Opinion
NOT FOR PUBLICATION
Argued and Submitted at Pasadena, California: May 22, 2008
Appeal from the United States Bankruptcy Court for the Central District of California. Bk. No. SA 02-16819-ES. Honorable Erithe A. Smith, Bankruptcy Judge, Presiding.
Before: MARKELL, MONTALI and DUNN, Bankruptcy Judges.
MEMORANDUM
SUMMARY
The essence of this protracted dispute is not complicated: The debtor, John Edward Amoroso, Jr. (" Amoroso"), owed money to a company, Audio Wood Products, Inc. (" Audio"), which in turn owed money to the appellant-creditor, ZTE Electronics Corp., Inc. (" ZTE"). A California statute recognizes derivative, third-party claims when the creditor has a judgment against a third party (A owes B, B owes C, therefore A owes C), so when Amoroso filed a chapter 7 bankruptcy case in 2002, ZTE filed a proof of claim against his estate.
Cal. Code of Civ. P. § 708.210 (" CCP § 708.210") provides, " If a third person has possession or control of property in which the judgment debtor has an interest or is indebted to the judgment debtor, the judgment creditor may bring an action against the third person to have the interest or debt applied to the satisfaction of the money judgment."
Unless otherwise indicated, all chapter, section, and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1330 as enacted and promulgated before the effective date (October 17, 2005) of the relevant provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (" BAPCPA"), Pub. L. 109-8, 119 Stat. 23 (2005), and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
But ZTE's filing did not spell out either its factual basis (Amoroso owes Audio and Audio owes ZTE) or its legal basis (CCP § 708.210). As a result, ZTE's proof of claim was deficient. It did not put the bankruptcy trustee or the creditors on notice that it was derivative, and it did not explain the basis for the derivative claim. Amoroso did not owe anything to ZTE directly, and his Schedule F, which listed his debt to Audio, did not show any debt to ZTE. So the trustee, James L. Joseph, had no way of knowing what the basis was for ZTE's filing.
The proof of claim contained a copy of an undated letter sent by ZTE to " Michael Amoroso, Audio Wood Products, " which began, " Dear Michael" and continued, " The details your company still owe us is [sic] as follows, " and it listed five items totaling $187,518.50, minus $20,000 (with a note " 09.04.01"), and it concluded, " Awp still owe [sic] ZTE Electronics Corp. $167,518.50 untill [sic] Sep. 04, 2001." But the proof of claim did not make the link to the debt that Amoroso owed Audio.
Making the problem more difficult for the trustee was the fact that the amount that Amoroso owed Audio ($200,000) was not the same as the amount of ZTE's proof of claim against Amoroso ($167,518.50). There was no match, and there was no way for the trustee to make a match. ZTE had the burden of making the connection, and it failed to meet that burden.
The trustee eventually moved to disallow ZTE's claim, and the bankruptcy court agreed. The court based its holding on the fact that, before the claims bar date, ZTE took no action under CCP § 708.210, so Amoroso's debt to Audio was discharged. In addition, the court determined that ZTE's claim was precluded by the findings in a prior adversary proceeding.
If ZTE's filing in the Amoroso bankruptcy had explained the basis for its claim against the debtor, it would have been sustainable. But because its proof of claim was deficient and ZTE did not amend the proof of claim or repair the deficiency before the claims bar date, we AFFIRM the bankruptcy court's holding.
In assessing the potential applicability of CCP § 708.210 to the facts of this case, we are not deciding any other cases involving third-party, derivative claims. Other cases that may arise will have to be evaluated on their own facts.
FACTS
On September 3, 2002, Amoroso filed a voluntary petition for bankruptcy relief under chapter 7. On his Schedule F, he listed an unsecured debt of $200,000 to Audio. But Audio did not file a claim in Amoroso's case, and no other party filed a claim on Audio's behalf. Amoroso was granted a discharge on December 16, 2002.
On December 23, 2002, before the claims bar date of January 29, 2003, ZTE filed its unsecured claim in Amoroso's bankruptcy for nonpayment for goods sold to Audio in the amount of $167,518.50 (Claim 14). Claim 14 does not refer to CCP § 708.210.
ZTE could have included in its proof of claim the legal or factual basis for it. We assume, without deciding, that if it had done so, its claim would likely have been valid, and it probably would have shared in Amoroso's bankruptcy estate. Instead, ZTE embarked on a legal strategy that consumed significant time, energy, and resources, and ultimately proved fruitless.
Before filing Claim 14, ZTE initiated an adversary proceeding to determine the dischargeability of Amoroso's debt to ZTE under § 523 (" 523 Action"). In its complaint, ZTE alleged that Amoroso was an alter ego of Audio. On April 14, 2004, the bankruptcy court held that ZTE had not presented sufficient evidence to justify piercing the corporate veil to hold Amoroso liable for Audio's debt to ZTE. It further held that " [t]here is no debt owed by [Amoroso] to [ZTE]." Neither the complaint nor the court's findings of fact and conclusions of law addressed the applicability of CCP § 708.210.
ZTE appealed, and this panel affirmed on December 13, 2004. ZTE again appealed, and on March 1, 2007, the Ninth Circuit affirmed the BAP. The Ninth Circuit held that ZTE had failed to establish Amoroso's personal liability on a theory of alter ego. ZTE Elecs. Corp, Inc. v. Amoroso, 223 Fed.Appx. 708 (9th Cir. 2007). The Ninth Circuit also affirmed that ZTE failed to demonstrate nondischargeability under 11 U.S.C. § 523(a). Id . at 709.
On August 20, 2007, the trustee filed its " Motion for Order Disallowing . . . Claim Number 14 of ZTE [etc.]" on grounds of collateral estoppel based on the holdings in the 523 Action. On September 17, 2007, ZTE opposed the trustee's motion, arguing for the first time that CCP § 708.210 gave it a direct claim against Amoroso. ZTE's opposition to the trustee's motion to disallow its claim contained its first explicit mention of CCP § 708.210.
On September 20, 2007, ZTE filed an amended proof of claim in the amount of $188,133 (Claim 22). In his reply to ZTE's opposition, the trustee sought to disallow Claims 14 and 22 on the ground that Audio had not filed a claim on which ZTE's claims under CCP § 708.210 could be based.
No explanation is found in the record for the difference between the amount of the state judgment, $203,457.57, and the amount of the amended claim.
At the hearing on October 4, 2007, ZTE clarified that its claim was now based on " Debtor's own admission that he [owes] Audio Wood money irrespective of his other relationship with Audio Wood." The bankruptcy court sustained the trustee's objection to both claims. The court held that " whatever claim [ZTE] may have had is barred at this point, " because the bar date had passed. On October 26, 2007, the bankruptcy court issued its order disallowing Claims 14 and 22. This appeal ensued.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. § § 1334 and 157(b)(2)(B). We have jurisdiction under 28 U.S.C. § 158.
ISSUE
Did the bankruptcy court err in sustaining the trustee's objection to ZTE's claims against Amoroso based on CCP § 708.210?
ZTE also claims that the trustee lodged the objection to claim in retaliation for ZTE's opposing the trustee's application to employ debtor's counsel and for arguing that the trustee and debtor's counsel colluded with one another. There are no facts or law to support these claims. Further, ZTE is raising these issues for the first time on appeal. See Concrete Equip. Co., Inc. v. Fox (In re Vigil Bros. Constr., Inc.), 193 B.R. 513, 520 (BAP 9th Cir. 1996). For these reasons, we do not consider the retaliation and collusion claims.
STANDARDS OF REVIEW
We review conclusions of law and issues of statutory interpretation de novo. Irwin Mortgage Co. v. Tippett (In re Tippett), 338 B.R. 82, 85 (BAP 9th Cir. 2006). The decision to permit the amendment of a filed proof of claim is reversible only for an abuse of discretion. Wall Street Plaza, LLC v. JSJF Corp. (In re JSJF Corp.), 344 B.R. 94, 99 (BAP 9th Cir. 2006).
DISCUSSION
For the past several years, ZTE fought Amoroso over whether Amoroso was Audio's alter ego. Only after losing that extended litigation did ZTE seek to characterize its proof of claim as raising claims under CCP § 708.210. As set forth above, the existence of this derivative claim, as well as its amount, were all unknown to the trustee until after the litigation had ended, and after the claims bar date had passed. A different story might have been written had ZTE indicated either the existence or the amount of its derivative claim in its original proof of claim. But it did not. And changing or amending claims after a claims bar date raises significant issues of equity and prejudice.
A claims bar date is not a mere technicality. A trustee and an estate's prepetition creditors are entitled to know what the claims are against a bankruptcy estate so the trustee can provide for the orderly distribution of the debtor's assets. In re Workman, 373 B.R. 460, 467 (D.S.C. 2007) (stating that " [u]ndue prejudice . . . may be demonstrated through evidence that allowance of [an] amended claim would interfere with the orderly distribution to other creditors."). See Brown v. Chestnut (In re Chestnut), 422 F.3d 298, 300 (5th Cir. 2005) (describing the purpose of orderly distribution in relation to the automatic stay).
As a result, " [t]he crucial inquiry" in whether to allow the type of modification and amendment attempted by ZTE 'is whether the opposing party would be unduly prejudiced by the amendment.'" In re JSJF Corp., 344 B.R. at 102 (quoting Roberts Farm, Inc. v. Bultman (In re Roberts Farms Inc.), 980 F.2d 1248, 1251 (9th Cir. 1992)). " [I]n determining prejudicial effect [we] look to such elements as bad faith or unreasonable delay in filing the amendment, impact on other claimants, reliance by the debtor or other creditors, and change of the debtor's position." Venhaus v. Wilson (In re Wilson), 96 B.R. 257, 262, (BAP 9th Cir. 1988). See also 9 COLLIER ON BANKRUPTCY ¶ 3001.04[1] (Alan N. Resnick & Henry J. Sommer eds., 15th ed. rev. 2008).
In the focus on prejudice, this view is consonant with approaches taken in other circuits.
The Court must scrutinize both the substance of the proposed amendment and the original proof of claim to ensure that the amendment meets three criteria. First, the proposed amendment must not be a veiled attempt to assert a distinctly new right to payment as to which the debtor estate was not fairly alerted by the original claim. Second, the amendment must not result in unfair prejudice to other holders of unsecured claims against the estate. Third, the need to amend must not be the product of bad faith or dilatory tactics on the part of the claimant.
In re Crane Rental Co., Inc., 341 B.R. 118, 120-21 (Bankr. D. Mass. 2006)(quoting Woburn Associates v. Kahn, 954 F.2d 1, 10 (1st Cir. 1992), cert. denied, 510 U.S. 914, 114 S.Ct. 303, 126 L.Ed.2d 251 (1993); Gens v. Resolution Trust Corp., 112 F.3d 569, 575 (1st Cir. 1997).
This approach is also consistent with those courts that have not permitted post-bar date changes if they attempt to change the nature of the claim as originally filed. See, e.g., In re Spiegel, Inc., 337 B.R. 816 (Bankr. S.D.N.Y. 2006) (a late proof of claim seeking lease rejection damages does not relate back to a timely filed proof of claim that asserted a claim for prepetition rent); In re Limited Gaming of America, Inc., 213 B.R. 369 (Bankr. N.D. Okla. 1997) (IRS not allowed to amend claim 13 months after passage of bar date, as amendment would prejudice debtor and creditors); In re Refrigerated Exp., Inc., 204 B.R. 44 (Bankr. D. Neb. 1996) (IRS not allowed to amend valid claim five years after the bar date passed).
As noted above, the proof of claim that ZTE filed on December 23, 2002 (Claim 14) was deficient because it failed to make the link between the money that Amoroso owed Audio and the money that Audio owed ZTE. ZTE attempted to cure this deficiency by filing Claim 22 on September 17, 2007, which amended Claim 14. Claim 22 included a copy of a judgment against Audio for $203,457.57 (including interest, attorneys' fees and costs) that ZTE had won on October 31, 2003.
But by 2007, the bar date in the Amoroso bankruptcy had long passed. The case had been administered for four years. Without even considering whether ZTE's failure to file a proof of claim specifying its alleged rights under CCP § 708.210 before the claims bar date extinguished its bankruptcy rights against Amoroso, it is apparent that much had happened that would make the late recognition of ZTE's claim unfair and inequitable. The debtor had fought a long alter ego lawsuit without notice that ZTE also claimed rights under CCP § 708.210. The trustee and other creditors no doubt developed expectations regarding the administration of Amoroso's estate without the unreasonable delay and alterations ZTE's last-minute change would have entailed. Against this background, we cannot say that the trial court abused its discretion when it overruled ZTE's Claim 22, essentially barring ZTE from amending its earlier proof of claim.
In 2007, long after losing the alter ego action, ZTE attempted to add CCP § 708.210 to its proof of claim. As noted, it could have done that when it had first filed in 2002, but attempting to do it at this point was a new argument, a new claim, and a new filing beyond the bar date.
Because of the result we reach, we do not need to decide the questions of collateral estoppel and claim preclusion.
CONCLUSION
The bankruptcy court held that ZTE failed to comply with the requirements of CCP § 708.210 by failing to bring an action showing Audio's indebtedness to ZTE and Amoroso's indebtedness to Audio. We believe that ZTE's burden was not even that great. All ZTE needed to have done was to timely file a proof of claim that showed the trustee why Amoroso owed it money. It didn't, and under the circumstances, the bankruptcy court's decision not to permit ZTE to press its CCP 708.210 claim cannot be an abuse of discretion.
On March 7, 2008, two weeks before oral arguments were heard in this appeal, the appellee/trustee, James J. Joseph, filed a motion with this panel seeking sanctions against the appellant, ZTE, and its counsel of record under Fed.R.Bankr.P. 8020 and 28 U.S.C. § 1927. He asserted that they had filed " a frivolous appeal that is without any legal or factual basis, that has unnecessarily increased the administrative expenses incurred by the Debtor's bankruptcy estate, and that could have been filed for no other reason than for an improper purpose."
AFFIRMED.
Rule 8020 permits the BAP to award damages and costs against an appellant who files a frivolous appeal. An appeal is frivolous when the result is obvious or when the appellant's arguments are wholly without merit. First Fed. Bank of Cal. v. Weinstein (In re Weinstein), 227 B.R. 284, 297 (9th Cir. BAP 1998); Determan v. Sandoval (In re Sandoval), 186 B.R. 490, 496, n.7 (9th Cir. BAP 1995).
In the opinion of this panel, though ZTE has lost the case, its appeal was not frivolous, its argument was not without merit, and the outcome was not obvious. As we have noted in this memorandum, if ZTE had made the derivative basis of its claim explicit in its initial proof of claim, the outcome of this case could have been different. Therefore, the appellee's motion for sanctions under Rule 8020 is denied.
Appellant's citation to 28 U.S.C. § 1927 is unavailing. In the Ninth Circuit, " 28 U.S.C. § 1927 does not suffice because the Ninth Circuit does not regard a bankruptcy court as a 'court of the United States.'" Miller v. Cardinale (In re DeVille), 361 F.3d 539, 546 (9th Cir. 2004) (citing Perroton v. Gray (In re Perroton), 958 F.2d 889, 896 (9th Cir. 1992)). Because only a court of the United States has the power to sanction under § 1927, and under DeVille and Perroton this panel is not a court of the United States, we will not act on appellant's request.
A separate order denying sanctions is being entered concurrently with this memorandum.