Case Name: Marhamat v. Wu, et al.
Case No.: 18CV338091

Defendants Lawrence Wu and Mealea Men (collectively, “Defendants”) demur to the complaint (“Complaint”) filed by plaintiff Majid Marhamat (“Plaintiff”).

I. Factual and Procedural Background

This is an action seeking equitable relief from default and default judgment. According to the allegations of the operative Complaint, on July 21, 2006, Defendants filed an action in this Court against Plaintiff for breach of contract and common counts entitled Wu, et al. v. Marhamat, Case No. 2006-1-CV-067705 (the “Original Action”), which pertained to a residential property purchase agreement for a property (the “Subject Property”) located in Saratoga. (Complaint, ¶ 3.) On November 14, 2006, Defendants obtained entry of default in the foregoing action, followed by entry of a default judgment on August 18, 2008. (Id., ¶ 4, Exhibit A.)

Plaintiff alleges that the default and default judgment in the Original Action were obtained through extrinsic fraud, particularly in that he was never served with the summons and complaint, and that the proof of service of summons filed in the action fraudulently represented that he was. (Complaint, ¶ 5.) Plaintiff further maintains that he had no actual knowledge of the Original Action during its pendency. (Id., ¶ 6.) He also alleges that he was likewise never served with the November 14, 2006 entry of default, and that the proof of service indicating to the contrary was also fraudulent. (Id.) Plaintiff purportedly never received actual notice of the request for entry of default, nor was he served with the default judgment itself. (Id., ¶ 7.) The default judgment contained in the court file does not have a proof of service. (Id.)

Plaintiff also alleges that Defendants perpetrated a fraud on the Court in the Original Action by supplying untruthful testimony and misrepresenting that the parties were engaged in settlement negotiations, and sought an unlawful judgment. (Complaint, ¶¶ 8-10.)

On May 18, 2018, Defendants filed an Application for and Renewal of Judgment and an Amended Memorandum of Costs after Judgment; judgment was renewed that same day. (Complaint, ¶ 11.) Plaintiff was not properly or timely served with these items but, having informally learned of the May 18th hearing date, attended with his bankruptcy counsel. (Id.) Plaintiff was not permitted to speak at the hearing, with the Court mistakenly assuming that counsel with him had represented him in the Original Action. (Id.)

Prior to initiating the Original Action, and without informing Plaintiff, Defendants transferred title to the Subject Property to him. (Complaint, ¶ 12.) They then recorded a judgment lien (the “Judgment Lien”) against that title, without informing Plaintiff. (Id.)
On September 9, 2010, Plaintiff’s then-counsel, Vi Katerina Tran (“Tran”), filed a Chapter 7 bankruptcy petition on Plaintiff’s behalf. (Complaint, ¶ 13.) Plaintiff alleges on information and belief that Tran learned at that time of the Judgment Lien, as well as nearly a dozen other liens filed by various creditors. (Id.) While she did not specifically inform Plaintiff of the Judgment Lien, Tran caused Defendants to be named as creditors. (Id.) The bankruptcy court served Defendants, via their counsel, with notice of the bankruptcy proceedings and creditors’ meeting; however, Defendants did not attend the latter event. (Id.) On December 8, 2010, the bankruptcy court issued an order discharging Plaintiff’s debts and served Defendants with it. (Id.) Tran did not take steps to strip the discharged liens from the title at that time. (Id.)

In April 2011, prompted by an inspection letter from the County of Santa Clara, Plaintiff visited the Subject Property and learned for the first time that Defendants had apparently abandoned it and transferred title back to him. (Complaint, ¶ 14.) Because the Chapter 7 bankruptcy did not protect the Subject Property from foreclosure and did not discharge two tax liens recorded on title thereto, on May 10, 2011, Tran filed a Chapter 13 bankruptcy petition on Plaintiff’s behalf. (Id., ¶ 15.) The petition did not mention the Judgment Lien or list Defendants as creditors, with Tran having understood the lien to have been discharge in the Chapter 7 bankruptcy action. (Id.) The petition was closed, apparently because of procedural errors, on June 24, 2011. (Id.) A second, similar petition was filed on the following month and was closed on November 8, 2015, again due to procedural errors. (Id., ¶ 16.) Tran was later suspended and then disbarred in November 2017. (Id., ¶ 17.) A third petition was filed on December 3, 2015 by new counsel Nancy Weng (“Weng”), which also did not list the Judgment Lien or Defendants based on the belief that the lien had been previously discharged. (Id., ¶ 18.) Lars Fuller (“Fuller”) subsequently substituted in for Weng in February 2016, and then converted the Chapter 13 petition to a Chapter 11 petition. (Id., ¶ 19.)

In July 2017, Fuller discovered that the liens believed to have been discharged in the Chapter 7 bankruptcy remained on title to the Subject Property, in addition to undischarged liens that were the subject of the Chapter 11 petition. (Complaint, ¶ 20.) In order to facilitate the Chapter 11 bankruptcy, Weng moved to reopen the Chapter 7 bankruptcy case on July 21, 2017 and avoid the Judgment Lien. (Id.) Defendants were served with Plaintiff’s motion to accomplish the foregoing. (Id.)

On October 25, 2017, Defendants filed an opposition to Plaintiff’s motion to avoid the Judgment Lien. (Complaint, ¶ 22.) On November 30, 2017, Fuller filed a Status Conference Statement in the Chapter 11 case stating that both sides intended to engage in mediation to resolve the dispute regarding the Judgment Lien and, if unsuccessful, Plaintiff would seek to set aside the default judgment in the Original Action for failure of service. (Id., ¶ 23.) After a stipulation between the parties was filed, mediation was set for March 15, 2018. (Id., ¶ 24.) The mediation was cancelled the day before it was scheduled to take place at Defendants’ behest. (Id., ¶ 26.)

On April 5, 2018, Plaintiff filed a Motion to Dismiss Case in the Chapter 11 bankruptcy action. (Complaint, ¶ 27.) Defendants opposed the motion and Plaintiff subsequently withdrew it. (Id.) On April 11, 2018, Defendants filed a Motion for Relief from Stay in the Chapter 11 bankruptcy action so that they could seek to renew the August 18, 2008 default judgment in the Original Action as it was set to expire on August 18, 2018. (Id., ¶ 28.) The motion was granted on May 7, 2018. (Id.)

On July 3, 2018, the Chapter 7 bankruptcy case was closed so that the Judgment Lien could be addressed in the Chapter 11 case and/or in state court proceedings. (Complaint, ¶ 30.) After it became clear that the Judgment Lien would have to be addressed in state court, Plaintiff retained new counsel to assist him in his efforts to set aside the default judgment in the Original Action. (Id., ¶ 31.) Unfortunately, his new counsel, Saeed Ghaffari, was ultimately not qualified to represent Plaintiff in such efforts because he practiced immigration law and did not promptly disclose his lack of qualifications to Plaintiff. (Id.) Plaintiff ultimately obtained new counsel in October 2018. On November 9, 2018, Plaintiff filed the Complaint to set aside the entry of default and judgment by the Court in the Original Action and obtain leave to file an answer to the complaint in that action as well as a cross-complaint.

On January 22, 2019, Defendants filed the instant demurrer to the Complaint on the ground that Plaintiff lacks standing to pursue this action. Plaintiff opposes the motion.

II. Requests for Judicial Notice

Both parties have filed requests for judicial notice. First, in support of their demurrer, Defendants request that the Court take judicial notice of the following items: (1) the Chapter 7 bankruptcy petition filed by Plaintiff on September 9, 2010, Case No. 10-59396 (Exhibit 1); and (2) the Amended Schedules A/B filed by Plaintiff in the foregoing case on August 21, 2017 (Exhibit 2). As these items are both court records, they are proper subjects of judicial notice pursuant to Evidence Code section 452, subdivision (d). Accordingly, Defendants’ request for judicial notice is GRANTED.

In connection with his opposition to the demurrer, Plaintiff requests that the Court take judicial notice of the following: (1) the complaint in the Original Action, filed on July 21, 2006 (Exhibit 1); (2) the request for entry of default (and accompanying proof of service) in the Original Action filed on November 14, 2006 (Exhibit 2); (3) the Application for Renewal of Judgment in the Original Action filed on May 18, 2018 (Exhibit 3); and (4) Defendants’ case management statement filed in the instant action on February 4, 2019 (Exhibit 4). Similar to Defendants’ request, the foregoing items are all court records and therefore proper subjects of judicial notice. Consequently, Plaintiff’s request for judicial notice is GRANTED.

III. Defendants’ Demurrer

The thrust of Defendants’ demurrer to the Complaint is that Plaintiff lacks standing to assert the instant action to set aside the entry of default and default judgment in the Original Action because he failed to disclose the existence of this claim in his bankruptcy filings and, as a consequence, the claims belongs to the bankruptcy estate and not him.

As a general matter, a person lacks standing to sue “if, for example, it is not a real property in interest.” (Color-Vue, Inc. v. Abrams (1996) 44 Cal.App.4th 1599, 1604, fn. 4.) “The widely accepted rule is that after a person files for bankruptcy protection, any causes of action previously possessed by that person become the property of the bankrupt estate.” (Cloud v. Northrup Grumman Corp. (1998) 67 Cal.App.4th 995, 1001 [citing 11 U.S.C. §§ 541, subd. (a)(1) and 323].) Where a claim becomes such property, the plaintiff debtor losses standing to assert it unless it is abandoned by the bankruptcy trustee. (Id. [citing 11 U.S.C. § 554, subd. (d) [stating that “Unless the court orders otherwise, property of the estate that is not abandoned under this section remains property of the estate”]; see Harris v. St. Louis University (E.D. Mo. 1990) 114 B.R. 647, 648.)

Given that the bankruptcy estate includes “all legal or equitable interests of the debtor” (11 U.S.C. § 541, subd. (a)(1)), the Bankruptcy Code subjects debtors to a “continuing duty to disclose all pending and potential claims.” (Kane v. National Union Fire Ins. Co. (2008) 535 F.3d 380, 384-385; see also In re Mohring (Bankr. E.D. Cal. 1992) 142 B.R. 389, 394 [stating that “[T]he debtor has a duty to prepare schedules carefully, completely, and accurately”].) The consequences for failing to do so are significant. First, causes of action that the debtor failes to properly schedule continue to belong to the bankruptcy estate and do not revert back to the debtor. (See Cusano v. Klein (2001) 264 F.3d 936, 945; see also Stein v. United Artists Corp. (9th Cir. 1982) 691 F.2d 885, 893 [holding that only property “administered or listed in the bankruptcy proceedings” reverts to the bankrupt]; accord Hutchins v. IRS (3d Cir. 1995) 67 F.3d 40, 43.) Second, the doctrine of judicial estoppel is implicated, which operates to preclude a party from gaining an unfair advantage by asserting one position in one proceeding and subsequently taking a clearly inconsistent position in another. (Hamilton v. State Farm Fire & Casualty Co. (9th Cir. 2001) 279 F.3d 778, 782.) In the bankruptcy context in particular, “a party is judicially estoppel from asserting a cause of action not raised in a reorganization plan or otherwise mentioned in the debtor’s schedules or disclosure statements.” (Id. at 783.) The failure is deemed to have operated as a deception on the bankruptcy court and compels the court to invoke judicial estoppel to “protect the integrity of the bankruptcy process.” (Id. at 785.)

Defendants maintain that Plaintiff’s claim for equitable relief from the default judgment (as well as a proposed cross-complaint for alleged collection fraud) belongs to the Chapter 7 trustee in his bankruptcy case as Plaintiff did not disclose this claim in his schedules filed in that proceeding. Plaintiff does not dispute that he did not list his claim to set aside the default judgment or the claims in his proposed cross-complaint in the relevant schedules. However, he maintains that this is not fatal to his action (i.e., he has standing to assert it) for two reasons: (1) this action is not an asset within the meaning of the Bankruptcy Code because it is a defense and not a claim; and (2) the Subject Property was abandoned by the bankruptcy trustee when the bankruptcy court issued its final decree without liquidation of the property.

Plaintiff does not provide any authority that stands for the proposition that a separate lawsuit to set aside a judgment does not qualify as property within the meaning of the Bankruptcy Code. However, the purpose of a debtor listing all of his or her property in a bankruptcy petition, including potential causes of action, is to provide a full inventory of items of value that can be liquidated by the trustee and used to pay the debtor’s creditors. (See 11 U.S.C. §§ 704, subd. (a)(1), 725; see In re Hyman (9th Cir. BAP 1991) 123 B.R. 342, 347.) Plaintiff’s action here to set aside the default judgment, if successful, would merely place the parties back in the positions that they maintained at the initiation of the Original Action and has no monetary value that could be used to satisfy any of Plaintiff’s debts. Consequently, this Court is not persuaded that Plaintiff’s claim to set aside the default judgment qualifies as a legal interest in property that was required to be disclosed on his Chapter 7 bankruptcy petition. Accordingly, Defendants’ assertion that Plaintiff lacks standing to assert the instant lawsuit to set aside the default judgment is without merit. Plaintiff’s proposed cross-claims seeking actual monetary damages, however, are a different story and, unless abandoned, belong to the bankruptcy estate. Formal abandonment of estate property is required before a debtor can take any action with respect to it (see In re Mejia (Bankr. S.D. N.Y. 2017) 576 B.R. 464, 470-471) and here, because the claim was never disclosed, there could not have been any formal abandonment by the trustee.

It is also important to note that a void judgment, as Plaintiff maintains is the case with the default judgment in the Original Action due to a lack of service, is subject to collateral attack (if the time for a direct attack has expired) at any time- either by a separate lawsuit to set aside the judgment or by raising it as a defense to a separate action by the judgment creditor to enforce the judgment. (Yu v. Signet Bank/Virginia (1999) 69 Cal.App.4th 1377, 1386.) There is no doubt that Plaintiff’s failure to list his claim would have no effect on his ability to raise the lack of proper service as a defense in an action asserted against him by Defendants to collect on the judgment, nor would it have prevented him from raising it in support of a motion to vacate renewal of the judgment (Code Civ. Proc., § 683.170; Fidelity Creditor Service, Inc. v. Browne (2001) 89 Cal.App.4th 195, 207). It seems to this Court that it would be inequitable to conclude that Plaintiff could not make a collateral effort to set aside the default judgment via a separate lawsuit due to a failure to disclose in bankruptcy but could otherwise make the same argument if an action to collect on the judgment had been asserted against him.

While the Court agrees that Plaintiff’s proposed cross-claims belong to the bankruptcy estate and therefore that he lacks standing to assert them, a demurrer does not lie to only part of a cause of action and Plaintiff has otherwise stated a claim to set aside the default judgment. (See PH II, Inc. v. Superior Court (1995) 33 Cal.App.4th 1680, 1682.) Therefore, Defendants’ demurrer to the Complaint on the ground of failure to state facts sufficient to constitute a cause of action is OVERRULED.

– oo0oo –