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stating that “[t]he differences between conspiracy and aiding and abetting are not merely semantic” and that “[t]hese differences have led several courts [including the court in Neilson ] to recognize that a non-fiduciary can aid and abet a breach of fiduciary duty”
Summary of this case from Villains, Inc. v. American Economy Ins. Co.Opinion
Case No. 97-32321, Adv. No. 99-3144.
January 26, 2007
MEMORANDUM DECISION ON MOTIONS FOR PARTIAL SUMMARY JUDGMENT AND TO DISMISS
The following discussion constitutes the court's findings of fact and conclusions of law. Fed.R.Bankr.P. 7052 (incorporating by reference Fed.R.Civ.P. 52(a)). Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. §§ 101- 1330, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9036, as enacted and promulgated prior to the effective date of The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub.L. 109-8, 119 Stat. 23.
On April 26, 2006, the court issued its Memorandum Decision Regarding Judicial Estoppel that describes the background of this lengthy dispute in more detail (the "Judicial Estoppel Decision"). Terms not defined herein have the meanings given in that decision.
The rightful ownership of Ted's share of his father's trust was disputed. Notwithstanding that dispute, Ted and his siblings, acting as Successor Trustees of the trust, distributed Ted's share (the "Property") to his sons and not to Cassel as representative of Ted's creditors, who turned out to be the rightful owners.
This is an action to recover the Property or its value. The Successor Trustees and Ted's sons (collectively, "Defendants") previously argued that they were protected from liability because the California probate court approved the distributions and discharged the Successor Trustees. The Judicial Estoppel Decision holds that they are estopped from raising the probate court orders as a defense in this action.
Defendants now argue that the distributions were properly made in reliance on this court's earlier judgment that Ted's disclaimer of any interest in the Property was valid (the "Disclaimer Judgment") even though the true ownership of the Property was still disputed and had yet to be finally resolved by the Ninth Circuit. The court rejects this and other arguments raised by Defendants and holds that the Successor Trustees are jointly and severally liable for the amount of all distributions to Ted's sons, plus interest, and Ted's sons are liable for what they received individually, plus interest. The court makes no determination on Cassel's claim for punitive damages or his asserted rights to consequential damages and attorneys' fees, and declines to enter any judgment on fewer than all claims pursuant to Fed.R.Civ.P. 54(b) (incorporated by Fed.R.Bankr.P. 7054(a)), for the reasons stated on the record at the hearing on December 14, 2006.
II. Procedural background
After the Judicial Estoppel Decision the court issued orders that among other things permitted Cassel to add the Successor Trustees as named defendants and to file a supplemental complaint regarding the distributions made by the Successor Trustees to Ted's sons. Cassel's supplemental complaint states (in ¶ 25):
This Supplemental Complaint concerns facts occurring after the [original] Complaint in this adversary proceeding was filed on April 19, 1999. A copy of the Complaint is attached hereto and incorporated herein as if set forth in full. The numbering of paragraphs and the claims for relief herein follows sequentially the numbered paragraphs and the claims for relief in the Complaint.
In July of 2006 Defendants filed a motion to dismiss the Supplemental Complaint (the "MTD"). In October of 2006, Cassel filed his Motion for Summary Judgment on less than All Claims for Relief under Rule 54(b) (the "Partial MSJ"). The parties filed opposition and reply papers and the motions came on for hearing on December 14, 2006. Appearances are noted in the record.
The MTD treats the Supplemental Complaint as subsuming the original Complaint. The court will treat the MTD as seeking dismissal of both the original Complaint and the Supplemental Complaint.
III. Discussion
A. Defendants have not established that the Disclaimer Judgment protects them from liability
Ted's sons cannot use the Disclaimer Judgment as a shield from liability. It is well established that a party who previously obtained funds based on a court order or judgment must make restitution after reversal on appeal, even though the party was entitled to the funds at the time. See generally Arkadelphia Milling Co. v. St. Louis SW Ry. Co., 249 U.S. 134, 145 (1919); 5 Cal. Jur.3d, App. Review §§ 715, 720; Levy v. Drew, 4 Cal.2d 456, 50 P.2d 435 (1935) (under California law the restitution obligation is in the nature of a trust obligation and is without any right of setoff). Ted's sons have cited no authority to the contrary.
The Successor Trustees also have not established that they can use the Disclaimer Judgment as a shield. They had an obligation to determine who should receive the funds that they held. Under the Judicial Estoppel Decision they cannot rely on the state court's orders approving their distributions and discharging them. They must be treated as if they made distributions favoring Ted's sons over Ted's creditors (represented by Cassel) without the protection of those orders.
The Successor Trustees claim that under state law, even without authorization from the probate court, they had no duty to withhold distributions pending determination of Cassel's appeal. They rely principally on Arluk Med. Ctr. Indus. Group, Inc. v. Dobler, 116 Cal. App.4th 1324, 11 Cal. Rptr.3d 194 (2 Dist. 2004).
Arluk is inapposite. It involved a competition between creditors and beneficiaries, not a dispute among alleged beneficiaries. The majority in Arluk held that in proper circumstances a trustee can make a distribution to beneficiaries without incurring personal liability to unpaid creditors, some of whom may be unknown, because under the Probate Code the trustee's sole duty is to beneficiaries. Arluk, 116 Cal. App.4th 1324, 11 Cal. Rptr.3d 194. That holding has nothing to do with a trustee's personal liability for making distributions to persons who turned out not to be beneficiaries at all (Ted's sons), leaving the true beneficiaries (Ted's creditors through Cassel) with nothing.
The Successor Trustees claim that if Ted's sons had demanded distributions on the strength of the Disclaimer Judgment then they would have had to comply with such demands, but that is not what happened and they have not established that this is the law. The Disclaimer Judgment might have been strong evidence that Ted's sons were the proper parties to receive distributions, but that judgment was subject to reversal on appeal as the Successor Trustees knew. This court had no jurisdiction to authorize the Successor Trustees to make distributions out of Leon's trust estate, and was never asked to do so. The probate court was never told of the controversy or asked to rule on it. The Judicial Estoppel Decision prevents the Successor Trustees from using as a shield the state court orders authorizing distributions and discharging them. Cassel has established various theories under which a person who distributes contested funds to the wrong party is liable, as discussed below.
The Successor Trustees claim, relying on Glass v. Najafi, 78 Cal. App.4th 45, 92 Cal. Rptr.2d 606 (2000), that they are protected because they acted consistent with the Disclaimer Judgment before it was reversed. That reliance is misplaced.Glass held that a landlord was entitled to act upon a writ of possession and to use self-help to evict a tenant before the writ was quashed. Id., 78 Cal. App.4th at 50-51. It says nothing about whether the landlord had to return possession after the writ was quashed. See id. at 48 (issue of possession bifurcated from other issues). Glass has no bearing on whether the Successor Trustees have to return the distributions, or the value of the distributions, that they made to the wrong parties. The Successor Trustees have not met their burden to establish a defense to Cassel's claims based on the Disclaimer Judgment.
B. Defendants' liability under Section 542(a) (second and third claims)
Defendants argue that any claim under Section 542(a) is barred because it was not expressly reserved in Ted's confirmed Plan. The court disagrees.
The principal economic aspect of the Plan is continuing Cassel's pre-confirmation action, and that action is based in large part on Section 542. The original Complaint, filed before confirmation, is entitled "Creditor's Complaint to Avoid Fraudulent Transfer, To Recover Property of the Estate and For Other Related Relief." (Emphasis added.) It cites Section 542 at the top of the second page and it argues (second claim for relief) that Ted's disclaimer was invalid. The claim under Section 542(a) survived confirmation.
Defendants also argue (in their opposition to the Partial MSJ, p. 4:25-26) that by implication Section 542 cannot be used "when property has been transferred in derogation of one of the avoiding powers" and that the Plan did not preserve any avoiding powers (e.g., a claim under Section 549). The court disagrees with the premise that the Plan needed to preserve any power to avoid the distributions to Ted's sons, which had not yet occurred when the Plan was confirmed. In any event, Section 542(a) provides an independent basis for recovery of the Property, wholly apart from any avoiding powers.
Section 542(a) provides:
542. Turnover of property to the estate
(a) Except as provided in subsection (c) or (d) of this section [regarding entities without notice or knowledge of the bankruptcy case, or insurance companies], an entity, other than a custodian, in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.
Defendants had "possession, custody, or control, during the case," of the Property. They knew that according to Cassel this was property of the estate (or, in the language of the statute, that Ted's beneficial interest in assets in his father's trust was "property that the trustee may use, sell, or lease under section 363"). They knew that the rightful owner of the Property had yet to be finally determined on appeal. Yet they ignored Cassel's claims. The Successor Trustees distributed the Property and Ted's sons received it. Defendants must deliver and account for "the value of such property."
Under Section 542(a) it does not matter if Defendants genuinely believed that Ted's sons were entitled to the Property. The statute does not require "actual knowledge" of the true ownership of property but only "notice of circumstances that would cause a reasonable person to inquire further" as to the true ownership of the property at issue. Matter of USA Diversified Prod's, Inc., 100 F.3d 53, 57 (7th Cir. 1996). Defendants had notice of such circumstances: Cassel's adversary proceeding and his appeal from the Disclaimer Judgment. As the bankruptcy court in Diversified observed, any distribution notwithstanding such notice is at the distributor's "own peril." Diversified, 193 B.R. at 879 (citation omitted).
Nor does it matter that the Successor Trustees, and perhaps Ted's sons as well, no longer have possession, custody, or control of the Property. Section 542(a) speaks of delivering "the value of such property" so it applies "not just to propertypresently in someone's possession, custody or control but to property in its `possession, custody or control during the case.'" Diversified, 193 B.R. at 875 (emphasis in original). Defendants may have divested themselves of the Property but they certainly had possession, custody, or control during the case. They must now return the value of such Property.
Defendants argue that Section 542(a) is inapplicable because (a) the statute allegedly only applies "during the case" and (b) the case allegedly ends upon the effective date of the plan of reorganization, citing In re Greater Jacksonville Transp. Co., 169 B.R. 221 (Bankr. M.D. Fla. 1994). Defendants are wrong on both counts.
What must occur "during the case" is the possession, custody, or control of property (Diversified, 193 B.R. at 875) not the resolution of the Section 542(a) claim. Nor does the case end upon confirmation. This case was open when the distributions to Ted's sons were made and it is still open today. Greater Jacksonville held that the period for filing a UCC continuation statement was extended until 60 days after the effective date of the plan of reorganization, which was the "termination" of insolvency proceedings for purposes of former UCC § 9-403(2) as enacted in Florida. Id. at 223. That decision has nothing to do with whether a person must return property, or its value, that was in the person's possession, custody, or control "during a case" under Section 542(a). Greater Jacksonville specifically distinguishes "termination" of insolvency proceedings under UCC § 9-403(2) from closing a case under Fed.R.Bankr.P. 3022. Id. at 224.
The Successor Trustees are jointly and severally liable for the entire amount of what they distributed to Ted's sons, even if they did not receive or benefit from such distributions themselves. In Diversified a law firm received $125,000 from a Mr. Davis to fund a possible settlement involving him and the company he owned, and after the company filed a Chapter 11 petition the law firm retained $14,000 for its services and returned the balance to Mr. Davis, who claimed that the $125,000 had come from his personal funds. That turned out to be wrong and the law firm was held liable for the entire $125,000, not just the $14,000 it had retained. Diversified, 100 F.3d at 56.
Ted's sons are liable for what they received. They had possession, custody, or control, during the case, of a portion of the Property and they must return what they received or its value.
The court will grant Cassel's Partial MSJ on his second claim for relief (in the original Complaint) as against the Successor Trustees as successors to named defendant Hilde. The court will also grant Cassel's Partial MSJ on the third claim for relief (in the Supplemental Complaint) as against the Successor Trustees and Ted's sons.
C. Sections 549 and 550 (fourth claim)
Cassel argues that the Successor Trustees became transferees of an avoidable postpetition transfer under Section 549 when they "assumed Hilde's role and took possession of property of the probate estate, including the portion which should have been paid to Ted's bankruptcy estate, and transferred it to Ted's sons." Opp. to MTD at 5:14-16. Cassel asserts that Ted's sons are immediate or mediate transferees from the Successor Trustees within the meaning of Section 550(a)(2). The court does not decide who is a transferee and whether Sections 549 and 550 are applicable. Assuming without deciding that Cassel states a claim under those sections, his fourth claim for relief is barred by the two year statute of limitations in Section 549(d). See 11 U.S.C. § 549(d) ("An action or proceeding under this section may not be commenced after the earlier of — (1) two years after the date of the transfer sought to be avoided; or (2) the time the case is closed or dismissed.").
The Defendants did not raise the statute of limitations until oral argument. The court's initial view at the hearing on December 14, 2006, was that Defendants had waived this defense by not raising in it their opposition to Cassel's MSJ as required by Fed.R.Civ.P. 56(c) and (e) (incorporated by Fed.R.Bankr.P. 7056). See In re Pugh, 158 F.3d 530, 532-38 (11th Cir. 1998) (Section 549(d) is a true statute of limitation that can be waived). On further consideration the court is persuaded that the defense of a time bar has not been waived.
Courts are not inclined to find a technical failure to raise an affirmative defense when the plaintiff had adequate notice of the defense and was not deprived of the opportunity to respond.See, e.g., Camarillo v. McCarthy, 998 F.2d 638, 639 (9th Cir. 1993). After the hearing Defendants filed and served a letter brief (docket no. 239) arguing the limitations issues and inviting Cassel to respond should he wish to do so. Cassel has filed no response and has not established any prejudice from Defendants' lateness in raising their defense under Section 549(d). Cassel concedes in his opposition to the MTD (pp. 7:25-8:2) that the Defendants' conduct was revealed on June 23, 2003, and that the first supplemental complaint was not filed until almost three years later, on June 19, 2006. Therefore Cassel's fourth claim for relief is barred by the two year statute of limitations in Section 549(d).
D. Successor Trustees' liability for breach of trust (fifth claim)
At oral argument Cassel's counsel insisted that Cassel is suing the Successor Trustees in their personal capacities and not as trustees. This seems somewhat inconsistent with Cassel's claim for breach of trust, and possibly his other claims. The court interprets counsel's comments to mean that, pursuant to the Judicial Estoppel Decision, Cassel is treating the Successor Trustees as if they had made distributions without authorization or, put differently, as if they were not acting in any official capacity.
Defendants argue that between the time of the Disclaimer Judgment and the Ninth Circuit's reversal the estate was not a beneficiary so they had no fiduciary duty to the estate. That is incorrect. The estate was always a beneficiary (according to the Ninth Circuit's binding determination). There were intermediate rulings saying otherwise, but they were reversed. Defendants may have tried to moot the Ninth Circuit decision by obtaining the state court orders, but they are judicially estopped from using those orders as a shield. As Cassel argues, there is no issue of mootness both for this reason and because this court can fashion effective relief in the form of damages.
Cassel has established a prima facie claim against the Successor Trustees for breach of trust and the Successor Trustees have not established any defense. The court will grant the Cassel Partial MSJ as to the fifth claim for relief.
E. Defendants' liability for conversion (sixth claim)
"Conversion is any act of dominion wrongfully exerted over another's personal property in denial of or inconsistent with his rights therein." Susumu Igauye v. Howard, 114 Cal. App.2d 122, 126; 249 P.2d 558, 561 (1952). See also Cal. Civil Code §§ 1712, 1713. Defendants argue that a plaintiff must establish animmediate right to possession as an element of conversion, citingGreka Integrated, Inc. v. Lowrey, 133 Cal. App.4th 1572, 1581; 35 Cal. Rptr.3d 684, 691 (2005). Defendants read too much intoGreka.
Greka states that the elements of conversion include "the plaintiff's ownership or right to possession of the property at the time of the conversion." Greka, 133 Cal. App.4th at 1581 (citation omitted, emphasis added). See also, Aero Prop's, Inc. v. Gottlieb, 206 Cal. App.2d 711, 716; 24 Cal.Rptr. 277, 280 (1962) (it was not conversion to hold collateral until debt was repaid). As Cassel argues, the bankruptcy estate did have rights in the Property "at the time of conversion" when the distributions were made. The bankruptcy court and District Court did not think so, but the Ninth Circuit reversed and held that Ted's disclaimer was never effective so the Property had always been property of the estate.
Nothing in Greka suggests the opposite. An employee was accused of converting Greka's corporate documents but he stated in his declaration that "he took the documents home at the direction of Greka's chief executive officer" and Greka "presented no evidence to the contrary" so it failed to make "a prima facie showing that [the employee's] possession of the documents is `wrongful.'"Greka, 133 Cal. App.4th 1572, 1581 (citation omitted). There is no similarity between Greka and this case. Cassel never consented to the Successor Trustees' transfer of the Property to Ted's sons.
Defendants argue that dominion over the Property was lawful at the time so no conversion was committed, citing Kertz v. Paris, 168 Cal. App.2d 67, 335 P.2d 154 (1959). That case involved some laundry equipment that had been left on the premises by evicted lessees and that was used by subsequent lessees and eventually sold by them. The evicted lessees sued the landlord, who was held not liable for conversion. The court stated:
In a very similar case, it has been held that a lessor who secures possession of the leased premises upon default by the lessee in payment of rent, and transfers possession of the premises to one who takes and holds with notice and knowledge of lessee's rights in the furnishings, is not liable to the lessee for a tortious conversion of the furnishings by the lessee, in the absence of a showing that the lessor participated in the conversion.
Kertz, 168 Cal. App.2d at 70 (citation omitted, emphasis added).
In this case the Successor Trustees did participate with Ted's sons in the conversion. They exercised dominion over the Property that was inconsistent with the rights asserted by Cassel.
Defendants also cite Pullin v. Allen, 37 Cal. App. 218, 173 P. 772 (1918). That case involved a fee dispute in which the attorneys withheld $500 to which they claimed they were entitled.Pullin actually supports Cassel. It implies that if the proper amount of fees had been any less than $500 then the attorneys would have to turn over the difference or else be liable for conversion:
Conceding, as we think must be admitted, that under the facts of the case the defendants had the right to retain possession of the five hundred dollars until it was legally ascertained that a reasonable compensation for their services amounted to a less sum, then it must follow that until such ascertainment was had there would be no ground for the action of conversion.
Pullin, 37 Cal. App. at 220 (emphasis added).
Unlike the law firm in Pullin, the Successor Trustees did not simply retain possession of the Property until it was legally ascertained who was entitled to it. Instead they transferred the Property to Ted's sons. That is conversion.
Defendants argue that the three year statute of limitations for conversion has passed. See Cal. Code Civ. Pro. § 338(c). Defendants claim that Cassel had actual notice of the probate proceedings, should have filed a request for special notice, and had constructive notice of the distributions. See Bono v. Clark, 103 Cal. App.4th 1409, 1433; 128 Cal.Rptr.2d 31, 49 (2002) ("if the possessor acts in a manner inconsistent with the owner's interests, the owner's cause of action for conversion accrues at that time"). Cassel argues that the statute should be tolled because the distributions were concealed and he did not discover them until June 23, 2003.
The court is persuaded that the statute should be tolled. The California Supreme Court has stated:
Ordinarily the statute of limitations applying in conversion actions, Code Civ. Proc., § 388, subd. 3, beings to run from the date of the conversion even though the injured person is ignorant of his rights. This rule, however, is not absolute; for example, where there has been a fraudulent concealment of the facts the statute of limitations does not commence to run until the aggrieved party discovers or ought to have discovered the existence of the cause of action for conversion.
Since a fiduciary has a duty to make a full disclosure of facts which materially affect the rights of the parties, it seems obvious that any act by him amounting to a conversion of trust property is akin to a fraudulent concealment.
Bennett v. Hibernia Bank, 47 Cal.2d 540, 560-61; 305 P.2d 20 (1957) (citations omitted).
In Bennett the directors of Hibernia Bank had changed the by-laws without the consent or ratification of its members. The heir of one member was held not to be bound by the statute of limitations if she had no actual knowledge of the change, notwithstanding the existence of public records disclosing the change. "[W]hile public records [are] constructive notice for certain purposes, [they] are not sufficient to start the running of the statute in favor of the fiduciary as to those of its members who had no knowledge of them." Id., 47 Cal.2d at 562. Under the same reasoning, the statute of limitations did not bar the heir's action against 15 individual defendants who benefitted from the change in the by-laws if they had "notice of any breach of fiduciary duty or trust upon the part of the corporation." Id.
The Successor Trustees had a fiduciary duty to the beneficiaries of Leon's trust. They had a duty to make full disclosure of the facts to Cassel. As outlined in the Judicial Estoppel Decision they did not make full disclosure but instead they and Ted's sons made misrepresentations to the probate court that all parties were in agreement with the distributions to Ted's sons. Tolling applies.
Cassel has established his claim for conversion. Defendants have not established a defense under the statute of limitations. The court will grant Cassel's Partial MSJ on the sixth claim for relief.
F. Fraudulent transfer (first and seventh claims)
The court rejects these claims for the reasons stated at the hearing on December 14, 2006.
G. Asserted defense of setoff for taxes
The Partial MSJ asserts that each of Ted's three sons received $224,251.76, for a total distribution of $672,755.28. Defendants do not contest the amounts but argue that the net distributions were only $180,955.30 to each of Ted's sons after payment of $129,889.37 in taxes. Defendants argue that they are entitled to a setoff for this tax payment, because allegedly if they had not paid these taxes then someone else would have had to — Leon's trust estate, Ted's bankruptcy estate (or its successor the Liquidating Trust), or Ted's creditors. According to Defendants, the taxes were passed through to and paid by "the Trust beneficiaries because one beneficiary, not involved in this proceeding [i.e., one of Ted's siblings], could make use of a net loss carry forward." Opp. to Partial MSJ p. 12:22-24. This pass-through allegedly saved the probate estate from paying the taxes, which ultimately benefits Ted's creditors, according to Defendants.
Cassel argues that just as one of Ted's siblings had a net loss carry forward, so too some of Ted's creditors might not have tax liability, or at least Defendants have not established that by paying their own taxes they have reduced the taxes that Ted's creditors would have to pay on a dollar for dollar basis. Cassel argues that Defendants' remedy is to file amended tax returns and seek a refund.
The court rejects the setoff defense for a different reason. Under California law the restitution obligation is without any right of setoff. See Levy v. Drew, 4 Cal.2d at 461-63. The court expresses no opinion whether Ted's sons (or whoever paid their tax obligations) would be entitled to a refund or could establish a claim against the bankruptcy estate or the Liquidating Trust for any alleged benefit from paying the taxes on the distributions to Ted's sons. Levy instructs that such claims must be kept separate and cannot be used as a setoff. See Levy v. Drew, 4 Cal.2d at 461-63 (after reversal, restitution is a trust obligation and creditor was obligated to return funds to insolvent debtor without right of setoff). See also Annotation,Judgment Debtor's Right to Restitution upon Reversal or Vacation of Judgment as Subject to Set-off in Favor of Judgment Creditor, 101 A.L.R. 1148 ("Though the grounds of the decisions have been somewhat variant, the ultimate question whether the right of a judgment debtor for restitution upon reversal or vacation of the judgment is subject to a set-off in favor of the judgment creditor has been uniformly answered in the negative by all the courts which have had occasion to pass upon that question.").
H. Asserted defense of litigation privilege
Defendants argue that the distributions to Ted's sons are protected by the litigation privilege. "A privileged publication or broadcast is one made . . . (b) In any . . . (2) judicial proceeding, . . . ." Cal. Civ. Code § 47(b)(2).
Defendants are correct that the litigation privilege has been held to extend beyond the communication itself. The California Supreme Court has stated:
we conclude that if the gravamen of the action is communicative, the litigation privilege extends to noncommunicative acts that are necessarily related to the communicative conduct, which in this case included acts necessary to enforce the judgment and carry out the directive of the writ.
Rusheen v. Cohen, 37 Cal.4th 1048, 1065; 128 P.3d 713, 724; 39 Cal.Rptr.3d 516, 529 (2006) (party's acts to enforce judgment, which had allegedly been obtained using perjured proof of service, were protected by litigation privilege).
The court explained:
modern public policy seeks to encourage free access to the courts and finality of judgments by limiting derivative tort claims arising out of litigation-related misconduct and by favoring sanctions within the original lawsuit.
37 Cal.4th 1048, 1063; 128 P.3d 713, 723; 39 Cal.Rptr.3d 516, 527.
The court assumes for the sake of argument that the gravemen of Cassel's claims is communicative. In that event the litigation privilege might apply both to Defendants' communications (e.g., their false and misleading assertions to the probate court that all beneficiaries agreed to the distributions) and also to the benefits that they derived from making those assertions — i.e., the probate court orders approving the distributions and discharging the Successor Trustees. Cassel's remedy ordinarily would be to return to the probate court and seek sanctions in that case. This is not an ordinary situation. In this case there is a separate federal litigation, and there is a separate interest in protecting the integrity of that litigation in federal court. The Judicial Estoppel Decision bars the Defendants from asserting that their actions are protected by the proceedings state court. The litigation privilege does not protect Defendants.
I. Pre-judgment interest
Both Cassel and the Defendants cite authority that pre-judgment interest is within the court's discretion. They dispute whether, if any interest is awarded, it should be at the 10% rate applicable to California claims for breach of fiduciary duty, the 7% rate applicable to non-fiduciary California claims, or the federal post-judgment interest rate (1.22%) that is often used as a guide to pre-judgment interest. Defendants argue persuasively that to avoid inconsistency the rate should be uniform as between the Successor Trustees and Ted's sons to avoid inconsistencies between the Defendants' obligations to Cassel and the claims among them for indemnity or contribution. See Banks v. Gill Distribution Centers, Inc., 263 F.3d 862, 871-72 (9th Cir. 2001). Applying its discretion the court will award interest and will apply the 1.22% federal rate because Cassel's claims have been preserved by federal judicial estoppel and include claims under federal bankruptcy law.
IV. Conclusion
Separate orders are being issued reflecting the disposition of Cassel's Partial MSJ and Defendants' MTD as stated in this memorandum decision. No judgment is being issued at this time. Cassel has not requested a ruling on punitive or consequential damages or attorneys' fees in his Partial MSJ, but neither have Defendants challenged those damages in their MTD so those issues remain to be resolved.
The court will hold a status conference on February 16, 2007, at 1:30 p.m.