Judge: Michael Shultz, Case: 23STCV30648, Date: 2025-05-29 Tentative Ruling

Case Number: 23STCV30648    Hearing Date: May 29, 2025    Dept: 40

23STCV30648 Ashley S. Aarons, et al. v. David Furtado, et al.

[TENTATIVE] ORDER SUSTAINING DEMURRER TO PLAINTIFFS’ FIRST AMENDED COMPLAINT WITH LEAVE TO AMEND

I.          BACKGROUND

       The first amended complaint alleges Plaintiff, Ashley S. Aarons (“Plaintiff”), retained Defendants to represent her with respect to an insurance claim that arose during Plaintiff’s bankruptcy proceeding. Plaintiff alleges claims for negligent misrepresentation, legal malpractice, breach of contract, and breach of fiduciary duty.

II.         ARGUMENTS

Defendants demur to all claims on grounds Plaintiff does not have standing to pursue these claims because they belong exclusively to the bankruptcy trustee administering her Chapter 7 petition for bankruptcy protection. The claims fail to state facts to constitute a cause of action and are uncertain, ambiguous, and unintelligible. The case should be dismissed.

In opposition, Plaintiff argues that she retained Defendants to represent her during the Chapter 11 bankruptcy proceedings. Plaintiff has standing to pursue the claims because Plaintiffs were harmed, when they lost their primary residence. The bankruptcy court confirmed the debtors’ plan pursuant to Plaintiff’s Chapter 11 petition for bankruptcy.

In reply, Defendants argue that Plaintiff fails to address the jurisdictional issues. The bankruptcy court appointed Defendants to serve as counsel for the bankruptcy trustee. The bankruptcy court’s Chapter 11 confirmation order converted the proceeding to a Chapter 7 bankruptcy proceeding, and it included this malpractice action as an asset of the bankruptcy estate, therefore, Plaintiff’s malpractice claims belong to the bankruptcy estate.

III.        LEGAL STANDARDS

       A demurrer tests the sufficiency of a complaint as a matter of law and raises only questions of law. (Schmidt v. Foundation Health (1995) 35 Cal.App.4^th 1702, 1706.) In testing the complaint’s sufficiency, the court must assume the truth of the properly pleaded factual allegations as well as facts that can be reasonably inferred from those expressly pleaded facts. The court may also consider matters properly subject to judicial notice. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.)

       The court may not consider contentions, deductions, or conclusions of fact or law. (Moore v. Conliffe (1994) 7 Cal.4^th 634, 638.) Plaintiff is required to allege facts sufficient to establish every element of each cause of action. (Rakestraw v. California Physicians Service (2000) 81 Cal.App.4^th 39, 43.) Where the complaint fails to state facts sufficient to constitute a cause of action, courts should sustain the demurrer. Code Civ. Proc., § 430.10(e); (Zelig v. County of Los Angeles (2002) 27 Cal.4^th 1112, 1126.)

       Sufficient facts are the essential facts of the case “with reasonable precision and with particularity that is sufficiently specific to acquaint the defendant with the nature, source, and extent of his cause of action.” (Gressley v. Williams (1961) 193 Cal.App.2d 636, 643-644.)  Whether the Plaintiff will be able to prove the pleaded facts is irrelevant. (Stevens v. Superior Court (1986) 180 Cal.App.3d 605, 609–610.)

       A demurrer may also be sustained if a complaint is “uncertain.” Uncertainty exists where a complaint’s factual allegations are so confusing, they do not sufficiently apprise a defendant of the issues it is being asked to meet. (Williams v. Beechnut Nutrition Corp. (1986) 185 Cal.App.3d 135, 139, fn. 2; Code Civ. Proc., § 430.10(f).)

       A pleading is required to assert general allegations of ultimate fact. Evidentiary facts are not required. (Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal. 4^th 26, 47; Lim v. The.TV Corp. Internat. (2002) 99 Cal. App. 4^th 684, 690.)

IV.     DISCUSSION

       Plaintiff alleges that beginning February 11, 2021 to the present, Defendants acted as Plaintiff’s counsel with regard to an insurance claim filed with Lexington Insurance (“Lexington”) in connection with economic loss of personal property that should have been deemed “exempt” from bankruptcy proceedings. (FAC ¶¶ 8-9.) Plaintiff alleges Lexington paid the claim of $179,999 to Plaintiff and the Chapter 7 bankruptcy trustee, but the insurance claim did not include losses for the contents of Plaintiff’s home totaling $46,940.88. (FAC ¶¶ 9-11.)

       Plaintiff alleges that that the confirmed Chapter 11 plan required Defendants to pursue Plaintiff’s insurance claims for the benefit of the estate, and if Defendants were not able to obtain payment for additional losses from Lexington, Defendants were required to pursue bad faith litigation against Lexington Insurance Company. (FAC ¶ 14.) Plaintiff alleges that Defendants failed to aggressively pursue the insurance bad faith action and was otherwise negligent. (FAC ¶ 16.) Plaintiff alleges that Defendants were bound by the Chapter 11 Plan before and after conversion of the proceeding to a Chapter 7 petition for bankruptcy. (FAC ¶ 26.)

       The court grants Defendants’ request for judicial notice fo the United States Bankruptcy Appellate Panel of the Ninth Circuit (“9^th Circuit BAP”) bearing Case No. BAP CC-22-1170-SGF Ashley Susan Aarons, debtor.  (Evid. Code, § 452(d); RJN Ex. A.) The record shows that the court converted the Plaintiff’s Chapter 11 plan to Chapter 7. (RJN Ex. A, pp. 2) Upon conversion, Plaintiff’s property, as the reorganized debtor, vested in the Chapter 7 estate. (RJN Ex. A, 6 ¶ D.)

       Notably, the 9^th Circuit BAP determined that under the terms of the confirmed plan and conversion order, all property held by the debtor at the time of conversion to Chapter 7 became the property of the bankruptcy estate, which Aarons did not dispute. (Id. at p. 17-18 [“As the bankruptcy court explained, and Aarons does not challenge, the confirmation and conversion orders provided that all property of the debtor vested in the Chapter 7 trustee upon conversion of Aarons' case to Chapter 7.”]

       The district courts have original exclusive jurisdiction of all cases under title 11. (28 U.S.C.A. § 1334 (West) subd (a).) Where a Chapter 11 case is converted to a Chapter 7 case, the appointed Chapter 7 trustee is essentially a successor estate representative ... [who] assumes the powers of the debtor in possession. (In re R & R Associates of Hampton (1st Cir. 2005) 402 F.3d 257, 265. Standing to maintain a Chapter 7 debtor’s lawsuit is vested in the bankruptcy trustee. (Bostanian v. Liberty Savings Bank (1997) 52 Cal.App.4th 1075.) The debtor may not prosecute a cause of action on his or her own, unless the bankruptcy trustee is substituted in for Plaintiff or the trustee abandons the claim as the trustee is the real party in interest. (Bostanian at 1081.)

       The case cited by Plaintiff supports the foregoing principles. (In re Alvarez (11th Cir. 2000) 224 F.3d 1273, 1277 (Debtor’s legal malpractice claim is vested in the bankruptcy estate “at the precise moment his Chapter 7 petition was filed.” (In re Alvarez (11th Cir. 2000) 224 F.3d 1273, 1277.)

       Plaintiff argues that Defendants breached duties personal to Plaintiff, and therefore, Plaintiff’s claims for malpractice are independent of the bankruptcy estate’s interest. (Opp. 3:24-25.) Plaintiff cites In re O'Dowd (3d Cir. 2000 233 F.3d 197, for the proposition that in a post-petition situation, only if the debtor is personally injured by the alleged malpractice “while the estate is concomitantly not affected, is it appropriate to assign the malpractice to the debtor." (In re O'Dowd (3d Cir. 2000) 233 F.3d 197, 204.) However, this court does not have jurisdiction to determine whether or not the debtor’s estate is unaffected such that the malpractice claims can be assigned to the debtor.

V.         CONCLUSION

       Based on the foregoing, demurrer is SUSTAINED. Under the circumstances, the court "shall provide a reasonable time in which plaintiff may secure either the bankruptcy trustee's participation in, or abandonment of, these causes of action." (Haley v. Dow Lewis Motors, Inc. (1999) 72 Cal.App.4th 497, 511.)

       The standing defect is curable depending on whether the Chapter 7 bankruptcy trustee elects to participate. Accordingly, leave to amend is GRANTED in the event the bankruptcy trustee elects to substitute in for the debtor Plaintiff to pursue the claims. The court sets an OSC: Re Substitution of Bankruptcy Trustee for August 11, 2025,  at 8:30 a.m. in Department 40 of the Stanley Mosk Courthouse.