Otte v. Naviscent, LLC, Lead Case No. 19-cv-07898-CRB

• Decision Date: 07 January 2021
• Docket Number: Case No. 20-cv-03144-CRB,Lead Case No. 19-cv-07898-CRB,Consolidated with Case No. 19-cv-08139-CRB
• Citation: 624 B.R. 883
• Court: U.S. District Court — Northern District of California
• Parties: Michael OTTE, Appellant, v. NAVISCENT, LLC, Appellee; Leeanna Martinez, Appellant, v. Naviscent, LLC, Appellee

624 B.R. 883

Michael OTTE, Appellant,

v.NAVISCENT, LLC, Appellee;

Leeanna Martinez, Appellant,

v.Naviscent, LLC, Appellee;

Lead Case No. 19-cv-07898-CRB

Consolidated with Case No. 19-cv-08139-CRB

Case No. 20-cv-03144-CRB

United States District Court, N.D. California.

Signed January 7, 2021

John DiNapoli, DiNapoli & Sibley, Ten Almaden Boulevard, Suite 1250, Steven Jude Sibley, Sibley Law Group, P.O. Box 8724, San Jose, CA, for Appellant.

Robert Glenn Harris, Binder and Malter, LLC, 2775 Park Avenue, Santa Clara, CA, Daphne C. Lin, Trump, Alioto, Trump & Prescott, LLP, 2201 Walnut Ave. Ste. 290, Fremont, CA, for Defendant.

Brent David Meyer, Meyer Law Group LLP, 268 Bush Street, #3639, San Francisco, CA, for Interested Party.

ORDER RE BANKRUPTCY APPEALS

CHARLES R. BREYER, United States District Judge

Before the Court are two appeals from the bankruptcy court in a case involving an embezzling bookkeeper and two of her victims.¹

I. BACKGROUND

A. Embezzlement

Since at least 2006, Appellant and debtor Leeanna Martinez ("Martinez") worked as an independent contractor, performing bookkeeping services for several clients. Mem. Dispo. After Trial (hereinafter "Trial Order") (dkt. 1-3) at 3. One of Martinez's clients was Appellee Naviscent, LLC ("Naviscent"), a California consulting company that specializes in marketing research and user interface design. Martinez also performed bookkeeping services for Appellant Michael Otte ("Otte"). Id.

In March 2018, Otte discovered that Martinez had embezzled approximately $38,000 from him. Id. After he confronted Martinez and requested more information to determine his losses, Otte contacted Martinez's other clients, including Naviscent CEO George Papazian, to inform them of Martinez's embezzlement. Id. Naviscent began its own investigation into Martinez. Id. In a meeting with Naviscent representatives and her husband, Martinez admitted to embezzling from Naviscent. Id. Otte pursued settlement efforts with Martinez. Id. After failed efforts to settle, Naviscent pursued a state court action against Martinez. Otte Brief (dkt. 41) at 8–9.

B. Naviscent v. Martinez – State Court Action

In April 2018, Naviscent sued Martinez in Santa Clara Superior Court. Naviscent Brief re Otte (dkt. 49) at 8. Naviscent also filed an ex parte application for a right to attach order and writ of attachment. Id. Naviscent sought a temporary protective order in the alternative. Id. The court denied Naviscent's ex parte application and converted it to a noticed motion for right to attach order ("Writ Application"). Id. On April 24, 2018, the court issued a Temporary Protective Order ("TPO"), which prohibited Martinez from transferring any interest in any of her real or personal property. Id. When it issued the TPO, the court did not require Naviscent to post a bond.² Naviscent Brief re Martinez (dkt. 47) at 7. Naviscent served Martinez with the TPO and other relevant documents. Id. On May 3, 2018, Naviscent recorded a lis pendens, which notifies the public of the TPO lien. Id. At Martinez's request, the court continued the hearing on Naviscent's writ application to June 19, 2018 and extended the TPO. Id. at 9. Before the hearing, Naviscent learned that Martinez and Otte entered a settlement agreement and that Martinez executed a promissory note and deed of trust encumbering her home to Otte. Id. Naviscent filed an ex parte application for an order to show cause re contempt for Martinez's violation of the TPO. Id.

Martinez requested a further continuance of the hearing on the writ application and did not challenge the validity of the TPO before or during the hearing. Naviscent Brief re Martinez at 7– 8. On June 28, 2018, the court granted Naviscent's right to attach order ("RTAO") and issued a writ of attachment ("Writ"). Id. Naviscent did not post an undertaking because the RTAO did not require it to.³ Id. at 10. The Writ was served and recorded on June 29,⁴ 2018. Id.

C. Otte & Martinez Settlement

On April 30, 2018, shortly after Naviscent filed its complaint against Martinez, Otte and Martinez reached a settlement agreement. Otte Brief at 10. The agreement required Martinez to pay Otte $300,000 in the form of a promissory note and a deed of trust against her home. Id. The deed of trust was recorded with the county on May 16, 2018—only a few weeks after Naviscent obtained a TPO against Martinez. Id.

Otte contends that, at the time he signed the settlement agreement, he reviewed a title report for the Martinez property that did not indicate any TPOs, writs, or lis pendens in favor of Naviscent. Id. at 10–11. Otte also maintains that he learned of Naviscent's state court action against Martinez only after he signed the settlement agreement with Martinez. Id. at 10. Additionally, Otte states that he did not know of Naviscent's TPO or Writ against Martinez until May 31, 2018—almost two weeks after Otte recorded the deed of trust against Martinez's property. Id. at 11.

D. Bankruptcy Court Proceedings

Martinez filed for Chapter 13 bankruptcy on August 22, 2018. Naviscent Brief re Otte at 10. Judge M. Elaine Hammond presided over the bankruptcy proceedings in this case. Martinez Brief (dkt. 40) at 1.

1. Proofs of Claim

Naviscent and Otte filed claims against Martinez's estate on October 9, 2018 and September 25, 2018, respectively. Naviscent Brief re Otte at 10. Naviscent retained an accounting firm to compute its claim based on the amount of money that Martinez embezzled from Naviscent. Otte Brief at 14. Naviscent's initial claim was for $279,919.54 plus prejudgment interest and attorneys' fees. Id. On June 21, 2019, Naviscent filed an amended proof of claim which sought to recover a larger amount—$734,000.⁵ Id. at 15.

Otte based his claim on the settlement agreement, promissory note, and deed of trust. Id.

2. Adversary Proceedings

a. Naviscent v. Otte

On November 13, 2018, Naviscent filed an adversary proceeding in bankruptcy court against Otte, and sought a declaration that: (1) Otte's deed of trust was invalid; and (2) Naviscent's TPO had priority over Otte's deed of trust.⁶ Otte Brief at 12. Naviscent later amended its complaint to add causes of action for avoidance of Otte's deed of trust and actual and constructive fraud. Id.; Naviscent Brief re Otte at 13.

On March 19, 2019, Otte filed an adversary proceeding against Naviscent, seeking declaratory relief, and alleging that: (1) Naviscent's TPO and Writ were void; (2) Naviscent's claim, if it existed, was subordinate to Otte's deed of trust; and (3) Naviscent had failed to establish the amount of its claim against Martinez. Otte Brief at 12. Otte argued that Naviscent did not qualify for a Writ, the state court extended the TPO without noticed motions, and Naviscent did not post an undertaking. Id. Naviscent asserted a variety of affirmative defenses and argued that Otte's settlement agreement, promissory note, and deed of trust were unenforceable. Id.

The bankruptcy court consolidated the two adversary proceedings for trial and appeal. Otte Brief at 12.

b. Martinez v. Naviscent

On December 27, 2018, Martinez filed an adversary proceeding against Naviscent, alleging for the first time that Naviscent's TPO and Writ were void because it did not post an undertaking. Naviscent Brief re Otte at 10. On March 5, 2019, the court denied Martinez's motion for summary judgment on that claim and held that the Writ was voidable but not void.⁷ Id.; Order on MSJ (dkt. 1-3) Ex. B at 36.

Martinez then moved to alter or amend the order denying summary judgment. Mem. Dec. re Mot. to Alter or Amend (dkt. 1-3) Ex. C at 41. Both parties moved for relief from the stay⁸ to allow the state court to make further findings regarding the validity of the TPO and Writ. Id. At an initial hearing on Martinez's motion to alter or amend the judgment, the court determined that it could resolve the question of whether Naviscent's Writ remained valid, and directed the parties to file supplemental briefing on that issue as part of the motion to alter or amend the judgment. Id. Judge Hammond also invited Otte and Rene Martinez, who were parties in interest but not parties to the adversary proceeding, to file briefs on the motion to alter or amend. See Naviscent Brief re Otte at 12. Otte did not file a brief. See Trial Order at 6. Because the court determined that the issue was properly before the bankruptcy court, it denied the parties' requests for stay relief. Id.

In a memorandum decision denying Martinez's motion to alter or amend the judgment, the court on September 6, 2019 affirmed its prior ruling that Naviscent's TPO and Writ were voidable, not void, and held that the doctrine of laches barred Martinez from voiding the TPO and Writ. Id.; Mem. Dec. on Mot. to Alter or Amend Ex. C at 41. This decision was binding on all parties, including Otte. See Otte Brief at 13.

3. Naviscent & Otte - Consolidated Trial

The bankruptcy court consolidated the adversary proceedings between Naviscent and Otte for trial. Otte Brief at 13.

a. Pre-trial Issues

At the pretrial conference, Otte challenged Naviscent's expert report, which contained "heavily-or completely-redacted invoices and communications." See Naviscent Brief re Otte at 13; Otte Brief at 13–14. On June 19, 2019, the court issued a discovery order which: (1) required Naviscent to verify that only one ATM card was relevant to its claim against Martinez; and (2) allowed Naviscent to produce redacted documents, without a privilege log, if those documents "pertain[ed] to [Naviscent's] legitimate business operations and that [were] not part of or related to [Naviscent's] claims against Ms. Martinez or Mr. Otte." Otte Brief at 14.

b. Trial

After the two-day trial, the judge concluded that: (1) Naviscent established an allowed secured claim of $734,000, plus interest and attorneys' fees and costs; (2) Otte established a non-priority unsecured claim in the amount of $300,000; and (3) Martinez demonstrated an intent to hinder or delay Naviscent's recovery when she transferred...