Judge: Virginia Keeny, Case: 22VECV00637, Date: 2022-09-27 Tentative Ruling

Case Number: 22VECV00637    Hearing Date: September 27, 2022    Dept: W

HANNAH BEATON v. DONALD E KARPEL, et al.

DEMURRER to plaintiff’s COMPLAINT

Date of Hearing:        September 27, 2022             Trial Date:       None set.  

Department:              W                                            Case No.:        22VECV00637

Moving Parties:         Defendants Donald E. Karpel and Barry S. Zelner

Responding Party:     No Opposition filed but on September 16, 2022, Plaintiff filed a declaration indicating that she intends to file an amended complaint before the hearing. As of September 21, 2022, no amended complaint has been filed.

Meet and Confer:      Demurrer, Yee Decl. ¶¶ 3-6.

BACKGROUND

In 2019, Plaintiff Hannah Beaton (also known as Dang Thu) was trying to open a business and get financing to invest in real property. A friend referred her to defendant Donald Karpel (“Karpel”), an attorney.

Karpel advised Plaintiff to get a line of credit and that Defendant Ray Bailey (“Bailey”) could acquire up to a $20,000,000 line of credit. Bailey told Plaintiff he could get that amount of credit within a month, Plaintiff will receive $2,500,000 for free, and Bailey and Karpel would take the rest, $17,500,000, for themselves.

Karpel and Bailey asked Plaintiff to pay $200,000 in advance as prepaid fees. The $200,000 was to stay in the “Karpel Client Trust account” until the line of credit was approved and given to Plaintiff. Karpel assured Plaintiff that there was no risk involved and that he would return Plaintiff’s money if the defendants failed to extend a line of credit to Plaintiff.   

Karpel prepared a contract and gave it to Plaintiff, a copy of which is attached to the Complaint as Exhibit 1. Under the agreement, Karpel was to pay back Plaintiff’s $200,000 within 30 days if the credit was not approved. Plaintiff waited for 30 days, but nobody contacted her. Karpel told her to wait because they were working on getting the line of credit. However, almost three years have passed, and neither has Plaintiff received a line of credit nor refunded her $200,000 by Karpel and defendant Barry Zelner (another attorney and Karpel’s partner at a law firm).

Plaintiff filed this action against Karpel, Zelner, Bailey, Angela Bailey, and Global Bailey Group II, asserting causes of action for (1) breach of contract, (2) breach of contract, (3) conversion, (4) breach of fiduciary duty, (5) constructive fraud, (6) fraud and misrepresentation, (7) constructive trust, (8) breach of the covenant of good faith and failure dealing, (9) alter ego allegations, (10) unjust enrichment, and (11) declaratory relief.

Defendants Karpel and Zelner now demur the Complaint, contending that it fails to state facts sufficient to constitute a cause of action against them and is uncertain.

[Tentative] Ruling

Defendants Donald E. Karpel and Barry S. Zelner’s Demurrer to the Complaint is sustained with leave to amend.  

ANALYSIS

Requests for Judicial Notice

On August 31, 2022, the Defendants filed a request asking this court to take judicial notice of Exhibits A through C, which seek notice of documents filed with the U.S. Bankruptcy Court, Central District of California.

The Defendants’ Request for Judicial Notice is GRANTED pursuant to Evid. Code § 452(d).

On September 16, 2022, Plaintiff filed a request for judicial notice of documents (Exhibits A and B) that she filed in the bankruptcy proceeding mentioned above.

Plaintiff’s Request for Judicial Notice is GRANTED pursuant to Evid. Code § 452(d).

Causes of Action Against Karpel

Defendants contend that Plaintiff cannot state any cause of action against Karpel for the following reasons.

On December 16, 2020, before Plaintiff filed this action, Karpel (and his spouse) filed a Chapter 7 petition in U.S. Bankruptcy Court, Central District of California, as case 20-bk-12207-MT. Plaintiff’s claim was identified in Schedule E/F, section 4:30 of the petition as a non-priority unsecured claim. The Plaintiff’s address was also listed on the Master Mailing List of Creditors. (See Request for Judicial Notice (“RJN”), Exhibits A [Chapter 7 Petition], B [Copy of Bankruptcy Case], and D [Copy of Bankruptcy Case Docket].) Karpel, “aka Law Offices of Donald E Karpel,” was granted a discharge in bankruptcy on April 5, 2021, and the case was closed on October 29, 2021. (RJN, Exhibit C [Certified Order of Discharge].)

Defendants argue that the “filing of a federal bankruptcy case divests state courts of jurisdiction, as state-law claims impermissibly intrude upon exclusive federal authority over bankruptcy proceedings and threaten the uniformity of federal bankruptcy law regardless of the nature of the underlying proceeding.” (Demurrer, p. 11:14-18.) They cite Pauletto v. Reliance Ins. Co. (1998) 64 Cal.App.4th 597, 605-606 (“Pauletto”) and Ross v. Universal Studios Credit Union (2002) 95 Cal.App.4th 537, 542 (“Ross”), to support that argument.

In Pauletto and Ross, the issue was whether the plaintiffs could bring malicious prosecution state court actions when the underlying proceedings were bankruptcy proceedings authorized by federal law. (Satten v. Webb (2002) 99 Cal.App.4th 365, 379 (“Satten”) [summarizing the holdings in Pauletto, Ross, and other cases and concluding that “all these cases disallowing a malicious prosecution state court action involved an underlying proceeding that was an authorized bankruptcy proceeding, i.e., one authorized by the federal law in the bankruptcy area”].)

The Court of Appeal in Pauletto held that “no authorized bankruptcy proceeding can properly support a state-law claim for malicious prosecution or abuse of process. Such state-law tort claims impermissibly intrude upon exclusive federal authority over bankruptcy proceedings and threaten the uniformity of federal bankruptcy law regardless of the nature of the underlying proceeding.” (Pauletto, supra, 64 Cal.App.4th at pp. 605-606 [emphasis added].)

Likewise, in Ross, the Court of Appeal held: “In substance, the preemption of state court claims rests upon the premise that the Bankruptcy Code provides adequate remedies for the resolution of any abuse that may occur in such proceeding and that the jurisdiction of the bankruptcy court would otherwise be undercut. …. [For example] Ross’s claim turns on the fact that he prevailed against Universal’s complaint for a determination of nondischargeability. It is his contention that he cannot be denied a jury trial and the opportunity to recover damages according to state law. He is wrong. Because his remedy is limited to such satisfaction afforded to him in the bankruptcy court, he is not entitled to a jury.” (Ross, supra, 95 Cal.App.4th at p. 542 [emphasis added].)

However, in Satten, the Court of Appeal reversed a trial court’s decision sustaining a demurrer to a malicious prosecution complaint based on an underlying bankruptcy proceeding. (Satten, supra, 99 Cal.App.4th at p. 368.) The Court explained, among other things, that “[a] malicious prosecution case based on an underlying common law fraud action, even if the underlying action was removed to bankruptcy court and then resolved there on state law grounds, does not raise the concerns that require a federal preemption finding.” (Id. at p. 387 [emphasis added].) In other words, federal law does not preempt malicious prosecution claims based on state law, even if the underlying proceeding was a bankruptcy case.

Therefore, contrary to the Defendants’ contentions, Pauletto and Ross do not stand for the proposition that bankruptcy cases divest state courts of jurisdiction of all claims. Federal law preemption of state law claims is not as clear cut as the Defendants would like the court to believe.

Nonetheless, “[a] discharge order under the Bankruptcy Code: extinguishes the debtor’s personal liability with respect to his creditor’s claims; voids any judgment to the extent of the debtor’s personal liability for a discharged debt; and enjoins the commencement or continuation of civil suits against the debtor personally to recover any discharged debt. (11 U.S.C. § 524, subd. (a); [citations].)” (Hurley v. Bredehorn (1996) 44 Cal.App.4th 1700, 1703 [emphasis added].)

Here, the court has reviewed Defendant’s judicially noticed bankruptcy petition and notes, as Defendants argue, that Plaintiff’s claim for $200,000 was listed as belonging to one of the creditors with unsecured claims. (See RJN, Exhibit A, p. 16 – Schedule E/F: Creditors Who Have Unsecured Claims, Section 4.30.)

In a declaration filed on September 16, 2022, Plaintiff’s counsel states that Plaintiff reopened the bankruptcy case, and counsel believes the reopening of the case stays this action. (Madaen Decl., ¶¶ 10, 11.)

However, the “[r]eopening [of a bankruptcy] case does not undo any of the statutory consequences of closing,” according to the Ninth Circuit. (In re Menk (B.A.P. 9th Cir. 1999) 241 B.R. 896, 913.)

Therefore, since Plaintiff is seeking to recover discharged debt from Karpel, the court finds that the Complaint fails to state any cause of action against that defendant.

In his declaration, Plaintiff’s counsel states that he “strongly believe[s]” that Plaintiff can amend the complaint to add more facts and intends to file an amended complaint before the hearing on this motion. (Madaen Decl., ¶¶ 12, 13.)

Accordingly, the court sustains the demurrer as to Karpel, with leave to amend.

Causes of Action Against Zelner

Defendants contend that Plaintiff’s Complaint against Defendant Zelner is, among other things, uncertain.

The court agrees.

Plaintiff alleges that she went to “Karpel law office,” and “[i]n the law office, Plaintiff consulted with Karpel regarding her [investment] goals and her options to achieve those goals.” (Compl., ¶¶ 14, 15 [emphasis added].) It was then that Karpel advised her to get a line of credit. (Compl., ¶ 16.) Later, while at “Karpel office,” Bailey informed Plaintiff that he could get a line of credit for Plaintiff. (Compl., ¶ 24.) On May 31, 2019, Plaintiff wired $200,000 to “Karpel’s Trust account.” (Compl., ¶ 33.)

However, the Complaint also alleges that “at the time relevant to this action, Zelner and Karpel were partners in Zelner and Karpel law office.” (Compl., ¶ 3 [emphasis added].) Karpel was not the only one that advised Plaintiff but Zelner as well. (Compl., ¶ 66.) The money was not just sent to Karpel but to “Defendants Karpel and Zelner on May 31, 2019.” (Compl., ¶ 60.) In addition, Plaintiff did not just wire her money to “Karpel’s Trust account,” but also “into Karpel and Zelner Attorney-client trust account.” (Compl., ¶ 81.)

The agreement attached to the Complaint is placed on the “Law Offices of Zelner & Karpel” letterhead. (Compl., Exhibit 1, p. 1, top of the page.) However, the agreement also states that Plaintiff was to deposit the funds with the “Law Offices of Donald E. Karpel.” (Compl., Exhibit 1, p. 1.)

Therefore, it is not clear whether (1) there are two separate law firms involved, (2) Karpel was acting in his capacity as an alleged partner of the “Zelner and Karpel law office” when he engaged in the alleged wrongful conduct, and (2) Zelner was directly involved in advising and harming Plaintiff, or Plaintiff is suing him based on agency principles.

Accordingly, the court finds the pleading uncertain as to Zelner.

The court sustains the demurrer of the Complaint against Zelner, with leave to amend.