Appeal from the United States Bankruptcy Court for the Central District of California Honorable Victoria S. Kaufman, Bankruptcy Judge, Presiding Bk. No. 00-11061-VK
U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT
Submitted Without Oral Argument on February 24, 2012*fn2
Before: KIRSCHER, MARKELL, and HOLLOWELL, Bankruptcy Judges.
Appellants, Martin and Gabrielle Strand ("Strands"), appeal an order from the bankruptcy court denying their motion to reopen the chapter 7*fn3 bankruptcy case of appellees, Jeffrey and Jodene Clark ("Clarks"). We conclude the bankruptcy court applied an incorrect standard of law by going beyond the scope of the motion to reopen and reviewing the merits of the underlying claims Strands wish to bring. Therefore, we must REVERSE and REMAND with instruction to reopen the case.
I. FACTUAL AND PROCEDURAL BACKGROUND
A. Events leading up to the Motion to Reopen.
This case has a long, litigious history, but little of it was included in the record.*fn4 In 1990, Strands owned a rental house in Simi Valley, California, which they had been renting to the Clarks for several years (the "Property").
On November 6, 1990, the parties executed a written agreement for the Property entitled "Equity-Share Partnership Agreement with Right-to-Purchase Option" ("Partnership Agreement"). In the Partnership Agreement, Clarks agreed to purchase the Property from Strands for $192,200. Specifically, Clarks were to make a $1,200 down payment, and the balance of the purchase price was to be financed by a $131,250 conventional loan secured by a first deed of trust and by a $59,750 loan from Strands secured by a second deed of trust. The parties further agreed to share, on a 60/40 basis, the appreciation in the Property above $192,200, if any, "from the date of this agreement until the agreement is concluded and satisfied." The Partnership Agreement would be "concluded and satisfied" when the parties received their respective "percentage share amount(s) . . ., and the pay-off of the remaining balance of the second deed of trust to [the Strands]." Strands' 40% share in the Property's appreciation was to be inclusive of any interest payment portions and exclusive of any principal payment portions paid toward the $59,750 second deed of trust. The Partnership Agreement gave Strands the option to purchase the Property under certain conditions. No copy of a promissory note or a second deed of trust is in the record. It is uncertain whether these documents were ever created and/or recorded.*fn5
Several days prior to the execution of the Partnership Agreement, Strands executed a grant deed conveying the Property without reservation to Clarks as joint tenants on October 24, 1990. The grant deed, recorded on November 2, 1990, in Ventura County, does not refer to any partnership or partnership interest.
1 The escrow instructions, dated October 24, 1990, are also silent 2 as to any partnership and state that the grant deed was being 3 recorded to establish the Property in the name of "Clarks only."
4 On September 30, 1998, Strands executed a Notice of Lien in 5 Ventura County claiming a contractual ownership interest in the 6 Property. For reasons unknown, the Notice was not recorded until 7 March 30, 1999.
8 Clarks filed a chapter 7 bankruptcy case on February 1, 2000. 9 In their Schedule A, Clarks listed the Property with a market 10 value of $183,000 and a secured claim against it for $172,495, but 11 they failed to list the nature of their interest in it. 12 Schedule F reflects an unsecured "personal loan" of $59,750 owed 13 to Mr. Strand, whose address was "unknown." Mrs. Strand was not 14 named anywhere in Clarks' schedules. Clarks have alleged that 15 they were unable to contact Strands because Strands had moved out 16 of state. Clarks did not schedule an interest in any partnership 17 in their Schedule B. They also did not disclose their cross- 18 claims against Strands in their Schedule B or their Statement of 19 Financial Affairs. The chapter 7 trustee administered Clarks' 20 case as a "no asset" case, and Clarks received their discharge in 21 May 2000. Their bankruptcy case was closed that same month.
22 In November 2005 and unaware of the bankruptcy, Strands sued 23 Clarks in state court alleging claims premised on the 24 partnership's ownership of the Property ("Partnership Case"). 25 Specifically, Strands alleged that the Property was the sole asset 26 of the partnership. They sought dissolution of the partnership, 27 an accounting, and the appointment of a receiver to wind up the 28 partnership's affairs and to sell the Property. Strands further sought declaratory relief to ascertain their interest in the Property and to receive their 40% share of the Property's equity.
In their answer, Clarks contended that Strands' suit was barred in light of the discharge in 2000. Clarks further contended that the alleged partnership dissolved by its own terms in 2000. Clarks filed a cross-complaint, alleging claims for slander of title and abuse of process.
In September 2006, Strands filed a motion to reopen Clarks' bankruptcy case which was granted on November 30, 2006.*fn6 In August 2007, Strands moved for relief from stay to continue prosecuting the Partnership Case in state court.*fn7 In October 2007, the bankruptcy court entered an order granting the motion, which states:
The parties may return to the state court and litigate all issues regarding the existence if any and the effect if any of the alleged partnership, including a determination of what the partnership assets are if any,
dissolution of the partnership and disposition of the partnership assets and the rights and obligations of the partners.
There shall be no personal liability of the debtors. The rights of contribution, reimbursement, and satisfaction of claims against the partnership property may be determined, including if necessary the determination of the existence and if necessary ...