PM Factors, Inc. dba 1st PM Factors Bancorp v. Kreisel et al

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UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
SAN FERNANDO VALLEY DIVISION
In re:
KENNETH W. KREISEL and
LAURENE M. KREISEL,
Debtor(s).
PM FACTORS, INC., A CALIFORNIA
CORPORATION DOING BUSINESS AS
1ST PM FACTORS BANCORP, its
assignees and/or successors in interest,
Plaintiff(s),
v.
KENNETH W. KREISEL and
LAURENE M. KREISEL,
Defendant(s)
Bk. No. SV 07-11493 MT
Chapter 7
Adv. No. SV 08-01169 MT
MEMORANDUM RE: COUNTER-
DEFENDANTS’ MOTION TO DISMISS
ALL PURPORTED CLAIMS OF
COUNTER-CLAIMANT KENNETH W.
KREISEL’S COUNTER-CLAIM
I. INTRODUCTION:
Counter-Defendants PM Factors, Inc., Stephen Perl, and Peter Perl
(collectively known as “Counter-Defendants”) filed a Notice of Motion and Motion
FILED & ENTERED
AUG 14 2008
CLERK U.S. BANKRUPTCY COURT
Central District of California
BY DEPUTY CLERK	marshall
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to Dismiss on May 29, 2008. Counter-Defendants asked this Court to grant its
request for dismissal of all counterclaims brought by Counter-Claimant Kenneth
Kreisel (“Counter-Claimant”) for: (1) lack of standing under 11 U.S.C. § 323; (2)
failure to follow pleading requirements for bringing a shareholder derivative suit
under Fed. R. Civ. P. 23.1; (3) failure to state a claim for which relief can be
granted under Fed. R. Civ. P. 12(b)(6); and (4) protection under Counter-
Defendants’ assertions of its litigation and common interest privileges. For the
reasons stated below, Counter-Defendants’ motion is denied. Counter-Claimant
is also granted leave to amend to correct the deficiencies of his counterclaim
pursuant to the guidance provided below.
II. FACTS:
Kenneth Kreisel and Laurene Kreisel (collectively known as “Debtors”) filed a
chapter 11 bankruptcy on April 25, 2007, case no. SV 07-11493-MT. The bankruptcy
case was converted to chapter 7 on November 29, 2007 and discharged on June 10,
2008. Kenneth Kreisel (“Kreisel”) is one of the founders of the corporation, M&K Sound
(“M&K”). M&K filed for chapter 7 bankruptcy on February 27, 2007, case no. SV 07-
10614-MT. The M&K bankruptcy has yet to be closed.
On February 30, 2008, PM Factors, Inc. (“Plaintiff”) commenced an adversary
proceeding against Debtors, adv. no. SV 08-01169-MT. This adversary proceeding
involves two agreements. The first related to a factoring agreement (“Factoring
Agreement”), entered into around March 9, 2005 between PM Factors and M&K, which
Kreisel signed. PM Factors agreed that it would purchase goods for M&K and advance
funds to M&K on its purchase orders and invoices. PM Factors also agreed to give
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M&K access to certain portions of PM Factor’s personal property for sales, subject to its
approval. (Compl. ¶ 6). The second agreement was an intercreditor agreement
(“Intercreditor Agreement”), also entered into around March 9, 2005 between PM
Factors and M&K, which Kreisel also signed. M&K agreed that goods purchased by PM
Factors for M&K would be held in trust, segregated, and immediately delivered to PM
Factors upon demand. (Compl. ¶ 7).
PM Factors claims that M&K did not pay for certain inventory and goods
purchased by PM Factors after M&K received the goods. PM Factors also claims
Kreisel intentionally engaged in fraudulent conduct, making material representations in
the Factoring Agreement and Intercreditor Agreement upon which PM Factors
detrimentally relied. (Compl. ¶ 9). In Plaintiff’s Complaint to Determine Dischargeability
of Certain Debt (“Complaint”), Plaintiff seeks (1) a determination that Debtors’ debt to
Plaintiff be non-dischargeable; (2) determinations of fraud, conversion, and
embezzlement in connection with Debtors’ bankruptcy; (3) interest, attorneys’ fees, and
other costs of suit; and (4) for such other and further relief as this court deems proper
and just. (Compl. at 9).
On April 21, 2008, Debtors submitted answers to the complaint that denied all of
PM Factor’s allegations. (Answer to Compl. at 2-4). Also on April 21, 2008, Kreisel filed
a Counter-Claim (“Counterclaim”) in which he seeks against Counter-Defendants: (1)
joint and several judgments, compensatory damages, and punitive damages for claims
of (a) breach of contract, (b) fraud, (c) breach of fiduciary duty, (d) interference with
contract, and (e) interference with prospective economic advantage; (2) interest at the
legal rate on damages awarded; (3) attorneys’ fees and costs incurred herein, and (4)
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for such other relief as this court deems appropriate under the circumstances.
(Countercl. at 13-14).
Counter-Defendants filed a Motion to Dismiss All Purported Claims of Counter-
Claimant Kenneth W. Kreisel (“Motion to Dismiss”) on May 29, 2008. The Motion to
Dismiss seeks dismissal of the Counterclaim in its entirety. On July 8, 2008, both
parties appeared before this Court for a hearing on the Motion to Dismiss. Kreisel
responded to Counter-Defendant’s lack of standing argument with the assertion that his
lack of standing had been cured because in M&K’s bankruptcy, the chapter 7 trustee
had abandoned all claims against Counter-Defendants. This assertion of standing, as
well as Counter-Defendants’ remaining arguments in its Motion to Dismiss, are the
subject of this memorandum.
III. DISCUSSION:
Standard on Motion to Dismiss
Counter-Defendants request a motion to dismiss Counterclaim pursuant to Fed.
R. Civ. P. 12(b)(6). Rule 12(b)(6) is incorporated into federal bankruptcy law by
reference under Fed. R. Bankr. P. 7012(b). A Rule 12(b)(6) motion tests the legal
sufficiency of the claims asserted in the complaint. See Fed. R. Civ. P. 12(b)(6). A
Rule 12(b)(6) dismissal is proper only where there is either a “lack of cognizable legal
theory” or “the absence of sufficient facts alleged under a cognizable legal theory.”
Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir. 1988). “While a complaint
attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual
allegations, a plaintiff’s obligation to provide the ‘grounds’ of his ‘entitlement to relief’
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requires more than labels and conclusions, and a formulaic recitation of a cause of
action’s elements will not do.” Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955, 1959
(2007).
In deciding a motion to dismiss pursuant to Rule 12(b)(6), the court’s review is
limited to the contents of the complaint. Campanelli v. Bockrath, 100 F.3d 1476, 1479
(9th Cir. 1996); Allarcom Pay Television, Ltd. V. General Instrument Corp., 69 F.3d 381,
385 (9th Cir. 1995). The court must accept all factual allegations pleaded in the
complaint as true, and must construe them and draw all reasonable inferences from
them in favor of the nonmoving party. Cahill v. Liberty Mutual Ins. Co., 80 F.3d 336,
337-38 (9th Cir. 1996). However, it need not accept as true unreasonable inferences or
conclusory legal allegations cast in the form of factual allegations. Western Mining
Council v. Watt, 643 F.2d 618, 624 (9th Cir. 1981).
Debtors’ Standing to Sue
Standing to Sue in Bankruptcy
Counter-Defendant’s first argument for dismissal of the Counterclaim is that
Kreisel has no standing to sue because his standing was transferred to an appointed
trustee when he filed for chapter 7 bankruptcy. The Bankruptcy Code establishes that
the trustee is the “representative of the estate” and thus “has the capacity to sue and be
sued.” 11 U.S.C. § 323 (2008). In Estate of Spiritos v. One San Bernardino County
Super. Ct., the court held that “11 U.S.C. § 323 vests the bankruptcy trustee with the
exclusive right to sue on behalf of the bankruptcy estate.” 443 F.3d 1172, 1174 (9th Cir.
2006) (finding that a creditor of a bankruptcy estate does not have standing to file a
complaint on behalf of the estate unless permission from the trustee is obtained)
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(emphasis added). Additionally, the court in In re Eisen found that a chapter 7 debtor
had no standing to sue because when a chapter 7 trustee was appointed, he was
vested with all of the debtor’s causes of action. 31 F.3d 1447, 1451 n.2 (9th Cir. 1994)
(finding that “as trustee, Moneymaker is vested with Eisen’s [the debtor’s] causes of
action, rendering Eisen with no standing to appeal”). That the estate could acquire
additional funds as a result of a debtor’s complaint is irrelevant to whether the debtor
has standing to bring the matter before the court. Id.
However, when a trustee abandons a claim, a debtor regains standing to bring
that claim because “upon abandonment, the debtor’s interest in the property is restored
nunc pro tunc as of the filing of the bankruptcy petition.” Catalano v. Comm’r of Internal
Revenue, 279 F.3d 682, 685 (9th Cir. 2002); see also Harris v. St. Louis Univ., 114 B.R.
647, 648 (E.D. Mo. 1990). The Ninth Circuit describes abandonment in the bankruptcy
context as, “the formal relinquishment of the property at issue from the bankruptcy
estate.” Catalano, 279 F.3d at 685. In the case at hand, Kreisel argues that, contrary to
Counter-Defendants’ assertions, he does have standing to bring his Counterclaim
because all relevant causes of action were properly abandoned.
Proper Abandonment of Claims by the Bankruptcy Estate
Proper abandonment resulting in restoration of a debtor’s interest in property
(and thus debtor’s standing to bring a claim for that property) is governed by 11 U.S.C.
§ 554. First, claims must be scheduled in order to be abandoned. Section 554(c)
states, “[u]less the court orders otherwise, any property scheduled under 521(1) of this
title ... not otherwise administered at the time of the closing of a case is abandoned to
the debtor.” 11 U.S.C. § 554(c) (2008) (emphasis added). In Moreno v. Autozone, Inc.,
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the court stated that “a cause of action that was never disclosed in the bankruptcy
petition cannot be abandoned.” 2007 U.S. Dist. LEXIS 29432 at 11 (N.D. Cal. 2007)
(holding that a debtor lacked standing to bring claims against her former employer
because such claims were never scheduled and therefore could not be abandoned)
(citation omitted). In the case at hand, all causes of action named in the Counterclaim
were listed in schedules submitted in both the Debtors’ personal bankruptcy as well as
the M&K bankruptcy. Because these claims were scheduled, they can also be
abandoned by the trustees in both bankruptcies. See id.
Second, proper abandonment requires that the trustee give all creditors notice of
his intent to abandon a claim. § 554(a) states, “[a]fter notice and a hearing, the trustee
may abandon any property of the state that is burdensome to the estate or that is of
inconsequential value and benefit to the estate.” 11 U.S.C. § 554(a). Fed. R. Bankr. P.
6007 implements § 554 by adding, “the trustee...shall give notice of a proposed
abandonment or disposition of property to...all creditors...” Fed. R. Bankr. P. 6007
(2006-2007). The Ninth Circuit has therefore found, “there is no abandonment without
notice to creditors.” Sierra Switchboard Co. v. Westinghouse Elec. Corp., 789 F.2d 705,
710 (9th Cir. 1986) (holding that trustee had not abandoned an emotional distress claim
to the debtor because “[n]othing in the record indicates that creditors were notified of the
trustee’s intent to abandon...”).
In the case at hand, the Counterclaim contains causes of action both on behalf of
Kreisel as well as for his corporation, M&K. When the Counterclaim was filed on April
21, 2008, however, neither the trustee in Kreisel’s personal bankruptcy nor M&K’s
corporate bankruptcy had abandoned any claims pursuant to § 554(a). Even though
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the pertinent causes of action were recorded in the appropriate bankruptcy schedules,
standing to sue and be sued still transferred solely to the trustees when each Chapter 7
bankruptcy was filed. See Estate of Spiritos v. One San Bernardino County Super. Ct.,
443 F.3d 1172, 1174 (9th Cir. 2006); In re Eisen, 31 F.3d 1447, 1451 n.2 (9th Cir.
1994). Thus, neither Kreisel nor M&K had standing to sue as real parties in interest at
the time the Counterclaim was first filed.
Curing Standing by Ratification
The Ninth Circuit has allowed that a standing defect can be cured under Fed. R.
Civ. P. 17(a), which is incorporated into federal bankruptcy law by Fed. R. Bankr. P.
7017(a). If a claimant without standing can obtain ratification from the real party in
interest, “such ratification...shall have the same effect as if the action had been
commenced in the name of the real party in interest.” Fed. R. Civ. P. 17(a). In
Dunmore v. U.S., Internal Revenue Serv., the Ninth Circuit found that a trustee’s
abandonment of claims to a debtor one and a half years after the debtor lodged a
complaint without standing “could constitute the estate’s ratification of [the debtor’s]
lawsuit.” 358 F.3d 1107, 1112 (9th Cir. 2004).
However, the Ninth Circuit has also found this ratification to be contingent upon
the claimant showing that the decision to sue in his own name was the result of “an
understandable mistake.” See Dunmore, 358 F.3d at 1112; U.S. v. CMA, Inc., 890 F.2d
1070, 1074 (9th Cir. 1989); Note of Advisory Committee on 1966 Amendment to Fed. R.
Civ. P. 17. Whether there was “an understandable mistake and not a strategic decision”
is a question of fact that the bankruptcy court must determine. Dunmore, 358 F.3d at
1112. An understandable mistake is not present if the court can conclude that “there
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was no difficulty and no mistake in determining who was the proper party to bring suit.”
Capobianco v. Trew, 248 B.R. 833, 839 (9th Cir. 2000). For example, in Capobianco,
the court held that “an understandable mistake” was present because determining
whether a claim belonged to an individual or a corporation when it arose before the
incorporation was an “easy subject of confusion.” Id. at 840. Contra CMA, Inc., 890
F.2d at 1074-75 (finding that an “understandable mistake” did not exist because
previous efforts by creditors to obtain an assignment of a subcontractor’s claims against
a contractor demonstrated that the creditors were aware that the subcontractor was the
real party in interest).
In the case at hand, the facts initially do not seem to give rise to an
“understandable mistake,” as interpreted by the court in Capobianco. Kreisel filed
bankruptcy and his claims transferred to the chapter 7 trustee assigned to his case.
Similarly, M&K filed for bankruptcy and the corporation’s claims also transferred to the
chapter 7 trustee assigned to its case. In both bankruptcies, the transfer of causes of
action to the Chapter 7 trustees appears standard and uncomplicated. Instead, the
confusion appears to be a result of a pro se debtor attempting to represent himself and
his corporation in this adversary proceeding.
Nevertheless, “modern decisions are inclined to be lenient when an honest
mistake has been made in choosing the party in whose name the action is to be filed.”
Note of Advisory Committee on 1966 Amendment to Fed. R. Civ. P. 17. Further, the
trustee in the M&K bankruptcy abandoned all outstanding claims to the debtor less than
two months after the Counterclaim was filed. See Trustee’s Motion to (A) Pay
Miscellaneous Court Costs et al. at ¶ 4, 2:16-19 [filed under case no. 07-10614-MT].
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This suggests that Kreisel’s filing was an “understandable mistake and not a strategic
decision.” Dunmore, 358 F.3d at 1112. Thus, for policy purposes, this court construes
“understandable mistake” broadly to encompass this confusion on the part of a pro se
debtor.
Having found an “understandable mistake” on the part of the Kreisel, his lack of
standing may therefore be cured by subsequent abandonment by the trustee under
Dumore. 358 F.3d at 1112. On June 16, 2008, the trustee in the M&K bankruptcy
abandoned claims which included “causes of action against third parties, including
without limitation PM Factors, ACI and Stephen Perl.” See Trustee’s Motion at ¶ 4,
2:16-19. Kreisel’s standing to bring claims on behalf of M&K still requires an
amendment to the pleadings asserting shareholder status. However, with this
correction, these alleged counterclaims brought on behalf of M&K are cured by the
trustee’s abandonment.
Regarding Kreisel’s counterclaims in connection with his personal bankruptcy,
Debtors Kenneth Kreisel and Laurene Kreisel had their case discharged on June 10,
2008. However, the bankruptcy case still remains open and none of the estate’s claims
have been abandoned by the trustee. Section 554(d) provides that, “[u]nless the court
orders otherwise, property of the estate that is not abandoned under this section and
that is not administered in the case remains the property of the state.” 11 U.S.C. §
554(d). Furthermore, even though § 554(b) allows that "[o]n request of a party in
interest and after notice and a hearing, the court may order the trustee to abandon any
property of the estate that is burdensome to the estate or that is of inconsequential
value and benefit to the estate," Kenneth Kreisel and Laurene Kreisel have not sought
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abandonment of any of the estate’s claims. Id. (emphasis added). In the absence of
any abandonment of claims in Kreisel’s personal bankruptcy, standing to sue remains
solely with the trustee. See also Estate of Spiritos, 443 F.3d at 1176 (finding that a
debtor who failed to request abandonment of certain claims of the bankruptcy estate did
not have standing to bring those claims.) Therefore, unless Kreisel can obtain a court
order to abandon the personal claims brought in the Counterclaim, his standing is only
cured with regards to claims brought on behalf of M&K.
Shareholder Status to Bring a Derivative Suit
Counter-Defendant also argues that Kreisel still has no standing to bring his
Counterclaim because he failed to assert his shareholder status per Fed. R. Civ. P.
23.1, incorporated into federal bankruptcy law by Fed. R. Bankr. P. 7023.1. See Mot. to
Dismiss at 12-13. Rule 7023.1 explicitly states that a shareholder bringing a derivative
action must, in his complaint, “allege that the plaintiff was a shareholder or member at
the time of the transaction of which the plaintiff complains.” Fed. R. Bankr. P. 7023.1
(2008). Kreisel implies shareholder status, but makes no explicit allegations that would
satisfy Rule 7023.1. Therefore, Counter-Defendants correctly assert that Kreisel has
failed to follow the statutory pleading requirements in bringing a shareholder derivative
action.
Fed. R. Civ. P. 12(b)(6)
Claims Against PM Factor Employees/Representatives
Counter-Defendants argue that claims against PM Factor directors Stephen Perl
and Peter Perl are improper because employees of a corporation “cannot be held liable
for tortuous [sic] acts of the corporation simply because of their official position” Mot. to
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Dismiss, at 13 ¶¶ 11-14. U.S. Liab. Ins. Co. v. Haidinger-Hayes, Inc., states, “[d]irectors
or officers of a corporation do not incur personal liability for torts of the corporation
merely by reason of their official position.” 1 Cal. 3d 586, 595 (1970). However,
directors and officers can incur personal liability if they “participate in the wrong or
authorize or direct that it be done.” Id. The Counterclaim asserts that both Stephen
Perl and Peter Perl individually participated in the wrongs alleged. See Countercl., ¶
31, 7:17-24. Because this court is only considering a 12(b)(6) motion to dismiss, all
factual allegations pleaded in the complaint are assumed true and construed in favor of
the non-moving party. Cahill, 30 F.3d at 337-38. Therefore, at this stage, Counter-
Defendants’ argument that employees cannot be held liable for a corporation’s tortious
acts is insufficient to warrant granting a motion to dismiss.
Imaginary and Speculative Damages
Counter-Defendants next argue that stated damages for all five claims put
forward in the Counterclaim are speculative and therefore must be dismissed. See
Countercl. at 13-14. In determining whether damages are speculative, this circuit has
“distinguished uncertain damage, which prevent[s] recovery, from an uncertain extent of
damage, which [does] not prevent recovery.” Allen v. United Food & Commercial
Workers Intern. Union, 43 F.3d 424, 427-28 (9th Cir. 1994) (quoting In re Multidistrict
Vehicle Air Pollution 591 F.2d 68, 73 (9th Cir. 1979).
Counter-Defendants argue that a plaintiff cannot recover loss of prospective
profits without evidence that such profits were reasonably certain to have accrued.
Engle v. Oroville, 47 Cal. Rptr.2d 630, 634 (App. Ct. 1965); Westside Ctr. Assoc. v.
Safeway Stores 23 Inc., 49 Cal. Rptr.2d 793, 808 (App. Ct. 1996). Kreisel claimed
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estimated damages proximately caused by breach of contract, fraud, breach of fiduciary
duty, interference with contract, and interference with prospective economic advantage.
Kreisel does not appear to claim lost “prospective profits” as Counter-Defendants
suggests, but instead alleged damages already incurred. See Countercl. at 13-14.
While Kreisel’s stated damages of $5M may seem arbitrary, in this case, Counter-
Defendants nonetheless appear to be confusing “uncertain damage” with “uncertain
extent of damage.” Therefore, on the issue of damages alone, Counter-Defendants
have not presented arguments that compel dismissal of the Counterclaim.
Breach of Contract Claim
A proper claim for breach of contract must allege (1) the existence of an
agreement, (2) consideration for the agreement, (3) performance by the claimant, (4)
breach by the defendant, and (5) damages proximately caused by the breach. In re
Sahuaro Petroleum & Asphalt Company, 33 Fed. Appx. 896, 898 (9th Cir. 2002).
Counter-Defendants correctly argue that the Counterclaim failed to allege the existence
of a contract that was breached and caused damages, some of the “usual breach of
contract elements” required for a complaint to survive past the pleading stage. Id.
Nowhere does Counterclaim establish the existence of a contract between Kreisel and
Stephen Perl and/or Peter Perl. The only contracts identified are a factoring agreement
between M&K and PM Factors and an agreement by which Kreisel purportedly
personally guaranteed the M&K-PMF factoring agreement. Kreisel argues that Counter-
Defendants breached an implied covenant of good faith and fair dealing in its guaranty
agreement, but is unable to allege any actual damages since Counter-Claimant never
ultimately transferred stock to Stephen Perl or Peter Perl nor did he allege that he made
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any guaranty payments to PM Factors. Kreisel’s other allegation that “Perl, Peter, and
PMF breached their several agreements to provide funding to M&K” by allegedly
diverting M&K’s shipments is also improperly pleaded. The Counterclaim fails to allege
any performance on the part of himself or M&K that would indicate the existence of such
an agreement and damages caused by any of the named Counter-Defendants.
Fraud Claim
A proper claim for fraud must include allegations that every element of fraud has
been met: The claimant must allege (1) a misrepresentation, (2) knowledge of its falsity,
(3) intent by the defendant to defraud, (4) detrimental and justifiable reliance by
claimant, and (5) resulting damage sustained by the claimant. Roberts v. Ball, Hunt,
Hart, Brown, & Baerwitz, 57 Cal. App.3d 104, 109 (2nd Dist. 1976). Furthermore,
“[e]very element of the cause of action for fraud must be alleged in the proper manner
and the facts constituting the fraud must be alleged with sufficient specificity to allow
defendant to understand fully the nature of the charge made.” Id. (citing Hills Trans. Co.
v. Southwest Forest Indus., Inc., 72 Cal. Rptr. 441 (1968). This entails a showing of
“how, when, where, to whom, and by what means the representations were tendered.”
Stansfield v. Starkey, 220 Cal. App.3d 59, 73 (1990).
Counter-Defendants also correctly note that Kreisel’s claim for fraud is improperly
pleaded because at best, the Counterclaim identifies oral promises between PM Factors
and M&K to provide financing. The timing of such representations is not indicated nor
does the Counterclaim identify the individuals who made the representations. Even if
these oral promises were misrepresentations known to be false by Counter-Defendants,
and were put forward with an intent to defraud, Kreisel has also failed to allege actual
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justifiable detrimental reliance on his own part or damages incurred directly as a result
of any Counter-Defendants’ actions. Kreisel alleges that, despite admitting that M&K
had been sustaining losses, he decided to “abandon other funding or operational
alternatives” simply because he was convinced by Counter-Defendants to do so.
Kreisel also states that “as a direct and proximate result of the Defendant’s
representations and false promises...[Kreisel] has suffered and continues to suffer
general and special damages...” See Countercl., ¶ 44, 10:19-22. Although the
Counterclaim’s vocabulary asserts causation, there are no allegations that indicate
actual damages proximately caused by actual reliance on Counter-Defendants’ alleged
misrepresentations.
Whether the breach of fiduciary duty counterclaim was properly pled
A proper claim for breach of fiduciary duty must establish (1) existence of a
fiduciary duty, (2) breach of the fiduciary duty, and (3) damages proximately caused by
the breach. Maglica v. Maglica, 78 Cal. Rptr.2d 101, 103 (Ct. App. 1998). Here,
Counter-Defendants also correctly argue that the Counterclaim fails to allege the
existence of a valid fiduciary relationship between Kreisel and Counter-Defendants. By
all facts alleged in the Counterclaim, Counter-Defendants’ relationship to Kreisel is that
of a lender to a loan customer. In Price v. Wells Fargo Bank, the court found that “[a]
debt is not a trust and there is not a fiduciary relation between debtor and creditor as
such. The same principle should apply with even greater clarity to the relationship
between a bank and its loan customers.” 213 Cal. App. 3d 465, 261 (1989) (internal
citations omitted). Price involved a group of ranchers who claimed a breach of fiduciary
duty against a bank after the bank initiated foreclosure proceedings when the ranchers
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defaulted on their loans. Id. The court found that fiduciary relationships do not exist
between a bank and its loan customers. Id.
Here, Kreisel alleges that Counter-Defendants had a fiduciary relationship to
M&K, but fails to allege that the relationship between the two companies was anything
more than a creditor-debtor arrangement. In the absence of any alleged relationship
that could give rise to fiduciary duties, Counter-Defendants are correct in arguing that
the breach of fiduciary duty claim was improperly pleaded.
Interference with Contract Claim
To prevail on an intentional interference with contract claim, Kreisel needs to
allege that (1) a valid contract existed between himself and a third party, (2) Counter-
Defendant’s knew of the contract, (3) Counter-Defendants engaged in intentional acts
that were intended to induce the breach or disruption of the contractual relationship, (4)
actual breach or disruption of the contract actually occurred, and (5) actual damages
resulted. Bank of New York v. Fremont Gen. Corp., 523 F.3d 902, 909 (9th Cir. 2007)
(citations omitted).
Kreisel puts forward two alleged instances of Counter-Defendants’ interference
with contract. First, he alleges that Counter-Defendants knew of M&K’s valid contract
with a supplier, ACI, to ship product to M&K’s warehouses. He then alleges that
Counter-Defendants intentionally engaged in negotiations with ACI to disrupt the M&K-
ACI contract and were ultimately successful when ACI began diverting shipments
originally intended for M&K to PM Factor warehouses. He alleges that the damages
incurred were monetary losses that stemmed from M&K’s inability to inspect product
and fulfill customer orders. See Countercl. at 12-13. Because Kreisel sufficiently
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alleges each element of an interference with contract claim, Counter-Defendants’
motion to dismiss should be denied with respect to M&K’s shipment agreement with
ACI.
Second, Kreisel alleges that Counter-Defendants made representations to
customers with whom M&K had pre-existing contracts to supply product. He alleges
that Counter-Defendants purposely approached these customers and engaged in the
intentional act of suggesting there was an impending change in ownership of M&K. He
alleges that after receiving this information from Counter-Defendants, M&K customers
canceled purchase orders, causing damage to the business. See id. Because the
Counterclaim sufficiently alleges each element of an interference with contract claim,
Counter-Defendants’ motion to dismiss should also be denied with regards to M&K’s
contract with its customers.
Interference with Prospective Economic Advantage Claim
To properly bring a claim for interference with prospective economic advantage,
Kreisel must plead intentional acts on the part of Counter-Defendants that were
designed to divert or disrupt the business relationship in a manner that falls outside fair
competition practices. See TransWorld Airlines, Inc. v. American Coupon Exch., Inc.,
913 F.2d 676, 690 (9th Cir. 1990); Settimo Assocs. V. Environ Sys., Inc., 14 Cal. App.
4th 842, 845 (1993). The elements of this cause of action are: “(1) the existence of a
prospective business relationship containing the probability of future economic rewards
for plaintiff; (2) knowledge by defendant of the existence of the relationship; (3)
intentional acts by defendant designed to disrupt the relationship; (4) actual causation,
and, (5) damages to plaintiff proximately caused by defendant's conduct.” Settimo, 14
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Cal. App. 4th at 845 (citing Buckaloo v. Johnson, 122 Cal. Rptr. 745, 537 P.2d 865
(1975)).
The Counterclaim alleges interference with prospective economic advantage that
resulted in loss of customers and the devaluation of his stock ownership in M&K.
However, Counter-Defendants’ argument that the claim was improperly pleaded is
correct because Kreisel fails to specify the intentional acts on the part of Counter-
Defendants that actually and proximately caused the damages he alleges.
Litigation and Common Interest Privileges
Litigation Privilege
Counter-Defendants argue that the litigation privilege bars all of causes of action
brought in the Counterclaim because Counter-Defendants communicated with third
parties while they were asserting PM Factor’s rights. Cal. Civ. Code § 47(b) provides
for the litigation privilege as follows: A publication or broadcast protected by the litigation
privilege is one made in any (1) legislative proceeding, (2) judicial proceeding, (3) in any
other official proceeding authorized by law, or (4) in the initiation or course of any other
proceeding authorized by law and reviewable pursuant to Chapter 2 of Title 1 of Part 3
of the Code of Civil Procedure. Cal. Civ. Code § 47(b) (2008). “The principal purpose
of section 47(b) is to afford litigants and witnesses the utmost freedom of access to the
courts without fear of being harassed subsequently by derivative tort actions.” Nguyen
v. Proton Tech. Corp., 69 Cal. App.4th 140, 146 (1999). For example, in Silberg v.
Anderson the California Supreme Court found the litigation privilege to apply to
statements made “in the context of a judicial proceeding, [that] were logically related to
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the action, played an integral role in the proceeding, and were made by one of the
participants about an authorized participant.” 786 P.2d 365, 374 (Cal. 1990).
However in the case at hand, Counter-Defendants failed to show how the
litigation privilege bars the causes of action alleged in the Counterclaim, which are all
predicated upon the same facts that underlie the original causes of action PM Factors
claimed when it commenced its adversary proceeding against Kenneth Kreisel and
Laurene Kreisel. As Nguyen asserts, the purpose of § 47(b) is to bar “derivative tort
actions,” not necessarily those brought to counterclaim an original complaint. 69 Cal.
App.4th at 146 (emphasis added). Therefore, Counter-Defendants’ motion to dismiss
counterclaims based upon the application of the litigation privilege is denied.
Common Interest Privilege
Counter-Defendants further argue that the common interest privilege also bars all
of Kreisel’s counterclaims because Counter-Defendants communicated with third
parties while asserting PM Factor’s rights. “The common interest privilege applies
where (1) the communication was made by separate parties in the course of a matter of
common interest, (2) the communication was designed to further that effort, and (3) the
privilege has not been waived.” Value Prop. Trust v. Zim Co. (In re Mortgage & Realty
Trust) 212 B.R. 649, 653 (C.D. Cal. 1997) (citing In re Bevill, Bresler & Schulman Asset
Mgmt. Corp., 805 F.2d 120, 126 (3d Cir. 1986); Griffith v. Davis, 161 F.R.D. 687, 692
(C.D. Cal. 1995).
Counter-Defendants argue that as assignee to M&K’s accounts receivables, it
was entitled to communicate with M&K’s customers in the course of protecting PM
Factor’s rights. However, it is questionable that the communication between PM
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Factors and M&K customers can be characterized as “communication...designed to
further that [matter of common interest].” Id. While PM Factors was an assignee to
M&K’s accounts receivables, it does not necessarily follow that all of PM Factor’s
communications with M&K customers were protected by the common interest privilege.
In fact, Kreisel alleges that Counter-Defendants had very different interests as to
operation of M&K’s business. Further, courts have found that “[t]he common interest
privilege is an extension of the attorney-client privilege and work product doctrine.”
Burroughs v. DeNardi, 167 F.R.D. 680, 685 (S.D. Cal. 1986). Given this underlying
purpose for the common interest privilege and Kreisel’s allegations denying the
presence of a common interest, it is inappropriate to apply the bar.
IV. CONCLUSION:
This Court denies Counter-Defendants’ Motion to Dismiss on the grounds that
Kreisel is found to have standing to bring his Counterclaim. While Kreisel did not have
standing to sue at the time the Counterclaim was filed, his lack of standing as the real
party in interest was cured by the trustee’s subsequent abandonment of claims in the
M&K bankruptcy. Dunmore, 358 F.3d at 1112. This Court also finds that, for the
reasons above, Counter-Defendants’ assertions of a litigation privilege and common
interest privilege are inapplicable to the Counterclaim.
The Court finds, however, that Kreisel does not have standing to bring claims on
behalf of himself because the trustee has not abandoned any claims in the Kenneth
Kreisel and Laurene Kreisel personal bankruptcy. Kreisel has also failed to follow the
pleading requirements for bringing a shareholder derivative suit as well as for bringing
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claims for breach of contract, fraud, fiduciary duty, and interference with prospective
economic advantage. As this Motion to Dismiss has been brought at the Rule 12(b)(6)
stage, this Court grants Kreisel leave to amend within 30 days to plead the additional
facts required to correct the deficiencies noted in the discussion above should such
facts apply. If no amended counterclaim is filed within 30 days of service of this
Memorandum, those causes of action are dismissed.
United States Bankruptcy Judge
DATED: August 14, 2008
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SERVICE LIST FOR ENTERED ORDER
SERVED ELECTRONICALLY
Andrew A Goodman
200 N Westlake Blvd Ste 202
Westlake Village, CA 91362
agoodman@andyglaw.com
Cassandra J Richey
Polk Prober & Raphael ALC
20750 Ventura Blvd Ste 100
Woodland Hills, CA 91364
cmartin@pprlaw.net
SERVED BY U.S. MAIL
PM Factors, Inc. dba 1st PM Factors
Bancorp
Law Offices of Scott E. Shapiro, P.C.
P. O. Box 1488
Culver City, CA 90232
Kenneth W. Kreisel
Laurene Kreisel
5409 Castle Knoll Road
La Canada Flintridge, CA 91011
Scott E Shapiro, Esq
17337 Ventura Blvd Ste 200
Encino, CA 91316
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