Regal Financial Bank v. Heaton et al

UNITED
STATES
BANKRUPTCY
COURT
NORTHERN DISTRICT OF CALIFORNIA
1300 Clay Street (2d fl.)
Oakland, CA. 94612
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Decision
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re 	Case No. 10-40297 EDJ
Chapter 11
DOYLE D. HEATON AND
MARY K. HEATON,
Debtors./
REGAL FINANCIAL BANK, 	Adv. No. 10-04085 AJ
Plaintiff,
vs.
DOYLE D. HEATON AND
MARY K. HEATON,
Defendant./
DECISION: CROSS-MOTION FOR LEAVE TO AMEND COMPLAINT
Regal Financial Bank, plaintiff herein, (“Regal”) filed its
complaint under Bankruptcy Code § 523(a)(2) and (a)(6) (the
“Original Complaint”) against Doyle Heaton (“Heaton”), debtor, on
April 9, 2010, the deadline to file a complaint to determine the
dischargeability of certain debts in the Heaton bankruptcy case.
Signed: November 18, 2010

EDWARD D. JELLEN
U.S. Bankruptcy Judge

Entered on Docket
November 18, 2010
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 10-04085 	Doc# 27 	Filed: 11/18/10 	Entered: 11/18/10 16:27:30 	Page 1 of 8
Entered on Docket
November 23, 2010
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 10-04085 Doc# 31 Filed: 11/18/10 Entered: 11/23/10 08:30:50 Page 1 of 9

UNITED
STATES
BANKRUPTCY
COURT
NORTHERN DISTRICT OF CALIFORNIA
1300 Clay Street (2d fl.)
Oakland, CA. 94612
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2	Decision
Regal now seeks leave of this court to amend its complaint.
For the reasons hereinafter discussed, the court will deny Regal’s
motion.
I. Background
Regal’s claim arises from its issuance of a loan in March,
2008, to Antinori Development LLC (“Antinori”), an entity of which
Heaton was a member. 	Heaton signed a personal guaranty on March 5,
2008, by which he guaranteed the entire loan amount. 	Regal renewed
the loan at the request of Antinori in March of 2009, prior to the
loan maturity date, on the condition that Heaton execute a new
guaranty. 	Heaton executed a new guaranty in May of 2009. 	On July
27, 2009, Regal issued its default letter on all members of
Antinori. 	On January 11, 2010, Heaton filed a petition under
Chapter 11 of the Bankruptcy Code.
By the Original Complaint, Regal seeks a nondischargabiltiy
determination under Bankruptcy Code §§ 523(a)(2)(A), (a)(2)(B), and
(a)(6), based on the guaranty Heaton executed in 2009 in support of
the renewal loan. 	The guaranty stated that no material adverse
change had occurred in Heaton’s financial condition since the most
recent financial statement provided to Regal. 	But, Regal contends
in the Original Complaint, the financial statements Heaton provided
do not disclose that Heaton was also the guarantor on several other
loans. 	The Original Complaint contends the omission was intentional
and material, and that Regal relied on Heaton’s misrepresented
financial condition, by way of the 2009 guaranty, when it renewed
the Antinori loan.
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UNITED
STATES
BANKRUPTCY
COURT
NORTHERN DISTRICT OF CALIFORNIA
1300 Clay Street (2d fl.)
Oakland, CA. 94612
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3	Decision
Regal concedes that the evidence does not support its claims.
See Regal Opposition to Summary Judgment at 2. 	The court
accordingly granted Heaton’s motion for summary judgment as to
Regal’s April 9, 2010 complaint. 	However, Regal has moved to amend
the Original Complaint to allege that the financial statements
Heaton provided prior to executing the initial guaranty in 2008
contained fraudulent omissions upon which Regal relied in issuing
the 2008 loan.
II. Discussion
Federal Rule of Civil Procedure 15, applicable herein via
Federal Rule of Bankruptcy Procedure 7015, provides that “a party
may amend its pleading only with the opposing party's written
consent or the court's leave. 	The court should freely give leave
when justice so requires.” 	Fed. R. Civ. P. 15(a)(2). 	The Supreme
Court has held that motions to amend the complaint should generally
be granted absent “any apparent or declared reason” such as undue
delay, bad faith, prejudice to the opposing party, or futility of
the amendment. 	See Foman v. Davis, 371 U.S. 178, 182 (1962). 	See
also Moore v. Kayport Package Exp., Inc., 885 F.2d 531, 538 (9th
Cir. 1989), DCD Programs, Ltd. v. Leighton, 833 F.2d 183, 186 (9th
Cir. 1987). 	Despite the liberality with which motions to amend
complaints are generally granted (see DCD Programs, Ltd. v.
Leighton, 833 F.2d at 183) if the complaint as amended is
nonetheless deficient, the court must deny Regal’s motion to amend.
Federal Rule of Bankruptcy Procedure 4007(c) provides that a
complaint to determine the dischargeability of a debt, such as the
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UNITED
STATES
BANKRUPTCY
COURT
NORTHERN DISTRICT OF CALIFORNIA
1300 Clay Street (2d fl.)
Oakland, CA. 94612
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1 The court notes that Heaton filed an objection to Regal’s
supplemental brief, and requested this court not consider it.
Because the supplemental brief does not change the outcome of the
motion at issue herein, the court declines to sustain Heaton’s
objection.
4	Decision
complaint herein, must be filed no later than sixty days after the
first date set for the meeting of creditors. 	In this case, that
date was April 9, 2010. 	Regal filed its complaint on the April 9,
2010 deadline. 	Therefore, in order for the proposed amended
complaint to be timely under Bankruptcy Rule 4007(c), it must relate
back to the date the original complaint was filed.
Rule 15(c) provides that “an amendment to a pleading relates
back to the date of the original pleading when . . . the amendment
asserts a claim or defense that arose out of the conduct,
transaction, or occurrence set out — or attempted to be set out — in
the original pleading.” 	Fed. R. Civ. P. 15(c)(1)(B). 	Here, the
transaction identified by the Original Complaint is the 2009
guaranty Heaton signed in support of the renewal loan issued by
Regal to Antinori, that Regal argues incorporated misrepresentations
Heaton made in financial statements dated in 2008. 	Regal seeks to
amend its complaint to allege fraudulent omissions in the financial
documents dated December 31, 2006 provided by Heaton in support of
the original loan as the transaction that supports Regal’s
§ 523(a)(2)(B) nondischargeability claim. 	See [Proposed] First
Amended Complaint at 2-4.
In its supplemental brief 1 Regal argues that because the
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UNITED
STATES
BANKRUPTCY
COURT
NORTHERN DISTRICT OF CALIFORNIA
1300 Clay Street (2d fl.)
Oakland, CA. 94612
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5	Decision
Antinori loan was given one identifying number upon its issuance in
2008, and retained that same identifying number when it was renewed
in 2009, it is a single loan and therefore satisfies the same
transaction requirement of Rule 15(c). 	But, the manner in which
Regal identified the loan, and whether or not the 2009 loan renewal
is a separate loan from the 2008 loan, are not the relevant
inquiries here. 	In order for Regal’s proposed amended complaint
(the “Proposed Complaint”) to satisfy Rule 15(c) the court simply
looks to whether the Proposed Amended Complaint is based upon the
same set of facts alleged by the Original Complaint to give rise to
Regal’s cause of action. 	A careful review of the Original Complaint
and the Proposed Complaint reveal that this is not so here.
The Original Complaint does mention the 2008 guaranty Heaton
executed in support of the 2008 loan. 	See Complaint at 2-5.
However there is no mention of the 2006 financial statements
anywhere in the Original Complaint. 	The Original Complaint
identifies Heaton’s failure to disclose that his financial condition
had “materially deteriorated” between the 2008 loan issuance date
and the 2009 renewal as the source of its claim.
By contrast, the Proposed Complaint states only one claim for
relief, based entirely upon alleged fraud in the 2006 financial
statements provided by Heaton in support of the 2008 loan. 	See
[Proposed] First Amended Complaint at 5. 	Regal now seeks to allege
that it “would not have closed the Loan if it had been fully
appraised of Heaton’s true financial position as of December 31,
2006.” 	Id. at 4.
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UNITED
STATES
BANKRUPTCY
COURT
NORTHERN DISTRICT OF CALIFORNIA
1300 Clay Street (2d fl.)
Oakland, CA. 94612
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2The court also notes that a complaint alleging fraud is
subject to the heightened pleading requirement of Federal Rule of
Civil Procedure 9(b), applicable herein via Federal Rule of
Bankruptcy Procedure 7009. 	It is therefore appropriate in this
case to find that the merely incidental relationship between the
transaction giving rise to the Original Complaint and that giving
rise to the Proposed Complaint is not sufficient to satisfy Rule
15(c).
6	Decision
The court finds that the Proposed Complaint does not assert a
claim that, “arose out of the conduct, transaction, or occurrence
set out — or attempted to be set out — in the original pleading.”
Fed. R. Civ. P. 15(c). 	The Supreme Court has explained that, “[t]he
rationale of Rule 15(c) is that a party who has been notified of
litigation concerning a particular occurrence has been given all the
notice that statutes of limitations were intended to provide.”
Baldwin County Welcome Ctr. v. Brown, 66 U.S. 147, 149 n.3 (1984).
In this case, there is nothing in the Original Complaint to put
Heaton on notice of the transaction that is the subject of the sole
count of the Proposed Complaint. 2 	Accordingly, the Proposed
Complaint does not relate back to the Original Complaint for the
purposes of satisfying the April 9, 2010 deadline to file a
complaint to determine the dischargeability of certain debts in
Heaton’s bankruptcy case.
Having concluded that the Proposed Complaint does not relate
back to the Original Complaint under Federal Rule of Civil Procedure
15(c), the court returns to Regal’s motion to amend its complaint
under Federal Rule of Civil Procedure 15(a). 	The Ninth Circuit has
held that leave to amend may not be given if the complaint, as
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UNITED
STATES
BANKRUPTCY
COURT
NORTHERN DISTRICT OF CALIFORNIA
1300 Clay Street (2d fl.)
Oakland, CA. 94612
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7	Decision
amended, is subject to dismissal. 	See Moore v. Kayport Package
Exp., Inc., 885 F.2d at 538. 	If Regal were permitted to amend its
complaint it would be subject to dismissal as in violation of the
statue of limitations for filing a complaint to object to discharge
of debt (see Fed. R. Bankr. P. 4007(c)) because the Proposed
Complaint does not relate back to the Original Complaint within the
meaning of Federal Rule of Civil Procedure 15(c). 	The court
therefore holds that amendment of the complaint is futile, and leave
to amend is not appropriate. 	See Foman v. Davis, 371 U.S. at 182.
III. Conclusion
Regal’s Proposed Complaint does not state a claim that arises
out of the same transaction set out in the Original Complaint. 	The
Proposed Complaint therefore does not relate back to the Original
Complaint within the meaning of Federal Rule of Civil Procedure
15(c)(1)(B) and is subject to dismissal as violative of the statute
of limitations set out in Federal Rule of Bankruptcy Procedure
4007(c). 	Leave to amend is therefore futile, and impermissible
under Federal Rule of Civil Procedure 15(a)(2).
The Cross-Motion for Leave to Amend Complaint is therefore
DENIED. 	The court will issue its order accordingly.
END OF DECISION
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UNITED
STATES
BANKRUPTCY
COURT
NORTHERN DISTRICT OF CALIFORNIA
1300 Clay Street (2d fl.)
Oakland, CA. 94612
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8	Decision
COURT SERVICE LIST
Stephen M. Judson
Fitzgerald, Abbott and Beardsley
P.O. Box 12867
Oakland, CA 94604-2867
Saied Kashani
800 West First Street
Suite 400
Los Angeles, CA 90012
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Notice Recipients
District/Off: 0971−4 	User: tleyba 	Date Created: 11/18/2010
Case: 10−04085 	Form ID: pdfeoapc 	Total: 2
Recipients of Notice of Electronic Filing:
aty 	Stephen M. Judson 	sjudson@fablaw.com
TOTAL: 1
Recipients submitted to the BNC (Bankruptcy Noticing Center):
Saied Kashani 	800 West First Street 	Suite 400 	Los Angeles, CA 90012
TOTAL: 1
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1
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