In re: Med Equity, LLC ( 2022 )

FILED
JUL 13 2022
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
NOT FOR PUBLICATION OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. CC-21-1247-GFS
MED EQUITY, LLC,
Debtor. Bk. No. 2:21-bk-12447-ER
RANDY ROSE,
Appellant,
v. MEMORANDUM*
MED EQUITY, LLC,
Appellee.
Appeal from the United States Bankruptcy Court
for the Central District of California
Ernest M. Robles, Bankruptcy Judge, Presiding
Before: GAN, FARIS, and SPRAKER, Bankruptcy Judges.
INTRODUCTION
Randy Rose appeals the bankruptcy court’s order sustaining the
objection to his proof of claim filed by chapter 111 debtor Med Equity, LLC
(“Debtor”). Rose’s proof of claim was based on his state-court suit against
*
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
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
Debtor and others for alleged wrongdoing in a real estate development
deal. The bankruptcy court determined that even if the allegations in the
complaint were true, they at most stated a claim for relief in favor of 871
Linda Flora LLC (“Linda Flora”)—an entity of which Rose was a member—
but not in favor of Rose in his individual capacity. The court determined
that Rose filed the claim as an individual creditor and did not properly
assert a derivative claim.
The bankruptcy court further held that leave to amend the claim was
not warranted because amendment could not overcome the fact that the
claim was filed by the wrong party, and even if a claim filed by Linda Flora
could be deemed an amendment to Rose’s claim, such amendment would
prejudice Debtor.
We agree that Rose did not state viable individual claims against
Debtor. And we agree that Rose did not properly file a derivative claim on
behalf of Linda Flora. But the facts he alleged could support a claim by
Linda Flora, and we see no undue prejudice to Debtor or other creditors by
allowing Rose to amend the proof of claim to clarify its derivative nature.
Furthermore, because Linda Flora is the real party in interest for those
claims, the court erred by holding that Linda Flora cannot be joined or
substituted as creditor. Accordingly, we AFFIRM the court’s decision to
disallow the claim but REVERSE its decision to deny leave to amend.
Accordingly, we REMAND with instruction to permit Rose to amend the
Civil Procedure.
2
claim or to permit Linda Flora to join or substitute as the real party in
interest.
FACTS
A. Prepetition Events
In late 2016, Rose met Howard Royal, and the two agreed to pursue a
plan to purchase, renovate, and sell a parcel of real property. According to
Rose, Royal had a general contractor and another investor in mind. They
located a suitable property on Linda Flora Drive (the “Property”) and
outlined a deal under which Rose would contribute funds toward the
purchase of the Property and Royal would contribute project management
services. The parties intended to demolish the existing home and construct
a larger home on the Property.
Royal then contacted Joshua Pukini to obtain financing for the
project. Pukini had authority to act on behalf of Debtor and other entities. 2
He agreed to arrange purchase financing and an investment of
approximately $200,000 for plans, permits, and other costs. Rose alleges
that Pukini also promised to obtain construction financing after the
Property was purchased.
2
Pukini was the managing member of Debtor, and The Joshua R. Pukini Trust
owned 80% of the membership interests in Debtor. Pukini was also an officer and
director of Calpac Management LLC (“Calpac”), which brokered the loans for the
project, and the managing member of Luna Construction Management LLC (“Luna
Construction”), the contractor for the project.
3
In March 2017, Rose and Royal formed Linda Flora and purchased
the Property for approximately $2,500,000 with Linda Flora taking title.3 As
part of the purchase, Calpac brokered two secured loans in the amounts of
$1,650,000 and $350,000. Rose contributed approximately $520,000 toward
the purchase and Debtor contributed approximately $140,000 to cover an
escrow shortfall.
After purchasing the Property, Linda Flora and Debtor entered into a
written joint venture agreement (the “JVA”) with the purpose to “acquire,
design, permit the renovation or build and/or the completion of permitted
construction, and immediately resell” the Property. Rose and Royal signed
the JVA on behalf of Linda Flora, and they forwarded the document to
Pukini to sign on behalf of Debtor.
The JVA provides for Linda Flora to contribute $520,000 toward the
purchase of the Property, and for Debtor contribute $300,000, consisting of:
(1) $140,000 toward the purchase of the Property; and (2) $160,000 for
plans, permits, and other costs. Under the JVA, Debtor is entitled to a
preferred return on its investment and 25% of net profits upon sale or
disposition of the Property. The JVA also provides for Debtor to receive a
third-position deed of trust, governed by the terms of the JVA, and for
Debtor and Linda Flora to jointly manage the project.
3
Rose owned 55% of the membership interests in Linda Flora, and Mag Equities,
LLC (“Mag Equities”), an entity owned by Royal, owned the remaining 45%.
4
In April 2017, Linda Flora granted Debtor a deed of trust to secure its
obligations under the JVA. According to Rose, Pukini and Debtor stated
that the amount due under the deed of trust would be repaid only after the
Property was sold.
Later in 2017, the relationship between Rose and Royal began to
deteriorate. Rose alleges that Royal restricted his access to Linda Flora’s
transactions and excluded him from communications related to the
Property. He claims that Royal unilaterally made changes to the
construction plan and conspired with Pukini and Debtor to complete
construction, without insurance, using undocumented labor, and using
Luna Construction, which Rose asserts was an unlicensed contractor.
In late 2017, Pukini took steps to take over management of the project
in lieu of foreclosing Debtor’s deed of trust. He sent Rose and Royal a
construction contract and a corporate resolution which purported to
amend Linda Flora’s operating agreement to give Debtor management
control of Linda Flora and to give Mag Equities day-to-day control over
construction management. The resolution also authorized Debtor to raise
or invest additional capital and altered the distribution of proceeds from
the project.
Rose contends that he did not approve the corporate resolution and
instead demanded an end to all work at the Property. Notwithstanding his
demand, Rose alleges that Pukini and Royal fraudulently obtained a
5
demolition permit and, on January 4, 2018, Debtor recorded a notice of
default on the deed of trust.
According to Rose, he withdrew Linda Flora’s assent to the JVA by
January 2018, before receiving a signed copy of the JVA. He claims that
Pukini withheld his signature on the JVA until after Rose commenced the
state court litigation, and he accuses Pukini of forging signatures on
construction contracts and entering into contracts on behalf of Linda Flora
without authority.
In June 2018, Debtor recorded a notice of trustee’s sale which
indicated an amount due of $1,187,998.01. Rose contends that the increased
amount due on the deed of trust was for payments to Pukini and Luna
Construction for unauthorized work. Debtor foreclosed in July 2018 and
took title to the Property through a credit bid.
B. Rose’s State Court Complaint
In 2018, Rose filed suit in California state court against Debtor,
Pukini, Royal, Mag Equities, Calpac, Luna Construction, and Linda Flora.
In his second amended complaint (“SAC”), Rose asserted eleven causes of
action, including negligence, fraud, breach of fiduciary duty, breach of
contract, and wrongful foreclosure.4 The SAC indicates that the suit was
brought in Rose’s individual capacity and as a derivative action on behalf
of Linda Flora.
4
Rose also asserted claims to quiet title, for involuntary dissolution of Linda
Flora, for accounting and declaratory relief, and for assault and battery against Royal.
6
Rose alleged generally that Pukini, Debtor, and Royal conspired to
exclude Rose and Linda Flora from the project and to take the Property in
violation of the agreements and promises between the parties. He alleged
that Debtor and all other corporate defendants were sham entities which
should be disregarded, and all defendants should be held jointly and
severally liable. Regarding the specific causes of action against Debtor or
Pukini, he alleged as follows:
1. Negligence
Rose claimed that all defendants owed him a duty to manage the
Property with ordinary care and skill. He contended that Pukini and
Debtor breached their duty by failing to advise Rose of the true nature of
the loans, by failing to properly manage construction and allowing
demolition to occur without authority, and by foreclosing on the Property.
2. Fraud
Rose asserted that Pukini, with the other defendants conspiring and
ratifying his conduct, made intentional misrepresentations about obtaining
a construction loan, the terms of repayment on the loans, and his intent to
continue demolition and construction without authority.
Rose alleged that Pukini, individually and on behalf of Debtor, made
material misrepresentations that construction would be through licensed
contractors, that no payments would be due on Debtor’s deed of trust until
the Property was sold, and that Debtor’s deed of trust was only security for
Pukini’s investment in the project. He claimed that in December 2017,
7
Pukini and Debtor promised that no demolition would go forward, when
they planned the opposite.
3. Breach of Fiduciary Duty
Rose maintained that Pukini and Calpac breached fiduciary duties
owed to Linda Flora as its mortgage broker. He asserted that Linda Flora
disavowed the JVA and Royal and Pukini breached fiduciary duties under
a prior oral agreement by foreclosing and acquiescing to foreclosure of the
Property. Alternatively, if the court determined that the JVA was
enforceable, Rose alleged that all acts of Royal were on behalf of Mag
Equities and all acts of Pukini were on behalf of Debtor.
4. Breach of Contract
Although he stated that Pukini and Debtor were subject to his breach
of contract claims, Rose did not allege any conduct by Pukini or Debtor
constituting a breach of contract. Instead, he asserted that Royal and Mag
Equities breached the terms of Linda Flora’s operating agreement by failing
to perform reasonable construction management services, and Luna
Construction breached the construction contract with Linda Flora.
5. Wrongful Foreclosure and Quiet Title
Rose claimed that Pukini and Debtor, with the consent of Royal and
Mag Equities, fraudulently and illegally foreclosed on the Property. He
alleged that Pukini and Debtor promised that the deed of trust was merely
a way to ensure their priority of proceeds after the sale of the Property and
no payments would be due prior to a sale. Rose also contended that Debtor
8
stated a false amount due on the deed of trust, and he sought to quiet title
in the Property against all adverse claims of defendants.
6. Involuntary Dissolution, Accounting, and Declaratory Relief
The remaining claims involving Debtor and Pukini pertained to the
alleged mismanagement of Linda Flora and the joint venture under the
JVA. Rose sought judicial dissolution of Linda Flora, an accounting of all
funds related to the Property, and declaratory relief that: (1) the true
members of Linda Flora were Rose and Royal; and (2) the true members of
the joint venture were Rose, Royal, and Pukini.
C. The Bankruptcy and Rose’s Proof of Claim
After Rose filed his state-court suit, Debtor obtained a $3,000,000 line
of credit from Saman Jilanchi, Qwan International Investments, LLC, and
Qwan Capital (collectively the “Qwan Group”), which it used to pay
existing senior loans and develop the Property. A dispute arose between
Debtor and Qwan Group, and Qwan Group initiated foreclosure
proceedings. Debtor filed suit to enjoin the foreclosure, and in March 2021,
it filed a chapter 11 petition, electing to proceed under subchapter V.
In the bankruptcy case, Rose filed a proof of claim indicating an
unsecured claim for $700,000 based on the state court lawsuit. He listed
“Randy Rose” as creditor and attached an explanation of the claim stating:
This claim relates to a lawsuit filed in the Los Angeles
County Superior Court, Case No. BC697499. In essence,
[Debtor], aided by other defendants, defrauded Mr. Rose into
investing his life savings in a property development project.
9
Defendants intentionally underfunded the project and
fraudulently created a lien on the real property as a means to
seal [sic] Mr. Rose’s property interest, investment and funds.
[Debtor] in violation of the Joint Venture Agreement with
Mr. Rose, foreclosed on the property, effectively stealing their
joint venture partner’s funds and interest.
Attached is a copy of the Second Amended Complaint
that was filed in the action which supports the claim.
In June 2021, Debtor filed its chapter 11 plan, proposing to sell the
Property for an amount which it estimated would pay administrative and
secured claims in full and pay 91% of unsecured claims, if allowed. 5 After
filing its plan, Debtor objected to the claim filed by Qwan Group, and in
July 2021, the parties stipulated to allow the claim in the amount of
$3,800,000. The bankruptcy court entered an order approving the
settlement on October 19, 2021.
In September 2021, Debtor objected to Rose’s claim and argued that
even if the court accepted all allegations in the SAC, those allegations did
not state a cause of action against Debtor. Debtor argued that because the
Property was owned by Linda Flora—and the JVA was between Debtor
and Linda Flora, not Rose—none of the claims related to management or
disposition of the Property belonged to Rose. And because Rose did not
allege facts to support a contractual relationship or duty owed by Debtor,
5
The Plan proposes to treat two classes of creditors: Class One secured claims,
consisting of a property tax claim, Qwan Group’s claim, and a claim asserted by Pukini,
and Class Two unsecured claims, consisting of Rose’s claim and a claim asserted by
10
he could not state a viable claim against Debtor in his individual capacity
on any of his asserted causes of action in the SAC.
Rose opposed the objection and maintained that the SAC supported
his individual claim for negligence because Debtor owed him a duty to
avoid causing injury. Rose argued that he stated derivative claims for
negligence, breach of contract, wrongful foreclosure, accounting, and
declaratory relief, but he did not address Debtor’s objection to his claims
for fraud, breach of fiduciary duty, quiet title, or dissolution. He contended
that because he alleged that Debtor is the alter ego of Pukini, Debtor could
be liable for Rose’s individual claims against Pukini. Finally, he argued that
if the bankruptcy court sustained the objection, it should grant leave to
amend the proof of claim.
In its reply, Debtor argued that Rose did not assert a derivative claim
because the claim form listed as creditor “Randy Rose,” and if Rose had
truly filed a derivative claim, he would list as creditor “Randy Rose,
derivatively on behalf of [Linda Flora].” Debtor noted that the attachment
to the proof of claim described only an individual claim, and any payment
on the claim would go to Rose and not Linda Flora, which further
evidenced its individual nature. Debtor also argued that because the SAC
did not include allegations that Rose made a demand on Linda Flora to
pursue the action, Rose could not meet the threshold requirements for a
derivative claim under state law.
Luna Construction.
11
Finally, Debtor maintained that Rose should not be permitted to
amend the claim because the asserted claims belong to Linda Flora, and
Rose was prohibited from stating a new claim after the claims bar date.
Because Linda Flora did not file a timely claim on its own behalf, Debtor
argued that it should not be allowed to amend Rose’s claim.
D. The Bankruptcy Court’s Ruling
The bankruptcy court issued a detailed tentative decision, which it
adopted as its final ruling, sustaining Debtor’s objection and disallowing
Rose’s claim in its entirety. The court reasoned that the claim form and
attachment listed Rose as the current creditor and described a claim in
which Rose’s interest in the property was wrongfully taken. The court
determined that nothing in the claim or the SAC indicated that Rose sought
a derivative claim on behalf of Linda Flora.
Assuming the truth of the allegations in the SAC, the bankruptcy
court reasoned that it supported a potential claim by Linda Flora, but not
by Rose. The court held that because Rose alleged that Linda Flora entered
into the JVA with Debtor—and that agreement permitted Debtor to record
the deed of trust against the property—any claim arising from the
foreclosure or mismanagement belonged to Linda Flora.
The court determined that amendment to the claim could not
overcome the fact that it was filed by the wrong party. And, assuming a
claim filed by Linda Flora could be deemed an amendment to Rose’s claim,
which the court doubted, it would not be allowable because of prejudice to
12
Debtor. The bankruptcy court found that, because Debtor executed the
settlement with Qwan Group after the claims bar date, it would be
prejudiced by having to defend against a claim asserted by an entirely new
entity.
The court entered its written order disallowing Rose’s claim and
denying leave to amend. Rose timely appealed.
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.
ISSUES
Did the bankruptcy court err by sustaining Debtor’s objection to
Rose’s claim?
Did the bankruptcy court err by denying leave to amend the claim?
STANDARDS OF REVIEW
In the claim objection context, we review the bankruptcy court’s legal
conclusions de novo and its findings of fact for clear error. Lundell v. Anchor
Constr. Specialists, Inc., 223 F.3d 1035, 1039 (9th Cir. 2000). Because the
bankruptcy court determined that Rose could not state a claim for relief as
a matter of law, we review the decision de novo. Under de novo review,
“we consider a matter anew, as if no decision had been made previously.”
Francis v. Wallace (In re Francis), 505 B.R. 914, 917 (9th Cir. BAP 2014).
We review the bankruptcy court’s decision to deny a motion to
amend a claim for abuse of discretion. Wall St. Plaza, LLC v. JSJF Corp. (In re
13
JSJF Corp.), 344 B.R. 94, 99 (9th Cir. BAP 2006), aff’d and remanded, 277 F.
App’x 718 (9th Cir. 2008). A bankruptcy court abuses its discretion if it
applies an incorrect legal standard or its factual findings are illogical,
implausible, or without support in the record. TrafficSchool.com, Inc. v.
Edriver Inc., 653 F.3d 820, 832 (9th Cir. 2011).
DISCUSSION
A. Legal Standards Governing Claim Objections and Claim
Amendments
Pursuant to § 502(a), a claim filed under § 501 is deemed allowed
unless a party in interest objects. If an objection is made, the bankruptcy
court must determine the amount of the claim as of the petition date and
allow the claim except to the extent it is disallowable under the provisions
of § 502.
Section 502(b)(1) requires the bankruptcy court to disallow a claim
that is unenforceable against the debtor or the property of the debtor under
applicable law. Because Rose asserts state law causes of action, the
bankruptcy court must disallow the claim if it is unenforceable under state
law, and Debtor may raise any state law defenses to the claim. Durkin v.
Benedor Corp. (In re G.I. Indus.), 204 F.3d 1276, 1281 (9th Cir. 2000); see also
Johnson v. Righetti (In re Johnson), 756 F.2d 738, 741 (9th Cir. 1985) (“[I]n
proof of claim litigation under 11 U.S.C. § 502(b)(1), the validity of the
claim is determined under state law.”).
14
The Ninth Circuit has a “long established liberal policy that permits
amendments to a proof of claim.” Roberts Farms Inc. v. Bultman (In re Roberts
Farms Inc.), 980 F.2d 1248, 1251 (9th Cir. 1992). The bankruptcy court, in the
absence of prejudice to an opposing party, should freely allow claim
amendments “when the purpose is to cure a defect in the claim as filed or
to describe the claim with greater particularity.” Sambo’s Rests., Inc. v.
Wheeler (In re Sambo’s Rests., Inc.), 754 F.2d 811, 816-17 (9th Cir. 1985).
B. The Bankruptcy Court Properly Disallowed Rose’s Individual
Claim Against Debtor.
On appeal, Rose argues that the bankruptcy court erred by assuming
the JVA was the operative agreement because he alleged in the SAC that
Linda Flora withdrew its assent before Debtor signed the document. He
contends that a prior oral agreement between Rose, Royal, and Pukini
governs the joint venture. Rose argues that he was personally injured, and
because the SAC includes allegations that Debtor conspired with the other
defendants, he has an enforceable claim against Debtor for coconspirator
liability.6
Based on Rose’s factual allegations, we see no legal basis for his
assertion that the JVA is not enforceable against Linda Flora. Rose alleged
only that he did not receive a copy signed by Debtor, but he clearly states
that Linda Flora entered into the JVA with Debtor. Rose and Royal signed
Rose does not argue on appeal that Debtor is liable for claims against Pukini
6
based on an alter ego theory. Consequently, he has waived the issue, and we do not
15
the JVA on behalf of Linda Flora in April 2017, and Debtor contributed
funds in reliance on the JVA. After signing the JVA, Rose and Royal also
signed the deed of trust securing Debtor’s investment, which was granted
by Linda Flora pursuant to the JVA.
This is sufficient to form an enforceable contract under California
law. See Benard v. Walkup, 272 Cal. App. 2d 595, 602 (1969) (“It is well
established that the receipt and acceptance by one party of a writing signed
by the other only, and purporting to embody all the terms of a contract
between the two, binds the acceptor as well as the signer, to the terms of
the writing.”); Cal. Civ. Code § 3388 (“A party who has signed a written
contract may be compelled specifically to perform it, though the other
party has not signed it, if the latter has performed, or offers to perform it on
his part . . . .”).
Assuming Linda Flora had a valid basis to rescind the JVA, it had to
do more than merely withdraw assent—it had to give notice of recission
and restore to Debtor its investment in the Property. See Cal. Civ. Code
§ 1691; Denevi v. LGCC, 121 Cal. App. 4th 1211, 1220 (2004) (“[T]he law
requires one who has been defrauded into entering a contract to choose
either to affirm or rescind the contract. Rescission consists of restoration by
the plaintiff of any benefits received under the contract, coupled with
restitution to the plaintiff of the consideration which he gave.” (cleaned
up)). Rose makes no allegation that Linda Flora returned Debtor’s
address it. See Smith v. Marsh, 194 F.3d 1045, 1052 (9th Cir. 1999).
16
investment and the facts alleged in the SAC do not support his notion that
the JVA was unenforceable merely upon Linda Flora’s disavowal.
Rose is not a party to the JVA; the duties owed by Debtor under the
JVA are to Linda Flora, not Rose. Thus, Rose does not properly assert
individual claims based on mismanagement of the project, breaches of the
JVA, or foreclosure of the Property.
But even if we accept Rose’s argument that the JVA is unenforceable
and a prior oral agreement between the individuals governs the joint
venture, he still does not allege viable individual claims. The SAC contains
no facts to support a conclusion that Debtor owed any duty to Rose or had
a sufficient relationship with Rose to form the basis of individual claims
against Debtor. In other words, claims for injury sustained by Rose
individually are based on a purported agreement between the individuals
and are not properly asserted against Debtor, while claims for injury
caused by Debtor’s actions are necessarily based on the JVA or deed of
trust and, consequently, are properly asserted only by Linda Flora.
Rose may have viable individual claims against Pukini or Royal,
which we do not decide, but for several reasons his allegations of
conspiracy are insufficient to impute liability to Debtor. First, Rose did not
raise the issue of conspiracy in his opposition to Debtor’s claim objection,
and therefore waived the issue. See Smith, 194 F.3d at 1052 (“As a general
rule, we will not consider arguments that are raised for the first time on
appeal.”). Second, the only allegations of conspiracy made in the SAC
17
pertain to the fraud claim, which Rose conceded by not contesting Debtor’s
objection to his claim based on fraud.
Finally, civil conspiracy “is not a cause of action, but a legal doctrine
that imposes liability on persons who, although not actually committing a
tort themselves, share with the immediate tortfeasors a common plan or
design in its perpetration.” Applied Equip. Corp. v. Litton Saudi Arabia Ltd., 7
Cal. 4th 503, 510-11 (1994). Tort liability arising from conspiracy requires
that the coconspirator be “legally capable of committing the tort, i.e., that
he or she owes a duty to plaintiff recognized by law and is potentially
subject to liability for breach of that duty.” Id. at 511. Conspiracy cannot
create a duty. Id. at 514. “It allows tort recovery only against a party who
already owes the duty and is not immune from liability based on
applicable substantive tort law principles.” Id. Because Rose does not allege
facts to support a legal duty owed by Debtor to Rose, Debtor cannot be
liable as a coconspirator.
The bankruptcy court did not err by sustaining Debtor’s objection to
Rose’s individual claims.
C. The Bankruptcy Court Did Not Err by Determining that Rose
Failed to Assert Derivative Claims.
1. Derivative Claims Under California Law
An LLC has a legal existence separate from its members. See Sirott v.
Super. Ct., 78 Cal. App. 5th 371, 381 (2022). “The principles governing
derivative actions in the context of corporations apply to limited liability
18
companies and limited partnerships.” Schrage v. Schrage, 69 Cal. App. 5th
126, 150 (2021). Members do not have a direct cause of action or right of
recovery against those who have injured the LLC. See Sirott, 78 Cal. App.
5th at 381.
Under California law, a member of an LLC who satisfies certain
statutory requirements may bring a derivative action on behalf of the LLC.
An action is derivative “if the gravamen of the complaint is injury to the
[entity], . . . or it seeks to recover assets for the [entity] or prevent the
dissipation of its assets.” Grosset v. Wenaas, 42 Cal. 4th 1100, 1108 (2008).
However, if the injury is to the plaintiff individually, and not to the LLC,
“as where the action is based on a contract to which he is a party, or on a
right belonging severally to him, or on a fraud affecting him directly, it is
an individual action.” Schrage, 69 Cal. App. 5th at 150 (quoting Sutter v.
Gen. Petroleum Corp., 28 Cal. 2d 525, 530 (1946)).
If a member is successful on a derivative action, the LLC is the only
party that benefits from any recovery; “the [members] derive no benefit
except the indirect benefit resulting from a realization upon the [LLC’s]
assets.” Grosset, 42 Cal. 4th at 1108 (cleaned up); see also Cotton v. Expo
Power Sys., Inc., 170 Cal. App. 4th 1371, 1380 (2009) (“If successful, a
derivative claim will accrue to the direct benefit of the corporation and not
to the stockholder who litigated it.” (citations omitted)). A derivative claim
is a property right that belongs to the LLC, not its members. See Grosset, 42
Cal. 4th at 1108.
19
To bring a derivative claim on behalf of an LLC, a member must
satisfy California Corporations Code § 17709.02. That statute requires the
plaintiff to be a member of the LLC at the time of the alleged injury and
remain a member throughout the litigation of the derivative claim. Sirott,
78 Cal. App. 5th at 381-82. The member must also allege with particularity
its efforts to demand that the LLC pursue the action or its reasons for not
doing so. Cal. Corp. Code § 17709.02(a)(2). Finally, the member must
inform the LLC or its managers in writing of the ultimate facts of each
cause of action or deliver to the LLC or its managers a copy of the
complaint which the member proposes to file. Id.
2. Rose Did Not Properly Assert Derivative Claims on Behalf of
Linda Flora.
The gravamen of the SAC is that the defendants mismanaged the
project and committed breaches stemming from the JVA which led to
Linda Flora losing the Property. The alleged injury is to Linda Flora as a
member of the joint venture, or as owner of the Property. As the
bankruptcy court recognized, the allegations in the SAC support potential
claims by Linda Flora.
But the proof of claim clearly indicates that “Randy Rose” is the
creditor, and the attachment describes injuries only to Rose in his
individual capacity. Rose suggests that he can assert derivative claims on
behalf of Linda Flora which inure to his benefit, and which give him a
personal claim against Debtor. He argues that under the holding of Jara v.
20
Suprema Meats, Inc., 121 Cal. App. 4th 1238 (2004), he can maintain a direct
action for injuries to Linda Flora when it is equitable to do so.
Jara does not support Rose’s position. In Jara, the California Court of
Appeal held that a minority shareholder could assert an individual claim
for breach of fiduciary duty against majority shareholders “which resulted
in the majority stockholders retaining a disproportionate share of the
corporation’s ongoing value.” Id. at 1257-58 (citation omitted). The court
determined that the “gravamen of [plaintiff’s] complaint is that he was
deprived of a fair share of the corporation’s profits as a result of
defendants’ generous payment of executive compensation to themselves.”
Id. at 1258. Consequently, the claim was not derivative; it involved an
injury which fell within the scope of allowable individual actions under
existing precedent.
The court found additional support for its decision in “the absence of
any policy considerations favoring derivative actions in the procedural
context of the present case.” 7 Id. It applied existing precedent to distinguish
individual and derivative claims and did not hold that equitable
considerations can cause a derivative claim to inure to the benefit of an
7 The policy considerations including “prevent[ing] a multiplicity of actions by
each individual shareholder,” “protect[ing] the creditors who have first call on the
corporate assets,” “shielding the corporation from meritless lawsuits,” “encouraging the
intracorporate resolution of disputes,” and “protecting managerial freedom,” favored
requiring such actions to be brought derivatively. Id. at 1258-59. Because Jara involved
only one minority shareholder and the defendants “constitute[d] the entire complement
of the board of directors and all the corporate officers,” policy concerns did not favor
21
individual. At best, Jara might support Rose’s ability to assert individual
claims against Mag Equity, the other member of Linda Flora, but it offers
no support for Rose’s ability to assert claims for injuries to Linda Flora
caused by others.
Whether brought derivatively, or directly by Linda Flora, the claims
for injury based on the JVA or the deed of trust belong to Linda Flora and
any recovery on such claims would necessarily be to Linda Flora. Because
Rose filed the proof of claim as an individual creditor, the bankruptcy court
correctly held that Rose did not properly assert a derivative claim.8
D. The Bankruptcy Court Abused Its Discretion by Denying Leave to
Amend the Claim.
In determining whether to allow a claim amendment, the critical
inquiry is whether the opposing party would be unduly prejudiced. In re
Roberts Farms, Inc., 980 F.2d at 1251. To establish undue prejudice, “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
requiring the breach of fiduciary duty claim to be brought derivatively. Id. at 1259.
8 Debtor additionally argues that Rose failed to state a derivative claim because
the SAC does not include the requisite allegations of demand on Linda Flora. The SAC
arguably includes facts that explain why Rose did not make a demand on Linda Flora to
pursue the claims. But we need not decide the issue because, as discussed below, Rose
should be permitted to amend the claim. See In re Sambo’s Rests., Inc., 754 F.2d at 817(holding that in the absence of prejudice, bankruptcy courts should freely allow
amendments to proofs of claim “when the purpose is to cure a defect in the claim as
filed or to describe the claim with greater particularity”).
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creditors, and change of the debtor’s position.” In re JSJF Corp., 344 B.R. at
102 (cleaned up).
Here, the bankruptcy court held that amendment would be
prejudicial to Debtor because Debtor filed its motion for approval of its
compromise with Qwan Group after the claims bar date elapsed, and thus,
changed its position. The court further concluded that allowing Linda Flora
to be added as creditor would prejudice Debtor because it would have to
defend against a claim asserted by a new entity. We disagree.
1. The Bankruptcy Court Erred by Determining that
Amendment Would Cause Undue Prejudice.
Debtor may have changed its position by settling its claim objection
with Qwan Group, but that is not relevant to allowing an amendment to
Rose’s claim. Section 502(a) provides that a proof of claim is deemed
allowed unless a party in interest objects. At the time Debtor filed its
motion for approval of the settlement with Qwan Group, it had not
objected to Rose’s claim. And the court approved the settlement before it
considered the objection to Rose’s claim. To the extent that Debtor changed
its position, it did so in reliance on a claim that was deemed allowed, not a
disallowed claim in need of amendment.
We see no legal detriment to Debtor in having to defend a claim
asserted by, or on behalf of, Linda Flora. Debtor was aware of the operative
facts giving rise to claims in favor of Linda Flora. It litigated the complaint
in state court, and even acknowledged in its objection to Rose’s claim that:
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“In the State Action, Rose seeks damages individually and derivatively on
behalf of [Linda Flora.]” Allowing Rose to amend the claim to clarify its
derivative nature would not “introduce a new claim in disguise.” See In re
Sambo’s Rests., Inc., 754 F.2d at 817. It would merely specify the derivative
nature of an existing proof of claim.
And it makes little difference that the claims bar date had passed
prior to Debtor’s claim objection. Amendments to proofs of claim are
liberally allowed and can relate back to the original claim when the
amended claim is based on the same set of operative facts. See In re Roberts
Farms Inc., 980 F.2d at 1251-52.
Finally, the record does not evidence any prejudice to other creditors.
Under Debtor’s plan, secured creditor Qwan Group will be paid in full and
is unaffected by allowance or disallowance of an unsecured claim by Linda
Flora. According to the bankruptcy court docket, the Property has not been
sold and Debtor’s plan has not been confirmed. Thus, we see no prejudice
caused by a delay in distributions to insider Luna Construction, the only
other unsecured creditor.
2. Linda Flora May Be Joined as a Real Party in Interest.
Whether Linda Flora is substituted as creditor or Rose amends the
proof of claim to seek a derivative claim, Linda Flora is the creditor, and
any recovery will inure to its benefit. See Grosset, 42 Cal. 4th at 1108. The
fact that Debtor may have to defend against a claim owned by Linda Flora
does not constitute prejudice. See In re JSJF Corp., 344 B.R. at 102
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(“[P]rejudice requires more than simply having to litigate the merits of, or
to pay, a claim—there must be some legal detriment to the party
opposing.”).
Moreover, adding Linda Flora to the proof of claim is not a typical
amendment to a claim, but a joinder of a real party in interest. If the claims
against Debtor properly belong to Linda Flora, as the bankruptcy court
held, it is the real party in interest.
Claim objections are contested matters subject to Rule 9014. United
States v. Levoy (In re Levoy), 182 B.R. 827, 834 (9th Cir. BAP 1995). Pursuant
to Civil Rule 17, made applicable to contested matters by Rules 9014(c) and
7017, “[a]n action must be prosecuted in the name of the real party in
interest.” A party without the legal right to enforce an obligation is not a
real party in interest. See Simon v. Hartford Life, Inc., 546 F.3d 661, 664 (9th
Cir. 2008). However, under Civil Rule 17(a)(3), “the 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 into the action.”
The bankruptcy court erred by denying leave to amend the proof of
claim to clarify that Rose seeks derivative claims and by ruling that Linda
Flora cannot be joined or substituted as creditor.
CONCLUSION
Based on the foregoing, we AFFIRM the bankruptcy court’s order
disallowing Rose’s individual claim and his derivative claim. We REVERSE
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the bankruptcy court’s denial of leave to amend and REMAND to permit
Rose to amend his claim to assert a derivative claim in accordance with
state law, or for Linda Flora to join or substitute as creditor.
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