The following is a case update written by Monique D. Jewett-Brewster, a member of the ad hoc group of the California Lawyers Association’s (CLA) Business Law Section, analyzing a recent decision of interest:
A bankruptcy court in California has held that a company that was ultimately adjudicated as being owner of corporate debtors in a suit it had commenced five years earlier was not judicially estopped, by its commencement of the suit, from denying that it was in control of debtors as of the date it had filed suit or from raising the adverse domination doctrine to toll the statute of limitations on derivative claims it asserted in the debtors’ names. [In re Cecchi Gori Pictures, 2019 WL 3943902 (Bankr. N.D. Cal. Aug. 20, 2019)] To view the entire opinion, click here.
FACTS: In 2011, the liquidators of Nous. S.r.l. (“Nous”) filed suit in the Los Angeles Superior Court (the “LASC Action”) to obtain a judgment finding that Nous was the ultimate owner of Cecchi Gori Pictures and Cecchi Gori USA, Inc. (“debtors”) and entitled to exercise control over them. The LASC Action was precipitated by entry of a $13 million judgment (the “Nunnari Judgment”) in favor of debtors and Vittorio Cecchi Gori (“Gori”) in separate litigation, which the Criminal Court of Rome had ordered seized to satisfy the debtors’ obligations to an Italian bankruptcy estate. In its suit, Nous sought to prevent Gori, or anyone purporting to act on his behalf, from transferring proceeds of the Nunnari Judgment until such time as the Nous liquidators could obtain a declaration that Nous was the ultimate owner of debtors.
In September 2016, after five years of litigation, the court in the LASC Action issued judgment in favor of Nous, finding that Nous owned the debtors. Shortly thereafter, in December 2016, debtors filed for Chapter 11 bankruptcy protection. Debtors then filed an adversary proceeding against Gori and another defendant, alleging that one or both of them transferred funds Gori and debtors had received from a 2012 settlement of the Nunnari Judgment during the pendency of the LASC Action (the “Nunnari Settlement”), a settlement which Nous had not authorized.
Defendants subsequently filed a motion for summary judgment in the adversary proceeding, claiming that the estate’s claims were time-barred by the three-year statute of limitations set forth in California Code of Civil Procedure § 338. In particular, defendants contended that certain correspondence between counsel for Nous and Gori established that debtors (via Nous’ counsel) were on notice of potential claims related to the Nunnari Settlement by September 2013. As a result, defendants argued, the statute of limitations for debtors’ claims ran prior to their chapter 11 filings in December 2016.
Defendants further argued that no equitable tolling applied to extend the statute of limitations beyond the debtors’ petition date, which would have initiated the two-year tolling period provided by 11 U.S.C. § 108. Defendants asserted that Nous had the knowledge, ability and motivation to bring suit against them prior to December 2016, such that any tolling based on California’s doctrine of “adverse domination” also expired more than three years prior to debtors’ bankruptcy filings.
Alternatively, defendants asserted that judicial estoppel applied to limit debtors’ claims against them in the adversary proceeding. First, defendants argued that Nous’ filing of the LASC Action barred debtors from asserting Nous did not control the debtors. Second, defendants contended that filings Nous made in the LASC Action should bar debtors from asserting that they had no knowledge of Gori’s alleged defalcations by 2013.
REASONING: Underlying the dispute was the applicable standard to be applied to determine when equitable tolling based on the “adverse domination” should terminate. Defendants contended that the LASC Action was a shareholder derivative suit whereby Nous, the shareholder, had notice of the Nunnari Settlement, and the dissipation of assets that followed, more than three years prior to the petition date. Denying defendants’ motion, the bankruptcy court first pointed out that Nous could not bring a derivative suit on debtors’ behalf until its ownership interest was recognized—which occurred years after the Nunnari Judgment was issued or settled. Citing to Federal Rule of Civil Procedure 23.1 and Grosset v. Wenaas, 42 Cal.4th 1100 (Cal. 2008), the court concurred with debtors that neither the LASC Action nor the adversary proceeding constituted shareholder derivative actions:
[A] derivative action is present when “when one or more shareholders or members of a corporation … bring a derivative action to enforce a right that a corporation … may property assert but has failed to enforce.”
In the LASC Action, Nous was not seeking to have an officer of the Debtors enforce a corporate right or redress an injury resulting from a failure to act. Instead, it was seeking to establish its ownership of Debtors. California Corporations Code § 800(b)(1) imposes stock ownership requirements for standing to pursue a shareholder’s derivative suit. In order to bring a derivative action, an individual must be a shareholder both when the derivative action is filed and when the event complained of occurred.
The court then examined California’s “adverse domination” doctrine for the tolling of statutes of limitations, discussed by the California Supreme Court in San Leandro Canning Co. v. Perillo, 211 Cal. 482, 487 (1931):
[T]he California Supreme Court recognized “what we deem to be a well-settled principle of law, that the statute of limitations does not commence to run against unlawful acts and expenditures made by or under the direction of the directors of the corporation while they were in full control of its affairs and of the expenditure of its funds.”
Relying on San Leandro Canning Co. and several prior California cases, the court opined that as long as the debtors remained subject to Gori’s control, equitable tolling continued pursuant to the doctrine of “adverse domination”. Consequently, the court concluded that defendants failed to establish that debtors’ claims were time-barred by California’s three-year statute of limitations. The court further reasoned that, even if it were to apply the standard proposed by defendants, disputed issues of material fact precluded summary judgment.
Finally, the court analyzed—and then rejected—defendants’ alternative judicial estoppel argument. In doing so, the court discussed the judicial estoppel doctrine and why it did not apply in this circumstance:
Judicial estoppel is an equitable doctrine that precludes a party from gaining an advantage by asserting one position, and then later seeking an advantage by taking a clearly inconsistent position…. The doctrine is intended “to protect against a litigant playing ‘fast and loose with the courts’ by asserting inconsistent positions.”….
Defendants would have this court focus solely upon entry of default judgment in the LASC Action. Applying the basic principle that entry of default is deemed an admission of all well-pled facts, Defendants extrapolate that any statements made by Nous in the complaint or TRO application should be attributed to Debtors, resulting in a finding that Nous was always subject to Debtors’ control. This argument ignores the five years of litigation between filing of the complaint and entry for judgment. Within that time period, extensive discovery, a TRO request, an appeal, and a stay of proceedings occurred. To view the allegations of a complaint as pre-ordained, and thereby the subsequent beneficiaries of the LASC Action from pursuit of claims made possible by the result of five years of litigation is a mockery of judicial estoppel.
AUTHOR’S COMMENT: While this decision involved a complicated set of facts relating back to (not so ancient) Rome, it also involved the court’s examination of California’s judicial estoppel doctrine—which is not exotic in bankruptcy cases. A debtor’s judicial admissions in prior litigation may come back to haunt the debtor in a bankruptcy case, especially in the case where a debtor has asserted a claim against a nondebtor third party, or holds such a claim, and deliberately fails to disclose that claim in its schedules.
As the court pointed out in its opinion, three factors are considered in determining whether judicial estoppel should apply:
(1) “a party’s later position must be ‘clearly inconsistent’ with its earlier position”;
(2) whether the party succeeded in its prior position, because “[a]bsent success in a prior proceeding, a party’s later inconsistent position introduces no ‘risk of inconsistent court determinations’”; and
(3) “whether the party seeking to assert an inconsistent position would derive an unfair advantage or impose an unfair detriment on the opposing part if not estopped.”
New Hampshire v. Maine, 532 U.S. 742, 750-51, 121 S.Ct. 1808, 149 L.Ed.2d 968 (2001) [Citations omitted.]
Judicial estoppel should apply where a debtor is fully aware of its potential or existing claims but conceals them from its creditors in bankruptcy. In such a situation, the debtor seeks to play “fast and loose” with the court, in the hopes that it will derive a windfall from the failure to disclose its assets. The court correctly concluded that the application of judicial estoppel to the complaint Nous filed in the LASC Action would “make a mockery” of this important equitable doctrine.
For discussions of cases dealing judicial estoppel;, see:
- 2003 Comm. Fin. News. 72, When Chapter 11 Disclosure Statement Fails to Disclose Known Claims, Debtor is Judicially Estopped to Prosecute Those Claims.
- 2018-41 Comm. Fin. News. NL 81, Deed of Trust Does Not Authorize Award of Attorneys’ Fees to Prevailing Lender, And Unsuccessful Plaintiffs Are Not Judicially Estopped by Their Prayer for Fees.
These materials were written by members of the California Lawyers Association Business Law Section for the Commercial Finance Newsletter, published weekly on Westlaw. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further distributed without the consent of Thomson Reuters.