- Case Type:
- Business
- Case Status:
- Reversed and Remanded
- Citation:
- BAP No. CC-21-1247-GFS (9th Circuit, Jul 13,2022) Not Published
- Tag(s):
-
- Ruling:
- The bankruptcy court abused its discretion by refusing to allow a claim to be amended after the claims bar date where the debtor failed to show that allowing the amendment would cause undue prejudice. The prejudice cited by the debt, a settlement with a secured creditor, occurred after the claims bar date and before the debtor objected to the claim in issue. Further, the debtor was aware of the relevant facts underlying the disputed claim, having litigated the issues in state court before bankruptcy. Joining the party to the derivative claim is allowable under Fed. R. Civ. P. 17(a)(3).
- Procedural context:
- The bankruptcy court disallowed the claim of Randy Rose because Rose failed to state on his proof of claim that he did not directly hold derivative claims that had been asserted in pre-petition state court proceedings and that amendment of the proof of claim would be improper because the claims bar date had lapsed. The bankruptcy court also denied Rose's motion for leave to amend the proof of claim.
Rose appealed.
- Facts:
- Randy Rose, the appellant, met Howard Royal in 2016. The two agreed to purchase, renovate and flip a parcel of real property. Rose and Royal found suitable property on Linda Flora Drive (the "Property"). They agreed, in principle, that Rose would contribute funds to purchase the Property and Royal would contribute project management services. Rose and Royal intended to demolish the existing house and construct a larger house on the property.
Royal contacted Joshua Pukini to obtain project financing. Pukini was given authority to act on behalf of the debtor. Rose alleged that Pukini promised to obtain construction financing.
Rose and Royal formed Linda Flora and purchased the Property for about $2,500,000. Calpac brokered two purchase money loans totaling $2,000,000. Rose contributed approximately $520,000 toward the purchase and the Debtor contributed about $140,000 to cover an escrow shortfall.
Linda Flora and the debtor formed a joint venture regarding the Property. Rose and Royal signed the Joint Venture Agreement (the "JVA") on behalf of Linda Flora and forwarded the joint venture agreement to Pukini to sign on the debtor's behalf.
In April 2017, Linda Flora granted the debtor a deed of trust to secure its obligations under the JVA. Rose alleged that Pukini and the debtor agreed that the amount due under the deed of trust would be due after the Property was sold.
The relationship between Rose and Royal deteriorated. Rose alleged that Royal unilaterally made changes to the construction plan and conspired with Pukini and the debtor to complete construction without insurance and using an unlicensed general contractor.
In late 2017, Pukin took steps to take over management of the project instead of foreclosing on the debtor's deed of trust. Pukini sent Rose and Royal a construction contract and a corporate resolution that purported to amend Linda Flora's operating agreement to give the debtor managerial control of Linda Flora and to give an entity known as Mag Equities (which was owned by Royal) operational control of construction management. The resolution also authorized the debtor to raise or invest additional capital and alter the project's distribution of proceeds.
Rose claimed that he did not approve the corporate resolution. Rose also claimed that Pukini and Royal fraudulently obtained a demolition permit and, on January 4, 2018, recorded a notice of default on the Linda Flores deed of trust.
Rose asserted that he "withdrew" Linda Flores' consent to the Joint Venture Agreement no later than January 2018, before he received a copy of the agreement countersigned by Pukini. Rose asserted that Pukini did not sign the JVA until after Rose commenced state court litigation and alleged that Pukini forged signatures on the construction contracts and entered into contracts on behalf of Linda Flora without authority.
In June 2018, the debtor recorded a notice of trustee's sale, alleging that Linda Flora owed the debtor $1,197,998.01. Rose alleged that the increased amount on the deed of trust was for payments to Pukini and Luna Construction (the unlicensed general contractor) for unauthorized work. The debtor foreclosed in July 2019 and took the property through a credit bid.
In the state court litigation, Rose sued the debtor, Pukini, Royal, Mag Equities (an entity owned by Royal), Calpac, Luna Construction (the unlicensed general contractor), and Linda Flora. The pleadings allege that Rose sued on his own behalf and derivatively on behalf of Linda Flora. The pleadings allege that Pukini, the debtor, and Royal conspired to exclude Linda Flora and Rose from the project.
After Rose filed his action in state court, the debtor obtained a $3,000,000 line of credit. The debtor used the loan proceeds to pay existing senior loans and to develop the Property. A dispute arose between the debtor and the new lender, and the new lender commenced foreclosure proceedings. The debtor filed a Subchapter V, Chapter 11 petition in March 2021.
Rose filed a proof of claim for $700,000.
In June 2021, the debtor filed its Chapter 11 plan, proposing to sell the Property for an amount that would pay administrative and secured claims in full and 91% of allowed unsecured claims. The debtor then objected to the claim filed by the new secured creditor, which was resolved by a stipulation allowing a $3,800,000 secured claim.
The debtor objected to Rose's claim and alleged that, even if Rose's allegations were true, Linda Flora, not Rose, had a claim because the Joint Venture Agreement was between the debtor and Linda Flora. The debtor ultimately argued that Rose's proof of claim should be disallowed because the proof of claim stated that Rose, not "Randy Rose, derivatively on behalf of Linda Flora," held the derivative claims. The debtor also argued that Rose should not be allowed to amend the proof of claim to clarify ownership of the derivative claims after the claims bar date.
- Judge(s):
- GAN, FARIS, and SPRAKER, Bankruptcy Judges
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