LAWRENCE J. O'NEILL, District Judge.
Defendant National Surety Corporation ("NSC") seeks dismissal under F.R.Civ.P. 12(c) of plaintiffs Fresno Rock Taco, LLC ("Fresno Rock") and Zone Sports Center, LLC's ("Zone Sports'") insurance and bad faith claims in that Zone Sports lacks capacity to sue as a suspended corporation and representations in a bankruptcy proceeding judicially estop Fresno Rock and Zones Sports' (collectively "plaintiffs'") claims. Plaintiffs respond that Zone Sports' good corporate standing has been restored and that they filed no bankruptcy to invoke judicial estoppel. Pursuant to Local Rule 230(g), this Court VACATES the May 30, 2012 hearing in that it has considered on the record NSC's F.R.Civ.P. 12(c) motion for judgment on the pleadings. For the reasons discussed below, this Court DENIES NSC's F.R.Civ.P. 12(c) motion for judgment on the pleadings.
Plaintiffs are each California limited liability companies. Zone Sports is a real estate developer and owns a Fresno commercial real estate project ("property"). Fresno Rock operated a restaurant/night club as a property lessee. NSC issued an unspecified insurance policy to plaintiffs. NSC argues that plaintiffs' insurance claim under the policy for theft and lost business income attempts to defraud bankruptcy creditors to invoke judicial estoppel to bar the FAC's claims for breach of insurance contract and bad faith. NSC took the position that as a suspended corporation, Zone Sports lacks capacity to sue and that plaintiffs' counsel is subject to criminal penalty for purporting to exercise Zone Sports' power to sue. Plaintiffs respond that restoration of Zone Sports' good standing permits it to proceed with this action and that plaintiffs are not subject to judicial estoppel as non-parties to the bankruptcy at issue.
Plaintiffs claim that on an unspecified date in early 2009, audio/visual equipment was stolen from Fresno Rock's restaurant/night club. On February 15, 2009, plaintiffs submitted a $139,172.28 claim to NSC. On March 30, 2009, for lost business income, Fresno Rock submitted a $2,578,000 policy limits claim, and Zone Sports submitted a $6.1 million policy-limits claim. On February 4, 2010, NSC denied plaintiffs' claims based on what it characterizes as "material misrepresentations" as to alleged theft of the audio/visual equipment. The denials give rise to the FAC's breach of insurance contract and bad faith claims against NSC to the effect that NSC wrongly denied the claims and failed to investigate them.
NSC claims that plaintiffs are wholly owned by Milton Barbis ("Mr. Barbis"). Plaintiffs deny such claim. Zone Sports' articles of organization filed with the California Secretary of State on February 21, 2001 indicate that Zone Sports is managed by one manager, an executive who operates it. Plaintiffs note that Mr. Barbis is not a Zone Sports member, that is, an owner. Plaintiffs explain that Zone Sports "has one manager but it is not a single member limited liability company which means [Zone Sports] cannot be wholly owned by Barbis."
Plaintiffs note that Fresno Rock has one member, Mr. Barbis, but has six investors.
On October 30, 2009, Mr. Barbis filed a chapter 7 bankruptcy. NSC notes that the Mr. Barbis' bankruptcy petition values plaintiffs at $0.00 and fails to disclose plaintiffs' contingent claims against NSC. NSC further notes that Mr. Barbis failed to amend his bankruptcy petition to disclose his claims against NSC.
As discussed below, NSC contends that plaintiffs' FAC claims are legally barred to warrant judgment on the pleadings in NSC's favor.
F.R.Civ.P. 12(c) permits a party to seek judgment on the pleadings "[a]fter the pleadings are closed — but early enough not to delay trial." "A motion for judgment on the pleadings should be granted where it appears the moving party is entitled to judgment as a matter of law." Geraci v. Homestreet Bank, 347 F.3d 749, 751 (9
"A judgment on the pleadings is a decision on the merits." 3550 Stevens Creek Associates v. Barclays Bank of California, 915 F.2d 1355, 1356 (9
Courts dismiss complaints under F.R.Civ.P. 12(c) for either of two reasons: "(1) lack of a cognizable legal theory, or (2) insufficient facts under a cognizable legal theory." Gutierrez v. RWD Technologies, Inc., 279 F.Supp.2d 1223, 1224 (E.D. Cal. 2003). The standards for deciding F.R.Civ.P. 12(b)(6) and F.R.Civ.P. 12(c) motions are the same. Great Plains Trust v. Morgan Stanley Dean Witter, 313 F.3d 305, 313, n. 8 (5
"When considering a motion for judgment on the pleadings, this court may consider facts that `are contained in materials of which the court may take judicial notice.'" Heliotrope General, Inc. v. Ford Motor Co., 189 F.3d 971, 981, n. 18 (9th Cir. 1999) (citation omitted). A motion for judgment on the pleadings may be granted if, after assessing the complaint and matters for which judicial notice is proper, it appears "beyond doubt that the [non-moving party] cannot prove any facts that would support his claim for relief." Morgan v. County of Yolo, 436 F.Supp.2d 1152, 1155 (E.D. Cal. 2006), af
A fact subject to judicial notice is not subject to reasonable dispute because it "(1) is generally known within the trial court's territorial jurisdiction; or (2) can be accurately and readily determined from sources whose accuracy cannot be reasonably questioned." F.R.Evid. 201(b). A "court may take judicial notice of `matters of public record.'" Lee v. City of Los Angeles, 250 F.3d 669, 689, (9
With these standards in mind, this Court turns to NSC's challenges to the FAC's claims.
NSC has challenged Zone Sports ability to pursue claims as a suspended corporation.
For a corporation, capacity to sue is determined "by the law under which it was organized." F.R.Civ.P. 17(b)(2). NSC explains that California law governs Zone Sports' capacity to sue since it is organized under California law.
Under California Revenue and Tax Code section 23301 ("section 23301"), a California corporation's powers, rights and privileges may be suspended upon failure to pay taxes. NSC points to California Secretary of State records to the effect that on November 1, 2011, Zone Sports' powers, privileges and rights were suspended for failure to pay taxes.
Plaintiffs acknowledge that Zone Sports was suspended from November 1, 2011 to May 9, 2012 for "a small tax arrearage that had inadvertently been unpaid." Plaintiffs explain that after Zone Sports paid the outstanding tax, the California Franchise Tax Board issued a May 9, 2012 certificate of revivor, retroactive to January 1, 2012.
In Kaufman & Broad Communities, Inc. v. Performance Plastering, Inc., 136 Cal.App.4th 212, 217-218, 39 Cal.Rptr.3d 33 (2006), the California Court of Appeal addressed section 23301 and the effect of a certificate of revivor:
Plaintiffs contend that Zone Sports'"suspension has been cured and it now enjoys status as an LLC in good standing." Plaintiffs continue that "prior invalid conduct and/or proceeding which took place during the suspension has been validated."
Zone Sports was suspended for six months when this action was pending. However, Zone Sports has paid outstanding taxes and received a certificate of revivor to permit it to proceed in this action, which NSC concedes in its reply papers. Section 23301's purpose has been fulfilled with Zone Sports' payment of taxes. The brief suspension fails to deprive Zone Sports of its capacity to sue.
NSC also claims that plaintiffs' counsel Richard Hamlish ("Mr. Hamlish") is guilty of a misdemeanor for exercising rights and powers of a corporation suspended under section 23301. See Cal. Rev. & Tax Code, § 19719(a) ("Any person who attempts or purports to exercise the powers, rights, and privileges of a corporation that has been suspended pursuant to Section 23301 . . . is punishable by a fine of not less than two hundred fifty dollars ($250) and not exceeding one thousand dollars ($1,000), or by imprisonment not exceeding one year, or both fine and imprisonment.") NSC points to Mr. Hamlish's post-suspension acts of filing the FAC on February 1, 2012 and taking a March 2012 deposition for plaintiffs.
Plaintiffs respond that Mr. Hamlish's purported misdemeanor is irrelevant in that he was unaware of the suspension until NSC raised the issue. "If the company is revived, there is no need for section 19719, subdivision (b),
This Court agrees with plaintiffs that the alleged misdemeanor offense is irrelevant, especially given the retroactive effect of the certificate of revivor.
NSC argues that judicial estoppel bars plaintiffs' FAC claims in that Mr. Barbis' knowingly failed to list claims against NSC on his bankruptcy petition. Plaintiffs respond that judicial estoppel does not apply to them in that they did not file bankruptcy.
Judicial estoppel "precludes a party from gaining an advantage by taking one position, and then seeking a second advantage by taking an incompatible position." Rissetto v. Plumbers andSteamfitters Local 343, 94 F.3d 597, 600 (9
Russell v. Rolfs, 893 F.2d 1033, 1037 (9th Cir.1990), cert. denied, 501 U.S. 1260, 111 S.Ct. 2915, 115 L.Ed.2d 1078 (1991).
Judicial estoppel applies to inconsistent positions taken in the same and multiple litigation. See Rissetto, 94 F.3d at 605 ("We now make it explicit that the doctrine of judicial estoppel is not confined to inconsistent positions taken in the same litigation."); see also Hamilton v. State Farm Fire & Cas. Co., 270 F.3d 778, 783 (9
"In the bankruptcy context, a party is judicially estopped from asserting a cause of action not raised in a reorganization plan or otherwise mentioned in the debtor's schedules or disclosure statements." Hamilton, 270 F.3d at 783 see Hay v. First Interstate Bank of Kalispell, N.A., 978 F.2d 555, 557 (9th Cir.1992) (failure to give notice of a potential cause of action in bankruptcy schedules and Disclosure Statements estops the debtor from prosecuting that cause of action); In re Coastal Plains, 179 F.3d 197, 208 (5th Cir.1999), cert. denied, 528 U.S. 1117, 120 S.Ct. 936, 145 L.Ed.2d 814 (2000) (holding that a debtor is barred from bringing claims not disclosed in its bankruptcy schedules); Payless Wholesale Distributors, Inc. v. Alberto Culver (P.R.) Inc., 989 F.2d 570, 572 (1st Cir.), cert. denied, 510 U.S. 931, 114 S.Ct. 344, 126 L.Ed.2d 309 (1993) (debtor who obtained relief on the representation that no claims existed cannot resurrect such claims and obtain relief on the opposite basis); Oneida Motor Freight, Inc. v. United Jersey Bank, 848 F.2d 414, 419 (3rd Cir.), cert. denied, 488 U.S. 967, 109 S.Ct. 495, 102 L.Ed.2d 532 (1988) (debtor's failure to list potential claims against a creditor "worked in opposition to preservation of the integrity of the system which the doctrine of judicial estoppel seeks to protect," and debtor is estopped by reason of such failure to disclose).
Moreover, judicial estoppel precludes a plaintiff-debtor "from pursuing claims about which he had knowledge, but did not disclose, during his bankruptcy proceedings." Hamilton, 270 F.3d at 784. "Judicial estoppel will be imposed when the debtor has knowledge of enough facts to know that a potential cause of action exists during the pendency of the bankruptcy, but fails to amend his schedules or disclosure statements to identify the cause of action as a contingent asset." Hamilton, 270 F.3d at 784; see Hay, 978 F.2d at 557 ("We recognize that all facts were not known to Desert Mountain at that time, but enough was known to require notification of the asset to the bankruptcy court."); In re Coastal Plains, 179 F.3d at 208 (quoting Youngblood Group v. Lufkin Fed. Sav. & Loan Ass'n, 932 F.Supp. 859, 867 (E.D. Tex.1996)) ("[I]f the debtor has enough information . . . prior to confirmation to suggest that it may have a possible cause of action, then that is a known cause of action such that it must be disclosed") (internal quotations omitted). "The debtor's duty to disclose potential claims as assets does not end when the debtor files schedules, but instead continues for the duration of the bankruptcy proceeding." Hamilton, 270 F.3d at 785.
NSC argues that Mr. Barbis knew of claims against NSC when he filed his October 30, 2009 bankruptcy petition in that he submitted the insurance claim in February 2009 to seek policy limits. NSC points to Mr. Barbis'"None" response to Schedule B, Question No. 21 inquiring into "Other contingent and unliquidated claims of every nature . . ." See Hamilton, 270 F.2d at 281 (indicating that this question is the proper place to list insurance claims). NSC further notes that Mr. Barbis could have included the claims as part of plaintiffs' value but instead listed plaintiffs' value as $0. NSC notes the absence of amended schedules.
NSC characterizes as immaterial Mr. Barbis' delay to pursue claims at issue in this action (April 20, 2011 for Fresno Rock and February 1, 2012 for Zone Sports) in that judicial estoppel applies when a debtor knows "of enough facts to know that a potential cause of action exists during the pendency of the bankruptcy, but fails to amend his schedules or disclosure statements to identify the cause of action as a contingent asset." Hamilton, 270 F.3d at 784. NSC argues that Mr. Barbis knew of the insurance breach of contract and bad faith claims as of NSC's February 4, 2010 denial of his insurance claims but failed to amend his pending bankruptcy schedules to include the breach of insurance contract and bad faith claims.
NSC accuses Mr. Barbis of "fraud and abuse of the court system" in that for bankruptcy purposes, he represented plaintiffs having no value yet prosecutes his breach of insurance contract and bad faith claims to which he attaches more than $8 million in contract damages. NSC concludes that if Mr. Barbis succeeds in this action, he could gain millions of dollars which would be beyond the reach of his creditors in that plaintiffs are deemed assets abandoned by the bankruptcy trustee.
Plaintiffs respond that they are not subject to judicial estoppel in that they filed no bankruptcy and as limited liability companies could not be included in Mr. Barbis' bankruptcy given 11 U.S.C. § 727(a)(1), under which Mr. Barbis filed his bankruptcy and which provides: "The court shall grant the debtor a discharge, unless — (1) the debtor is not an individual . . ." Plaintiffs note that Mr. Barbis is not a plaintiff in this action and that representations on his bankruptcy petition are neither relevant to plaintiffs' claims nor binding on plaintiffs, which are corporate entities separate from him. Plaintiffs rely on Zone Sports' articles of organization which identify Mr. Barbis' limited roles of manager and agent for service of process. Plaintiffs point to Mr. Barbis' absence of interest in Zone Sports.
Plaintiffs challenge NSC's claims regarding their values reflected on Mr. Barbis' bankruptcy schedules in that the U.S. Trustee evaluated each plaintiff and calculated negative cash and current values. Plaintiffs note that if they prevail in this action, their recovery would be subject to judgments and debts against them and thus will not be paid to Mr. Barbis.
NSC fails to establish application of judicial estoppel to plaintiffs. NSC provides no authority to support that Mr. Barbis' chapter 7 bankruptcy representations judicially estop the claims of plaintiffs, corporate entities in which Mr. Barbis has limited interests.
Plaintiffs take exception to NSC's attempt to characterize plaintiffs as Mr. Barbis' alter egos in the absence of evidence to satisfy alter ego elements.
"Ordinarily, a corporation is regarded as a legal entity separate and distinct from its stockholders, officers and directors." Communist Party v. 522 Valencia, Inc., 35 Cal.App.4th 980, 993, 41 Cal.Rptr.2d 618 (1995). "The terminology `alter ego' or `piercing the corporate veil' refers to situations where there has been an abuse of corporate privilege, because of which the equitable owner of a corporation will be held liable for the actions of the corporation." Roman Catholic Archbishop v. Superior Court, 15 Cal.App.3d 405, 411, 93 Cal.Rptr. 338 (1971).
The alter ego doctrine applies if: (1) "there be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist," and (2) "the acts are treated as those of the corporation alone, an inequitable result will follow." Associated Vendors, Inc. v. Oakland Meat Co., 210 Cal.App.2d 825, 837, 26 Cal.Rptr. 806 (1962). "Courts will pierce the corporate veil only in exceptional circumstances." Calvert v. Huckins, 875 F.Supp. 674, 678 (E.D. Cal. 1995) (quoting National Precast Crypt Co. v. Dy-Core of Pennsylvania, Inc., 785 F.Supp. 1186, 1192 (W.D. Pa.1992)).
Plaintiffs note the absence of support to apply the alter ego doctrine, including commingling of funds, Mr. Barbis' liability for plaintiffs' debts, plaintiffs' common ownership, employees and officers, and failure to maintain separate operations and corporate records.
Plaintiffs raise valid points. The record is insufficient to qualify plaintiffs as Mr. Barbis' alter egos.
For the reasons discussed above, this Court DENIES NSC F.R.Civ.P. 12(c) relief.
IT IS SO ORDERED.
