Judge: Colin Leis, Case: BC656279, Date: 2025-01-14 Tentative Ruling

Case Number: BC656279    Hearing Date: January 14, 2025    Dept: 74

Cojulun v. Melendez et al.

Non-Party Carolyn A. Dye’s Motion to Substitute in as Plaintiff and Judgment Creditor in Cross-Complaint

BACKGROUND 

            This case arises from a quiet title action.

            On April 3, 2017, plaintiff Rosa Cojulun (Plaintiff) filed a complaint against defendants Liria Melendez, Luisa Melendez, Javier Perez, Victor Valle, and Best Alliance Foreclosure and Lien Services Corp. 

            On February 7, 2018, Liria Melendez filed a cross complaint against defendants Best Alliance Foreclosure and Lein, Victore Valle, and Javier Perez.

            On August 25, 2022, the Court entered judgment for Liria Melendez against Javier Perez (Perez) for $1,400,000 in damages.

            On March 30, 2019, Liria Melendez filed for Chapter 7 Bankruptcy, but she failed to disclose the existence of the cross-complaint claims.

            On July 30, 2024, the California Court of Appeal remanded the case to the trial court to determine whether the trustee intended to administer Liria Melendez’s claims and judgment

            On September 23, 2024, the Bankruptcy was reopened for the purpose of administering the judgment.

            Carolyn A. Dye (Trustee) now files a motion to substitute as the real party in interest.

JUDICIAL NOTICE

Granted.

LEGAL STANDARD

            Pursuant to Code of Civil Procedure section 473, subdivision (a)(1), “[t]he court may, in furtherance of justice, and on any terms as may be proper, allow a party to amend any pleading.” Amendment may be allowed at any time before or after commencement of trial. (Code Civ. Proc., § 576.)

            Amendment is allowed to substitute in plaintiffs with standing for original plaintiffs without standing.  (Cloud v. Northrop Grumman Corp. (1998) 67 Cal.App.4th 995, 1001.)  The trustee may intervene in the action or move to be substituted as the real part of interest.  (Danielson v. ITT Industrial Credit Co. (1988) 199 Cal.App.3d 645, 650.)

DISCUSSION

            Trustee moves to be substituted as the real party in interest.  Neither Liria Melendez nor Perez oppose Trustee’s substitution.  The Court grants Trustee’s Motion to be Substituted as real party of interest.

Trial Court v. Bankruptcy Court

            As a preliminary matter, the trial court has jurisdiction over the case after Trustee substitutes into the case.  When a plaintiff files for bankruptcy and a trustee takes over a civil action, the trustee may remove the claim to bankruptcy court but is not required to do so.  (28 U.S.C. § 1452.)  Here, Trustee choose to continue the action in state court to allow for the trial court to amend its judgment.  Therefore, the trial court may proceed to determine the effect of allowing Trustee to proceed as real party of interest on the judgment.

Judgment

            Liria Melendez filed a cross-complaint on February 7, 2018.  On March 30, 2019, Liria Melendez filed a Chapter 7 Bankruptcy, but did not disclose the existence of the cross-complaint.  (Dye Decl., ¶ 4.)  After a jury trial, Liria Melendez was awarded a total judgment of $1,400,000.  Perez appealed the judgment.  The Court of Appel found that Liria Melendez lacked standing because of the bankruptcy proceeding and remanded the case to the trial court to determine the effect of allowing the trustee to substitute in as the real party of interest.

            Trustee requests the Court amend the judgment so that Trustee becomes the judgment creditor. Perez requests, on the other hand, that Trustee take over the case as of March 30, 2019, making the judgment void.

            Parties identify a tension in legal precedent regarding the treatment of Trustee’s late substitution into a case.  What is widely accepted is that after a person files for bankruptcy protection, any causes of action previously possessed by that person become the property of the bankrupt estate.  (Cloud, supra, 67 Cal.App.4th at pp. 1001.)  Plaintiffs lose their standing to pursue their claims unless the bankruptcy trustee abandons the claims.  (Id. at 1003.) 

            In cases where a cause of action would not be “wholly different,” the Supreme Court has held that a complaint may be amended to substitute in the real party of interest.  (Id. at 1005 [citing Klopstock v. Superior Court (1941) 17 Cal.2d 13, 19-22; Kayel v. Catalina Yachts (1986) 187 Cal.App.3d 1187, 1195].)  In Klopstock, a judgment was issued and reversed on a stockholder derivative suit. (17 Cal.2d at 15.)  The trial could entered judgment for the Plaintiff, which the Court of Appeal reversed on the grounds that the Plaintiff was not the proper party to bring the cause of action and thus the trial court erred in overruling the general demurrer to the complaint.  (Id. at 16.) Following the court of appeal’s reversal, the trial court granted leave to file an amended complaint naming the administrator of the estate, the real party of interest, as plaintiff.  (Ibid.)  The Supreme Court upheld the trial court’s decision on the grounds that Code of Civil Procedure section 473 permitted amendments so long as the amendment does not present an entirely different set of facts.  (Id. at pp. 19-21.)

            Kaley continued Klopstock’s line of reasoning.  In Kaley, while litigation was pending, plaintiff filed bankruptcy proceedings but failed to list the cause of action on any bankruptcy schedules.  (187 Cal.App.3d at pp. 1193.)  The Court of Appeal in Kaley relied on, now repealed, California Code of Civil Procedure section 385, which permitted an action to be continued in the name of the original party after a transfer of interest.  (Id. at pp. 1194.)  Kaley found that the purpose of the real party in interest statute was “to protect a defendant from a multiplicity of actions predicated on the same gravamen and to preserve to that defendant all personal and counterclaims available.”  (Id. at pp. 1195.)  The Court found that since the defendant was protected from further suit by awarding the judgment to the Trustee, and the defendant was not denied any personal defenses or setoffs, the protection of the statute was afforded.  (Ibid.)  Cloud v. Northrup Grumman restates the legal theory supported by Klopstock and Kaley, applying Klopstock to the bankruptcy context and extending Kaley.  (67 Cal.App.4th at pp. 1005.)

            Perez contends the Court of Appeal for the Second District Court has “basically abandoned” Kaley. In support, Perez cites Bostanian v. Liberty Savings Bank, which ruled that a plaintiff has no standing to pursue an appeal when the case had become property of the bankrupt estate, and the trustee had not abandoned the case.  (52 Cal.App.4th 1075, 1087.)  Bostanian stops the plaintiff from pursuing additional legal remedies until the Trustee is allowed to either substitute in or abandon the case. Bostanian does not allow the Parties to return the case to the filing of the bankruptcy action, nor does it void any decision of the action filed after the plaintiff had filed for bankruptcy. 

             In tracing the precedential progeny of both Kaley and Bostanian, the Court is unable to find a case that supports Perez’s contention that the Court must deem void all proceedings occurring after Plaintiff’s bankruptcy filing and essentially turn back the action to 2019.

Prejudicial Effect

            Trustee alleges that Liria Melendez’s creditors would be prejudiced by the relitigating of the case because of the additional administrative fees and costs, as well as the delays and uncertainty of new litigation, all costs that would ultimately be borne by the creditors.  Perez alleges that Liria Melendez’s creditors would not be prejudiced because (1) Liria Melendez failed to properly list all pending litigation in her bankruptcy proceedings and (2) if she had, the case would have been stayed.  It’s unclear how the past failures overcome a current prejudice, given that the Trustee has now been substituted in the case.

            Perez also shows no prejudice in the original hearing caused by Plaintiff incorrectly pursing the cause of action.  Perez does not show that he was unable to assert and personal defenses or counterclaims due to the failure to substitute the trustee.  (See Kaley, supra, 187 Cal.App.3d at pp. 1195.)

            The Court finds that Trustee is entitled to be substituted in as the real party of interest and named in the judgment as the judgment creditor.

CONCLUSION

            The Court grants Trustee’s Motion for Order Authorizing Real Party in Interest to Substitute as Judgment Creditor.

            Trustee to give notice.