Southern v. Rush Truck Centers CA4/2 (2014) · DecisionDepot
Southern v. Rush Truck Centers CA4/2
California Court of Appeal Apr 8, 2014 No. E053752Unpublished
Filed 4/8/14 Southern v. Rush Truck Centers CA4/2
NOT TO BE PUBLISHED IN OFFICIAL REPORTS California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FOURTH APPELLATE DISTRICT
DIVISION TWO
TROY SOUTHERN,
Plaintiff and Appellant, E053752
v. (Super.Ct.No. CIVDS907869)
RUSH TRUCK CENTERS OF OPINION CALIFORNIA, INC.,
Defendant and Respondent.
APPEAL from the Superior Court of San Bernardino County. Donna G. Garza,
Judge. Affirmed.
Troy Southern, in pro. per.; Law Offices of John R. Setlich and John R. Setlich for
Plaintiff and Appellant.
Chapman Glucksman Dean Roeb & Barger, Craig A. Roeb and Grace A. Nguyen
for Defendant and Respondent.
1
In January 2008, plaintiff Troy Southern learned that a truck that he had purchased
as new from defendant Rush Truck Centers of California, Inc. (Rush) had actually been
damaged in a previous accident. In June 2008, he filed a Chapter 7 bankruptcy; his
schedules did not list his claim against Rush as an asset. In June 2009, he filed this action
against Rush. Later, his debts were discharged and the bankruptcy was closed.
Here, Southern alleges that he was aware of the facts underlying this action in
January 2008. Nevertheless, in June 2008, when he filed the bankruptcy, he failed to
schedule his claim against Rush. Accordingly, when the bankruptcy was closed, the
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claim remained property of the bankruptcy estate. The trustee has standing to litigate it;
Southern does not.
Southern relies on Morlan v. Universal Guar. Life Ins. Co., supra, 298 F.3d 609.
Because it is central to his arguments, we discuss it in some detail. There, plaintiff
Morlan filed a class action; subsequently, he filed a bankruptcy. (Id. at p. 614.) He did
not list the class action in his schedules. (Id. at p. 618.) At a creditors’ meeting,
however, he remarked, “I think I might be involved in a class action lawsuit involving an
insurance company I used to work for . . . .” (Id. at p. 617.) The trustee wrote a letter to
Morlan’s lawyer, stating that he “had decided to ‘abandon any claim the bankruptcy
estate might have to any future proceeds arising from [the class action]’ . . . .” (Id. at
p. 617.) The trustee then filed a statement abandoning “‘any scheduled property . . . .’”
(Id. at p. 618.) The bankruptcy court approved the statement and closed the bankruptcy.
(Id. at pp. 617-618.)
The appellate court stated, “[W]e begin by noting that it was virtually inevitable
that the trustee would abandon the claim, precisely because it was the claim of the
representative plaintiff in a class action suit . . . . The named plaintiff in a class action
usually has only a small stake in the action, [citations], and while the stakes for the class
as a whole may be large, very few of the benefits of settling the class action or
prosecuting it to judgment would be received by the trustee (which is to say the
creditors), since he would just be the named plaintiff’s surrogate. Most of the benefits
would go to the other members of the class and to the lawyers for the class, so that the
7
trustee, as class representative yet having fiduciary obligations exclusively to the estate in
bankruptcy, would have a potential conflict of interest . . . .” (Id. at p. 619.) “The
expenses the trustee incurred in prosecuting the claim would be subtracted from the
assets of the estate in bankruptcy, though it turned out there were no other assets —
another good reason for abandonment of the debtor’s claim: how was the trustee to
finance the class action?” (Ibid.)
The court added, “[I]t is doubtful that any of Morlan’s creditors would have
wanted the trustee to involve himself in the class action, though this would depend on the
value of Morlan’s claim, which we don’t know.” (Morlan v. Universal Guar. Life Ins.
Co., supra, 298 F.3d at p. 619.)1
It concluded: “The defendants’ argument amounts to saying that they, because
Morlan’s creditors might still try to take away Morlan’s claim from him, cannot be sued;
that they, because the trustee or the bankruptcy judge may have dropped the ball, are to
get off scot free. We cannot see the sense of that.” (Morlan v. Universal Guar. Life Ins.
Co., supra, 298 F.3d at p. 621.)
Finally, the court added that there was “an alternative basis for rejecting the
defendants’ challenge to Morlan’s standing. The steps that the trustee took to abandon
Morlan’s claim would suffice to establish abandonment under the ordinary principles
1 The court speculated that Morlan’s creditors “might well” be barred by laches from reopening the bankruptcy. (Morlan v. Universal Guar. Life Ins. Co., supra, 298 F.3d at p. 620.) At the same time, however, it conceded that at least some of them might not be barred by laches; ultimately, it declined to decide the laches issue. (Ibid.)
8
applicable to abandonment, [citations], a fundamental doctrine of property law; it is only
the provisions of the Bankruptcy Code regarding abandonment that cast doubt on whether
Morlan’s claim really did revest in him. But those provisions are intended for the benefit
of creditors, none of whom complained or is complaining about the trustee’s failure to
comply with them. They are not intended for the benefit of alleged violators of the
debtor’s legal rights, and so the defendants are the ones who lack standing — standing to
object to the abandonment of Morlan’s claim. [Citations.]” (Morlan v. Universal Guar.
Life Ins. Co., supra, 298 F.3d at p. 621.)
Southern argues that, under Morlan, he should be allowed to litigate his claim
because the trustee probably would have abandoned it, and because his creditors probably
would have wanted the trustee to abandon it. Here, however, unlike in Morlan, there is
no evidence that it was “virtually inevitable” that, if the claim had been properly
scheduled, the trustee would have abandoned it. It must be remembered that, in Morlan,
the trustee stated — in writing — that he intended to abandon the claim. Nevertheless,
the court discussed (in some detail) the likelihood that the trustee would have litigated a
class action; it determined that abandonment was a foregone conclusion.
By contrast, here, the trustee never stated that he intended to abandon Southern’s
claim. Quite the contrary, at the creditors’ meeting, he expressed some interest in it; he
questioned Southern about it, and he pronounced, “So we have a claim against Rush
Truck Center for selling us a bad truck.” In addition, the claim was not a class claim;
thus, none of the Morlan court’s concerns about the feasibility of having a bankruptcy
9
trustee act as a class representative applied here. Actually, Southern’s claim (if
meritorious) was valuable and thus worth financing. Southern was claiming
approximately $57,500 in compensatory damages; moreover, because his legal theories
included intentional misrepresentation, there was a possibility of punitive damages.
Precisely because Southern never scheduled the claim, presumably his creditors
were never aware of it. He disclosed it orally at the creditors’ meeting, but none of his
creditors was present. There is every reason to suppose that, if they had known about the
claim, they would have wanted the trustee to pursue it. They would not have had to
advance any litigation costs, yet they would have enjoyed any net recovery. Thus, unlike
in Morlan, it is clear, beyond a triable issue of fact, that full compliance with the
Bankruptcy Code’s requirements regarding scheduling and abandonment of claims would
not have been a purely formal exercise.
Next, Southern argues that, under Morlan, Rush lacks standing to assert that he
lacks standing. Again, however, in Morlan, it was crucial that the trustee had stated that
he did intend to abandon Morlan’s claim. The court reasoned that this would have
sufficed for abandonment under common law; all that was lacking was compliance with
the heightened requirements for abandonment imposed by the Bankruptcy Code, which,
the court held, were intended for the protection of creditors and could not be invoked by
noncreditors. Indeed, the Seventh Circuit later characterized Morlan as holding that
“claims formally abandoned by a trustee revert to the debtor even if not scheduled . . . .”
(Pease v. Prod. Workers Union of Chi. & Vicinity Local 707 (7th Cir. 2004) 386 F.3d
10
819, 821, italics added.) Here, by contrast, the trustee never manifested any intent to
abandon Southern’s claims against Rush, formally or informally.
Cases other than Morlan make it clear that a noncreditor can assert the failure to
schedule a claim as a defense to that claim. In First Nat’l Bank v. Lasater (1905) 196
U.S. 115, the United States Supreme Court held that an erstwhile debtor lacks standing to
prosecute an unscheduled (and thus unabandoned) cause of action after the close of his
bankruptcy. (Id. at pp. 118-119.) It did so even though the issue was raised by the
defendant in the action, rather than by any of the debtor’s creditors. (See ibid.) Since the
rule of Lasater was made part of the Bankruptcy Code, defendants have routinely been
allowed to raise the debtor’s lack of standing as a defense. (E.g., Vreugdenhill v.
Navistar Int’l Transp. Corp., supra, 950 F.2d at pp. 525-526.) A California court has
likewise allowed a defendant to assert a former bankruptcy debtor’s lack of standing as a
defense. (M & M Foods, Inc. v. Pacific American Fish Co., Inc., supra, 196 Cal.App.4th
at pp. 558, 564.) Ultimately, this benefits the creditors, because the bankruptcy can be
reopened to allow the trustee to litigate the claim on their behalf. (11 U.S.C. § 350(b);
see, e.g., Kane v. Nat’l Union Fire Ins. Co. (5th Cir. 2008) 535 F.3d 380, 386-388.)
In Stein v. United Artists Corp. (9th Cir. 1982) 691 F.2d 885, the Ninth Circuit
specifically rejected a contention identical to the one that Southern is raising here. It
explained: “The right to sue goes to the essential merits of the claim, as the identity of
the injured party relates directly to the measure of damages and under general standing
principles only the injured party ensures the adversary interest necessary to prosecute the
11
suit. The defendants in the district court were entitled to contend that [the plaintiff]
lacked title to the claim he was asserting.” (Id. at p. 893.)
In our view, Rush has standing to assert Southern’s lack of standing. “Every
action must be prosecuted in the name of the real party in interest . . . .” (Code Civ.
Proc., § 367.) If Southern wins a judgment against Rush, Rush would be exposed to the
risk that Southern’s creditors might reopen the bankruptcy and win a double recovery
against it. (Simpson v. Miller (1907) 7 Cal.App. 248, 254.) Accordingly, Rush has a
very real and pecuniary interest in being sued by the right party.
Morlan pooh-poohed the likelihood of this scenario. The court felt comfortable
that the creditors would not reopen the bankruptcy (although it declined to hold that they
could not). It was more concerned about the apparent windfall to the defendants. It is
true that, if Southern cannot litigate this action (and if the bankruptcy is not reopened),
Rush will enjoy a windfall. However, from the moment Southern filed for bankruptcy,
he could no longer count on being able to litigate his claim against Rush, and he could no
longer count on enjoying the fruits of the claim. The key effect of his failure to schedule
the claim is that it did not revert to him when the bankruptcy was closed. However, he
had no legitimate expectation that, if he did disclose it, it would revert to him. It was
entirely possible that the trustee would prosecute it or, at a minimum, settle it. Indeed,
the more potentially lucrative it was, the more likely it was that it would never revert. If
Southern is allowed to sue Rush anyway, he will enjoy a windfall. And he created the
12
problem by failing to disclose the claim when he had a duty to do so. In this respect,
Rush is an innocent party. Thus, any windfall should go to Rush.
Southern complains that, in this case, the rule that unscheduled property remains
property of the estate is inequitable — indeed, “patently unjust.”
We acknowledge that “bankruptcy courts . . . are courts of equity and ‘appl[y] the
principles and rules of equity jurisprudence.’ [Citations.]” (Young v. United States
(2002) 535 U.S. 43, 50.) However, “whatever equitable powers remain in the bankruptcy
courts must and can only be exercised within the confines of the Bankruptcy Code.”
(Norwest Bank Worthington v. Ahlers (1988) 485 U.S. 197, 206.) The rule that
unscheduled property remains property of the estate has been codified in 11 United States
Code section 554(d), and we are required to follow this federal statutory provision.
We hasten to add that we are not particularly persuaded that the rule operates
inequitably in this case. Southern points out that he did disclose the claim, albeit in oral
testimony at the creditors’ meeting, rather than in writing in his schedules, as required.
He also argues that his failure to amend his schedules was the fault of his bankruptcy
counsel; he characterizes himself as “an innocent debtor.” As we have already discussed,
however, once he filed his bankruptcy, the claim was no longer his to litigate. As
between him and Rush, the equities favor Rush. Thus, it is not inequitable to hold that
Southern no longer has standing to litigate the claim.
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Finally, Southern argues that the trial court erred by failing to give him leave to
amend to substitute the trustee as plaintiff. However, he never requested leave to amend
below.
“[T]he pleadings set the boundaries of the issues to be resolved at summary
judgment. [Citations.] . . . Thus, a plaintiff wishing ‘to rely upon unpleaded theories to
defeat summary judgment’ must move to amend the complaint before the hearing.
[Citations.]” (Oakland Raiders v. National Football League (2005) 131 Cal.App.4th 621,
648, fn. omitted.) Here, Southern did not do so. Hence, we need not consider this issue.
III
DISPOSITION
The judgment is affirmed. Rush is awarded costs on appeal against Southern.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
RICHLI J.
We concur:
HOLLENHORST Acting P. J.
KING J.
14
AI Brief
AI-generated · verify before citing
Holding. A debtor lacks standing to pursue a pre-petition cause of action that was not scheduled in their bankruptcy proceedings, as such claims remain property of the bankruptcy estate and do not automatically revert to the debtor upon the closing of the case.
Issues
Whether a debtor has standing to pursue a cause of action that was not formally scheduled as an asset in their Chapter 7 bankruptcy estate.
Whether a defendant has standing to challenge a plaintiff's lack of standing due to the plaintiff's failure to schedule a claim in bankruptcy.
Whether the trial court erred in failing to grant leave to amend the complaint to substitute the bankruptcy trustee as the plaintiff.
Disposition. Affirmed
Quotations verified verbatim against the opinion
“property not formally scheduled in the bankruptcy proceeding is not abandoned at the close of the bankruptcy proceeding”
“The trustee has standing to litigate it; Southern does not.”