FILED NOT FOR PUBLICATION JUL 11 2024 SUSAN M. SPRAUL, CLERK U.S. BKCY.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 Nos. CC-23-1168-SCL EAST COAST FOODS, INC., CC-23-1169-SCL Debtor. Bk. No. 2:16-bk-13852-BB EAST COAST FOODS, INC., Appellant, Adv. No. 2:23-ap-01192-BB v. DEVELOPMENT SPECIALISTS, INC.; MEMORANDUM* BRADLEY D. SHARP, Chapter 11 Trustee, Appellees.
Appeal from the United States Bankruptcy Court for the Central District of California Sheri Bluebond, Bankruptcy Judge, Presiding
Before: SPRAKER, CORBIT, and LAFFERTY, Bankruptcy Judges.
INTRODUCTION
East Coast Foods, Inc. (“ECF”) is the reorganized debtor in the above-
captioned chapter 11 bankruptcy case. 1 ECF has repeatedly sought to sue
* 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. Unless specified otherwise, all chapter and section references are to the 1
Bankruptcy Code, 11 U.S.C. §§ 101–1532, all “Rule” references are to the Federal Rules the former chapter 11 trustee, Bradley D. Sharp, and Development
Specialists, Inc. (“DSI”), the company through which Sharp does business,
for actions he took as chapter 11 trustee. None of its attempts have been
successful. The bankruptcy court previously ordered ECF to dismiss two of
its prior lawsuits based on the “Barton doctrine.”2 We affirmed the
bankruptcy’s court denial of ECF’s Barton motion in a prior decision. E.
Coast Foods, Inc. v. Dev. Specialists, Inc. (In re E. Coast Foods, Inc.) (“East Coast
I”), 652 B.R. 910 (9th Cir. BAP 2023).
The bankruptcy court dismissed the latest action, an adversary
proceeding, with prejudice when ECF failed to appear at the initial status
conference. ECF then moved for reconsideration under Rule 9023 and
sought an extension of the time to serve the summons and complaint under
Civil Rule 4(m). The bankruptcy court denied both motions. The court
explained that dismissal was appropriate for a variety of reasons. ECF now
appeals from the dismissal order, the reconsideration denial order, and the
extension denial order.
We affirm the dismissal of the complaint based on ECF’s lack of
standing as well as the denial of leave to amend the complaint. There is no
set of facts consistent with the existing complaint that ECF plausibly could
have alleged to cure ECF’s lack of standing. However, once the court
of Bankruptcy Procedure, and all “Civil Rule” references are to the Federal Rules of Civil Procedure. 2 See Barton v. Barbour, 104 U.S. 126 (1881). 2 correctly determined that ECF lacked standing, it lacked subject matter
jurisdiction to reach the substantive issues it identified as additional
grounds for dismissal. Nor did the court render sufficient findings to
support a dismissal based on lack of prosecution or violation of local rules.
Accordingly, the bankruptcy court’s dismissal order is hereby ordered
MODIFIED to dismiss solely for lack of standing without leave to amend.
As modified, we AFFIRM. Dismissal as modified is without prejudice to
the right of the claims’ true owner to pursue or otherwise dispose of such
claims, if any remain viable, if so desired.
As for the denial of reconsideration, review of this ruling largely has
been rendered unnecessary by our resolution of the appeal from the
dismissal order. But to the extent ECF sought reconsideration of the
bankruptcy court’s standing decision, ECF failed to present sufficient
grounds for reconsideration. Therefore, we AFFIRM the denial of
reconsideration. Similarly, because the court properly dismissed the
adversary proceeding for lack of jurisdiction, there was no justification to
extend the time to serve the summons and complaint in the dismissed
action. Thus, we AFFIRM the extension denial.
Accordingly, we AFFIRM IN PART, MODIFY IN PART, AND
AFFIRM AS MODIFIED.
//
3 FACTS3
A. Sharp’s retention of TNI to manage ECF’s operations and ECF’s plan of reorganization.
We need not recount ECF’s history leading up to its bankruptcy filing
or the circumstances that precipitated Sharp’s appointment as chapter 11
trustee. Those facts are set forth in East Coast I, as are the details concerning
Sharp’s employment of The Next Idea [International] LLC (“TNI”) and its
principal Robert Ancill to manage operations at ECF’s four restaurant
properties. East Coast I also discussed the reorganization plan the
bankruptcy court confirmed.
Two points from our prior decision deserve emphasis because they
are directly relevant to ECF’s lack of standing. First, though Sharp, as
chapter 11 trustee, was in charge of ECF’s bankruptcy estate at the time of
plan confirmation, ECF’s principal Herbert Hudson and the Official
Committee of Unsecured Creditors (“OCC”) (jointly, “Plan Proponents”)
spearheaded the plan confirmation efforts. The Plan Proponents filed their
first draft reorganization plan in January 2018, and the court confirmed an
amended version of their plan in July 2018 (“Plan”).
Second, while the Plan provided that ECF’s assets generally revested
in the reorganized debtor as of its effective date, some of ECF’s assets were
3 We exercise our discretion, when appropriate, 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). 4 carved out from revesting and instead vested in a “Plan Trust” to be
controlled and administered by the “Plan Trustee” and to be distributed in
accordance with the Plan. Hudson was classified as ECF’s sole equity
interest holder, and the Plan did not designate any specific amount for
distribution to him. Instead, the Plan provided that he would retain his
equity interest in the reorganized debtor and was prohibited from
receiving any Plan distributions on account of his equity interest unless
and until all allowed claims were paid in full. The Plan’s distribution
scheme also did not provide for any distributions to ECF as the
reorganized debtor. Nor did the Plan identify either Hudson or ECF as
“Beneficiaries” of the Plan Trust. The designated Beneficiaries consisted
solely of holders of allowed claims, who by virtue of their Beneficiary
status were entitled to Plan distributions.4
The Plan Trust’s assets included causes of action and claims referred
to as “Estate Claims.” The Plan broadly defined “Estate Claims” as “any
and all claims and causes of action that constitute property of the Estate
including, but not limited to, . . . any causes of action or claims for recovery
of any amounts owing to the Debtor or the Estate.” In turn, the Plan
specified that “’Estate’ means the Debtor’s bankruptcy estate created under
4 Under the Plan, the Plan Trust had a fixed “initial” duration of six years, subject to extension upon Plan Trustee request and bankruptcy court approval. The Plan further provided: “[u]pon the termination of the Plan Trust, . . . all of the Plan Trust’s assets shall be re-vested in the Reorganized Debtor or such other original owner of such assets.” 5 Section 541 of the Bankruptcy Code in the Case.” The Plan also contained
roughly a half dozen provisions making it abundantly clear that Estate
Claims were assets of the Plan Trust and the Plan Trustee held exclusive
authority over such claims. The following Plan provision is representative:
On or after the Effective Date, the Plan Trustee shall have sole authority and responsibility for investigating, analyzing, commencing, prosecuting, litigating, compromising, collecting, and otherwise administering . . . Estate Claims. . . . Unless an Estate Claim is expressly waived, relinquished, compromised or settled as provided or identified in the Plan, the Confirmation Order, or any other order of the Court, the Plan Trust expressly reserves any Estate Claim for later adjudication.
B. The Plan Trustee’s discovery of TNI’s misconduct and the immediate fallout therefrom.
Sharp’s control over estate administration and TNI’s role managing
ECF’s operations ended on the effective date of the Plan in September 2018.
In October 2018, the Plan Trustee began a review of ECF’s transactions with
its vendors, including postpetition, preconfirmation vendors Hospitality
Merchandise (‘‘Hospitality’’) and Restaurant Extensions (‘‘Extensions’’).
According to the Plan Trustee, TNI’s principal Ancill formed Hospitality
and Extensions postpetition and then caused them to sell excessive
amounts of goods to ECF and overcharged it in the amount of $660,841.55.
Based on this conduct, and TNI’s failure to disclose its lack of
disinterestedness to the bankruptcy court and interested parties, the Plan
Trustee successfully opposed TNI’s third and final fee application.
6 Additionally, the bankruptcy court ordered TNI to disgorge $376,550 in
fees received by TNI on its first and second interim fee applications.
C. ECF initiates litigation against Sharp and DSI in state court.
In November 2022, roughly four years after the Plan Trustee sought
and obtained disgorgement of TNI’s fees, ECF filed a complaint against
Sharp and DSI (collectively, “Sharp”) in the Los Angeles County Superior
Court. The complaint sought damages for fraud (intentional and negligent
misrepresentation), breach of fiduciary duty, and aiding and abetting fraud
and breach of fiduciary duty (against DSI).
ECF’s allegations initially mirrored the points made by the Plan
Trustee regarding TNI’s overordering and overpayment of Hospitality and
Extensions. However, ECF then alleged that Sharp knew or should have
known that TNI was using affiliated entities including Hospitality,
Extensions, and Touch Bistro to procure goods for ECF. It further alleged
that Sharp failed to do anything to prevent TNI and Ancill from engaging
in self-dealing transactions with their affiliates, to its detriment. According
to ECF’s state court complaint, Sharp had a duty under § 327(a) to disclose
that TNI was not disinterested. Furthermore, the complaint stated that,
under these circumstances, Sharp should not have verified and approved
TNI’s fee applications. It also broadly claimed that Sharp negligently
permitted ECF’s labor and supply costs to balloon during his tenure as
chapter 11 Trustee.
7 D. The motion for leave to sue Sharp, the bankruptcy court’s denial of the motion, and the appeal to this Panel.
Roughly a month after it filed the state court action, ECF moved for
leave to sue Sharp outside the bankruptcy court pursuant to the Barton
doctrine. Sharp opposed the motion.5 According to Sharp, ECF lacked
standing to sue him because the Plan vested authority to sue on account of
Estate Claims exclusively in the Plan Trustee. Sharp additionally
maintained that the motion needed to be denied because ECF violated the
Barton doctrine by filing its state court complaint before seeking and
obtaining leave from the bankruptcy court. Sharp also contended that the
three-year limitations period for actions based on misrepresentation
already had run, as well as the four-year limitations period for breach of
fiduciary duty based on neglect. Finally, Sharp asserted that ECF had failed
to set forth a prima facie case in support of any of its causes of action, so
the motion for leave had to be denied.
The bankruptcy court denied ECF’s motion for leave. It ruled that it
held “exclusive jurisdiction” over all claims arising from Sharp’s acts as the
chapter 11 trustee. But the court additionally held that ECF lacked standing
to assert affirmative claims against Sharp. It also noted: (1) the complaint
appeared to be a collateral attack on its prior order granting Sharp’s final
5ECF also filed a complaint against Sharp in federal district court. But the parties and the bankruptcy court focused on the state court complaint in addressing ECF’s motion for leave to sue. Even so, the order denying the leave motion required ECF to dismiss both non-bankruptcy complaints. 8 fee application; (2) the stated claims appeared to be barred by the
applicable statute of limitations; (3) ECF had violated the Barton doctrine
by filing the complaint before obtaining leave; and (4) ECF had failed to
present a prima facie case in support of any of its claims.6
On appeal, this Panel affirmed the denial of the motion for leave.
Though the bankruptcy court believed that it had exclusive jurisdiction
over challenges to Sharp’s performance as chapter 11 trustee, we declined
to decide the appeal on that basis. Instead, citing the factors articulated in
Kashani v. Fulton (In re Kashani), 190 B.R. 875, 886-87 (9th Cir. BAP 1995), we
held that the record supported the bankruptcy court’s decision to deny
ECF leave to sue Sharp outside the bankruptcy court. East Coast I, 652 B.R.
at 918-19. As an alternate basis for our affirmance, we held that ECF lacked
standing to pursue the claims stated in its state court complaint. As we
explained, the Plan vested all Estate Claims in the Plan Trust, only the Plan
Trustee could pursue them, and ECF’s causes of action constituted Estate
Claims. East Coast I, 652 B.R. at 921.
E. ECF’s adversary proceeding against Sharp.
While the East Coast I appeal was pending, ECF filed an adversary
proceeding in the bankruptcy court against Sharp. The complaint stated
claims for fraudulent concealment, constructive fraud, fraud on the court,
6 Despite its remarks regarding limitations periods and collateral attacks, the bankruptcy court explained that it was not rendering any substantive ruling on the merits of ECF’s claims against Sharp. 9 and professional negligence. Similar to the state court complaint, the
adversary proceeding complaint alleged that Sharp knew or should have
known that Hospitality, Extensions, and Touch Bistro were affiliates of TNI
and Ancill. The complaint asserted that Sharp wrongfully failed to prevent
and disclose TNI’s over-ordering goods from these affiliates and the
affiliates’ overcharging for those goods.
However, unlike the state court complaint, the adversary complaint
also alleged a host of additional chapter 11 trustee misconduct. ECF alleged
that Sharp failed to vet TNI and monitor its status as a limited liability
company. According to ECF, if Sharp had done so, he would have learned
that, at the time he employed TNI, it was delinquent in submitting certain
information to the California Secretary of State and later was suspended
from operating in California. ECF further alleged that TNI and Ancill were
unknown in restaurant management circles but Sharp failed to consider
alternatives to hiring TNI. ECF additionally assailed Sharp for allegedly
failing to cooperate with Hudson and the OCC—and for overseeing ECF’s
finances, taxes, and labor issues in an inept and incompetent manner. ECF
asserted that as a direct result of Sharp’s incompetence (and his failure to
disclose his incompetent oversight and the resulting harm), Sharp caused
ECF to suffer roughly $20 million in damages.7
7 ECF specifically maintained that Sharp caused ECF to suffer the loss of roughly $15 million in Franchise Tax Board tax credits when he authorized the firing of between 75 and 100 of ECF’s employees. This was in addition to the alleged $5 million in
10 F. The court’s dismissal of the adversary proceeding and ECF’s motion to reconsider.
Promptly after ECF commenced the adversary proceeding, the
bankruptcy court duly issued its form summons to ECF for service. The
summons also provided notice that the court had scheduled a status
conference for August 29, 2023. But ECF never served the summons and
complaint.
Prior to the status conference, the bankruptcy court issued a tentative
ruling. The court noted that “[t]his complaint appears to be a rehash of the
complaint that was commenced in state court . . . that this court found was
a violation of the Barton Doctrine. Plaintiff overlooks the fact that its
violation of the Barton Doctrine was only one of several problems with this
action.” The court then incorporated a portion of its prior tentative ruling
addressing ECF’s Barton motion, which began by stating that ECF lacked
standing to sue Sharp but also observed that any such action was barred by
the statutes of limitations and issue preclusion. The court then concluded
its tentative ruling for the status conference by stating that it would issue
an order to show cause why the adversary proceeding should not be
dismissed for the reasons discussed in the prior tentative ruling for the
damages ECF claimed arose from Sharp’s other missteps. These missteps allegedly disrupted ECF’s regular business practices and caused ECF to incur excessive and unnecessary operating and administrative costs. 11 Barton motion and based on quasi-judicial immunity.
ECF did not appear at the August 29, 2023 status conference. The
bankruptcy court noted ECF’s failure to appear and recognized that it had
not served the summons and complaint. The court referenced the Panel’s
affirmance of the denial of ECF’s Barton motion. It also referenced the
concerns it had raised in its status conference tentative ruling, including
lack of standing, collateral estoppel, and statutes of limitations.
At the same time, the court acknowledged it had stated in its status
conference tentative ruling that it would enter an order to show cause why
the adversary proceeding should not be dismissed. But the court concluded
that the order to show cause was unnecessary in light of ECF’s failure to
serve the complaint and appear at the status conference, which it construed
as a voluntary abandonment of the adversary proceeding. The bankruptcy
court entered its order dismissing the adversary proceeding on August 30,
2023, “[f]or the reasons set forth on the record at the time of hearing[.]”
ECF timely moved for reconsideration of the dismissal order under
Rule 9023, which incorporates by reference Civil Rule 59. It argued that the
dismissal constituted clear legal error and was manifestly unjust. As ECF
reasoned, its failure to serve the summons negated the August 29 status
conference the court had calendared on the docket as of June 20, 2023.
Alternatively, ECF insisted it had no way of knowing that the status
conference would proceed when it had not served the summons and when
the court’s tentative ruling stated that the court would continue the status
12 conference to be held at the same time as the hearing on the anticipated
order to show cause. 8 ECF also contended that the court deprived it of any
meaningful opportunity to address the standing, preclusion, and
limitations issues raised in the bankruptcy court’s tentative ruling. In
addition, it asserted that it was manifestly unjust for the bankruptcy court
to dismiss the adversary proceeding for lack of prosecution without first
considering the five factors set forth in Bautista v. Los Angeles County, 216
F.3d 837, 841 (9th Cir. 2000). Finally, ECF maintained that the court should
have given it some opportunity to amend its complaint to address the
court’s standing, preclusion, and limitations concerns.9
Though he had not been served with the summons and complaint,
Sharp appeared and responded to ECF’s reconsideration motion. Sharp
stated that he took no position on whether the dismissal should be set aside
but nonetheless claimed that the adversary proceeding was frivolous and
filed to harass him. He further opined that ECF consciously disregarded
the court’s status conference procedures when it elected to ignore the duly-
scheduled status conference.
At the hearing on the reconsideration motion, the court initially
8 ECF conceded at oral argument that it did not know of the tentative ruling posted by the bankruptcy court before the status conference. 9 ECF also requested issuance of an alias summons and moved to extend the 90-
day deadline under Civil Rule 4(m) for it to serve the summons and complaint on the defendants. The bankruptcy court denied these requests in light of the dismissal of the underlying adversary proceeding. 13 observed that its local rules and procedures were unambiguous, the status
conference had been set, it had not been taken off calendar, and ECF had a
clear duty to appear at the status conference. But the court then indicated
that its dismissal was only partly based on the failure to appear. The court
explained that dismissal was appropriate based on the continuing
standing, preclusion, and limitations problems first identified when it
denied ECF’s Barton motion. The court explained that it might have been
willing to issue an order to show cause to give ECF an additional
opportunity to address the standing, preclusion, and limitations problems
if ECF had appeared at the status conference. In light of ECF’s failure to
appear, however, the court concluded that it was appropriate to dismiss
the case because “we already went through all of this,” and “[t]he action
that the debtor seeks to prosecute is entirely lacking in merit.”
In responding to the court’s comments, ECF argued that it “should
have an opportunity to address your questions in the context of a motion to
dismiss or a summary judgment.” The court then asked ECF for an offer of
proof, which led to a colloquy between the court and ECF’s counsel
regarding ECF’s standing and other issues. At the end of the colloquy, the
court held that its observations and reasoning stated at the outset of the
hearing justified dismissal.
On October 5, 2023, the bankruptcy court entered its order denying
the Rule 9023 motion. On that same date, the court denied ECF’s motion
for more time to serve the complaint and an alias summons. ECF timely
14 appealed both orders, as well as the order dismissing the adversary
proceeding.
JURISDICTION
The bankruptcy court had subject matter jurisdiction under 28 U.S.C.
§ 1334. We have jurisdiction under 28 U.S.C. § 158.
ISSUES
1. Whether the bankruptcy court erred when it dismissed ECF’s
adversary proceeding.
2. Whether the bankruptcy court abused its discretion when it denied
ECF’s motion for reconsideration under Rule 9023 and its motion for
extension of time to serve the summons and complaint.
STANDARDS OF REVIEW
We review de novo the bankruptcy court’s dismissal for lack of
Article III standing. See Clifton Cap. Grp., LLC v. Sharp (In re E. Coast Foods,
Inc.) (“East Coast II”), 80 F.4th 901, 905 (9th Cir. 2023). When we review a
matter de novo, we give no deference to the bankruptcy court’s decision.
Francis v. Wallace (In re Francis), 505 B.R. 914, 917 (9th Cir. BAP 2014).
Dismissals based on a failure to prosecute, or on a local rules
violation, are reviewed for an abuse of discretion. Olomi v. Tukhi (In re
Tukhi), 568 B.R. 107, 112 (9th Cir. BAP 2017). We also review for an abuse of
discretion the bankruptcy court’s denial of ECF’s reconsideration motion.
Carruth v. Eutsler (In re Eutsler), 585 B.R. 231, 235 (9th Cir. BAP 2017). The
bankruptcy court abused its discretion if it applied an incorrect legal rule
15 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. Standing doctrine and applicable procedure.
Our resolution of this appeal hinges on ECF’s standing to sue Sharp.
Standing is a threshold question in every federal case. Warth v. Seldin, 422
U.S. 490, 498 (1975); East Coast II, 80 F.4th at 905. The standing inquiry
typically considers both constitutional and prudential concerns. Warth, 422
U.S. at 498-99. However, when the plaintiff fails to allege sufficient facts to
establish Article III standing, prudential standing limits “are beside the
point.” Fleck & Assocs., Inc. v. Phoenix, 471 F.3d 1100, 1105 (9th Cir. 2006). A
plaintiff has constitutional or Article III standing when: “(1) the plaintiff
suffered an injury in fact, i.e., one that is sufficiently ‘concrete and
particularized’ and ‘actual or imminent, not conjectural or hypothetical,’ (2)
the injury is ‘fairly traceable’ to the challenged conduct, and (3) the injury is
‘likely’ to be ‘redressed by a favorable decision.’” Bates v. United Parcel
Serv., Inc., 511 F.3d 974, 985 (9th Cir. 2007) (quoting Lujan v. Defenders of
Wildlife, 504 U.S. 555, 560–61 (1992)).
“In the absence of standing, a federal court lacks subject matter
jurisdiction over the suit.” Righthaven LLC v. Hoehn, 716 F.3d 1166, 1172 (9th
Cir. 2013) (cleaned up). Because it is jurisdictional, the bankruptcy court
appropriately raised the standing issue sua sponte. See Fleck & Assocs., Inc.,
471 F.3d at 1107 n.4. Indeed, even if the bankruptcy court had not
16 addressed ECF’s standing, we would have an independent duty to assess
not only our own jurisdiction but also the bankruptcy court’s. See Steel Co.
v. Citizens for a Better Env't, 523 U.S. 83, 95 (1998); Aheong v. Mellon Mortg.
Co. (In re Aheong), 276 B.R. 233, 239 (9th Cir. BAP 2002).
To satisfy Article III standing concerns, the plaintiff must at the
pleading stage allege sufficient facts plausibly demonstrating each element
of Article III standing. Jones v. L.A. Cent. Plaza LLC, 74 F.4th 1053, 1057 (9th
Cir. 2023) (citing Spokeo, Inc. v. Robins, 578 U.S. 330, 338 (2016)). When the
plaintiff fails to do so, “the complaint is subject to dismissal at the outset ...
upon the court’s own inquiry.” Id. (citation omitted). When assessing the
complaint’s standing allegations at the pleading stage, the court considers
them in the same manner it would consider the complaint’s allegations for
purposes of reviewing the complaint’s sufficiency under Civil Rule
12(b)(6). See id. at 1057-58. Thus, we must accept as true all well-pled,
material factual allegations. Thomas v. Mundell, 572 F.3d 756, 760 (9th Cir.
2009); Fleck & Assocs., Inc., 471 F.3d at 1102 n.2. But conclusory allegations
are not sufficient to establish standing. Brown v. Bank of Am., N.A., 2014 WL
12707378, at *1 (C.D. Cal. Feb. 24, 2014) (citing Lopez v. Candaele, 630 F.3d
775, 787 (9th Cir. 2010)), aff'd, 660 F. App’x 506 (9th Cir. 2016). Similarly,
allegations contradicted by documents referenced in the complaint or that
are properly subject to judicial notice will not preclude dismissal. Lazy Y
Ranch Ltd. v. Behrens, 546 F.3d 580, 588 (9th Cir. 2008) (citing Sprewell v.
Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001)).
17 B. ECF’s lack of standing supports the bankruptcy court’s dismissal.
The bankruptcy court repeatedly ruled that ECF lacks standing to
pursue the types of claims it asserted in both its state court complaint and
its adversary proceeding complaint. Furthermore, this Panel in its prior
decision agreed with the bankruptcy court’s initial ruling that ECF lacked
standing. We specifically held:
[T]he bankruptcy court stated that ECF lacks standing to sue the Trustee, because the Plan vested all estate claims in the plan trust, and only the Plan Trustee could pursue those claims. We agree; the Plan clearly provided that “Estate Claims,” including “any causes of action or claims for recovery of any amounts owing to the Debtor or the Estate,” were property of the estate, did not revest in ECF, and were under the Plan Trustee’s exclusive control. This is an independently sufficient reason to affirm the court’s decision.
East Coast I, 652 B.R. at 921. Our prior holding is law of the case. See Am.
Express Travel Related Servs. Co. v. Fraschilla (In re Fraschilla), 235 B.R. 449,
454 (9th Cir. BAP 1999). We typically follow our law of the case. Id.
As the bankruptcy court correctly recognized, the current claims
present the same standing issue as the similar state court causes of action.
They all are based on alleged injuries to the bankruptcy estate during
Sharp’s preconfirmation administration of ECF as the chapter 11 trustee. As
explained above, the Plan vested such claims in the Plan Trustee. The Plan
further gave the Plan Trustee exclusive authority to pursue and dispose of
18 such claims. 10
The Plan could have provided for all property of the estate simply to
revest in the reorganized debtor on the effective date. But it did not.
Instead, the confirmed Plan created a trust which specifically carved out
assets of the estate from revesting in the reorganized debtor. Upon the
effective date, certain bankruptcy estate assets, including the Estate Claims,
were transferred to the Plan Trust for the Plan Trustee to administer and
eventually distribute.
1. ECF’s claims against Sharp are property of the bankruptcy estate and hence are “Estate Claims” held by the Plan Trust.
ECF contends that the claims against Sharp arose postpetition and are
not property of estate. Therefore, it argues, the claims against Sharp are not
Estate Claims within the meaning of the Plan. However, § 541(a)(7)
includes within the Bankruptcy Code’s definition of property of the estate,
“[a]ny interest in property that the estate acquires after the commencement
of the case.” ECF argues that any property acquired postpetition must be
traceable to or arise from estate property to constitute property of the estate
(and therefore be an Estate Claim) under § 541(a)(7). This is a partially
correct albeit incomplete statement of our precedent. In MacKenzie v.
Neidorf (In re Neidorf), 534 B.R. 369, 371-72 (9th Cir. BAP 2015), we held that
10Any attempt by ECF to allege facts inconsistent with the plain and unequivocal terms of the Plan would be ineffectual. The Plan is both referenced in ECF’s adversary complaint and is properly subject to judicial notice. See Lazy Y Ranch Ltd. v. Behrens, 546 F.3d at 588; Sprewell, 266 F.3d at 988. 19 “for the after-acquired interest to be considered property of the estate
under § 541(a)(7), the interest (1) must be created with or by property of the
estate; (2) acquired in the estate’s normal course of business; or (3)
otherwise be traceable to or arise out of any prepetition interest included in
the bankruptcy estate.”
Without citing any authority, ECF baldly maintains that its claims
against Sharp for the mismanagement of the debtor’s prepetition business
are not after-acquired property of the estate under § 541(a)(7) because ECF
had no prepetition relationship to Sharp. This argument ignores Sharp’s
relationship to the bankruptcy estate. Sharp was the chapter 11 trustee of
the bankruptcy estate and was responsible for the estate’s administration
and for ECF’s operations while in chapter 11. Inherently, the ongoing
business of the estate was property of the bankruptcy estate, and any
mismanagement of that business falls squarely within § 541(a)(7).
Indeed, ECF‘s complaint recognizes as much. ECF specifically alleged
that Sharp’s misconduct harmed the estate either by increasing its
expenses, decreasing its income, or diminishing the value of its assets while
operating in chapter 11. Any postpetition, preconfirmation harm to the
estate’s income, expenses, and assets injured the bankruptcy estate rather
than ECF personally. When, as here, the asserted misconduct allegedly
harms the estate’s assets or interests rather than the debtor’s personal
assets or interests, a legal claim (even if accruing postpetition) belongs to
the bankruptcy estate under § 541(a)(7). O'Dowd v. Trueger (In re O'Dowd),
20 233 F.3d 197, 204 (3d Cir. 2000); Winick & Rich, P.C. v. Strada Design Assocs.,
Inc. (In re Strada Design Assocs., Inc.), 326 B.R. 229, 239–40 (Bankr. S.D.N.Y.
2005).
We recognized this principle in Solano v. Magnum Prop. Invs. LLC
(In re Solano), 2020 WL 4280662, at *5-6 (9th Cir. BAP July 24, 2020), aff'd,
854 F. App’x 781 (9th Cir. 2021). In Solano, the plaintiff debtor commenced
an adversary proceeding attacking the postpetition foreclosure of his house
and alleging fraud and other misconduct against the purchaser and
additional parties. Id. at *2-3. The bankruptcy court dismissed the
adversary proceeding based on the debtor’s lack of standing. Id. at *3.
Debtor appealed, and we affirmed. In upholding the bankruptcy court’s
standing ruling, we pointed out that debtor’s claims arose out of the
postpetition sale of the debtor’s house, which was property of the estate,
and the misconduct alleged by debtor pertained to the postpetition sale of
the house. Therefore, the postpetition causes of action were property of the
estate pursuant to § 541(a)(7). Id. at *5. We further reasoned:
Although Debtor’s alleged fraud claims are predicated on his premise that no sale occurred, he suggests that the Property was no longer property of the estate after Magnum purchased it at the foreclosure sale. But, Debtor does not explain how the claims against the purchaser vested in Debtor upon sale of the Property. The alleged fraudulent sale would harm the estate’s interest in the Property, not Debtor’s, and the estate did not abandon the potential claims.
Id. at 6 (emphasis added); see also Ehrenberg v. Roussos (In re Roussos), 2016
21 WL 5349717, at *12 n.12 (Bankr. C.D. Cal. Sept. 22, 2016) (similarly holding
that the debtors lacked standing over “fraud on the court claim” because
the alleged misrepresentations were made “in connection with the
administration of the Properties, an asset of the estate.”).
In sum, ECF alleged injury to the bankruptcy estate rather than to the
debtor’s property. As a result, the claims against Sharp belonged to the
estate under § 541(a)(7) before plan confirmation. Upon confirmation, those
claims became Estate Claims belonging to the Plan Trust. Consequently,
ECF’s scope of Estate Claims argument must fail.
2. Third-party beneficiary doctrine is irrelevant to this appeal.
ECF’s other standing-related arguments are hardly worthy of
mention. Citing Lucas v. Hamm, 56 Cal.2d 583, 590 (1961), ECF argues that
Sharp is merely an “incidental beneficiary” of the Plan terms vesting Estate
Claims in the Plan Trust, and he cannot enforce those Plan terms. This
argument is frivolous. Assuming without deciding that third-party
beneficiary doctrine has any relevance to the enforcement of a confirmed
plan, this doctrine generally permits an intended beneficiary to enforce an
unperformed promise set forth in a contract even though the third-party
beneficiary is not a contracting party. See Goonewardene v. ADP, LLC, 6 Cal.
5th 817, 828-32 (2019).
Sharp is not seeking to enforce unperformed Plan terms. Rather, he
has been sued by ECF. It is incumbent on ECF to establish its Article III
standing and that it is suing on its own rights. But ECF is ignoring the
22 binding effect of the Plan. Any postconfirmation right ECF otherwise might
have held to sue Sharp was disposed of by the Plan, which expressly
conveyed the Estate Claims to the Plan Trust and vested the Plan Trustee,
not ECF, with the right to sue. Whether Sharp was a party to the Plan or an
incidental beneficiary of the Plan is irrelevant to ECF’s standing to sue.
3. ECF’s Plan Trustee acquiescence theory also lacks merit.
ECF’s only other standing-related argument concerns the Plan
Trustee’s purported acquiescence to ECF pursuing the claims against
Sharp. ECF did not allege the Plan Trustee acquiesced in its adversary
complaint. Nonetheless, if granted leave to amend, it potentially could do
so. Even so, such purported acquiescence does not help ECF. According to
ECF, the Plan Trustee exercised his absolute discretion and exclusive
control over the claims against Sharp by “greenlight[ing]” ECF’s
prosecution of the claims. In ECF’s own words, the Plan Trustee
“interposed no objection [nor] asserted any exclusive right to pursue these
claims,” and the Plan Trustee characterized ECF’s action as “a two-party
dispute that does not affect the interests of the Plan Trust.” ECF thus
concludes that these facts give it standing to sue Sharp.
ECF’s acquiescence theory is at odds with the Plan, which provides:
“Unless an Estate Claim is expressly waived, relinquished, compromised
or settled as provided or identified in the Plan, the Confirmation Order, or
any other order of the Court, the Plan Trust expressly reserves any Estate
Claim for later adjudication.” In short, ECF’s Plan Trustee acquiescence
23 theory is insufficient to confer standing on ECF to pursue claims owned by
the Plan Trust.
C. The bankruptcy court did not err by dismissing the adversary proceeding without leave to amend.
ECF contends that the bankruptcy court should not have dismissed
its complaint before its right to amend under Civil Rule 15(a)(1) had
expired. Civil Rule 15(a) is made applicable in adversary proceedings by
Rule 7015. In relevant part, it permits a party to amend its pleading once
“as a matter of course” within certain specified time constraints.11
ECF’s argument is based on a mistaken reading of this Civil Rule.
The rule simply does not restrict the bankruptcy court’s authority to enter
dismissal on appropriate grounds. Rather, the question is whether the
court erred in denying leave to amend. Ordinarily, “leave to amend should
be granted unless the court determines that the allegation of other facts
consistent with the challenged pleading could not possibly cure the
deficiency.” Schreiber Distrib. Co. v. Serv–Well Furniture Co., 806 F.2d 1393,
1401 (9th Cir. 1986); see also Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir.
2000). Here, we now have twice affirmed the bankruptcy court’s rulings
that the Plan Trust, not ECF, owns the Estate Claims, including any claims
11 Civil Rule 15(a)(1) permits a litigant to “amend its pleading once as a matter of course” within: “(A) 21 days after serving it, or (B) if the pleading is one to which a responsive pleading is required, 21 days after service of a responsive pleading or 21 days after service of a motion under Rule 12(b), (e), or (f), whichever is earlier.”
24 against Sharp for the administration of the chapter 11 estate. There is no set
of facts that ECF plausibly could have alleged to establish its standing to
sue Sharp. ECF certainly has not identified any such facts. Accordingly,
ECF’s amendment-related arguments do not justify reversal.
D. The bankruptcy court had authority to dismiss the adversary proceeding for lack of subject matter jurisdiction.
ECF also asserts that under Stern v. Marshall, 564 U.S. 462 (2011), it
was unconstitutional for the bankruptcy court to enter a dismissal with
prejudice, fully and finally disposing of the merits of ECF’s state law causes
of action. See id. at 487. Here, however, we are only affirming the dismissal
of ECF’s adversary proceeding based on ECF’s lack of standing. A
jurisdictional dismissal simply does not implicate the Article III concerns
addressed in Stern. See id. at 503. When, as here, the appellant could avail
itself of a fully de novo review before an Article III judge, the bankruptcy
court’s decision does not infringe on the appellant’s Article III interests. See
Exec. Benefits Ins. Agency v. Arkison (In re Bellingham Ins. Agency, Inc.), 702
F.3d 553, 566 (9th Cir. 2012), aff'd sub nom., Exec. Benefits Ins. Agency v.
Arkison, 573 U.S. 25 (2014).12
12 Because we have concluded that Stern does not apply, we need not address whether ECF’s conduct in the bankruptcy case and on appeal constituted express or implied consent to final determination of matters by an Article III court. See generally Wellness Int'l Network, Ltd. v. Sharif, 575 U.S. 665, 686 (2015) (holding that “Article III permits bankruptcy courts to decide Stern claims submitted to them by consent”). 25 E. Dismissal for lack of standing did not deny ECF due process.
Finally, ECF claims that the bankruptcy court’s actions immediately
before, during, and after the status conference denied it due process. To
support its due process claim, ECF needed not only to establish a denial of
a full and fair opportunity to be heard,13 but also that it was prejudiced as a
result, see Rosson v. Fitzgerald (In re Rosson), 545 F.3d 764, 776-77 (9th Cir.
2008), partially abrogated on other grounds as recognized by Nichols v. Marana
Stockyard & Livestock Mkt., Inc. (In re Nichols), 10 F.4th 956, 962 (9th Cir.
2021).
Before the status conference, the court issued a tentative ruling
indicating it would issue an order to show cause requiring ECF to explain
why the adversary proceeding should not be dismissed and would
continue the status conference pending the resolution of the show cause
proceedings. The court then changed course at the status conference and
decided to immediately dismiss the adversary proceeding. Shortly after the
status conference, it issued its order dismissing the adversary proceeding
with prejudice. Assuming without deciding that the bankruptcy court’s
actions implicated ECF’s due process rights by initially depriving it of a
meaningful opportunity to address the court’s standing concerns, ECF has
not established any prejudice. ECF has known that its standing to sue
Sharp was a significant issue for the bankruptcy court since the court
13 See Mullane v. Cent. Hanover Bank & Tr. Co., 339 U.S. 306, 314 (1950). 26 denied ECF’s Barton motion. ECF additionally knew by the time of the
August 2023 status conference that East Coast I had held that ECF lacked
standing to sue Sharp.
Perhaps more importantly, by the time ECF moved for
reconsideration of the bankruptcy court’s dismissal of the adversary
proceeding in September 2023, it obviously had reviewed the bankruptcy
court’s prior rulings—tentative and final. It knew that its standing to sue
Sharp was a critical jurisdictional issue. And yet its moving papers did
little or nothing to explain how ECF plausibly could allege standing.
At the hearing on the reconsideration motion, the bankruptcy court
addressed the standing issue. It also invited ECF to give an “offer of proof”
to apprise the court as to how ECF could plead around the standing issue.
ECF responded that it would allege and prove the Plan Proponents
intended that the Plan Trustee would not have exclusive control over
Estate Claims. We reject this argument based on the unequivocal Plan
terms vesting such exclusive authority in the Plan Trustee discussed above.
Under California contract law, the undisclosed intent of the Plan
Proponents cannot supersede their stated intent as objectively manifested
in the plain and unambiguous terms of the Plan. See Founding Members of
Newport Beach Country Club v. Newport Beach Country Club, Inc., 109 Cal.
App. 4th 944, 956-960 (2003) (holding that extrinsic evidence of a party’s
undisclosed intent is immaterial in construing an unambiguous contract
under California law, which adheres to the objective theory of contracts);
27 see also Green Coin v. Khadavi (In re Khadavi), 2023 WL 2770982, at *5 (9th Cir.
BAP Apr. 3, 2023) (“The language of a contract is to govern its
interpretation, if the language is clear and explicit, and does not involve an
absurdity.” (quoting Cal. Civ. Code § 1638)), aff'd, 2023 WL 8596681 (9th
Cir. Dec. 12, 2023). We previously have affirmed the bankruptcy court’s
reading of the Plan and its determination that its clear language vested the
Plan Trustee with exclusive control over the Estate Claims, including any
claims against Sharp for his actions and inactions as the chapter 11 trustee.
ECF’s desire to rely on the unstated intent of the Plan Proponents is
insufficient to establish reversible error as to due process or leave to
amend. In the parlance of Rosson, there is no reason to think on this record
that additional notice and opportunity for hearing would have changed the
resolution of the standing issue. In re Rosson, 545 F.3d at 776-77.
Consequently, without any demonstrable prejudice, any deprivation of due
process ECF allegedly suffered does not justify reversal of the bankruptcy
court’s dismissal for lack of standing. Id.
F. To the extent of the jurisdictional dismissal, the bankruptcy court correctly denied ECF’s Rule 9023 motion for relief.
ECF has not specifically and distinctly argued that the bankruptcy
court’s denial of its reconsideration motion was, by itself, reversible error.
Instead, as to every other issue it has raised on appeal, it has argued that a
favorable ruling on any one of those issues would justify reversal of both
the dismissal order and the reconsideration order.
28 Because we limit our affirmance of the bankruptcy court’s dismissal
to lack of standing, there is only one issue concerning reconsideration that
we need discuss: whether anything in the reconsideration motion
established grounds for reconsideration with respect to the bankruptcy
court’s determination that ECF lacked standing.
When a litigant’s motion under Rule 9023 fails to demonstrate clear
error, an intervening change in the law, or newly discovered evidence,
denial of the motion is appropriate. See In re Eutsler, 585 B.R. at 239. As
indicated throughout this decision, nothing in ECF’s reconsideration
motion established either that dismissal for lack of standing was improper
or that ECF should have been granted leave to amend its standing
allegations. Nor did ECF present newly discovered evidence or an
intervening change in the law. Accordingly, the bankruptcy court did not
abuse its discretion when it denied ECF’s reconsideration motion.
Similarly, there was no need for an extension of time to serve the
summons and complaint in a dismissed adversary proceeding.
G. The bankruptcy court should not have dismissed the adversary proceeding on any ground other than lack of standing.
When the plaintiff lacks standing, the court should dismiss based on
the absence of subject matter jurisdiction. Fleck & Assocs., Inc., 471 F.3d at
1102. Typically, a jurisdictional dismissal should not be conjoined with a
merits dismissal. Id. at 1106-07. This is particularly so when, as here, the
court dismissed the action at the initial status conference—before either of
29 the defendants had been served. The bankruptcy court’s concerns
regarding issue preclusion and statutes of limitations are affirmative
defenses that a defendant must assert, or they are waived. See Pauma v.
NLRB, 888 F.3d 1066, 1073 (9th Cir. 2018); Rivera v. Anaya, 726 F.2d 564, 566
(9th Cir. 1984).
Nor was the bankruptcy court’s dismissal of the action with prejudice
to the underlying merits warranted to the extent it was based on a failure to
prosecute or on a violation of the court’s local rules. Dismissal for failure to
prosecute only should be entered after a showing of unreasonable delay
and consideration of the five factors identified in Henderson v. Duncan, 779
F.2d 1421, 1423 (9th Cir. 1986). See In re Tukhi, 568 B.R. at 114.14 In turn,
local-rules based dismissals must be supported not only by the Henderson
factors but also by a determination that the plaintiff harbors a sufficiently
culpable state of mind, and the penalty must be proportionate to the
offense. Id. at 113.15
Here, the bankruptcy court did not specifically consider any of these
14 The five Henderson factors are: “(1) the public’s interest in expeditious resolution of litigation; (2) the court’s need to manage its docket; (3) the risk of prejudice to the defendants; (4) the public policy favoring disposition of cases on their merits[;] and (5) the availability of less drastic sanctions.” In re Tukhi, 568 B.R. at 113 (citing Lee v. Roessler–Lobert (In re Roessler–Lobert), 567 B.R. 560, 573-74 (9th Cir. BAP 2017)). 15 With respect to ECF’s state of mind, the bankruptcy court’s comments at the
reconsideration hearing indicated that the court did not attribute ECF’s failure to appear to any egregiously culpable state of mind but rather to counsel’s lack of familiarity with the district’s local rules and procedures, which differed from counsel’s local practice in another district. 30 factors. We have discretion in appropriate cases to consider these factors
ourselves as part of our appellate review, or we can vacate and remand, so
that the bankruptcy court can consider the appropriate factors in the first
instance. See id. at 113; see also Zambrano v. City of Tustin, 885 F.2d 1473, 1484
& n.32 (9th Cir. 1989). However, in light of the valid dismissal of the
adversary proceeding on jurisdictional grounds, we consider it
unnecessary for either the bankruptcy court or this Panel further to address
either of these procedural grounds for dismissal. The dismissal here should
have been based solely on ECF’s lack of standing.
Therefore, we will MODIFY the court’s dismissal order. The
dismissal order’s dispositive language should read as follows:
IT IS HEREBY ORDERED that this Adversary No. 2:23-ap- 01192-BB is DISMISSED for lack of standing, without leave to amend. But this dismissal is without prejudice to the substance of the claims set forth in the complaint and the right of the claims’ true owner to pursue or otherwise dispose of such claims, if any remain viable, if so desired.
CONCLUSION
For the reasons set forth above, we AFFIRM IN PART, MODIFY IN
PART, AND AFFIRM AS MODIFIED.