Filed: Jun. 24, 2021
Latest Update: Jun. 25, 2021
FILED
JUN 24 2021
NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. SC-19-1149-GBS
KIMBERLY DAWN FRANKLIN,
Debtor. Bk. No. 3:17-bk-00425
KIMBERLY DAWN FRANKLIN, Adv. No. 3:17-ap-90177
Appellant,
v. MEMORANDUM*
U.S. BANK TRUST, N.A., as Trustee for
LSF9 Master Participation Trust,
Appellee.
Appeal from the United States Bankruptcy Court
for the Southern District of California
Laura S. Taylor, Bankruptcy Judge, Presiding
Before: GAN, BRAND, and SPRAKER, Bankruptcy Judges.
INTRODUCTION
Chapter 13 1 debtor Kimberly Franklin (“Debtor”) appeals the
bankruptcy court’s order granting the motion to dismiss Debtor’s third
*
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, all “Civil Rule” references are to the Federal Rules of Civil
amended complaint under Civil Rule 12(b)(6), made applicable by Rule
7012(b), with prejudice. Debtor filed the complaint against U.S. Bank, N.A.,
as Trustee for LSF9 Master Participation Trust (“US Bank”) seeking to
disallow US Bank’s proof of claim and obtain a judgment prohibiting it
from enforcing its interest in Debtor’s residence. She alleged that US Bank
lacked standing to assert a claim because the promissory note was
improperly endorsed. Debtor also alleged mortgage fraud under the Fraud
Enforcement and Recovery Act of 2009 (“FERA”) and intentional and
negligent infliction of emotional harm.
Debtor failed to timely respond to US Bank’s motion to dismiss,
which is a sufficient basis for the court to grant the motion. We also
perceive no error in the bankruptcy court’s alternative ruling that the
complaint failed to state a claim for relief. Accordingly, we AFFIRM.
FACTS 2
A. Prepetition Events
In June 2006, Debtor borrowed $690,000 from First Magnus Financial
Corporation (“First Magnus”) to refinance an existing mortgage on her
residence (“Property”). Debtor executed a promissory note in favor of First
Magnus and a deed of trust in favor of Mortgage Electronic Registration
Procedure, and all “LBR” references are to the Local Bankruptcy Rules for the Southern
District of California.
2 We exercise our discretion to take judicial notice of documents electronically
filed in Debtor’s adversary proceeding and main bankruptcy case. See Atwood v. Chase
Manhattan Mortg. Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003).
2
Systems Inc. (“MERS”), as nominee for First Magnus. First Magnus
recorded the deed of trust in July 2006. The note and deed of trust provided
that First Magnus could transfer its interests without prior notice to Debtor.
In 2011, MERS assigned the deed of trust to BAC Home Loans
Servicing, L.P., fka Countrywide Home Loans Servicing, L.P. In 2014, Bank
of America, N.A., as successor by merger to BAC Home Loans Servicing,
assigned the deed of trust to Christina Trust, a division of Wilmington
Savings Fund Society, FSB. Christina Trust then assigned the deed to trust
to Wilmington Trust, N.A. in 2015, and Wilmington Trust assigned it to
U.S. Bank in 2016. Each of the assignments were recorded.
Pursuant to an allonge to the promissory note, the note was endorsed
by First Magnus as payable to Residential Funding Corporation (“RFC”),
which endorsed it as payable to Countrywide Home Loans, Inc.
Countrywide Home Loans, Inc. endorsed the note as payable to
Countrywide Bank, FSB, which in turn endorsed the note in blank.
In September 2016, US Bank recorded a notice of default and election
to sell under the deed of trust which indicated that Debtor was in default
by the amount of $416,959.03. In January 2017, US Bank’s servicer recorded
a notice of trustee’s sale.
B. The Bankruptcy Case And Adversary Complaints
Debtor filed her chapter 13 petition in January 2017. US Bank filed an
amended proof of claim asserting a secured claim of $1,027,117.61 and a
3
prepetition arrearage of $437,301.83. It attached the note, the deed of trust
and assignments, and Debtor’s payment history.
Debtor did not provide for payment of the US Bank claim in her plan
and instead stated that she anticipated filing an adversary complaint to
challenge the validity of the claim. The plan provided that if Debtor was
successful in the adversary, US Bank would not have an allowed claim, and
if Debtor was unsuccessful, she would exclude the US Bank claim from the
plan. The bankruptcy court confirmed the plan in September 2017.
In October 2017, Debtor filed an adversary complaint against US
Bank alleging that it lacked standing to assert a claim based on various
deficiencies in the endorsements and assignments of the note and deed of
trust. US Bank filed a motion to dismiss the complaint, which the
bankruptcy court granted with leave to amend.
Debtor filed a first amended complaint in March 2018 and again
alleged that US Bank had no interest in either the promissory note or the
deed of trust. She alleged that First Magnus went out of business prior to
June 2011 and therefore, MERS lacked authority to assign the deed of trust.
Debtor also alleged that RFC could not endorse the note because it was out
of business prior to the date of the promissory note. She sought declaratory
relief and additionally asserted a claim for presentation of false claims
under 18 U.S.C. § 152.
US Bank filed a motion to dismiss the first amended complaint and a
request for judicial notice of documents recorded in the San Diego
4
Recorders Office and with the California Secretary of State. US Bank
asserted that it had standing to enforce the note under state law and
because Debtor was not a party to the various assignments of the deed of
trust, she lacked standing to challenge those assignments prior to
foreclosure. Debtor opposed the motion to dismiss and objected to the
request for judicial notice. US Bank filed a reply.
The bankruptcy court issued a tentative ruling which indicated that
problems remained with the first amended complaint. The court noted that
Debtor had retained new counsel and had acknowledged that the first
amended complaint needed further amendment. The court requested
further briefing from Debtor addressing Bryer v. U.S. Bank National Ass’n,
No. 15-cv-00378-PSG, 2015 WL 9304054 (N.D. Cal. Dec. 22, 2015), a case
cited by US Bank in its reply, and provided guidance that it would take
judicial notice only that proffered documents were recorded, given that
Debtor disputed the legal effect of those documents. The bankruptcy court
continued the hearing on the motion to dismiss and ordered that if Debtor
did not file either a responsive brief or an amended complaint by June 26,
2018, the motion to dismiss would be granted.
On June 27, 2018, Debtor filed a supplemental brief in support of her
opposition to the motion to dismiss and attached a proposed second
amended complaint. Debtor argued that she had standing to challenge the
assignments of the deed of trust under Yvanova v. New Century Mortgage
Corp., 62 Cal. 4th 919 (2016). US Bank responded that Debtor did not file
5
the supplemental brief within the deadline set by the court, and she failed
to address Bryer, which the court specifically ordered.
The bankruptcy court issued a tentative decision expressing its intent
to grant the motion to dismiss but to allow Debtor “one more opportunity
to file an amended complaint” consistent with the court’s ruling. The
tentative decision noted that Debtor appeared to continue to defend the
first amended complaint but also appeared to argue that the court should
rely on the proposed second amended complaint. The bankruptcy court
also stated that under the reasoning of Bryer, MERS had authority to assign
the deed of trust, and to the extent that Debtor’s claims relied on an
argument that the assignments were void, those claims would be dismissed
with prejudice.
At the hearing, the bankruptcy court granted the motion to dismiss
but deferred ruling on Debtor’s eighth cause of action for presentation of
false claims under 18 U.S.C. § 152 to permit the court to consider whether
that claim should be dismissed with prejudice. On August 14, 2018, the
bankruptcy court entered an order dismissing Debtor’s cause of action for
presentation of false claims with prejudice because Debtor failed to provide
any authority or argument supporting her private right of action under 18
U.S.C. § 152. The court dismissed the remaining claims without prejudice
but ordered any new complaint to be filed within three weeks of the court’s
order and be titled “Third Amended Complaint.”
6
On August 31, 2018, Debtor filed a third amended complaint
(“TAC”). She again alleged that US Bank lacked standing to enforce the
note, but she no longer alleged that the assignments of the deed of trust
were void. Debtor asserted that First Magnus and RFC were out of
business at the time of their purported endorsements and further argued
that the note was non-negotiable. She also included a cause of action for
false presentation of claims under 18 U.S.C. § 152. 3
On September 6, 2018, Debtor filed a different third amended
complaint which omitted the cause of action for presentation of false
claims. The new complaint asserted four causes of action: (1) lack of
standing to enforce the note pursuant to § 502; (2) declaratory relief that US
Bank has no interest in the Property; (3) “manufactured claims/financial
institutional mortgage fraud for profit” under the Fraud Enforcement and
Recovery Act of 2009 (“FERA”); and (4) “intentional and/or negligent
infliction of emotional harm.” The third and fourth causes of action were
new.
C. The Motion To Dismiss And The Court’s Ruling
On September 14, 2018, US Bank filed a motion to dismiss the TAC. It
also filed a motion to strike the third and fourth causes of action because
Debtor amended her complaint without a stipulation from US Bank or a
The first TAC asserted four causes of action: (1) lack of standing to enforce the
3
note pursuant to § 502; (2) declaratory relief that US Bank has no interest in the
Property; (3) presentation of false claims under 18 U.S.C. § 152; and (4) actual fraud.
7
court order granting leave to amend. US Bank again filed a request for
judicial notice of the promissory note, the deed of trust, and various
recorded assignments and documents. It served Debtor with a notice of
hearing and motion on local Form CSD 3015, which stated that “any
opposition or other response to this motion” must be filed and served “not
later than fourteen (14) days from the date of service.” Debtor filed her
oppositions to the motion to dismiss and the motion to strike on October
29, 2018.
At the November 6, 2019 hearing, the bankruptcy court stated that it
would not consider Debtor’s oppositions to the motions because they were
filed over 30 days late and the delay was not due to Debtor’s excusable
neglect. However, the court said that it would hear Debtor’s substantive
arguments and decide the issues on both bases.
Debtor acknowledged that US Bank was in possession of the
promissory note but argued that it was not enforceable because the note
was non-negotiable, and the endorsements were invalid. The bankruptcy
court reasoned that if the note was negotiable, US Bank could enforce it
because it had possession and the note was endorsed in blank. And, if the
note was non-negotiable, it could still be transferred under Division 9 of
the California Commercial Code.
The court held that Debtor did not dispute the assignments of the
deed of trust, which under California law, were sufficient to justify US
Bank’s right to foreclose. It also stated that Debtor could not allege any
8
damages because she lived in the Property for approximately ten years
without paying the debt and she could not plausibly assert a risk of double
recovery because under California law, a nonjudicial foreclosure would
eliminate any deficiency.
The bankruptcy court determined that Debtor amended the TAC
without leave to bring additional causes of action and therefore the third
and fourth causes of action would be struck. The bankruptcy court also
dismissed the third cause of action because Debtor not only failed to allege
what provisions of FERA US Bank allegedly violated, but also failed to
provide any authority for the proposition that she had a private right of
action to assert a violation of a criminal statute. And the court dismissed
the fourth cause of action for the reasons stated in the tentative decision on
the motion to strike.
The bankruptcy court dismissed the TAC with prejudice because
despite having several attempts to amend the complaint, Debtor continued
to base her claims on allegations that the note was not validly endorsed,
without addressing the possibility that it could be transferred under Cal.
Com. Code § 9110(a)(3). The court entered a judgment dismissing the
adversary proceeding on January 23, 2018.
On February 1, 2019, Debtor filed a motion for reconsideration and
argued that the court erred by treating the motion to dismiss as
unopposed. She asserted that the court converted the motion to dismiss
9
into a motion for summary judgment without fairly apprising her that it
would consider the evidentiary effect of the promissory note.
The bankruptcy court denied the motion for reconsideration. It held
that Debtor’s late filed opposition justified dismissal because it was not late
due to excusable neglect, but furthermore, even considering Debtor’s
opposition, dismissal was appropriate. Finally, the bankruptcy court stated
that it did not convert the motion to dismiss into a motion for summary
judgment and did not consider matters outside of the pleadings. The
documents offered in support of the motion to dismiss were the types of
materials which the court could consider because they were referred to in
the TAC and were attached as exhibits to the original complaint. Debtor
timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(O). We have jurisdiction under 28 U.S.C. § 158.
ISSUE
Did the bankruptcy court err by dismissing Debtor’s third amended
complaint with prejudice?
STANDARDS OF REVIEW
We review de novo the bankruptcy court’s grant of a Civil Rule
12(b)(6) motion to dismiss. Movsesian v. Victoria Versicherung AG, 670 F.3d
1067, 1071 (9th Cir. 2012). Under de novo review, we look at the matter
10
anew, giving no deference to the bankruptcy court’s determinations.
Francis v. Wallace (In re Francis), 505 B.R. 914, 917 (9th Cir. BAP 2014).
We review the bankruptcy court’s decision to dismiss a complaint
with prejudice for abuse of discretion. Tracht Gut, LLC v. L.A. Cnty.
Treasurer & Tax Collector (In re Tracht Gut, LLC), 836 F.3d 1146, 1150 (9th Cir.
2016). 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 v. Edriver, Inc.,
653 F.3d 820, 832 (9th
Cir. 2011).
DISCUSSION
Debtor argues that Civil Rule 12(d) required the bankruptcy court to
treat the motion to dismiss as a motion for summary judgment under Civil
Rule 56(a), made applicable by Rule 7056. As a result, she argues that the
court was required to give her reasonable time to respond and therefore,
her opposition was timely, and the court erred by dismissing the complaint
as unopposed. Debtor further argues that the bankruptcy court made
multiple errors of law in applying the standards for a Civil Rule 12(b)(6)
motion. We disagree.
A. The Bankruptcy Court Properly Considered The Motion To
Dismiss Under Civil Rule 12(b)(6).
Civil Rule 12(b)(6) provides for dismissal if the plaintiff fails “to state
a claim upon which relief can be granted[.]” Fed. R. Civ. P. 12(b)(6). In
reviewing a motion to dismiss, the court generally may not consider any
11
materials beyond the pleadings. Lee v. City of Los Angeles, 250 F.3d 668, 688
(9th Cir. 2001), overruled on other grounds by Gailbraith v. County of Santa
Clara,
307 F.3d 1119, 1125-26 (9th Cir. 2002). Pursuant to Civil Rule 12(d), a
court must treat a motion to dismiss under Civil Rule 12(b)(6) as one for
summary judgment under Civil Rule 56(a) if “matters outside the
pleadings are presented to and not excluded by the court.” Fed. R. Civ. P.
12(d).
The court may consider material submitted as part of the complaint
and matters that are properly the subject of judicial notice without treating
the motion as one for summary judgment. Tellabs, Inc., v. Makor Issues &
Rts., Ltd., 551 U.S. 308, 322 (2007); Khoja v. Orexigen Therapeutics, Inc.,
899
F.3d 988, 998-1000 (9th Cir. 2018). However, “a court cannot take judicial
notice of disputed facts contained in such public records.” Khoja, 899 F.3d
at 999.
Here, the bankruptcy court properly treated the motion as a motion
to dismiss. The court took judicial notice of the undisputed chain of
assignments of the deed of trust and did not consider the legal effect of the
First Magnus and RFC endorsements which were disputed by Debtor. The
bankruptcy court applied the correct standard under Civil Rule 12(b)(6)
and was not required to treat the motion to dismiss as a motion for
summary judgment.
Because the motion was one under Civil Rule 12(b)(6) and not a
motion for summary judgment, Debtor’s opposition was untimely. Under
12
LBR 9013-7 the bankruptcy court could consider Debtor’s failure to oppose
the motion as consent to granting it. 4 The court had discretion to vacate the
pending hearing and enter an order granting the motion under LBR 9013-7,
but it was not required to do so.
We perceive no error in the court’s decision to conduct the hearing
and consider Debtor’s arguments despite her failure to timely oppose the
motion. Debtor has not shown any error by the court in dismissing the
complaint based on Debtor’s failure to timely oppose the motion to dismiss
and we would affirm on that basis alone. But we find no error in the court’s
alternative basis for dismissal as well.
B. The Bankruptcy Court Did Not Err By Dismissing The Complaint
With Prejudice.
To avoid dismissal under Civil Rule 12(b)(6), a plaintiff must allege
“sufficient factual matter, accepted as true, to ‘state a claim to relief that is
plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell
Atl. Corp. v. Twombly,
550 U.S. 544, 555-56 (2007)). Dismissal is appropriate
if the complaint lacks a cognizable legal theory, or it if lacks sufficient
factual allegations under a cognizable legal theory. Johnson v. Riverside
4LBR 9013-7(b)(2) provides:
Failure to File Opposition. The Court may treat a failure to timely file
opposition to a motion or application by any party in interest, including
the U.S. Trustee and the chapter 13 trustee, as the non-objecting party's
consent to the granting of the motion and waiver of oral argument. The
Court, as a result, may vacate any then pending hearing and promptly
enter an order granting the requested relief.
13
Healthcare Sys., LP, 534 F.3d 1116, 1121 (9th Cir. 2008). Debtor’s TAC lacks a
cognizable legal theory.
The primary contention in the TAC is that US Bank lacks standing to
enforce the note or deed of trust because the endorsements by First
Magnus and RFC are invalid.
As we explained in Veal v. American Home Mortgage Servicing, Inc. (In
re Veal), 450 B.R. 897, 902 (9th Cir. BAP 2011), a “person entitled to enforce
the note,” as defined in U.C.C. § 3-301, has standing to file a proof of claim
in a bankruptcy case. California’s version of this U.C.C. provision is Cal.
Com. Code. § 3301, which provides that “the holder of the instrument” is a
person entitled to enforce it. A party in possession of a note endorsed in
blank is a “holder of the instrument.” Cal. Com. Code §§ 1201(b)(21);
3205(b); Zulueta v. Bronitsky (In re Zulueta), No. NC-10-1459-HPaJu,
2011
WL 4485621, at *6 (9th Cir. BAP Aug. 23, 2011), aff’d, 520 F. App’x. 558 (9th
Cir. 2013) (“A party in physical possession of an endorsed-in-blank note
qualifies as a holder of a note under [California law].”). “A person may be
entitled to enforce the instrument even though the person is not the owner
of the instrument or is in wrongful possession of the instrument.” Cal.
Com. Code § 3301.
Debtor does not dispute that she borrowed the funds, executed the
promissory note, or defaulted under the terms of the note and deed of
trust. She also does not dispute that US Bank is in possession of the note,
endorsed in blank. US Bank is therefore a “person entitled to enforce the
14
note” under California law, and Debtor is obliged to pay US Bank
according to the terms of the note. Cal. Com. Code § 3412.
Debtor alleges that the endorsements by First Magnus and RFC are
invalid and therefore one of those parties retains the beneficial interest in
the note. If true, these allegations may support a claim to the note or its
proceeds by First Magnus or RFC under Cal. Com. Code § 3306. But they
do not support a claim for relief by Debtor because such claims cannot be
asserted by the obligor of the note. Cal. Com. Code § 3305(c) (“the obligor
may not assert against the person entitled to enforce the instrument, a
defense, claim in recoupment, or claim to the instrument (Section 3306) of
another person . . .). 5
Although Debtor made an alternative argument that the note was
non-negotiable, she made no allegation that it was not properly transferred
by means other than endorsement, despite having multiple attempts to
amend the complaint. See Cal. Com. Code §§ 3203; § 9109(a)(3) (authorizing
transfers of the right to enforce a note and providing that Article 9 governs
sales of promissory notes); see also Cal. Civ. Code § 1459 (“A non-negotiable
written contract for the payment of money or personal property may be
5 Cal. Com. Code § 3305(c) permits an obligor to assert another person’s claim to
the instrument only if the other person is joined in the action and personally asserts the
claim against the person entitled to enforce the note. In such circumstances, an obligor
may be relieved of its obligation to pay the holder if it is not a holder in due course and
the obligor proves that the instrument was lost or stolen. Debtor did not join First
Magnus or RFC, and those parties have not asserted claims against US Bank. Debtor
also has not alleged the note was lost or stolen.
15
transferred by indorsement, in like manner with negotiable instruments.”).
Debtor’s allegations are insufficient to state a claim for relief, and the
bankruptcy court did not err by dismissing the first cause of action with
prejudice.
Debtor’s second claim for declaratory relief that US Bank has no
interest in the property also fails as a matter of law. Debtor focused on the
alleged invalid endorsements but did not dispute the validity of the
recorded deed of trust assignments. Not only did Debtor fail to state a
claim that US Bank lacks standing to enforce the note, under California
law, a party holding the beneficial interest in a deed of trust can initiate
nonjudicial foreclosure proceedings even without possessing or holding a
beneficial interest in the note. Debrunner v. Deutsche Bank Nat’l Tr. Co., 204
Cal. App. 4th 433, 441 (2012).
Debtor asserts that the bankruptcy court erred by dismissing the
third and fourth causes of action, but she provides no argument that the
court erred by striking those causes of action. Accordingly, she has waived
the issue. Smith v. Marsh, 194 F.3d 1045, 1052 (9th Cir. 1999) (“[O]n appeal,
arguments not raised by a party in its opening brief are deemed waived.”). 6
Moreover, we perceive no error in the court’s decision to grant the motion
to strike.
6
Similarly, Debtor makes no argument that the dismissal should not have been
with prejudice or that the court erred by denying the motion for reconsideration and
has thus waived these issues as well. See Smith, 194 F.3d at 1052.
16
Because the court properly struck the third and fourth causes of
action from the TAC, we need not consider whether dismissal was also
appropriate. However, Debtor has not demonstrated any error by the court
in dismissing the third and fourth causes of action because US Bank has an
enforceable interest in the deed of trust.7
CONCLUSION
Based on the foregoing, we AFFIRM the bankruptcy court’s order
granting the motion to dismiss with prejudice.
7
Debtor also fails to explain how she has a private right of action under FERA
and instead argues that the FERA claim is essentially one for common law fraud. But
Debtor cannot state a claim for relief for fraud or emotional harm because as the
bankruptcy court concluded, US Bank has a right to foreclose, California law limits
deficiency actions, and the default was caused by her failure to make payments under
the note, not by any deficiency in the endorsements.
17
