Satten v. Webb

• Decision Date: 14 June 2002
• Docket Number: No. D037375.,D037375.
• Citation: 99 Cal.App.4th 365,121 Cal.Rptr.2d 234
• Court: California Court of Appeals Court of Appeals
• Parties: Dorothy SATTEN, Plaintiff and Appellant, v. Patrick D. WEBB et al., Defendants and Respondents.

121 Cal.Rptr.2d 234

99 Cal.App.4th 365

Dorothy SATTEN, Plaintiff and Appellant, v. Patrick D. WEBB et al., Defendants and Respondents.

No. D037375.

Court of Appeal, Fourth District, Division 1.

June 14, 2002.

Rehearing Denied July 9, 2002.

Review Denied October 2, 2002.^*

Hovey & Kirby, Dean T. Kirby, Jr., and Martin T. McGuinn, San Diego, for Plaintiff and Appellant.

Klinedinst, Fliehman & McKillop, G. William VanDeWeghe, Jr., Kendra J. Hall and Natalie P. Vance, San Diego, for Defendants and Respondents.

HUFFMAN, J.

Plaintiff Dorothy Satten (Satten) appeals the order of dismissal entered against her after a demurrer to her complaint for malicious prosecution damages, brought by defendants and respondents Patrick D. Webb and his law firm, Webb & Carey, APC (collectively Webb), was sustained without leave to amend. The trial court ruled that it lacked jurisdiction to proceed with the malicious prosecution allegations, because they were based upon an underlying action that was within the exclusive jurisdiction of the bankruptcy court, in that it concerned the administration of the bankruptcy estate. The underlying action by James Keenan and Judy Keenan, clients of Webb, was originally commenced in state court on fraud theories, but was removed to bankruptcy court due to the allegations made about the participation of the bankruptcy trustee, as well as Satten, in the alleged fraud. (28 U.S.C. § 1452.) The Keenans' tort theories were that the bankruptcy trustee, along with Satten, acted fraudulently and interfered with prospective economic advantage in reaching a settlement during the administration of the Keenan bankruptcy estate. The bankruptcy court ruled against the Keenans on their fraud allegations.

Accordingly, even though Satten had received a favorable termination to this underlying action against her in the bankruptcy court, the trial court, in ruling on the demurrer, found federal preemption applied to her malicious prosecution action and sustained the demurrer without leave to amend. In making its ruling, the court relied on a line of authority well represented by Pauletto v. Reliance Insurance Co. (1998) 64 Cal.App.4th 597, 75 Cal.Rptr.2d 334 (Pauletto), holding that a party aggrieved by bad faith or malicious filings in bankruptcy court is limited to the remedies provided by the United States Bankruptcy Code (11 U.S.C.) and the Federal Rules of Bankruptcy Procedure. (See, e.g., Fed. Rules Bankr.Proc., rule 9011 providing for sanctions for frivolous filings.)

Satten contends the trial court's jurisdictional ruling was erroneous, because the underlying fraud proceeding in which she received a favorable termination was commenced in state court on state law claims, and only reached bankruptcy court due to removal of the matter by the bankruptcy trustee whose administration of the estate was challenged in the underlying action. She contends that the policies which require a finding of federal preemption of any challenges to an underlying authorized bankruptcy proceeding do not apply to her case, because this underlying action for fraud was not fundamentally based on federal law or specifically of a core bankruptcy character. (See, e.g., Pauletto, supra, 64 Cal.App.4th 597, 75 Cal.Rptr.2d 334.) We agree that this case represents an exception to the normal rule of preemption in the bankruptcy context and reverse the order sustaining the demurrer without leave to amend.

FACTUAL AND PROCEDURAL BACKGROUND

For purposes of analyzing the ruling on demurrer, we take as true the allegations in the complaint. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318, 216 Cal. Rptr. 718, 703 P.2d 58.) This malicious prosecution complaint against Webb and his former clients, James Keenan and Judy Keenan, was preceded by several different stages of state and federal litigation, which we describe in sequence.

1. Original 1994 State Court Action by Keenans.

In 1989, Satten sold the Keenans a one-half partnership interest in The Bridge Motor Inn, a hotel in Oceanside of which Satten was the longtime owner and operator. Satten received a number of promissory notes executed by the Keenans. The Keenans defaulted on the notes and Satten demanded payment.

The Keenans then brought the first state court action (the original action) against Satten, seeking $20 million in damages on the grounds that Satten had fraudulently induced the Keenans to enter into the partnership agreement and had also mismanaged the hotel. Satten crosscomplained for fraud and other theories. (Keenan v. Satten (Super. Ct. San Diego County, 1994, No. N64609).) Eventually, Satten prevailed, obtaining a superior court fraud judgment of over $18 million. The Keenans appealed.

2. Keenans' Chapter 11 Bankruptcy Filing.

In 1996, while the state court appeal was pending, James Keenan filed a Chapter 11 bankruptcy petition. (11 U.S.C. § 301 et seq.); In re James W. Keenan (So.Dist. S.D.Cal, 1996) 201 B.R. 263. Satten filed a claim in the Keenan bankruptcy case based on her judgment for damages. A former bankruptcy judge, Ross M. Pyle, was appointed as bankruptcy trustee. He joined in the state court appeal of Satten's judgment in the original action that had been brought by the Keenans.

Eventually, after competing expert evaluations of the existing judgment were obtained, Satten entered into a settlement with the bankruptcy trustee in which she accepted a $1.95 million general unsecured claim in the bankruptcy case in exchange for assigning her judgment against the Keenans to the bankruptcy trustee. The bankruptcy court approved the settlement (referred to herein as the bankruptcy settlement), and the order was affirmed after Keenan appealed it. The bankruptcy reorganization plan for Keenan was approved. Then, the appeal of Satten's state court judgment against the Keenans was dismissed. (Pyle v. Keenan (May 11, 2000), D025411 [nonpub. opn.].)

3. Underlying Fraud Action in State Court by the Keenans.

James and Judy Keenan then filed the fraud complaint that is the subject of this malicious prosecution action, in superior court, naming Satten as a defendant along with the bankruptcy trustee, Ross Pyle (Keenan v. Satten (Super. Ct. San Diego County, 1998, No. 721828)) (referred to here as the underlying action). The Keenans alleged in this underlying action that the bankruptcy settlement agreement was entered into with the intent to fraudulently deprive the Keenans of their $20 million claim against Satten, arising out of the failed partnership. The Keenans alleged the bankruptcy trustee had breached his fiduciary duty to the bankruptcy estate of James Keenan by liquidating the estate to obtain commissions, and by causing the previous state court appeal of the Satten judgment against the Keenans to be dismissed. Other claims were brought for Satten's and the trustee's alleged intentional interference with prospective economic and contractual advantage.

4. Removal of Fraud Action to Bankruptcy Court.

The bankruptcy trustee, joined by Satten, filed a notice of removal of the underlying action to bankruptcy court. (28 U.S.C. § 1452.)¹ The grounds given for the removal were that the bankruptcy court had retained jurisdiction under the Keenan bankruptcy reorganization plan to adjudicate subsequent disputes among holders of claims or causes of action involving the debtor and the bankruptcy court had jurisdiction over the matter because the Keenans asserted claims arising in or related to the Chapter 11 case. (28 U.S.C. §§ 157(b)(2)(A); 1334(b).)² The trustee argued removal was proper because these claims related to the administration of the estate or the liquidation of the assets of the estate. Satten joined in the request and removal was accomplished.³

Once the fraud action was properly before it, the bankruptcy court heard the trustee's motion for summary judgment of the underlying action by the Keenans, along with Satten's joinder in the motion. (In re James W. Keenan (So.Dist.S.D.Cal, 1996) 201 B.R. 263.) The trustee argued summary judgment in his favor was proper because he was immune from the claims, based on his actions that were all within the scope of his official duties, and that were carried out pursuant to the bankruptcy joint plan of reorganization confirmed by the court. He also argued the claims were barred by res judicata and collateral estoppel due to the effect of previous proceedings.

Satten joined in the summary judgment motion, arguing the same points about res judicata and collateral estoppel, and stating there was no factual basis to support any claims of fraud due to a lack of evidence to show Satten failed to disclose any material facts, or that the Keenans reasonably relied on any representations regarding the settlement agreement. At the hearing on the motion, Satten's attorney represented to the bankruptcy court that she would be seeking sanctions under the bankruptcy rules for the bringing of this frivolous action.⁴

The bankruptcy court's order granting summary judgment first stated that the court had subject matter jurisdiction over the matter under 28 United States Code section 1334, and the matter was a core proceeding in bankruptcy law. (28 U.S.C. § 157(b)(2)(A).)⁵ Summary judgment was granted in favor of both the trustee and Satten on the basis there was no evidence to support any of the Keenan allegations of fraud and breach of fiduciary duty.

This bankruptcy court order was appealed to the district court, which affirmed the order. The district court's order stated that the Keenan complaint did not identify any fraudulent acts by Satten or provide any admissible evidence of fraudulent conduct on her part. These orders are attached as exhibits to the malicious prosecution complaint before us. In addition to appearing in the appellant's appendix as part of the record on appeal, these documents are the subject of an order for judicial notice of the proceedings in bankruptcy court with respect to the summary judgment hearing,...