Frances M. Tydingco-Gatewood Chief Judge
(Chapter 7)
DECISION AND ORDER RE DEFENDANT'S MOTION TO DISMISS AND PLAINTIFF'S MOTION TO STRIKEBefore the court are Defendant Roy Kenneth Evans' ("Evans") Motion to Dismiss, and Plaintiff Mark Heath, Chapter 7 Bankruptcy Trustee's ("Trustee") Motion to Strike. See Mot. Dismiss, ECF No. 7; Mot. Strike, ECF No. 14. On November 4, 2016, the parties appeared before the court for a hearing. After reviewing the parties' submissions, and relevant caselaw and authority, and having heard argument from counsel on the matter, the court hereby GRANTS Evans' Motion to Dismiss, but permits Trustee leave to amend within twenty-one days of the date of this Order. Furthermore, the court DENIES Trustee's Motion to Strike, but GRANTS Trustee's oral request that the expunged criminal records be sealed.
I. FACTUAL AND PROCEDURAL BACKGROUNDA. The Underlying Bankruptcy.
On August 31, 2015, Debtor filed a voluntary bankruptcy petition pursuant to Chapter 7 of the United States Bankruptcy Code (In Re Myra Evans, Case No. BK 15-00090). Compl. ¶ 9, ECF No. 2. During the 341(a) meeting, on September 30, 2015, Debtor testified that she quitclaimed two parcels of real property to her husband, Defendant Evans, when she executed a Divorce and Property Settlement Agreement on April 30, 2015. Id. at ¶¶ 10-12. This property was acquired during their marriage as joint tenants with the right of survivorship. Id. at ¶¶ 10-12. Debtor purportedly testified that the transfer of these two parcels—Lot 10, R1 Block No. 1, Tract No. 543, Dededo, Guam (recorded June 29, 1999) and Lot 8, Tract 52103, Dededo, Guam (recorded June 1, 2012)—were quitclaimed to her husband, Evans, under duress, for either absent or inadequate consideration within one year of the date she filed for bankruptcy. Id. at ¶¶ 10-12. After these transfers were effectuated, Debtor's total remaining assets were valued at $5,529.45. Id. at ¶ 19.
B. The Complaint.
On June 13, 2016, Trustee filed a Complaint against Evans. Compl. 1, ECF No. 2. The Complaint sets forth four causes of action, including (1) Avoidance of Fraudulent Transfer Under 11 U.S.C. § 548(a)(1)(A); (2) Avoidance of Fraudulent Transfer Under 11 U.S.C. § 548(a)(1)(B); (3) Avoidance of Fraudulent Transfer Under 11 U.S.C. § 544 and Title 20 of the Guam Code Annotated §§ 6101 & 6103; (4) Recovery of Transfer per 11 U.S.C. § 550, and (5) for Declaratory relief. Id. The Complaint avers that Debtor's intent to "delay or defraud" her creditors can be inferred. Id. at ¶¶ 22-26, 40-44.
The requirements for a Fraudulent Transfer under subsections 548(a)(1)(A) (actual fraud) and (B) (constructive fraud) are as follows:
(a)(1) The trustee may avoid any transfer . . . of an interest of the debtor in property, or any obligation . . . incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily—
(A) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted; or
(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
(ii)(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;
(II) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital;
(III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor's ability to pay as such debts matured; or
(IV) made such transfer to or for the benefit of an insider . . . .
11 U.S.C. § 548(a) (emphasis added).
Guam's statute related to transfers to defraud creditors states:
Every transfer of property or charge thereon made, every obligation incurred, and every judicial proceeding taken, with intent to delay or defraud any creditor or other person of his demands, is void against all creditors of the debtor, and their successors in interest, and against any person upon whom the estate of the debtor devolves in trust for the benefit of others than the debtor.
20 G.C.A. § 6101.
Under Guam law, questions of fraudulent transfers are determined in the following manner:
In all cases arising under . . . the provisions of this Chapter, except as otherwise provided in 7 GCA § 50500 [Transfers, Etc., Defraud Creditors], the question of fraudulent intent is one of fact and not of law; nor can any transfer or charge be adjudged fraudulent solely on the ground that it was not made for a valuable consideration; provided, however, that any transfer or encumbrance of property made or given voluntarily, or without a valuable consideration, by a party while insolvent or in contemplation of insolvency, shall be fraudulent, and void as to existing creditors.
20 G.C.A. § 6103.
A Trustee may recover a fraudulent transfer under 11 USC § 548 "for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property" if the following conditions are met: "(1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or (2) any immediate or mediate transferee of such initial transferee." 11 U.S.C.A. § 550(a). However, "[t]he trustee may not recover . . . under subsection (a) from a transferee that is not an insider." 11 U.S.C. § 550(b).
C. The Motion to Dismiss.
On July 22, 2016, Evans filed a Motion to Dismiss pursuant to Federal Rule of Bankruptcy Procedure 7012, and Federal Rules of Civil Procedure ("FRCP") 12(b)(6) and 9(b). Mot. Dismiss at 1, ECF No. 7. The Motion to Dismiss alleges that the Complaint failed to sufficiently state claims that were plausible, and also that the fraud claims were not pleaded with particularity. Id.
Trustee opposed the Motion on August 1, 2016, asserting that the Complaint satisfied the applicable pleading requirements of the FRCP. Opp'n at 5, ECF No. 9. The Opposition introduces facts not alleged within the Complaint. Id. at 5. Trustee's Opposition requests leave to amend his Complaint should this court grant Evans' Motion to Dismiss. Id. at 13.
Evans filed a Reply Brief on August 8, 2016. Reply in Supp. Mot. Dismiss 1, ECF No. 11. The Reply noted that the Opposition asserted and relied on facts that were not pleaded in the Complaint, and also contends that amendment would be futile. Id. at 1, 11.
D. The Motion to Strike.
Criminal charges were filed against Debtor for Solicitation to Commit Aggravated Assault and Murder of Evans. See Reply In Supp. Mot. Dismiss at Ex. A, ECF No. 11. Evans attached Debtor's "Deferred Plea Agreement" and "Order After Hearing Re: Deferred Plea" to his Reply Brief. Id. at Ex. A-B. The inclusion of these Exhibits in Evans' Reply prompted Trustee to file a Motion to Strike the Exhibits on the grounds that Guam law prohibits one to make an expunged record public. See Mot. Strike at 2, ECF No. 14. Evans Opposed the Motion to Strike on September 1, 2016. Opp'n Mot. Strike, ECF No. 20.
II. APPLICABLE LEGAL STANDARDSA. FRCP 12(b)(6).
FRCP 12(b)(6) provides that, in response to a claim for relief, a party may move the court to dismiss that claim for "failure to state a claim upon which relief can be granted." FRCP 12(b)(6).
Whether a party has sufficiently stated a claim for relief is viewed in light of FRCP 8. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). Under Rule 8, a claim for relief must include "a short and plain statement of the claim showing that the pleader is entitled to relief." FRCP 8(a)(2). The pleading standard under Rule 8 "does not require detailed factual allegations, but it demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
"To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face." Id. (citing Twombly, 550 U.S. at 570) (internal quotation marks omitted). The court must engage in a two-step procedure to determine the plausibility of a claim. Id. at 678-79. First, the court must weed out the legal conclusions—that is "threadbare recitals of the elements of a cause of action, supported by mere conclusory statements"—in the pleading that are not entitled to a presumption of truth. Id. at 678. Second, the court should presume the remaining factual allegations are true and determine whether the claim is plausible. Id. at 679.
A claim is facially plausible if "the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. at 678 (citing Twombly, 550 U.S. at 556). The court must then "draw on its judicial experience and common sense" to determine the plausibility of a claim given the specific context of each case. Id. at 679.
B. FRCP 9.
FRCP 9(b) requires that "[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake." FRCP 9(b). Under Ninth Circuit law, "Rule 9(b) requires particularized allegations of the circumstances constituting fraud." In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1547-48 (9th Cir. 1994) (en banc) (emphasis added), superseded on other grounds by 15 U.S.C. § 78u-4.
A plaintiff's pleadings must include the time, place, and nature of the alleged fraud; "mere conclusory allegations of fraud are insufficient" to satisfy this requirement. Id. at 1548 (quoting Moore v. Kayport Package Express, Inc., 885 F.2d 531, 540 (9th Cir. 1989)). "[T]he circumstances constituting the alleged fraud [must] 'be specific enough to give defendants notice of the particular misconduct . . . so that they can defend against the charge and not just deny that they have done anything wrong.'" Kearns v. Ford Motor Co., 567 F.3d 1120, 1124 (9th Cir. 2009) (quoting Bly-Magee v. California, 236 F.3d 1014, 1019 (9th Cir. 2001)); see also Moore, 885 F.2d at 540 (finding that Rule 9(b) requires a plaintiff to attribute particular fraudulent statements or acts to individual defendants). However, "[m]alice, intent, knowledge, and other conditions of a person's mind may be alleged generally." Fed. R. Civ. P. 9(b); see also In re GlenFed, Inc. Sec. Litig., 42 F.3d at 1547 ("We conclude that plaintiffs may aver scienter . . . simply by saying that scienter existed."); Walling v. Beverly Enter., 476 F.2d 393, 397 (9th Cir. 1973) (finding that Rule 9(b) "only requires the identification of the circumstances constituting fraud so that the defendant can prepare an adequate answer from the allegations" (citations omitted)).
A motion to dismiss for failure to plead a claim with particularity is functionally equivalent of a motion to dismiss for failure to state a claim under Rule 12(b)(6). Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1107 (9th Cir. 2003). In considering a motion to dismiss, the court is not deciding the issue of "whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims." Scheuer v. Rhodes, 416 U.S. 232, 236 (1974) overruled on other grounds by Davis v. Scherer, 468 U.S. 183 (1984).
Rule 9(b) requires allegations of fraud to:
"[B]e 'specific enough to give defendants notice of the particular misconduct . . . so that they can defend against the charge and not just deny that they have done anything wrong.'" Bly-Magee, 236 F.3d at 1019 (quoting Neubronner v. Milken, 6 F.3d 666, 672 (9th Cir. 1993)). Averments of fraud must be accompanied by "the who, what, when, where, and how" of the misconduct charged. Cooper v. Pickett, 137 F.3d 616, 627 (9th Cir. 1997) (internal quotation marks omitted). "[A] plaintiff must set forth more than the neutral facts necessary to identify the transaction. The plaintiff must set forth what is false or misleading about a statement, and why it is false." In re GlenFed, Inc. Sec. Litig., 42 F.3d at 1548.
Vess, 317 F.3d at 1106 (second and third alterations in original).
C. FRCP 15.
FRCP 15(a)(2) provides that "[t]he court should freely give leave [to amend] when justice so requires." FRCP 15(a)(2). In deciding whether justice requires granting leave to amend, factors to be considered include "the presence or absence of undue delay, bad faith, dilatory motive, repeated failure to cure deficiencies by previous amendments, undue prejudice to the opposing party, and futility of the proposed amendment." Moore, 885 F.2d at 538 (citing Foman v. Davis, 371 U.S. 178, 182 (1962)).
B. DISCUSSIONEvans moves to dismiss Trustee's Complaint, arguing that Trustee fails to state a plausible claim for relief and inadequately pleads facts sufficient to satisfy the elements of causes of action related to purported fraudulent transfers of real property. Mot. Dismiss at 2, 5-7, ECF No. 7. Trustee contends that the Complaint meets the pleading requirements of the FRCP, but requests leave to amend his Complaint if the Motion to Dismiss is granted. Opp'n 12-13, ECF No. 9.
Trustee also moves to strike Exhibits as attachments to Evans' Reply Brief for including criminal records of Debtor, which Trustee claims are expunged. Mot. Strike 1-5, ECF No. 14.
A. Whether Evans' Motion to Dismiss Should be Granted.
Evans' Motion to Dismiss maintains that the Complaint failed to allege sufficient facts to state claims that were plausible, and also that the fraud claims were not pleaded with particularity. Mot. Dismiss 1-2, 5-7, ECF No. 7. In response, the Trustee's Opposition introduces facts not alleged within the Complaint to argue that the elements of his causes of action were satisfied. Opp'n, ECF No. 9.
"[W]hen the legal sufficiency of a complaint's allegations is tested by a motion under Rule 12(b)(6), '[r]eview is limited to the complaint,'" and allegations made outside of the complaint are not properly before the court. See Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir. 2001) (alteration in original) (quoting Cervantes v. City of San Diego, 5 F.3d 1273, 1274 (9th Cir.1993)); see also In re Am. Apparel, Inc. S'holder Litig., 855 F. Supp. 2d 1043, 1060 (C.D. Cal. 2012) ("Because Rule 12(b)(6) review is confined to the complaint, the court typically does not consider material outside the pleading (e.g., facts presented in briefs, affidavits, or discovery materials) (citation omitted)); In re Colonial Ltd. P'ship Litig., 854 F. Supp. 64, 79 (D. Conn. 1994) (citing Morgan Distributing Co., Inc. v. Unidynamic Corp., 868 F.2d 992, 995 (8th Cir. 1989) ("[I]t is axiomatic that a complaint may not be amended by the briefs in opposition to a motion to dismiss.")). If a party could reference matters outside of the Complaint in opposition to a motion to dismiss, it would essentially "mean that a party could unilaterally amend a complaint at will, . . . even without filing an amendment, and simply by raising a point in a brief." Morgan Distributing Co., Inc., 868 F.2d at 995 (citing Friedman v. Village of Skokie, 763 F.2d 236, 239 (7th Cir. 1985)).
Regarding Trustee's claim for transfer made with "actual fraud" under 11 U.S.C. § 548(a), Evans argues that Trustee fails to allege specific facts to state a plausible claim because the Complaint does not set forth the value of the properties at issue, that Debtor and/or Defendant knew that the value of the consideration exchanged was insufficient, and that the Complaint failed to allege facts that Debtor was insolvent at the time of the fraudulent transfer, or became insolvent as a result of the transfer. Mot. Dismiss at 6, ECF No. 7.
Concerning Trustee's second claim for relief for constructive fraud under 11 U.S.C. § 548(a)(1)(B), Evans asserts that the Complaint does not contain sufficient facts to plausibly show that Debtor was actually insolvent or received less than what was given to Evans on the date of the transfer. Mot. Dismiss 7, ECF No. 7. This claim references "duress," but the circumstances of this supposed duress are not described within the Complaint, but are rather impermissibly elucidated upon in Trustee's Opposition to the Motion to Dismiss. Opp'n at 5, ECF No. 9; see also Compl. at ¶ 30, ECF No. 2.
As to Trustee's third claim for relief that a transfer was made with actual intent to delay or defraud a creditor under 20 G.C.A. § 6101, Evans contends that the Complaint "conclusively alleges that the transfers were with the actual intent to delay or defraud Debtor's creditors," but that it does not "sufficiently allege facts that would form the basis for finding that the transfers themselves hindered, delayed or defrauded a creditor of the Debtors or that the Debtor intended the Divorce and Property Settlement Agreement to do so on the date of the transfer." Mot. Dismiss at 5, ECF No. 7. The Ninth Circuit has held that:
In some cases, the plaintiff may allege a unified course of fraudulent conduct and rely entirely on that course of conduct as the basis of a claim. In that event, the claim is said to be "grounded in fraud" or to "sound in fraud," and the pleading of that claim as a whole must satisfy the particularity requirement of Rule 9(b).
Vess, 317 F.3d at 1103-04 (9th Cir. 2003). Thus, Evans contends that Trustee has not pleaded a plausible 20 G.C.A. § 6101 claim because the facts alleged regarding the requisite actual intent fail to satisfy FRCP 9's particularity requirements. Mot. Dismiss at 5, 7, ECF No. 7.
The Complaint in this case conclusively avers facts that Debtor's intent to "delay or defraud" her creditors can be inferred from the fact that (1) the value of the consideration that Debtor received for the transfers was insufficient; (2) Debtor became insolvent shortly after the transfers were made; (3) "the transfers were substantially all of debtor's assets;" (4) Debtor's obligations exceeded her ability to pay her debts at the time of the transfers; and (5) "the [t]ransfers were made to an insider of the Debtor[, h]er husband." Compl. at ¶¶ 22-26, 40-44, ECF No. 2. The Complaint generally references that the properties at issue were quitclaimed to her husband under duress, under either absent or inadequate consideration within one year of the date she filed for bankruptcy. Id. ¶¶ 10-12. Evans is correct that Trustee fails to plead "facts forming the basis for the assertion that Debtor or [Evans] knew that the value of the consideration received by Debtor in exchange for the properties was not of reasonably equivalent value." See Mot. Dismiss at 6, ECF No. 7. The "threadbare recitals of the elements of a cause of action, supported by mere conclusory statements"—within Trustee's Complaint, particularly related to the claim that the transfers were made "under duress" without clarifying those circumstances, are not entitled to a presumption of truth. Iqbal, 556 U.S. at 678.
At the hearing, Trustee stated that his Complaint is sufficient because it was modeled after another Complaint that survived beyond the pleading stage. Trustee conceding, however, that there was no motion to dismiss challenging the sufficiency of the pleadings in that case.
Facts raised in the Opposition that were not within the Complaint include that Evans misrepresented to Debtor that she would be criminally prosecuted unless "Defendant [Evans] agreed to dismiss the Complaint, that the terms of the Divorce and Property Settlement . . . were 'fair and equitable,'[and] that [Evans] was an insider." Opp'n at 5, ECF No. 9. Additionally, the Opposition states that Evans failed to disclose that the property at issue was joint at the time of the transfer, that Evans fraudulently stated that the Office of the Attorney General of Guam's dismissal of the Complaint against Evans was not dependent on Evans written waiver agreement, by fraudulently stating that Debtor's property interests were community rather than separate property, that Debtor had not community property right to Evans' National Guard Retirement, and by fraudulently stating the terms of the Divorce and Property Settlement Agreement were "fair and equitable." Id. at 5.
The facts not raised within the Complaint that clarify the circumstances of the supposed "duress" under which the transfers were made should not be considered when considering whether Trustee's claims survive. See Morgan Distributing Co., Inc., 868 F.2d at 995; see Compl. ¶¶ 11-12, ECF No. 2. Pursuant to FRCP 9(b), the claim that the real property transfers were made "under duress" without clarifying the circumstances of the purported fraud and duress are not "specific enough to give defendants notice of the particular misconduct . . . so that they can defend against the charge and not just deny that they have done anything wrong." See Kearns, 567 F.3d at 1124 (citations omitted); see also Compl. ¶¶ 10-12, ECF No. 2. Moreover, the Trustee "must set forth more than neutral facts necessary to identify the transaction . . . [and] must set forth what is false or misleading about [Evans' actions], and why it is false." See Vess, 317 F.3d at 1106 (citing Decker, 42 F.3d at 1548).
Because the circumstances of fraud are insufficiently pleaded, and also because Trustee's Opposition relies on factual assertions extrinsic to the Complaint to support his claims, the Motion to Dismiss is GRANTED. The facts references within the Opposition should be incorporated into Trustee's Amended Complaint.
B. Whether Trustee's Motion to Strike Should be Granted.
Trustee moves to strike the exhibits attached to Evans' Reply Brief that include criminal records of Debtor, which Trustee claims are expunged. Mot. Strike at 1, ECF No. 14.
Criminal charges were filed against Debtor for Solicitation to Commit Aggravated Assault and Murder. See Reply In Supp. Mot. Dismiss, Ex. A, ECF No. 11. Evans attached Debtor's "Deferred Plea Agreement" and "Order After Hearing Re: Deferred Plea" to his Reply Brief. Id. Ex. A-B. The purpose of the inclusion was to argue that Evans could not "collude[] with Debtor to delay, hinder or defraud Debtor's creditor's" because the plea agreement prohibits contact between Debtor and Evans. Id. at 4, Ex. A at 3 ([Debtor] shall stay away, directly and indirectly, from . . . Evans . . .") (emphasis omitted)).
The inclusion of these Exhibits in Evans' Reply prompted Trustee to move to strike the exhibits because Guam law, specifically 8 GCA §§ 11.10 & 11.11, and 9 GCA § 70.44, prohibits one to make public an expunged record. See Mot. Strike at 2-4, ECF No. 14.
The situations that permit expungement of criminal records are found within 8 GCA § 11.10, and the term "expungement" is defined within 8 GCA § 11.11. Under Guam law, it is a criminal misdemeanor for expunged records to be made public:
A person is guilty of a misdemeanor if he permits to be made public or reveals to any person not entitled to review it any official record of the court, Attorney General or any other entity of the government of Guam which has been expunged in accordance with § 271 of the Code of Civil Procedure or Chapter 11 of Title 8 GCA.
9 G.C.A. § 70.44. --------
In response, Evans first argues that Debtor effectively "unexpunge[d]" her records by putting them at issue in this separate proceeding. See In re State Bar of Texas, 440 S.W.3d 621, 625 (Tex. 2014) (citing W.V. v. State, 669 S.W.2d 376, 378-79 (Tex. App.-Dallas 1984, writ ref'd n.r.e.) ("holding that retention of files was not necessary to afford protection from potential civil action because expunged records would be held by district clerk and could be retrieved if needed for subsequent proceedings"); see also Thomas v. City of Selma, 2006 WL 2854405, *3 (W.D.Tex. Oct. 4, 2006) ("holding that district clerk must produce arrest records for use in suit based on arrest"); Opp'n Mot. Strike, at 3, ECF No. 20. Hence, the court agrees that Debtor put the records at issue during the 341(a) meeting, on September 30, 2015, when she testified that she quitclaimed the two parcels at issue under duress. See Compl. at ¶¶ 10-12, ECF No. 2.
Second, Evans maintains that 9 G.C.A. § 70.44 only prohibits disclosure of criminal records from criminal justice agencies as opposed to private conduct. Opp'n Mot. Strike, at 3, ECF No. 20 (citing Taha v. Bucks Cty., 9 F. Supp. 3d 490, 492 (E.D. Pa. 2014)). Here, Evans and his counsel are private parties, and Evans' counsel permissively obtained the documents from the privately owned database www.JurisPacific.com. Id.
Third, Evans includes three media articles reporting that Debtor was charged with soliciting to murder Evans. Opp'n Mot. Strike, at Ex. A-D, ECF No. 20. The fact that information regarding Debtor's charges is publicly available on the internet supports Evans' use of this information in his defense. In re State Bar of Texas, 440 S.W.3d at 626 (propriety of use of expunged records in disciplinary case supported by the fact that the transcript of trial was publicly available on the internet.). This case is unlike In re State Bar Texas, however, because the expunged records themselves are not publicly available online. Thus, the court is persuaded that Evans is permitted to use the information in his defense, but that the court documents themselves should be sealed because they are not publicly available online.
Fourth, Evans cogently asserts that it would be inequitable to restrict him from referencing these records "to defend himself against the allegations of wrongdoing, while allowing [Trustee] to use those same facts as a sword." Opp'n Mot. Strike, at 4, ECF No. 20 (citing State v. J.R.S., 939 A.2d 226, 229 (App. Div. 2008) (holding it would be inequitable to bar Defendant from using expunged records in plaintiff's tort claim for an alleged false arrest and malicious prosecution)). The court agrees that it would be unjust to permit Trustee to reference the criminal proceeding while prohibiting Evans from doing the same.
Finally, Evans convincingly contends that expungement of Debtor's records is not constitutionally protected because Debtor has no privacy interest due to the fact that references to criminal conduct lingered in public media after expungement. See Opp'n Mot. Strike at 4, ECF No. 20 (citing Eagle v. Morgan, 88 F.3d 620, 625 (8th Cir. 1996) (holding the details of plaintiff's prior guilty plea were not inherently private and that plaintiff had no legitimate expectation of privacy in these details because the nature of the matters were within the public domain.) (citations omitted)); see also Nunez v. Pachman, 578 F.3d 228, 229, 231 (3d Cir. 2009) (there is no cognizable privacy interest in expunged criminal records under the federal constitution because "the information expunged is never truly 'private'" and "may persist in public news sources after expungement." (footnote omitted)).
The court is persuaded that Evans should be permitted to reference Debtor's expunged conviction so that he has the opportunity to fully defend himself in this action. To the extent that Trustee's Motion sought to strike the records from being used in this proceeding, the motion is DENIED. Trustee's request to file the documents under seal, however is GRANTED. Even though information regarding Debtor's criminal history is accessible online, the expunged records themselves are not publicly available.
C. Whether Trustee's Request for Leave to Amend His Complaint Should Be Granted.
Trustee's Opposition requests leave to amend his Complaint should this court grant Evans' Motion to Dismiss. Opp'n at 13, ECF No. 9. Leave to amend should be granted liberally, unless such amendment would be futile. See Ascon Props., Inc., 866 F.2d at 1160 (citation omitted).
Evans' Reply first maintains that leave to amend would be futile because Trustee cannot allege any facts that would make him an "insider" of the Debtor because divorcing spouses are not spouses. Reply in Supp. Mot. Dismiss, 4, ECF No. 11 (citing In re Carbaat, 357 B.R. 553, 558 (Bankr. N.N. Cal. 2006). A "trustee may not recover . . . under subsection (a) [of 11 U.S.C. § 548] from a transferee that is not an insider." 11 U.S.C. § 550(b). In re Carbaat, however, does not appear to establish a per se rule that spouses cannot be insiders. 357 B.R. at 558. Rather, it states that "[a]ssuming a divorce is not collusive, the Court does not consider a spouse an insider of the divorcing spouse." Id. (emphasis added). Perhaps the parties can address the issue of collusion more thoroughly within the Amended Complaint and/or by future motion.
As to the claim that the Divorce and Property Settlement was executed under duress of Evans conditioning its execution on the dismissal of the Criminal Complaint, Evans argues that her (expunged) criminal plea was entered before the Settlement was signed. Reply in Supp. Mot. Dismiss, 4, ECF No. 11. This is a fact outside the pleadings, and the court declines to exercise its discretion to consider matters outside the pleadings for motion to dismiss purposes. See In re Colonial Ltd. P'ship Litig., 854 F. Supp. at 79; see also Shugart v. GYPSY Official No. 251715, its Engines, Mach., Appurtenances, No. 2:14-CV-1923RSM, 2015 WL 1965375, at *2 (W.D. Wash. May 1, 2015) (citation omitted).
Evans next contends that a plausible claim for a transfer less than reasonably equivalent value cannot be sustained because the Ninth Circuit has held that "a state court's dissolution judgment, following a regularly conducted contested proceeding, conclusively establishes 'reasonably equivalent value' for the purpose of § 548, in the absence of actual fraud." In re Blesdoe, 569 F.3d 1106, 1112 (9th Cir. 2009); see also Reply in Supp. Mot. Dismiss at 5, ECF No. 11. Evans' Reply fails to acknowledge, however, that this presumption is not present in cases of "actual fraud." See In re Blesdoe, 569 F.3d at 1112. Trustee's Complaint alleges that "actual fraud" occurred, thus the presumption may not apply if this fraud is sufficiently pleaded and subsequently proven.
In his Opposition to the Motion to Strike, Evans argues that the Motion to Strike weighs against leave to amend because it amounts to a dilatory practice. Opp'n Mot. Strike at 5-6, ECF No. 20. Evans also argues that Trustee failed to satisfy Civil Local Rules 7 and FRCP 15 by failing to request leave to amend through a separate motion with a copy of the proposed amended complaint. Id. at 6. Trustee does not respond to these argument.
Although Evans is correct that Trustee failed to satisfy the requirements of Civil Local Rules 7 and FRCP 15 with respect to the appropriate procedure for requesting leave to amend his complaint, the court nonetheless will grant leave to amend. See Foman, 371 U.S. at 182 ("the grant or denial of an opportunity to amend is within the discretion of the District Court"). Therefore, due to the liberal policies permitting amendments of pleadings, and both parties' extensive reference to matters outside the pleadings, Trustee's request for leave to amend is
GRANTED. C. CONCLUSIONEvans' Motion to Dismiss is GRANTED because the Trustee's fraud claims are not pleaded with particularity, and Opposition references facts outside of the Complaint in support of Trustee's claim. However, Trustee is granted leave to amend because Evans' Reply has not proven futility of amendment at this time, and because leave to amend should be given freely.
The court is persuaded that Evans should be permitted to reference Debtor's expunged conviction so that he has the opportunity to fully defend himself in this action. To the extent that Trustee's Motion sought to strike the records from being used in this proceeding, the motion is DENIED. Trustee's request to seal the expunged records themselves, however is GRANTED. The Clerk of Court is hereby ordered to seal Exhibits A and B in ECF No. 11.
SO ORDERED.
/s/ Frances M. Tydingco-Gatewood
Chief Judge
Dated: Nov 10, 2016
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