Judge: Gregory Keosian, Case: 23STCV20647, Date: 2024-01-23 Tentative Ruling

Case Number: 23STCV20647    Hearing Date: January 23, 2024    Dept: 61

Defendant Emser Tile, LLC’s Demurrer to the First Amended Complaint is OVERRULED. Defendant to answer within 30 days.

Plaintiffs to give notice.

I.                DEMURRER

A demurrer should be sustained only where the defects appear on the face of the pleading or are judicially noticed. (Code Civ. Pro., §§ 430.30, et seq.) In particular, as is relevant here, a court should sustain a demurrer if a complaint does not allege facts that are legally sufficient to constitute a cause of action. (See id. § 430.10, subd. (e).) As the Supreme Court held in Blank v. Kirwan (1985) Cal.3d 311: “We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. . . . Further, we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context.” (Id. at p. 318; see also Hahn. v. Mirda (2007) 147 Cal.App.4th 740, 747 [“A demurrer tests the pleadings alone and not the evidence or other extrinsic matters. Therefore, it lies only where the defects appear on the face of the pleading or are judicially noticed. [Citation.]”)

“In determining whether the complaint is sufficient as against the demurrer … if on consideration of all the facts stated it appears the plaintiff is entitled to any relief at the hands of the court against the defendants the complaint will be held good although the facts may not be clearly stated.”  (Gressley v. Williams (1961) 193 Cal.App.2d 636, 639.)

“A demurrer for uncertainty is strictly construed, even where a complaint is in some respects uncertain, because ambiguities can be clarified under modern discovery procedures.” (Khoury v. Maly’s of Cal., Inc. (1993) 14 Cal.App.4th 612, 616.) Such demurrers “are disfavored, and are granted only if the pleading is so incomprehensible that a defendant cannot reasonably respond.” (Mahan v. Charles W. Chan Insurance Agency, Inc. (2017) 14 Cal.App.5th 841, 848.)

A demurrer should not be sustained without leave to amend if the complaint, liberally construed, can state a cause of action under any theory or if there is a reasonable possibility the defect can be cured by amendment. (Schifando v. City of Los Angeles, supra, 31 Cal.4th at p. 1081.) The demurrer also may be sustained without leave to amend where the nature of the defects and previous unsuccessful attempts to plead render it probable plaintiff cannot state a cause of action. (Krawitz v. Rusch (1989) 209 Cal.App.3d 957, 967.)

Defendant Emser Tile, LLC (Defendant) demurrers to the claims alleged by Plaintiff Crescenta Valley Tile Distributor, Inc. (Plaintiff) on the grounds that Plaintiff lacks standing to assert claims for unpaid invoices not adequately presented in Plaintiff’s bankruptcy proceeding. (Demurrer at pp. 9–12.)

In the context of bankruptcy proceedings, it is well understood that a trustee, as the representative of the bankruptcy estate, is the real party in interest, and is the only party with standing to prosecute causes of action belonging to the estate once the bankruptcy petition has been filed. The commencement of Chapter 7 bankruptcy extinguishes a debtor's legal rights and interests in any pending litigation, and transfers those rights to the trustee, acting on behalf of the bankruptcy estate. Thus, generally speaking, a pre-petition cause of action is the property of the Chapter 7 bankruptcy estate, and only the trustee in bankruptcy has standing to pursue it.

. . .

An outstanding legal claim that is abandoned by the trustee reverts back to the original debtor-plaintiff. Upon abandonment the trustee is divested of control of the property because it is no longer part of the estate. Property abandoned under § 554 reverts to the debtor, and the debtor's rights to the property are treated as if no bankruptcy petition was filed. In other words, ‘when property of the bankrupt is abandoned, the title reverts to the bankrupt, nunc pro tunc, so that he is treated as having owned it continuously. But property not formally scheduled in the bankruptcy proceeding is not abandoned at the close of the bankruptcy proceeding, even if the trustee was aware of the existence of the property

(M & M Foods, Inc. v. Pacific American Fish Co., Inc. (2011) 196 Cal.App.4^th 554, 562–563, internal citations, alterations, and quotation marks omitted.)

Plaintiff’s claims arise from allegedly unpaid invoices due from April 5, 2022, to February 28, 2023, concerning delivery of goods shipped from December 6, 2021, to December 19, 2022. (FAC Exh. A.) Plaintiff’s bankruptcy petition was filed on December 29, 2022, and included a schedule of assets listing, under “Accounts Receivable,” a total of $22,000.00, representing $88,000 of accounts, of which most were placed in the space marked on the form for “doubtful or uncollectable accounts.” (RJN Exh. 2.) The schedule includes a space for “[c]auses of action,” under which Plaintiff wrote “Unknown,” and an “[a]mount requested” of zero. (Ibid.)

Although the bankruptcy trustee entered a notice of no distribution and abandonment of Plaintiff’s property on February 1, 2023 (RJN Exh. 3), Defendant argues that Plaintiff did not adequately disclose its claims against Defendant to the bankruptcy tribunal. Defendant points to the M & M Foods case, quoted above, in which the court held that a bankruptcy disclosure of “Debtor's interest in collections obtained on outstanding accounts receivable from former business activities,” with a value listed as “unknown,” was not adequate to support the plaintiff’s standing to bring a later claim for $700,000 in accounts receivable. (M & M Foods, supra, 196 Cal.App.4^th at p. 564.) The court stated, “M & M's asset disclosure schedule did not mention Pacific American, M & M, or the asset purchase agreement, much less the accounts receivable Pacific American was obligated to collect on behalf of M & M under that agreement.” (Id. at p. 564.) Defendant argues that the present case is analogous to M & M Foods, in that Plaintiff’s schedule did not mention Defendant, and did not include Plaintiff’s claims under the space marked for “causes of action.” (Demurrer at pp. 10–11.)

Defendant’s argument is unpersuasive, as Plaintiff’s schedule did not include just a vague reference to accounts receivable in an “unknown” amount, but actually included the amount of accounts receivable at issue, most of which it alleges were the invoices upon which it now sues. Although Defendant argues that Plaintiff does not explain why it valued these accounts at a mere $22,000, the rationale for this value, per the information included on the schedule, was that the greater portion of the accounts consisted of “doubtful or uncollectable accounts.” (RJN Exh. 2.)

Plaintiff was not obliged to report these amounts as causes of action, rather than accounts receivable. Most of the invoices at issue did not come due until after the schedule was filed, and were reasonably classified as accounts receivable rather than causes of action. Although Defendant relies on Cusano v. Klein (9^th Cir. 2001) 264 F.3d 936, for the proposition that Plaintiff’s claims accrued the moment any invoice was unpaid, that court in fact held only that the plaintiff was required to disclose an “unpaid royalties balance, which was ascertainable and collectible when he filed his petition,” not that he was obliged to schedule causes of action for payments that had not yet become due. (Id. at p. 948.) In any event, the plaintiff in that case had failed to disclose any claims at all, and the court held that the plaintiff had to disclose them as “either receivables or legal claims.” (Id. at pp. 945.) Plaintiff alleges that the bulk of their disclosed receivables consisted of the claims at issue here. (FAC at p. 6.) Thus Plaintiff has alleged a basis for standing here.

The demurrer is therefore OVERRULED.[1]