Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-1_03-cv-06605/USCOURTS-caed-1_03-cv-06605-0/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 28:0158 Notice of Appeal re Bankruptcy Matter (BAP)

---

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

1

IN THE UNITED STATES DISTRICT COURT FOR THE

EASTERN DISTRICT OF CALIFORNIA

JOHN R. SNIDER, CHARLES A. )

WENTLAND, and THE WENTLAND )

FAMILY INVESTMENT GROUP, )

)

)

)

)

Plaintiff, )

)

vs. )

)

)

LARRY NEAL SHERMAN, RITA )

ROBINSON SHERMAN, DENNIS M. )

HAUSER, HAUSER & MOUZES, )

)

)

Defendant. )

)

)

No. CV-F-03-6605 OWW

MEMORANDUM DECISION 

REVERSING ORDER OF

BANKRUPTCY COURT RE REMAND

OF ACTION

Dennis M. Hauser and Hauser & Mouzes, PLC (hereinafter

referred to collectively as Hauser) appeal the Order Remanding

Case, Striking Motion to Dismiss and Granting Parties' Request

for Judicial Notice filed by the Bankruptcy Court on September

17, 2002.

A. Background.

On January 18, 1991, Larry and Rita Sherman, then

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 1 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

The filing of a bankruptcy petition brings a bankruptcy 1

estate into being and triggers an automatic stay, which prevents

creditors from enforcing their claims, thus preserving the debtor’s

assets for ultimate distribution by the bankruptcy trustee.

Sherwood Partners, Inc. v. Lycos, Inc., 394 F.3d 1198, 1204 (9th

Cir.), cert. denied, 126 S.Ct. 397 (2005). A Chapter 7 bankruptcy

discharge releases the debtor from personal liability for prebankruptcy debts. In re Ybarra, 424 F.3d 1018, 1022 (9 Cir.2005), th

cert. denied, 126 S.Ct. 2328 (2006). 

2

represented by Oscar Kleinfeld, filed a Chapter 7 bankruptcy

petition in the United States District Court for the Eastern

District of California, Case No. 91-90181. Schedules filed with

the Chapter 7 petition identified John R. Snider, Charles

Wentland, and Wentland Family Investment Group (hereinafter

referred to collectively as Snider/Wentland) as creditors of the

Shermans. However, the schedules did not list a claim by the

Shermans against Snider/Wentland. Michael McGranahan was

appointed as trustee for the bankruptcy estate. On April 23,

1991, Dennis Hauser was substituted as the Shermans’ attorney. 

On May 1, 1991, a Discharge of Debtor was filed by the Bankruptcy

Court.1

On May 21, 1991, Dennis Hauser, as counsel for the Shermans,

filed as an Adversary Proceeding a Complaint in the Bankruptcy

Court against Snider/Wentland and the Bank of Lodi (Adv.Proc. No.

91-9061). The Adversary Proceeding Complaint alleged that

Michael McGranahan had been appointed as trustee of the

bankruptcy estate and that the Bankruptcy Court had jurisdiction

because the “adversary proceeding involves property of the estate

of the Debtors as well as certain other potential assets of the

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 2 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

3

Debtors to include claims for indemnification as against

outstanding loan obligations ....” However, McGranahan was not

named as a party plaintiff in the Adversary Proceeding. The

Adversary Proceeding Complaint alleged claims for specific

performance, quiet title, and damages arising from allegations

that Snider/Wentland and the Bank of Lodi failed to honor a

contractual obligation under which Snider/Wentland had primary

liability for a $100,000 loan secured by a deed of trust on the

Sherman’s residence; that the Bank of Lodi failed to act in a

commercially reasonable manner in settling an insurance claim

concerning other property leased by the Shermans to conduct their

business and failed to rehabilitate property sold pursuant to a

stipulated foreclosure; and that the Shermans were entitled to

indemnification and damages from Snider/Wentland to the extent

that assets of the Shermans are used to satisfy outstanding

obligations to the Bank of Lodi. 

In January/February 1992, Hauser as counsel for the

Shermans, Mattanian Eytan as counsel for Snider/Wentland, James

Ganzer as counsel for the Bank of Lodi, and Malcolm Gross as

counsel for McGranahan, executed a Stipulation Re: Dismissal of

Adversary Proceeding (hereinafter referred to as the 1992

Stipulation), whereby these parties stipulated:

The court may enter its order of dismissal as

to the pending adversary proceeding with each

party to bear their respective costs and

attorneys fees. The court may further enter

its Order authorizing Dennis M. Hauser to pay

from interest accruing on the sale of

proceeds of Plaintiffs’ residence income tax

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 3 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

4

payable on said interest accruals. 

The 1992 Stipulation states that it is entered upon the following

facts:

2. At the time the Bankruptcy Petition was

filed, Larry Neal Sherman and Rita Robinson

Sherman owned real property commonly known as

14170 N. Alpine Road, Lodi, California (‘the

Property’). At the time of the filing of the

Petition, the Property was subject to certain

liens and encumbrances to include an

encumbrance arising out of the execution and

recording of a Deed of Trust in which the

Bank of Lodi (‘the Bank’) was the named

beneficiary.

3. That on May 21, 1991, Larry Neal Sherman

and Rita Robinson Sherman filed their

Complaint (‘the Complaint’) initiating the

within adversary proceeding.

4. Since the filing of the Complaint, the

Property has been sold and, pursuant to order

entered in the bankruptcy case, sale proceeds

in excess of those necessary to satisfy other

encumbrances of record but potentially

subject to the encumbrance held by the Bank

have been held in a separate bank account

under the name of Dennis M. Hauser as Trustee

for Mr. and Mrs. Sherman. These funds are

currently on deposit at the Bank in a

certificate of deposit and shall hereinafter

be referred to as ‘the sales proceeds’. 

Pursuant to order of the Bankruptcy Court, no

disbursements can be made from the sale

proceeds absent further order of the court.

5. That each of the parties to the pending

action and the Trustee either desire or have

no objection to dismissal of the within

action so that it can be refiled and

prosecuted in the Superior Court for the

County of San Joaquin, State of California.

6. That the within stipulation of dismissal

of the action shall not in any event be

construed to be a waiver of any claim or

defense asserted in the pending action. 

While each party hereto agrees that as part

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 4 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

5

of the order of dismissal each party shall

bear, for the time being, his, her or its own

costs and attorneys fees, all claims with

respect thereto shall be preserved and, as

permitted under the laws of the State of

California, the prevailing party in the

action to be filed in the San Joaquin

Superior Court shall receive such costs and

attorneys fees as that court, by statute or

in the exercise of its discretion, allows.

7. Each of the parties hereto further

stipulates that to the extent the existing

factual allegations of the existing Complaint

supports any claim for damages against any

one or more of the Defendants, to the extent

such claim is not barred by the applicable

statute of limitations upon the refiling of

the Complaint as contemplated below or was

not barred by any applicable statute of

limitations on the date the Complaint was

filed initiating the within adversary

proceeding and so long as on or before thirty

days from the date of the last party

executing this stipulation Plaintiffs file a

new complaint in the Superior Court for the

County of San Joaquin including the substance

of the allegations of the existing Complaint,

any applicable statute of limitations will be

tolled (i.e., suspended) for purposes of

computing whether any applicable statute of

limitations may act as a bar to any claim

asserted individually or collectively by the

Plaintiffs on their own behalf or in

conjunction with the Trustee. 

8. It is further understood that the

Trustee, through his counsel, has at the

Status Conference which occurred on November

6, 1991, expressed a belief that the Trustee

should join as a party Plaintiff to the

contemplated San Joaquin Superior Court

action and any benefits and burdens imposed

upon the Plaintiffs/Debtors as a result of

this Stipulation shall similarly extend to

the Trustee.

9. It is further understood and agreed that

as to the sale proceeds, Dennis M. Hauser

shall continue to be in custody of those

proceeds and no further disbursements shall

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 5 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

6

occur therefrom except as permitted by order

of the court. However, it is hereby

stipulated that Mr. Hauser shall proceed to

obtain a separate tax payer identification

number for the sale proceeds characterizing

the relationship as being a trust

relationship and, with respect to interest

income which has accrued or may hereafter

accrue as a result of the sale proceeds being

invested in an interest bearing account, Mr.

Hauser shall pay such sums as may be required

as income tax on the interest accruals. 

11. By executing this Stipulation, each of

the parties hereto through their respective

attorneys hereby approves the proposed Order

of Dismissal, a copy of which is attached

hereto as Exhibit ‘A’.

For reasons undisclosed by the record, neither the 1992

Stipulation nor the Order of Dismissal of the Adversary

Proceeding were filed in the Bankruptcy Court until January 20,

1995, which is also the date on which the Bankruptcy Court signed

the Order of Dismissal of the Adversary Proceeding.

On March 11, 1992, Hauser, as counsel for the Shermans and

for McGranahan, as bankruptcy trustee, filed a Complaint in the

San Joaquin Superior Court against Snider/Wentland and the Bank

of Lodi (hereinafter the Superior Court Action). The Complaint

alleged in pertinent part:

2. That on January 18, 1991, the Plaintiffs

Sherman filed their joint voluntary petition

in bankruptcy seeking protection under

Chapter 7 of the Bankruptcy Code. Said

petition was filed in the United States

Bankruptcy Court for the Eastern District of

California, Case No. 91-90181 ....

3. That since the filing of the petition

initiating the bankruptcy case, the

Plaintiff, Michael D. McGranahan, has been

and remains the duly appointed and qualified

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 6 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

7

Trustee in Bankruptcy of the estate of the

Plaintiffs Sherman created upon the filing of

their bankruptcy petition.

4. That certain of the claims asserted

herein are or may be more properly assets of

the bankruptcy estate as to which Plaintiff

Michael D. McGranahan as Trustee has the

responsibility for prosecution and, to the

extent any recovery occurs, arranging for the

distribution of amounts recovered to

creditors of the Plaintiffs Sherman in the

bankruptcy case. Pursuant to stipulation

with Plaintiffs Sherman, Plaintiff Michael D.

McGranahan has joined as a party Plaintiff to

this action for purposes of protecting,

preserving and prosecuting such claims.

...

11. That for several years preceding the

filing of this Complaint, the Defendant

Wentland on his own behalf and acting

frequently as a partner with the Defendant

Snider has been involved in many commercial

real estate development projects located in

the County of San Joaquin and particularly in

the City of Lodi ... For several years

preceding the filing of this Complaint,

Plaintiff Larry Sherman knew the Defendant

Charles Wentland as a result of Mr. Sherman

acting as an electrician on certain of the

projects with which Mr. Wentland was

associated. Over the years, a relationship

developed so that the Plaintiffs Sherman

reposed great trust and confidence in the

Defendant Charles Wentland and said Defendant

knew of and encouraged said relationship. 

12. That the Plaintiffs Sherman desired to

open a store generally engaged in the

business of the sale of lighting fixtures. A

business plan was developed by them under

which they projected that $100,000 would be

necessary to support inventory acquisitions

and general expenses of operation until the

business would generate sufficient cash flow

to thereafter support its ordinary and normal

expenses of operation. Plaintiffs Sherman

did not themselves have the necessary

$100,000.

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 7 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

8

13. In approximately March, 1989, Plaintiff

Larry Sherman approached Defendant Charles

Wentland. At the time, the Plaintiff knew as

a result of prior communications with Mr.

Wentland that Mr. Wentland from time to time

assisted in the location of investment money

for start up business operations of the type

contemplated by the Plaintiffs Sherman. Mr.

Sherman requested of Mr. Wentland his

assistance in locating $100,000 to start up

the light fixture store. Mr. Wentland

responded with words to the following effect:

‘Look no further and I will personally invest

the $100,000 necessary so that you can open

up your store. [sic]

14. That thereafter at the request of the

Defendant Wentland, a meeting occurred

between the Plaintiff Rita Sherman and Mr.

Wentland to discuss in greater detail the

business plan which had been developed by the

Plaintiffs Sherman. Thereafter, meetings and

conversations occurred over the next six to

eight week period leading up to the formation

of the partnership known as Lodi Lighthouse,

a limited partnership (hereinafter ‘the

Lighthouse’) as to which Plaintiffs Sherman

were to act as its General Partners and the

Defendants Wentland Family Investment Group

and Snider were to act as its limited

partners. During said meetings, Defendant

Charles Wentland indicated that he could not

personally come up with the $100,000 of

investment capital required under the

business plan prepared by the Plaintiffs

Sherman. He suggested that the Defendant

Snider should be included as an investor and

the Plaintiffs Sherman agreed. By April,

1989, the Defendant Snider was also

participating in certain of the meetings

referred to above.

15. That during the course of the meetings

referred to above, Defendants Wentland and

Snider were dissatisfied with the proposed

location at which the Lighthouse would

conduct business. They insisted upon and

obtained a concession from the Plaintiffs

Sherman to lease space located at the Beckman

Industrial Park. Plaintiffs Sherman were

reluctant to lease such space as they

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 8 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

9

perceived it to be potentially more expensive

than space which they had located. 

Additionally, the Defendants Snider and

Wentland wanted Plaintiffs to lease more

space than was necessary for the operation of

the proposed business. The Plaintiffs

Sherman acquiesced in the demands of the

Defendants Wentland and Snider upon the

following representations:

(a) That in addition to the 

$100,000 required by Plaintiffs Sherman to

successfully start up the business operation,

Defendants would additionally advance the

aggregate of $50,000 to the Lighthouse by way

of a partnership contribution to fund the

projected costs of tenant improvements of the

proposed space.

(b) The Defendants Wentland 

and Snider would co-sign upon the lease and

thereby assume a prime and direct

responsibility for payment of the obligations

evidenced thereby.

16. That in justifiable reliance upon the

foregoing representations, on May 3, 1989,

Plaintiffs Sherman together with Defendants

Wentland Family Investment Group and Snider

entered into that certain lease with Beckman

Industrial Park, Limited (hereinafter ‘the

Lease’) ....

17. On or about May 28, 1989, Plaintiffs

Sherman entered into a contractual

relationship with the Defendants Wentland and

Snider ... Upon execution of such contract,

the formation of the Lighthouse partnership

was completed and the parties to the

partnership agreement ... proceeded to

operate said partnership.

The Superior Court Complaint alleges a claim for declaratory

relief, alleging that Wentland/Snider agreed as part of their

capital contribution either to obtain a loan or guarantee

repayment of a loan in the amount of $100,000; that

Wentland/Snider obtained a loan from the Bank of Lodi to the

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 9 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

10

Lighthouse partnership; that Plaintiffs Sherman, acting as

general partners, together with Snider/Wentland as co-signors,

executed a promissory note to the Bank of Lodi to repay the loan;

that Wentland/Snider executed continuing guarantees of the loan;

that, shortly before the execution of the promissory note, the

Plaintiffs Sherman were advised for the first time that the Bank

of Lodi was requiring that the Plaintiffs Sherman execute a Deed

of Trust on the property occupied by the Shermans as their

residence; that the Shermans were induced to execute the deed of

trust on their residence upon representations of Snider/Wentland

that Snider/Wentland would continue to remain primarily liable

for repayment of the loan; that, after negotiations between the

Shermans, Snider/Wentland, and the Bank to renew the loan after

it matured on July 4, 1990, the Bank declared a default and

commenced proceedings for repayment, including to foreclose the

deed of trust; that the Shermans demanded that Snider/Wentland

honor their contractual obligations and repay the outstanding

indebtedness to the Bank; that a dispute has arisen between the

Shermans and Snider/Wentland concerning the scope of the

contractual obligations. Paragraph 29 of the Superior Court

Complaint alleges:

29. That on January 18, 1991, the Plaintiffs

Sherman filed their bankruptcy petition to

forestall a scheduled foreclosure of the

Property. Since the filing of said petition

initiating the bankruptcy case, pursuant to

stipulation between all parties to this

action the Property was sold pursuant to

order entered in the bankruptcy court and the

sale proceeds are currently on deposit in a

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 10 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

11

trust account maintained in the name of

Plaintiffs’ counsel (‘the Account’) with said

funds on deposit at the Defendant Bank.

30. Plaintiffs ... allege that all

Defendants contend that the funds on deposit

in the Account should be applied to reduce

the outstanding loan obligation ... The

Plaintiffs dispute said contention and

contend that the monies on deposit in the

Account are either a lien free asset of the

bankruptcy estate or the personal asset of

the Plaintiffs Sherman. 

The Superior Court Complaint alleges a claim for specific

performance by Snider/Wentland of the contractual promises made

to the Shermans, alleging in pertinent part:

35. Plaintiffs have no adequate remedy at

law for the injuries which have been suffered

and which may hereafter be suffered. 

Plaintiffs Sherman have been forced to file a

bankruptcy petition initiating the bankruptcy

case in an attempt to preserve their assets

to arrange for an orderly distribution to all

of their creditors to include general

unsecured creditors of the Lighthouse

partnership. Plaintiffs have been frustrated

in their efforts to do so and [sic] the

continuing wrongful conduct of the

Defendants. 

The Superior Court Complaint also alleged a claim for declaratory

relief, alleging that “when Plaintiffs Sherman filed their

petition initiating the bankruptcy case, they as general partners

of the Lighthouse partnership were in possession of inventory and

accounts receivable assets of the partnership;” that “the

petition was filed not only on their behalf individually but

included in the caption the Lighthouse partnership;” that,

shortly before filing the bankruptcy petition, frozen water pipes

burst in the premises of the Lighthouse causing damage to the

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 11 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

12

premises and the inventory; that, upon the filing of the

bankruptcy petition and pursuant to stipulation, the Bank was

granted relief from the automatic stay, took possession of the

inventory and proceeded to sell the inventory, applying the

proceeds to the outstanding indebtedness; that Wentland/Snider

should have completely repaid the loan obligation and that “if

such had occurred, any amounts received upon the sale of the

inventory assets would have remained an asset of the bankruptcy

case available for distribution to remaining creditors of the

Lighthouse partnership” and that “the Bank should be required to

turn over to the possession of the Plaintiff Trustee in

Bankruptcy amounts received upon the auction sale of the

inventory assets”. The Superior Court Complaint also alleges

claims for breach of contract, breach of the implied covenant of

good faith and fair dealing, fraud and deceit, and conspiracy to

defraud against Snider/Wentland and the Bank arising out of the

loan transactions. 

On June 18, 1993, a Stipulation Regarding Dismissal of

Plaintiff Michael D. McGranahan as Party Plaintiff (hereinafter

referred to as the 1993 Stipulation), executed by Hauser on

behalf of the Shermans, by Malcolm Gross as counsel for

McGranahan, and the attorneys for Snider/Wentland and the Bank,

was filed in the Superior Court Action, which Stipulation states

in pertinent part:

Whereas Larry N. Sherman and Rita R. Sherman

... are Plaintiffs in the herein action, and

are also Debtors in a bankruptcy proceeding

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 12 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

Pages 2-4 of the First Amended Complaint are not included in 2

the Excerpt of Record filed with this appeal.

13

filed under 11 U.S.C. § 301, filed in the

United States Bankruptcy Court for the

Eastern District, Case No. 91-90181; and

Whereas Michael D. McGranahan, the Trustee of

estate of the Shermans is also a Plaintiff in

the above entitled action; and 

Whereas Michael D. McGranahan, the Trustee of

the bankruptcy estate of the Shermans,

disclaims any further interest in the aboveentitled state court action and intends to

close out the bankruptcy proceeding;

IT IS STIPULATED by and through the Shermans,

[Snider/Wentland, the Bank of Lodi], and

Michael D. McGranahan, that Michael D.

McGranahan, on behalf of the bankruptcy

estate of the Shermans is withdrawing as a

party Plaintiff in the aforesaid state court

action disclaiming any further interest

herein.

IT IS FURTHER STIPULATED THAT further

pleadings filed in the aforementioned state

court action should reflect this stipulation

and withdrawal by deleting Michael D.

McGranahan as a party Plaintiff. 

It is undisputed that Mr. McGranahan did not file a motion

in the Bankruptcy Court to abandon the Trustee’s interest in the

Superior Court Action and did not obtain an Order from the

Bankruptcy Court approving his disclaimer of interest in or

withdrawal as plaintiff from the Superior Court Action.

In September 1993, the Shermans filed a First Amended

Complaint in the Superior Court.2

On May 20, 1994, Mr. McGranahan as trustee of the Shermans

Chapter 7 bankruptcy estate, filed a final report and account in

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 13 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

The right side of the copy of this Order in the Excerpt of 3

Record is cut off. This Order was attached to the Notice of

Removal filed in the Bankruptcy Court. The same defect occurs on

the copy in the Notice of Removal. 

14

the Bankruptcy Court.

On June 27, 1994, the Shermans filed a Second Amended

Complaint in the Superior Court Action against Snider/Wentland

and the Bank of Lodi. The Second Amended Complaint alleges in

paragraph 4 that the Shermans filed a bankruptcy petition on

January 18, 1991, in Case No. 91-90181 but all references to the

trustee are omitted. The Second Amended Complaint contains

allegations similar to those set forth in the Complaint and

alleges causes for breach of written contract, breach of the

covenant of good faith and fair dealing, specific performance,

declaratory relief, fraud and deceit, negligence, conspiracy, and

estoppel/quiet title. 

On March 21, 1995, the Bankruptcy Court entered the final

decree in the Shermans’ bankruptcy case and the bankruptcy case

was closed.

In February, 1997, Judge Van Oss of the San Joaquin Superior

Court filed an Order Granting Nonsuit in the Superior Court

Action. After noting that prior motion practice had disposed of 3

all causes of action in the Second Amended Complaint except the

Seventh Cause of Action for fraud and deceit, the Eighth Cause of

Action for negligent misrepresentation, and the Ninth Cause of

Action for conspiracy, the Superior Court addressed

Snider/Wentland and the Bank’s motion that the remaining causes

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 14 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

15

of action should be dismissed:

[B]ased upon events that had occurred in

connection with plaintiffs’ 1991 bankruptcy

filing. Defendants contended that in

connection with such filing plaintiffs had

failed to disclose the claims currently

before this Court and such failure to

disclose justified the imposition of judicial

estoppel, as well as the application of

issue-preclusion principles associated with

the finality of the bankruptcy proceedings. 

Defendan [] did not raise any of these

arguments until after their January 29, 1997

motion to dismiss.

Defendants also contended for the first time,

that an order dated February 27, 199[] the

bankruptcy court modifying the automatic stay

in favor of the Bank had permitted the [] to

take legal charge and custody of all tangible

and intangible property belonging to Lodi []

Lighthouse, a California Limited Partnership

(the ‘Partnership’), of which plaintiffs were

general partners and the Wentland Family

Investment Group and Snider were the limited

partners. As more fully set forth in the

record, plaintiffs contended the authorities

relied [] by defendants did not bar their

claims.

Having considered arguments in open court on

January 29 and 30, 1997, as well as pertinent

documents from plaintiffs’ 1991 bankruptcy

file, the Court decided to treat defendants’

motion to dismiss as a motion for nonsuit and

to grant defendants the relief requested. In

connection therewith, the Court makes the

following findings

(1) At the time of trial, all claims in the

Second Amended Complaint except the following

had been disposed of either by demurrer,

summary adjudication, judgment on the 

pleadings or by determinations made pursuant

to in limine motions. The following prom[]

and representations form the basis for

plaintiffs’ remaining claims under the

seventh throug[] ninth causes of action:

(A) Before the Partnership

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 15 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

16

Agreement was executed, Wentland

and Snid[] agreed any financing for

the Partnership would be a term of

at least seven years.

(B) After the Partnership Agreement

was executed, Wentland and Snide[]

promised or represented (i) they

would take primary responsibility

for the $100,000 loan extended by

the Bank to the Partnership, (ii)

they had sufficient assets to

support the Ban[] loan, (iii)

plaintiffs did not need to worry

about the requirement in the Bank’s

June 29, 19[] commitment letter

that the Bank loan be secured by

deed of trust on plaintiffs’ home,

an[] (iv) they would not let

plaintiffs lose their home.

(C) After the Partnership Agreement

was executed, Wentland and Snide[]

represented to plaintiffs that the

Bank had agreed to make a term loan

as opposed to a sho[] term (i.e.,

one year or less) loan.

(D) At a meeting on July 5, 1989,

the Bank represented to plaintiffs

tha[] Bank would proceed to process

their application on behalf of the

Partnership for a seven-[] $100,000

loan guaranteed by the Small

Business Administration (‘SBA’),

and on approva[] SB loan would

supercede the $100,000 line of

credit with a one-year term

extended by [] Bank to the

Partnership (‘the Bank Loan’). 

(E) At the July 5, 1989 Bank

meeting, Wentland and Snider

represented Bank would proceed to

process the SBA loan application

and on approval, the SBA loan []

supercede the Bank Loan.

(F) At the July 5, 1989 Bank

meeting, Wentland represented that

the B[] wanted the deed of trust on

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 16 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

17

plaintiffs’ home as additional

collateral for the Bank Loan ev[]

though it was Wentland and Snider,

not the Bank, who insisted on the

trust deed require[] The Bank and

Snider said nothing to contradict

Wentland’s representation.

(2) On January 18, 1991 plaintiffs filed a

Chapter 7 petition as individuals and general

partners of the Partnership. Plaintiffs

listed the Bank, Wentland and Snider as

creditors, but listed such claims as

disputed. Plaintiffs did not, however, list

either the B[] or Wentland or Snider as

parties against whom plaintiffs had

contingent, unliquidated and [] counterclaims

of any kind. On the Statement of All

Property of Debtor filed by plaintiffs

plaintiffs were required to list all such

claims. Plaintiffs inserted the word

‘unknown’ un[] the column for the market

value of the claims, but did not otherwise

identify either the B[] or Wentland or Snider

as persons or parties against whom any such

claim might exist. N[] did plaintiffs list

claims or counterclaims against any other

person or entity.

(3) When plaintiffs filed their bankruptcy

petition, they knew Wentland and Sn[] would

not indemnify them against any loss suffered

as a result of the Bank’s lien on their home,

and plaintiffs knew the Bank would not issue

a seven-year $100,000 loan guarantee[] the

SBA.

(4) Prior to its discharge order, on February

27, 1991, the bankruptcy court iss[] an order

accepting a stipulation entered into between

plaintiffs and the Bank lifting the automatic

stay associated with plaintiffs’ bankruptcy

petition. The order permitted the Ba[] take

legal and physical possession of all

collateral pledges by the Partnership to the

Bank [] the general partners, plaintiffs had

executed a security agreement in favor of the

Bank pur[] to which all tangible assets of

the Partnership, as well as its accounts

receivable and its g[] intangibles, were

pledged to the Bank as additional collateral

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 17 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

18

for repayment of the loan. Under the

February 27, 1991 order of the Bankruptcy

Court, the Bank was permitted to []

possession of such collateral and liquidate

the same. Included in the stipulation which

was incorporated into the order was a

statement of the liquidated amount owing by

the Partner[] to the Bank and a description

of the collateral subject to the Bank’s

possession and liquida[]

(5) On May 1, 1991, the plaintiffs received a

discharge from their debts from [] bankruptcy

court. Thereafter, on or about May 21, 1991,

plaintiffs filed a complaint in th[]

bankruptcy court against the Bank, Wentland

and Snider listing only themselves as

plaintif[] and seeking recovery against the

Bank for its failure to act in a commercially

reasonable manner in connection with its sale

of the Partnership inventory and disposition

of the Partnership’s insurance claim on the

inventory, and against Wentland and Snider

for speci[] performance and damages

associated with Wentland and Snider’s failure

to repay the Bank Loan or indemnify

plaintiffs. The trustee in bankruptcy was

not made a party to this complaint. This

complaint in bankruptcy was subsequently

dismissed by stipulation of the parties

incorporated into an order of the bankruptcy

court. The stipulation and order

contemplated that plaintiffs would file a new

complaint in the Superior Court for the ...

County of San Joaquin.

(6) In the original complaint filed on March

11, 1992 in this Court, the trustee [] named

as a co-plaintiff. However, in a First

Amended Complaint filed on September 17 []

the trustee was eliminated as a party. He

has not reappeared in these proceedings.

On the basis of the foregoing, the Court

makes the following conclusions of law:

(A) Plaintiffs’ failure to disclose

in their bankruptcy schedules the

claims which [] now assert

precludes them from maintaining

those claims before this Court. 

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 18 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

19

Plaintiffs are barred from

proceeding under principles of

judicial estoppel. ....

(B) When plaintiffs received their

discharge on May 1, 1991, that

discharge [] with it issue

preclusion consequences.

(C) The stipulation and order of

the bankruptcy court dated February

27, 19[] also entitled to res

judicata effect.

The judgment of the San Joaquin Superior Court was affirmed

on appeal by the state Court of Appeals.

On November 10, 1999, Snider/Wentland filed a Complaint for

malicious prosecution against the Shermans, Hauser and Does 1-50

in the San Joaquin County Superior Court (hereinafter referred to

as the Malicious Prosecution Complaint or Malicious Prosecution

Action).

The Malicious Prosecution Complaint describes the pleadings

and rulings in the Shermans’ Superior Court action against

Snider/Wentland. The Malicious Prosecution Complaint alleges in

pertinent part:

9. On March 11, 1992, THE SHERMANS as

parties and HAUSER as attorney instituted a

civil action against Plaintiffs in the

Superior Court of California, County of San

Joaquin, as Case No. 242437. The complaint

sought damages and other remedies for (1)

declaratory relief; (2) specific performance;

(3) declaratory relief; (4) breach of written

contract; (5) breach of covenant of good

faith and fair dealing; (6) fraud and deceit;

(7) conspiracy; and (8) promissory

estoppel/quiet title. A true and correct

copy of the complaint is attached hereto ....

10. HAUSER & MOUZES first appeared in the

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 19 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

20

action on or about June 18, 1993. A true and

correct copy of the first document filed by

HAUSER & MOUZES is attached hereto ....

11. The Complaint was subsequently amended

on or about September 8, 1993. The First

Amended Complaint sought damages and other

remedies for (1) declaratory relief, (2)

specific performance, (3) breach of written

contract, (4) breach of covenant of good

faith and fair dealing, (5) fraud and deceipt

[sic], (6) conspiracy, and (7) estoppel/quiet

title. A true and correct copy of the First

Amended Complaint is attached hereto.

11. [sic] The Complaint was subsequently

amended again and on or about June 27, 1994,

the Second Amended Complaint sought damages

and other remedies for (1) breach of written

contract, (2) breach of covenant of good

faith and fair dealing, (3) declaratory

relief, (4) specific performance, (5) breach

of written contract, (6) breach of covenant

of good faith and fair dealing, (7) fraud and

deceipt [sic], (8) negligence, (9) conspiracy

and (10) estoppel/quiet title. A true and

correct copy of the Second Amended Complaint

is attached hereto ....

12. On February 13, 1997, the Honorable

Terrence R. Van Oss, Judge of the Superior

Court, granted a non-suit in favor of

[Snider/Wentland] against THE SHERMANS. A

true and correct copy of the Order granting

non-suit is attached hereto ....

13. On or about April 10, 1997, a Notice of

Appeal of said judgment for non-suit was

filed on behalf of THE SHERMANS by HAUSER,

DONNA L. REYNOLDS, and HAUSER & MOUZES as

counsel for THE SHERMANS ... On or about

January 25, 1999, the Court of Appeal of the

State of California in and for the Third

Appellate District issued a Remittitur to the

trial court clerk, the opinion of the Court

of Appeal in favor of [Snider/Wentland] and

against THE SHERMANS ....

14. Defendants THE SHERMANS acted without

probable cause in bringing and/or maintaining

the above-mentioned action, in that they did

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 20 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

21

not honestly and reasonably believe that

there were grounds for the action because as

follows:

a. On or about January 18, 

1991, THE SHERMANS filed a Petition under

Chapter 7 of the Bankruptcy Code as Case No.

91-90181 in the United States Bankruptcy

Court, Eastern District of California ....

b. In connection with the

bankruptcy filing, THE SHERMANS filed

schedules, including Schedule A, Statement of

All Liabilities of Debtor; Schedule B,

Statement of All Property of Debtor; and

Summary of Debts and Property. Said

schedules were signed under penalty of

perjury by THE SHERMANS ....

c. The applicable law 

requires that debtors, in seeking relief

under the Bankruptcy Code, complete true,

complete, and accurate schedules specifying

their assets and liabilities.

d. Although THE SHERMANS 

listed WENTLAND, SNIDER, and THE WENTLAND

FAMILY INVESTMENT GROUP as creditors holding

claims against THE SHERMANS, they did not

disclose on the schedule of assets any claim

(unliquidated, disputed, contingent, or

otherwise) against WENTLAND, SNIDER, THE

WENTLAND FAMILY INVESTMENT GROUP, or any of

them.

e. On or about May 1, 1991, 

THE SHERMANS received a ‘Discharge of Debtor’

from the United States Bankruptcy Court ...

releasing them from all of their

dischargeable debts ....

f. Defendant HAUSER acted 

without probable cause in bringing and/or

maintaining the above-mentioned action

against Plaintiffs as attorney of record

because he unreasonably neglected to

investigate the facts or the law applicable

to the action, and no reasonable attorney

would regard as tenable the prosecution of a

claim that accrued before the filing of a

Chapter 7 bankruptcy, that was not mentioned

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 21 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

22

as an asset in the bankruptcy proceeding and

that was pursued after the bankruptcy

discharge was granted. Defendant, HAUSER,

was the attorney of record for SHERMANS in

the bankruptcy proceeding before the SHERMANS

received their bankruptcy discharge and was

aware of the failure to disclose the alleged

claim and failed to take any action to

correct such omission. Having consciously

allowed the SHERMAN bankruptcy to proceed to

discharge, HAUSER then caused the original

Complaint against WENTLAND and SNIDER to be

filed seeking affirmative relief and alleged

the complaints set forth therein.

15. Defendant HAUSER acted without probable

cause in bringing and/or maintaining the

above-mentioned action against Plaintiffs as

attorney of record because he unreasonably

neglected to investigate the facts or the law

applicable to the action, and no reasonable

attorney would regard as tenable the

prosecution of a claim that accrued before

the filing of a Chapter 7 bankruptcy, that

was not mentioned as an asset in the

bankruptcy proceeding and that was pursued

after the bankruptcy discharge was granted. 

Defendant, HAUSER, [sic] was the attorney of

record for SHERMANS in the bankruptcy

proceeding before the SHERMANS received their

bankruptcy discharge and was aware of the

failure to disclose the alleged claim and

failed to take any action to correct such

omission. Having consciously allowed the

SHERMAN bankruptcy to proceed to discharge,

HAUSER then caused the original Complaint

against WENTLAND and SNIDER to be filed

seeking affirmative relief and alleging the

complaints set forth therein.

16. Defendants THE SHERMANS acted

maliciously in bringing and/or maintaining

the above-mentioned action against Plaintiffs

by a desire to annoy, harass and wrong the

Plaintiffs. Among other things, they were

upset concerning a failed business enterprise

and have sought, in numerous ways, to gain

retaliation for that failure against

Plaintiffs, even though Plaintiffs had

nothing to do with the business failure. 

Defendant HAUSER acted maliciously in

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 22 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

Although the Malicious Prosecution Action was removed to the 4

Shermans’ 1991 bankruptcy action, Case No. 01-09112, the case was

transferred from the Modesto Division to the Sacramento Division on

October 29, 2004. All pleadings filed in connection with

proceedings in the Bankruptcy Court pertaining to the removed

Malicious Prosecution Action are now docketed in Bankruptcy Case

No. 04-02405.

23

bringing and/or maintaining the abovementioned action against the Plaintiffs by

instituting proceedings against the

Plaintiffs without probable cause, without

reasonably investigating the facts and/or the

law, by failing to disclose his knowledge

regarding the law, by failing to advise the

SHERMANS to report their alleged claims

against the Plaintiffs in their bankruptcy

schedules by failing to amend the schedules

and by consciously choosing to let the

bankruptcy proceed [sic] to discharge and

then, within a matter of weeks, file the

original Complaint against plaintiffs herein.

On October 12, 2001, the Bankruptcy Court granted Hauser’s

motion to re-open the Shermans’ bankruptcy case. On October 12,

2001, Hauser removed the Malicious Prosecution Action from the

San Joaquin Superior Court to the Bankruptcy Court. The Notice 4

of Removal alleges in pertinent part:

7. The instant action ... was filed on

November 10, 1999 ... seeking compensatory

and punitive damages for malicious

prosecution ... However, the Complaint was

not served on HAUSER ... until September 14,

2001. THE SHERMANS, who are again debtors in

a new Chapter 7 proceeding, Eastern District

of California, Sacramento Division, No. 01

26747 C-7, have apparently not yet been

served with process. On or about September

19, 2001, a notice of automatic stay as to

the SHERMANS was filed in the instant action

....

8. This action may be properly removed to

the Eastern District of California, Modesto

Division, under 28 U.S.C. § 1452 and

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 23 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

24

Bankruptcy Rule 9027 because it involves a

suit against a legal representative of the

Chapter 7 Trustee regarding post-petition

representation of the Trustee, filed without

leave of the bankruptcy court, a matter for

which the bankruptcy court has original

jurisdiction under 11 U.S.C. § 1334 [sic]. 

The action being removed qualifies as a core

proceeding under 28 U.S.C. § 157(b)(2)(A)

because it is a matter concerning

administration of the Estate, under Section

157(b)(2)(C) because it involves, and arises

from, a counterclaim by the Estate against

persons filing claims against the Estate, and

under Section 157(b)(2)(O) as constituting

other proceedings affecting liquidation of

assets of the estate or adjustment of the

debtor/creditor relationship. 

On November 19, 2001, Hauser filed a motion to dismiss the

Malicious Prosecution Complaint, which motion was briefed by the

parties. On February 13, 2002, Snider/Wentland filed a motion to

remand the Malicious Prosecution Action, which was briefed and

argued to the bankruptcy court. 

On September 17, 2002, the Bankruptcy Court filed a Joint

Memorandum Decision, striking Hauser’s motion to dismiss and

granting Snider/Wentland’s motion to remand. 

In remanding the Malicious Prosecution Complaint to the San

Joaquin County Superior Court, the Bankruptcy Court ruled that it

lacked subject matter jurisdiction over the Malicious Prosecution

Complaint. 

The Bankruptcy Court concluded that jurisdiction was not

provided by 28 U.S.C. § 1334(a) (“district courts shall have

original and exclusive jurisdiction of all cases under title 11")

because “cases ‘under title 11' are the actual bankruptcy case

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 24 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

25

and the property thereunder” and that the Malicious Prosecution

Action “is an adversary action, not the actual bankruptcy case.” 

The Bankruptcy Court further ruled that the Malicious

Prosecution Action does not fall within the Bankruptcy Court’s

“original but not exclusive jurisdiction of all civil proceedings

arising under title 11, or arising in or related to cases under

title 11" within the meaning of 28 U.S.C. § 1334(b). Noting that

the term “arising under” means the Bankruptcy Court may hear

proceedings involving a claim that is created or determined by a

provision of Title 11 and that the term “arising in” means the

Bankruptcy Court may hear administrative-type matters that exist

only because of the bankruptcy case, the Bankruptcy Court

concluded that the Malicious Prosecution Action does not satisfy

either of these terms because it “is based on a state law claim,

and can exist outside the bankruptcy context, as shown by the

fact it was first filed in state court.” 

The Bankruptcy Court rejected Hauser’s argument that

jurisdiction under Section 1334(b) exists because the Malicious

Prosecution Action challenges actions taken in administering an

asset of the bankruptcy estate:

The Malicious Prosecution Action does not

challenge any action taken by McGranahan or

the Hauser Defendants in any alleged capacity

as counsel for McGranahan. The Wentland

Entities have represented to the court, with

the knowledge that they would be subsequently

judicially estopped from taking a contrary

position, that they will not attempt to amend

the complaint in the Malicious Prosecution

Action to proceed against McGranahan or

anyone acting on his behalf with the proper

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 25 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

26

authority to do so. The Wentland Entities

only seek relief against the Shermans and

their counsel, the Hauser Defendants.

The Bankruptcy Court ruled that, even though the Shermans were

dealing with an asset of the bankruptcy estate when they

prosecuted the Superior Court Action, “they were not

‘administering’ an asset of the bankruptcy estate [but] were mere

interlopers who had no standing to prosecute the claims.” The

Bankruptcy Court concluded that McGranahan never formally

abandoned the claims alleged in the Superior Court Action because

no motion to do so was filed or served on the creditors in the

Chapter 7 case, thereby making McGranahan’s stipulation of

disclaimer of interest filed in the Superior Court Action

ineffective to constitute abandonment. The Bankruptcy Court

relied on Krank v. UTICA Mutual Ins. Co., 109 B.R. 668 (E.D.Pa.

1990), aff’d, 908 F.2d 962 (3 Cir.1990), which held that rd

“[o]nce a cause of action becomes the property of the estate, the

debtor may not bring suit on that action unless the property has

been abandoned by the trustee” and that the proper course of

action was for the debtor to move the Bankruptcy Court to have

the trustee abandon the property (claims) so that the debtor

could pursue the lawsuit in state court. 109 B.R. at 669. The

Bankruptcy Court ruled:

The facts before the court are similar. Even

though the Shermans were dealing with an

asset of the bankruptcy estate in the 1991

Bankruptcy Case when they prosecuted the

March 1992 State Court Action, they were not

‘administering’ an asset of the bankruptcy

estate. They were mere interlopers who had

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 26 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

no standing to prosecute the claims. Such

action does not constitute administering an

asset of a bankruptcy case.

The Bankruptcy Court also rejected Hauser’s claim that

subject matter jurisdiction under Section 1334(b) exists because

the Malicious Prosecution Action is preempted by the Bankruptcy

Code. Hauser, citing MSR Exploration, Ltd. v. Meridian Oil,

Inc., 74 F.3d 910 (9 Cir.1996), in addition to California state th

court authority, argued that the Malicious Prosecution Action is

preempted because the basis for the malicious prosecution were 

events taking place within the bankruptcy court proceedings. The

Bankruptcy Court ruled:

The actions complained of in the Malicious

Prosecution Action were not taken in the

bankruptcy court or even as part of the

proper administration of an asset of the

bankruptcy estate in the 1991 Bankruptcy

Case. Rather, the Malicious Prosecution

Action seeks a remedy for the Shermans and

their counsels’ independent actions in state

court. There is no infringement on the

overall scheme of the Bankruptcy Code. Thus,

the claims alleged in the Malicious

Prosecution Action are not preempted.

The Bankruptcy Court rejected Hauser’s argument that

jurisdiction under Section 1334(b) existed because in filing and

prosecuting the Superior Court State Action, they were carrying

out the requirements of the Bankruptcy Court’s January 1995

Order, thus making the Malicious Prosecution Action a collateral

attack on the January 1995 Order and, therefore a “core”

proceeding:

... This argument does not properly analyze

the purpose of determining whether an action

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 27 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

28

is core or non-core and mis-apprehends the

effect of involvement of a bankruptcy court

order in another proceeding.

Before ever reaching the issue of ‘core’

versus ‘non-core’ status, subject matter

jurisdiction must exist under 28 U.S.C. §

1334. Regarding matters over which the

bankruptcy court has subject matter

jurisdiction, the distinction between ‘core’

and ‘non-core’ dictates whether an Article I

bankruptcy judge may enter a final order. 28

U.S.C. § 157; Harris Pine, 44 F.3d at 1436.

The fact that an order of a bankruptcy court

may be interpreted in another proceeding does

not, in and of itself, vest the bankruptcy

court with subject matter jurisdiction over

that proceeding. 

The Bankruptcy Court further ruled:

First, for reasons undisclosed in the record,

the 1992 Stipulation was not submitted to the

bankruptcy court and made an order until

January 1995. It is axiomatic that the

Hauser Defendants could not have been

compelled by the court to file a lawsuit in

state court in 1992, when the court did not

enter the order at issue until three years

later in 1995. Second, even if the court had

entered the January 1995 Order before the

Hauser Defendants filed the March 1992 State

Court Action, that order cannot reasonably be

interpreted as compelling the Hauser

Defendants to file the March 1992 State Court

Action. Their contention to the contrary is

a misinterpretation of the plain language and

meaning of the January 1995 Order. The order

was an example of a common occurrence. It

approved a stipulation for dismissal in one

forum without prejudice to the re-filing in

another forum. It did not compel the refiling.

The Bankruptcy Court noted that “if it had been intended to

compel re-filing of the May 1991 Adversary in state court, the

January 1995 Order would not contain the language ‘... nothing

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 28 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

29

herein contained is intended to be a bar to refiling of such

Complaint.’” 

The Bankruptcy Court also ruled that it did not have

“related to” jurisdiction within the meaning of Section 1334(b)

over the Malicious Prosecution Action:

[T]he Malicious Prosecution Act does not

involve actions taken by McGranahan (or the

Hauser Defendants acting as McGranahan’s

counsel), nor does it involve actions taken

by the Shermans (or the Hauser Defendants

acting as the Shermans’ counsel) in

administering an asset of the bankruptcy

estate in the 1991 Bankruptcy Case, nor does

it involve claims that are preempted by the

Bankruptcy Code, nor does it involve actions

the Shermans were compelled to take by order

of the bankruptcy court in the 1991

Bankruptcy Case. It is an action seeking

damages against the Shermans (and the Hauser

Defendants acting as the Shermans’ counsel)

for actions that were taken in the state

court without standing or authority to act on

behalf of the estate of the 1991 Bankruptcy

Case. It may have great effect on the

Wentland Entities, the Shermans and the

Hauser Defendants, but the court concludes

that it has no conceivable effect on the

bankruptcy estate in the 1991 Bankruptcy

Case.

Finally, the Bankruptcy Court ruled that, even if subject

matter jurisdiction in the Bankruptcy Court existed over the

Malicious Prosecution Action, it would exercise its discretion

under 28 U.S.C. § 1452(b) to remand the Malicious Prosecution

Action to the San Joaquin Superior Court:

Even if the Malicious Prosecution Action were

to have some conceivable effect on the

bankruptcy estate in the 1991 Bankruptcy

Case, there is an insufficient connection

between the conduct of the Shermans (and the

Hauser Defendants acting as the Shermans’

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 29 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

30

counsel) alleged in the Malicious Prosecution

Action and the 1991 Bankruptcy Case. As

stated above, the Malicious Prosecution

Action does not involve actions taken by

McGranahan (or the Hauser Defendants acting

as McGranahan’s counsel), nor does it involve

actions taken by the Shermans (or the Hauser

Defendants acting as the Shermans’ counsel)

in administering an asset of the bankruptcy

estate in the 1991 Bankruptcy Case, nor does

it involve claims that are preempted by the

Bankruptcy Code, nor does it involve actions

the Shermans were compelled to take by the

order of the bankruptcy court in the 1991

Bankruptcy Case. It is an action seeking

damages against the Shermans (and the Hauser

Defendants acting as the Shermans’ counsel)

for actions that were taken in the state

court without the standing or authority to

act on behalf of the bankruptcy estate of the

1991 Case. The Malicious Prosecution Action

belongs in state court.

Upon the filing by Hauser of an appeal of this ruling, the

Bankruptcy Court stayed the remand order pending resolution of

the appeal by the district court.

B. Appellate Jurisdiction.

28 U.S.C. § 1452(a) provides in pertinent part that “[a]

party may remove any claim or cause of action in a civil action

... to the district court for the district where such civil

action is pending, if such district court has jurisdiction of

such claim or cause of action under section 1334 of this title.” 

Section 1452(b), as amended in 1990 by the Judicial Improvements

Act, provides:

The court to which such claim or cause of

action is removed may remand such claim or

cause of action on any equitable ground. An

order entered under this subsection remanding

a claim or cause of action, or a decision not

to remand, is not reviewable by appeal or

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 30 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

31

otherwise by the court of appeals under

section 158(d), 1291, or 1292 of this title

or by the Supreme Court of the United States

under section 1254 of this title.

In In re Borelli, 132 B.R. 648 (N.D.Cal.1991), the district

court rejected the argument that Section 1452(b) makes any

decision on a remand motion in a bankruptcy case unreviewable on

appeal:

While the amendment does not specifically

address appellate review by the district

court, it is clear from the legislative

history that Congress intended to give the

district court jurisdiction to review remand

and abstention decisions of the bankruptcy

courts. The Congressional Record clarifies

any ambiguity in the language of the

amendment:

Section 309 would amend ... 38

(sic) U.S.C. 1334(c)(2) and 1452(b)

to clarify that, with respect to

certain determinations in

bankruptcy cases, they forbid only

appeals from the district courts to

the courts of appeals, not from

bankruptcy courts to the district

courts .... Such determinations

would therefore by (sic) reviewable

by the district court.

138 Cong.Rec. S17580 (daily ed. Oct. 27,

1990).

Section 9027(e) of the Federal Rules of

Bankruptcy procedure was amended August 1,

1991 to conform to the changes in section

1452(b). Judicial Conf.Comm. on Rules of

Practice and Procedure Amendments to the

Fed.R.Bankr.Proc., H.R.Doc. NO. 102-80, 102d

Cong. 1 Sess. 169 (1991). The notes of the st

Advisory Committee explain the change:

Subdivision (e) [of section 9027],

redesignated as subdivision (d), is

amended to delete the restriction

that limits the role of the

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 31 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

32

bankruptcy court to the filing of a

report and recommendation for

disposition of a motion for remand

under 28 U.S.C. 1452(b). This

amendment is consistent with §

309(c) of the Judicial Improvements

Act of 1990, which amended §

1452(b) so that it allows an appeal

to the district court of a

bankruptcy court’s order

determining a motion for remand

....

132 B.R. at 649-650; see also McLeod v. Dalkon Shield Claimants

Trust, 886 F.Supp. 16, 18 (D.Or.1995).

Snider/Wentland do not dispute the jurisdiction of the

district court to review the Bankruptcy Court’s remand order, “if

in fact Judge Holman was ever empowered to hear the removal

action.” Snider/Wentland notes that they objected and continue

to object to “this matter” being heard as an Adversary

Proceeding. Snider/Wentland contends that Hauser has not

complied “with the requirements of 11 U.S.C. § 7001 [sic]

(Bankruptcy Code, adversary proceedings), or the related Federal

Rules of Civil Procedure (Title 28, starting at Rule 3) regarding

service of a summons to ‘defendants.’” 

Snider/Wentland’s challenge to the Bankruptcy Court’s

jurisdiction is meritless. Rule 7001(10), Bankruptcy Rules,

defines an adversary proceeding to include “a proceeding to

determine a claim or cause of action removed under 28 U.S.C. §

1452.” The Malicious Prosecution Action filed by Snider/Wentland

against Hauser in the San Joaquin County Superior Court was

removed by Hauser to the Bankruptcy Court. Therefore, there was

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 32 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

33

no requirement that Hauser serve Snider/Wentland with a complaint

and summons pursuant to Rules 3 and 4, Federal Rules of Civil

Procedure. Removal is effectuated by serving a Notice of Removal

on all non-removing parties who have appeared in the action and

are subject to the jurisdiction of the court in which they were

first sued. 

Snider/Wentland contend that the Bankruptcy Court lacked

jurisdiction to review any motions filed by Hauser in the

Bankruptcy Court because Hauser was not a party to the Sherman’s

bankruptcy action.

This challenge to the Bankruptcy Court’s jurisdiction also

is meritless. The Malicious Prosecution Action names Hauser as

a defendant. As a defendant to an existing state case he may

seek to remove. The entire issue on this appeal is whether the

Malicious Prosecution Action was properly removed to the

Bankruptcy Court pursuant to the Bankruptcy Court’s subject

matter jurisdiction. That Hauser was not previously named as a

creditor of the Shermans in their initial bankruptcy proceedings

does not, of itself, deprive the Bankruptcy Court of jurisdiction

over the Malicious Prosecution Action.

Snider/Wentland’s appellees’ brief asserts that they 

“dispute the authority of Judge Russell to issue a stay of Judge

Holman’s order of September 19, 2003, order remanding this case

to State court”, contending that they were denied due process and

an opportunity to be heard with regard to Hauser’s emergency

motion to stay the remand order. 

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 33 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

34

Snider/Wentland did not file a notice of appeal from Judge

Russell’s stay order nor did Snider/Wentland file a cross-appeal. 

This district court has discretion to consider this issue

notwithstanding the absence of a notice of appeal by

Snider/Wentland. See In re Hessco Industries, Inc., 295 B.R.

372, 376-377 (9 Cir.BAP 2003), citing Mendocino Environmental th

Center v. Mendocino County, 192 F.3d 1283, 1297-1298 (9th

Cir.1999). In Mendocino Environmental Center, the Ninth Circuit

ruled that a notice of cross-appeal is a rule of practice that

can be waived at the court’s discretion, rather than a

jurisdictional requirement. 192 F.3d at 1298. The Ninth Circuit

further held:

In deciding whether to allow a cross-appeal

that has not been properly noticed, courts

have considered factors such as the

interrelatedness of the issues on appeal and

cross-appeal (particularly whether they

involve the same parties), whether a notice

of cross-appeal was merely late or not filed

at all, whether the nature of the district

court opinion should have put the appellee on

notice of the need to file a cross-appeal,

[and] the extent of any prejudice to the

appellant caused by the absence of notice

....

Id. at 1299. Applying these factors, the issue raised by

Snider/Wentland will not be considered. Although the parties are

the same, the issues are not related and Snider-Wentland did not

file a notice of cross-appeal.

C. Statement of Issues.

The issues identified by Hauser in the Statement of Issues

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 34 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

Snider/Wentland’s “Statement of Issues” in its opening brief, 5

includes as an issue “[w]hether Appellants’ are attempting to

obtain a Federal Rules of Civil Procedure (FRCP) Rule 12(b)(6)

dismissal, or a FRCP 56 summary judgment”. In the opening brief,

Snider/Wentland asserts:

The Appellants’ filed a FRCP 12(b)(6) motion,

requesting a dismissal based on their claim

that Appellees’ failed to state a claim upon

which relief can be granted. However,

Appellants’ [sic] have seemingly (and

continuously) argued this case as if a FRCP 56

(Summary Judgment) motion had been filed. It

is not.

This assertion makes no sense and raised no issue to be resolved on

appeal. As noted, the Bankruptcy Court struck Hauser’s Rule

12(b)(6) motion to dismiss because the Bankruptcy Court granted

Snider/Wentland’s motion to remand the Malicious Prosecution

Action. No summary judgment motion was before the Bankruptcy Court

and no issue regarding standards governing resolution of a Rule

12(b)(6) motion as opposed to a summary judgment motion is involved

in this appeal.

35

are as follows:5

1. Whether federal law preempts and bars

Snider/Wentland’s Malicious Prosecution Action;

2. Whether the Bankruptcy Court erred in concluding

that it lacked subject matter jurisdiction even if federal

preemption does not result in exclusive jurisdiction in the

Bankruptcy Court.

3. Whether the Bankruptcy Court erred in concluding 

that it could be divested of subject matter jurisdiction by postremoval statements of the record by Snider/Wentland’s counsel.

4. Whether the findings of the Bankruptcy Court in the

Joint Memorandum Decision are supported by the record.

5. Whether the Bankruptcy Court abused its discretion 

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 35 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

Snider/Wentland “strongly disagree[s]” with the standard of 6

review to the extent that review may include the “clearly

erroneous” standard, contending that the entire review must be de

novo. Depending on the nature of the issue under review, the

appropriate standards are those set forth above.

36

by remanding the Malicious Prosecution Action on equitable

grounds. 

D. Standard of Appellate Review.

A district court reviews the bankruptcy court’s findings of

fact under a clearly erroneous standard and reviews its

conclusions of law de novo. In re Windmill Farms, 841 F.2d 1467,

1469 (9 Cir. 1988). “A finding is ‘clearly erroneous’ when th

although there is evidence to support it, the reviewing court on

the entire evidence is left with the definite and firm conviction

that a mistake has been committed.” United State v. United

States Gypsum Co., 333 U.S. 364, 395 (1948). As long as findings

are plausible in light of the record viewed in its entirety, a

reviewing court may not reverse even if convinced it would have

reached a different result. Wardley Int’l Bank, Inc. v. Nasipit

Bay Vessel, 841 F.2d 259, 262 n.1 (9 Cir. 1988). th 6

When reviewing for an abuse of discretion, “‘[a] bankruptcy

court necessarily abuses its discretion if its bases its ruling

on an erroneous view of the law.’” In re Cady, 266 B.R. 172, 178

(9 Cir.BAP 2001), aff’d, 315 F.3d 1121 (9 Cir.2003). An abuse th th

of discretion also occurs if the reviewing court has “‘a definite

and firm conviction that the court below committed a clear error

of judgment in the conclusion it reached ....’” DaRonde v.

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 36 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

37

Shirley (In re Shirley), 134 B.R. 940, 943 (9 Cir.BAP 1992). th

E. Preemption.

State law is preempted under the Supremacy Clause in three

circumstances. English v. General Electric Co., 496 U.S. 72, 78

(1990). Of relevance to the resolution of this appeal are “field

preemption” and “conflict preemption”. “Field preemption” “may

be inferred from a ‘scheme of federal regulation ... so pervasive

as to make reasonable the inference that Congress left no room

for the States to supplement,’ or where an Act of Congress

‘touch[es] a field in which the federal interest is so dominant

that the federal system will be assumed to preclude enforcement

of state laws on the same subject.’” Id. at 79. “Conflict

preemption exists “where ‘compliance with both federal and

statute regulations is a physical impossibility,’ or where state

law ‘stands as an obstacle to the accomplishment and execution of

the full purposes and objectives of Congress.’” Gade v. Nat’l

Solid Wastes Mgmt. Ass’n, 505 U.S. 88, 98 (1992).

Hauser contends the Bankruptcy Court erred in ruling that

conflict preemption and field preemption did not apply to the

allegations of the Malicious Prosecution Action. 

Hauser relies primarily on MSR Exploration v. Meridian Oil,

74 F.3d 910, 913 (9 Cir.1996). th

In MSR Exploration, the Ninth Circuit addressed “whether

state malicious prosecution actions for events taking place

within the bankruptcy court proceedings are completely preempted

by federal law.” 74 F.3d at 912. MSR had a contract with

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 37 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

38

Producers to take and process natural gas, which contract

required MSR to pay for the gas on a monthly basis and for MSR

and Producers to share equally in any drop in gas prices. After

paying monthly for the gas for several years, MSR informed

Producers that it was reducing the price it paid for gas. After

being advised by a unit manager for Producers that the reduction

was improper and requesting a check to cover the amount of the

reductions, MSR continued to pay the reduced price for several

years without further objection and without reimbursing the

difference to Producers. Some years later MSR and Producers

agreed to a new pricing schedule. Thereafter, MSR filed a

Chapter 11 bankruptcy petition. Producers filed creditors’

claims against MSR based on the unit manager’s objection to the

reduced payments. MSR filed objections to the creditors’ claims

and the Bankruptcy Court disallowed Producers’ claims. MSR did

not pursue sanctions, attorneys fees or any other remedy in the

Bankruptcy Court. 

After MSR’s plan of reorganization was confirmed and

substantially consummated, MSR brought a malicious prosecution

action against Producers in the District Court. The District

Court dismissed the action for lack of subject matter

jurisdiction, agreeing with Producers that the malicious

prosecution claim was preempted and could only be pursued in the

Bankruptcy Court. In affirming, the Ninth Circuit ruled that

“field preemption” applied to MSR’s malicious prosecution action

because Congress had expressed its intent that bankruptcy matters

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 38 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

39

be handled in a federal forum by placing bankruptcy jurisdiction

exclusively in the district courts as an initial matter, citing

28 U.S.C. § 1334(a). Although “[t]he mere fact that exclusive

jurisdiction over a particular action is in the district courts

would not necessarily mean that a later malicious prosecution

action must be brought there ... it does militate in that

direction ... [because] the exclusivity of federal jurisdiction

over bankruptcy matters is an indication of Congress’s intent.” 

Id. at 913. Secondly, the Ninth Circuit inferred Congressional

intent to preempt from the “complex, detailed, and comprehensive

provisions of” Title 11. Id. at 914. The Ninth Circuit

commented:

... While it is true that bankruptcy law

makes reference to state law at many points,

the adjustment of rights and duties within

the bankruptcy process itself is uniquely and

exclusively federal. It is very unlikely

that Congress intended to permit the

superimposition of state remedies on the 

many activities that might be undertaken in

the management of the bankruptcy process. 

Debtors’ petitions, creditors’ claims,

disputes over reorganization plans, disputes

over discharge, and innumerable other

proceedings, would all lend themselves to

claims of malicious prosecution. Those

possibilities might gravely effect the

already complicated processes of the

bankruptcy court ....

In short, the highly complex laws needed to

constitute the bankruptcy courts and regulate

the rights of debtors and creditors also

underscore the need to jealously guard the

bankruptcy process from even slight

incursions and disruptions brought about by

state malicious prosecution actions. To put

it another way, the problem here is not only

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 39 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

40

one of state courts deciding issues of

federal law in one manner or another. That

is not an entirely unique situation, even

when uniformity is required ... The

difficulty here goes much deeper. It is a

question of state courts, in effect,

interfering with the whole complex,

reticulated bankruptcy process itself. That

is not to say that the need for uniformity

should be denigrated. There can be no doubt

that Congress did place considerable weight

on the need for a uniform bankruptcy process,

which leads to our third reason for finding

preemption.

Bankruptcy law does require uniformity, and

that need persuaded the framers of the United

States Constitution to expressly grant

Congress the power ‘to establish ... uniform

Laws on the subject of Bankruptcies

throughout the United States.’ Art. I, § 8,

cl. 4. ....

It is true that in many circumstances state

courts can, and do, resolve questions of

federal law ‘with no difficulty.’ ...

Nevertheless, the unique, historical, and

even constitutional need for uniformity in

the administration of the bankruptcy laws is

another indication that Congress wished to

leave the regulation of parties before the

bankruptcy court in the hands of the federal

courts alone. Of course, Congress did

provide a number of remedies designed to

preclude the misuse of the bankruptcy process

... That, too, suggests that Congress has

considered the need to deter misuse of the

process and has not merely overlooked the

creation of additional deterrents .... 

Id. at 914-915. The Ninth Circuit concluded:

... We hold that MSR’s malicious prosecution

action against the Producers is completely

preempted by the structure and purpose of the

Bankruptcy Code. Therefore, MSR’s purported

action must, in fact, be a federal claim. 

That claim, however, should have been brought

in the bankruptcy court itself, and not as a

separate action in the district court. 

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 40 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

41

Id. at 916. 

Hauser takes issue with the Bankruptcy Court’s conclusion

that the preemption discussed in MSR Exploration is not

applicable to the Malicious Prosecution Action because the

“actions complained of in the Malicious Prosecution Action were

not taken in the bankruptcy court or even as part of the proper

administration of an asset of the bankruptcy estate in the 1991

bankruptcy.” Hauser notes that the Malicious Prosecution

Complaint is premised on what occurred in the Bankruptcy Court

and the application of bankruptcy law to the fact that the

Shermans failed to list their claim against Snider/Wentland on

the schedules required by law to be filed in a bankruptcy

proceeding; that the Shermans received a discharge from the

Bankruptcy Court on May 1, 1991; and that Hauser, as counsel for

the Shermans, negligently allowed the Shermans to proceed to

discharge without scheduling the claims against Snider/Wentland

and then negligently filed the Adversary Proceeding against

Snider/Wentland in the Bankruptcy Court. Hauser argues that,

although the Malicious Prosecution Complaint avoids using this

terminology, what the Malicious Prosecution Complaint alleges is

bad faith initiation of an adversary proceeding initially filed

in the Shermans’ bankruptcy in Bankruptcy Court. This, Hauser

contends, is precisely the type of conduct MSA found preempted. 

That the Adversary Proceeding filed in the Bankruptcy Court

was dismissed subject to refiling in the Superior Court does not,

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 41 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

42

Hauser urges, negate preemption of the Malicious Prosecution

Action. First, Hauser argues, MSR Exploration encompasses state

court proceedings authorized by the Bankruptcy Court, citing Saks

v. Parilla, Hubbard & Militzok, 67 Cal.App.4th 565 (1998). 

In Saks, the Debtor in a bankruptcy proceeding filed an

Adversary Proceeding in the Bankruptcy Court against Saks based

on a fraudulent conveyance and preferential transfer. Saks

prevailed in the Adversary Proceeding and then filed a malicious

prosecution action against the Debtor and Debtor’s counsel in

state court. The trial court dismissed the malicious prosecution

action for lack of subject matter jurisdiction and the Court of

Appeals affirmed, holding:

The gist of Saks’ complaint is that the

defendants misused the bankruptcy process by

filing the adversary proceeding. He had

remedies available in the bankruptcy court. 

Like the plaintiff in MSR Exploration, Ltd.,

he chose not to invoke them. That was a

mistake. Parties may not avail themselves of

state court tort remedies to circumvent

federal remedies for the opponents’ alleged

misuse of the bankruptcy process.

67 Cal.App.4th at 573-574.

Here, Snider/Wentland also had a remedy in the Bankruptcy

Court concerning the invalidity of the underlying claims alleged

in the Adversary Proceeding. Instead of stipulating with the

Shermans and McGranahan to dismissal of the Adversary Proceeding

and its refiling in the Superior Court, Snider/Wentland could

have moved the Bankruptcy Court for dismissal of the Adversary

Proceeding on the ground that the claims alleged therein had not

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 42 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

43

been included in the required schedules and/or were without

merit. Snider/Wentland eventually obtained dismissal of the

Superior Court Action based on the application of Bankruptcy law

to the Shermans’ failure to list an asset of the bankruptcy

estate. 

Citing Satten v. Webb, 99 Cal.App.4th 365 (2002),

Snider/Wentland argues that the Bankruptcy Court’s conclusion

that the Malicious Prosecution Action is not preempted was not

error. In Satten v. Webb, Satten sold the Keenans property and

the Keenans defaulted on the purchase money promissory note. 

Satten sued the Keenans and obtained a money judgment, which the

Keenans appealed. While the appeal was pending, the Keenans

filed a Chapter 11 bankruptcy petition. Satten filed a claim in

the bankruptcy proceeding based on the money judgment. A

bankruptcy trustee was appointed and joined in the Keenans’

appeal of the money judgment. Satten entered into a settlement

with the bankruptcy trustee of her claim, which settlement was

approved by the Bankruptcy Court, and the order approving the

settlement was affirmed after the Keenans appealed it. The

bankruptcy reorganization plan was approved and, then, the

Keenans’ appeal of the money judgment was dismissed. 

The Keenans then filed a fraud complaint in the Superior

Court against Satten and the bankruptcy trustee, alleging that

the bankruptcy settlement was entered into with the intent to

defraud the Keenans, that the bankruptcy trustee had breached

fiduciary duties to the Keenans by liquidating the estate to

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 43 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

44

obtain commissions and by causing the Keenans’ appeal of the

money judgment to be dismissed. Satten and the bankruptcy

trustee filed a notice of removal of the Superior Court action to

the Bankruptcy Court pursuant to 11 U.S.C. § 1452, contending

that the Bankruptcy Court had retained jurisdiction under the

Keenans’ bankruptcy reorganization plan to adjudicate subsequent

disputes among holders of claims or causes of action involving

the Debtor, that the Bankruptcy Court had jurisdiction over the

claims in the Superior Court action because the Keenans asserted

claims “arising in or related to” the Chapter 11 case, and that

the Keenans’ claims related to the administration of the estate

or the liquidation of the assets of the estate. The Bankruptcy

Court granted summary judgment for Satten and the bankruptcy

trustee, ruling that it had subject matter jurisdiction under 28

U.S.C. § 1334 and the matter was a core proceeding under 28

U.S.C. § 157(b)(2)(A) and further ruling that there was no

evidence to support the Keenans’ allegations of fraud and breach

of fiduciary duty. 

The district court affirmed the Bankruptcy Court’s summary

judgment. Satten then filed a malicious prosecution action in

Superior Court against the Keenans and their attorney, Webb. 

Webb demurred to the malicious prosecution complaint on the

ground that the Superior Court lacked jurisdiction because the

claims were preempted by federal law. The Superior Court

sustained Webb’s demurrer without leave to amend, ruling that the

malicious prosecution complaint was a core proceeding within the

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 44 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

45

meaning of 28 U.S.C. § 157(b)(2)(A) and finding that the

malicious prosecution complaint was within the exclusive

jurisdiction of the Bankruptcy Court because it concerned the

administration of the bankruptcy estate by alleging that the

bankruptcy trustee and Satten acted fraudulently and breached

fiduciary duties in the administration of the estate. 99

Cal.App.4th at 369-373. 

The Court of Appeal reversed. After a lengthy description

of numerous federal and state cases discussing preemption, the

Court of Appeal held in pertinent part:

We must analyze these allegations [in

Satten’s malicious prosecution complaint] in

light of the policies [concerning preemption]

outlined above. First, as summarized in MSR

Exploration, ..., we inquire if the exercise

of state court jurisdiction ‘would be

inconsistent with and subvert the exclusive

jurisdiction of the federal courts by

allowing state courts to create their own

standards as to when persons may properly

seek relief in cases Congress has

specifically precluded those courts from

adjudicating.’ Gonzales [v. Parks, 830 F.2d

1033, 1035 (9 Cir.1987]. Second, state th

court jurisdiction would not be proper to

accomplish ‘the adjustment of rights and

duties within the bankruptcy process itself,’

which should be uniquely and exclusively

federal (e.g. debtors’ petitions, creditors’

claims, disputes over reorganization plans,

disputes over discharge, and such other

proceedings). (MSR Exploration, supra, 74

F.3d at p. 914). Third, the preemption

determination must recognize the need for

uniformity in bankruptcy law. (Id. at pp.

914-915).

These factors will assist us in determining

the nature of the federal jurisdiction over

Satten’s malicious prosecution claims. This

in turn will depend on whether the

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 45 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

46

jurisdiction over the underlying matter that

was litigated in federal bankruptcy court was

exclusively federal, or was instead

concurrent or supplemental. (28 U.S.C. §§

157(b)(2)(A), (O), 1334, 1367.) We first

take note of the trial court’s reliance on In

re Delorean Motor Co., supra, 155 B.R. 521,

which stands for the rule that a state law

malicious prosecution action arising out of a

trustee’s attorney’s performance of official

duties in a bankruptcy matter was a ‘core

proceeding,’ such that it could not be

litigated in state court. The issue actually

presented in DeLorean was whether the

bankruptcy court erred in determining that it

should remand a state court action previously

removed to its court, based on the doctrines

of mandatory and discretionary abstention. 

(28 U.S.C. § 1334(c)(1), (2).) The appellate

court ruled that no such remand to state

court was required and the matter could be

decided in bankruptcy court. This is an

entirely different scenario, because Satten

is not claiming tortious conduct by a

trustee’s attorney, but instead a malicious

filing outside of bankruptcy court by and

against a third party.

In light of all the considerations outlined

above, we must reject each of Webb’s

arguments in support of the demurrer ruling

below. First, although the underlying fraud

proceeding was ultimately resolved in

bankruptcy court, it did not amount to an

‘authorized bankruptcy proceeding.’ because

it was not grounded in a federal statutory

provision, but rather represented a common

law fraud action (removed for different

reasons involving the trustee’s

participation). Our reference in Pauletto

[v. Reliance Insurance Co.], 64 Cal.App.4th

597, to the underlying case as an ‘authorized

bankruptcy proceeding,’ was made in the

factual context that the underlying case

there was brought under 11 United States Code

section 523. Although we said there that

‘the distinctions between the various

bankruptcy proceedings which could give rise

to a malicious prosecution action are not

important,’ we made that statement in

reference to adversary proceedings, etc.,

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 46 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

47

authorized by federal statutes, that are

clearly core proceedings. (28 U.S.C. §

157(b)(2)(A), (O).) Here, the underlying

case sounded in state common law fraud and

tort. Thus, Pauletto is distinguishable,

because a case is not authority for a

proposition not considered therein ....

Next, the jurisdiction question is considered

de novo in this ruling on demurrer. (MSR

Exploration, supra, 74 F.3d at p. 912.) The

fact that Satten joined in the removal

request does not mean she must be deemed

bound by it for all purposes, such as to give

the bankruptcy court exclusive jurisdiction

where it would not otherwise exist. Our

independent subject matter jurisdiction

inquiry is not affected by the removal

request, because removal was otherwise proper

due to the presence of the codefendant, the

bankruptcy trustee, whose alleged activities

were made in an official capacity so as to

require exclusive jurisdiction in the

bankruptcy court as a core proceeding. (See

In re DeLorean Motor Co., supra, 155 B.R. at

p. 525 [proper inquiry is whether a defendant

is the functional equivalent of a trustee in

bankruptcy due to the defendant’s alleged

actions].) However, as to Satten, no such

official status was alleged regarding her

claimed participation in the defrauding of

Keenan. Instead, it appears she was brought

along to bankruptcy court under 28 United

States Code section 1367 supplemental

jurisdiction, when the trustee made the

initial removal request and when she joined

it. (28 U.S.C. § 1452.) However, her role

in the bankruptcy case was one step removed

from that of the trustee, which makes her

less centrally involved in the bankruptcy

estate matters.

Similarly, the finding by the bankruptcy

court that this was a core proceeding under

28 United States Code section 157(b)(2)(A),

concerning the administration of the

bankruptcy estate, is not dispositive when

the allegations as to Satten are individually

considered as outlined above. The same is

true of the trial court’s finding in ruling

on the demurrer here, that the underlying

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 47 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

48

case was a core proceeding, when we review

the jurisdiction question de novo.

In summary, we believe the nature of the

underlying fraud case, filed outside of

bankruptcy, does not require or justify a

finding that it was an authorized bankruptcy

proceeding. It was not based on federal law,

as were the underlying ‘[d]ebtors’ petitions,

creditors’ claims, disputes over

reorganization plans, disputes over

discharge, and innumerable other

proceedings,’ referred to in MSR Exploration,

supra, 74 F.3d at page 914, as requiring

later preemption of a subsequent malicious

prosecution action. Here, state court

jurisdiction over the malicious prosecution

case that is founded upon the unsuccessful

fraud allegations will not improperly

accomplish ‘the adjustment of rights and

duties within the bankruptcy process itself,’

which is uniquely and exclusively federal. 

Nor will it interfere uniformity of

application of bankruptcy law. (Ibid.)

In this regard, it is somewhat disingenuous

of Webb to contend that there can be no state

court jurisdiction of this malicious

prosecution action, since his clients’

underlying fraud action was commenced in

state court. Under these circumstances, the

state courts should be able to examine

whether that state court filing on behalf of

his client met the standards required for

subsequent malicious prosecution relief ...

Satten must have his day in court to decide

her rights or remedies regarding malicious

prosecution. 

Further, even though Satten’s attorney at the

summary judgment hearing in bankruptcy court

showed she was aware of the available

bankruptcy remedies under Federal Rules of

Bankruptcy Procedure, rule 9011 (11 U.S.C.),

that does not demonstrate that those were the

only remedies available for all time. Even

if Satten could show Webb’s frivolous filing

of pleadings, etc. under the standards of

rule 9011, that would be different than

showing the elements of the tort of malicious

prosecution, such as not only a favorable

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 48 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

49

termination (not disputed), but also lack of

probable cause to sue or the initiation of

the proceeding with malice ....

Moreover, no waiver of any state law claims

that were otherwise available occurred

through Satten’s failure to pursue bankruptcy

sanctions, since the matter was only in

bankruptcy court as to Satten under the

supplemental jurisdiction or ‘related to’

rationales. (28 U.S.C. §§ 1334(b), 1367.) 

The prosecution of this action will not

create any impermissible state court

interference with the existence of federal

sanctions for the filing of frivolous and

malicious bankruptcy pleadings, such as was

disallowed by Idell, supra, 224 Cal.App.3d at

page 271: ‘The mere possibility of being sued

in tort in state court, with the potential

for substantial damage awards, could deter

persons from exercising their rights in

bankruptcy. Thus, it is for Congress and the

federal courts, not state courts, to decide

what incentives and penalties should be

utilized in the bankruptcy process.’ ... We

do not believe the underlying Keenan common

law fraud case amounted to a protected

exercise of his rights in bankruptcy, such

that no later state court malicious

prosecution filings may be premised upon it.

Further, as stated in Hinuja [v. Arco

Products Co., 102 F.3d 987, 990 (9th

Cir.1996)], ‘This is not a case where a

separate state action will interfere with the

uniformity required in bankruptcy proceedings

or with the control of the bankruptcy court

over those proceedings. It is a simple

matter of enforcing [state] law and deciding

claims arising out of actions which allegedly

[violated state law].’ 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.

99 Cal.App.4th at 384-387.

Snider/Wentland argues that the facts involved in this

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 49 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

50

appeal are very similar to those involved in Sattan, except that

the Malicious Prosecution Action was not removed by the

bankruptcy trustee and there is no participation by the

bankruptcy trustee in the Malicious Prosecution Action. 

However, as Hauser argues, the holding in Sattan is inapplicable

to the facts here. Unlike Sattan, here, the Adversary Proceeding

was commenced in the Bankruptcy Court and alleged that the

Bankruptcy Court had jurisdiction because the “adversary

proceeding involves property of the estate of the Debtors as well

as certain other potential assets of the Debtors to include

claims for indemnification as against outstanding loan

obligations ....” Adversary Proceedings involving the

administration of a bankruptcy estate, allowance or disallowance

of claims, and matters affecting adjustment of debtor-creditor

relations are core proceedings pursuant to 28 U.S.C. § 157(b)(2).

The Shermans’ underlying original claims filed as an

adversary proceeding in the Bankruptcy Court about

Snider/Wentland’s liability for alleged fraud and other

misconduct in causing the Shermans’ residence to be pledged as

collateral and ultimately foreclosed concerned the $100,000 loan

repayment and related to and arose out of the business of the

debtors, Shermans, and the partnership (the Lighthouse). The

potential asset represented by the debtors’ claims against

Snider/Wentland was first asserted in Bankruptcy Court in the

Adversary Proceeding. When the Adversary Proceeding was

dismissed by the Bankruptcy Court pursuant to the 1992

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 50 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

51

Stipulation signed by all parties, including McGranahan, and the

action refiled in the San Joaquin County Superior Court, the

Complaint alleged that the claims against Snider/Wentland were

property of the bankruptcy estate. When the San Joaquin Superior

Court granted non-suit for Snider/Wentland, it did so based on

bankruptcy law, because of the Shermans’ failure to schedule the

claims against Snider/Wentland in the Chapter 7 bankruptcy case. 

Also distinguishable from Sattan is the fact that the

Malicious Prosecution Action is against Hauser for actions taken

in the Bankruptcy Court and the bankruptcy. Mr. Hauser was

counsel for both the Shermans and the trustee in the Superior

Court Action until McGranahan, as bankruptcy trustee, attempted

to withdraw pursuant to the 1993 Stipulation, but did so without

an order from the Bankruptcy Court authorizing the abandonment of

the claims. Unlike Sattan, the core issues in the Malicious

Prosecution Action cannot be resolved by California law because

of the allegation in paragraphs 14 and 15 of the Malicious

Prosecution Complaint that “applicable law requires that debtors,

in seeking relief under the Bankruptcy Code, complete true,

complete and accurate schedules specifying their assets and

liabilities” and that Hauser acted without probable cause because

“no reasonable attorney would regard as tenable the prosecution

of a claim that accrued before the filing of a Chapter 7

bankruptcy, that was not mentioned as an asset in the bankruptcy

proceeding and that was pursued after the bankruptcy discharge

was granted.” These allegations establish that a state court

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 51 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

52

hearing the Malicious Prosecution Action would be and was 

“hopelessly entangled in bankruptcy law.” 

In addition, bankruptcy law applied to determine the

probable cause element of the malicious prosecution claim,

including whether McGranahan properly withdrew from the Superior

Court Action under bankruptcy law and whether he lawfully

abandoned the Sherman claims, which were assets of the bankruptcy

estate. The ramifications and the legal effect of all

McGranahan’s actions or inactions in the state court case and

Hauser’s performance in relation to the trustee’s withdrawal, 

are questions of bankruptcy law. Further, as discussed infra, a

cause of action becomes “property of the bankruptcy estate as of

the Petition Date, even though the Action was not listed in the

schedules, and property that is neither abandoned nor

administered remains property of the estate even after the case

is closed.” In re Lopez, 283 B.R. 22, 28 (9 Cir.BAP 2002). th

Technically, the Shermans’ claims against Snider/Wentland

continued to be property of the bankruptcy estate after the

trustee’s purported withdrawal and ineffective abandonment of the

claims. Although concededly the state court could determine that

a “favorable termination” for purposes of a malicious prosecution

claim cannot be based on a void judgment, determination of the

validity or invalidity of the judgment of “non-suit” in the

Superior Court Action depends on and requires resolution of

issues of bankruptcy law. 

Snider/Wentland’s contention that Sattan negates preemption

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 52 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

53

of the Malicious Prosecution Action requires that the Court deem

irrelevant that Hauser first filed the Adversary Proceeding in

the Bankruptcy Court; advanced the Shermans’ claims on behalf of

the bankruptcy estate; dismissed and refiled the Adversary

Proceeding claims in the San Joaquin Superior Court pursuant to

the 1992 Stipulation approved by the Bankruptcy Court;

represented McGranahan as trustee in the Superior Court Action;

and lost the Superior Court Action based on application of

bankruptcy law under the judicial estoppel doctrine. 

Snider/Wentland’s analysis also ignores that resolution of the

malicious prosecution claim will require determination whether

Hauser initiated the Adversary Proceeding in Bankruptcy Court

without probable cause under bankruptcy law; the effect of

McGranahan’s joinder as a party plaintiff to the Superior Court

Action; his purported withdrawal from the Superior Court Action;

potential abandonment of the bankruptcy estate claims against

Snider/Wentland; the effect of McGranahan’s purported approval of

the continued pursuit of the Superior Court Action; and the

effect of the Automatic Stay of 11 U.S.C. § 362 on the validity

of the Superior Court’s non-suit judgment. Sattan is not

persuasive authority supporting the Bankruptcy Court’s ruling

that the Malicious Prosecution Action is not preempted.

Hauser argues that preemption cannot be avoided “by

indulging the fiction that the [Malicious Prosecution Action] was

born when the trustee withdrew from the Superior Court Case.

Hauser notes that the only actions alleged in the Malicious

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 53 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

54

Prosecution Complaint reflecting lack of probable cause and

malice are the filing of the Adversary Proceeding in Bankruptcy

Court and inactions of Hauser and the trustee in the Bankruptcy

Court that resulted in the Shermans’ failure to file a claim

against Snider/Wentland in their bankruptcy proceeding, of which 

Hauser was aware. 

In In re Crown Vantage, Inc., 421 F.3d 963, 970 (9th

Cir.2005), the Ninth Circuit “join[ed] our sister circuits in

holding that a party must first obtain leave of the bankruptcy

court before it initiates an action in another forum against a

bankruptcy trustee or other officer appointed by the bankruptcy

court for acts done in the officer’s official capacity.” In In

re DeLorean Motor Co., 991 F.2d 1236, 1241 (6 Cir.1993), the th

Sixth Circuit held:

[C]ounsel for trustee, court appointed

officers who represent the estate, are the

functional equivalent of a trustee, where ...

they act at the direction of the trustee and

for the purpose of administering the estate

or protecting its assets ... In authorizing

the Trustee to bring the suit against

DeLorean and Weitzman, the court authorized

the Trustee’s attorneys to aid the Trustee in

bringing the suit. The protection that the

leave requirement affords the Trustee and the

estate would be meaningless if it could be

avoided by simply suing the Trustee’s

attorneys. Therefore, leave of the

Bankruptcy Court must be granted before a

suit may be brought against counsel for the

trustee, in their capacity as counsel for

trustee, since such suit is essentially a

suit against the trustee.

Hauser refers to Snider/Wentland’s stipulation in the

Bankruptcy Court during hearings on the motion to remand which is 

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 54 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

55

the subject of this appeal that gave “an unconditional,

irrevocable waiver of including the trustee or the trustee’s

counsel in the malicious-prosecution action.” Snider/Wentland

made this stipulation to shore up its position that the Malicious

Prosecution Complaint is not based on the filing of the Adversary

Proceeding, the initiation of the Superior Court Case, or any

actions by Hauser in the Superior Court Case up to the time

McGranahan attempted to withdraw from the Superior Court Case. 

Hauser correctly maintains that the allegations of the Malicious

Prosecution Complaint are to the contrary and further contends:

[L]eave to amend was neither requested nor

given, and amendment would have eviscerated

the factual basis for Snider/Wentland’s

allegations concerning malice and probable

cause ... The [Bankruptcy C]ourt’s contrary

conclusion reflects an apparent

misunderstanding of governing law.

In so arguing, Hauser cites California authority that a

cause of action for malicious prosecution must allege, inter

alia, that the underlying litigation was initiated without

probable cause and with malice. However, since this appeal was

briefed, the California Supreme Court ruled that “[c]onfining the

tort of malicious prosecution to the initiation of a suit without

probable cause would be ... without support in authority or in

principle”, Zamos v. Stroud, 32 Cal.4th 958, 966 (2004), and that

“an attorney may be held liable for malicious prosecution for

continuing to prosecute a lawsuit discovered to lack probable

cause.” Id. at 970. The Malicious Prosecution Complaint alleges

that Hauser initiated and/or maintained the Superior Court Case

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 55 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

56

without probable cause because the Shermans had not listed their

claims against Snider/Wentland on the required bankruptcy

schedules filed in the Bankruptcy Court. Snider/Wentland’s

stipulation in the Bankruptcy Court that it will not include

McGranahan as trustee or McGranahan’s counsel as parties to the

Malicious Prosecution Action does not alter the allegations of

the Malicious Prosecution Complaint. However, the propriety of

McGranahan’s withdrawal from the Superior Court Case and apparent

abandonment of a bankruptcy estate asset without court approval

raises additional issues of bankruptcy law.

Hauser alternatively argues that preemption still applies

even if the basis of the Malicious Prosecution Complaint is the

continued maintenance of the Superior Court Action after

McGranahan withdrew.

Title 11 U.S.C. § 541(a)(1) provides in pertinent part that

a bankruptcy estate is comprised of “all legal or equitable

interests of the debtor in property as of the commencement of the

case.” Once appointed, a bankruptcy trustee becomes the

representative of the estate, 11 U.S.C. § 323(a), and succeeds to

the debtor’s right to pursue causes of action which are the

property of the estate. See In re Alcala, 918 F.2d 99, 102 (9th

Cir.1990). 

Hauser argues that the trustee’s discretion with regard to

pursuit of pending actions by the debtor may be exercised in one

of three ways: (1) intervene and assume prosecution as trustee;

(2) consent to prosecution by the debtor for the benefit of the

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 56 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

57

estate; or (3) decline prosecution. See Detrick v. Panalpina,

Inc., 108 F.3d 529, 535 (4 Cir.), cert. denied, 522 U.S. 810 th

(1997). 

Hauser argues that the Bankruptcy Court ignored the second

option. In In re Anchorage Nautical Tours, Inc., 145 B.R. 637,

642 (9 Cir.BAP 1992), the BAP explains: th

Under [11 U.S.C.] § 554(a), notice and a

hearing is required to abandon property of

the estate. Abandonment is not effective

without notice to the creditors. Sierra

Switchboard Co. v. Westinghouse Elec. Corp.,

789 F.2d 705,709 (9 Cir.1986). Section th

554(d) explicitly provides that when property

is not effectively abandoned in accordance to

§ 554(a), it remains property of the estate.

In Cusano v. Klein, 264 F.3d 936 (9 Cir.2001), Cusano, a former th

member of a rock group brought suit against the rock group, its

members, owners of rights to the group’s songs, and publishers of

books and videotapes concerning the rock group, seeking to

recover royalties owed for songs he had written, and asserting

claims for defamation and infringement of his right to publicity. 

In pertinent part, the District Court granted summary judgment

against Cusano and dismissed all claims for royalties which

should have been paid prior to March 21, 1989, the date on which

Cusano filed a Chapter 11 bankruptcy petition, finding that

Cusano had failed to schedule his royalty claims, that the

unscheduled claims belonged to the bankruptcy estate, and that

Cusano could not proceed with those claims without first

obtaining permission from the bankruptcy court. Id. at 942-944.

The Ninth Circuit affirmed the District Court with regard to

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 57 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

58

claims for unpaid pre-petition royalties, which were required to

be scheduled separately as either receivables or legal claims. 

Id. at 945. Noting that 11 U.S.C. § 521(1) imposes an

affirmative duty on the debtor to schedule his assets and

liabilities and that causes of action are separate assets which

must be formally listed, id. at 945-947, the Ninth Circuit,

rejected Cusano’s argument that his royalty claims for prepetition compositions had not yet accrued, id. at 947, and ruled

that Cusano’s failure to list the cause of action on his schedule

“vests the claim in the bankruptcy estate, where it remains.” 

Id. at 948. See also In re Lopez, supra, 283 B.R. at 28:

[T]he Action became property of the

bankruptcy estate as of the Petition Date,

even though the Action was not listed in the

schedules, and property that is neither

abandoned nor administered remains property

of the estate even after the case is closed.

Relying on these cases, Hauser contends that the 1993 

Stipulation filed in the Superior Court Action on June 18, 1993,

wherein McGranahan stipulated “on behalf of the bankruptcy estate

of the Shermans is withdrawing as a party Plaintiff in the

aforesaid state court action disclaiming any further interest

herein” did not constitute a lawful abandonment by McGranahan

under bankruptcy law because he did not give notice to creditors

and opportunity for a hearing as required by Section 554(a). 

Therefore, Hauser argues, the Superior Court Action remained the

property of the Shermans’ bankruptcy estate as a matter of law. 

Hauser acknowledges that the Bankruptcy Court reached this

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 58 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

59

conclusion, but argues that the Bankruptcy Court erred in further 

concluding that “[e]ven though the Shermans were dealing with an

asset of the bankruptcy estate in the 1991 Bankruptcy Case when

they prosecuted the March 1992 State Court Action, they were not

‘administering’ an asset of the bankruptcy estate [but] were mere

interlopers who had no standing to prosecute the claims.” 

Hauser argues that there is no factual foundation for the

Bankruptcy Court’s conclusion and contends that the existence of

the bankruptcy, coupled with McGranahan’s retention of Hauser and

the execution of the 1993 Stipulation “evinced exercise of the

trustee’s discretion to allow the Shermans to proceed on behalf

of the estate.” Hauser refers to Detrick v. Panalpina, Inc.,

supra, 108 F.3d at 536:

While no doubt exists that the bankruptcy

Trustees did not file a motion to substitute

as plaintiffs before the district court, by

virtue of the Dericks’ bankruptcy, the

Trustees succeeded to the Dericks’ RICO and

conspiracy claims, and the Trustees’

retention of the Dericks’ counsel

sufficiently evinced the Trustees’ exercise

of their discretion to allow the Dericks to

pursue the present cause of action on behalf

of the estate.

See also In re Lopez, supra, 283 B.R. at 28: “[A] chapter 7

trustee can ... prosecute [an action], settle it, abandon it, or

arrange for [the debtor] to prosecute it in exchange for the

estate receiving a share of the proceeds.” Hauser further

contends that Snider/Wentland effectively conceded a grant of

authority from McGranahan to the Shermans to prosecute the

Superior Court Action for the benefit of the bankruptcy estate. 

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 59 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

60

Hauser refers to the statement of Snider/Wentland’s counsel, Mr.

Castillo, to the Bankruptcy Court at the hearing on the motion to

dismiss and the motion to remand:

The stipulation was and is that the matter

could be refiled in the state court. It was

refiled in state court, and it proceeded from

there. And sometime after that, the trustee,

I would characterize it as, abandoned the

claim, said, ‘Mr. Hauser, you and the

Shermans, go ahead. I’ - I have no further

interest in this. If you prevail, great. If

you lose, then the estate would not be

subject to any type of claim.’

(ER, Tab 28, p. 000636). Finally, Hauser contends, irrespective

of any agreement between McGranahan and the Shermans, the 1992

Stipulation “and the order it approved” obligated him, as an

officer of the bankruptcy court, to take necessary actions with

respect to property of the bankruptcy estate.

Snider/Wentland argues that Hauser’s assertion that he acted 

on behalf of the trustee is unsupported by the facts, asserting

that Hauser admitted to the San Joaquin Superior Court that he

knew that the Shermans’ claims against Snider/Wentland should

have been listed on the bankruptcy schedules and knowingly did

not amend the schedules and that Hauser represented to the San

Joaquin Superior Court that any monetary recovery in the Superior

Court Action “would not be an asset of the bankruptcy estate.” 

Hauser’s inaccurate statement does not change the law that the

claims were then property of the bankruptcy estate.

Snider/Wentland refers to statements made by

Snider/Wentland’s counsel, Mr. Castillo, at the hearing on April

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 60 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

61

1, 2002 before the Bankruptcy Court on Snider/Wentland’s motion

to remand. Mr. Castillo, referring to a Request for Judicial

Notice filed in the Bankruptcy Court, but not part of the record

on appeal, states in pertinent part:

The money was from the sale of the property. 

The proper party that would have received

those funds would have been the Bank of Lodi. 

So the court is asking on 391, the state

court:

‘So even if the funds are somehow

returned to the debtor, then the

bankruptcy trustee no longer has

any claim over them?’

Mr. Hauser’s reply is: ‘And that’s an

important point, too, Your Honor, because

many of these cases talk about assets which

are going to be distributed to creditors.’

Very, very clearly the stakeholder funds were

for the pure benefit of the Shermans. It had

nothing to do with the bankruptcy estate; it

had nothing to do with the trustee, by Mr.

Hauser’s own words. [ER 30, p.756]

Snider/Wentland also requests that this Court “review the

(original) Plaintiff’s Request for Judicial Notice (P/RJN) filed

for the February 25, 2002, oral argument before Judge HOLMAN

(this pleading was conveniently left out of the Excerpts of

Record filed by the Appellants).” 

However, Snider/Wentland did not include this Request for

Judicial Notice in the Excerpts of Record. Rule 8006, Bankruptcy

Rules, provides in pertinent part:

Within 10 days after filing the notice of

appeal as provided by Rule 8001(a), the

appellant shall file with the clerk and serve

on the appellee a designation of items to be

included in the record on appeal and a

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 61 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

62

statement of the issues to be presented. 

Within 10 days after the service of the

appellant’s statement the appellee may file

and serve on the appellant a designation of

additional items to be included in the record

on appeal ....

Rule 8009(b), Bankruptcy Rules, provides that “[a]n appellee may

also serve and file an appendix which contains material required

to be included by the appellant but omitted by the appellant.” 

It is Snider/Wentland’s burden as appellees to assure that the

record is sufficiently complete to defend the bankruptcy court’s

ruling. In re Cogliano, 355 B.R. 792, 803 (9 Cir.BAP 2006), th

citing In re Kyle, 317 B.R. 390, 394 (9 Cir.BAP 2004), aff’d,

th

170 Fed.Appx. 457 (9 Cir.2006). Because Snider/Wentland had th

the opportunity to include the Request for Judicial Notice in the

Excerpt of Record on Appeal, Snider/Wentland cannot argue that

representations made by Hauser preclude Hauser from now

contending that he was acting on behalf of the trustee after the

1993 Stipulation was executed. 

Furthermore, even if Hauser’s alleged representations to the

San Joaquin Superior Court were part of the record on appeal,

Snider/Wentland’s contention that Hauser is judicially estopped

from arguing a contrary position on the issues of preemption and

exclusivity of the Bankruptcy Court to redress the allegations in

the Malicious Prosecution Action is without merit. The debtor

cannot deal with or characterize the nature of an asset of a

bankruptcy estate, except in accordance with bankruptcy law. 

As explained in Wagner v. Professional Eng’rs in Cal. Gov’t,

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 62 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

63

354 F.3d 1036, 1044 (9 Cir.2004): th

‘Judicial estoppel, sometimes known as the

doctrine of preclusion of inconsistent

positions, precludes a party from gaining an

advantage by taking one position, and then

seeking a second advantage by taking an

incompatible position.’ ... Judicial estoppel

is an equitable doctrine that is intended to

protect the integrity of the judicial process

by preventing a litigant from ‘playing fast

and loose with the courts.’ ... Judicial

estoppel applies to a party’s stated position

whether it is an expression of intention, a

statement of fact, or a legal assertion. 

The Ninth Circuit restricts the application of judicial estoppel

“to cases where the court relied on, or “accepted,” the party’s

previous inconsistent position.” Hamilton v. State Farm Fire &

Cas. Co., 270 F.3d 778, 783 (9 Cir.2001). th

However, Hauser did not benefit from the alleged

representations to the San Joaquin Superior Court because that

Court granted nonsuit for Snider/Wentland based on the Shermans’

failure to schedule the causes of action in the Chapter 7

bankruptcy. Therefore, the San Joaquin Superior Court did not

rely on or accept Hauser’s representations that he was acting on

behalf of the trustee or that the claims were not an asset of the

bankruptcy estate. The Superior Court’s judgment was implicitly

premised on the bankruptcy law that a bankruptcy estate asset

must be scheduled and the failure to do so foreclosed the claims.

Snider/Wentland also argues, that Hauser was not acting on

behalf of the trustee in continuing to litigate the Superior

Court Action after the 1993 Stipulation, is evidenced by the

scheduling in the Shermans’ second bankruptcy petition, Case No.

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 63 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

64

01-26747-C-7, in the United States Bankruptcy Court for the

Eastern District of California, of a debt to Hauser that is

asserted to be “business related in that it is for legal fees

incurred in litigation with Bank of Lodi”.

The Bankruptcy Court erred in ruling that preemption does

not apply to the Malicious Prosecution Action and that the

Malicious Prosecution Action is not within the exclusive

jurisdiction of the Bankruptcy Court. There is no question that

the Superior Court Action was commenced by the Shermans and the

trustee to litigate claims which were retained property of the

bankruptcy estate, which had never been scheduled property of the

estate. As a matter of bankruptcy law, the Superior Court Action

against Snider/Wentland was and remained an asset of the

Shermans’ bankruptcy estate because of the trustee’s failure to

abandon that property as required by bankruptcy law. 

Snider/Wentland’s reliance on Sattan and on judicial estoppel of

Hauser do not change this conclusion. 

F. Concurrent Jurisdiction.

Assuming arguendo that the Bankruptcy Court did not err in

concluding that preemption did not give rise to exclusive

jurisdiction in the Bankruptcy Court of the Malicious Prosecution

Action, Hauser argues that the Bankruptcy Court erred in

concluding that it lacked concurrent jurisdiction.

“Federal district courts have exclusive jurisdiction over

all cases under Title 11 of the United States Code, and

concurrent jurisdiction over all civil proceedings arising under

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 64 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

65

Title 11, or arising in or related to cases under Title 11.” In

re Harris Pine Mills, 44 F.3d 1431, 1434 (9 Cir.), cert. th

denied, 515 U.S. 1131 (1995); 28 U.S.C. § 1334(a). “Those

matters falling under the heading of concurrent jurisdiction

(i.e., civil actions involving claims that arise under or in or

are related to Title 11 proceedings) may be originally filed in

state court, then subsequently removed by one of the parties to

federal district court. 28 U.S.C. § 1452(a).” In re Harris Pine

Mills, id. at 1435.

1. Core Proceeding - Interpretation of Bankruptcy

Court Order.

As explained in In re Gruntz, 202 F.3d 1074, 1081 (9th

Cir.2000), Congress created the “core” and “non-core” distinction

in the Bankruptcy Amendments and Federal Judgeship Act of 1984 in

response to Northern Pipeline Construction Co. v. Marathon Pipe

Line Co., 458 U.S. 50 (1982):

Under the 1984 Act, bankruptcy judges may

hear and decide core proceedings. See 28

U.S.C. § 157(b)(1). However, bankruptcy

judges may only propose findings of fact and

conclusions of law to federal district courts

as to non-core proceedings related to a case

under title 11. See 28 U.S.C. § 157(c)(1). 

Thus, the separation of ‘core’ and ‘non-core’

proceedings in the 1984 Act creates a

distinction between those judicial acts

deriving from the plenary Article I

bankruptcy power and those subject to general

Article III federal court jurisdiction.

“[C]laims that arise under or in Title 11 are deemed to be ‘core’

proceedings, while claims that are related to Title 11 are

‘noncore’ proceedings.” Id. at 1435. “‘Non-core proceedings’

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 65 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

Whether a particular proceeding is core represents a question 7

wholly separate from that of subject matter jurisdiction. In re

Allegheny Health Educ. & Research Foundation, 383 F.3d 169, 175 (3rd

Cir.2004), citing In re Marcus Hook Dev. Park, Inc. 943 F.2d 261,

266 (3 Cir.1991). rd

66

are those not integral to the restructuring of debtor-creditor

relations and not involving a cause of action under title 11.” 

In re Gruntz, id. at 1081. “Core proceedings are ‘matters

concerning the administration of the estate’ and rights created

by title 11.” In re Intl Nutronics, Inc., 28 F.3d 965, 969 (9th

Cir.), cert. denied, 513 U.S. 1016 (1994). Core proceedings

include, but are not limited to, those listed in 28 U.S.C. §

157(b)(2). Thus, core proceedings include “matters concerning

the administration of the estate”, 28 U.S.C. § 157(b)(2)(A), and

“other proceedings affecting the liquidation of the assets of the

estate ...”, 28 U.S.C. § 157(b)(2)(O). “[R]esolution turn[ing]

on the interpretation of a prior court order, which in turn

interpreted and applied a specific provision of Title 11 ... is a

core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (O)

....” In re Cooley, 88 B.R. 788, 789 (Bkrtcy.S.D.Tex.1988). 

See also In re Gray Line of Boston, Inc., 62 B.R. 811, 813

(Bkrtcy.D.Mass.1986)(core matter because action involved the

terms of a stipulation which became an Order of the Bankruptcy

Court). 

7

As Hauser argues, the Bankruptcy Court erred in concluding

that the Malicious Prosecution Action is not a “core” proceeding 

because it requires interpretation of the Bankruptcy Court’s

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 66 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

67

Order approving the 1992 stipulation which allowed dismissal of

the Adversary Proceeding filed by the Shermans and the refiling

of that action in the San Joaquin Superior Court. 

The terms and existence of that Order and the stipulation

the Order approved are critical to the resolution of the

Malicious Prosecution Action, in part because one who acts

pursuant to the Stipulation and Order does not violate the law

and one who consents to conduct cannot later claim to be

aggrieved by it. California Civil Code § 3515. In order to

address and resolve the probable cause and malice elements of the

Malicious Prosecution Action, the Order of the Bankruptcy Court

approving the 1992 stipulation must be interpreted:

The order approving the stipulation dealt

specifically with how and where to adjudicate

claims first advanced in the adversary

action. It contemplated and approved

transfer of the dispute to state court,

joinder of the trustee as a party plaintiff,

and retention of Hauser to bring the estate’s

claims in that action. It required Hauser to

maintain, litigate entitlement to, and

thereafter properly disburse potential estate

assets which resulted from the sale of real

property in the bankruptcy. 

Hauser refers to cases holding that “[b]ankruptcy courts have

inherent or ancillary jurisdiction to interpret and enforce their

own orders wholly independent of the statutory grant of

jurisdiction under 28 U.S.C. § 1334.” In re Chateaugay

Corporation, 201 B.R. 48, 62 (Bkrtcy.S.D.N.Y. 1996), aff’d, 213

B.R. 633 (S.D.N.Y.1997); see also In re White Motor Credit Corp.,

75 B.R. 944, 947-948 (Bkrtcy.N.D.Ohio 1987).

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 67 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

68

Although Hauser is unable to cite any decision

characterizing an action against a debtor or trustee’s attorney

for maliciously pursuing an action that the Bankruptcy Court

approved, as a “core proceeding”, Hauser refers to In re

Interlogic Trace, Inc., 200 F.3d 382 (5 Cir.2000), which held th

that an action by the bankruptcy trustee against the debtor’s

accountants for alleged malpractice in providing bankruptcy

related services was barred by res judicata because of the

bankruptcy court’s prior order approving the accountants’ fee

application. Hauser also refers to Matter of Southmark Corp.,

163 F.3d 925 (5 Cir.), cert. denied, 527 U.S. 1004 (1999). In th

Southmark Corp., a Chapter 11 debtor filed a malpractice suit in

state court against the accountant to the court-ordered examiner

in the debtor’s reorganization case. The malpractice action

alleged breaches of fiduciary duty and of the contract whose

terms were approved by the Bankruptcy Court and prayed for the

return of the accountant’s fee, which fee was approved by the

Bankruptcy Court. After the accountant removed the case to the

Bankruptcy Court, the debtor moved to remand. The Bankruptcy

Court denied remand and the Fifth Circuit affirmed, holding that

the malpractice action at issue was a “core proceeding” because

it “involves the nature of the services performed for the

debtor’s estate and the fees awarded under the superintendence of

the bankruptcy court” and it sought “to recover an asset of

Southmark’s estate that Coopers let slip away.” 163 F.3d at 931.

These cases require the conclusion that the Bankruptcy

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 68 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

69

Court’s 1995 Order approving the 1992 Stipulation Re: Dismissal

of Adversary Proceeding must be evaluated to determine whether it

negates Snider/Wentland’s malicious prosecution claim. The

Bankruptcy Court, noting the delay in submitting the 1992

Stipulation to the Bankruptcy Court, concluded:

It is axiomatic that the Hauser Defendants

could not have been compelled by the court to

file a lawsuit in state court in 1992, when

the court did not enter the order at issue

until three years later in 1995. Second,

even if the court had entered the January

1995 Order before the Hauser Defendants filed

the March 1992 State Court Action, that order

cannot reasonably be interpreted as

compelling the Hauser Defendants to file the

March 1992 State Court Action. Their

contention to the contrary is a

misinterpretation of the plain language and

meaning of the January 1995 Order. The order

was an example of a common occurrence. It

approved a stipulation for dismissal in one

forum without prejudice to the re-filing in

another forum. It did not compel the refiling.

This analysis is flawed because whether the 1992 Stipulation

Re: Dismissal of Adversary Proceeding compelled or simply

authorized the Superior Court Action, its existence and terms are

central to the resolution of key issues in the Malicious

Prosecution Action. In addition, Hauser argues that there is no

support in the record that the 1992 Stipulation was not acted

upon until 1995. In the partial transcript of proceedings in the

San Joaquin County Superior Court on January 29, 1997, attached

to Snider/Wentland’s Request for Judicial Notice in Reply to

Defendant’s Motion to Dismiss, ER 33, Mr. Hauser states in

pertinent part:

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 69 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

70

We proceeded before the bankruptcy court upon

notice to creditors. And with the consent of

Michael McGranahan - who was the courtappointed bankruptcy trustee - the Court

approved, pursuant to stipulation, dismissal

of the federal case so that it can be refiled

in state court. 

It also approved Mr. McGranahan joining in as

a party co-plaintiff. 

...

This complaint, pursuant to stipulation, and

pursuant to a lot of other motions heard by

the bankruptcy court, was dismissed so that

we could proceed to pursue the action in

state court. [ER 33, pp.824-825]

As Hauser contends, the 1992 Stipulation “indicates that the

agreement in question was reached at a status conference, which

obviously was attended by the court itself.” The 1992

Stipulation states in pertinent part:

8. It is further understood that the

Trustee, through his counsel, has at the

Status Conference which occurred on November

6, 1991, expressed a belief that the Trustee

should join as a party Plaintiff to the

contemplated San Joaquin Superior Court

action and any benefits and burdens imposed

upon the Plaintiffs/Debtors as a result of

this Stipulation shall similarly extend to

the Trustee. 

Oral stipulations in open court are effective even if no written

stipulation is filed. See Eitel v. McCool, 782 F.2d 1470, 1473

(9 Cir.1986), agreeing with other circuits that “an unqualified th

oral stipulation of dismissal made in open court satisfies Rule

41(a)(1)(ii), even where no formal stipulation was signed by the

parties”; see also Golden v. Barenborg, 53 F.3d 866, 869 (7th

Cir.1995): “The purpose of filing a stipulation of dismissal with

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 70 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

71

prejudice is to facilitate the management of the judicial docket

... Since both [the] Magistrate Judge and [the district court

judge] along with the parties were aware the Coldwell-Golden suit

was dismissed with prejudice without there being a formal filing,

the failure to file in these circumstances is irrelevant”;

compare Camacho v. Mancuso, 53 F.3d 48, 52 (4 Cir.1995)(where th

neither the presiding district court judge nor the clerk of the

court had any indication that the parties had agreed by telephone

to dismiss the action, Rule 41(a)(1)(ii) requires tangible

confirmation of the parties’ agreement to dismiss). 

Finally, the Bankruptcy Court ignored the fact that the 1995

entry of the Order approving the 1992 Stipulation Re: Dismissal

of Adversary Proceeding preceded resolution of the Superior Court

Action by more than two years, during which time it cannot be

concluded that the Shermans were pursuing the Superior Court

Action without Bankruptcy Court approval. Noteworthy is the

transcript reference in the Bankruptcy Court status conference

that the trustee’s participation in the state court case would be

for the estate.

2. Core Proceeding - Wrongdoing of Bankruptcy

Trustee’s Attorney.

Hauser argues that the Bankruptcy Court erred in concluding

that the Malicious Prosecution Action is not a core proceeding

because claims against a trustee or a trustee’s attorney for

alleged misconduct in handling estate actions are core

proceedings.

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 71 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

72

In so arguing, Hauser cites In re Harris Pine Mills, supra,

44 F.3d 1431, and In re Ferrante, 51 F.3d 1473 (9 Cir.1995). th

In Harris Pine, purchasers of a division of a Chapter 11 debtor

brought an action in state court against the Chapter 11 trustee

and its agents, alleging fraud, negligence, and negligent

misrepresentation, after the division proved less profitable than

the purchasers had expected. In pertinent part the Ninth Circuit

held that the district court did not err in denying the motion to

remand because federal jurisdiction existed over the case as a

core proceeding in bankruptcy. In so holding, the Ninth Circuit

followed “the clear majority of decisions from other courts ...

that postpetition state law claims asserted by or against a

trustee in bankruptcy or the trustee’s agents for conduct arising

out of the sale of property belonging to the bankruptcy estate

qualify as core proceedings.” Id. at 1437.

In In re Ferrante, a successor Chapter 11 trustee brought an

adversary proceeding to recover on a surety bond based on the

predecessor trustee’s alleged embezzlement and breach of

fiduciary duties. The insurance company argued on appeal that

the Bankruptcy Court did not have jurisdiction. The Ninth

Circuit ruled:

The bankruptcy court did have jurisdiction

because this case involves a core proceeding. 

Core matters ‘”concern[] the administration

of the estate.”’ ... Because this case evokes

the Bankruptcy Act’s imposition of duties on

trustees to administer estate property and a

surety’s liability on its bond for the

benefit of the estate, it cannot be gainsaid

that it involves a core issue ... It is also

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 72 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

73

particularly germane to the bankruptcy

proceeding context, for it involves the very

bankruptcy process itself. Nothing could be

more important to the handling of a

bankruptcy estate than the fidelity of those

who are entrusted with its assets.

51 F.3d at 1476. 

Hauser argues that, in filing the Adversary Proceeding in

the Shermans’ bankruptcy action, he was administering an estate

asset, regardless of whether or not the Shermans’ scheduled their

claims against Snider/Wentland, because the claims became, as a

matter of law, the property of the bankruptcy estate when the

petition was filed. See discussion supra. In addition, the

Superior Court Action was filed pursuant to the 1992 Stipulation

allowing McGranahan as the trustee for the bankruptcy estate to

join as a party plaintiff. Pre-petition state law claims

asserted by a trustee in bankruptcy qualify as core proceedings

as does the post-petition pursuit of the claims against

Snider/Wentland by McGranahan as trustee. 

The Malicious Prosecution Complaint, read in conjunction

with judicially noticed documents, challenges Hauser’s conduct in

his capacity as counsel for the debtors, Shermans, and as counsel

for the bankruptcy trustee in pursuing the Snider/Wentland

claims. These facts establish core jurisdiction based on the

authority cited above. 

3. Core Proceeding - Malicious Prosecution Action

Exists Only By Virtue of Bankruptcy Proceeding.

Hauser argues that the Bankruptcy Court’s conclusion that

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 73 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

74

the Malicious Prosecution Action is not a core proceeding is

error because it is a proceeding that, by its nature, could arise

only in the context of a bankruptcy case under bankruptcy law.

Southmark Corp., supra, 163 F.3d at 930, quoting In re Woods, 825

F.2d 90, 97 (5 Cir.1987). th

As Hauser argues, the Bankruptcy Court’s ruling that “[t]he

Malicious Prosecution Action is based on a state law claim, and

can exist outside the bankruptcy context, as shown by the fact

that it was first filed in state court” is an untenable

conclusion:

All that was required for Snider/Wentland to

file this malicious prosecution action in

state court was payment of a filing fee. The

fact appellees paid the price of admission

hardly establishes state court jurisdiction;

if it did, no party could ever launch an

attack on the jurisdiction of the original

forum.

Further, as Hauser argues, the conclusion that the Malicious

Prosecution Action exists outside the bankruptcy context is

belied by the record:

The action arises out of an adversary

proceeding initiated in bankruptcy court and

moved to state court pursuant to the parties’

stipulation and the bankruptcy court’s

approval. The only wrongdoing alleged is

pursuit of assets omitted from the debtors’

schedules without taking action to amend

those schedules. The so-called favorable

termination is, according to appellees, a

judgment of nonsuit based on the conclusion

that the Shermans’ pursuit of the San Joaquin

action was inconsistent with the information

provided in their bankruptcy schedules. 

Every aspect of this action exists solely

because of what was done or not done in a

bankruptcy proceeding.

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 74 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

75

4. Core Proceeding - Disposition Determined by Title 

11.

Hauser argues that the Bankruptcy Court erred in concluding

that the Malicious Prosecution Action will not be determined by a

provision of Title 11. 

In so arguing, Hauser relies on the concurring opinion in In

re Lopez, supra, 283 B.R. 22. In In re Lopez, a former Chapter 7

debtor moved to reopen the bankruptcy case in order to schedule

an omitted cause of action, and to cut off an estoppel argument

which the state court defendant sought to raise. The Bankruptcy

Court denied the motion based on the debtor’s alleged lack of

good faith in omitting the asset in the first place. The BAP

held that, even assuming the debtor had intentionally concealed

the cause of action by omitting it from her bankruptcy schedules

and statements, this was not a sufficient reason for denying the

motion to reopen in order to administer the asset that could

benefit creditors. In his concurring opinion, Judge Klein wrote

separately “to emphasize salient practice points about the

problem of unscheduled causes of action that is increasingly a

headache for nonbankruptcy courts and litigants so that they may

have more sophisticated insights about how to deal with the

problem.” Id. at 31. Judge Klein noted that “[i]t has become

increasingly popular to interpose judicial estoppel as a defense

to a lawsuit by a former debtor who did not schedule the cause of

action in the bankruptcy case”, and went on to state that “the

judicial estoppel defense to the basic unscheduled cause of

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 75 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

76

action is meretricious and potentially inexpedient for two

reasons”:

First, the unscheduled cause of action is

still the property of the bankruptcy estate

after a chapter 7 bankruptcy case is closed,

not the property of the debtor, regardless of

whether the case is reopened and regardless

of whether schedules are amended after

reopening.

Upon closing a case, correctly scheduled

property not otherwise administered by the

trustee is abandoned to the debtor. 11

U.S.C. § 554(c).

Property that was not correctly scheduled

remains property of the estate forever (until

administered or formally abandoned by the

trustee), regardless of whether it is

scheduled after the case is reopened. 11

U.S.C. § 554(d); cf. Helbling & Klein, The

Emerging Harmless Innocent Omission Defense

to Nondischargeability under Bankruptcy Code

§ 523(a)(3)(A): Making Sense of the Confusion

over Reopening Cases and Amending Schedules

to Add Omitted Debts, 69 AM.Bankr.L.J. 33,

37-47 (1995).

Thus, in the case of an omitted cause of

action, the trustee is the real party in

interest and the more correct defenses are

that the action is not being prosecuted by

the real party in interest and that the

debtor lacks standing. Haley v. Dow Lewis

Motors, Inc., 72 Cal.App.4th 497, 511 ...

(1999).

The purpose of reopening the bankruptcy case

in this context is to permit the appointment

of a trustee to deal with the property of the

estate. At the time of reopening, the court

must determine whether a trustee should be

appointed because the original trustee is

ordinarily relieved at the time the case is

closed. Fed.R.Bankr.P. 5010. If the purpose

of the reopening is to deal with unscheduled

assets as property of the estate, then it is

per se an abuse of discretion not to order

the appointment of a trustee.

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 76 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

77

The second difficulty with the judicial

estoppel defense is that the automatic stay

remains in effect to protect the property of

the estate so long as it is property of the

estate, even after the bankruptcy case is

closed. 11 U.S.C. § 362(c)(1). Thus,

dismissing the action probably violates the

automatic stay. The practical consequence is

futility because acts in violation of the

automatic stay are void ab initio. Schwartz

v. United States (In re Schwartz), 954 F.2d

569, 574-75 (9 Cir.1992). th

If one is determined to impose judicial

estoppel, the better course is to use it as a

device to require that the action be

prosecuted by the real party in interest - a

bankruptcy trustee.

Reopening does not bring property back into

the estate nor does it cause the automatic

stay to be revived. The unscheduled asset

never lost its character as property of the

estate and the automatic stay, which

otherwise terminated on closing the case,

never ceased to remain applicable to protect

(and render void any act against) the

property of the estate. It is for this

reason that it is often difficult to perceive

nonobfuscatory merit in a defendant’s

opposition to reopening; it ought to be in

the interest of defendant to be in a position

to have a definitive resolution of the

matter.

The expedient solution to this dilemma is to

require the parties to return to bankruptcy

court for reopening so that a trustee can be

appointed to deal with the cause of action

that is property of the estate. The trustee

has authority to act for the benefit of the

estate and may sell the cause of action,

prosecute it in nonbankruptcy court, settle

it, or abandon it to the debtor as of

inconsequential value to estate.

The worst thing the parties can do is to

ignore the property of the estate problem. 

The worst thing a bankruptcy court can do is

to frustrate the process by refusing to

reopen and order the appointment of a trustee

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 77 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

78

who can definitively deal with property of

the estate. [Emphasis added]

Id. at 32-33. Judge Klein notes that if the trustee abandons

the cause of action to the debtor, “the debtor thenceforth owns

the cause of action and must be prepared to deal with all

defenses, including estoppel.” Id. at 33 n.16. 

Relying on Judge Klein’s concurring opinion, as Hauser

argues, there are only two reasonable constructions of the

Superior Court Action after McGranahan “withdrew”:

Either Hauser and the Shermans were

administering an asset on behalf of the

bankruptcy estate with authority to do so, or

they were proceeding without authority to

act. In the latter event, pursuit of the

action from 1993 forward was an exercise in

futility for all the parties because acts

taken in violation of the automatic stay

(including the judgment of nonsuit) were void

ab initio. If so, this malicious prosecution

action will indeed be determined by a

provision of Title 11, because it is

predicated on an alleged ‘favorable

termination’ which in fact is a void judgment

in violation of the automatic stay. 

G. Divestiture of Subject Matter Jurisdiction.

Hauser argues that the Bankruptcy Court erred in ruling that

subject matter jurisdiction pursuant to Section 1334(b) does not

exist based on the representation by Snider/Wentland to the

Bankruptcy Court that they will not attempt to amend the

Malicious Prosecution Complaint to proceed against McGranahan or

anyone acting on his behalf with proper authority to do so. With

this representation, Hauser contends, the Bankruptcy Court

considered itself divested of subject matter jurisdiction and

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 78 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

In Hose v. I.N.S., 180 F.3d 992, 996 (9 Cir.1999), the Ninth 8 th

Circuit, citing F. Alderete General Contractors, stated:

“Ordinarily, under [28 U.S.C. §] 1631, jurisdiction is determined

as of the filing of the initial complaint and, after vesting,

cannot be ousted by subsequent events”, but further holding that

“when subsequent events render the case non-justiciable so that no

federal court would have jurisdiction, then transfer is

inappropriate.” 

79

free to characterize the Malicious Prosecution Act as divorced

from the Shermans’ bankruptcy proceedings. Hauser cites cases

holding that the presence or absence of subject matter

jurisdiction must be determined on the state of affairs when the

Bankruptcy Court’s jurisdiction is invoked. See In re Cannon,

196 F.3d 579, 586 n.29 (5 Cir.1999); In re Toledo, 170 F.3d th

1340, 1346 n.8 (11 Cir.1999). th

Although most of the cases invoking this principle involve

diversity jurisdiction, the rule has been applied to federal

question cases. See Rosa v. Resolution Trust Corp. 938 F.2d 383,

392 n.12 (3 Cir.), cert. denied, 502 U.S. 981 (1991); F. rd

Alderete General Contractors, Inc. v. United States, 715 F.2d

1476, 1480 (D.C.Cir.1983); Westmoreland Hosp. Ass’n v. Blue

Cross, Etc., 605 F.2d 119, 123 (3 Cir.1979), cert. denied, 444 rd

U.S. 1077 (1980).8

The Third Circuit, noting that the principle that subject

matter jurisdiction is determined at the time the suit is filed

is most often recognized in diversity cases, has opined that “a

district court can sometimes, after suit is filed, permit the

destruction of subject matter jurisdiction.” Kabakjian v. United

States, 267 F.3d 208, 212 (3 Cir.2001), citing New Rock Asset rd

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 79 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

80

Partners, L.P. v. Preferred Entity Advancements, Inc., 101 F.3d

1492, 1503 (3 Cir.1996). In New Rock Asset Partners, the Third rd

Circuit stated in dicta,

Even in the federal question context,

however, the focus of the time of filing rule

has been on preventing manipulation of

jurisdiction when a claim is removed. As we

observed in Westmoreland Hospital Ass’n v.

Blue Cross of Western Pa., ‘a subsequent

amendment to the complaint after removal

designed to eliminate the federal claim will

not defeat federal jurisdiction.’ ... Along

with the obvious goal of judicial efficiency,

we perceive the risk of strategic behavior as

the primary rationale behind the time of

filing rule.

101 F.3d at 1503-1504. 

No case has been found to indicate that the Ninth Circuit

will follow the Third Circuit’s rule. 

In any event, the record on appeal demonstrates that

Snider/Wentland, when confronted with the allegation in the

Malicious Prosecution Complaint that Hauser, on behalf of the

Shermans, brought and/or maintained the Superior Court Action 

without probable cause because of the failure to include the

causes of action alleged in the Superior Court Case on their

bankruptcy schedules, represented to the Bankruptcy Court that

Snider/Wentland would not amend to name McGranahan as a party. 

The only inference to be drawn from this representation is an

attempt to purposefully avoid and negate the subject matter

jurisdiction of the Bankruptcy Court in order to obtain remand

by, in effect, deleting the averment that the Malicious

Prosecution Action was brought (as opposed to maintained) without

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 80 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

Counsel for Snider/Wentland, in the hearing on Hauser’s 9

Emergency Motion for Stay Pending Appeal, denied making any

representation that the Malicious Prosecution Complaint would not

be amended to allege a claim against Hauser for his representation

of McGranahan in the Superior Court Action. ER 31, p. 792

81

probable cause.9

H. Factual Findings Not Supported by the Record.

Hauser argues that the Bankruptcy Court’s findings are not

supported by the record.

Hauser contends that the finding that “the 1992 Stipulation

was not filed with or acted upon by the bankruptcy court until

January 30, 1995" has “absolutely no support” in the record. 

Hauser asserts that the January 30, 1995 date is the date the

1992 Stipulation was filed and ordered approved by the Bankruptcy

Court. The record, however, reflects that the agreement to

dismiss the Adversary Proceeding, refile it in the San Joaquin

Superior Court, join McGranahan as a plaintiff, and authorize

Hauser to present the Shermans and McGranahan in the Superior

Court Action was approved years before the 1992 Stipulation was

filed and ordered approved by the Bankruptcy Court.

The contention that the above-quoted finding is not

supported by the record is without merit. It is a fact that the

1992 Stipulation was not filed with the Bankruptcy Court and

approved by Order until January 30, 1995. There is no

explanation for the delay in the record. While the inferences to 

be drawn from the fact of the 1992 Stipulation may be different,

the actual finding at issue is conclusively supported by the

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 81 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

82

record.

Hauser further argues that the Malicious Prosecution

Complaint’s allegations do not support that the Complaint is

“based on the alleged Malicious Prosecution of the March 1992

State Court Action”. Hauser contends that a finding that the

malicious prosecution case is based “solely” on the Complaint

filed in the San Joaquin Superior Court on March 11, 1992 is

contrary to the allegations in paragraph 16 of the state

Malicious Prosecution Complaint that Hauser acted maliciously “by

failing to advise the SHERMANS to report their alleged claims

against plaintiffs in their bankruptcy schedules and by

consciously choosing to let the bankruptcy proceed to discharge

and then, within a matter of weeks, file the original Complaint

against plaintiffs herein.” Hauser argues that the “original

Complaint” alleged in paragraph 16 can only refer to the

Adversary Proceeding because the Superior Court Action was

commenced approximately one year after the Shermans’ discharge. 

Hauser argues that there is no support in the record for the

Bankruptcy Court’s conclusion that the Shermans “were not

‘administering’ an asset of the bankruptcy estate [but] were mere

interlopers who had no standing to prosecute the claims.” Hauser

contends that the stipulation in the Adversary Proceeding and 

order of the Bankruptcy Court authorized the Shermans’ pursuit in

the San Joaquin County Superior Court of the claims first

advanced in the Adversary Proceeding and also reflects exercise

of the trustee’s discretion to allow the Shermans to pursue the

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 82 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

83

Superior Court Action as co-plaintiffs with the trustee for the

bankruptcy estate. 

The 1993 Stipulation Regarding Dismissal of Plaintiff

Michael D. McGranahan as Party Plaintiff “reflects an exercise of

the trustee’s discretion to allow the Shermans to continue with

the litigation notwithstanding his withdrawal” and that

Snider/Wentland’s counsel conceded that the trustee granted such

authority. See discussion supra. Hauser argues:

The most that can be said of this record when

the [Bankruptcy Court] issued its memorandum

decision is that it was unclear whether, or

to what extent, there was an agreement

between the trustee and the Shermans

concerning pursuit of the underlying action. 

This is not surprising since the matter

before the court until the filing of

appellees’ eleventh-hour remand motion was a

Rule 12(b)(6) motion to dismiss, not a motion

for summary judgment supported by

declarations, deposition testimony, discovery

responses and the like. In any event,

nothing in the record supports the conclusion

that the Shermans were ‘interlopers’ at all,

much less as a matter of law.

Hauser’s arguments rely on the inferences that may be drawn

from the fact that McGranahan executed the 1993 Stipulation but

did not file it with the Bankruptcy Court nor obtain Bankruptcy

Court approval to abandon the bankruptcy estate’s claims. 

Whether the legal inference drawn by the Bankruptcy Court from

these facts is error is an issue separate from the factual

record. Here, it cannot be disputed that McGranahan as trustee

attempted to withdraw as a party plaintiff in the Superior Court

Action but the attempt was legally ineffective, a point

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 83 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

84

recognized by the Bankruptcy Court. 

In concluding that the claims alleged in the Malicious

Prosecution Action are not preempted, the Bankruptcy Court ruled:

The actions complained of in the Malicious

Prosecution Action were not taken in the

bankruptcy court or even as part of the

proper administration of an asset of the

bankruptcy estate in the 1991 Bankruptcy

Case. Rather, the Malicious Prosecution

Action seeks a remedy for the Shermans’ and

their counsels’ independent actions in state

court. 

Hauser contends that this conclusion is “wholly inconsistent”

with the record. Hauser argues that the actions complained of in

the Malicious Prosecution Complaint are acts or failures to act

in the Bankruptcy Case and that “[t]he fact appellees accepted

the [Bankruptcy Court’s] invitation to construe the complaint as

saying something other than what it says does not change the

allegations themselves” and that “[n]ot one word of this record

suggests wrongdoing by Hauser and/or the Shermans in state court’

independent’ of the bankruptcy.”

Hauser goes on to argue that the Bankruptcy Court’s ruling

that the actions complained of in the Malicious Prosecution

Complaint were not taken by Hauser on behalf of the Shermans as

part of the “proper administration” of the bankruptcy estate also

is unsupported in the record. Hauser argues that the record

demonstrates that Hauser represented McGranahan, which

representation was approved by the Bankruptcy Court in the 1995

Order approving the 1992 Stipulation and that McGranahan withdrew

as a plaintiff pursuant to the 1993 Stipulation. 

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 84 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

85

Hauser asserts that the record is silent about the

circumstances surrounding McGranahan’s withdrawal beyond what is

recited in the 1993 Stipulation. That McGranahan contemplated

that the Superior Court Action would continue is inferrable,

Hauser contends, from the provision in the 1993 Stipulation that

“further pleadings filed in the aforementioned state court action

should reflect this stipulation and withdrawal by deleting

Michael D. McGranahan as a party Plaintiff”. Hauser suggests

that a reasonable inference under the circumstances is that

Hauser and McGranahan communicated about the continued

prosecution of the Superior Court Action and the distribution of

any recovery. Therefore, that Hauser continued to act at least

partially on behalf of the bankruptcy estate is also a reasonable

inference. Hauser contends that the Bankruptcy Court “was not at

liberty to ‘adjudicate’ the issue based on speculation or

assumptions. This suggestion is equally speculative.

However, leaving aside that the 1993 Stipulation was

ineffective as a matter of law, the inferences Hauser attempts to

draw from the 1993 Stipulation are belied by its terms. The 1993

Stipulation recites that McGranahan, as trustee of the Shermans’

bankruptcy estate “disclaims any further interest in the aboveentitled state court action and intends to close out the

bankruptcy estate” and that McGranahan “on behalf of the

bankruptcy estate of the Shermans is withdrawing as a party

Plaintiff in the aforesaid state court action disclaiming any

further interest herein”. This makes clear that the trustee

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 85 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

Snider/Wentland argue that if the trustee did not abandon the 10

causes of action in 1993 pursuant to the 1993 Stipulation, the

trustee would have remained potentially liable to creditors for

costs, fees and sanctions. They also argue that once a trustee

discharged and the bankruptcy closed, there was no further estate

to administer and any continuing proceedings in the Superior Court

Action did not involve property of the estate or the administration

of property of the estate. However, the case law cited above makes

clear that property of the estate, that is not abandoned by the

trustee in accordance with the requirements of law, remains

property of the estate even after the bankruptcy is closed. In re

Lopez, supra, 283 B.R. at 28.

86

purported to abandon the State Court Action, but failed to obtain

legal authority from the Bankruptcy Court to do so. Any factual

inference that the Shermans’ continued prosecution of the State

Court Action after the execution of the 1993 Stipulation was to

benefit the bankruptcy estate and that the trustee tacitly

continued to participate in the State Court Action is totally 

unfounded. However, the trustee’s failure to formally abandon

the State Court Action as the property of the estate by required

order of the Bankruptcy Court, means that the state causes of

action remained the property of the estate even after execution

of the 1993 Stipulation and the closing of the Shermans’ Chapter

7 bankruptcy case.10

Hauser argues that the Bankruptcy Court’s ruling that “[t]he

Malicious Prosecution Action does not challenge any action taken

by McGranahan or the Hauser Defendants in any alleged capacity as

counsel for McGranahan” is inconsistent with the record. The

Superior Court Action was filed by Hauser as counsel for both the

Shermans and McGranahan, the trustee, and was pursued by Hauser

for a year before the 1993 Stipulation by which McGranahan

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 86 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

87

purported to withdraw and disclaim any interest on behalf of the

bankruptcy estate. 

I. Abuse of Discretion - Remand on Equitable Grounds.

Title 28 U.S.C. § 1452(a) provides in pertinent part that

“[a] party may remove any claim or cause of action in a civil

action ... to the district court for the district in where such

civil action is pending, if such district court has jurisdiction

of such claim or cause of action under section 1334 of this

title.” Pursuant to Section 1452(b), “[t]he court to which such

claim or cause of action is removed may remand such claim or

cause of action on any equitable ground.”

As quoted supra, the Bankruptcy Court ruled that, even if

subject matter jurisdiction in the Bankruptcy Court existed over

the Malicious Prosecution Action, it would exercise its

discretion under 28 U.S.C. § 1452(b) to remand the Malicious

Prosecution Action to the San Joaquin Superior Court:

Even if the Malicious Prosecution Action were

to have some conceivable effect on the

bankruptcy estate in the 1991 Bankruptcy

Case, there is an insufficient connection

between the conduct of the Shermans (and the

Hauser Defendants acting as the Shermans’

counsel) alleged in the Malicious Prosecution

Action and the 1991 Bankruptcy Case. As

stated above, the Malicious Prosecution

Action does not involve actions taken by

McGranahan (or the Hauser Defendants acting

as McGranahan’s counsel), nor does it involve

actions taken by the Shermans (or the Hauser

Defendants acting as the Shermans’ counsel)

in administering an asset of the bankruptcy

estate in the 1991 Bankruptcy Case, nor does

it involve claims that are preempted by the

Bankruptcy Code, nor does it involve actions

the Shermans were compelled to take by the

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 87 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

88

order of the bankruptcy court in the 1991

Bankruptcy Case. It is an action seeking

damages against the Shermans (and the Hauser

Defendants acting as the Shermans’ counsel)

for actions that were taken in the state

court without the standing or authority to

act on behalf of the bankruptcy estate of the

1991 Case. The Malicious Prosecution Action

belongs in state court.

The discretion to remand pursuant to Section 1452(b) applies

only to cases arising under Title 11, or arising in or related to

cases under Title 11. See In re Harris Pine Mills, supra, 44

F.3d at 1435; see also In re McCarthy, 230 B.R. 414, 418 (9th

Cir.BAP 1999). 

Although the standard of review is abuse of discretion, In

re McCarthy, id., 230 B.R. at 417, the factors governing the

exercise of that discretion are not fixed. In re Marathon Home

Loans, 96 B.R. 296 (E.D.Cal.1989), cited in In re McCarthy,

explained:

The ‘any equitable’ ground needed for remand

subsumes both the usual considerations of

fairness, economy, and common sense and,

albeit uncomfortably, the procedural and

jurisdictional grounds for granting a motion

to remand. The traditional grounds include:

forum non conveniens; judicial economy;

prompt, final resolution of disputes; respect

for state courts on issues of state law; and

the expertise of the court in which the

matter was pending originally. See 1 L.

King, Collier on Bankruptcy ¶ 3.01[g]. The

more technical grounds include, for example,

untimely removal or lack of proper basis for

removal. 1A J. Moore & B. Ringle, Moore’s

Federal Practice ¶ 0.171; Bankr.Rule 9027(a).

96 B.R. at 300. In In re Diversified Contract Services, Inc.,

167 B.R. 591, 596-597 (Bkrtcy N.D.Cal.1994), the factors approved

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 88 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

89

by the Ninth Circuit in determining whether to abstain as a

discretionary matter, were applied in determining whether to

remand under Section 1452(b), these factors are:

(1) the effect or lack thereof on the

efficient administration of the estate if a

Court recommends abstention, (2) the extent

to which state law issues predominate over

bankruptcy issues, (3) the difficulty or

unsettled nature of the applicable law, (4)

the presence of a related proceeding

commenced in state court or other

nonbankruptcy court, (5) the jurisdictional

basis, if any, other than 28 U.S.C. § 1334,

(6) the degree of relatedness or remoteness

of the proceeding to the main bankruptcy

case, (7) the substance rather than the form

of an asserted ‘core’ proceeding, (8) the

feasibility of severing state law claims from

core bankruptcy matters to allow judgments to

be entered in state court with enforcement

left to the bankruptcy court, (9) the burden

of [the bankruptcy court’s] docket, (10) the

likelihood that the commencement of the

proceeding in bankruptcy court involves forum

shopping by one of the parties, (11) the

existence of a right to jury trial, and (12)

the presence in the proceeding of non-debtor

parties.

In Williams v. Shell Oil Co., 169 B.R. 684, 692 (S.D.Cal.1994),

the factors considered in deciding to remand included:

(1) the effect of the action on the

administration of the bankruptcy estate; (2)

the extent to which the issues of state law

predominate; (3) the difficulty of applicable

state law; (4) comity; (5) the relatedness or

remoteness of the action to the bankruptcy

case; (6) the existence of a right to jury

trial; and (7) prejudice to the party

involuntary removed from state court.

Hauser argues that the Bankruptcy Court abused its

discretion because the conclusions supporting granting

Snider/Wentland’s motion to remand were based on an erroneous

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 89 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

90

view of the law. In re Cady, supra, 266 B.R. at 178.

In addition, Hauser, relying on the twelve factors listed in

In re Diversified Contract Services, Inc., contends that the

Bankruptcy Court abused its discretion by failing to analyze

these factors. Hauser asserts that “the true basis for the

bankruptcy court’s decision to remand was its misplaced

conclusion subject matter jurisdiction was entirely lacking” and

that “[t]o the extent remand was ordered on equitable grounds,

the [Bankruptcy Court] not only failed to consider the [twelve]

factors ..., it necessarily based its decision on an erroneous

view of the law and the facts, resulting in an abuse of

discretion.”

The Bankruptcy Court abused its discretion by failing to

consider the twelve Diversified Contract Services factors. 

Considering these factors, the first factor is: the effect or

lack thereof on the efficient administration of the estate if

abstention is recommended. The estate was closed and had to be

re-opened to adjudicate any recovery. The second factor, the

extent to which state law issues predominate over bankruptcy

issues, favors bankruptcy jurisdiction because bankruptcy law

issues control the essential elements and merits of the malicious

prosecution claim. The third factor is the applicable law. The

law is neither difficult nor unsettled, except as to analysis of

property of the estate. The fourth factor, the presence of a

related proceeding commenced in state court, does not apply

because of the removal of the Malicious Prosecution Action to the

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 90 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

91

Bankruptcy Court. With regard to the fifth factor, as concluded

above, there is no jurisdictional basis other than 28 U.S.C. §

1334. With regard to the degree of relatedness or remoteness of

the proceeding to the main bankruptcy case, the Malicious

Prosecution Action is totally related to and determined by the

Shermans’ bankruptcy action and bankruptcy law. The seventh

factor, the substance rather than the form of an asserted “core”

proceeding, is inapplicable because the Malicious Prosecution

Action is, in the context of this case, a “core” proceeding for

the reasons discussed above. With regard to the eighth factor,

severance of state law claims from bankruptcy matters, severance

is not feasible because the real outcome depends on the

bankruptcy case and law. The ninth factor, the burden on the

Bankruptcy Court’s docket, is not as great since enactment of the

Bankruptcy Reform Act. With regard to the tenth and eleventh

factors, the likelihood that removal of the Malicious Prosecution

Action to the Bankruptcy Court involves forum shopping and the

right to a jury trial, although it is arguable that Hauser is

attempting by removal to avoid a jury trial; the availability of

procedures to withdraw the reference of the Malicious Prosecution

Action from the Bankruptcy Court to the District Court, negates

these factors. Although Hauser, a non-debtor party, is named in

the Malicious Prosecution Action, Hauser was counsel for the

debtors, the Shermans, in both the bankruptcy petition and in the

Superior Court Action. 

The failure of the Bankruptcy Court to analyze the factors

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 91 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

92

described in Williams v. Shell Oil Co., id., also constitute an

abuse of discretion. The effect of the Malicious Prosecution on

the administration of the bankruptcy estate is potentially 

disruptive because the Shermans’ bankruptcy had been closed and

the creditors paid. With regard to the second factor, bankruptcy

law issues predominate over state law issues. The difficulty of

applicable state law does not weigh in favor of remand because

the removed action is a straightforward malicious prosecution

action, the state law is well-established. With regard to

comity, the state has less concern. The case involves how a

bankruptcy estate was administered and claims of the estate

pursued first in Bankruptcy Court and then in state court where

bankruptcy law as applied, determined the outcome of the case.

With regard to the fifth factor, the bankruptcy case is

integrally related to the Malicious Prosecution Action. 

Snider/Wentland is entitled to a jury trial of the Malicious

Prosecution Action, which right does not exist in the Bankruptcy

Court. However, Snider/Wentland may move in the District Court

for withdrawal of the reference of the Malicious Prosecution

Action in order to obtain a jury trial. There is no prejudice to

Snider/Wentland because of the removal of the Malicious

Prosecution Action because Snider/Wentland was a party in the

bankruptcy case as well as the Superior Court Action. 

CONCLUSION

For the reasons stated above, the Order Remanding Case,

Striking Motion to Dismiss and Granting Parties' Request for

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 92 of 93
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

93

Judicial Notice filed by the Bankruptcy Court on September 17,

2002 is REVERSED AND REMANDED to the Bankruptcy Court for further

proceedings consistent with this decision.

IT IS SO ORDERED.

Dated: April 18, 2007 /s/ Oliver W. Wanger 

668554 UNITED STATES DISTRICT JUDGE

Case 1:03-cv-06605-OWW Document 54 Filed 04/19/07 Page 93 of 93