Court Opinion

ID: 2831603
Source: CourtListenerOpinion
Date Created: 2015-08-27 16:02:18.576156+00
Date Added: 2024-06-11T08:04:51.244835
License: Public Domain

NOTICE: NOT FOR OFFICIAL PUBLICATION.
  UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL
                  AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.

                                     IN THE
              ARIZONA COURT OF APPEALS
                                 DIVISION ONE

  VERDE VALLEY PLAZA, LLC, a California limited liability company,
                     Plaintiff/Appellant,

                                         v.

  BRIAN STONEKING and JANE DOE STONEKING, a married couple,
                    Defendants/Appellees.

                              No. 1 CA-CV 14-0160
                                FILED 8-27-2015

            Appeal from the Superior Court in Maricopa County
                             CV2013-054033
                The Honorable Michael D. Gordon, Judge

                       VACATED AND REMANDED

                                    COUNSEL

Goldman & Zwillinger PLLC, Scottsdale
By Scott H. Zwillinger, Scott A. Griffiths
Counsel for Plaintiff/Appellant

Trent S. Trueblood, Scottsdale
Counsel for Defendants/Appellees

                        MEMORANDUM DECISION

Presiding Judge John C. Gemmill delivered the decision of the Court, in
which Judge Kenton D. Jones and Judge Donn Kessler joined.
                          VERDE v. STONEKING
                           Decision of the Court

G E M M I L L, Judge:

¶1            Verde Valley Plaza, LLC (“VVP”) appeals the dismissal of its
action against Brian Stoneking and Jane Doe Stoneking. The primary issue
on appeal is whether the superior court erred in dismissing VVP’s
complaint against Stoneking based on judicial estoppel. For the reasons
that follow, we vacate the judgment of dismissal and remand for further
proceedings.

                              BACKGROUND

¶2             In November 2011, VVP filed for Chapter 11 bankruptcy and
continued to operate, as a debtor in possession, a strip mall property in
Cottonwood, Arizona. In February 2012, Stoneking, a member of EB
Enterprise, LLC, doing business as the Noodle Bowl, agreed to lease from
VVP a suite located on the property. The lease required both parties to
perform renovations in order for Stoneking to operate a restaurant out of
the suite. VVP did not notify Stoneking that VVP was in bankruptcy, nor
was Stoneking initially aware of VVP’s status in bankruptcy. After learning
that VVP had filed for bankruptcy, Stoneking hired counsel who filed a
notice of representation in the bankruptcy proceeding in June 2012. VVP
later alleged that on July 1, 2012, Stoneking abandoned the project and left
the suite unusable.

¶3             VVP filed an amended plan of reorganization in bankruptcy
court on July 6, 2012. In Section 8.7 of the plan, VVP indicated that it wished
to preserve

       any and all Causes of Action accruing to the Debtor and
       Debtor in Possession, including, without limitation, actions
       under sections 510, 542, 544 . . . of the Bankruptcy Code . . .
       and the Reorganized Debtor shall have the authority to
       commence and prosecute such Causes of Action for the
       benefit of the Estate of the Debtor.

Specifically, the plan provided that VVP had “conducted a preliminary
investigation and determined” there might be a basis for a claim against
Midfirst Bank. VVP did not specifically assert or preserve any claim against
Stoneking, EB Enterprise LLC, or the Noodle Bowl in the amended plan at
that time.

¶4            In August 2012, Stoneking filed a motion in bankruptcy court

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                         VERDE v. STONEKING
                          Decision of the Court

seeking “compensation for damages based on [VVP’s] post [bankruptcy]
petition torts and breach of contract, as an administrative expense.”
Stoneking alleged VVP made numerous false representations and failed to
complete renovations it contracted to provide. Because VVP was in
bankruptcy and the acts alleged occurred after the filing of the bankruptcy
petition, Stoneking asserted that it was entitled to compensation as an
“administrative creditor.”

¶5           In September 2012, VVP opposed Stoneking’s motion for
administrative expenses, explaining that VVP

      is in the process of compiling documents which will be filed
      as a supplement to this Objection. In the interim, however,
      the Debtor will most likely be filing a counterclaim to the
      Application for Administrative Claim, as Noodle Bowl has
      failed to abide by the terms of the parties’ agreement.
      Accordingly, the Debtor requests the Court set this matter for
      a hearing, and at the conclusion of the hearing, deny the
      Application in its entirety.

According to the record on appeal before us, however, VVP did not file a
supplement to the objection nor did the bankruptcy court schedule or
conduct the requested hearing; and Stoneking did not object to the hearing
not being set or request a hearing on his own. It is not apparent from the
available record whether the bankruptcy court ever addressed Stoneking’s
motion. VVP’s next filing, on October 15, 2012, was a proposed order for
the bankruptcy court to approve VVP’s July 6, 2012 plan of reorganization.
Accompanying the filing was a “Notice of Lodging Form of Order”
indicating that a copy of the order had been sent to Midfirst Bank’s counsel
but not specifically indicating a copy had been sent to Stoneking’s counsel.
The October 15, 2012 order expressly referenced Stoneking and EB
Enterprise, LLC, explaining that “[t]he Plan is hereby amended to include
a preservation by [VVP] of all claim(s) it has against (1) EB Enterprise, LLC
d/b/a The Noodle Bowl; (2) Brian Stoneking; and (3) [Eric] Horn.” The
bankruptcy court issued the order on October 22, 2012, approving VVP’s
reorganization and signed the final decree in March 2013.

¶6           In August 2013, VVP filed a complaint in superior court

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                          VERDE v. STONEKING
                           Decision of the Court

against Stoneking.1 VVP alleged a lease was executed in February 2012 and
that Stoneking personally guaranteed full performance of the terms of the
lease. VVP further alleged that Stoneking failed to open a restaurant in the
suite because he did not perform according to terms of the lease and
abandoned the suite, leaving it unusable. VVP asserted Stoneking breached
the agreement, the implied covenant of good faith and fair dealing, and the
personal guarantee.

¶7             In September 2013, Stoneking responded to the complaint by
filing a motion to dismiss pursuant to Arizona Rule of Civil Procedure
12(b)(6). Stoneking’s Rule 12(b) motion alleged that VVP’s claims were
barred because they were (1) based on an alleged lease which [VVP]
rejected in its bankruptcy case and (2) based on the doctrine of judicial
estoppel, because [VVP] never disclosed such claims in its bankruptcy
schedule. Along with the motion, Stoneking filed attachments that
included the bankruptcy court docket and minute entries, the motions and
responses filed in bankruptcy court, and the October 22, 2012 order. VVP
opposed the motion to dismiss, contending that its claims against Stoneking
were preserved in the bankruptcy court’s October 22, 2012 order. VVP also
attached documents from the bankruptcy proceedings.

¶8              After Stoneking replied to VVP’s response, the superior court
heard oral argument on the pending motion. The court then ordered both
parties to file supplemental memoranda addressing:

       (1) with respect to judicial estoppel, to whom the prejudice
       must run, the Court or the parties; and (2) whether this Court
       would have subject matter jurisdiction over any
       counterclaims that [Stoneking] should choose to assert;
       specifically, those counterclaims that encompass the claims
       made in the administrative claim before the bankruptcy court.

¶9           After receiving the supplemental briefing, the court granted
Stoneking’s motion to dismiss, stating that VVP was “judicially estopped
from asserting its claims against [Stoneking] in this state court action.” The
court explained:

1 Only Brian Stoneking and Jane Doe Stoneking were named as defendants
in this action. EB Enterprise, LLC was not named as a party nor was Eric
Horn, who was also a member of the LLC.

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                        VERDE v. STONEKING
                         Decision of the Court

      [VVP] was aware of the administrative claim pending and
      took no action to advise the Bankruptcy Court of that filing in
      a manner that would have avoided that court’s oversight of
      [Stoneking’s][2] claim.

      Instead, without meaningful notice to [Stoneking], it simply
      preserved its own claim in its proposed order of confirmation.

      Thus, if [VVP’s] position prevails here, this Court will
      entertain an action against [Stoneking] but will be deprived of
      subject matter jurisdiction over [Stoneking’s] counterclaims.
      That result arises from [VVP’s] procedural transgression in
      bankruptcy court and prejudices [Stoneking] here. The Court
      will not permit that result.

(Emphasis added.)

¶10           The superior court entered final judgment and VVP timely
appealed. This court has jurisdiction in accordance with Arizona Revised
Statutes (“A.R.S.”) sections 12-120.21(A)(1) and -2101(A)(1).

                               ANALYSIS

I. The Motion to Dismiss Should Have Been Treated as a Motion for
Summary Judgment

¶11          Although Stoneking filed a Rule 12(b)(6) motion to dismiss,
both Stoneking and VVP submitted a number of documents from the
bankruptcy court proceeding in support of or opposition to the motion. On
a motion to dismiss, if “matters outside the pleading are presented to and
not excluded by the court, the motion shall be treated as one for summary
judgment and disposed of as provided in [Arizona Rule of Civil Procedure]
56, and all parties shall be given reasonable opportunity to present all
material made pertinent to such a motion by Rule 56.” Ariz. R. Civ. Proc.
12(b).

¶12          The motion to dismiss should therefore have been treated as
a motion for summary judgment. See Frey v. Stoneman, 150 Ariz. 106, 108-
09 (1986) (holding that when “evidence extrinsic to the pleadings was

2  The superior court references “Plaintiff’s” claim at this point, but we
assume from the context that the court meant “Defendant’s” or
“Stoneking’s” claim.

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                            VERDE v. STONEKING
                             Decision of the Court

offered to and relied on by the trial judge in making [a] decision, the motion
to dismiss should have been treated as one for summary judgment”).
Although VVP does not complain on appeal that the superior court erred
in not converting Stoneking’s motion to dismiss to a motion for summary
judgment, the applicable standard of judicial review requires that we
examine whether summary judgment was appropriate under Arizona Rule
of Civil Procedure 56(a).

II. Summary Judgment Was Not Appropriate

¶13           Under Arizona Rule of Civil Procedure 56(a), “[t]he court
shall grant summary judgment if the moving party shows that there is no
genuine dispute as to any material fact and the moving party is entitled to
judgment as a matter of law.” We view the facts and the inferences arising
from those facts in the light most favorable to the nonmoving party. Best
Choice Fund, LLC v. Low & Childers, P.C., 228 Ariz. 502, 506, ¶ 10 (App. 2011).
“[W]e determine de novo whether any genuine issues of material fact exist
and whether the trial court properly applied the law.” Id.

¶14            VVP primarily asserts that Stoneking’s motion and the
superior court’s ruling constitute an unauthorized collateral attack on the
bankruptcy court’s final order approving VVP’s reorganization. See
generally Duncan v. Progressive Preferred Ins. Co. ex rel. Estate of Pop, 228 Ariz.
3, 7, ¶¶ 13-15 (App. 2011) (discussing collateral attack principles).3 We
agree with VVP that the bankruptcy court’s order is not subject to collateral
attack in this state court action. To the extent there were, or may have been,
procedural irregularities in bankruptcy court, such issues must generally
be addressed in the bankruptcy court, not in state court. It is not ordinarily
within the purview of the superior court or this court to examine and
attempt to rectify any perceived injustices in a bankruptcy court
proceeding, order, or judgment. See Rackers v. Nicholson, 89 Ariz. 397, 400
(1961) (bankruptcy court order is judgment and is not subject to collateral
attack); Duncan, 228 Ariz. at 7, ¶¶ 13-15.

¶15           A defense based upon judicial estoppel, however, does not
necessarily constitute an inappropriate collateral attack on the bankruptcy
court’s order. Judicial estoppel may be asserted against VVP without
setting aside or rendering invalid the bankruptcy order. See Duncan, 228

3 Because we agree with VVP’s assertion that the superior court’s ruling
was an improper collateral attack on the bankruptcy court’s ruling, we need
not consider its assertion that res judicata prevents relitigation of issues that
could have been litigated in bankruptcy court.

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                          VERDE v. STONEKING
                           Decision of the Court

Ariz. at 7 (explaining that a collateral attack on a judgment “is an effort to
obtain another and independent judgment which will destroy the effect of
the former judgment”). If applicable, judicial estoppel would rest upon a
determination that VVP has changed its position under such circumstances
that it should be estopped from seeking damages from Stoneking in this
action. This would not undermine the effect of the bankruptcy court’s
judgment. Rather, it would protect the integrity of the judicial system and
prevent VVP from asserting a position to obtain judicial relief in one
proceeding and then a new, inconsistent position in a second proceeding.
See State v. Towery, 186 Ariz. 168, 182, 920 P.2d 290, 304 (1996) (“Judicial
estoppel is not intended to protect individual litigants but is invoked to
protect the integrity of the judicial process by preventing a litigant from
using the courts to gain an unfair advantage.”).

¶16            We note that the parties have primarily cited, in both superior
court and this court, federal cases regarding judicial estoppel. But state law
is controlling on this issue. Regarding judicial estoppel, our supreme court
has explained “that a party who has assumed a particular position in one
judicial proceeding will not be allowed to assume an inconsistent position
in a subsequent proceeding.” Standage Ventures, Inc. v. State, 114 Ariz. 480,
483 (1977). “For judicial estoppel to apply, three requirements must be met:
‘(1) the parties must be the same, (2) the question involved must be the
same, and (3) the party asserting the inconsistent position must have been
successful in the prior judicial proceeding.’” Bank of Am. Nat. Trust & Sav.
Ass'n v. Maricopa Cnty, 196 Ariz. 173, 175 (App. 1999) (quoting Towery, 186
Ariz. at 182).

¶17            In granting Stoneking’s motion to dismiss, the superior court
referenced what it perceived to be VVP’s “procedural transgression” in the
bankruptcy proceeding. See supra ¶ 9. It is not clear, however, that the court
made the necessary determination of the requisite change of position by
VVP sufficient to support application of judicial estoppel. To apply judicial
estoppel, it is necessary for a party to show that an inconsistent factual
position was taken. See State Farm Auto Ins. v. Civil Service Emp. Ins. Co., 19
Ariz. App. 594, 600 (1973) (noting that the litigants, in a claim against an
insurance company, took an inconsistent position when they first argued
that they purchased a vehicle to replace an insured vehicle, and then later
argued that a different vehicle they borrowed was the replacement); Colonia
Verde Homeowners Ass'n v. Kaufman, 122 Ariz. 574, 578 (App. 1979) (holding
that the appellants took an inconsistent position when they obtained relief
under the enforcement provision of a restrictive covenant attached to their
property and in a subsequent proceeding denied the restrictions applied).

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                          VERDE v. STONEKING
                           Decision of the Court

¶18           Even the United States Supreme Court case cited by
Stoneking involved an inconsistent factual position taken from one
proceeding to the next. In New Hampshire v. Maine, the states litigated the
boundary between them, in the vicinity of the Piscataqua River. 532 U.S.
742, 751 (2001). In earlier litigation, New Hampshire claimed the boundary
between the states was in the “middle of the river,” which meant the middle
of the main channel of navigation. Id. In the subsequent proceeding, New
Hampshire asserted that the same boundary was along Maine’s shoreline
of the Piscataqua River, which the Supreme Court held was inconsistent
with New Hampshire’s earlier position. Id.

¶19             Stoneking contends VVP’s inconsistent position began with
the failure to timely disclose in bankruptcy court its claim against Stoneking
for damages for alleged breach of the lease. At the heart of Stoneking’s
argument that VVP played “fast and loose” with the bankruptcy rules is a
contention that VVP failed to follow the procedural and notice
requirements of bankruptcy court. The superior court labelled VVP’s
conduct in bankruptcy court a “procedural transgression” and indicated
that VVP provided no “meaningful notice” that would have allowed
Stoneking to litigate his administrative claim prior to VVP preserving its
claims.

¶20            The perceived procedural transgression is not analogous to
taking a factually inconsistent position as detailed in the Arizona judicial
estoppel cases or the New Hampshire case. VVP did not assert one set of
facts to the bankruptcy court and a different, inconsistent set of facts in the
superior court. VVP specified in its proposed final order approving the
plan that it had a claim against Stoneking. In the superior court, it asserts
the same argument. Stoneking asks this court to affirm the superior court’s
finding that the alleged failure to timely attempt to preserve a claim, or
failure to provide appropriate notice in bankruptcy court, is an act that
should preclude VVP’s claim in state court. Even assuming VVP was tardy
in disclosing its claim against Stoneking in bankruptcy court, or failed to
provide proper notice of that claim to Stoneking, such omission or
omissions do not constitute the taking of an inconsistent position as
required for application of judicial estoppel.

¶21             Stoneking has not established as a matter of law that VVP
took an inconsistent position in the bankruptcy proceeding and obtained
judicial relief resulting from that position. See Bank of Am. Nat. Trust & Sav.
Ass'n v. Maricopa Cty, 196 Ariz. 173, 176 ¶ 8 (App. 1999) (“For purposes of

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                          VERDE v. STONEKING
                           Decision of the Court

judicial estoppel, a party is not considered to have been successful in a prior
judicial proceeding unless (a) the court in that proceeding granted the party
relief or accepted the party's earlier inconsistent position either as a
preliminary matter or as part of a final disposition, and (b) the party's
inconsistent position was a significant factor in the relief granted.”). The
inconsistent position must have been a factor in the relief obtained.

¶22            Accordingly, we must vacate the dismissal and remand for
further proceedings. A defense such as judicial estoppel may be available
to Stoneking and may be further addressed on remand if supported by the
facts. On the record before us, however, it cannot be said that Stoneking is
entitled to judgment as a matter of law on the basis of judicial estoppel.

¶23           We also recognize that the superior court expressed a concern
regarding the possibility of a counterclaim being asserted by Stoneking.
But there is no issue before us in this appeal regarding such a counterclaim,
and we will not speculate as to what theories might support a counterclaim
by Stoneking or what defenses might be raised in response to a potential
counterclaim.

                             ATTORNEY FEES

¶24           Both parties have requested awards of attorney fees under
A.R.S. § 12-341.01. Stoneking has not succeeded on appeal and we therefore
deny his request. Although VVP is the successful party on appeal, in our
discretion we deny its request for attorney fees but VVP is awarded its
statutory, taxable costs on appeal, contingent upon its compliance with
Arizona Rule of Civil Appellate Procedure 21.

                              CONCLUSION

¶25          For these reasons, we vacate the judgment of dismissal and
remand to the superior court for further proceedings.

                                    :ama

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