-
claims were, and remain, property of the estate.
26
27 Section 541(a) provides that the commencement of a bankruptcy
28 case “creates an estate.” With certain exceptions not relevant
-14-
1 here, § 541(a)(1) provides that property of the estate includes
2 “all legal or equitable interests of the debtor in property as of
3 the commencement of the case.” A debtor has a mandatory,
4 affirmative duty to disclose all assets to the bankruptcy court.
5 § 521(1).
6 Any legal or equitable interests Clarks held in the
7 partnership and their cross-claims against Strands became property
8 of the bankruptcy estate as of the petition date. Cusano v.
9 Klein, 264 F.3d 936, 945 (9th Cir. 2001)(assets of the estate
10 include any of the debtor’s causes of action). The accrued cross-
11 claims were property of the estate even if Clarks were unaware of
12 them when they filed for bankruptcy protection.13 Crum v.
13 Tomlinson (In re Hettick), 413 B.R. 733, 752 (Bankr. D. Mont.
14 2009). When debtors fail to properly schedule an asset, the asset
15 remains property of the estate until administered or abandoned
16 formally by the trustee, even after the case is closed.
17 In re Lopez, 283 B.R. at 31-32; § 554(d)(property not abandoned or
18 administered remains property of estate). A leading treatise
19 explains abandonment as follows:
20 Abandonment presupposes knowledge. There can, as a rule,
therefore be no abandonment by mere operation of law of
21 property that was not listed in the debtor's schedules or
otherwise disclosed to creditors. This principle is
22 recognized in section 554(c) which provides that, unless
the court orders otherwise, property of the estate that
23 is neither abandoned nor administered in the case remains
property of the estate. *** If the property is later
24 discovered and is valuable the court may reopen the
case[.]
25
26 13
Although counsel for Clarks argued at the motion to reopen
hearing that the cross-claims did not accrue until 2003 and
27 therefore belonged to Clarks, the cross-claims are based on
Strands’ filing of the Notice of Lien, which occurred prepetition
28 in 1999. Clarks concede this fact in their cross-complaint.
-15-
1 5 COLLIER ON BANKRUPTCY, ¶ 554.03 (Henry Somers & Alan Resnick, eds.
2 16th ed. 2011)(footnotes omitted). Thus, the chapter 7 trustee is
3 the only proper party in interest with standing to prosecute the
4 cross-claims. See § 323; Rule 6009; and Haley v. Dow Lewis
5 Motors, Inc., 85 Cal. Rptr. 2d 352, 356 (Cal. Ct. App. 1999)(in
6 the case of an omitted cause of action, the trustee is the real
7 party in interest and the debtor lacks standing to prosecute it).
8 3. The bankruptcy court applied an incorrect legal standard
to the motion to reopen.
9
10 Strands contend the bankruptcy court abused its discretion by
11 going beyond the permissible scope of a motion to reopen and
12 prejudging the merits of the underlying dispute. We agree.
13 Reopening a case under § 350(b) is typically ministerial and
14 “‘presents only a narrow range of issues: whether further
15 administration appears to be warranted; whether a trustee should
16 be appointed; and whether the circumstances of reopening
17 necessitate payment of another filing fee.’” In re Lopez,
18 283 B.R. at 26 (quoting Menk v. Lapaglia (In re Menk), 241 B.R.
19 896, 916-17 (9th Cir. BAP 1999)). “Extraneous issues should be
20 excluded.” In re Menk, 241 B.R. at 917. While “considerations of
21 economy make it sensible to combine consideration of the motion to
22 reopen with consideration of dispositive issues in the underlying
23 litigation, and although it is tempting to say that the reopening
24 motion entitles the court to perform a gatekeeping function that
25 justifies inquiring in to the related relief that will be sought,
26 such inquiries are in fact inappropriate.” Staffer v. Predovich
27 (In re Staffer), 306 F.3d 967, 972 (9th Cir. 2002)(reversing
28 bankruptcy court for denying motion to reopen on the ground that
-16-
1 underlying suit was barred by laches)(citations omitted).
2 In short, on a motion to reopen it is procedurally improper
3 for the bankruptcy court to consider the merits of the underlying
4 dispute. In re Menk, 241 B.R. at 916; In re Dunning Bros. Co.,
5 410 B.R. 877, 887 (Bankr. E.D. Cal. 2009)(conflating the reopening
6 question with the merits of the underlying dispute creates a risk
7 that the adversary process will be inappropriately truncated or
8 preempted entirely).
9 The bankruptcy court applied an incorrect standard of law
10 when it reviewed the underlying merits of the relief sought by
11 Strands and denied their motion to reopen on the basis of laches,
12 or issue or claim preclusion, or that their claims were time
13 barred.14 Accordingly, the bankruptcy court abused its discretion
14 in denying the motion to reopen. Hinkson, 585 F.3d at 1262.
15 4. The bankruptcy case should be reopened.
16 The question of whether Clarks’ bankruptcy case should be
17 reopened required only a decision whether there may be unscheduled
18 assets that could be administered by a trustee. Here, at least
19 two assets were not disclosed that belong to the estate. If the
20 case is not reopened and the cross-claims belong to the estate,
21 then Strands run the risk of dismissal of any future suit in state
22 court on the ground that Clarks lack standing. This is what
23 Strands were trying to avoid by bringing the motion. Why Strands
24 failed to raise this issue in the bankruptcy court at the time of
25
14
Even if it were proper for the bankruptcy court to review
26 the underlying merits of the dispute, as we noted above, issue or
claim preclusion does not prevent Strands from bringing their
27 claims to either the state court or bankruptcy court because their
voluntary dismissal without prejudice is not a final judgment on
28 the merits.
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1 the first reopening in 2006 is unknown. It is also unknown why
2 Strands pursued the Partnership Case in state court when they knew
3 Clarks’ standing may be an issue.
4 Nonetheless, further administration is warranted in this
5 case. When faced with the prima facie existence of undisclosed
6 estate assets, the best solution is to reopen the case and appoint
7 a trustee to deal with the assets. In fact, if the purpose of the
8 reopening is to deal with unscheduled assets as property of the
9 estate, then it is per se an abuse of discretion not to order
10 appointment of a trustee. In re Lopez, 283 B.R. at 32 (Klein, J.,
11 concurring).15
12 VI. CONCLUSION
13 Based on the foregoing reasons, we REVERSE the bankruptcy
14 court’s decision concerning standing and reopening and REMAND with
15 instruction that the bankruptcy court reopen the case, that a
16 trustee be appointed and that further proceedings consistent with
17
18
19
15
In the motion to reopen, Strands sought under
20 § 523(a)(3)(B) to file a claim under § 523(a)(2), (4) or (6).
Because Strands did not receive notice of the bankruptcy, their
21 action against Clarks for nondischargeability of a debt under
§ 523(a)(2), (4) or (6) is not subject to the time limits set
22 forth in Rule 4007(c). See § 523(a)(3)(B) (a discharge under
§ 727 does not discharge a debtor from a debt under § 523(a)(2),
23 (4) or (6) that was not scheduled in time to permit the timely
request for a determination of dischargeability, unless the
24 creditor had notice or actual knowledge of the case in time for
timely request).
25
Motions to reopen are not a prerequisite for commencing an
26 action for nondischargeability of a debt under § 523(a)(3)(B).
In re Staffer, 306 F.3d at 972-73. Thus, Strands were free to
27 file their nondischargeability action without permission of the
bankruptcy court. However, we note that it could be subject to a
28 laches defense. Id. at 973.
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1 this memorandum be undertaken.16
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16
By ordering reopening of the case, we are not implying that
26 Strands’ claims have any merit. Clarks (or the appointed trustee)
are free to raise any defenses available. In re Staffer, 306 F.3d
27 at 972-73. It could very well be that Strands’ claims are time
barred, that they are precluded on the ground of laches, or that
28 some other legal defense applies. Id.
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