McClincy Bros. Floor Covering Inc. v. Zubel
| Decision Date | 05 August 2019 |
| Docket Number | No. 78283-5-I,78283-5-I |
| Parties | McCLINCY BROTHERS FLOOR COVERING INC. and TIM McCLINCY, Appellants, v. ERIC ZUBEL and his marital community; and ERIC ZUBEL, P.C., Respondents. |
| Court | Washington Court of Appeals |
UNPUBLISHED OPINION
SMITH, J. — As a general rule, if a bankruptcy debtor fails to report a cause of action in bankruptcy and then obtains a discharge or confirmation, a trial court may apply judicial estoppel to bar the action. In 2017, McClincy Brothers Floor Covering Inc. (company) and its owner, Tim McClincy (together the McClincy parties) sued their former attorney, Eric Zubel, for malpractice related to Zubel's representation of the McClincy parties in a 2013 lawsuit. Because McClincy did not disclose his malpractice claims during his intervening bankruptcy and because he has not established that any exception to the general rule applies here, the trial court did not err when it dismissed McClincy's claims. But the company is a separate legal entity from McClincy, and Zubel has not established that the company's separate legal entity status should be ignored. Therefore, the trial court did err by dismissing the company's claims against Zubel solely because McClincy is the company's sole owner. We affirm in part, reverse in part, and remand for further proceedings.
FACTS
In 2013, the company sued its former clients, Trish and Collin Carpenter, and a former project manager, Randall Brooks (underlying lawsuit). The Carpenters filed a third party complaint against McClincy. Zubel represented both the company and McClincy in the underlying lawsuit until September 2014, when the McClincy parties terminated Zubel and hired a new attorney.
Brooks and the Carpenters prevailed in the underlying lawsuit. Specifically, the court dismissed the company's claims in their entirety and entered judgment against the McClincy parties in February 2015. Some components of the judgment were entered against the company and McClincy individually, while others were entered against the company and McClincy jointly and severally.
The McClincy parties appealed the judgment to this court. While that appeal was pending, and after attempts to negotiate a stay of the judgment were unsuccessful, McClincy (but not the company) filed a voluntary chapter 11 bankruptcy in January 2016. In the section of McClincy's bankruptcy schedules asking whether he had any "[c]laims against third parties, whether or not you have filed a lawsuit or made a demand for payment," McClincy responded no. McClincy also responded no to the section of his schedules directing him to list any "[o]ther contingent and unliquidated claims of every nature, including counterclaims of the debtor and rights to set off claims." McClincy later amended his schedules to list the then-pending appeal of the underlying lawsuit as well as a "Bad Faith/Insurance Coverage Claim." But his amended schedules stillresponded no when asked to list any other "contingent and unliquidated claims of every nature, including counterclaims . . . and rights to set off claims."
In his schedule of creditors with unsecured claims, McClincy listed Zubel's claim for fees arising out of the underlying lawsuit and indicated that the claim was disputed.1 Zubel timely filed a proof of claim on March 4, 2016, indicating that the amount of his claim as of that date was $96,954.24. McClincy did not object to Zubel's proof of claim.
On April 28, 2016, McClincy filed a First Amended Disclosure Statement (disclosure statement) and a proposed First Amended Plan of Reorganization (plan). The purpose of the disclosure statement was to explain the proposed plan and provide creditors with material needed to decide whether to vote to accept the plan. The disclosure statement explained how the proposed plan classified each creditor's claim into 1 of 10 classes. Zubel's claim was classified as part of class 10, the "Allowed General Unsecured Claims." The disclosure statement also summarized how the claims within each class would be treated under the proposed plan and whether each class would be impaired or unimpaired by the plan.2 As relevant to Zubel's claim, class 10 claims were impaired under the proposed plan. Class 8, which consisted solely of the Carpenters' and Brooks' claims arising from the judgment in the underlyinglawsuit, was the only other impaired class.
Class 10, including Zubel, voted to accept the proposed plan, but class 8 voted to reject it. Objections to confirmation of the plan were later resolved in a Second Amended Plan of Reorganization, and on June 29, 2016, the bankruptcy court confirmed that plan. The bankruptcy court later approved certain postconfirmation modifications to the plan and confirmed a Fourth Amended Plan of Reorganization (confirmed plan).
On July 21, 2017, the McClincy parties filed this malpractice lawsuit against Zubel. Zubel moved for summary judgment, arguing that the McClincy parties' claims were barred (1) by judicial estoppel because McClincy did not disclose them as potential assets in his bankruptcy case and (2) by res judicata because McClincy did not object to Zubel's proof of claim.
The McClincy parties opposed the motion, arguing among other things that (1) Zubel failed to establish that the elements of judicial estoppel had been satisfied; (2) Zubel's judicial estoppel theory did not apply to chapter 11, as opposed to chapter 7, bankruptcy cases; (3) judicial estoppel could not apply to the company; (4) res judicata was inapplicable because McClincy marked Zubel's claim as "disputed" in his bankruptcy schedules; and (5) the trial court should impose CR 11 sanctions against Zubel's counsel for filing "a summary judgment motion with no evidence and no authority." In reply, Zubel submitted a declaration from Charles Robinson, a bankruptcy attorney who opined among other things that McClincy could not have obtained plan confirmation without Zubel's vote. Additionally, Zubel argued for the first time in his reply thatbecause McClincy did not "specifically and unequivocally" retain the right under the confirmed plan to pursue his malpractice claim against Zubel, McClincy lacked standing to bring the claim, and the trial court lacked jurisdiction to hear it.
The trial court granted Zubel's motion for summary judgment. The McClincy parties then moved for reconsideration. They argued that the trial court erred by considering the Robinson declaration and reinforced their arguments regarding judicial estoppel and res judicata. The trial court denied reconsideration but indicated in its order that it did not consider Robinson's opinion that McClincy lacked standing. The McClincy parties appeal.
ANALYSIS
Judicial Estoppel of McClincy's Claims
The McClincy parties argue that the trial court erred by dismissing McClincy's claims on judicial estoppel grounds. We disagree.
"'Judicial estoppel is an equitable doctrine that precludes a party from asserting one position in a court proceeding and later seeking an advantage by taking a clearly inconsistent position.'" Arkison v. Ethan Allen, Inc., 160 Wn.2d 535, 538, 160 P.3d 13 (2007) (quoting Bartley-Williams v. Kendall, 134 Wn. App. 95, 98, 138 P.3d 1103 (2006)). The doctrine is not designed to protect litigants. Chonah v. Coastal Vills. Pollock, LLC, 5 Wn. App. 2d 139, 147, 425 P.3d 895 (2018), review denied, 192 Wn.2d 1012 (2019). Rather, "[t]he doctrine seeks 'to preserve respect for judicial proceedings,' and 'to avoid inconsistency, duplicity, and . . . waste of time.'" Arkison, 160 Wn.2d at 538 (alterations in original) (internal quotation marks omitted) (quoting Cunningham v. Reliable ConcretePumping, Inc., 126 Wn. App. 222, 225, 108 P.3d 147 (2005)).
In Arkison, our Supreme Court set forth the following three factors to "guide a trial court's determination of whether to apply the judicial estoppel doctrine":
(1) whether "a party's later position" is "clearly inconsistent with its earlier position"; (2) whether "judicial acceptance of an inconsistent position in a later proceeding would create 'the perception that either the first or the second court was misled'"; and (3) "whether the party seeking to assert an inconsistent position would derive an unfair advantage or impose an unfair detriment on the opposing party if not estopped."
Arkison, 160 Wn.2d at 538-39 (quoting New Hampshire v. Maine, 532 U.S. 742, 750-51, 121 S. Ct. 1808, 149 L. Ed. 2d 968 (2001)).
The Arkison factors are not an "'exhaustive formula,'" and additional considerations may guide a court's decision whether to apply the judicial estoppel doctrine. Arkison, 160 Wn.2d at 539 (quoting New Hampshire, 532 U.S. at 751). For example, "[a]pplication of the doctrine may be inappropriate 'when a party's prior position was based on inadvertence or mistake.'" Arkison, 160 Wn.2d at 539 (internal quotation marks omitted) (quoting New Hampshire, 532 U.S. at 753). Furthermore, "[a]s a general rule, if a debtor in a bankruptcy proceeding fails to report a cause of action and obtains a discharge or confirmation, a trial court may apply judicial estoppel to bar the action." Arp v. Riley, 192 Wn. App. 85, 92, 366 P.3d 946 (2015). "This prevents a debtor from protecting the asset from creditors by representing to the bankruptcy court that no claim exists and then asserting in another court that the claim does exist." Arp, 192 Wn. App. at 92.
In short, judicial estoppel is flexible and fact-based. Chonah, 5 Wn. App. 2d at 148. "[C]ourts must apply [it] at their own discretion; they are not bound to apply it but rather must determine on a case-by-case basis if applying the doctrine is appropriate." Arp, 192 Wn. App. at 92. To that end, we review a trial court's decision to apply judicial estoppel for abuse of discretion. Miller v. Campbell, 164 Wn.2d 529, 536, 192 P.3d 352 (2008). "A decision constitutes an abuse of discretion when it is manifestly unreasonable or based on untenable grounds or reasons." Gosney v. Fireman's Fund Ins. Co., 3 Wn. App. 2d...
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