Jon Milby v. Patricia Templeton , 875 F.3d 1229 ( 2017 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
IN RE CHARLENE M. MILBY, Nos. 16-60022
Debtor, 16-60023
BAP No.
JON A. MILBY; D&J TRUCKING 15-1180
COMPANY, a California corporation;
SANDRA HOLDER MILBY, an
individual; SANJON, INC., a OPINION
California corporation; 5TH STREET
CONDO, LLC, California Limited
Liability Company; CHARLENE M.
MILBY; CHARLENE’S
TRANSPORTATION, INC., a California
corporation,
Appellants/Cross-Appellees,
v.
PATRICIA A. TEMPLETON,
individuals on behalf of the
Bankruptcy Estate of Debtor
Charlene M. Milby, and derivatively
on behalf of Charlene’s
Transportation, Inc.; G. CRESSWELL
TEMPLETON, III, Bankruptcy Estate
of Debtor Charlene M. Milby, and
derivatively on behalf of Charlene’s
Transportation, Inc.,
Appellees/Cross-Appellants.
2 IN RE MILBY
Appeal from the Ninth Circuit
Bankruptcy Appellate Panel
Taylor, Faris, and Corbit, Bankruptcy Judges, Presiding
Argued and Submitted September 1, 2017
Pasadena, California
Filed November 21, 2017
Before: Kim McLane Wardlaw and Jay S. Bybee, Circuit
Judges, and Harvey Bartle III,* District Judge.
Opinion by Judge Bybee
SUMMARY**
Bankruptcy
The panel affirmed the judgment of the Bankruptcy
Appellate Panel, which (1) reversed the bankruptcy court’s
dismissal as time-barred of a bankruptcy estate’s claims
seeking avoidance of fraudulent transfers and (2) affirmed the
bankruptcy court’s dismissal of other claims based on
transfers not made by the debtor.
*
The Honorable Harvey Bartle III, United States District Judge for
the Eastern District of Pennsylvania, sitting by designation.
**
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
IN RE MILBY 3
Regarding the time bar, the bankruptcy court held that the
bankruptcy estate’s delay in filing after discovering the
transfers precluded equitable tolling of the statute of
limitations. The BAP reversed, holding that such post-
discovery delay is irrelevant to whether equitable tolling
applies. The panel wrote that neither court correctly applied
the law on equitable tolling. Under the correct standard, post-
discovery delay does not preclude equitable tolling but is still
relevant to assessing a party’s overall diligence. The panel
affirmed the judgment of the BAP because the estate’s overall
diligence, combined with extraordinary circumstances
preventing earlier discovery of the transfers, warranted
equitable tolling.
The panel affirmed, for the same reasons stated in the
BAP’s opinion, the BAP’s affirmance of the bankruptcy
court’s dismissal of claims based on transfers that were made
by individuals and entities other than the debtor and therefore
could not serve as predicates for a claim under 11 U.S.C.
§ 544(b). The panel remanded the case to the bankruptcy
court.
COUNSEL
Karen L. Grant (argued), Law Offices of Karen L. Grant,
Santa Barbara, California; Janet K. McGinnis, Law Office of
Janet K. McGinnis, Santa Barbara, California; for
Appellants/Cross-Appellees.
Daniel Joseph McCarthy (argued), Hill Farrer & Burrill LLP,
Los Angeles, California, for Appellees/Cross-Appellants.
4 IN RE MILBY
OPINION
BYBEE, Circuit Judge:
The bankruptcy estate of Debtor Charlene Milby
discovered allegedly fraudulent transfers days before the
statute of limitations on avoidance claims was set to expire.
This action was not filed until almost a year later. The
bankruptcy court dismissed the action as time barred and held
that the estate’s delay in filing after discovering the transfers
precluded equitable tolling. The Bankruptcy Appellate Panel
(“BAP”) reversed, holding that such post-discovery delay is
irrelevant to whether equitable tolling applies.
Neither court correctly applied our law on equitable
tolling. Under Gibbs v. Legrand, post-discovery delay does
not preclude equitable tolling but is still relevant to assessing
a party’s “overall diligence.” 767 F.3d 879, 891–93 (9th Cir.
2014). We affirm the judgment of the BAP because, here, the
estate’s overall diligence, combined with the extraordinary
circumstances preventing earlier discovery of the subject
transfers, warrants equitable tolling.
I
Charlene Milby petitioned for Chapter 7 bankruptcy on
September 22, 2011. Under 11 U.S.C. § 546(a)(1), the
bankruptcy estate had two years, or until September 22, 2013,
to file any avoidance actions.1 Between September 5 and 18,
1
The Templetons argue a “discovery” rule should apply, such that the
limitations period began running only when the estate discovered the
subject transfers in September 2013. This is not only contrary to what
they argued before the district court, but also contradicts the express
IN RE MILBY 5
2013, with just days remaining on the two-year limitations
period, creditors Patricia and G. Cresswell Templeton
informed the bankruptcy trustee of allegedly fraudulent
transfers the estate might seek to avoid. The trustee chose not
to act on that information, however, concluding that the cost
of litigation would likely outweigh any potential benefit.
Thus, on September 19, 2013, the trustee filed a complaint to
avoid certain transfers but not those the Templetons had
identified.
The bankruptcy court approved a settlement of the
trustee’s action in August 2014. While the court was still
considering the settlement, the Templetons approached the
trustee about being appointed to challenge the transfers they
had previously brought to her attention. The trustee agreed,
and on September 16, 2014, the court approved the
Templetons’ appointment to pursue claims on behalf of the
estate or derivatively on behalf of Charlene’s company,
Charlene’s Transportation, Inc. (“CTI”). The next day,
September 17, 2014, the Templetons filed this avoidance
action on behalf of the estate and also, they contend,
derivatively on behalf of CTI.
The Templetons’ complaint challenged transfers from
bank accounts allegedly owned by Defendants Charlene
Milby; her father, Jon A. Milby; her step-mother, Sandra
Holder Milby; and various companies. The complaint
asserted four counts: (1) actual fraud under 11 U.S.C.
§ 544(b) and Cal. Civil Code § 3439.04(a)(1);
(2) constructive fraud under 11 U.S.C. § 544(b) and Cal. Civil
language of § 546(a)(1). See 11 U.S.C. § 546(a)(1) (requiring avoidance
actions to be brought within two years “after the entry of the order for
relief”).
6 IN RE MILBY
Code §§ 3439.04(a)(2) and 3439.05; (3) aiding and abetting
fraud; and (4) unjust enrichment. The Milby Defendants
moved for summary judgment, arguing that the first three
counts were barred by the two-year limitations period on
avoidance actions. The Templetons conceded that the
limitations period would normally have expired on September
22, 2013—nearly a year before the action was filed—but
argued that equitable tolling applied given Charlene’s
misconduct in failing to disclose the subject transfers or to
cooperate with the bankruptcy trustee.
In deciding summary judgment, the bankruptcy court first
analyzed whether the subject transfers were “an interest of the
debtor in property” as required to state a claim under
§ 544(b). In re Milby, No. 9:11-BK-14487-PC, 2015 WL
967714, at *10 (Bankr. C.D. Cal. Mar. 2, 2015). The court
held that only the transfers alleged in paragraph 30 of the
Templetons’ complaint so qualified. Id. at *12. It therefore
dismissed without prejudice any claim based on the
remaining transfers alleged in paragraphs 31–35 for failure to
state a claim and granted the Templetons leave to amend to
challenge those transfers under a different theory. Id.The bankruptcy court then considered whether the claims
based on the paragraph 30 transfers were timely. Id. It found
that equitable tolling did not apply because the estate had the
opportunity to assert claims based on the subject transfers
before the limitations period would normally have expired but
did not do so. Id. at *16. Thus, the court held that the
Templetons’ first three claims based on the paragraph 30
transfers were untimely and dismissed those claims with
prejudice. Id. at *17. It also dismissed the unjust enrichment
claim for failure to state a claim. Id. The Templetons filed
IN RE MILBY 7
a notice that they would not amend their complaint, thereby
allowing a final judgment to issue.
On appeal, the BAP vacated in part the judgment for
Defendants. In re Milby, 545 B.R. 613, 625 (B.A.P. 9th Cir.
2016). In a published opinion, the BAP held that the
bankruptcy court erred in considering the estate’s diligence
after discovering the subject transfers. Id. It ruled that
equitable tolling could apply and remanded for further
proceedings. Id. And in a separate, unpublished opinion, the
BAP affirmed the bankruptcy court’s dismissal of any claims
based on the paragraph 31–35 transfers. In re Milby, No. AP
14-01132-PC, 2016 WL 778164, at *4 (B.A.P. 9th Cir. Feb.
24, 2016). Defendants appealed the BAP’s decision
respecting equitable tolling, and the Templetons cross-
appealed the decision affirming dismissal of their claims
based on the paragraph 31–35 transfers.2
II
The doctrine of equitable tolling is “read into every
federal statute of limitation.” Holmberg v. Armbrecht,
327 U.S. 392, 397 (1946). Indeed, we have previously
applied equitable tolling to § 546(a)(1). Gladstone v. U.S.
Bancorp, 811 F.3d 1133, 1143 (9th Cir. 2016). “A litigant
seeking equitable tolling bears the burden of establishing two
elements: (1) that he has been pursuing his rights diligently,
and (2) that some extraordinary circumstance stood in his
way and prevented timely filing.” Gibbs, 767 F.3d at 884–85
(quotation marks omitted).
2
We have jurisdiction pursuant to 28 U.S.C. § 158(d) and review
legal conclusions of the BAP de novo. In re Jones, 657 F.3d 921, 924 (9th
Cir. 2011).
8 IN RE MILBY
The bankruptcy court had no difficulty finding that the
second element of equitable tolling was met here. The court
described at length the extraordinary circumstances
preventing the estate from initially filing the claims at issue,
referring for example to “the Debtor’s egregious conduct,
including . . . the failure to schedule assets, false oaths in the
schedules and in response to questions at creditors’ meetings,
and failure to turn over documents and cooperate with the
trustee.”3 Milby, 2015 WL 967714 at *13. The court also
noted that there was “no significantly probative evidence in
the record that [the trustee] discovered, or could have
discovered, the Subject Transfers earlier than September 18,
2013.” Id. at *15. We agree with the bankruptcy court that
the Templetons successfully established the second element
of equitable tolling. See Gladstone, 811 F.3d at 1143
(applying equitable tolling where debtor concealed
transactions).
The principal issue is thus whether the Templetons also
established diligence, the first element of equitable tolling.
Although the bankruptcy court found the trustee “was diligent
in her administration of the estate” up to the time she
discovered the subject transfers, it nevertheless declined to
apply equitable tolling because no “exceptional circumstances
existed after discovery of the Subject Transfers” to prevent
timely filing. Milby, 2015 WL 967714 at *16 (emphasis
added). The BAP, in turn, reversed on the ground that “[a]
court should not look at the trustee’s post-discovery diligence
when considering whether equitable tolling should be
applied.” Milby, 545 B.R. at 622.
3
The bankruptcy court ultimately denied Milby’s discharge as a
discovery sanction.
IN RE MILBY 9
Neither the bankruptcy court nor the BAP correctly
applied our law on equitable tolling. The bankruptcy court
erred insofar as it held that equitable tolling is inappropriate
any time a litigant has the opportunity to file before a
limitations period would normally expire but does not do so.
In other words, the bankruptcy court erred insofar as it held
that failing to file a complaint after extraordinary
circumstances cease but before the limitations period would
normally expire is dispositive of whether equitable tolling
applies. That rule is too narrow.
The BAP, for its part, erred in holding that post-discovery
diligence is never relevant to whether equitable tolling
applies. That rule is too broad. As we explained in Gibbs,
“[d]iligence after an extraordinary circumstance is lifted may
be illuminating as to overall diligence, but is not alone
determinative.” 767 F.3d at 892. It is “one factor in a
broader diligence assessment.” Id. That said, we give
diligence before the extraordinary circumstance ends more
weight than diligence afterward. Id. (noting that “diligence
after the fact is less likely to be probative of the question of
whether the extraordinary circumstance caused the late
filing,” such that “diligence during the existence of an
extraordinary circumstance is the key consideration”).
It appears that the BAP’s confusion stemmed from
conflating diligence considered as an element of equitable
tolling with the “stop-clock” rule we adopted in Socop-
Gonzalez v. I.N.S., 272 F.3d 1176 (9th Cir. 2001). In Socop,
Oscar Socop-Gonzalez married a U.S. citizen while his
request for asylum was pending. 272 F.3d at 1181. He asked
an officer of the Immigration and Naturalization Service how
he should proceed in light of his marriage and was
erroneously advised to withdraw his request for asylum. Id.10 IN RE MILBY
By doing so, he unwittingly triggered his own
deportation—which he learned of only twenty-seven days
before the ninety-day period to reopen proceedings was set to
expire. Id. He sought legal advice and eventually moved to
reopen proceedings, but the Board of Immigration Appeals
refused to reopen his case because more than ninety days had
elapsed. Id. On petition for review, we applied equitable
tolling and held that “the event that ‘tolls’ the statute simply
stops the clock until the occurrence of a later event that
permits the statute to resume running.” Id. at 1195. We
therefore concluded that Socop was entitled to the full ninety
days to move to reopen proceedings counting from the date
he learned of his deportation. Id.Socop’s stop-clock rule governs the computation of time
remaining on a statute of limitations when equitable tolling
applies. It does not, however, preclude considering post-
discovery diligence in deciding whether equitable tolling
applies in the first place. In Gibbs, we noted an apparent
“tension” between the stop-clock rule and examining post-
discovery diligence but explained how that tension is
resolved:
We note some tension between examining a
petitioner’s diligence after the lifting of an
obstacle to timely filing, and the stop-clock
rule established by an en banc panel of this
Court in Socop-Gonzalez. Socop-Gonzalez
rejected the approach to equitable tolling
wherein courts consider whether a claimant
should have been expected to file his lawsuit
within the amount of time left in the statute of
limitations, after an extraordinary
circumstance barring filing was lifted.
IN RE MILBY 11
Instead, “the event that ‘tolls’ the statute
simply stops the clock until the occurrence of
a later event that permits the statute to resume
running.”
. . . . Socop-Gonzalez’s “stop-clock”
holding remains the law in our circuit and
applies here. That rule prohibits courts from
constraining litigants to a judicially imposed
filing window, and warns against imposing
additional diligence requirements on
recipients of equitable tolling.
Courts may, however, consider a
petitioner’s diligence, after an extraordinary
circumstance has been lifted, as one factor in
a broader diligence assessment.
767 F.3d at 891–92 (final emphasis added and citations
omitted); see also Luna v. Kernan, 784 F.3d 640, 651–52 (9th
Cir. 2015) (“[U]nder current circuit law, we must apply both
the diligence-through-filing requirement imposed by Spitsyn
and the stop-clock approach adopted in Gibbs.”); Spitsyn v.
Moore, 345 F.3d 796, 801 (9th Cir. 2003) (remanding for
consideration of diligence after an extraordinary circumstance
in deciding whether to apply equitable tolling).
Applying Gibbs to the case before us, we hold that the
estate satisfied the diligence element of equitable tolling. The
bankruptcy court found that the trustee was diligent during
the time the subject transfers were concealed, and it is
“diligence during the existence of an extraordinary
circumstance [that] is the key consideration.” Gibbs,
767 F.3d at 892. Less than a week remained on the statute of
12 IN RE MILBY
limitations when the estate discovered the subject transfers in
September 2013, and it would have been unreasonable to
require the estate to file in that time. The trustee brought an
avoidance action challenging other unconcealed transfers, and
she settled that action in August 2014. Once it became
apparent the trustee would not pursue the subject transfers,
the Templetons asked to be appointed to do so. The
bankruptcy court appointed them on September 16, 2014, and
they filed their complaint the very next day.4 Although nearly
a year had elapsed between discovery of the subject transfers
and filing, this does not, under the circumstances, undercut
the estate’s overall diligence. Equitable tolling applies, and
the estate gets the benefit of the stop-clock rule. The action
was timely filed.
III
Finally, we turn to the Templetons’ cross-appeal. As
noted above, the bankruptcy court found that the transfers
alleged in paragraphs 31–35 of the Templetons’ complaint
were made by individuals and entities other than the Debtor
and therefore could not serve as predicates for a § 544(b)
claim. It also found that the Templetons had failed to state a
claim to avoid the paragraph 31–35 transfers under any other
theory. It therefore dismissed without prejudice any claim
based on the paragraph 31–35 transfers, and the BAP
affirmed.
4
Prior to their appointment—which followed a court-approved
settlement between Charlene and the trustee—the Templetons did not
have the power to pursue the subject transfers. See 11 U.S.C. § 544(b)
(granting to the bankruptcy trustee the power to “avoid any transfer of an
interest of the debtor in property”).
IN RE MILBY 13
We affirm the BAP’s judgment in this regard for the same
reasons stated in its opinion. In brief, § 544(b) provides that
a bankruptcy trustee “may avoid any transfer of an interest of
the debtor in property . . . that is voidable under applicable
law by a creditor holding an unsecured claim.” 11 U.S.C.
§ 544(b)(1) (emphasis added). The transfers alleged in
paragraphs 31–35 were transfers from bank accounts in the
names of non-Debtor Defendants and therefore could not
support a § 544(b) claim. Although the Templetons argued
that their complaint also adequately pled claims under other
theories, both the bankruptcy court and the BAP correctly
held that it did not. The bankruptcy court granted the
Templetons leave to amend to plead their alternate theories,
but they chose not to do so.
Accordingly, we AFFIRM the judgment of the BAP and
REMAND to the bankruptcy court for further proceedings
consistent with this opinion.