WVSV Holdings, LLC v. 10K, LLC (In re WVSV Holdings, LLC)
| Docket Number | 21-16874,21-16952 |
| Decision Date | 29 August 2023 |
| Parties | In re: WVSV HOLDINGS, LLC, Debtor, v. 10K, LLC; LEO R. BEUS; ANNETTE BEUS; PAUL GILBERT; SUSAN GILBERT; RANDY STOLWORTHY; KARI STOLWORTHY, Defendants-Appellees. WVSV HOLDINGS, LLC, Plaintiff-Appellant, In re: WVSV HOLDINGS, LLC, Debtor, WVSV HOLDINGS, LLC, Plaintiff-Appellee, v. 10K, LLC; LEO R. BEUS; ANNETTE BEUS; PAUL GILBERT; SUSAN GILBERT; RANDY STOLWORTHY; KARI STOLWORTHY, Defendants-Appellants. |
| Court | U.S. Court of Appeals — Ninth Circuit |
NOT FOR PUBLICATION
Argued and Submitted November 16, 2022 Phoenix, Arizona Appeal from the United States District Court for the District of Arizona John Joseph Tuchi, District Judge, Presiding No 2:20-cv-01927-JJT
Before: BYBEE, OWENS, and COLLINS, Circuit Judges.
This case is the latest in a protracted litigation between two real-estate companies over a 13,000-acre tract in Arizona. Defendant 10K, LLC contracted to sell the land in 2002. The deal collapsed, and 10K's manager-a separate firm- sold the plot to Plaintiff WVSV Holdings, LLC. 10K's members challenged that sale in state court, precipitating a 16-year quagmire. In 2012, nine years after the inception of 10K's suit, WVSV filed Chapter 11 bankruptcy. 10K was by far its largest creditor. WVSV's reorganization plan was confirmed two years later, providing in part for the preservation of "all claims of 10K against the Debtor . . . [and vice versa] brought in the State Court Litigation."
In 2019, judgment was entered for WVSV on the land sale. A little over a year later, it sued Defendants in state court, claiming, inter alia, wrongful institution of civil proceedings ("WICP").[1] WVSV asserted that 10K's members, indignant over losing the contract, embroiled it in a decade and a half of sham litigation. Since Arizona law makes winning the wrongful suit a condition of pleading WICP, WVSV's 2020 action was the earliest that it could file. Bradshaw v. State Farm Mut. Auto. Ins. Co., 758 P.2d 1313, 1319 (Ariz. 1988). Defendants removed to bankruptcy court, 28 U.S.C. § 1452, and sought dismissal and attorneys' fees. Claiming jurisdiction to determine whether WVSV's suit flouted its confirmed plan, the bankruptcy court held that it did, dismissed, and awarded Defendants their fees. WVSV appealed to the district court, which affirmed the dismissal but reversed the fee award. Both sides cross-appeal from that judgment. We have jurisdiction under 28 U.S.C. § 158(d) and affirm.
1. Based on its authority to interpret WVSV's plan, the bankruptcy court asserted jurisdiction to verify whether the WICP claim was property of the estate, which should have been scheduled as an asset and was now waived. Reviewing de novo, we agree. "Bankruptcy courts have subject matter jurisdiction over proceedings 'arising under title 11 . . . or related to cases under title 11.'" Wilshire Courtyard v. Cal. Franchise Tax Bd. (In re Wilshire Courtyard), 729 F.3d 1279, 1285 (9th Cir. 2013) (quoting 28 U.S.C. § 1334(b)). In determining whether a post-confirmation proceeding is sufficiently "related to" a bankruptcy case to confer jurisdiction, we ask if it "affect[s] the interpretation, implementation, consummation, execution, or administration of the confirmed plan." Id. at 1289 (citation omitted) (alteration in original).
Here, as the bankruptcy court explained, the central issues are whether WVSV's WICP claim was property of the estate and, if so, whether failure to schedule it operates as a waiver. These issues raise a "substantial question of bankruptcy law" that "requir[es] interpretation of the confirmed plan" and a determination of what constitutes "property" under the Bankruptcy Code. Cnty. of San Mateo v. Chevron Corp., 32 F.4th 733, 762 (9th Cir. 2022) (citation omitted). Considering these factors and taking a "holistic look at 'the whole picture,'" we hold that the bankruptcy court had jurisdiction under Section 1334(b) to decide the limited issues that it did. Id. (quoting Wilshire Courtyard, 729 F.3d at 1289).
2. That brings us to the merits. "We review de novo the district court's decision on appeal from a bankruptcy court," United States v. Warfield (In re Tillman), 53 F.4th 1160, 1166 (9th Cir. 2022), and the bankruptcy court's application of judicial estoppel for abuse of discretion, Ah Quin v. Cnty. of Kauai Dep't of Transp., 733 F.3d 267, 270 (9th Cir. 2013). The bankruptcy court abuses its discretion if, inter alia, it applies the wrong legal standard. Id. We find the bankruptcy court did not err in defining estate property as it did and so affirm.
Determining what qualifies as property for bankruptcy purposes requires navigating a delicate intersection of state and federal law. "Property interests are created and defined by state law." Butner v. United States, 440 U.S. 48, 55 (1979).
Thus, in examining causes of action as property, we have "look[ed] to state law" to establish the elements of a claim and when it accrues. Cusano v. Klein, 264 F.3d 936, 947 (9th Cir. 2001). But that is not the whole story. "[The] definition of property of the estate has been broadly construed to encompass a debtor's contingent interest . . ., even if that interest is reliant on future contingencies that have not occurred as of the filing date." Anderson v. Rainsdon (In re Anderson), 572 B.R. 743, 747 (B.A.P. 9th Cir. 2017). To decide whether to treat post-petition claims as estate property, the Supreme Court has instructed us to determine whether such claims are "sufficiently rooted in the pre-bankruptcy past." Segal v. Rochelle, 382 U.S. 375, 380 (1966); see also Jess v. Carey (In re Jess), 169 F.3d 1204, 1208 (9th Cir. 1999).
Under Arizona law, WVSV could not have sued 10K for WICP until 2019. Frey v. Stoneman, 722 P.2d 274, 278 (Ariz. 1986). At that point, WVSV could assert all the elements of WICP, including a favorable judgment in the allegedly abusive litigation. But it is a question of bankruptcy law whether the unmatured claim was "sufficiently rooted" in pre-petition events to come into the estate. Segal, 382 U.S. at 380. We think that it was. At its bankruptcy, WVSV had satisfied all conditions to plead WICP, save for victory in the predicate suit. The conduct yielding this claim had been known to WVSV for a decade. And even if the state-court suit had terminated in its favor before the petition, the resulting WICP claim would still have depended on winning some future action. The unmatured claim that WVSV knew of, no different from the counterfactual matured claim, was a contingent interest. Under Section 541, it should have been disclosed on WVSV's schedules. Based on its sound finding that WVSV's WICP claim was estate property, the bankruptcy court did not abuse its discretion by holding the unscheduled claim waived. Ah Quin, 733 F.3d at 271.
3. Finally, we agree with the district court that the bankruptcy court abused its discretion in granting 10K attorneys' fees. The award was granted under Ariz. Rev. Stat. § 12-341.01(A), which allows the victor to obtain fees in "any . . . action arising out of a contract." Here, 10K argues that the relevant contract was the land sale to WVSV. But the basis for the WICP claim sounded in tort, not contract. WVSV's claim was based on 10K's litigation conduct, and the Supreme Court of Arizona has held it is insufficient for Section 12-341.01(A) purposes that a contract exists "somewhere in the transaction." Marcus v. Fox, 723 P.2d 682, 684 (Ariz. 1986). Since the bankruptcy court's fee award rested on an erroneous reading of Arizona law, it was properly reversed by the district court.
AFFIRMED.
I agree with the majority that, under the applicable "close nexus" test, see Wilshire Courtyard v. Cal. Franchise Tax Bd. (In re Wilshire Courtyard), 729 F.3d 1279, 1287 (9th Cir. 2013), the bankruptcy court properly exercised jurisdiction to decide the limited issues that it did. But I disagree with the majority's resolution of the merits of those issues.
The central question is whether WVSV Holdings, LLC ("WVSV") is barred from asserting its state law claim for "wrongful institution of civil proceedings" against Defendants due to the fact that no such claim was listed in WVSV's schedules during its bankruptcy proceedings. The answer to that question is no.
Ordinarily, "[i]f a plaintiff-debtor omits a pending (or soon-to-be filed) lawsuit from the bankruptcy schedules and obtains a discharge (or plan confirmation), judicial estoppel bars the action." Ah Quin v. County of Kauai Dep't of Transp., 733 F.3d 267, 271 (9th Cir. 2013). However, "generally, a debtor has no duty to schedule a cause of action that did not accrue prior to bankruptcy." Cusano v. Klein, 264 F.3d 936, 947 (9th Cir. 2001); see also 11 U.S.C. § 541(a)(1) (). "To determine when a cause of action accrues, we look to state law." Cusano, 264 F.3d at 947; see also Butner v. United States, 440 U.S. 48, 55 (1979) (). In examining state law for this purpose, what matters is when "accrual has occurred for purposes of ownership," and not when the statute of limitations begins to run under "principles of discovery and tolling." Cusano, 264 F.3d at 947.
Only two claims in WVSV's removed complaint remain relevant here- WVSV's claim for "wrongful institution of civil proceedings" and its claim for aiding and abetting tortious conduct. See Mem. Dispo. at 2 n.1. A claim for "wrongful institution of civil proceedings" is the more technical name for a "malicious prosecution"...
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