California Aviation, Inc. v. Leeds

• Decision Date: 23 August 1991
• Docket Number: No. B048101,B048101
• Citation: 284 Cal.Rptr. 687,233 Cal.App.3d 724
• Court: California Court of Appeals Court of Appeals
• Parties: CALIFORNIA AVIATION, INC., Plaintiff and Appellant, v. Arthur LEEDS, et al., Defendants and Respondents.

Page 687

284 Cal.Rptr. 687

233 Cal.App.3d 724

CALIFORNIA AVIATION, INC., Plaintiff and Appellant, v. Arthur LEEDS, et al., Defendants and Respondents.

No. B048101.

Court of Appeal, Second District, Division 1, California.

Aug. 23, 1991.

As Modified Sept. 20, 1991.

Davis & Thomas, Thomas D. Thomas and Charlotte E. Costan, Los Angeles, for plaintiff and appellant.

Robie & Matthai, Kyle Kveton, Pamela E. Dunn, Los Angeles, Kozel & Rady and Timothy J. Kozel, La Jolla, for defendants and respondents.

ORTEGA, Associate Justice.

Plaintiff California Aviation, Inc. (CAI) appeals from the judgment dismissing its case entered following the trial court's grant of defendant Arthur Leeds' (Leeds) summary judgment motion. CAI filed a Chapter 11 bankruptcy petition, and later sued Leeds, an attorney, for malpractice allegedly arising from his representation of CAI in an earlier case. Leeds successfully argued that the statute of limitations barred CAI's claim. We conclude the trial court erred in applying the one-year legal malpractice state limitations statute (Code Civ.Proc., § 340.6, subd. (a)) rather than the two-year federal bankruptcy limitations extension statute (11 U.S.C. § 108(a)). We reverse the judgment.

FACTS

In 1966, the City of Santa Monica (City) leased portions of Santa Monica Airport to CAI's corporate predecessor to provide fuel, airplane accessories, maintenance, hangars, and other support services to aircraft using the airport. CAI contracted with C & K Aviation, Inc. (C & K) to provide management services. Later, the City decided to develop portions of CAI's leasehold and move CAI's operations to other airport property. Disputes arose regarding whether CAI's contract with C & K constituted a prohibited sublease, and whether CAI was entitled to additional development rights. The lease contained a provision for attorneys' fees.

In 1979, CAI sued the City for, among other causes of action, breach of contract, inverse condemnation, and tortious interference with easement. CAI hired Leeds to prosecute its case. Settlement negotiations stalled and the City moved for summary adjudication of issues. Leeds failed to file timely written opposition, although the trial court considered his late written opposition and he orally opposed the motion. The motion was granted on February 3, 1986. On the same day, in a letter to Leeds, the City offered "to waive the attorneys' fees in exchange for the dismissal, with prejudice, of [CAI]'s complaint.... [p] We expect that this settlement offer will be conveyed to your client." CAI claims, but Leeds denies, that Leeds did not convey the offer to CAI. Leeds failed to file written opposition to the City's later summary judgment motion, although he orally opposed it. On August 12, 1986, the motion was granted and, on September 8, 1986, the case was dismissed. Leeds filed a timely notice of appeal. The City claimed over $230,000 in legal fees pursuant to the attorneys' fees lease provision. On December 11, 1986, CAI filed a Chapter 11 bankruptcy petition, and, on the same day, substituted new counsel for Leeds in its dismissed state court action. The appeal was dismissed on January 30, 1987.

In a related case, on May 24, 1985, the City sued CAI for equitable relief, seeking, among other things, a declaration that CAI's contract with C & K was a prohibited sublease. CAI hired Leeds to represent it in this second case. On June 17, 1986, CAI substituted a second law firm for Leeds in the second case. During the summer of 1986, an attorney at the second law firm told CAI that Leeds' response to the City's summary judgment motion in the first case was inadequate. The second case was stayed by the bankruptcy proceedings. CAI does not contend that Leeds committed malpractice in his handling of the second case.

CAI also discussed a possible legal malpractice action against Leeds with its new counsel in the first case during November 1986, before the December 11, 1986, attorney substitution. The bankruptcy petition stayed the City's motion for attorneys' fees in the first action, but the bankruptcy court lifted the stay on March 18, 1987. CAI and the City eventually settled the attorneys' fees dispute. Sometime between January and April of 1987, CAI's new counsel in the first case told CAI that Leeds' summary judgment opposition was inadequate. By March 3, 1987, CAI admittedly knew it had a claim against Leeds. In April of 1987, after receiving the files from Leeds, CAI discovered the February 3, 1986, settlement offer letter from the City to Leeds. On February 10, 1988, CAI sued Leeds for legal malpractice. On February 24, 1988, the bankruptcy court, with the trustee's consent, granted CAI's application to employ special counsel to represent it and pursue its case against Leeds. On February 16, 1989, the bankruptcy court granted the trustee's motion to convert CAI's bankruptcy petition from a Chapter 11 to a Chapter 7 petition. The Chapter 7 trustee later specifically authorized CAI's counsel to pursue the case and this appeal.

During the October 27, 1989, hearing on Leeds' summary judgment motion, the trial court asked Leeds' counsel: "Isn't that really a disputed issue, whether or not there was knowledge?" Leeds' counsel responded that any "dispute" was created only by inconsistencies between CAI's earlier discovery responses and its declarations opposing Leeds' summary judgment motion. After hearing further argument from both parties, the trial court granted summary judgment. The order granting summary judgment and the judgment dismissing CAI's case were entered on December 1, 1989. On February 2, 1990, the trial court denied CAI's new trial motion, stating "as far as I'm concerned, it's a one-year statute of limitations...."

ISSUES

Leeds contends (I) CAI's appeal should be dismissed because CAI's conversion from a Chapter 11 to a Chapter 7 bankruptcy petitioner deprived it of standing to pursue its appeal. CAI contends the trial court erred in granting Leeds summary judgment because (II) the federal Bankruptcy Act's two-year statute of limitations for Chapter 11 petitioners, rather than the one-year state statute relied on by the trial court, controls this case, and CAI filed its case within two years of discovery of Leeds' alleged malpractice; and (III) even if the one-year state statute of limitations applies, CAI filed this case within a year of discovering Leeds' alleged malpractice.

DISCUSSION

I

Leeds' contention that CAI's conversion from a Chapter 11 "debtor in possession" to a Chapter 7 "debtor" deprived it of standing to appeal lacks merit. Leeds does not dispute that CAI had standing to pursue its case against him as a Chapter 11 debtor in possession. "With or without court approval, the trustee or debtor in possession may prosecute or may enter an appearance and defend any pending action or proceeding by or against the debtor, or commence and prosecute any action or proceeding in behalf of the estate before any tribunal." (Fed.Rules Bankr., rule 6009, 11 U.S.C., italics added.) Chapter 11 debtors in possession have such standing with or without bankruptcy court approval because they retain possession and control of their assets as part of their bankruptcy court-supervised plans to revive their businesses and satisfy their creditors. However, the bankruptcy court supervises the liquidation of failed Chapter 7 debtors, who can begin or maintain lawsuits in their own name only with the bankruptcy court's and trustee's approval. Leeds ignores the bankruptcy court's order, concurred in by the Chapter 11 trustee, permitting CAI to pursue this case, and the Chapter 7 trustee's express authorization, after CAI's bankruptcy petition was converted to a Chapter 7 proceeding, for CAI to proceed with the case and this appeal.

Leeds then correctly notes that, "[u]pon the filing of a petition for bankruptcy all of the debtor's assets, including any interest in a cause of action, pass to the trustee in bankruptcy. [Citations.] An appeal is a continuation of a cause of action. The action 'is deemed to be pending from the time of its commencement until its final determination upon appeal, or until the time for appeal has passed, ...' [Citations.] [p] ... [p] Also, absent an 'abandonment,' only the trustee in bankruptcy can represent a debtor's interests in any litigation by or against the debtor. [Citation.] Nothing before us indicates that when [the debtor] decided to pursue an appeal on its own behalf the trustee had abandoned its right to file an appeal from the superior court judgment in this case. To prove abandonment, the debtor must establish 'at least the trustee's intention' to do so. [Citation.] Also, leave of the bankruptcy court is required before there can be any abandonment by the trustee. [Citation.] Neither of these two requirements was met here." (People v. Kings Point Corp. (1986) 188 Cal.App.3d 544, 548-549, 233 Cal.Rptr. 227; see Vreugdenhil v. Hoekstra (8th Cir.1985) 773 F.2d 213, 215-216; Reichert v. General Ins. Co. (1968) 68 Cal.2d 822, 829-830, 69 Cal.Rptr. 321, 442 P.2d 377.) Leeds concludes that CAI lacks standing because only the trustee can pursue the appeal.

However, in all the cited cases there were no express bankruptcy court orders and trustee approval authorizing the debtors to proceed with the litigation. In People v. Kings Point Corp., supra, 188 Cal.App.3d at pp. 548-549, 233 Cal.Rptr. 227, the trustee actively intervened in the underlying lawsuit and stipulated to certain facts and a judgment. Thus, the court denied the debtor, as opposed to the trustee, standing to pursue an appeal. The cited language in Vreugdenhil v. Hoekstra, supra, 773 F.2d 213, is dictum, as the court expressly declined to determine the debtor's standing to proceed without the trustee. (Id. at p. 216.) (Another federal circuit disagrees with this dictum (see Smith v. State Farm Fire and Cas. Co. (5th Cir.1980) 633 F.2d 401, 404-406).) Thus, we reject...