Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-canb-5_06-ap-05197/USCOURTS-canb-5_06-ap-05197-0/pdf.json

Parties Involved:
John Challas
Plaintiff
Steven Goetz
Defendant
United States Bankruptcy Court
Interested Party

Document Text:

UNITED STATES BANKRUPTCY COURT

 For The Northern District Of California

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MEMORANDUM DECISION FOLLOWING EVIDENTIARY HEARING

NOT INTENDED FOR

 PUBLICATION

UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF CALIFORNIA

In re STEPHEN J.R. GOETZ and DIANA

GOETZ,

Debtors.

 Case No. 05-57623-MM

Chapter 11

JOHN CHALLAS,

Plaintiff,

vs.

STEVEN GOETZ and Does 1 through 20

inclusive,

Defendants.

Adversary No. 06-5197

MEMORANDUM DECISION

FOLLOWING EVIDENTIARY

HEARING

INTRODUCTION

John Challas alleges that the debtor, Stephen Goetz, slanderously told other people that Challas

had admitted to a variety of criminal conduct, including breaking and entering, burglary and theft.

Goetz moved to dismiss the complaint asserting that Challas knew or should have known of any claim

for slander prior to the confirmation of Goetz’s plan of reorganization, and as a result, the claim was

discharged when Goetz’s plan of reorganization was confirmed. Because the parties’ motion papers

relied on declarations and other evidence, the court treated the motion as a motion for summary

judgment. After two contradictory affidavits created a clear question of fact, the parties agreed to hold

The following constitutes 

the order of the court. Signed October 19, 2007

Marilyn Morgan

U.S. Bankruptcy Judge

________________________________________

Entered on Docket 

October 22, 2007

GLORIA L. FRANKLIN, CLERK 

U.S BANKRUPTCY COURT 

NORTHERN DISTRICT OF CALIFORNIA

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UNITED STATES BANKRUPTCY COURT

 For The Northern District Of California

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an evidentiary hearing solely with respect to the potentially dispositive issue of when the cause of action

for slander against Goetz was first within Challas’ fair contemplation. Based on the evidence adduced

and the arguments of counsel, and for the reasons explained, the court concludes that the cause of action

alleged in the adversary complaint was not within Challas’ fair contemplation at the time that Goetz’s

plan of reorganization was confirmed and, therefore, was not discharged.

FACTS

Challas and Goetz are long-time acquaintances as a result of commercial real estate activities

in Los Altos, California. Jane Challas, John’s wife, is a shareholder of 4920 Corporation (“4920"), a

company that owns a building located at 4920 El Camino Real in Los Altos. From time to time, Challas

has been an agent for the property. The Goetz family, and later Goetz himself, owned a nearby building

located at 4906 El Camino Real. The business connection between Challas and Goetz developed into

something of a friendship among the two men and their wives. However, Challas testified that the

relationship deteriorated significantly when Challas agreed to serve as a witness against Goetz in a 2001

state court action. In that action, members of the Goetz Family Trust accused Goetz of fraud and other

breaches of fiduciary duty arising out of Goetz’s purchase of the 4906 building from his father, shortly

before his father’s death. Challas indicated that the friendship ended in 2002 when Goetz sent Challas

an email concerning Challas’ use of Goetz’s Chevy Suburban. The details surrounding the email were

not offered into evidence. 

Beginning in 2000, a law firm known as Reynolds, Casas & Riley, LLP became a tenant at 4920,

El Camino Real, and Challas hired Goetz’s wife, Diana, to decorate the firm’s suite. The landlordtenant relationship, however, was contentious. By May 2003, 4920 had initiated a state court unlawful

detainer action to evict RC&R from the premises. A few months later, in August 2003, RC&R filed a

separate state court action against 4920 asserting various tort and breach of contract claims (“RC&R

action”). The RC&R complaint alleges, in part, that Challas, along with several other defendants,

conspired to and did enter RC&R’s office suite on June 16, 2002 with a hidden purpose of stealing

RC&R’s copy of its office lease, altering the copy to reflect higher rates of rent than RC&R had agreed

to pay, and destroying the original lease. The complaint further alleges that 4920's unlawful detainer

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UNITED STATES BANKRUPTCY COURT

 For The Northern District Of California

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action was premised on the wrongfully altered lease. The allegations regarding Challas and the

alteration of the lease are on information and belief. The attorney who drafted the complaint, Samuel

Goldstein, testified that before the complaint was filed, Sheila Riley, a principal of RC&R, had advised

him that, nearly a year earlier, she had had a conversation with Goetz in which Goetz told her that

Challas had bragged to Goetz about entering into the RC&R offices and removing documents.

Goldstein noted, however, that Riley had instructed him not to identify Goetz as the source of the

information. 

Early in the RC&R action, the state court stayed discovery, and 4920 did not serve its first set

of interrogatories on RC&R until February 2006. One of those interrogatories asked RC&R to identify

all individuals who: a) witnessed the alleged June 16, 2002 trespass into RC&R or the events occurring

immediately before or after the incident; b) made a statement at the scene of the alleged trespass into

RC&R; c) heard any statements made about the alleged trespass into RC&R by an individual at the

scene; and d) may have knowledge of the alleged trespass into RC&R. Although RC&R was aware that

Goetz claimed to have heard statements about the incident from Challas, RC&R did not specifically

identify Goetz in response to subpart c) of the interrogatory. Instead, RC&R stated that it lacked

sufficient information to respond. However, in response to subpart d), RC&R included Goetz and his

wife in the middle of a list of approximately sixteen individuals or entities who might have knowledge

of the incident. 

On June 6, 2006, this court entered an order confirming the Goetz’ chapter 11 plan of

reorganization. Goetz and his wife had filed a chapter 11 petition eight months earlier, in October 2005,

because the fraud and breach of fiduciary duty lawsuit filed by the Goetz Family Trust had resulted in

a judgment against Goetz. The Goetz schedules listed Challas as a creditor holding an unsecured claim

of $75,000 related to “attorneys’ fees.” 

Six weeks after confirmation, on July 26, 2006, Riley gave her deposition in the RC&R action.

Challas was present for her testimony. Riley stated that back on August 22, 2002, she had telephoned

Diana Goetz, the decorator for the RC&R office space, because Riley had just received a letter from

4920 indicating the RC&R owed 4920 money for things that the firm never heard about. Diana Goetz

asked her husand to come to the phone and, when he did, Goetz told Riley that Challas had bragged to

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UNITED STATES BANKRUPTCY COURT

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Goetz about planning the June 16, 2002 incident at RC&R’s office. Goetz told Riley that Challas was

an evil man and that Challas had said that while he was in the office, he had copied papers from

RC&R’s lease file in order to “get” the law firm. Goetz stated that Challas had shown him some of the

copies, but Goetz told Riley that he would deny ever speaking with Challas because he and John “had

things on each other.”

Both Challas and Chris Ashworth, an attorney that initially represented Challas in the both the

unlawful detainer and the RC&R actions, testified at trial that they first learned that Goetz was the

source of the information behind the trespass allegations in the RC&R action during or after Riley’s

deposition. Shortly after the Riley deposition, Challas contacted George Eshoo, his counsel in this

adversary proceeding, and asked for legal assistance because Goetz was spreading lies about him. In

mid-October 2006, Challas filed a state court slander action against Goetz. That complaint was removed

to this court and serves as the basis of this adversary proceeding.

To counter Challas’ evidence that he did not fairly contemplate a claim against Goetz until he

heard Riley’s deposition testimony, Goetz offered his own testimony and that of RC&R’s state court

attorney, Goldstein. Goetz testified that Challas often complained bitterly about RC&R’s failure to pay

rent and how he wanted to get the firm out of the 4920 building. Then, a few days after June 16, 2002,

Goetz was sitting on his patio with his wife when Challas telephoned. When Goetz answered, Challas

bragged that he had “solved his problem” with RC&R. Challas told Goetz that he, Challas, had gone

into RC&R’s office, removed some documents, and solved his problem. Challas denies that this

telephone conversation ever took place and denies that he ever removed any documents from RC&R’s

office suite.

In addition to the filing of the complaint in the RC&R action, Goldstein testified that there were

several occasions prior to June 2006 when Challas either knew of or should have fairly contemplated

his slander action against Goetz. First, in July 2003, Goldstein deposed Challas as part of 4920's

unlawful detainer action. At that deposition, Goldstein asked Challas pointed questions about whether

Challas had ever told anyone that Challas had taken documents from RC&R’s offices. Within the next

few weeks, Goldstein had a conversation with Ashworth where Ashworth specifically asked whether

it was Goetz that had said that Challas was talking about the June 16, 2002 incident. Although

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Goldstein told Ashworth that he could not respond, Goldstein believes the conversation demonstrates

that Challas knew that Goetz was the source of the information. Goldstein recalls that he surprised that

Ashworth named Goetz because Riley had instructed Goldstein to take care not to reveal Goetz as the

source of the information. Goldstein assumed that Ashworth must have learned Goetz’s identity directly

from Challas.

Goldstein further stated that RC&R’s March 2006 answers to 4920's interrogatories should have

put Challas on notice that Goetz was the source of the allegations that Challas had taken documents from

RC&R. The responses identified Mr. and Mrs. Goetz as individuals who might have knowledge of the

June 16, 2002 incident, and their names should have stood out because they were the only individuals

identified that were not related to RC&R, 4920 or the local authorities. Then, sometime in June 2006,

RC&R responded to additional special interrogatories that 4920 had propounded. Goldstein recalls that

those interrogatories referred more explicitly to Goetz as the source of the allegations regarding Challas

and the June 16, 2002 incident. The actual responses, however, were not offered into evidence, and it

is not known whether those responses were served before confirmation on June 6, 2006.

DISCUSSION

Under § 1141(d), confirmation of a chapter 11 plan discharges the debtor from any debt or claim

that arose before the date of confirmation. The Ninth Circuit uses the “fair contemplation” test to

determine when a claim arises. See In re Cool Fuel, Inc., 210 F.3d 999 (9th Cir. 2000)(tax claims);

Corman v. Morgan (In re Morgan), 197 B.R. 892 (N.D. Cal. 19960(fraud prevention), aff’d, 131 F.3d

147 (9th Cir. 1997); In re Jensen, 995 F.2d 925 (9th Cir. 1993)(environmental clean-up under CERCLA).

Under this test, the court must consider whether Challas had a fair basis for contemplating that he might

have a claim against the debtor prior to the confirmation of the debtor’s plan. Morgan, 197 B.R. at 899.

If yes, the claim is discharged by the confirmation, but if not, the claim is not discharged. 

Consistent with the goal of providing debtors with a fresh start, the Bankruptcy Code broadly

defines the term “claim”to include any right to payment from the debtor, regardless of whether that right

is liquidated, contingent, matured or disputed.. See 11 U.S.C. § 101(5). Thus, a claim can arise before

actual injury occurs or before all the jurisdictional prerequisites to bringing the claim are satisfied.

Nevertheless, in choosing the fair contemplation test, the Ninth Circuit rejected the notion that claims

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can be discharged before a creditor knows or should know that it has rights against the debtor. Jensen,

995 F.2d at 931-32; In re Conseco Life Insurance Co. Cost of Insur. Litigation, 2005 WL 2203150, at

*8 (N.D. Cal. Apr. 13, 2005). As a result, a claim will not be discharged unless, prior to confirmation,

the creditor had real or constructive notice of all the facts needed to reasonably anticipate a potential

claim against the debtor. 

Here, Challas testified that he had no reason to believe Goetz had slandered him until he heard

Riley’s deposition testimony in July 2006, about six weeks after Goetz’s plan of reorganization was

confirmed. To counter this prima facie showing, Goetz must demonstrate that the existence of facts and

circumstances from which Challas should have fairly contemplated that he had a potential slander claim

against Goetz prior to June 6, 2006.

I. The Allegations of RC&R’s 2003 Complaint Were Insufficient to Make Challas Fairly

Contemplate a Slander Action Against Goetz.

Although Challas was named as a defendant in the RC&R action, the allegations that Challas

conspired with other individuals to break into the law firm and remove documents were all on

“information and belief.” Further, the complaint contained no facts establishing the basis of that

information and belief. As a result, there was nothing in RC&R’s complaint to suggest that Goetz might

have been the source of any allegations, much less that he had allegedly slandered Goetz by telling other

people that Challas had admitted that he was involved in the break-in. Significantly, Goldstein testified

to the contrary. From the outset, he had been specifically instructed to protect Goetz’s identity from

discovery. Thus, it appears that the complaint was carefully drafted to avoid identifying Goetz. Finally,

with discovery stayed, Challas was denied all opportunity to investigate the source of the allegations until

the stay was lifted. Under these facts, it cannot be said that the mere existence of RC&R’s lawsuit

reasonably put Challas on notice of a slander action against Goetz. 

II. The March 2006 Responses to Interrogatories Were Not Sufficient to Cause Challas to

Fairly Contemplate a Slander Action Against Goetz.

As noted above, from the beginning of the RC&R action, Goldstein was operating under

instructions to avoid revealing Goetz’s identity. His effort to comply with his client’s instructions is

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evident from his carefully crafted response to 4920's first set of interrogatories. He avoided identifying

Goetz as someone who had heard statements from any other person who had been at the scene of the June

16, 2002 incident. Rather, he more ambiguously identified Mr. and Mrs. Goetz, together, as people that

might have some knowledge of the June 16, 2002 incident. This response certainly creates no specific

impression that Goetz had been spreading slanderous statements about Challas. 

Additionally, the court is not persuaded that the inclusion of Mr. and Mrs. Goetz’s names should

have stood out to Challas and, as a result, put him on notice to inquire further. First, there is no evidence

that Challas himself ever saw the discovery responses. After receiving RC&R’s complaint, Challas hired

attorneys and left the handling of the RC&R action in his attorneys hands. Challas testified that he had

no idea what his attorney sent out as discovery, and he has no recollection of any particular conversation

with his counsel regarding discovery. Challas does not recall going over RC&R’s interrogatory response

that identifies Goetz as a person that might have knowledge, and he had no conversations with his

attorney regarding any specific person as the perpetrator of the allegations surrounding the June 16, 2002

incident. There is also no reason to believe that including both Mr. and Mrs. Goetz in the interrogatory

responses would have stood out to Challas’attorneys. Ashworth testified that he believed he had heard

of Goetz because Goetz had some kind of management role related to 4920. This suggests that Ashworth

would not have considered the inclusion of the Goetz name as unusual. Further, there is no evidence

indicating that Margaret Schneck, who replaced Ashworth as Challas’ counsel, would have identified the

Goetz name as unusual.

III. Goetz’s Testimony That Challas Discussed the June 16, 2002 Incident With Goetz Is Not

Credible.

At trial, Goetz asserted for the first time that Challas should have fairly contemplated a potential

slander action against Goetz as early as June 2002 when Challas allegedly told Goetz that he had

removed and altered documents located in RC&R’s office suite. Goetz reasons that once Challas

revealed such stunning information, Challas should have fairly contemplated that Goetz would repeat the

information to others. Because truth is a defense to slander, the court expects that whether or not Challas

actually made admissions to Goetz will be hotly disputed at any trial on the merits of this slander action.

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However, in determining whether the matter can proceed to trial, the court concludes that it is enough

that Goetz’s credibility regarding the alleged admissions is highly doubtful. Near the time of the June

2002 incident, Goetz was questioned by the local police investigating the incident. The police

specifically asked Goetz if Challas had told Goetz that Challas was involved in the break-in, but Goetz

denied that any such conversation with Challas had ever taken place. Goetz contends that he lied to the

police but now has testified truthfully about his conversation with Challas on the witness stand. The

court does not know yet whether Goetz lied to the police or lied in court, but Goetz’s willingness to lie

to authorities has substantially damaged his credibility. It is also significant that questions regarding

Goetz’s honesty stretch beyond this adversary proceeding. The precipitating event for the Goetz’s

chapter 11 case was the entry of a judgment for fraud and breach of fiduciary duty against Goetz in the

lawsuit filed by other members of his family. Finally, it is questionable that, in June 2002, Challas would

have trusted Goetz enough to make the alleged admissions to him. By that time, the friendship between

Goetz and Challas was ending, and Challas had agreed to be a witness against Goetz in the fraud action

against Goetz. 

In light of all of these factors, the court concludes that evidence offered to date is too doubtful

to overcome Challas’ denial that the conversation with Goetz ever took place and his affirmative

testimony that he first learned of Goetz’s slanderous statements in July 2006. As a result, the record does

not adequately demonstrate that Challas fairly contemplated the potential for a slander action against

Goetz prior to the June 2006 confirmation of Goetz’s plan of reorganization. What additional evidence

can be offered at a trial on the merits remains to be seen. 

CONCLUSION

Based on the foregoing, the court concludes that the cause of action for slander alleged in the

adversary complaint was not within Challas’ fair contemplation at the time the plan of reorganization was

confirmed. As a result, the cause of action was not discharged upon confirmation.

Good cause appearing, IT IS SO ORDERED.

**** END OF ORDER ****

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Adv. P. 06-5197

UNITED STATES BANKRUPTCY COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SERVICE LIST

George P. Eshoo, Esq.

LAW OFFICES OF GEORGE P. ESHOO & ASSOC. 702 Marshall Street, Suite 500

Redwood City, CA 94063

Stanley A. Zlotoff

LAW OFFICES OF STANLEY A. ZLOTOFF

300 South First Street, Suite 215

San Jose, CA 95113

Mark E. Ellis

Wendy D. Vierra

Daniel D. McGee

ELLIS, COLEMAN, POIRER, LAVOIE, &

STEINHEIMER LLP

555 University Avenue, Suite 200East

Sacramento, CA 95825

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