2010-00073429-CU-PA

Judith Parrott vs. Reynolds Resorts-Sacramento, LLC

Nature of Proceeding: Motion for Judgment on the Pleadings

Filed By: Cummings, Katy A.

Defendant Reynolds Resorts-Brannan Island, LLC’s motion for judgment on the
pleadings is granted with leave to amend as set forth below.

Defendant’s request for judicial notice is granted. Plaintiff’s request for judicial notice
is also granted.

Defendant seeks judgment on pleadings pursuant to the doctrine of judicial estoppel.
It argues that Plaintiff is judicially estopped from maintaining the instant action because
she failed to identify it in her Chapter 7 bankruptcy filing. Defendant also argues that
Plaintiff has no standing to maintain the instant action and oppose the motion because
the lawsuit is a part of the bankruptcy estate.

The outcome of the instant motion is dictated by Cloud v. Northrop Grumman Corp.
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(1998) 67 Cal.App.4 995. Cloud addresses both the standing and judicial estoppel
issues in similar circumstances in the context of a motion for judgment on the
pleadings. There, a trial court granted a defendant’s motion for judgment on the
pleadings without leave to amend on the basis that a plaintiff who failed to list her
lawsuit as asset in her bankruptcy proceeding was judicially estopped from pursuing
her state court lawsuit and also because she lacked standing. The appellate court
reversed finding that the motion for judgment on the pleadings should have been
denied to the extent it was based upon judicial estoppel because it raised factual
issues and should have granted with leave to amend to the extent it was based on the
standing issue to allow for the bankruptcy trustee to be substituted for the plaintiff as
the real party in interest.

Judicial Estoppel

Here, to the extent the motion is based on judicial estoppel, the motion is denied.
Courts have applied the doctrine of judicial estoppel to bar a litigant from maintaining
litigation that was not disclosed in a bankruptcy proceeding. (International Engine
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Parts, Inc. v. Fedderen & Co. (1998) 64 Cal.App.4 345, 350-351.) “The concept of judicial estoppel prevents a party from asserting a position in a judicial proceeding that
is contrary or inconsistent with a position previously asserted in a prior proceeding.
The purpose is to protect the integrity of the judicial process and not the parties to the
lawsuit.” (Id. at 350.) “California courts have utilized the concept of judicial estoppel
and have followed the rule laid down in Oneida Motor Freight, Inc. v. United Jersey
Bank (3d Cir. 1988) 848 F.2d 414. In that case, the federal court held that where a
debtor in bankruptcy violates its statutory and fiduciary duty to disclose a current claim
during a bankruptcy proceeding, equitable and judicial estoppel operate as a bar to
further litigation by the debtor.” (Id.) In granting summary judgment in favor of the
defendant based upon the plaintiff’s failure to list the litigation as an asset in
bankruptcy proceedings, the International Court made clear to state that the
“determination of the existence of judicial estoppel is a factual finding which will be
upheld if supported by substantial evidence.” (Id. at 354.)

In Cloud, the Court extensively discussed the judicial estoppel in the bankruptcy
context, including how “[c]ases concerning judicial estoppel have generally been
decided after a fact-finding or evidence-reviewing proceeding of some sort” and further
noted the limitations on the doctrine, specifically, noting that “the same court that
pioneered the application of judicial estoppel in the bankruptcy context with the
seminal Oneida case later was anxious to limit the scope of the Oneida ruling, even to
the extent of quoting with approval from the dissent in Oneida. Clearly, ‘judicial
estoppel’ is a concept to be applied with restraint in egregious cases only and with
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clear regard for the facts of the particular case.” (Cloud, supra, 67 Cal.App.4 at
1018.) “As stated in Ryan, nondisclosure in bankruptcy filings, standing alone, is
insufficient to support the finding of bad faith intent necessary for the application of
judicial estoppel. Yet nondisclosure, and nothing more, is all that could be established
in the case by a review limited to plaintiff’s complaint plus her bankruptcy filings. The
Ryan court looked for ‘evidence that [the debtor] acted in bad faith.’ (Ryan Operations
G.P. v. Santiam-Midwest Lumber Co. ( ) 81 F.3d at 362.) Ryan stated that judicial
estoppel applies only when the debtor engages in an effort to obtain ‘unfair advantage’
and engages in a ‘scheme to mislead the court,’ that any inconsistencies in the
debtor’s position must be ‘attributable to intentional wrongdoing’ and ‘tantamount to a
knowing misrepresentation to or even fraud on the court,’ and that a ‘good faith
mistake’ cannot support judicial estoppel.” (Id. at 1019.) Clearly, consideration of
whether a debtor has engaged in a deliberate scheme to mislead and gain unfair
advantage, as opposed to having made a mistake born of misunderstanding,
ignorance of legal procedures, lack of adequate legal advice, or some other innocent
cause, requires consideration of the evidence. As the declaration filed by plaintiff in
opposition to Northrop’s motion for judgment on the pleadings shows, there is
evidence which could negate the findings necessary to support the application of
judicial estoppel in this case. Hence the trial court should not have attempted to
decide this issue on a motion for judgment on the pleadings.” (Cloud, supra, 67
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Cal.App.4 at 1020.)

Judicial estoppel is an equitable doctrine with some vagueness in its application. It is a
doctrine invoked by courts in their discretion. International Engine Parts, Inc. v.
Feddersen & Co. (1998) 64 Cal. App.4th 345, 351. In that case, the evidence
supported the trial court’s discretion to apply the doctrine of judicial estoppel, where
the corporation that filed bankruptcy had knowledge of the malpractice claim against
its attorney four years before it filed the schedule in the bankruptcy, and there was
evidence that the corporation intentionally failed to include the claim in the bankruptcy.
There was no evidence of ignorance, fraud or mistake in that case.
In the instant case, the Court can only consider Plaintiff’s complaint and the judicially
noticeable bankruptcy documents which show that Plaintiff did not initially list the
instant lawsuit in her bankruptcy action. As Cloud makes clear, this is insufficient to
support the application of judicial estoppel. Further, each case cited by Defendant in
its motion involved resolution of the judicial estoppel question by way of an evidentiary
motion, not a pleading motion, and as Cloud makes clear, judicial estoppel is a factual
issue and the trial court should not attempt to resolve such issues on a motion for
judgment on the pleadings. Indeed, the documents that are judicially noticeable show
that Plaintiff amended her bankruptcy schedule to list the instant lawsuit. Clearly,
factual issues regarding whether judicial estoppel applies exist, which preclude this
Court from granting a motion for judgment on the pleadings on the application of a fact
specific doctrine which is ‘to be applied with restraint in egregious cases only and with
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clear regard for the facts of the particular case.” (Cloud, supra, 67 Cal.App.4 at
1018.) Resolution of whether Plaintiff is judicially estopped is appropriately resolved
through an evidentiary motion such as a motion for summary judgment, but not
through a motion for judgment on the pleadings. Defendant’s reply brief does nothing
more than highlight the factual nature of the judicial estoppel defense in these
circumstances.

As a result, to the extent the motion is based on judicial estoppel it is denied.

Standing

However, the motion is granted with leave to amend on the basis that Plaintiff lacks
standing as the lawsuit is an asset of the bankruptcy estate. Pending causes of action
are among the “legal or equitable interests” that become the property of a bankruptcy
estate upon filing a bankruptcy petition. As stated in Cloud, “[t]he widely accepted rule
is that after a person files for bankruptcy protection, any causes of action previously
possessed by that person becomes the property of the bankruptcy estate. (See 11
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U.S.C. § 541(a)(1) and 323.) Cloud, supra, 67 Cal.App.4 at 1001.) A cause of action
becomes property of the bankruptcy estate upon filing of the petition, even if not listed
on the schedules. Vertkin v. Wells Fargo Home Mortg., 2010 U.S. Dist. LEXIS 94105,
2010 WL 3619798 (N.D. Cal. Sept. 9, 2010) citing Sierra Switchboard Co. v.
Westinghouse Elec. Corp., 789 F.2d 705, 707 (9th Cir.1986). As a result, the real party
in interest in this action is the bankruptcy trustee, who seeks leave to substitute in.
Plaintiff is given leave to amend to substitute the bankruptcy trustee, J. Michael
Hopper as the plaintiff in this action.

To the extent that Defendant argues that Plaintiff’s lack of standing is somehow fatal to
the complaint or otherwise precluded her from opposing the instant motion, Defendant
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is incorrect. (Cloud, supra, 67 Cal.App.4 at 1004.) As stated in Cloud, whereas here,
“if the facts of the cause of action against the defendant would not be ‘wholly different’
after amendment, a complaint filed by a party without standing may be amended to
substitute in the real party in interest.” (Id. at 1005.) “In the case of a trustee in
bankruptcy seeking to be substituted in, the trial court lacks discretion not to allow the
substitution.” (Kaley v. Catalina Yachts (1986) 187 Cal.App.3d 1187, 1195, fn. 7.)
Leave to amend is properly granted to allow Plaintiff to substitute in the bankruptcy
trustee. Any challenge that the Defendant has to any amended pleading allowing the
trustee to be substituted in, for example a statute of limitations challenge as alluded to
in reply, may be raised by demurrer or other appropriate motion. The amended complaint substituting the bankruptcy trustee as the plaintiff in this
action shall be filed and served no later than June 16, 2014. Defendant shall file and
serve its response within 10 days thereafter, 15 days of the amended complaint is
served by mail. (Although not required by any statute or rule of court, Plaintiff is
requested to attach a copy of the instant minute order to the amended complaint to
facilitate the filing of the pleading.)

The minute order is effective immediately. No formal order pursuant to CRC Rule
3.1312 or other notice is required.