Court Opinion

ID: 9401168
Source: CourtListenerOpinion
Date Created: 2023-06-11 23:01:14.274803+00
Date Added: 2024-06-11T17:19:51.181636
License: Public Domain

FILED
                            NOT FOR PUBLICATION                                       JUN 8 2023
                                                                               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 No. CC-22-1170-SGF
 Ashley Susan Aarons,
                Debtor.                               Bk. No. 2:19-bk-18316-NB

 Ashley Susan Aarons,                                 Adv. No. 2:22-ap-01008-NB
                    Appellant,
 v.                                                   MEMORANDUM*
 Patch of Land Lending, LLC; FCI Lender
 Services, Inc.; California TD Specialists;
 Versus Residential LoanCo, LLC,
                    Appellees.

                 Appeal from the United States Bankruptcy Court
                      for the Central District of California
                  Neil W. Bason, Bankruptcy Judge, Presiding

Before: SPRAKER, GAN, and FARIS, Bankruptcy Judges.

                                   INTRODUCTION

      Ashley Susan Aarons believed that her secured creditor improperly

calculated the balance owed on its secured loan and pursued foreclosure in

violation of federal and state law. Aarons filed for chapter 11 1 relief and

      *
        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.
      1
          Unless specified otherwise, all chapter and section references are to the
settled her claims with the secured creditor. She incorporated the

settlement into her confirmed chapter 11 plan. Post-confirmation the

bankruptcy court converted her case to chapter 7. Aarons then sued the

secured lender in state court to quiet title, cancel the recorded documents

setting the foreclosure in motion, and recover damages for wrongful

foreclosure. The lender removed the action to the bankruptcy court and

moved to dismiss it under Civil Rule 12(b)(6), made applicable by Rule

7012. The bankruptcy court granted the lender’s dismissal motion without

leave to amend. We agree with the bankruptcy court that the settlement

precluded any claims based on the lender’s pre-confirmation conduct, and

any potentially surviving claims belonged to the bankruptcy estate, not to

Aarons. Therefore, we AFFIRM.

                                        FACTS2

A.    The parties and their roles in the loan transaction.

      Patch of Land Lending, LLC (“Patch”) loaned Aarons’ family trust

$3,000,000, evidenced by a promissory note requiring interest-only

payments and maturing on April 1, 2020. Aarons, on behalf of the trust,

executed a deed of trust to secure the loan, which encumbered real

Bankruptcy Code, 11 U.S.C. §§ 101–1532, all “Rule” references are to the Federal Rules
of Bankruptcy Procedure, and all “Civil Rule” references are to the Federal Rules of
Civil Procedure.
      2
          We exercise our discretion 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).
                                            2
property located on Bel Air Road in Los Angeles (”Bel Air Property”).

Aarons personally guaranteed the loan. Patch thereafter sold and assigned

its loan and lien rights to Wilmington Savings Fund Society, as trustee for a

mortgage pool trust owned or controlled by Invictus Residential Pooler

Trust 3A. In turn, Invictus sold and assigned its rights to the Verus

Securitization Trust 2020-NPL1. Notwithstanding these assignments, Patch

retained the servicing rights for the loan, and FCI Lender Services became

the sub-servicer.

B.    Default, bankruptcy, and burgeoning disputes between the parties.

      By January 2019, the loan was in default, with payments in arrears of

$73,168. Aarons alleges that she tendered $73,200 to pay the delinquency

but Patch refused to apply the payment and placed it in a suspense account

instead. Aarons contends that as a result Patch wrongfully calculated the

balance of the loan and improperly charged interest and other fees. On

February 1, 2019, Patch issued a notice of default.

      Aarons filed her chapter 11 petition in June 2019. Through various

filings in the bankruptcy court, Aarons and Patch skirmished over their

respective rights and duties. In November 2019, Aarons filed a motion

challenging the validity and amount of Patch’s secured claim and

contended that the lender had applied an improper interest rate, charged

improper interest and late charges, had violated multiple consumer finance

and usury laws, wrongfully interfered with Aarons’ attempts to refinance

the Bel Air Property, incorrectly accounted for the loan, and improperly

                                      3
failed to credit her for the $73,200 payment.

       In December 2019, Patch timely filed a proof of claim for

$3,354,858.00 due and owing as of the petition date. In addition, in

February 2020, Wilmington on behalf of Invictus filed a motion for relief

from stay. Among other things, Wilmington obtained partial relief from

stay permitting it to issue a new notice of default (collectively, “NODs”)

and a notice of trustee’s sale (“NOTS”) against the Bel Air Property.

California TD Specialists is identified as the successor trustee in the NOD

recorded in June 2020 against the Bel Air Property.

C.     Settlement and plan confirmation.

       In the spring and summer of 2020, the parties negotiated a tentative

settlement resolving the issues relating to the loan and Patch’s secured

claim. The settlement was executed in September 2020 and attached to the

brief Aarons filed in support of confirmation of her proposed plan. This

agreement was supplemented and amended by four addenda, though none

of the addenda terms are pertinent to this appeal.

       The settlement treated Aarons’ November 2019 motion as an

objection to Patch’s December 2019 proof of secured claim. According to

Patch, by the time the original settlement was executed, Aarons owed it

over $4,000,000 (including all interest, fees, and charges). The key terms of

the settlement included the following:

     • Reduction of Patch’s secured claim from $4,006,291.07 (as of June 1,
       2020) to a “New Principal Balance” of $3,432,916.07.

                                       4
   • Reinstatement of the loan as “current” with a 7.5% nondefault
     interest rate as specified in the note and a default rate of 18% as
     specified in the note.

   • Extension of the loan’s maturity date to April 1, 2021, at which point
     the entire outstanding loan balance would be due.

   • Monthly interest-only payments of $21,455.73, to be paid until full
     satisfaction of the debt.

   • Treatment of Aarons’ 2019 $73,200 payment as a reserve to be applied
     to satisfy the first three months of interest only payments, plus
     estimated real property taxes and part of the fourth monthly interest
     payment.

   • A $60,000 fee for extension of the new maturity date for up to six
     months, subject to waiver under certain conditions.

      In exchange for these new loan terms, Aarons granted Patch, FCI,

Wilmington, and their successors, assigns, agents, and other

representatives a very broad release of all then-existing claims she held

against them.

      In her own words, Aarons stated, “the settlement reached will result

in substantial benefit for my bankruptcy estate and its creditors.”

According to Aarons, the settlement gave her breathing room from the

secured debt obligations she owed to Patch and enabled her to refinance or

sell the Bel Air Property to help fund her plan. She further predicted: “[i]f

the Plan is not approved, I will lose this favorable opportunity to generate

                                       5
funds from the Bel Air Property and more importantly, I will lose the Bel

Air Property to a foreclosure sale.”

      The final version of the settlement, with all addenda, was made a

part of Aarons’ plan and was approved under Rule 9019 during the

confirmation proceedings. The settlement became effective in February

2021—shortly after the bankruptcy court entered its order confirming

Aarons’ plan. By the time Aarons confirmed her plan and the settlement

became effective, she had two months remaining before the note matured

under the settlement.

      On April 13, 2021, Aarons requested a six-month extension of the

maturity date. The record does not include any response to the request for

extension, but Aarons’ subsequent request for forbearance was denied, and

on August 11, 2021(more than six months after the maturity date under the

settlement), a notice of default was recorded.

D.    Plan default, conversion to chapter 7, and Aarons’ complaint.

      Aarons neither sold nor refinanced the Bel Air Property, and her case

was converted to chapter 7 on October 18, 2021. In accordance with the

terms of the plan and the conversion order, her property as the reorganized

debtor vested in the chapter 7 estate, except for property that would have

been excluded from the estate if the case always had been under chapter 7.

      Several months after the conversion of the bankruptcy to chapter 7,

Aarons filed a complaint in state court to quiet title to the Bel Air Property,

for cancellation of the recorded NODs and NOTS, and for wrongful

                                       6
foreclosure.3 The complaint named Patch, FCI, TD, and Verus as

defendants (collectively, the “Patch Defendants”). Though the foreclosure

had not yet occurred, many allegations read as if it had. The allegations are

wide ranging and span the years from 2019 to 2022, including the alleged

refusal to credit her loan account for the $73,200 she had paid to bring her

loan current. Many of these allegations complain about events that were

prior to, and the subject of, the settlement. Some of the allegations,

however, occurred after confirmation and prior to conversion of the

bankruptcy. Aarons also included in her allegations the post-conversion

NOTS and stated that she requested a loan modification after the post-

conversion NOTS. The complaint, however, omits any reference to the

settlement, the release of Aarons’ claims, or the revesting of her property in

the bankruptcy estate upon conversion.

E.     Removal of the complaint and the motion to dismiss.

       The Patch Defendants removed the state court complaint to the

bankruptcy court and moved to dismiss it under Civil Rule 12(b)(6).

According to the Patch Defendants, the causes of action in the complaint

belonged to Aarons’ chapter 7 estate and only could be pursued by the

       3In her cause of action to quiet title, Aarons essentially alleged that the Patch
Defendants’ misconduct entitled her to consequential damages and to have title to the
Bel Air Property quieted in the name of the Ashley S. Aarons 2015 Trust Dated May 15,
2015. In her cause of action for cancellation of instrument(s), Aarons further alleged that
the recorded NODs and NOTS were invalid and should be cancelled. Based on the
same allegations of misconduct and defective instruments, Aarons maintained in her
cause of action for wrongful foreclosure that she was entitled to recover damages.
                                             7
chapter 7 trustee. As for Aarons’ key allegations, the Patch Defendants

asserted that they were precluded by the plain and unambiguous terms of

the settlement because it released all causes of action that had accrued

before confirmation. With respect to the merits of Aarons’ assertions of

post-confirmation malfeasance, the Patch Defendants maintained that they

properly calculated the amounts stated consistent with the settlement

terms so the amounts were neither false nor fraudulent.

      Meanwhile, Aarons unsuccessfully sought a temporary restraining

order. The foreclosure occurred on March 30, 2022.

      Aarons opposed the motion to dismiss. In response to the Patch

Defendants’ arguments, she maintained that under the “person aggrieved”

standard historically applied by the Ninth Circuit in relation to bankruptcy

appeals, she had standing to pursue the causes of action based on her

pecuniary interest in the proceeds and equity in the Bel Air Property. As

for the contention that she had released the claims stated in her complaint,

she insisted that the terms of the settlement and the plan were ineffective

because the plan never was fully consummated. In other words, because

she failed to perform her plan obligations and the case was converted to

chapter 7, she maintained that the settlement and the chapter 11 plan were

ineffective and non-binding. 4

      4
         Aarons also stated in her opposition that she was fraudulently induced to enter
into the settlement and plan. The bankruptcy court rejected this argument, and she has
abandoned it on appeal.
                                           8
F.    The bankruptcy court’s ruling.

      The bankruptcy court ruled that dismissal was appropriate and leave

to amend would be futile. It agreed that any claims belonging to Aarons

that arose before confirmation of the plan were released by the settlement

incorporated into the plan. The court rejected Aarons’ argument that the

settlement and plan were ineffective, noting that she had failed to obtain

financing or make the monthly payments required under the settlement.

Nor was there any authority to support her contention that she could, by

her own breach, render the settlement and plan ineffective. As the court

aptly observed: “Such a conclusion would make all settlements and all

resolutions of disputed issues in any chapter 11 plan meaningless because

they would be terminable at will by the settling party, simply by choosing

not to perform.”

      The court additionally held that the claims asserted were assets of the

chapter 7 estate. This result was dictated by the express provisions of the

court’s confirmation order and its order converting the case to chapter 7.

Both orders stated that any property belonging to the reorganized debtor

(except possibly for any property subject to valid exemption) would

become property of the estate upon conversion. This included any post-

confirmation claims that existed prior to conversion. Because the chapter 7

estate owned the Bel Air Property, and all claims related to it, the court

held that Aarons lacked standing to pursue the claims against the Patch

Defendants.

                                      9
      The bankruptcy court also concluded that leave to amend was futile. 5

It reasoned that Aarons could not plead around the release of claims or the

estate’s ownership of any post-confirmation claims. For these reasons, the

court dismissed the claims with prejudice.

      The bankruptcy court entered its judgment of dismissal with

prejudice on August 8, 2022. Aarons timely appealed.

                                  JURISDICTION

      The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and

157(b)(2)(A) and (C). We have jurisdiction under 28 U.S.C. § 158.

                                       ISSUES

1.    Did the bankruptcy court commit reversible error when it dismissed

Aarons’ claims for relief?

2.    Did the bankruptcy court abuse its discretion when it denied Aarons

leave to amend?

                           STANDARDS OF REVIEW

      We review de novo the bankruptcy court’s order granting a Civil

      5
         The bankruptcy court also held that dismissal was appropriate because the
complaint failed to state claims for which relief could be granted. It noted that the
complaint failed to explain what balances or calculations were incorrect, or why they
were so material as to justify the relief she sought. The bankruptcy court repeatedly
noted that the debt matured prior to conversion and Aarons failed to meet her
obligations under the plan. Because we agree with the bankruptcy court that all claims
based on pre-confirmation activity have been released and the estate owns any claims
related to the Bel Air Property, we need not address the alternate basis adopted by the
bankruptcy court and whether the complaint could have been amended to address
those deficiencies.
                                           10
Rule 12(b)(6) motion to dismiss. See Camacho v. Bridgeport Fin. Inc., 430 F.3d

1078, 1079 (9th Cir. 2005). When we review a matter de novo, we consider

the matter anew, as if it were not previously decided by the bankruptcy

court. Mele v. Mele (In re Mele), 501 B.R. 357, 362 (9th Cir. BAP 2013).

      Generally, we review the bankruptcy court’s denial of leave to amend

for an abuse of discretion. See Reddy v. Litton Indus., Inc., 912 F.2d 291, 296

(9th Cir. 1990). The bankruptcy court abused its discretion if it applied an

incorrect legal rule 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.    Civil Rule 12(b)(6) standards.

      When we review an order granting a Civil Rule 12(b)(6) motion, we

consider the legal sufficiency of the plaintiff’s complaint. See Johnson v.

Riverside Healthcare Sys., LP, 534 F.3d 1116, 1121–22 (9th Cir. 2008). This

means that we must assess whether the complaint presents a cognizable

legal theory and whether it contains sufficient factual allegations to

support that theory. Id. Thus, “for a complaint to survive a motion to

dismiss, the non-conclusory ‘factual content,’ and reasonable inferences

from that content, must be plausibly suggestive of a claim entitling the

plaintiff to relief.” Moss v. U.S. Secret Serv., 572 F.3d 962, 969 (9th Cir. 2009)

(citing Ashcroft v. Iqbal, 556 U.S. 662, 677-78 (2009)).

      A claim is facially plausible when it contains factual allegations that,

                                        11
if taken as true, would allow the court to reasonably infer that the

defendant is liable to the plaintiff. Iqbal, 556 U.S. at 678. “Threadbare

recitals of the elements of a cause of action, supported by mere conclusory

statements, do not suffice.” Id. Additionally, we do not accept as true mere

legal conclusions because they cannot by themselves establish a plausible

claim for relief. Id.

      Though our review generally is limited to the allegations of the

complaint, Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir.),

opinion amended on denial of reh'g, 275 F.3d 1187 (9th Cir. 2001), we also may

consider matters properly subject to judicial notice, including other papers

filed in the adversary proceeding and the underlying bankruptcy case, see

Est. of Blue v. Cnty. of L.A., 120 F.3d 982, 984 (9th Cir. 1997); Barron v. Reich,

13 F.3d 1370, 1377 (9th Cir. 1994). In fact, we need not accept as true factual

allegations that contradict judicially noticed matters or exhibits attached to

and incorporated into the complaint. Sprewell, 266 F.3d at 988.

B.    Aarons’ arguments.

      What Aarons does not argue on appeal is as important as what she

does argue. On appeal, she does not claim that the bankruptcy court

misconstrued the terms of the settlement or the plan, including the

reversion of her property to the chapter 7 bankruptcy estate upon

conversion. Similarly, she does not deny that the release covered her claims

based on the Patch Defendants’ pre-confirmation conduct, including the

alleged misapplication of the $73,200. Nor does she contest that she failed

                                        12
to obtain financing or make the monthly payments required under the

settlement.

     Instead, Aarons now argues that the conversion of her bankruptcy to

chapter 7 “rescinded” the settlement and plan or rendered them ineffective

because it frustrated her purpose of retaining the Bel Air Property. She

makes only one other relevant argument in her appeal brief. She claims

that she had standing to file the complaint for her individual benefit by

virtue of her $600,000 homestead exemption. We address each of these

arguments in turn.

     1.       The conversion of the case did not rescind the settlement or
              the plan.

     Aarons stated claims for quiet title, cancellation of the NODs and

NOTS, and wrongful foreclosure. She does not deny that to the extent these

claims were based on pre-confirmation actions, the claims were within the

scope of the release in the settlement, which was approved and

incorporated into her confirmed plan. The Patch Defendants moved to

dismiss on this basis, arguing that Aarons was bound by that release

pursuant to § 1141(a), and the doctrine of claim preclusion. Aarons

opposed dismissal based on her belief that the approved settlement was

not enforceable because the plan was not consummated and that she was

fraudulently induced into making the settlement. She does not press either

argument on appeal. Rather, she now argues that the settlement cannot be

enforced because conversion of her case frustrated her purpose in settling

                                      13
her claims. She reasons that under the “frustration of purpose doctrine”

any contract whose purpose is frustrated is immediately terminated.

      Frustration of purpose is an affirmative defense that may be applied

in a breach of contract action when the defendant shows: “(1) the purpose

of the contract that has been frustrated was contemplated by both parties in

entering the contract; (2) the risk of the event was not reasonably

foreseeable and the party claiming frustration did not assume the risk

under the contract; and (3) the value of counter-performance is totally or

nearly totally destroyed.” SVAP III Poway Crossings, LLC v. Fitness Int'l,

LLC, 87 Cal. App. 5th 882, 895 (2023). Aarons contends that conversion of

her bankruptcy has frustrated the purpose of the settlement, which was to

save her property from foreclosure.

      This argument is without merit. Nothing in the settlement, in the

confirmed plan, or even in the complaint, spoke of any guaranty that

Aarons would retain her property. Rather, the settlement and plan gave

Aarons the opportunity to save the property by paying Patch on

renegotiated terms. Through the settlement, Aarons resolved her existing

claim dispute with Patch, including the alleged 2019 misapplication of her

$73,200 payment. Aarons also received a substantial reduction in the

amount owed, and an extension of a matured loan that offered her the

opportunity to refinance or sell the Bel Air Property. The settlement

permitted Aarons to proceed with confirmation of her plan. Aarons fails to

state any basis for frustration of purpose. Rather, she received the

                                      14
opportunity that she bargained for; it was her failure to make the loan

payments as modified by the settlement that caused the foreclosure.

      Similarly, Aarons fails completely to allege or explain how the risk of

foreclosure for nonpayment of her loan was neither foreseeable nor

assumed in this instance. She failed to plead the elements of the defense in

her complaint and has similarly failed to detail any basis to suggest that

she would be able to address this requirement on amendment.

      Moreover, Aarons may not simply discard the plan she negotiated

and confirmed. Under § 1141(a), “the provisions of a confirmed plan bind

the debtor” and other interested parties, such as creditors and equity

interest holders. The statute recognizes two exceptions to this rule related

to the discharge of the debtor, see § 1141(d)(2), (3), but neither are relevant

here. Thus, once her plan was confirmed and the confirmation order

became final and unappealable, the unambiguous terms of her plan and

the confirmation order bound her and the other plan constituents. See J.J.

Re-Bar Corp. v. United States (In re J.J. Re-Bar Corp.), 420 B.R. 496, 503 (9th

Cir. BAP 2009), aff'd, 644 F.3d 952 (9th Cir. 2011). Aarons was bound by the

terms of her confirmed plan, and conversion had no effect on her

settlement. See In re Oakhurst Lodge, Inc., 582 B.R. 784, 792 (Bankr. E.D. Cal.

2018) (“Moreover, conversion of a chapter 11 case to chapter 7 does not

vacate the order confirming the plan. See 11 U.S.C. § 348 (omitting any

reference to §§ 1129 and 1141).”); see also In re Space Bldg. Corp., 206 B.R. 269,

274 (D. Mass. 1996) (“[C]ourts which have considered whether dismissal or

                                        15
conversion of a Chapter 11 case revokes a confirmed Plan, consistently

have determined that it does not.”).

      Aarons cites two Ninth Circuit decisions for the unremarkable

proposition that confirmed chapter 11 plans—and settlements incorporated

into plans—are “construed basically as a contract.” But neither case helps

Aarons. In Baroni v. Seror (In re Baroni), 36 F.4th 958, 967-68 (9th Cir. 2022),

the Ninth Circuit analogized the confirmed plan to a contract for purposes

of determining whether a particular payment default by the reorganized

debtor qualified as a material default under the plan. And in Hillis Motors,

Inc. v. Hawaii Automobile Dealers' Ass'n, 997 F.2d 581, 588 (9th Cir. 1993), the

Ninth Circuit analogized the confirmed plan to a contract for purposes of

determining whether the plan contemplated that Hillis’ corporate assets

would continue to be property of the estate after confirmation. In short,

both cases used traditional rules of contract interpretation to construe and

effectuate the provisions of confirmed plans. Neither case addressed the

effect of conversion on a confirmed chapter 11 plan.

      Contrary to her argument, nothing in either Baroni or Hillis Motors

suggests that she has pled or could plead a plausible basis to conclude that

either her settlement or her confirmed plan are subject to the doctrine of

frustration of purpose. Under these circumstances, the bankruptcy court

correctly determined that the Patch Defendants’ Civil Rule 12(b)(6) motion

should be granted as to any pre-confirmation claims she stated in her

complaint.

                                       16
      2.     Only the chapter 7 trustee had authority to pursue the post-
             confirmation causes of action stated in the complaint.

      Though the settlement released any claims that existed prior to

approval of the settlement at confirmation, Aarons alleged certain conduct

that occurred after plan confirmation. The bankruptcy court alternately

held that to the extent that any of Aarons’ claims were not released by the

settlement, she lacked standing to pursue those claims. It held that under

the terms of the confirmed plan and conversion order, all property held by

the debtor at the time of conversion to chapter 7 became property of the

bankruptcy estate. Aarons does not dispute this. Instead, she contends that

because she claimed certain exemptions, she had pecuniary interests that

gave her standing to bring her action against the Patch Defendants.

      In her complaint, Aarons alleged that she had a homestead interest in

the Bel Air Property.6 Aarons argues that her exemption provided her with

a concrete and specific injury sufficient to establish injury in fact for

constitutional standing and that she is a person aggrieved for purposes of

prudential standing. We agree that her exemptions gave Aarons a

pecuniary interest in the administration of the Bel Air Property. But she

      6
        Aarons originally claimed a homestead exemption but amended her
exemptions after her case was converted and the Bel Air Property foreclosed. She
deleted the homestead exemption and exempted $10,275 in the claims she brought
against the Patch Defendants. Nonetheless, on appeal Aarons relies on her homestead
exemption to establish her pecuniary interest for purposes of standing. As further
explained in this discussion, the exact exemption applied is immaterial to our analysis.
                                           17
neither owned nor controlled the property or the causes of action related to

it.

      As the bankruptcy court explained, and Aarons does not challenge,

the confirmation and conversion orders provided that all property of the

debtor vested in the chapter 7 trustee upon conversion of Aarons’ case to

chapter 7. See, e.g., In re Baroni, 36 F.4th at 971–73; Pioneer Liquidating Corp.

v. U.S. Tr. (In re Consol. Pioneer Mortg. Entities), 264 F.3d 803, 807-08 (9th Cir.

2001). The Patch Defendants had not foreclosed the deed of trust against

the Bel Air Property prior to conversion of the bankruptcy case to chapter

7. Consequently, the Bel Air Property became property of the chapter 7

bankruptcy estate upon conversion. Moreover, any causes of action that

existed at the time of conversion became property of Aarons’ bankruptcy

estate as well.7 See generally Cusano v. Klein, 264 F.3d 936, 947-48 (9th

Cir.2001) (assets of the plaintiff’s bankruptcy estate included prepetition

causes of action for unpaid royalties); Runaj v. Wells Fargo Bank, 667 F.

Supp. 2d 1199, 1206 (S.D. Cal. 2009) (“It is well settled that prepetition

causes of action, including TILA claims, are assets included within the

meaning of property of the estate.”). Aarons does not argue otherwise.

      Citing Estate of Spirtos v. One San Bernardino County Superior Court

      7
        At oral argument counsel for Aarons argued that she owned causes of action
that accrued post-conversion. This makes no sense as the causes of action arise from the
ownership of the Bel Air Property which was property of the estate. Accordingly, any
causes of action that arose post-conversion from the foreclosure are property of the
bankruptcy estate as well.
                                           18
Case Numbered SPR 02211, 443 F.3d 1172, 1175-76 (9th Cir. 2006), the

bankruptcy court properly recognized that only the chapter 7 trustee has

authority to bring claims on behalf of the bankruptcy estate. Id. (citing

§ 323); see also § 704. 8 Spirtos amply supports the bankruptcy court’s

dismissal of Aarons’ complaint. See Est. of Spirtos, 443 F.3d at 1175-76; see

also Runaj, 667 F. Supp. 2d at 1206. Pursuant to Civil Rule 17(a)(1), made

applicable by Rule 7017, “[a]n action must be prosecuted in the name of the

real party in interest.” That party was the chapter 7 trustee, not Aarons.9

       Aarons misunderstands the significance of her exemptions. Both the

original homestead exemption and the subsequent exemption in the claims

against the Patch Defendants implicitly recognize that the underlying

assets are property of the estate. Aarons’ exemptions gave her only a right

to receive proceeds if those assets were successfully liquidated. As the

Supreme Court explained in Schwab v. Reilly, 560 U.S. 770, 792 (2010), when

       8
         Admittedly, there are limited instances when others may pursue causes of
action held by a chapter 7 estate. See, e.g., Simantob v. Claims Prosecutor, LLC (In re
Lahijani), 325 B.R. 282, 288 n.10 (9th Cir. BAP 2005); § 522(h). Aarons does not argue that
she was authorized by either the trustee or court to file her complaint.
       9 Civil Rule 17(a)(3) provides that “[t]he court may not dismiss an action for

failure to prosecute in the name of the real party in interest until, after an objection, a
reasonable time has been allowed for the real party in interest to ratify, join, or be
substituted in the action.” The trustee was allowed to participate in the adversary
proceeding and elected not to oppose the motion to dismiss though he requested that
the case be dismissed without prejudice. The court ultimately dismissed the case with
prejudice, but the trustee has not appealed. Though the trustee was never formally
substituted into the case, he participated in the case as the real party in interest.
Whatever Civil Rule 17(a)(3) may mean in this instance, and we express no opinion on
the subject, that issue has not been presented by this appeal.
                                            19
examining the effect of a bankruptcy exemption, “[i]f an interested party

does not object to the claimed interest by the time the Rule 4003 period

expires, title to the asset will remain with the estate pursuant to § 541, and

the debtor will be guaranteed a payment in the dollar amount of the

exemption.” See also Hyman v. Plotkin (In re Hyman), 967 F.2d 1316, 1321 (9th

Cir. 1992) (holding that the California homestead exemption is a limited

and conditional right to receive a portion of the proceeds if the exempted

homestead is sold rather than an interest in the homestead itself); see also

Morgan-Busby v. Gladstone (In re Morgan-Busby), 272 B.R. 257, 265 (9th Cir.

BAP 2002) (expanding Hyman to other California exemptions and stating

that “California’s exemption laws do not provide Debtors with an

unassailable ownership interest in exempt property . . . . Rather, it restricts

Debtors’ exemption to the proceeds [of the exempt property], up to the

statutory maximum.”) Aarons’ exemptions did not remove the assets as

property of the bankruptcy estate subject to the exclusive administration by

the trustee.10 See generally Est. of Spirtos, 443 F.3d at 1175-76. Again, she has

not argued otherwise.

      10 The Supreme Court in Schwab explained how a debtor could exempt the
entirety of an asset: “Where, as here, it is important to the debtor to exempt the full
market value of the asset or the asset itself, our decision will encourage the debtor to
declare the value of her claimed exemption in a manner that makes the scope of the
exemption clear, for example, by listing the exempt value as ‘full fair market value
(FMV)’ or ‘100% of FMV.’” Schwab, 560 U.S. at 792-93 (emphasis added). See also
Masingale v. Munding (In re Masingale), 644 B.R. 530, 540-41 (9th Cir. BAP 2022). Aarons
did not attempt to exempt the full fair market value of either the Bel Air Property or the
causes of action.
                                            20
      Both the Bel Air Property, and the causes of action related to it, were

property of the chapter 7 estate when Aarons filed her lawsuit against the

Patch Defendants.11 Despite her potential pecuniary interest in the causes

of action based on her exemption, she was not the real party in interest.

Accordingly, she could not prosecute the estate’s causes of action. The

record demonstrates that the court and the parties recognized this

fundamental fact and allowed the trustee to participate in the adversary

proceeding as the real party in interest. Ultimately, after two hearings on

the motion to dismiss in which the trustee participated, the court

concluded: “The Chapter 7 Trustee has elected not to oppose the MTD so

he has waived and forfeited any defenses to dismissal on the merits.” The

trustee did not appeal the court’s decision.

      While Aarons held some pecuniary interests in the Bel Air Property

and the causes of action she filed against the Patch Defendants by virtue of

her exemptions, those assets belonged to the bankruptcy estate. She is not

the real party in interest and cannot bring or prosecute the causes of action

she filed against the Patch Defendants. As a matter of law, her exemptions

      11 Property of the estate may also be returned to a debtor by abandonment under
§ 554. Runaj, 667 F. Supp. 2d at 1206-07. The record reflects that the trustee originally
attempted to abandon the Bel Air Property, but not the causes of action. However, the
bankruptcy court denied abandonment as moot because the Patch Defendants had
already foreclosed. No motion was ever made to abandon the causes of action and the
trustee’s participation in the adversary proceeding, including the two hearings on the
motions to dismiss, further emphasize that the estate did not abandon the causes of
action before the court dismissed the complaint.

                                           21
did not confer on her any property interest in the Bel Air Property, or any

related causes of action, and the court properly dismissed her complaint.

      3.     The court did not err in dismissing the adversary proceeding
             with prejudice.

      Civil Rule 15 is made applicable in adversary proceedings by Rule

7015. Under Civil Rule 15, a bankruptcy court should grant leave to amend

when dismissing under Civil Rule 12(b)(6) unless amendment would be

futile. Ebner v. Fresh, Inc., 838 F.3d 958, 968 (9th Cir. 2016) (citing Doe v.

United States, 58 F.3d 494, 497 (9th Cir. 1995)); see also Lopez v. Smith, 203

F.3d 1122, 1130 (9th Cir. 2000) (en banc). This is true even when leave to

amend was not requested in the trial court. Lopez, 203 F.3d at 1127; Cook,

Perkiss & Liehe, Inc. v. N. Cal. Collection Serv., Inc., 911 F.2d 242, 247 (9th Cir.

1990).

      While devoting little time and effort to the issue, Aarons mentions in

passing that she should have been granted leave to amend because she

believes that some of the shortcomings identified by the bankruptcy court

could have been fixed by amendment. But nothing she said in her

complaint, in her opposition to the dismissal motion, or on appeal

sufficiently addressed the deficiencies in her pleadings arising from her

release of pre-confirmation claims and the estate’s exclusive right to bring

the post-confirmation claims. Nor are we aware of any allegations

consistent with her existing pleadings that could cure these deficiencies in

her complaint. As a result, any attempt by Aarons to amend the complaint

                                         22
would have been futile, and the bankruptcy court did not err when it

dismissed it with prejudice. See Garmon v. Cnty. of L.A., 828 F.3d 837, 846

(9th Cir. 2016); Intri-Plex Techs., Inc. v. Crest Grp., Inc., 499 F.3d 1048, 1056

(9th Cir. 2007).

                                 CONCLUSION

      For the reasons set forth above, we AFFIRM.

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