Opinion
NOT FOR PUBLICATION
Argued and Submitted at Pasadena, California: March 23, 2006
Appeal from the United States Bankruptcy Court for the Central District of California. Honorable John E. Ryan, Bankruptcy Judge, Presiding. Bk. No. SA 02-16993-JR. Adv. No. SA 04-01016-JR.
Before: PAPPAS, KLEIN and MARLAR, Bankruptcy Judges.
MEMORANDUM
This is an appeal from an order entered in an adversary proceeding by the bankruptcy court denying a pretrial motion to amend a trustee's complaint to add a claim for avoidance of fraudulent transfer under § 548(a)(1)(B). The order became appealable upon entry of the final judgment in the adversary proceeding on August 4, 2005. We AFFIRM.
Unless otherwise indicated, all chapter, section, and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1330 and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9036, in effect prior to the effective date of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (" BAPCPA"), Pub. L. 109-8, 119 Stat. 23 (Apr. 20, 2005).
These facts have been gleaned from information in the record that the parties either acknowledge to be correct, or that they do not controvert. To the extent that factual disputes exist, they do not appear material to the issue in this appeal: whether the bankruptcy court abused its discretion in denying Trustee's motion to amend his complaint to include a claim for avoidance of a fraudulent transfer.
This is a dispute concerning a single family residence in Garden Grove, California (the " Property").
In June 1983, Michael Griffin (" Griffin") purchased the Property in his own name and that of his wife at the time, Patricia Griffin. In April 1984, Patricia Griffin deeded her one-half interest in the Property to Griffin. The precise date is not clear from the record, but at some point in 1983-84, Michael and Patricia Griffin were divorced.
From 1982 through 1994, Edleen Stapleton (" Stapleton") and Griffin maintained a personal relationship. From 1983 to 1994, Stapleton and Griffin lived together at the Property. On December 31, 1987, Griffin executed a grant deed conveying the Property to Griffin and Stapleton as joint tenants.
Griffin moved out of the Property in November 1994. Stapleton continued to live at the Property until November 2001.
On December 29, 2001, while hospitalized, Stapleton executed a grant deed transferring her interest in the Property to Griffin. The tax section of the deed indicates that this was a " Gift Deed" for which there was " no consideration." Stapleton alleges that Griffin offered to give Stapleton $40,000 from the proceeds of refinancing the Property, and one-half of sale proceeds, in exchange for her transfer of her interest in the Property to him. Griffin alleges that Stapleton gave him the Property in exchange for help in locating a care facility where Stapleton could stay and for payment of Stapleton's hospital bills.
Sometime before 2001, Griffin married Kathleen Griffin. There is a dispute among the parties whether, or to what extent, Kathleen Griffin was a party to the 2001 transfer. However, this dispute is not at issue in this appeal.
On September 10, 2002, Stapleton filed a petition for relief under chapter 7 of the Bankruptcy Code. Appellant Richard A. Marshack (" Trustee") was appointed trustee.
On January 12, 2004, Trustee commenced an adversary proceeding against Appellees Griffin and Kathleen Griffin (" the Griffins") by filing a complaint (the " Original Complaint") in which he asserted claims for (1) quiet title; (2) partition; (3)breach of contract; (4) dissolution of partnership and accounting; (5) fraud and deceit; (6) constructive fraud; (7) breach of fiduciary duty; (8) constructive trust; (9) cancellation of cloud on title; and (10) cancellation of instrument. The Griffins denied any liability to Trustee in their answer to the complaint, filed on January 24, 2004.
On March 23, 2004, the bankruptcy court conducted a status conference with the parties at which it set August 31, 2004, as the discovery cutoff date. Because of various scheduling problems, Trustee and the Griffins agreed to " waive" the discovery cutoff date so that Griffin could be deposed by Trustee, and Stapleton could be deposed by the Griffins, after the cutoff date. There is no indication in the record that the bankruptcy court was consulted about or approved this arrangement.
On January 14, 2005, the parties filed a Joint Status Report pursuant to Local Bankruptcy Rule 7016-1(a)(2), in which they stated that they expected to complete discovery by March 1, 2005. There is no indication in the Joint Status Report or in the adversary proceeding docket that the bankruptcy court approved the Joint Status Report, or in particular, any extension of discovery to March 1, 2005.
On February 4, 2005, Trustee filed a motion to amend the Original Complaint to add a claim for avoidance of the transfer from Stapleton to Griffin as fraudulent under § 548(a)(1)(B). Trustee justified his request to add the fraudulent transfer claim as follows:
There were also other changes to the Original Complaint in the proposed Amended Complaint that are not relevant in this appeal.
The addition of the eleventh cause of action for avoidance of a fraudulent transfer is a simple housekeeping matter. The facts have already been pled for a § 548(a)(1)(B) claim, so there is no reason why Plaintiff should not be able to seek relief under this specific code section. And although Plaintiff has grounds for causes of action for breach of contract, fraud, and related claims, the requirements of a § 548(a)(1)(B) claim provide for a more streamlined means of compelling Defendants to return the bankruptcy estate's interest in the property. . . .
Trustee further elaborated:
Adding a § 548(a)(1)(B) claim to the complaint does not change Plaintiff's objective, although it makes it easier for him to prove his case. § 548(a)(1)(B) only requires that Plaintiff show that Defendants did not give fair consideration in exchange for the property, which he does not believe will be a problem.
The Griffins refused to stipulate with Trustee to the amendment to the Original Complaint. Instead, the Griffins filed an opposition to the Trustee's motion. The Griffins argued that the motion was untimely in that Trustee was aware of all alleged facts necessary to plead a fraudulent transfer claim at the time of filing the Original Complaint thirteen months earlier. They contended that no evidence had been discovered in those thirteen months that would support a claim of surprise or otherwise justify a delay in raising the fraudulent transfer claim. Further, they asserted, the issue of reasonably equivalent value was not material to the defense of the claims stated in the Original Complaint, and they had not explored this issue in their discovery. Thus, the Griffins argued, it would be unfair and prejudicial to have to defend against a new claim without first having an opportunity to conduct appropriate discovery.
On March 1, 2005, the bankruptcy court conducted a hearing concerning Trustee's motion for leave to amend the complaint. The court agreed with the positions advanced by the Griffins that the motion was untimely, not supported by good cause, and that an amendment would be prejudicial to the Griffins.
[T]his is very late in the process and under these circumstances, it seems to me the Plaintiff needs to establish some good cause for allowing an amendment at this stage. I didn't see any good cause. There are no new facts that came out of the discovery process that would justify the amendment. It's strictly a [§ ]548 addition, but the problem is that that involves reasonably equivalent value.
The Defendant has not undertaken any discovery with respect to reasonably equivalent value in terms of the exchange and I'm not sure whether you [Trustee] have. The discovery phase has ended. We're into the pretrial phase and for those reasons, I think it would be prejudicial, under the circumstances, and again, there's no good cause for adding a cause of action that could have been part of the original complaint.
So, for those reasons the motion is denied.
On April 12, 2005, the bankruptcy court conducted a pretrial conference in the adversary proceeding and set trial for July 14, 2005. Before the pretrial conference, on July 1, 2005, Trustee submitted a Joint Pretrial Order that included three disputed issues of law regarding: reasonably equivalent value, insolvency on the date Stapleton transferred her interest in the Property to Griffin, and fraudulent transfer under § 548(a)(1)(B). Although the court signed the Pretrial Order on July 12, 2005, it struck the three fraudulent transfer issues.
The bankruptcy court held a one-day trial on July 14, 2005. During the trial, Trustee again moved to add the fraudulent transfer claim " to conform to the evidence." The court denied Trustee's motion.
The bankruptcy court took the issues under submission. The proceedings were reconvened telephonically on July 15, 2005, at which time the bankruptcy court announced that it would enter judgment in favor of the Griffins on all of Trustee's claims. Trial Tr. 1-7, July 15, 2005. Judgment was entered on August 4, 2005. Trustee timely filed a notice of appeal challenging both the March 1, 2005, order denying Trustee's motion for leave to amend the complaint and the Judgment of August 4, 2006.
Although the Trustee appealed the Judgment, the arguments in his briefs on appeal address only the March 1, 2005, order by the bankruptcy court denying leave to amend the complaint.
JURISDICTION
The bankruptcy court had jurisdiction of this action under 28 U.S.C. § 1334 and § 157(b)(2). Our jurisdiction is based upon 28 U.S.C. § 158(b)(1).
ISSUE
Whether the bankruptcy court abused its discretion in denying Trustee's motion for leave to amend the Original Complaint to include a claim against the Griffins for avoidance of a fraudulent transfer under § 548(a)(1)(B).
STANDARD OF REVIEW
A trial court's denial of a motion to amend a complaint is reviewed for an abuse of discretion. Gerber v. Hickman, 291 F.3d 617, 623 (9th Cir. 2002)(en banc). In reviewing a denial of a motion to amend a complaint under an abuse of discretion standard, the appellate panel cannot reverse unless it has a definite and firm conviction that the trial court committed a clear error of judgment in the conclusion it reached upon a weighing of the relevant factors. Solomon v. N. Am. Life & Cas. Ins. Co., 151 F.3d 1132, 1138-39 (9th Cir. 1998).
DISCUSSION
Fed.R.Civ.P. 15(a), made applicable in bankruptcy adversary proceedings by FED. R. BANKR. P. 7015, governs amendments to pleadings. It provides:
A party may amend the party's pleading once as a matter of course at any time before a responsive pleading is served or, if the pleading is one to which no responsive pleading is permitted and the action has been placed upon the trial calendar, the party may so amend it at any time within 20 days after it is served. Otherwise a party may amend the party's pleading only by leave of the court or by written consent of the adverse party; and leave shall be freely given when justice so requires. . . .
In this appeal, Trustee moved to amend the Original Complaint to add a claim against the Griffins to avoid a fraudulent conveyance. A responsive pleading had been filed by the Griffins. In addition, the Griffins would not consent to Trustee's motion to amend. Therefore, Trustee could only amend the complaint by leave of the bankruptcy court. The Rule instructs that such leave should be " freely given when justice so requires." Based upon this record, we conclude that the bankruptcy court did not abuse its discretion in finding that justice did not require that leave to amend be granted to Trustee.
There is extensive case law examining the grounds for granting or denying leave to amend pleadings. The best known, and still the most frequently cited, precedent is the Supreme Court's decision in Foman v. Davis, 371 U.S. 178, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962). In Foman, the Court considered, among other issues, whether a district court abused its discretion by denying leave to amend a complaint without providing any reasons for its decision. The Court criticized the district court for its approach, observing that an outright refusal to grant leave without any justifying reason " is not an exercise of discretion; it is merely abuse of that discretion and inconsistent with the spirit of the Federal Rules." Foman, 371 U.S. at 182. But in doing so, the Court referred to several factors courts could use to justify refusal to grant leave to amend:
In the absence of any apparent or declared reason - such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the appealing party by virtue of allowance of the amendment, futility of amendment, etc. - the leave sought should, as the rules require, be " freely given."
Id. The list provided by the Court was non-inclusive as indicated by its use of the term " etc." These reasons for denying an amendment have come to be known as the " Foman Factors."
The Ninth Circuit has employed the Foman Factors in determining whether a trial court properly granted or denied leave to amend pleadings. Johnson v. Buckley, 356 F.3d 1067, 1077 (9th Cir. 2004)(listing five factors taken into account to assess the propriety of a motion for leave to amend: bad faith, undue delay, prejudice to opposing party, futility of amendment and whether plaintiff has previously amended the complaint); Chodos v. West Publ'g Co., 292 F.3d 992, 1003 (9th Cir. 2002)(instructing that when considering a motion for leave to amend complaint, court must consider undue delay, bad faith, prejudice to opposing party or dilatory tactics by movant); Griggs v. Pace Am. Group, Inc., 170 F.3d 877, 880 (9th Cir. 1999)(holding that a district court determines the propriety of a motion to amend a complaint by ascertaining the presence of any of four factors: bad faith, undue delay, prejudice to the opposing party, and/or futility).
Although the Ninth Circuit has stressed that trial courts should consider all, or most, Foman Factors before granting or denying leave to amend a pleading, it has only required that trial courts base their decision on one or more of the factors. Brass v. County of Los Angeles, 328 F.3d 1192, 1197 (9th Cir. 2003) (decision to allow late attempt to expand complaint lies within the discretion of the district court); Acri v. Int'l Ass'n of Machinists & Aerospace Workers, 781 F.2d 1393, 1398 (9th Cir. 1986)(" Late amendments [to complaint] to assert new theories are not reviewed favorably when the facts and the theory have been known to the party seeking amendment since the inception of the cause of action."), quoted in Royal Ins. Co. Of Am. v. Sw. Marine, 194 F.3d 1009, 1017 (9th Cir. 1999); Solomon, 151 F.3d at 1139 (affirming denial of motion to amend on grounds of undue delay and prejudice where allowing the motion would have required reopening discovery); W. Shoshone Nat'l Council v. Molini, 951 F.2d 200, 204 (9th Cir. 1991)(holding that denial of leave to amend was justified because of undue delay, prejudice to adverse party, and movant had filed multiple amendments to complaint); M/V Am. Queen v. San Diego Marine Constr. Corp., 708 F.2d 1483, 1492 (9th Cir. 1991)(holding that denial was justified by undue delay, no new facts were alleged, and there was prejudice to opposing party); Jackson v. Bank of Hawaii, 902 F.2d 1385, 1387-89 (9th Cir. 1990)(sustaining denial of motion for leave to amend because of prejudice to opposing party, undue delay or futility); Kates v. Crocker Nat'l Bank, 776 F.2d 1396, 1398 (9th Cir. 1985)(observing that court did not abuse discretion in denying motion to amend, where motion was made late in proceedings and plaintiff gave no reason for delay).
In this appeal, the bankruptcy court based its decision to deny leave to amend the complaint on two of the most frequently cited Foman Factors: that an amendment would prejudice the Griffins; and that Trustee was guilty of undue delay in proposing the amendment. These reasons constitute an adequate basis to sustain the bankruptcy court's decision.
The Ninth Circuit has held that prejudice to the opposing party is the most significant of the Foman Factors. Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003)(" Not all of the [Foman] factors merit equal weight. As this circuit and others have held, it is the consideration of prejudice to the opposing party that carries the greatest weight.") Accord Lone Star Ladies Inv. Club v. Schlotzsky's Inc., 238 F.3d 363, 368 (5th Cir. 2001)(" Prejudice is the 'touchstone of the inquiry under [R]ule 15(a).'").
The bankruptcy court made a specific finding that the Griffins would be prejudiced by the addition of a fraudulent transfer claim to Trustee's Original Complaint. It reasoned that a fraudulent transfer claim under § 548(a)(1)(B) implicates, among other issues, the question of whether the debtor obtained reasonably equivalent value in exchange for the property that was allegedly transferred. The court noted:
The Defendant has not undertaken any discovery with respect to reasonably equivalent value in terms of the exchange and I'm not sure whether you [Trustee] have. The discovery phase has ended. We're into the pretrial phase and for those reasons, I think it would be prejudicial, under the circumstances.
Hr'g Tr. 2:16-20, March 1, 2005. The court agreed with the Griffins that it would be unfair and prejudicial to the Griffins to have to defend against a new claim without first being able to conduct appropriate discovery. Defending against a fraudulent transfer claim, and in particular the determination of reasonably equivalent value, is not a simple process. Determination of reasonably equivalent value was not material to the original causes of action under state law alleging fraud or breach of contract to convey real property, and neither party had engaged in the discovery needed to determine the value of the interest, if any, transferred by Stapleton to the Griffins as of the date of that transfer. In addition, assuming the transfer was not a " gift, " there was also an issue concerning the value of the consideration given to Stapleton by the Griffins.
In Solomon, 151 F.3d at 1139, the Court of Appeals decided prejudice to the opposing party was present when, if an amendment was allowed, it would be necessary to reopen discovery. Lockheed Martin Corp. v. Network Solutions, Inc., 194 F.3d 980, 986 (9th Cir. 1999) reaches the same conclusion: " [A] need to reopen discovery and delay the proceedings supports a district court's finding of prejudice from a delayed motion to amend the complaint."
Trustee argues that the Griffins did not need to perform further discovery to defend against a § 548 claim:
[T]he only additional evidence appellees needed for trial was evidence that they gave debtor Edleen Stapleton reasonably equivalent value for the subject matter property. However, appellees already had this evidence when appellant filed his motion. . . . [A]ny evidence supporting appellees' claim that they gave debtor reasonable value was in their control exclusively. Only appellees would know the value of the " compensation" they gave the debtor for the property.
We disagree with Trustee's contention. To determine reasonably equivalent value, the parties would need to discover more than the value of what the Griffins gave Stapleton in exchange for the deed to the Property. To litigate Trustee's claim, the parties would also need to explore the value of Stapleton's undivided interest in the Property at the time it was transferred. Because Stapleton and Griffin were joint tenants, this analysis could require an accounting of the financial investments and returns of both Stapleton and Griffin as to the Property. For example, it is not at all clear from this record how much Stapleton and Griffin each paid before and after 1997 toward satisfaction of the mortgages on the Property. There could be an issue about how much Stapleton and Griffin each contributed over the years toward payment of expenses associated with the Property. There is evidence that Stapleton collected rent during the period before 2001 that she did not share with the Griffins, but there is no record of how much or when it was collected. There are also inconsistencies between the trial testimony of Griffin and the deposition testimony of Stapleton concerning the number and amount of loans taken out against the property, and concerning which owner may have benefitted more from them. Neither Stapleton nor the Griffins have had access to each other's tax returns, which could show income and expenses related to the Property or potential tax liabilities that might attach to the Property. Finally, there is no conclusive evidence showing the market value of Stapleton's interest in the Property at the time of the transfer.
In short, contrary to Trustee's suggestion, there may be several significant factual issues involving information and evidence not in the Griffins' possession that they may need to discover in order to properly prepare a defense to a charge that Stapleton did not receive reasonably equivalent value for the transfer of the Property. It can be reasonably assumed that discovery would be necessary in the effort to obtain that information.
For this reason alone, the bankruptcy court did not abuse its discretion in deciding that reopening discovery would prejudice the Griffins.
Although the court focused on the " reasonably equivalent value" issue in deciding that allowing the proposed amendment to the complaint would prejudice the Griffins, there was another issue that would seemingly require further investigation or discovery by the Griffins to defend against a fraudulent transfer claim. There is no evidence in the record before the Panel showing that Stapleton was insolvent at the time the transfer occurred, or that she was rendered insolvent as a result of the transfer. Proof of insolvency is required to avoid a transfer under § 548(a)(1)(B)(ii). Moreover, the Original Complaint contains no allegation concerning Stapleton's insolvency. For that reason, Trustee's assurance that " [t]he facts have already been pled [before the filing of the amended complaint] for a § 548(a)(1)(B) claim, " is not accurate.
The second basis articulated by the bankruptcy court for denying Trustee's motion for leave to amend the complaint was that Trustee had unduly delayed in submitting the proposed amended complaint. The bankruptcy court found that:
[T]his is very late in the process and under these circumstances, it seems to me the Plaintiff needs to establish some good cause for allowing an amendment at this stage. I didn't see any good cause. There are no new facts that came out of the discovery process that would justify the amendment. . . . [T]here's no good cause for adding a cause of action that could have been part of the original complaint.
Hr'g Tr. 2:5-10 & 20.
We agree with the bankruptcy court that Trustee's delay in seeking to amend the complaint in this case was egregious. Thirteen months elapsed after commencement of the action before Trustee moved to amend the complaint, even though Trustee acknowledges in the motion that he was aware of the presence of the elements of a possible fraudulent transfer issue at the time of filing the Original Complaint:
We note the warning in Bowles v. Reade, 198 F.3d 752 (9th Cir. 1999), that undue delay is not sufficient alone to justify denial of leave to amend a complaint. Here, Trustee's undue delay was not the only, nor perhaps even the most important, of the Foman Factors considered by the bankruptcy court.
The addition of the eleventh cause of action for avoidance of a fraudulent transfer is a simple housekeeping matter. The facts have already been pled for a § 548(a)(1)(B) claim, so there is no reason why Plaintiff should not be able to seek relief under this specific code section. (Emphasis added.)
Far from justifying the addition of a late amendment to the Original Complaint, this statement serves to emphasize the tardy nature of Trustee's proposed amendment.
Trustee's approach runs afoul of the Ninth Circuit's admonition in Sw. Marine, 194 F.3d at 1016-17, that late amendments to a complaint are not reviewed favorably when the facts and the theory have been known to the party seeking amendment since the inception of the action.
Trustee was presumably aware of the possibility that an avoidable conveyance had taken place for purposes of § 548(a)(1)(B) well before the filing of the Original Complaint. Stapleton's bankruptcy schedules filed in September 2002 disclose the " disputed" transfer of her interest in the Property to Griffin. This information should have alerted Trustee to inquire further, and if appropriate, to seek to avoid the transfer.
The bankruptcy petition and schedules were not a part of the original record on appeal supplied by the parties in their excerpts. Ironically, it was Trustee, in a motion filed during the briefing period, who requested they be added to the record. The Panel granted Trustee's request by order entered March 3, 2006.
Trustee disputes he is guilty of " undue delay" for two reasons. First, he contends there was no trial to be " unduly delayed" at the time he filed his motion for leave to amend because the trial date had not yet been set. Second, according to Trustee, discovery was still pending at the time he filed the motion.
Regarding both arguments, the bankruptcy court found that " [t]he discovery phase has ended. We're into the pre-trial phase." Hr'g Tr. 2:16-17. The court's finding is amply supported by the record. Under the bankruptcy court's scheduling order, discovery had closed on August 31, 2004. Trustee admits that " [a]s defendants point out, the discovery cutoff date in this case was August 31, 2004." Although it appears that by agreement of the parties, some discovery was conducted after this date, the bankruptcy court had never authorized an extension of its discovery deadline. In addition, it appears all of the discovery conducted after August 31, 2004, was either planned before August 31, 2004, or authorized by the court at the April 12, 2005, pretrial conference. Finally, the fact that a trial had not been scheduled at the time of filing of Trustee's motion for leave to amend is not germane. To the bankruptcy court, it was the lateness in the course of the proceedings that militated against granting leave to amend, not the imminence of the trial. See Kates, 776 F.2d at 1396 (finding no abuse of discretion in denying plaintiff's motion to amend complaint, where motion was made late in the proceedings and plaintiff gave no reason for the delay).
The bankruptcy court's decision to deny leave to amend based on prejudice to the Griffins and on Trustee's undue delay in seeking to amend the Original Complaint did not constitute an abuse of its discretion. The court did not apply an incorrect legal standard. Nor did it operate under a clearly erroneous view of the facts. Nor, regardless of what we may individually have done as trial judges in this situation, can we say that we have a definite and firm conviction that there was a clear error of judgment.
There is also a serious concern in this action whether Trustee's proposed new claim, raised some five months after expiration of the two-year statute of limitations of § 546(a)(1)(A), is time-barred. Because we have concluded that the bankruptcy court did not abuse its discretion in denying Trustee's motion to amend for other reasons, we need not address whether the proposed amendment should have been denied based upon another Foman Factor, futility.
CONCLUSION
For the above reasons, we AFFIRM the order of the bankruptcy court denying the Trustee's motion for leave to amend the complaint.