Court Opinion

ID: 4192741
Source: CourtListenerOpinion
Date Created: 2017-08-03 17:02:27.879361+00
Date Added: 2024-06-11T14:40:20.888195
License: Public Domain

FILED
                                                            MAY 31 2016
 1                         NOT FOR PUBLICATION
                                                        SUSAN M. SPRAUL, CLERK
                                                          U.S. BKCY. APP. PANEL
 2                                                        OF THE NINTH CIRCUIT

 3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                            OF THE NINTH CIRCUIT
 5
 6   In re:                        )      BAP No.    NV-14-1517-FBD
                                   )
 7   PETER SZANTO,                 )      Bk. No.    3:13-51261-GWZ
                                   )
 8                  Debtor.        )      Adv. No.   3:13-05038-GWZ
     _____________________________ )
 9                                 )
     PETER SZANTO,                 )
10                                 )
                    Appellant,     )
11                                 )
     v.                            )      MEMORANDUM*
12                                 )
     VICTOR SZANTO; ANTHONY SZANTO,)
13                                 )
                    Appellees.     )
14   ______________________________)
15
                      Argued and Submitted on May 19, 2016
16                            at Las Vegas, Nevada
17                            Filed – May 31, 2016
18            Appeal from the United States Bankruptcy Court
                        for the District of Nevada
19
          Honorable Bruce T. Beesley, Chief Bankruptcy Judge, and
20         Honorable Gregg W. Zive, Bankruptcy Judge, Presiding
21
     Appearances:     Appellant Peter Szanto argued pro se; John S.
22                    Bartlett argued for Appellees Victor Szanto and
                      Anthony Szanto.
23
24
25
26        *
            This disposition is not appropriate for publication.
27   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
28   9th Cir. BAP Rule 8024-1.
 1   Before: FARIS, BARASH,** and DUNN, Bankruptcy Judges.
 2                              INTRODUCTION
 3        Appellant/chapter 111 debtor Peter Szanto appeals from the
 4   bankruptcy court’s order dismissing his complaint for failure to
 5   state a claim.   The bankruptcy court abused its discretion when
 6   it denied leave to file an amended complaint.   But this error was
 7   harmless.   The court dismissed the underlying bankruptcy case,
 8   and it did not abuse its discretion when it declined to retain
 9   jurisdiction over the adversary proceeding.   Accordingly, we
10   AFFIRM.
11                           FACTUAL BACKGROUND2
12   A.   The adversary complaint
13        Mr. Szanto3 initiated his chapter 11 bankruptcy on June 25,
14   2013 and later commenced an adversary proceeding against his
15   brothers, the appellees in this appeal.   Mr. Szanto claimed that
16
17        **
            Hon. Martin R. Barash, United States Bankruptcy Judge for
18   the Central District of California, sitting by designation.
          1
19          Unless specified otherwise, all chapter and section
     references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, all
20   “Rule” references are to the Federal Rules of Bankruptcy
     Procedure, Rules 1001-9037, and all “Civil Rule” references are
21
     to the Federal Rules of Civil Procedure, Rules 1-86.
22        2
            Mr. Szanto presents us with a limited record. We have
23   exercised our discretion to review the bankruptcy court’s docket,
     as appropriate. See Woods & Erickson, LLP v. Leonard (In re AVI,
24   Inc.), 389 B.R. 721, 725 n.2 (9th Cir. BAP 2008).
25        3
            Mr. Szanto is a serial litigant. The bankruptcy court
26   noted that there are seventy-six cases nationwide involving a
     party named Peter Szanto, and Mr. Szanto acknowledged that he was
27   a party to at least fifteen or twenty of those cases. At oral
     argument, Mr. Szanto acknowledged that the California state court
28   found him to be a vexatious litigant.

                                      2
 1   Appellees are fraudulently concealing or withholding
 2   approximately $3,200,000 in trust assets.
 3   B.   The motion to dismiss
 4        Appellees moved to dismiss the adversary proceeding (“Motion
 5   to Dismiss”).   Appellees argued (among other things) that
 6   Mr. Szanto failed to allege facts sufficient to meet the pleading
 7   standards of Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555
 8   (2007), and Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
 9        The bankruptcy court held that the complaint did not satisfy
10   the standards of Twombly and Iqbal.    Mr. Szanto does not
11   challenge this decision on appeal.    He does challenge the
12   bankruptcy court’s denial of an opportunity to file an amended
13   complaint.
14        The court explained that he would have to file a new
15   complaint and pay a new filing fee: “I mean, this is not even
16   close to Iqbal and Twombly, so you need to re-file a complaint.
17   It’s not a first amended complaint.    It is a new complaint.   You
18   have to allege facts.   You have to reserve it and we’ll go
19   forward from there.”
20   C.   The motion for reconsideration
21        Mr. Szanto filed a motion for reconsideration (“Motion for
22   Reconsideration”), arguing that the court should have allowed him
23   leave to amend the complaint.   The hearing on the Motion for
24   Reconsideration was delayed for fifteen months because Mr. Szanto
25   claimed he was too ill to appear.
26   D.   Dismissal of the bankruptcy case
27        In the meantime, the bankruptcy court dismissed Mr. Szanto’s
28   bankruptcy case.   The chapter 11 trustee moved to dismiss the

                                      3
 1   case or convert it to chapter 7 because Mr. Szanto failed timely
 2   under § 1112(b)(4)(J) to file a disclosure statement.   The court
 3   granted the motion and dismissed the bankruptcy case with a six-
 4   month bar on re-filing any bankruptcy petition.
 5        The district court affirmed the bankruptcy court’s order of
 6   dismissal.    Mr. Szanto appealed the district court’s decision to
 7   the Ninth Circuit, and that appeal is currently pending.
 8   E.   Ruling on the Motion for Reconsideration
 9        The bankruptcy court denied the Motion for Reconsideration
10   for two reasons.   First, it determined that granting leave to
11   amend would be an excise in futility, since Mr. Szanto failed to
12   “propose any amendments to his complaint that would cure the
13   deficiencies to allege any facts upon which a claim can be stated
14   against defendants.”
15        Second, the bankruptcy court noted that, during the fifteen
16   months that the Motion for Reconsideration was pending, the court
17   had dismissed the underlying bankruptcy case, and Mr. Szanto had
18   neither requested nor received a stay of the order dismissing the
19   bankruptcy case.   Applying Carraher v. Morgan Electronics, Inc.
20   (In re Carraher), 971 F.2d 327, 328 (9th Cir. 1992), the court
21   held that it would not retain jurisdiction over the adversary
22   proceeding.
23                               JURISDICTION
24        The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
25   §§ 1334 and 157(b)(1).   Mr. Szanto’s notice of appeal was
26   premature because he filed it before the bankruptcy court decided
27   his Motion for Reconsideration.   Now that the bankruptcy court
28   has denied the Motion for Reconsideration, the bankruptcy court’s

                                       4
 1   order has become final, and we have jurisdiction under 28 U.S.C.
 2   § 158.
 3                                   ISSUE
 4        Whether the bankruptcy court erred in dismissing
 5   Mr. Szanto’s adversary complaint without leave to amend.
 6                            STANDARDS OF REVIEW
 7        We review de novo the bankruptcy court’s decision to dismiss
 8   a complaint under Civil Rule 12(b)(6).      See Movsesian v. Victoria
 9   Versicherung AG, 670 F.3d 1067, 1071 (9th Cir. 2012) (en banc).
10        In contrast, we review for abuse of discretion the
11   bankruptcy court’s decision whether to grant leave to amend the
12   complaint.    See, e.g., Zadrozny v. Bank of N.Y. Mellon, 720 F.3d
13   1163, 1167 (9th Cir. 2013); Reddy v. Litton Indus., Inc.,
14   912 F.2d 291, 296 (9th Cir. 1990).      Appellate courts should
15   “review strictly a . . . court’s exercise of discretion denying
16   leave to amend.”   Albrecht v. Lund, 845 F.2d 193, 195 (9th Cir.
17   1988), amended, 856 F.2d 111 (9th Cir. 1988).
18        Similarly, we review for abuse of discretion the court’s
19   decision to decline to exercise jurisdiction over an adversary
20   proceeding.   In re Carraher, 971 F.2d at 328.
21        We also review for abuse of discretion the denial of a
22   motion for reconsideration.   See N. Alaska Envtl. Ctr. v. Lujan,
23   961 F.2d 886, 889 (9th Cir. 1992).
24        To determine whether the bankruptcy court has abused its
25   discretion, we conduct a two-step inquiry: (1) we review de novo
26   whether the bankruptcy court “identified the correct legal rule
27   to apply to the relief requested” and (2) if it did, whether the
28   bankruptcy court’s application of the legal standard was

                                       5
 1   illogical, implausible, or “without support in inferences that
 2   may be drawn from the facts in the record.”    United States v.
 3   Hinkson, 585 F.3d 1247, 1262–63 & n.21 (9th Cir. 2009) (en banc).
 4   “If the bankruptcy court did not identify the correct legal rule,
 5   or its application of the correct legal standard to the facts was
 6   illogical, implausible, or without support in inferences that may
 7   be drawn from the facts in the record, then the bankruptcy court
 8   has abused its discretion.”    USAA Fed. Sav. Bank v. Thacker
 9   (In re Taylor), 599 F.3d 880, 887–88 (9th Cir. 2010) (citing
10   Hinkson, 585 F.3d at 1261–62).
11        We may affirm on any ground supported by the record.     Diener
12   v. McBeth (In re Diener), 483 B.R. 196, 202 (9th Cir. BAP 2012).
13                                 DISCUSSION
14   A.   The propriety of dismissal is not before us.
15        As a preliminary matter, we note that Mr. Szanto is not
16   appealing the bankruptcy court’s decision to dismiss his
17   complaint.   We only consider whether the court should have
18   allowed Mr. Szanto leave to amend his complaint.
19   B.   The bankruptcy court abused its discretion in denying
          Mr. Szanto an opportunity to amend his adversary complaint.
20
21        Civil Rule 15(a), made applicable through Rule 7015,
22   provides that if an amendment is not allowed as a matter of
23   course, “a party may amend its pleading only with the opposing
24   party’s written consent or the court’s leave.    The court should
25   freely give leave when justice so requires.”    Civil
26   Rule 15(a)(2).   The Ninth Circuit has “stressed Rule 15’s policy
27   of favoring amendments, and [it has] applied this policy with
28   liberality.”   Ascon Props., Inc. v. Mobil Oil Co., 866 F.2d 1149,

                                       6
 1   1160 (9th Cir. 1989).
 2        In determining whether to grant leave to amend, we follow
 3   the United States Supreme Court’s dictate in Foman v. Davis,
 4   371 U.S. 178 (1962), which instructed that:
 5        In the absence of any apparent or declared reason -
          such as undue delay, bad faith or dilatory motive on
 6        the part of the movant, repeated failure to cure
          deficiencies by amendments previously allowed, undue
 7        prejudice to the opposing party by virtue of allowance
          of the amendment, futility of amendment, etc. - the
 8        leave sought should, as the rules require, be freely
          given.
 9
10   Id. at 182; see Tracht Gut, LLC v. Cty. of L.A. Treasurer & Tax
11   Collector (In re Tracht Gut, LLC), 503 B.R. 804, 814 (9th Cir.
12   BAP 2014) (relying on the “Foman Factors”).
13        “[A] determination that any amendment would be futile
14   requires the trial court to dismiss the complaint with
15   prejudice.”   In re Tracht Gut, LLC, 503 B.R. at 815 (citing
16   Mirmehdi v. United States, 689 F.3d 975, 985 (9th Cir. 2012);
17   Sanford v. MemberWorks, Inc., 625 F.3d 550, 557 (9th Cir. 2010)).
18   “Amendment is futile when ‘allegation of other facts consistent
19   with the challenged pleading could not possibly cure the
20   deficiency.’”   Van Zandt v. Mbunda (In re Mbunda), 484 B.R. 344,
21   356 (9th Cir. BAP 2012), aff’d, 604 F. App’x 552 (9th Cir. 2015)
22   (quoting Albrecht, 845 F.2d at 195).
23        The Ninth Circuit has cautioned that “[d]ismissal without
24   leave to amend is improper unless it is clear, upon de novo
25   review, that the complaint could not be saved by any amendment.”
26   Intri–Plex Techs., Inc. v. Crest Group, Inc., 499 F.3d 1048, 1056
27   (9th Cir. 2007) (quoting Sparling v. Daou (In re Daou Sys.,
28   Inc.), 411 F.3d 1006, 1013 (9th Cir. 2005)).

                                      7
 1        1.     The bankruptcy court erroneously denied leave to amend
                 based on the insufficiency of the original complaint.
 2
 3        The court abused its discretion by not allowing Mr. Szanto
 4   to amend his complaint.   The court apparently denied leave to
 5   amend because it thought the complaint was very far from meeting
 6   the Twombly and Iqbal standards.       This was an error.   When
 7   deciding whether to grant leave to amend, the degree of
 8   insufficiency of the original complaint is irrelevant.        Rather,
 9   the primary question is whether the plaintiff could file an
10   adequate complaint.
11        Further, in its ruling on the Motion to Dismiss, the court
12   did not rely on any of the Foman factors in its decision to deny
13   leave to amend.   Thus, the court applied the incorrect legal
14   standard.
15        2.     The court erred in determining that any amendment would
                 be futile.
16
17        In ruling on the Motion for Reconsideration, the court
18   properly identified the Foman factors, but held that futility of
19   amendment justified denying leave to amend under Civil
20   Rule 15(a).   It said that, because Mr. Szanto did not offer any
21   amendments to his complaint that would cure the deficiency,
22   “granting leave to plaintiff to file an amended complaint would
23   be an exercise in futility in the complete absence of any showing
24   by plaintiff he has a factual basis upon which a claim against
25   defendants can be stated.”
26        The record does not support the view that amendment would be
27   futile.   For example, the court pointed out that Mr. Szanto did
28   not identify the “assets” referenced in the complaint; however,

                                        8
 1   Mr. Szanto said that the “assets” at issue are those listed in
 2   his Schedule B.4   Mr. Szanto could solve that problem simply by
 3   identifying and adequately describing those assets in his amended
 4   complaint.   Similarly, the court faulted Mr. Szanto for not
 5   referencing the trusts at issue; in his Motion for
 6   Reconsideration, he identified the three trusts.   Mr. Szanto
 7   could incorporate this information in an amended complaint.     In
 8   other words, it is not apparent to us “that the complaint could
 9   not be saved by any amendment.”   See Intri–Plex Techs., Inc.,
10   499 F.3d at 1056; see also In re Tracht Gut, LLC, 503 B.R. at
11   814; cf. In re Mbunda, 484 B.R. at 356-57 (concluding that
12   amendment would be futile because the appellant conceded he could
13   not present additional facts).
14        The court faulted Mr. Szanto for not describing the
15   amendments he would make to the complaint.   But this puts the
16   cart before the horse.   A plaintiff does not have to file an
17   amended complaint, or say what an amended complaint would allege,
18   until after the court has dismissed the original complaint.     The
19   court cannot deny leave to amend because the plaintiff has failed
20   to describe the proposed amendments, as long as there is reason
21   to believe that the plaintiff could construct a viable complaint.
22   C.   The bankruptcy court properly declined to retain
          jurisdiction over the adversary proceeding, so its error in
23        refusing to grant leave to amend is harmless.
24        Even though the court erred in denying Mr. Szanto leave to
25   amend, such error was harmless.   The bankruptcy court dismissed
26
27
          4
            Schedule B generally identifies a “[f]amily trust
28   entitlement” valued at $3,200,000.

                                       9
 1   the underlying bankruptcy case.    It subsequently determined that
 2   it would not exercise jurisdiction over the adversary complaint.
 3   Mr. Szanto did not appeal this decision or otherwise address it
 4   in his appellate briefs, and we find no error.
 5        We follow the Ninth Circuit’s four-part test set forth in
 6   Carraher to determine whether a court should retain jurisdiction
 7   over an adversary proceeding after the underlying bankruptcy case
 8   has been dismissed.   The Ninth Circuit stated:
 9             In considering what standards govern the
          bankruptcy court’s discretion in determining whether to
10        retain a related case after dismissal of the underlying
          bankruptcy case, we, like other courts, turn for
11        guidance to cases considering the authority of federal
          district courts to retain pendent state claims after
12        the federal claims have been dismissed. The Supreme
          Court has held that where a federal district court
13        dismisses federal claims, the court must consider
          economy, convenience, fairness and comity in deciding
14        whether to retain jurisdiction over pendent state
          claims.
15
16   In re Carraher, 971 F.2d at 328 (emphasis added) (internal
17   citations omitted); see also Linkway Investment Co., Inc. v.
18   Olsen (In re Casamont Investors, Ltd.), 196 B.R. 517, 523 (9th
19   Cir. BAP 1996) (“retention of jurisdiction was found to have been
20   improper when the initiation of the dispute was recent, no action
21   had been taken prior to the dismissal and the dispute concerned
22   issues of probate law, in which the state courts had more
23   expertise” (emphasis in original)); Zegzula v. JPMorgan Chase
24   Bank, N.A. (In re Zegzula), BAP No. WW-14-1119-JuKiF, 2015 WL
25   5786572 (9th Cir. BAP Oct. 2, 2015) (holding that the bankruptcy
26   court did not abuse its discretion in declining to retain
27   jurisdiction over the adversary proceeding when it had previously
28   dismissed the underlying bankruptcy case and found that

                                       10
 1   considerations of judicial economy and fairness did not support
 2   the court’s retention of jurisdiction over the adversary
 3   proceeding).
 4        Mr. Szanto’s opening brief fails to discuss the bankruptcy
 5   court’s decision not to retain jurisdiction of the adversary
 6   proceeding.     Nor did he address this issue in his reply brief,
 7   even when specifically argued by Appellees in their answering
 8   brief.     We thus deem this issue waived for the purposes of
 9   appeal.5    See Smith v. Marsh, 194 F.3d 1045, 1052 (9th Cir. 1999)
10   (“on appeal, arguments not raised by a party in his opening brief
11   are deemed waived”).
12        Even if Mr. Szanto had not waived the issue, we would
13   conclude that the bankruptcy court did not err in dismissing the
14   adversary proceeding.     The bankruptcy court properly identified
15   the Carraher test as the correct legal standard and applied that
16   test to the facts of the case.     We find no error in the court’s
17   conclusions.
18        First, judicial economy does not favor retention of the
19   adversary proceeding.     As the bankruptcy court properly noted,
20   the adversary proceeding had not progressed beyond the initial
21   pleading stage.     Although the case had been pending for nearly
22   two years, the delay was largely caused by Mr. Szanto and his
23   failures to appear at the hearings on his Motion for
24
          5
            At oral argument, the Panel questioned Mr. Szanto about
25   the effect of the dismissal of the underlying bankruptcy case.
26   Mr. Szanto failed to provide any substantive answer (or explain
     why he did not raise that issue in this appeal) and only stated
27   that, because the dismissal order is currently on appeal to the
     Ninth Circuit, the effect “remains to be seen” as he is “charting
28   new law.”

                                       11
 1   Reconsideration.    Moreover, the issues raised by the adversary
 2   complaint are state law issues that can be resolved expeditiously
 3   in state court.    See In re Carraher, 196 B.R. at 524.      As such,
 4   judicial economy does not support retention of the adversary
 5   proceeding.
 6        Second, none of the parties would be inconvenienced by the
 7   dismissal of the case.    The bankruptcy court stated that there is
 8   ongoing litigation in California state court, which could
 9   potentially involve the present parties, most of whom are
10   California residents.6    See id.
11        Third, it would not be unfair to require Mr. Szanto to
12   assert his claims in state court.        Mr. Szanto fails to explain
13   why he could not assert his state law claims in state court.7
14        Finally, comity favors refusing jurisdiction over the
15   adversary complaint.     We agree with the bankruptcy court that the
16   fraud-based claims are grounded in state law and should be
17   decided in state court.
18        Therefore, the bankruptcy court did not err in refusing to
19   retain jurisdiction over the adversary proceeding after the
20   underlying bankruptcy case had been dismissed.
21
22        6
            Mr. Szanto says that, if his complaint is dismissed, the
23   statute of limitations would bar his claims. He offers no
     explanation for this statement, so we cannot say that the
24   bankruptcy court’s refusal to retain jurisdiction would be unfair
     to him.
25
          7
26          At oral argument, Mr. Szanto stated that he cannot present
     his claims in the California state courts because he has been
27   declared a vexatious litigant in California. The fact that a
     party apparently has abused the state court system does not
28   require the federal courts to hold their doors open.

                                         12
 1                              CONCLUSION
 2        The bankruptcy court abused its discretion in dismissing the
 3   complaint without leave to amend.   However, the bankruptcy court
 4   has dismissed the underlying bankruptcy case, and Mr. Szanto has
 5   not appealed the court’s decision to decline to exercise
 6   jurisdiction over the adversary proceeding.   Moreover, the court
 7   correctly declined jurisdiction under the Carraher analysis.
 8   Accordingly, the bankruptcy court’s error was harmless, and we
 9   AFFIRM.
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

                                    13