Court Opinion

ID: 9771944
Source: CourtListenerOpinion
Date Created: 2023-08-29 17:00:59.954275+00
Date Added: 2024-06-11T15:38:16.465490
License: Public Domain

NOT FOR PUBLICATION                           FILED
                    UNITED STATES COURT OF APPEALS                       AUG 29 2023

                           FOR THE NINTH CIRCUIT                     MOLLY C. DWYER, CLERK
                                                                       U.S. COURT OF APPEALS

In re: WVSV HOLDINGS, LLC,                      No. 21-16874
             Debtor,                            D.C. No. 2:20-cv-01927-JJT
______________________________
WVSV HOLDINGS, LLC,                             MEMORANDUM*

                Plaintiff-Appellant,
    v.
10K, LLC; LEO R. BEUS; ANNETTE
BEUS; PAUL GILBERT; SUSAN
GILBERT; RANDY STOLWORTHY;
KARI STOLWORTHY,
                Defendants-Appellees.

In re: WVSV HOLDINGS, LLC,                      No. 21-16952
             Debtor,                            D.C. No. 2:20-cv-01927-JJT
______________________________
WVSV HOLDINGS, LLC,
                Plaintiff-Appellee,
    v.
10K, LLC; LEO R. BEUS; ANNETTE
BEUS; PAUL GILBERT; SUSAN
GILBERT; RANDY STOLWORTHY;
KARI STOLWORTHY,
                Defendants-Appellants.

*
 This disposition is not appropriate for publication and is not precedent except as
provided by Ninth Circuit Rule 36-3.
                    Appeal from the United States District Court
                             for the District of Arizona
                    John Joseph Tuchi, District Judge, Presiding

                     Argued and Submitted November 16, 2022
                                Phoenix, Arizona

Before: BYBEE, OWENS, and COLLINS, Circuit Judges.
Dissent by Judge COLLINS

      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,

      1
         WVSV’s complaint also includes two declaratory relief claims (which the
parties jointly move to dismiss, and which we grant); a slander of title claim
(absent from its opening brief, and which we deem waived); and a claim for aiding
and abetting tortious conduct. The latter claim rests on WICP, so we analyze both
together.

                                           2
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

                                           3
(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).

                                               4
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

                                            5
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.

                                          6
                                                                              FILED
WVSV Holdings, LLC v 10K, LLC, Nos. 21-16874 & 21-16952
                                                                              AUG 29 2023
COLLINS, Circuit Judge, dissenting:                                      MOLLY C. DWYER, CLERK
                                                                          U.S. COURT OF APPEALS

      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) (stating that the estate’s property generally includes, inter

alia, “all legal or equitable interests of the debtor in property as of the

commencement of the [bankruptcy] case”). “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) (holding that, for bankruptcy purposes, “[p]roperty

interests are created and defined by state law”). 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” claim based on an underlying civil matter, and for

simplicity and convenience, I will use the latter term. See Giles v. Hill Lewis

Marce, 988 P.2d 143, 145 n.1 (Ariz. Ct. App. 1999). As WVSV notes in its

opening brief, its aiding and abetting claim is predicated on its malicious

prosecution claim, and the accrual of the former claim therefore turns on the

accrual of the latter claim.

      Under Arizona law, “an essential element of a malicious prosecution claim

is that the proceedings must have terminated in favor of the person against whom

they were brought.” Nataros v. Superior Ct. of Maricopa Cnty., 557 P.2d 1055,

1057 (Ariz. 1976) (en banc) (footnote omitted). Accordingly, a “malicious

                                          2
prosecution claim accrues when the prior proceedings have terminated in the

defendant’s favor.” Id. Prior to that point, “there [is] no cause of action.” Id. In

this case, the relevant “prior proceedings” that are the subject of WVSV’s

malicious prosecution claim did not terminate in WVSV’s favor until the mandate

was issued in January 2019 with respect to the November 2018 final decision of

the Arizona Court of Appeals. See 10K, LLC v. WVSV Holdings, LLC, 2018 WL

5904513 (Ariz. Ct. App. 2018). Thus, under Arizona law, the earliest that WVSV

possessed its chose in action for malicious prosecution (and its related action for

aiding and abetting) was January 2019.

      The majority does not—and cannot—dispute that, under Arizona law,

WVSV did not have any cause of action prior to January 2019. It follows from

that premise that “accrual . . . occurred for purposes of ownership” in January

2019. Cusano, 264 F.3d at 947. Under our controlling decision in Cusano, that

means that WVSV had no obligation to list these claims on its initial disclosure

schedules. Id. And because these causes of action did not exist until well after

WVSV’s plan was confirmed, it is of no consequence that WVSV did not amend

its schedules to list such claims prior to the confirmation of the plan. Moreover, it

follows that, in not listing these claims in its disclosure schedules, WVSV did not

make a representation that is inconsistent with its current assertion of the claims.

There is thus no ground for finding that WVSV is judicially estopped on that basis,

                                          3
see New Hampshire v. Maine, 532 U.S. 742, 750 (2001), and the bankruptcy court

abused its discretion in concluding otherwise. And, for the same reason, the

bankruptcy court erred in holding that WVSV is limited to those claims that were

preserved in the terms of the confirmation order.

      The majority disregards our decision in Cusano, which requires us to give

controlling weight to Arizona law on this point, and instead relies on a novel,

overriding rule of federal bankruptcy law that the majority erroneously derives

from Segal v. Rochelle, 382 U.S. 375 (1966). Segal recognized that there may be

certain “interests” that, while still contingent in some respects at the time of the

bankruptcy petition, are “sufficiently rooted in the pre-bankruptcy past” to count as

“property” of the bankruptcy estate at the time of the bankruptcy petition. Id. at

380. But nothing in Segal or in our other cases applying it authorizes us to do what

the majority has done here, which is to recognize, under federal law, property

interests that simply do not exist under state law. See id. (holding that debtor’s

interest in tax refunds was “property” of estate even though refunds could not be

claimed “until the end of the year,” after the petition was filed; the core facts

creating a contingent entitlement to the refunds had occurred before bankruptcy);

Jess v. Carey (In re Jess), 169 F.3d 1204, 1207–08 (9th Cir. 1999) (holding that

attorney’s interest in contingency fees for pre-petition work was a property interest

because it was rooted in contract rights that had value on the day the petition was

                                           4
filed); Rau v. Ryerson (In re Ryerson), 739 F.2d 1423, 1425 & n.1 (9th Cir. 1984)

(holding that insurance district manager’s contractual right to “accumulated value

to which he was entitled upon termination or cancellation” of his appointment was

“property” as of the filing of the bankruptcy petition; although termination

occurred later, the contractual right had value and, in addition, “termination or

cancellation of the appointment is an event certain to occur” at some point).

       The majority contends that, under Segal, potential lawsuits that may or may

not come into existence in the future are no more contingent or uncertain than

success in a lawsuit that has come into existence. See Mem. Dispo. at 5–6. But

the majority’s analogy overlooks what, under Cusano, is a critical difference: the

speculative future cause of action that has not yet accrued is not a property interest

recognized under state law, while a cause of action that has accrued is a recognized

property interest (despite the contingent risk and uncertainty as to its ultimate

actual value). Here, the problem is not that the value of the property interest was

contingent or uncertain at the filing of the petition; rather, it is that there was no

property interest at all.

       In addition to being contrary to Cusano, the majority’s position is contrary to

an overwhelming body of precedent that has explicitly rejected the view that un-

accrued malicious prosecution claims belong to the bankruptcy estate. See McAtee

v. Morrison & Frampton, PLLP, 512 P.3d 235, 239 (Mont. 2021) (rejecting

                                            5
comparable judicial estoppel claim, holding that “McAtee’s malicious prosecution

claim, as premised on the civil fraud action, had not yet accrued at the time she

filed her bankruptcy petition and cannot be deemed rooted in her pre-bankruptcy

conduct”); Vojnovic v. Brants, 612 S.E.2d 621, 624 (Ga. Ct. App. 2005) (rejecting

comparable judicial estoppel argument, because the debtor, who “filed for Chapter

7 bankruptcy on September 15, 1999,” “did not have a viable malicious

prosecution claim until January 2000, when the criminal case against her was

ultimately dismissed”); Jenkins v. A.T. Massey Coal Co. (In re Jenkins), 410 B.R.

182, 193–94 (Bankr. W.D. Va. 2008) (rejecting a comparable judicial estoppel

claim with respect to a malicious prosecution action, holding that, “[u]ndoubtedly,

the interests considered property of the estate are expansive under § 541; however,

this Court cannot support any position which would bring into the bankruptcy

estate causes of action not existing as of the commencement of the case”); Carroll

v. Henry Cnty., 336 B.R. 578, 584 (N.D. Ga. 2006) (“The plaintiff’s state law

claims for false arrest and malicious prosecution are, likewise, not barred by

judicial estoppel since those causes of action did not accrue until the termination of

his criminal trial.”); Brunswick Bank & Trust Co. (In re Atanasov), 221 B.R. 113,

117 (D.N.J. 1998) (“In the current case, the indictment was dismissed on May 10,

1993. Accordingly, as the bankruptcy petition was filed on February 2, 1993, the

cause of action for malicious prosecution arose post-petition. The claim—brought

                                          6
on May 9, 1995—simply was not an asset at the time the petition was filed. The

analysis is that straightforward.”). The one case cited by the parties that reaches a

contrary conclusion, Cole v. Pulley, 468 N.E.2d 652 (Mass. App. Ct. 1984), is

distinguishable, because it places dispositive weight on its state-law

characterization of the “[s]uccessful termination” element of a malicious

prosecution claim as being “in the nature of a threshold requirement” for filing suit

and only “technically an element of the tort.” Id. at 653. Arizona law does not

follow that view: as explained earlier, Arizona law is clear that, prior to a

successful termination of the predicate suit, “there [is] no cause of action” for

malicious prosecution. Nataros, 557 P.2d at 1057.

      Accordingly, I dissent from the majority’s conclusion that federal law

dictates that we deem a potential cause of action that does not yet exist under state

law to be a “contingent interest” that, notwithstanding state law, counts as a

sufficient property interest that must be listed on the debtor’s schedules and that

passes to the bankruptcy estate under § 541(a)(1) of the Bankruptcy Code.

Because in my view the claims at issue here were not property of the bankruptcy

estate, there was no obligation for WVSV to list them on its disclosure schedules.

And because there was no obligation to disclose the claims, judicial estoppel does

not attach from the failure to do so. As a result, the bankruptcy court erred in

holding that WVSV was barred from litigating its claims.

                                           7
      Because I would reverse the district court’s judgment in favor of

Defendants, I would dismiss as moot Defendants’ cross-appeal regarding the

district court’s ruling on their request for attorneys’ fees. See Sutter Home Winery,

Inc. v. Vintage Selections, Ltd., 971 F.2d 401, 409 (9th Cir. 1992). Under my

resolution of the case, the limited jurisdiction that the bankruptcy court correctly

asserted would be exhausted. I would then leave it to the district court to

determine on remand whether the case should be remanded back to state court.

Because the majority instead affirms the judgment, I respectfully dissent.

                                          8