Gottlieb v. Kest

• Decision Date: 10 July 2006
• Docket Number: No. B178729.,B178729.
• Citation: 46 Cal.Rptr.3d 7,141 Cal.App.4th 110
• Court: California Court of Appeals Court of Appeals
• Parties: Richard K. GOTTLIEB, Plaintiff, Cross-defendant and Appellant, v. Michael KEST, Individually and as Trustee, etc., Defendant, Cross-complainant and Respondent.

46 Cal.Rptr.3d 7

141 Cal.App.4th 110

Richard K. GOTTLIEB, Plaintiff, Cross-defendant and Appellant, v. Michael KEST, Individually and as Trustee, etc., Defendant, Cross-complainant and Respondent.

No. B178729.

Court of Appeal, Second District, Division 1.

July 10, 2006.

Tesser & Ruttenberg and Brian M. Grossman, Los Angeles, for Plaintiff, Cross-defendant and Appellant.

Raymond L. Asher, Los Angeles, for Defendant, Cross-complainant and Respondent.

MALLANO, J.

In this action, plaintiff alleged that defendant, a coparticipant in a real estate venture, breached the parties' agreement to fund the project, causing plaintiff to lose the deal. Defendant filed a cross-complaint against plaintiff and plaintiff's companies, contending they had fraudulently obtained funds from him to pursue the deal. Plaintiff answered the cross-complaint. But plaintiff's companies, which had no assets, defaulted. The ensuing default judgment recited that plaintiff had personally committed acts of fraud in securing funds from defendant.

The trial court granted summary judgment in favor of defendant on the complaint based on the doctrine of judicial estoppel, which protects the integrity of the judicial process by preventing a party from taking inconsistent positions in separate cases. In a prior bankruptcy case, plaintiff did not list any legal claims as assets, an omission seemingly at odds with the filing of this action. We conclude that, in accordance with the principles of judicial estoppel, the summary judgment must be reversed because the bankruptcy court did not adopt or accept the truth of plaintiff's omission, eliminating any threat to judicial integrity.

On the cross-complaint, the trial court entered judgment against plaintiff based on the doctrine of collateral estoppel, which precludes a party from relitigating issues actually decided in a prior proceeding. The trial court reasoned that the default judgment entered against plaintiff's companies precluded him from litigating his individual liability because he was in privity with them. Although a default judgment may have collateral estoppel effect in certain circumstances, there was no privity here because plaintiff's interests in defending the cross-complaint differed significantly from the interests of his companies, namely, the companies could not afford counsel and had no assets. Accordingly, we reverse the judgment on the pleadings.

I BACKGROUND

On March 2, 2001, plaintiff Richard Gottlieb filed this action against Michael Kest, individually and as the trustee of the Kest Children's Trust (Trust). Kest later filed a cross-complaint against Gottlieb and others.

A. The Complaint

On June 19, 1998, William Stoll entered into an agreement to buy 146 acres of raw land located in Las Vegas, Nevada, from Nevada Ready Mix Corporation. The purchase price for the property, known as the "Quarry," was around $5.5 million.

In October 1998, Gottlieb negotiated with Stoll to acquire Stoll's rights to the Quarry. Gottlieb formed a new company, RKG Acquisition, LLC (RKG), for that purpose. On November 4, 1998, Stoll and RKG entered into a written agreement conveying Stoll's rights in the Quarry to RKG. RKG negotiated a separate agreement with a different property owner to purchase a four-acre parcel adjacent to the Quarry.

In January 1999, Gottlieb had discussions with Kest to obtain funds to buy the Quarry. Kest indicated the Trust might be interested in providing the money. On or about January 20, 1999, the Trust loaned RKG and Gottlieb $125,000 in accordance with the terms of a promissory note. RKG and Gottlieb were to repay the loan, plus an additional $50,000, by March 22, 1999.

In February 1999, Gottlieb asked Kest to invest an additional $375,000 in the project. They orally agreed that if the Trust paid the additional amount: (1) the Trust would become an equal partner with Gottlieb in the Quarry project, each having a 50 percent ownership interest; (2) the Trust would provide 80 percent of the funds needed to proceed with the project — a minimum commitment of $1.3 million — and Gottlieb would provide the remaining 20 percent; and (3) the same percentages would govern the sharing of initial profits until each party recouped its investment, after which the profits would be distributed equally. This oral agreement, although considered by the parties to be binding, was to be memorialized in a written document. Before that was done, the Trust advanced the additional funds to RKG and Gottlieb.

On or about March 2, 1999, RKG and the Trust executed an "Assignment and Assumption of Assignment and Assumption of Purchase and Sale Agreement" (Assignment Agreement), which characterized the Trust's $125,000 and $375,000 payments as loans and assigned the Trust a 50 percent security interest in RKG's right to purchase the Quarry. The Assignment Agreement extended the maturity date of the promissory note to April 15, 1999, and recited that RKG and Gottlieb were jointly and severally liable on both loans. It further stated that if the parties did not reach an agreement by April 15, 1999, regarding how to proceed with the Quarry venture, the Trust could serve written notice within three days, either requiring repayment of the $375,000 loan or realizing on its 50 percent security interest.

Thereafter, the Trust made three more payments to RKG and Gottlieb: $150,000 on March 25, 1999; $125,000 on April 14, 1999; and $25,000 on April 26, 1999. Each payment was acknowledged by a written amendment to the Assignment Agreement, reflecting that the "$375,000 Loan is hereby revised to include the additional [payment]." The amendments also provided that the Assignment Agreement, except as so modified, was to remain in effect. With the last of these payments, the Trust had paid RKG and Gottlieb a total of $800,000, consisting of the amounts paid under the promissory note and the Assignment Agreement.

From April 1999, continuing into the summer of 1999, Gottlieb and the Trust exchanged documents that confirmed the terms of the oral agreement, but they never signed anything formal. The Trust did not give notice under the Assignment Agreement that the $375,000 loan (as increased by amendment) was to be repaid. As a result, Gottlieb believed that the Trust was his 50 percent partner in the Quarry project notwithstanding the lack of formal documentation.

During the summer of 1999, Gottlieb requested several times that the Trust advance additional funds for the project. In or about August 1999, the Trust refused to honor its agreement to advance up to 80 percent of the necessary funds. The loss of the project became imminent.

On August 31, 1999, RKG filed a bankruptcy petition under "Chapter 11" (11 U.S.C. § 1101 et seq.) in the United States Bankruptcy Court for the Central District of California (In re RKG Acquisition LLC (U.S.Bankr.Ct., C.D.Cal., 1999, No. LA-99-42501-ER)). RKG instituted the bankruptcy proceedings in an attempt to gain time to obtain the funds needed to preserve the Quarry project. Because the Trust did not provide adequate funds for the project, and RKG was not able to secure funds elsewhere, RKG's rights in the Quarry eventually lapsed.

Meanwhile, Kest and Stoll had been negotiating directly with each other. They had agreed that Kest would not provide RKG with the promised funds, and, upon RKG's loss of the Quarry, Kest would enter into a separate deal with Stoll to acquire the property. After RKG's rights in the project lapsed, Kest entered into an agreement with Stoll to purchase an interest in the Quarry without RKG's participation. Kest acquired either actual or beneficial title to the Quarry or the right to receive proceeds from the sale of the Quarry. He ultimately received profits in excess of $4 million from the project.

As stated, Gottlieb filed the complaint on March 2, 2001. He alleged that, by assignment, he held all of RKG's rights, title, and interest in the Quarry. The complaint contained five causes of action: breach of contract, fraud, unjust enrichment, resulting trust, and constructive trust. The contract claim, against Kest in his capacity as trustee, alleged that the Trust had breached the oral agreement to provide 80 percent of the Quarry funds and the minimum $1.3 million. The fraud claim, against Kest individually and as trustee, alleged that Kest entered into the oral agreement on behalf of the Trust without intending to perform it. The claim for unjust enrichment, also against Kest in both capacities, alleged that the Trust had improperly acquired the Quarry to Gottlieb's exclusion. The claims for resulting trust and constructive trust sought to protect Gottlieb's 50 percent share of the proceeds from the project. Gottlieb sought to recover lost profits, estimated to exceed $2 million.

On April 24, 2001, Kest, individually and as trustee, filed an answer to the complaint, generally denying all allegations. (See Code Civ. Proc., § 431.30, subd. (d).)

B. The Cross-complaint

Kest filed a cross-complaint, on behalf of himself and the Trust, against Gottlieb, RKG, and RKG Holdings, Inc. (RKG Inc.), alleging four causes of action for fraud (Civ.Code, § 1710, pars. 1-4), among others.

The cross-complaint alleged that Gottlieb, individually and on behalf of his two companies, had obtained $800,000 from the Trust by falsely telling Kest: (1) RKG had already obtained the necessary funding to close escrow on the Quarry but needed cash to extend the closing deadline; (2) Gottlieb had invested $325,000 in the deal; (3) Gottlieb would provide proof of his $325,000 investment; and (4) all sums advanced by the Trust would be used in connection with the Quarry project. Kest sued RKG Inc., the holding company, because the funds loaned under the Assignment Agreement were paid directly to it.

Gottlieb filed an answer to the cross-complaint, generally denying all allegations. (See Code Civ. Proc., § 431.30, subd. (d).) RKG and RKG Inc. did not file a...