Kendall v. State of California, Office of the Controller, Bur

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re 	No. 89-41018 TK
Chapter 7
NORTHGATE CENTER, INC.,
Debtor.
___________________________/
JOHN KENDALL, TRUSTEE, 	A.P. No. 06-4232 AT
Plaintiff,
vs.
THE STATE OF CALIFORNIA, OFFICE
OF CONTROLLER, BUREAU OF
UNCLAIMED PROPERTY, et al.
Defendants.
____________________________/
AND RELATED COUNTERCLAIMS
AND CROSS-CLAIMS.
____________________________/
MEMORANDUM OF DECISION
The motion filed by the above-captioned debtor (the “Debtor”) to
set 	aside 	the 	default 	and 	default 	judgment 	with 	respect 	to 	various
defendants and to restore the proceeding to the active calendar was
presented to the Court on April 28, 2009. 	The motion was opposed by
Signed: May 01, 2009
________________________________________
LESLIE TCHAIKOVSKY
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
May 04, 2009
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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the plaintiff, the chapter 7 trustee in the above-captioned case (the
“Trustee”). 	Appearances 	were 	stated 	on 	the 	record. 	At 	the
conclusion 	of 	the 	hearing, 	the 	Court 	took 	the 	motion 	under
submission. 	For 	the 	reasons 	stated 	below, 	the 	Court 	now 	concludes
that the motion should be denied.
SUMMARY OF FACTS AND PROCEDURAL HISTORY
On 	March 	10, 	1989, 	the 	debtor 	Northgate 	Center, 	Inc. 	(The
“Debtor”) filed a voluntary petition, seeking relief under chapter 7
of 	the 	Bankruptcy 	Code. 	In 	papers 	filed 	with 	the 	Court, 	Jack
Easterday 	(“Easterday”) 	was 	identified 	as 	the 	president 	and 	sole
shareholder 	of 	the 	Debtor. 	The 	chapter 	7 	trustee 	assigned 	to 	the
case at that time concluded that there were no assets to administer,
a final decree was issued, and the case was closed on May 12, 1989.
In or about early 2006, the Office of the United States Trustee
(the “UST”) apparently learned that the State of California, Office
of 	the 	Controller, 	Bureau 	of 	Unclaimed 	Property 	(the 	“Controller’s
Office”), 	was 	holding 	a 	$96,000 	refund 	(the 	“Refund”) 	due 	to 	the
Debtor 	from 	the 	State 	Compensation 	Insurance 	Fund 	(the 	“Insurance
Fund”) with respect to the pre-bankruptcy period. 	Since the Refund
had not been listed in the Debtor’s schedules, the Refund appeared to
be property of the Debtor’s bankruptcy estate.
On 	February 	28, 	2006, 	on 	the 	application 	of 	the 	UST, 	the 	case
was 	reopened, 	and 	John 	Kendall 	(the 	“Trustee”) 	was 	appointed 	as
chapter 7 trustee. 	On October 30, 2006, the law office of Stromsheim
& Associates was appointed counsel for the Trustee.
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1With one exception, all of these continuances were announced
in open court and no order or notice issued. 	In one instance, the
date announced had to be changed, and notice of the change was
filed and served.
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On October 23, 2006, the Trustee filed a complaint against the
Controller’s 	Office, 	seeking 	turnover 	of 	the 	Refund. 	The
Controller’s Office resisted turning over the Refund to the Trustee,
presumably because a conflicting claim to the Refund was being made
by the Debtor. 	On January 1, 2007, the Trustee filed a first amended
complaint, adding the Debtor as a defendant.
In 	early 	February 	2007, 	both 	the 	Controller’s 	Office 	and 	the
Debtor 	filed 	answers 	to 	the 	First 	Amended 	Complaint. 	Kim 	Dincel
(“Dincel”) 	and 	Chip 	Cox 	(“Cox”), 	at 	Long 	& 	Levit 	LLP 	(“Long 	&
Levit”), 	were 	listed 	on 	the 	Debtor’s 	answer 	as 	attorneys 	of 	record
for the Debtor. 	A series of status conferences were conducted over
the next five months, all of which were attended by an attorney for
the 	Debtor, 	primarily 	Cox. 1 	At 	the 	status 	conference 	on 	July 	26,
2007, 	the 	proceeding 	was 	scheduled 	for 	trial 	assignment. 	A
scheduling order was issued the next day.
On 	September 	21, 	2007, 	the 	Trustee 	filed 	a 	motion 	for 	summary
judgment. 	Oppositions were filed by the Controller’s Office and the
Debtor. 	In its opposition, the Debtor contended that the Refund was
abandoned when the estate was closed in 1989. 	The Debtor contended
that 	it 	could 	not 	have 	scheduled 	the 	Refund 	as 	an 	asset 	because 	it
did not know of its existence at that time. 	It also contended that
it 	adequately 	scheduled 	the 	Refund 	as 	an 	asset 	by 	scheduling 	a
liability to the Insurance Fund. 	Finally, the Debtor asserted that
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2The funds were ultimately deposited with the Court.
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a 	portion 	of 	the 	Refund 	belonged 	to 	other 	corporations 	owned 	by
Easterday (“Easterday’s Other Corporations”).
The motion for summary judgment was heard on January 17, 2009.
Cox appeared at the hearing on behalf of the Debtor. 	At the hearing,
the 	Court 	vacated 	the 	trial 	assignment 	date. 	The 	Court 	concluded
that the Debtor had no right to the Refund and should be removed from
the proceeding. 	It denied the Trustee’s motion for summary judgment
without prejudice on the ground that Easterday and Easterday’s Other
Corporations needed to be joined as defendants. 	A status conference
was set for September 4, 2008 at 11:00 a.m. 	Cox failed to appear at
the status conference, having mistakenly calendared the hearing for
2:00 p.m.
In the mean time, the Controller’s Office sought to be dismissed
from 	the 	proceeding 	as 	a 	mere 	stakeholder. 	On 	April 	21, 	2008, 	it
filed 	a 	cross-complaint 	for 	interpleader 	(the 	“Interpleader 	Cross-
Complaint”). 2 	The Trustee filed an answer to the Interpleader Cross-
Complaint and a cross-claim against the Insurance Fund and the Debtor
(the 	“Trustee’s 	Answer 	and 	Cross-Claim”). 	The 	proof 	of 	service 	of
the Trustee’s Answer and Cross-Claim evidences mailing of a copy of
this document to Cox at Long & Levit. 	The Debtor failed to file an
answer to the Cross-Claim. 	Cox claims that he did not receive a copy
of the Trustee’s Answer and Cross-Claim.
The 	September 	4, 	2008 	status 	conference 	was 	continued 	to
November 6, 2008 to give the Trustee time to file and serve a second
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amended complaint. 	The second amended complaint, filed on September
11, 	2008, 	named 	as 	defendants 	the 	Insurance 	Fund, 	Easterday,
Shoreline South Nursing Home, Inc./Shoreline South Intermediate Care,
Inc., 	Acqua 	6 	Inc., 	Fontana 	Development 	Corporation, 	and 	Inland
Pacific Health Care, Inc. 	The Debtor was not named as a defendant.
An 	alias 	summons 	directed 	to 	Easterday 	and 	Easterday’s 	Other
Corporations was served on September 29, 2008. 	The proof of service
of the second amended complaint and summons evidences that copies of
these documents were mailed to Cox at Long & Levit. 	Cox claims that
he did not receive them.
A timely answer to the second amended complaint was filed by the
Insurance Fund on October 22, 2008. 	No answers were filed by any of
the new defendants.
A continued status conference was conducted on November 6, 2008.
No 	one 	attended 	the 	status 	conference 	on 	behalf 	of 	the 	Debtor,
Easterday, 	or 	Easterday’s 	Other 	Corporations. 	At 	the 	Trustee’s
request, 	the 	Court 	took 	the 	defaults 	of 	Easterday 	and 	Easterday’s
Other 	Corporations. 	The 	Court 	set 	the 	proceeding 	for 	trial
assignment on March 6, 2009. 	The Scheduling Order, which was issued
by 	the 	Court, 	was 	served 	on 	counsel 	for 	the 	Trustee 	and 	Insurance
Fund. 	In the Court’s view, these were the only parties still active
in the proceeding.
On 	February 	20, 	2009, 	the 	Trustee 	filed 	an 	application 	for
approval 	of 	a 	settlement 	agreement 	with 	the 	Insurance 	Fund 	with
respect to the Refund. 	Notice of the application was served on all
creditors 	of 	the 	estate, 	including 	Cox 	at 	Long 	& 	Levit, 	Easterday,
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3This type of order is routinely issued by the Court in
adversary proceedings as a monitoring device pending completion of
either a settlement agreement or a request for default judgment.
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and 	Easterday’s 	Other 	Corporations. 	On 	March 	3, 	2009, 	the 	Court
vacated the trial assignment date and issued an order conditionally
dismissing the proceeding in sixty days. 3 	The order was served on Cox
at 	Long 	& 	Levit, 	as 	well 	as 	Easterday 	and 	Easterday’s 	Other
Corporations. 	No request to set aside the dismissal order was filed
by the Debtor.
On March 4, 2009, the Trustee filed an ex parte motion seeking
a 	default 	judgment 	against 	Easterday 	and 	Easterday’s 	Other
Corporations. 	The 	motion 	was 	granted 	by 	order 	filed 	on 	March 	11,
2009. 	On 	the 	same 	day, 	the 	Debtor, 	represented 	by 	Dincel, 	now
listing affiliation with a law firm other than Long & Levit, filed an
opposition 	to 	the 	proposed 	settlement. 	The 	Trustee 	scheduled 	a
hearing on the opposition for April 4, 2009.
On 	March 	25, 	2009, 	Dincel 	filed 	a 	motion 	to 	set 	aside 	the
default 	judgment 	and 	noticed 	it 	for 	hearing 	on 	April 	28, 	2009. 	In
response, 	the 	Trustee 	continued 	the 	hearing 	on 	the 	Debtor’s
opposition 	to 	the 	proposed 	settlement. 	That 	hearing 	is 	currently
scheduled for May 7, 2009. 	The Court anticipates that the ruling on
this motion will obviate the need for that hearing.
DISCUSSION
A. 	SUMMARY OF ARGUMENTS
The Debtor asserts that the proceeding should be restored to the
active 	calendar. 	First, 	it 	argues 	that 	the 	Debtor 	is 	still 	a
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26 4It does not appear that Easterday asserts any personal right
to the Refund and the motion does not appear to seek an order
setting aside his default.
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defendant 	to 	the 	proceeding 	and 	claims 	an 	interest 	in 	the 	Refund.
Therefore, 	the 	proceeding 	may 	not 	be 	concluded 	until 	its 	claim 	is
adjudicated. 	Second, it contends that the defaults entered against
Easterday’s 	Other 	Corporations 	should 	be 	set 	aside 	because 	their
failure 	to 	answer 	the 	second 	amended 	complaint 	was 	inadvertent 	and
based on excusable neglect and because they have a valid claim to a
portion of the Refund. 4
The Trustee contends that the Debtor’s neglect was not excusable
and 	that 	the 	estate 	has 	incurred 	substantial 	fees 	prosecuting 	the
case 	in 	reliance 	on 	the 	Debtor’s 	abandonment 	of 	its 	claim 	to 	the
Refund. 	Moreover, the Trustee contends that the Debtor has failed to
establish a meritorious defense. 	With respect to Easterday’s Other
Corporations, 	the 	Trustee 	contends 	that, 	even 	if 	their 	neglect 	to
answer 	the 	second 	amended 	complaint 	is 	excusable, 	they 	cannot
establish 	a 	meritorious 	defense. 	They 	are 	not 	in 	good 	standing 	as
California 	corporations 	and 	therefore 	are 	not 	qualified 	to 	file 	an
answer to the complaint.
B. 	APPLICABLE LAW
Rule 55(c) of the Federal Rules of Civil Procedure provides that
a 	default 	judgment 	may 	be 	set 	aside 	for 	good 	cause 	or 	pursuant 	to
Rule 60(b). 	The factors to be considered in determining good faith
are 	(1) 	whether 	the 	default 	was 	willful, 	(2) 	whether 	the 	plaintiff
will 	be 	prejudiced, 	and 	(3) 	whether 	the 	defaulting 	party 	acted
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5At some point, Cox left Long & Levit and affiliated with a
new firm, a different firm than the one joined by Dincel after
leaving Long & Levit. 	Cox does not disclose when this occurred.
Neither Cox nor Dincel filed a change of address with the Court.
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promptly. 	Rule 60(b) provides that, for a period of one year, relief
may 	be 	granted 	from 	a 	final 	judgment 	for 	a 	variety 	of 	reasons,
including mistake, inadvertence, newly discovered evidence, or fraud.
TGI Group Life Insurance Plan v. Knoebber, 244 F.3d 691, 696 (9 th Cir.
2001). 	These rules are made applicable to bankruptcy proceedings by
Rules 	7055 	and 	9014 	of 	the 	Federal 	Rules 	of 	Bankruptcy 	Procedure,
respectively, with a few alterations which are not relevant here.
Rule 21 of the Federal Rules of Civil Procedure provides that,
on motion or on its own, a court may at any time, on just terms, add
or 	drop 	a 	party. 	This 	rule 	is 	made 	applicable 	to 	bankruptcy
proceedings 	by 	Rule 	7021 	of 	the 	Federal 	Rules 	of 	Bankruptcy
Procedure.
C. 	DECISION
1. 	Easterday’s Other Corporations
As 	recited 	above, 	on 	or 	about 	September 	29, 	2008, 	the 	Trustee
served the second amended complaint and summons on Easterday’s Other
Corporations by mail. 	The proof of service states that copies were
also mailed to Cox at Long & Levit. 	Cox denies having received these
copies. 5 	No 	answers 	were 	filed 	to 	the 	second 	amended 	complaint 	by
Easterday’s Other Corporations.
As 	recited 	above, 	the 	Trustee 	filed 	an 	ex 	parte 	motion 	for
default judgments against Easterday’s Other Corporations on March 4,
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2009, and the default judgments were granted on March 11, 2009. 	The
Debtor 	filed 	a 	motion 	to 	set 	aside 	the 	default 	judgments 	against
Easterday’s Other Corporations on March 25, 2009. 	While considerable
time 	elapsed 	from 	the 	time 	the 	second 	amended 	complaint 	was 	served
and the time the motion to set aside was filed, little time elapsed
between the time the default judgments were requested and granted and
the 	time 	the 	motion 	to 	set 	aside 	was 	filed. 	If 	the 	time 	involved
were 	the 	only 	factor 	to 	be 	considered, 	the 	Court 	would 	grant 	the
motion to set aside the defaults on the condition that the Trustee’s
costs occasioned by the delay be paid.
The Trustee has provided evidence that none of Easterday’s Other
Corporations 	are 	in 	good 	standing 	with 	the 	California 	Secretary 	of
State. 	No evidence was provided to the contrary nor was it asserted
at 	the 	hearing 	that 	they 	were 	in 	good 	standing. 	Under 	California
law, a corporation that is not in good standing may neither prosecute
a lawsuit nor defend one. 	See Grell v. Laci Le Beau Corp., 87 Cal.
Rptr. 2d 358, 361 (Cal. Ct. App. 1999). 	Federal law looks to state
law 	in 	this 	respect. 	See 	Fed. 	R. 	Civ. 	Proc. 	17(b)(2), 	made
applicable 	here 	by 	Fed. 	R. 	Bankr. 	Proc. 	7017. 	Because 	Easterday’s
Other 	Corporations 	lack 	the 	capacity 	to 	file 	answers 	to 	the 	second
amended 	complaint, 	granting 	the 	motion 	to 	set 	aside 	the 	default
judgment would be futile, and the motion will be denied.
2. 	The Debtor
As recited above, at the January 17, 2008 status conference, the
Court 	directed 	the 	Trustee 	to 	add 	Easterday 	and 	Easterday’s 	Other
Corporations 	as 	defendants 	and 	to 	drop 	the 	Debtor 	as 	a 	defendant.
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For some reason, the Trustee failed to submit an order dismissing the
Debtor 	from 	the 	proceeding 	and 	simply 	filed 	the 	second 	amended
complaint. 	However, 	the 	Trustee 	may 	submit 	such 	an 	order 	now. 	No
default 	judgment 	was 	entered 	against 	the 	Debtor. 	Therefore, 	the
motion 	to 	set 	aside 	the 	default 	judgment 	is 	not 	relevant 	to 	the
Debtor.
At 	the 	time 	the 	Court 	ordered 	the 	Debtor 	to 	be 	dropped 	as 	a
party 	defendant, 	it 	was 	distracted 	by 	the 	emergence 	of 	Easterday’s
Other Corporations as claimants to the Refund. 	The Court ordered the
Debtor dismissed on the ground that only the Trustee could assert a
claim to the Refund. 	The Court did not address the argument made by
the Debtor in its opposition to the motion for summary judgment, that
the Refund was not property of the bankruptcy estate.
If an asset is scheduled by a debtor in a bankruptcy case, the
asset is abandoned to the debtor if not administered by the trustee.
However, 	if 	the 	asset 	is 	not 	scheduled, 	it 	remains 	property 	of 	the
bankruptcy 	estate 	even 	after 	the 	case 	is 	closed. 	11 	U.S.C. 	§
554(c),(d). 	The 	Debtor 	concedes 	that 	the 	Refund 	was 	not 	listed 	in
his schedules. 	However, the Debtor argues that there was no way that
it could list the Refund since the Refund’s existence was not known
to the Debtor when its bankruptcy case was filed. 	Alternatively, the
Debtor 	argues 	that 	the 	asset 	was 	adequately 	listed 	by 	listing 	the
$163,000 liability to the Insurance Fund.
Both arguments fail. 	The rule established by 11 U.S.C. § 554(d)
is not designed to punish a dishonest debtor. 	Therefore, good faith
or 	impossibility 	is 	not 	a 	defense. 	The 	rule 	is 	designed 	to 	give 	a
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trustee 	the 	opportunity 	to 	administer 	an 	asset 	not 	known 	to 	the
trustee 	before 	the 	case 	was 	closed. 	The 	argument 	that 	the 	Debtor
adequately listed the Refund by listing the $163,000 liability is too
lacking in persuasive force to require discussion.
The Debtor also argues that it would be inequitable for it to be
deprived of any share of the Refund after having expended thousands
of dollars pursuing it prior to the reopening of the bankruptcy case.
However, 	the 	Debtor 	appears 	to 	have 	expended 	these 	funds 	in 	an
attempt to obtain the Refund for its own benefit to the prejudice of
the bankruptcy estate. 	Once the Debtor learned of the existence of
the 	Refund, 	the 	Debtor 	should 	have 	made 	a 	motion 	to 	reopen 	the
bankruptcy 	case 	and 	alerted 	the 	Trustee 	to 	its 	existence. 	Had 	it
done 	so, 	its 	expenses 	in 	pursuing 	the 	Refund 	could 	have 	been
authorized and therefore reimbursed.
CONCLUSION
The Debtor’s motion will be denied. 	The failure of Easterday’s
Other 	Corporations 	to 	respond 	to 	the 	second 	amended 	complaint 	may
have 	been 	due 	to 	excusable 	neglect. 	They 	may 	have 	a 	meritorious
claim to a portion of the Refund. 	However, because they are not in
good 	standing 	with 	the 	California 	Secretary 	of 	State, 	they 	may 	not
respond 	to 	the 	second 	amended 	complaint, 	and 	it 	would 	be 	futile 	to
set aside their defaults judgments.
The 	Court 	previously 	ordered 	the 	Debtor 	to 	be 	dropped 	as 	a
defendant from the proceeding. 	The Court reiterates this ruling for
the reasons stated above. 	The dismissal should be with prejudice.
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Counsel for the Trustee is directed to submit a proposed form of
order in accordance with this decision.
END OF DOCUMENT
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COURT SERVICE LIST
Reidun Stromsheim
Stromsheim & Associates
201 California St., Ste. 350
San Francisco, CA 94111
Virginia O’Ryan Hoyt
State Compensation Insurance Fund
1275 Market St.
San Francisco, CA 94103
Kim O. Dincel
Hines Smith Carder Leasure Dincel
25 Metro Drive, Ste. 600
San Jose, CA 95110
Case: 06-04232 Doc# 102 Filed: 05/01/09 Entered: 05/04/09 16:20:10 Page 13 of
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