Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-1_11-cv-00845/USCOURTS-caed-1_11-cv-00845-3/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:1332 Diversity-(Citizenship)

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IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF CALIFORNIA

FRESNO ROCK TACO, LLC, CASE NO. CV F 11-0845 LJO BAM

et al., 

ORDER ON DEFENDANT’S MOTION FOR

Plaintiffs, JUDGMENT ON PLEADINGS

(Doc. 34.)

vs.

NATIONAL SURETY CORPORATION,

Defendant.

 /

INTRODUCTION

Defendant National Surety Corporation (“NSC”) seeks dismissal under F.R.Civ.P. 12(c) of

plaintiffs Fresno Rock Taco, LLC (“Fresno Rock”) and Zone Sports Center, LLC’s (“Zone Sports’”)

insurance and bad faith claims in that Zone Sports lacks capacity to sue as a suspended corporation and

representations in a bankruptcy proceeding judicially estop Fresno Rock and Zones Sports’ (collectively

“plaintiffs’”) claims. Plaintiffs respond that Zone Sports’ good corporate standing has been restored and

that they filed no bankruptcy to invoke judicial estoppel. Pursuant to Local Rule 230(g), this Court

VACATES the May 30, 2012 hearing in that it has considered on the record NSC’s F.R.Civ.P. 12(c)

motion for judgment on the pleadings. For the reasons discussed below, this Court DENIES NSC’s

F.R.Civ.P. 12(c) motion for judgment on the pleadings.

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BACKGROUND1

Summary

Plaintiffs are each California limited liability companies. Zone Sports is a real estate developer

and owns a Fresno commercial real estate project (“property”). Fresno Rock operated a restaurant/night

club as a property lessee. NSC issued an unspecified insurance policy to plaintiffs. NSC argues that

plaintiffs’ insurance claim under the policy for theft and lost business income attempts to defraud

bankruptcy creditors to invoke judicial estoppel to bar the FAC’s claims for breach of insurance contract

and bad faith. NSC took the position that as a suspended corporation, Zone Sports lacks capacity to sue

and that plaintiffs’ counsel is subject to criminal penalty for purporting to exercise Zone Sports’ power

to sue. Plaintiffs respond that restoration of Zone Sports’ good standing permits it to proceed with this

action and that plaintiffs are not subject to judicial estoppel as non-parties to the bankruptcy at issue. 

Plaintiffs’ Insurance Claims

Plaintiffs claim that on an unspecified date in early2009, audio/visual equipment was stolen from

Fresno Rock’s restaurant/night club. On February 15, 2009, plaintiffs submitted a $139,172.28 claim

to NSC. On March 30, 2009, for lost business income, Fresno Rock submitted a $2,578,000 policy

limits claim, and Zone Sports submitted a $6.1 million policy-limits claim. On February 4, 2010, NSC

denied plaintiffs’ claims based on what it characterizes as “material misrepresentations” as to alleged

theft of the audio/visual equipment. The denials give rise to the FAC’s breach of insurance contract and

bad faith claims against NSC to the effect that NSC wrongly denied the claims and failed to investigate

them.

Milton Barbis’ Bankruptcy

NSC claims that plaintiffs are wholly owned by Milton Barbis (“Mr. Barbis”). Plaintiffs deny

such claim. Zone Sports’ articles of organization filed with the California Secretary of State on February

21, 2001 indicate that Zone Sports is managed by one manager, an executive who operates it. Plaintiffs

note that Mr. Barbis is not a Zone Sports member, that is, an owner. Plaintiffs explain that Zone Sports

“has one manager but it is not a single member limited liability company which means [Zone Sports]

The factual background is derived generally from plaintiffs’ operative first amended complaint (“FAC”)

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and matters of which this Court may take judicial notice.

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cannot be wholly owned by Barbis.”

Plaintiffs note that Fresno Rock has one member, Mr. Barbis, but has six investors. 

On October 30, 2009, Mr. Barbis filed a chapter 7 bankruptcy. NSC notes that the Mr. Barbis’

bankruptcy petition values plaintiffs at $0.00 and fails to disclose plaintiffs’ contingent claims against

NSC. NSC further notes that Mr. Barbis failed to amend his bankruptcy petition to disclose his claims

against NSC.

DISCUSSION

F.R.Civ.P. 12(c) Motion For Judgment On The Pleadings Standards

As discussed below, NSC contends that plaintiffs’ FAC claims are legally barred to warrant

judgment on the pleadings in NSC’s favor.

F.R.Civ.P. 12(c) permits a party to seek judgment on the pleadings “[a]fter the pleadings are

closed – but early enough not to delay trial.” “A motion for judgment on the pleadings should be granted

where it appears the moving party is entitled to judgment as a matter of law.” Geraci v. Homestreet

Bank, 347 F.3d 749, 751 (9 Cir. 2003). A “judgment on the pleadings is appropriate when, even if all th

allegations in the complaint are true, the moving party is entitled to judgment as a matter of law.” 

Westlands Water Dist. v. Firebaugh Canal, 10 F.3d 667, 670 (9 Cir. 1993). th

“A judgment on the pleadings is a decision on the merits.” 3550 Stevens Creek Associates v.

Barclays Bank of California, 915 F.2d 1355, 1356 (9 Cir. 1990), cert. denied, 500 U.S. 917, 111 S.Ct.

th

2014 (1991). A F.R.Civ.P. 12(c) motion “is designed to dispose of cases where the material facts are not

in dispute and a judgment on the merits can be rendered by looking to the substance of the pleadings and

any judicially noticed facts.” Herbert Abstract Co. v. Touchstone Props., Ltd., 914 F.2d 74, 76 (5 Cir. th

1990) (per curiam). “[T]he central issue is whether, in light most favorable to the plaintiff, the complaint

states a valid claim for relief.” Hughes v. Tobacco Inst., Inc., 278 F.3d 417, 420 (5 Cir. 2001). th

Courts dismiss complaints under F.R.Civ.P. 12(c) for either of two reasons: “(1) lack of a

cognizable legal theory, or (2) insufficient facts under a cognizable legal theory.” Gutierrez v. RWD

Technologies, Inc., 279 F.Supp.2d 1223, 1224 (E.D. Cal. 2003). The standards for deciding F.R.Civ.P.

12(b)(6) and F.R.Civ.P. 12(c) motions are the same. Great Plains Trust v. Morgan Stanley Dean Witter,

313 F.3d 305, 313, n. 8 (5 Cir. 2002). “A Rule 12(c) motion challenges the legal sufficiency of the th

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opposing party's pleadings and operates in much the same manner as a motion to dismiss under Rule

12(b)(6).” Morgan v. County of Yolo, 436 F.Supp.2d 1152, 1154-1155 (E.D. Cal. 2006).

“When considering a motion for judgment on the pleadings, this court may consider facts that

‘are contained in materials of which the court may take judicial notice.’” Heliotrope General, Inc. v.

Ford Motor Co., 189 F.3d 971, 981, n. 18 (9 Cir. 1999) (citation omitted). A motion for judgment on th

the pleadings may be granted if, after assessing the complaint and matters for which judicial notice is

proper, it appears “beyond doubt that the [non-moving party] cannot prove any facts that would support

his claim for relief.” Morgan v. County of Yolo, 436 F.Supp.2d 1152, 1155 (E.D. Cal. 2006), aff’d,277

F. Appx. 734 (9 Cir. 2008). th

A fact subject to judicial notice is not subject to reasonable dispute because it “(1) is generally

known within the trial court’s territorial jurisdiction; or (2) can be accurately and readily determined

from sources whose accuracy cannot be reasonably questioned.” F.R.Evid. 201(b). A “court may take

judicial notice of ‘matters of public record.’” Lee v. City of Los Angeles, 250 F.3d 669, 689, (9 Cir. th

2001). Such a fact is “conclusive” and “precludes either party from introducing evidence to disprove

that fact.” Metropolitan Creditors' Trust v. Pricewaterhousecoopers, LLP, 463 F.Supp.2d 1193, 1197

(E.D. Wash. 2006).

With these standards in mind, this Court turns to NSC’s challenges to the FAC’s claims.

Suspended Corporation

NSC has challenged Zone Sports ability to pursue claims as a suspended corporation.

For a corporation, capacity to sue is determined “by the law under which it was organized.” 

F.R.Civ.P. 17(b)(2). NSC explains that California law governs Zone Sports’ capacity to sue since it is

organized under California law.

Under California Revenue and Tax Code section 23301 (“section 23301"), a California

corporation’s powers, rights and privileges may be suspended upon failure to pay taxes. NSC points to

California Secretary of State records to the effect that on November 1, 2011, Zone Sports’ powers,

privileges and rights were suspended for failure to pay taxes. 

Plaintiffs acknowledge that Zone Sports was suspended from November 1, 2011 to May 9, 2012

for “a small tax arrearage that had inadvertently been unpaid.” Plaintiffs explain that after Zone Sports

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paid the outstanding tax, the California Franchise Tax Board issued a May 9, 2012 certificate of revivor,

retroactive to January 1, 2012.

In Kaufman & Broad Communities, Inc. v. Performance Plastering, Inc., 136 Cal.App.4th 212,

217-218, 39 Cal.Rptr.3d 33 (2006), the California Court of Appeal addressed section 23301 and the

effect of a certificate of revivor:

The suspension of the corporate powers, rights, and privileges means a suspended

corporation cannot sue or defend a lawsuit while its taxes remain unpaid. . . . Once a

suspended corporation pays its taxes and obtains a certificate of revivor, however, the

corporation may be allowed to carry on the litigation. . . . Its revivor will validate most

otherwise invalid prior proceedings in the case. The underlying purpose of this statute

is to induce the corporation to pay its taxes. (Citations omitted.)

Plaintiffs contend that Zone Sports’ “suspension has been cured and it now enjoys status as an

LLC in good standing.” Plaintiffs continue that “prior invalid conduct and/or proceeding which took

place during the suspension has been validated.”

Zone Sports was suspended for six months when this action was pending. However, Zone Sports

has paid outstanding taxes and received a certificate of revivor to permit it to proceed in this action,

which NSC concedes in its reply papers. Section 23301's purpose has been fulfilled with Zone Sports’

payment of taxes. The brief suspension fails to deprive Zone Sports of its capacity to sue.

NSC also claims that plaintiffs’ counsel Richard Hamlish (“Mr. Hamlish”) is guilty of a

misdemeanor for exercising rights and powers of a corporation suspended under section 23301. See Cal.

Rev. & Tax Code, § 19719(a) (“Any person who attempts or purports to exercise the powers, rights, and

privileges of a corporation that has been suspended pursuant to Section 23301 . . . is punishable by a fine

of not less than two hundred fifty dollars ($250) and not exceeding one thousand dollars ($1,000), or by

imprisonment not exceeding one year, or both fine and imprisonment.”) NSC points to Mr. Hamlish’s

post-suspension acts of filing the FAC on February 1, 2012 and taking a March 2012 deposition for

plaintiffs.

Plaintiffs respond that Mr. Hamlish’s purportedmisdemeanorisirrelevant in that he was unaware

of the suspension until NSC raised the issue. “If the company is revived, there is no need for section

/ / /

/ / /

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19719, subdivision (b), as the corporation can then exercise its corporate powers.” Kaufman & Broad 2

Communities, 136 Cal.App.4th at 221, 39 Cal.Rptr.3d 33.

This Court agrees with plaintiffs that the alleged misdemeanor offense is irrelevant, especially

given the retroactive effect of the certificate of revivor. 

Judicial Estoppel

NSC argues that judicial estoppel bars plaintiffs’ FAC claims in that Mr. Barbis’ knowingly

failed to list claims against NSC on his bankruptcy petition. Plaintiffs respond that judicial estoppel

does not apply to them in that they did not file bankruptcy.

General Principles

Judicial estoppel “precludes a party from gaining an advantage by taking one position, and then

seeking a second advantage by taking an incompatible position.” Rissetto v. Plumbers and Steamfitters

Local 343, 94 F.3d 597, 600 (9 Cir. 1996). The Ninth Circuit Court of Appeals has explained the th

rationale of judicial estoppel:

The policies underlying preclusion of inconsistent positions are general considerations

of the orderly administration of justice and regard for the dignity of judicial proceedings.

. . . Judicial estoppel is intended to protect against a litigant playing fast and loose with

the courts. . . . Because it is intended to protect the dignity of the judicial process, it is an

equitable doctrine invoked by a court at its discretion.

Russell v. Rolfs, 893 F.2d 1033, 1037 (9th Cir.1990), cert. denied, 501 U.S. 1260, 111 S.Ct. 2915, 115

L.Ed.2d 1078 (1991). 

Judicial estoppel applies to inconsistent positions taken in the same and multiple litigation. See

Rissetto, 94 F.3d at 605 (“We now make it explicit that the doctrine of judicial estoppel is not confined

to inconsistent positions taken in the same litigation.”); see also Hamilton v. State Farm Fire & Cas.

Co., 270 F.3d 778, 783 (9 Cir. 2001) (“The application of judicial estoppel is not limited to bar the th

assertion of inconsistent positions in the same litigation, but is also appropriate to bar litigants from

making incompatible statements in two different cases.”).

Bankruptcy Context

“In the bankruptcy context, a party is judicially estopped from asserting a cause of action not

Although this statute addresses an insurer or its counsel, it supports plaintiffs’ points as to Mr. Hamlish.

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raised in a reorganization plan or otherwise mentioned in the debtor's schedules or disclosure

statements.” Hamilton, 270 F.3d at 783 see Hay v. First Interstate Bank of Kalispell, N.A., 978 F.2d

555, 557 (9th Cir.1992) (failure to give notice of a potential cause of action in bankruptcy schedules and

Disclosure Statements estops the debtor from prosecuting that cause of action); In re Coastal Plains, 179

F.3d 197, 208 (5th Cir.1999), cert. denied, 528 U.S. 1117, 120 S.Ct. 936, 145 L.Ed.2d 814 (2000)

(holding that a debtor is barred from bringing claims not disclosed in its bankruptcy schedules); Payless

Wholesale Distributors, Inc. v. Alberto Culver (P.R.)Inc., 989 F.2d 570, 572 (1st Cir.), cert. denied, 510

U.S. 931, 114 S.Ct. 344, 126 L.Ed.2d 309 (1993) (debtor who obtained relief on the representation that

no claims existed cannot resurrect such claims and obtain relief on the opposite basis); Oneida Motor

Freight, Inc. v. United Jersey Bank, 848 F.2d 414, 419 (3rd Cir.), cert. denied, 488 U.S. 967, 109 S.Ct.

495, 102 L.Ed.2d 532 (1988) (debtor's failure to list potential claims against a creditor “worked in

opposition to preservation of the integrity of the system which the doctrine of judicial estoppel seeks to

protect,” and debtor is estopped by reason of such failure to disclose).

Moreover, judicial estoppel precludes a plaintiff-debtor “from pursuing claims about which he

had knowledge, but did not disclose, during his bankruptcy proceedings.” Hamilton, 270 F.3d at 784. 

“Judicial estoppel will be imposed when the debtor has knowledge of enough facts to know that a

potential cause of action exists during the pendency of the bankruptcy, but fails to amend his schedules

or disclosure statements to identify the cause of action as a contingent asset.” Hamilton, 270 F.3d at

784; see Hay, 978 F.2d at 557 (“We recognize that all facts were not known to Desert Mountain at that

time, but enough was known to require notification of the asset to the bankruptcy court.”); In re Coastal

Plains, 179 F.3d at 208 (quoting Youngblood Group v. Lufkin Fed. Sav. &Loan Ass'n, 932 F.Supp. 859,

867 (E.D. Tex.1996)) (“[I]f the debtor has enough information . . . prior to confirmation to suggest that

it may have a possible cause of action, then that is a known cause of action such that it must be

disclosed”) (internal quotations omitted). “The debtor's duty to disclose potential claims as assets does

not end when the debtor files schedules, but instead continues for the duration of the bankruptcy

proceeding.” Hamilton, 270 F.3d at 785.

NSC argues that Mr. Barbis knew of claims against NSC when he filed his October 30, 2009

bankruptcypetition in that he submitted the insurance claim in February 2009 to seek policylimits. NSC

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points to Mr. Barbis’ “None” response to Schedule B, Question No. 21 inquiring into “Other contingent

and unliquidated claims of every nature . . .” See Hamilton, 270 F.2d at 281 (indicating that this question

is the proper place to list insurance claims). NSC further notes that Mr. Barbis could have included the

claims as part of plaintiffs’ value but instead listed plaintiffs’ value as $0. NSC notes the absence of

amended schedules.

NSC characterizes as immaterial Mr. Barbis’ delay to pursue claims at issue in this action (April 

20, 2011 for Fresno Rock and February 1, 2012 for Zone Sports) in that judicial estoppel applies when

a debtor knows “of enough facts to know that a potential cause of action exists during the pendency of

the bankruptcy, but fails to amend his schedules or disclosure statements to identify the cause of action

as a contingent asset.” Hamilton, 270 F.3d at 784. NSC argues that Mr. Barbis knew of the insurance

breach of contract and bad faith claims as of NSC’s February 4, 2010 denial of his insurance claims but

failed to amend his pending bankruptcy schedules to include the breach of insurance contract and bad

faith claims.

NSC accuses Mr. Barbis of “fraud and abuse of the court system” in that for bankruptcy

purposes, he represented plaintiffs having no value yet prosecutes his breach of insurance contract and

bad faith claims to which he attaches more than $8 million in contract damages. NSC concludes that

if Mr. Barbis succeeds in this action, he could gain millions of dollars which would be beyond the reach

of his creditors in that plaintiffs are deemed assets abandoned by the bankruptcy trustee. 

Plaintiffs respond that they are not subject to judicial estoppel in that they filed no bankruptcy

and as limited liability companies could not be included in Mr. Barbis’ bankruptcy given 11 U.S.C. §

727(a)(1), under which Mr. Barbis filed his bankruptcy and which provides: “The court shall grant the

debtor a discharge, unless – (1) the debtor is not an individual . . .” Plaintiffs note that Mr. Barbis is not

a plaintiff in this action and that representations on his bankruptcy petition are neither relevant to

plaintiffs’ claims nor binding on plaintiffs, which are corporate entities separate from him. Plaintiffs

rely on Zone Sports’ articles of organization which identify Mr. Barbis’ limited roles of manager and

agent for service of process. Plaintiffs point to Mr. Barbis’ absence of interest in Zone Sports.

Plaintiffs challenge NSC’s claims regarding their values reflected on Mr. Barbis’ bankruptcy

schedules in that the U.S. Trustee evaluated each plaintiff and calculated negative cash and current

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values. Plaintiffs note that if they prevail in this action, their recovery would be subject to judgments

and debts against them and thus will not be paid to Mr. Barbis. 

NSC fails to establish application of judicial estoppel to plaintiffs. NSC provides no authority

to support that Mr. Barbis’ chapter 7 bankruptcy representations judicially estop the claims of plaintiffs,

corporate entities in which Mr. Barbis has limited interests. NSC relies on authorities involving a

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debtor’s claims, not claims of corporate entities separate from the debtor. Mr. Barbis is the bankruptcy

debtor, not plaintiffs. Mr. Barbis’ purported knowledge of claims would be relevant if he pursued them

as plaintiff. He does not. Plaintiffs are not subject to judicial estoppel because any position asserted in

Mr. Barbis’ bankruptcy is imputed to him and is not inconsistent with plaintiffs’ positions in this action.

Alter Ego

Plaintiffs take exception to NSC’s attempt to characterize plaintiffs as Mr. Barbis’ alter egos in

the absence of evidence to satisfy alter ego elements.

“Ordinarily, a corporation is regarded as a legal entity separate and distinct from its stockholders,

officers and directors.” Communist Party v. 522 Valencia, Inc., 35 Cal.App.4th 980, 993, 41 Cal.Rptr.2d

618 (1995). “The terminology ‘alter ego’ or ‘piercing the corporate veil’ refers to situations where there

has been an abuse of corporate privilege, because of which the equitable owner of a corporation will be

held liable for the actions of the corporation.” Roman Catholic Archbishop v. Superior Court, 15

Cal.App.3d 405, 411, 93 Cal.Rptr. 338 (1971).

 The alter ego doctrine applies if: (1) “there be such unity of interest and ownership that the

separate personalities of the corporation and the individual no longer exist,” and (2) “the acts are treated

as those of the corporation alone, an inequitable result will follow.” Associated Vendors, Inc. v. Oakland

Meat Co., 210 Cal.App.2d 825, 837, 26 Cal.Rptr. 806 (1962). “Courts will pierce the corporate veil only

in exceptional circumstances.” Calvert v. Huckins, 875 F.Supp. 674, 678 (E.D. Cal. 1995) (quoting

National Precast Crypt Co. v. Dy-Core of Pennsylvania, Inc., 785 F.Supp. 1186, 1192 (W.D. Pa.1992)).

Plaintiffs note the absence of support to apply the alter ego doctrine, including commingling of

NSC points to April 25, 2012 printouts from the California Secretary of State which note Mr. Barbis as

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“GP/MGR/MEMB.” NSC extrapolates that Mr. Barbis owns 100 percent of each plaintiff. The printouts fail to establish

Mr. Barbis’ 100 percent ownership and contribute to factual issues which cannot be resolved on NSC’s F.R.Civ.P. 12(c)

motion.

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funds, Mr. Barbis’ liability for plaintiffs’ debts, plaintiffs’ common ownership, employees and officers,

and failure to maintain separate operations and corporate records. 

Plaintiffs raise valid points. The record is insufficient to qualify plaintiffs as Mr. Barbis’ alter

egos.

CONCLUSION AND ORDER

For the reasons discussed above, this Court DENIES NSC F.R.Civ.P. 12(c) relief.

IT IS SO ORDERED.

Dated: May 24, 2012 /s/ Lawrence J. O'Neill 

66h44d UNITED STATES DISTRICT JUDGE

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