Opinion

Schmalenberg v. Sunwest Bank

Court: United States Bankruptcy Court, W.D. Washington
Filed: Oct 8, 2020
Cited by: 0 cases
Authority: More cited than 30.2%

equitable estoppel is only available 22 as a defense to claims against enforcement of a contract

How later courts described this case

equitable estoppel is only available 22 as a defense to claims against enforcement of a contract
holding that money voluntarily paid cannot be recovered on the ground that the claim was illegal or that there was no liability to pay in the first instance.
referring 10 to the voluntary/involuntary character of the payment
holding 20 that the law of the case doctrine does not preclude a court from reassessing its own legal 21 rulings in the same case, particularly where a final judgment has not been entered

Written by the judges who cited it.

The opinion

Below is a Memorandum Decision of

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3 U.S. Bankruptcy Judge

(Dated as of Entered on Docket date above)

7 UNITED STATES BANKRUPTCY COURT

WESTERN DISTRICT OF WASHINGTON AT TACOMA

In re:

9 Case No. 12-45274

10 JAN W SCHMALENBERG and

BARBARA A SCHMALENBERG,

Debtors.

JAN W SCHMALENBERG and BARBARA Adversary No. 20-04001

13 || SCHMALENBERG,

14 Plaintiffs, MEMORANDUM DECISION ON CROSS-

15 MOTIONS FOR SUMMARY JUDGMENT

"6 SUNWEST BANK, a banking corporation

47 || under the laws of the State of California, and

TIMBERLAND BANK, a banking corporation

18 || under the laws of the State of Washington,

19 Defendants.

I. INTRODUCTION

59 On September 17, 2020, the Court heard the Motion for Partial Summary Judgment for

23 || Sunwest Bank to Disgorge Undisclosed Preconfirmation Excess Fees and Charges filed by

24 ||Jan and Barbara Schmalenberg ("Schmalenbergs," "Debtors" and/or "Plaintiffs"), and

25 || Sunwest Bank's ("Sunwest") Motion for Summary Judgment seeking dismissal of the

MEMORANDUM DECISION ON CROSS-

1 Schmalenbergs' First Amended Complaint with prejudice. The Court took the matters under

2 advisement. Based on the evidence, arguments of counsel, and pleadings submitted, the

3 Court makes the following findings of fact and conclusions of law.1

II. FINDINGS OF FACT

A. Evidentiary Issues.

As a preliminary matter, both parties requested in their responsive pleadings that

documents filed in support of the other party's respective motions be stricken. The

Schmalenbergs sought to strike the email thread attached as Exhibit 1 to the Donahue Decl.,

ECF No. 71. Sunwest sought to strike the report prepared by Richard Peterson, CPA,

attached as Exhibit D to Schmalenberg's Supp. Decl., ECF No. 89 ("Peterson Report").

12 Neither party filed a separate motion to strike. The Court, however, heard argument on both

13 requests at the September 17, 2020 hearing and rendered oral rulings, which the Court

14 incorporates herein.

15 1. Peterson Report.

Jan Schmalenberg describes Peterson in his supplemental declaration as a "forensic

accounting expert." Schmalenberg Supp. Decl. 2:10, ECF No. 89. Sunwest moved to strike

the Peterson Report arguing that it should not be considered on the cross-motions for

summary judgment because Peterson does not qualify as an expert and his report does not

qualify as an expert report. Sunwest cites to Fed. R. Evid. 702 and the U.S. Supreme Court

decision of Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579, 589 (1993). The Court

agrees with Sunwest.

1 Both parties have consented to entry of final orders or judgments by the bankruptcy court in this adversary

proceeding. See Local Rules W.D. Wash. Bankr. 7012-1(a) and (c); 28 U.S.C. § 157 and § 1334(b).

1 As indicated by the Court at the hearing and for the additional reasons stated by the

2 Court on the record, the Schmalenbergs have failed to establish that the Peterson Report

3 should be considered under Fed. R. Evid. 702. According to Rule 702, a witness who is

qualified as an expert may testify in the form of an opinion or otherwise if: (a) the expert's

scientific, technical, or other specialized knowledge will help the trier of fact to understand the

evidence or to determine a fact in issue, (b) the testimony is based on sufficient facts or data;

reliably applied the principles or methods to the facts of the case.

The Peterson Report is very brief and provides little information regarding the

information Peterson relied upon and methods he used to form his opinion. In addition, no

12 foundation was provided as to his qualifications as an expert, although it is likely that this

13 foundation could be established for purposes of trial if necessary. For purposes of summary

14 judgment, however, as already ruled by the Court at the hearing, the Schmalenbergs have

15 failed to establish that he is qualified as an expert and that his opinion will assist the Court in

understanding the evidence or in determining any facts at issue.

2. Settlement Emails.

In support of their Motion for Summary Judgment, Sunwest attached to their legal

counsel Terry Donahue's Declaration an email string from April 14—May 14, 2015, concerning

settlement negotiations with Mr. Donahue and the Schmalenbergs' two legal counsel at that

time, Ben Ellison and Noel Shillito. Donahue Decl. Ex. 1, ECF No. 71. In their pleadings and

at the September 17, 2020 hearing, the Schmalenbergs requested the Court exclude this

24 evidence under Fed. R. Evid. 408 as statements made during compromise negotiations

25 offered "to prove or disprove the validity or amount of a disputed claim[.]" Fed. R. Evid.

1 408(a). The Schmalenbergs argued that the emails do not reflect an integrated and mutual

2 agreement, but if the Court determined they did, Sunwest should be held to its terms. In its

3 pleadings, Sunwest in turn argued that the emails were offered for "another purpose" under

Fed. R. Evid. 408(b): (1) to show that the Schmalenbergs were aware that Sunwest was

seeking to collect accrued interest and the dollar amounts Sunwest considered owing; and (2)

to show that the Schmalenbergs were aware these amounts were not part of the ongoing

bankruptcy payments but were to be collected at the end of the loans. At the hearing, the

Schmalenbergs acknowledged exceptions permitting admission of evidence under Fed. R.

Evid. 408(b).

An unaccepted settlement offer ordinarily is not admissible evidence to show either the

12 existence or amount of liability. Cheyenne River Sioux Tribe v. United States, 806 F.2d 1046,

13 1050 (Fed. Cir. 1986); Fed. R. Evid. 408(a). Fed. R. Evid. 408(b), however, provides that

14 such evidence is admissible for "another purpose," such as "negating a contention of undue

15 delay[.]" The court has "broad discretion" as to whether to admit such evidence and should

weigh the need for the evidence against the possibility of discouraging future settlement

negotiations. Trebor Sportwear Co. v. The Ltd. Stores, Inc., 865 F.2d 506, 511 (2d Cir. 1989).

Sunwest argued that the emails were admissible to negate the Schmalenbergs'

argument of undue delay in providing the preconfirmation accrued interest amounts, citing

PRL USA Holdings, Inc. v. U.S. Polo Ass'n, Inc., 520 F.3d 109, 114—15 (2d Cir. 2008), and to

prove estoppel, citing Bankcard Am., Inc. v. Universal Bancard Sys., Inc., 203 F.3d 477, 484

(7th Cir. 2000). The Court agrees and thus ruled that the emails, while not admissible for

24 purposes of establishing the amount of the accrued interest, were admissible for the other

1 purposes articulated by Sunwest—that the Schmalenbergs were aware of the fact of accrued

2 interest and that this interest would be collected at the end of the loans.

3 3. January 26, 2015 Schmalenberg Note.

In support of their Motion for Partial Summary Judgment and opposition to Sunwest's

cross-motion, the Schmalenbergs rely on a note or an email dated January 26, 2015,

allegedly sent from Mr. Schmalenberg to "Peter Lofgrin [sic]," instructing Mr. Lofgren to

provide him any "costs/charges/present value” prior to any renewal of the secured notes

("Note"). Schmalenberg Decl. Ex. B, ECF No. 67; Schmalenberg Supp. Decl. Ex. B, ECF No.

89. Sunwest disputes the admissibility of this evidence because the Schmalenbergs have not

authenticated it. Specifically, the Note shows no hallmarks of an actual correspondence to

12 another individual or entity—no to/from line; no email header; and no indication it was sent to

13 Sunwest. Sunwest's Mot. Summ. J. 16:15—18, ECF No. 69. Sunwest represents that it has

14 no record of this correspondence. Sunwest's Mot. Summ. J. 17:3—4, ECF No. 69.

15 A trial court can only consider admissible evidence in ruling on a motion for summary

judgment. Fed. R. Civ. P. 56(e). "The requirement of authentication . . . as a condition

precedent to admissibility is satisfied by evidence sufficient to support a finding that the matter

in question is what its proponent claims." Fed. R. Evid. 901(a); Giulio v. BV CenterCal, LLC,

815 F.Supp.2d 1162, 1168—69 (D. Or. 2011). Evidence that is not properly authenticated will

not be considered by the court when reviewing a motion for summary judgment. Orr v. Bank

of America, NT & SA, 285 F.3d 764, 773 (9th Cir. 2002).

The parties did not raise this issue at the September 17, 2020 hearing. Based on the

24 record before it, the Court finds that the Note has not been properly authenticated for the

25 reasons articulated by Sunwest and thus is not admissible for purposes of the cross-motions

1 for summary judgment. Additionally, for reasons set forth in this Memorandum Decision, even

2 if the Court admitted this evidence, it would have no effect on the resolution of the cross-

3 motions before it.

B. Undisputed Facts.

The material facts relevant to the Court's decision are undisputed. Below is a

chronology of the key dates and events in this case.

July 30, 2012: The Schmalenbergs file a voluntary chapter 11 bankruptcy petition

listing 36 outstanding loans with various commercial banks including 9 obligations to Westside

Community Bank ("Westside").

December 31, 2012: Westside files Claim No. 12-1 ("Claim No. 12") in the amount of

12 $1,028,124.33, of which $836,412.34 is designated as secured and $191,711.99 as

13 unsecured.

14 January 11, 2013: The FDIC is named as receiver for Westside. Sunwest acquires all

15 of Westside's contractual rights from the FDIC, including the Schmalenbergs' loans. The loan

agreements contractually obligated the Schmalenbergs to pay attorneys' fees and late fees.

The three promissory notes contained substantially identical provisions expressly allowing the

lender to include a 5% late fee on any unpaid balances (and default interest of 15%). The

loan documents further provided that the "Lender may delay or forgo enforcing any of its rights

or remedies under this Note without losing them." Haden Decl. 2:25—26 & Ex 1, ECF No. 70.

September 29, 2014: The Court enters an Order Confirming Second Amended

Chapter 11 Plan Dated August 26, 2013 ("Confirmed Plan" and "Confirmation Order"). ECF

24 No. 446 (Bankr. Case No. 12-45274). The Confirmation Order amends the earlier filed plan

25 dated August 26, 2013 and addresses each of Sunwest's secured claims: Class II-M

1 designated as loan no. xxxx-4103, Class II-I designated as loan no. xxxx-4012, and Class II-L

2 designated as loan no. xxxx-5393, which is an obligation of JS&MH, LLC. For each of these

3 secured claims, the Confirmation Order provides that "the loan will be extended for a term for

five (5) years from October 2013 through the end of September 2018, at 6%, with principal

and interest payments based upon a 25 year amortization." Conf. Order 6:5—6, 15—16 and

7:1—2, ECF No. 446. For the Class II-M and Class II-I loans, the Confirmation Order further

states that "Sunwest shall provide a current payoff providing outstanding principal, interest,

default interest, fees and costs." Conf. Order 6:8—9, 22—23. The Confirmation Order also

includes a reservation of rights for the Schmalenbergs to pursue an offset for the unsecured

loan with Sunwest. Conf. Order 7:19—23, ECF No. 446.

12 November 14, 2014: The Schmalenbergs execute a Change in Terms Agreement for

13 the Class II claims memorializing the principal and interest only payments set forth in the

14 Confirmed Plan and indicating the final payoff will include all accrued interest not yet paid. No

15 additional legal fees are disclosed. Each Change in Terms Agreement has a "Cross-

Collateralization" clause, as well as a "Continuing Validity" clause providing: "Except as

expressly changed by this Agreement, the terms of the original obligation or obligations,

including all agreements evidenced or securing the obligation(s), remain unchanged and in full

force and effect." Haden Decl. Ex. 3, ECF No. 70; Ellison Decl. Ex. A, ECF No. 65.

Peter Lofgren, Sunwest's Vice President and special creditors officer until October 23,

2016, prepares an Interoffice Memo ("Memo") to Glenn Chesire, Senior Vice President,

indicating that there are fees, interest, and legal expenses the court has indicated Sunwest

24 has a right to collect on the three Schmalenberg loans. The Memo further states that based

25 on the confirmed bankruptcy plan, the Schmalenbergs will begin making "P&I" payments on

1 all notes, and the past due interest and fees will be added to the end of the notes for collection

2 at maturity. Haden Decl. Ex. 4, ECF No. 70; Ellison Decl. Ex. D, ECF No. 65.

3 November 28, 2014: Article VI, paragraph B of the Schmalenbergs' Confirmed Plan

requires that an objection to claim be filed within 60 days of confirmation, or 60 days after a

deficiency claim is filed, whichever is later. This period expired on November 28, 2014 and no

objection to Sunwest's Claim No. 12 was filed.

December 31, 2014: The Schmalenbergs' bankruptcy case is closed.

January 29, 2015: Mr. Lofgren prepares Demand Statements for the Class II loans.

Ellison Supp. Decl. Ex. 1 and Ex. 2 70:12—15, ECF No. 90. For the Class II-L loan xxxx-

5393, the Demand Statement lists a total to pay in full of $68,263.13, including interest as of

12 01/29/15 of $7,602.34; reconveyance fee of $75.00; demand fee of $30.00; and late charges

13 of $353.32. It does not include any amounts for attorneys' fees.

14 For the Class II-I loan xxxx-4012, the Demand Statement lists a total to pay in full of

15 $642,909.55, including interest as of 01/29/15 of $70,755.12; reconveyance fee of $150.00;

demand fee of $30.00; late charges of $11,564.85; title charges of $190.65; legal fees of

$1,495.00; and appraisal fee of $750.00.

For the Class II-M loan xxxx-4103, the Demand Statement lists a total to pay in full of

$242,727.19, including interest as of 01/29/15 of $16,714.07; reconveyance fee of $75.00;

and demand fee of $30.00. It does not include any amounts for attorneys' fees.

April 14—May 14, 2015: Parties engage in settlement negotiations regarding the

amounts owing for the Class II-I loan xxxx-4012 and Class II-M loan xxxx-4103, including the

24 amounts of accrued interest that will be owed upon maturity of the loans. Donahue Decl. Ex.

25 1, ECF No. 71.

1 July 16, 2015: The Schmalenbergs' bankruptcy case is reopened to pursue the

2 Debtors' Motion to Set-Off, Recoup, or Equitably Disallow Claim No. 12.

3 September 17, 2015: The Court enters a Memorandum Decision and Order Denying

Debtors' Objection to Claim No. 12. ECF Nos. 499 and 500 (Bankr. Case No. 12-45274).

October 1, 2015: The Schmalenbergs file a Motion for Reconsideration of Court's

September 17, 2015 Memorandum Decision.

January 27, 2016: The Court enters a Memorandum Decision and Order Denying Alter

Ego Theory in Support of Debtors' Objection to Claim No. 12. ECF Nos. 536 and 537 (Bankr.

Case No. 12-45274).

July 12, 2016: Letter from Sunwest's counsel to Schmalenbergs' counsel stating:

12 Sunwest Bank has approached Mr. Schmalenberg about addressing the

outstanding attorneys' fees and costs as part of its secured claim. Mr.

13 Schmalenberg appears to be unwilling to discuss such. If that issue cannot be

resolved, I am reviewing the matter for purpose of a default and my additional

14 fees will be added to the outstanding amount owing.

15 Haden Decl. Ex. 6, ECF No. 70; Donahue Decl. Ex. 2, ECF No. 71.

September 29, 2016: The Confirmed Plan required that unsecured claims be paid in

full two years from the date of confirmation. Conf. Plan Art. V.B.6, ECF No. 446 (Bankr. Case

No. 12-45274). This period expired September 29, 2016, and the unsecured debt was not

paid.

December 5, 2016: The Schmalenbergs' bankruptcy case is re-closed.

December 21, 2016: Ticor Title Company sends a Payoff Request to Sunwest Bank

for the Class II-M loan xxxx-4103. Schmalenberg Supp. Decl. Ex. A, ECF No. 89.

24 December 29, 2016: Sunwest prepares a Demand Statement for the Class II-M loan

25 xxxx-4103, listing a total to pay in full of $237,104.68, including interest to 12/30/2016 of

1 $725.00; "interest waived payoff as of 4/29/15" of $4,231.98; reconveyance fee of $75.00; and

2 demand fee of $30.00. The Demand Statement specifies that the payoff figures are subject to

3 final verification by Noteholders. It does not include any amounts for attorneys' fees.

Schmalenberg Supp. Decl. Ex. C, ECF No. 89.

August 3, 2017: The Schmalenbergs file another Motion to Reopen Chapter 11 Case

to resolve a dispute with Heritage Bank.

October 2, 2017: Letter from Sunwest's counsel to the Schmalenbergs' counsel

providing "notice of event of default as required by Paragraph J" of the Confirmed Plan

regarding the Class VI general unsecured claims. Haden Decl. Ex. 7, ECF No. 70.

October 4, 2017: Letter from Sunwest's counsel to the Schmalenbergs' counsel

12 providing "notice of event of default as required by Paragraph J" of the Confirmed Plan for

13 failure to make payments on the Class II-L loan held by JS MH Properties, LLC. Haden Decl.

14 Ex. 8, ECF No. 70.

15 November 7, 2017: Sunwest prepares a complaint against the Schmalenbergs that is

filed in Pierce County Superior Court (Unsecured Claims Lawsuit) under case number 17-2-

13696-0 for failure to make payments on the Class VI general unsecured claims as required

by the Confirmed Plan and the Confirmation Order. Haden Decl. Ex. 9, ECF No. 70.

January 11, 2018: In response to the Schmalenbergs' request for a final payoff figure

for all three Class II secured claims, Sunwest provides Demand Statements for each loan.

The legal fees in the Demand Statements total $91,156.75. Haden Decl. Ex. 12, ECF No. 70.

January 24, 2018: Sunwest issues another set of Demand Statements for each of the

24 Class II secured claims to Chicago Title Company of Washington. These statements also set

25 forth $91,156.75 in total legal fees. Haden Decl. Ex. 13, ECF No. 70.

1 For the Class II-I loan xxxx-4012, the Demand Statement lists a total to pay in full of

2 $569,441.75, including the following:

3 Principal Balance $457,828.28

Interest to 2/1/18 $1,363.52

Title Charges $190.65

5 Interest Waived Added to Payoff as of 4/29/15 $20,050.73

Legal Fees $1,495.00

6 Appraisal Reimbursement-credit GL 9300068 $750.00

Demand Fee $30.00

7 Late Charges Waived and put to payoff charges per renewal $5,699.21

Reconveyance Fee $75.00

8 Legal Expenses -collect at payoff and credit GL 8700056 $51,959.36

9 For the Class II-M loan xxxx-4103, the Demand Statement lists a total to pay in full of

$264,627.75, including the following:

Principal Balance $226,764.08

12 Interest to 2/1/18 $783.19

Interest waived added to payoff as of 4/29/15 $4,231.98

13 Reconveyance Fee $75.00

Demand Fee $30.00

14 Legal Expense Fee $32,743.50

15 For the Class II-L loan xxxx-5393, the Demand Statement lists a total to pay in full of

$71,001.23, including the following:

Principal Balance $53,756.46

18 Interest to 2/1/18 $132.55

Late Charge $676.20

19 Late Fee Deferred to end of loan per court $334.00

Demand Fee $30.00

20 Reconveyance Fee $75.00

Interest Waived Added to payoff per renewal of 11/14/14 $9,543.13

21 Legal Fee $6,453.89

January 25, 2018: Email from Debtor Jan Schmalenberg to Michael Haden

acknowledging receipt of the Demand Statements and stating that they "are about $150K

more than expected for all three." Debtor further states that "we will ask the Court to resolve

1 these issues, so when they are really due, they can be financed." Haden Decl. Ex. 14, ECF

2 No. 70.

3 March 6, 2018: The Schmalenbergs resolve the Unsecured Claims Lawsuit by

executing a Forbearance Agreement and Confession of Judgment, pursuant to which

Sunwest agreed to forbear from taking collection efforts on the unsecured loans until August

31, 2018.2 Haden Decl. Exs. 10 and 11, ECF No. 70.

April 17, 2018: The parties stipulate to dismissal of the Unsecured Claims Lawsuit with

prejudice by agreed order. Donahue Decl. Ex. 3, ECF No. 71.

May 2, 2018: The Schmalenbergs pay off the secured Class II-M loan by wire transfer

in the amount of $263,378.58. Pursuant to the Loan Payoff Statement dated May 2, 2018, the

12 payoff amount includes "INTEREST WAIVED ADDED TO PAYOFF AS OF 04/29/15" of

13 $4,231.98 and a "LEGAL EXPENSE FEE" of $32,743.50. Haden Decl. Ex. 16, ECF No. 70.

14 The Schmalenbergs did not reserve any rights as to the amounts paid. Sunwest released its

15 liens in the collateral securing the obligation. Haden Decl. 13:24—25, ECF No. 70.

May 25, 2018: Letter from the Schmalenbergs' counsel to Sunwest's counsel raising

concerns about the amount of the legal fees and other charges set forth in the January 24,

2018 Demand Statements. Haden Decl. Ex. 17, ECF No. 70.

June 1, 2018: Response from Sunwest's counsel to the Schmalenbergs' counsel

challenging the Schmalenbergs' statement that such fees were "unexpected" and setting forth

Sunwest's explanation as to why the fees and other charges were permissible, including

directing counsel to the loan documents and Confirmation Order. Donahue Decl. Ex. 5, ECF

24 No. 71.

2 The Forbearance Agreement lists August 31, 2018, while the Confession of Judgment lists both August 30 and

August 31, 2018, as the forbearance date.

1 July 19, 2018: The Schmalenbergs file a Complaint for Declaratory Relief and

2 Damages in Pierce County Superior Court Case No. 18-2-09929-9 ("Declaratory Action"),

3 seeking nearly identical relief to what is being sought in the current adversary proceeding.

Haden Decl. Ex. 19, ECF No. 70.

August 24, 2018: Sunwest provides Demand Statements for the two remaining

secured loans identified as Class II-I xxxx-4012 and Class II-L xxxx-5393. These Demand

Statements contain deferred interest, late charges, and attorneys' fees and costs in the final

payoff amounts. For the Class II-I loan xxxx-4012, the total payoff is $563,335.11, with the

same amounts in the January 24, 2018 Demand Statement except for the following:

Principal Balance $481,432.22

Interest to August 31, 2018 $1,265.94

12 Recording of Reconveyance $127.00

Recording of Assignment of Lease and Rent Release $130.00

13 Recording of Hazardous Release $130.00

14 For the Class II-L loan xxxx-5393, the total payoff is $70,205.34, with the same

15 amounts in the January 24, 2018 Demand Statement except for removal of the $75

reconveyance fee and changes to the following:

Principal Balance $52,911.19

18 Interest to August 31, 2018 $121.69

Late Charges $811.44

Haden Decl. Ex. 20, ECF No. 70.

August 29, 2018: The Schmalenbergs voluntarily dismiss the Declaratory Action.

Haden Decl. 15, ECF No. 70; Donahue Decl. 6, ECF No. 71.

August 31, 2018: The Schmalenbergs wire transfer Sunwest the payoff on the Class

24 II-I and Class II-L loans. The total payoff on the Class II-I loan xxxx-4012 is $563,572.53,

25 including legal fees, accrued interest, and late charges. The total payoff on the Class II-L loan

1 xxxx-5393 is $70,248.84, including legal fees, default interest, and late charges. Haden Decl.

2 Ex. 20, ECF No. 70. The Schmalenbergs do not reserve any rights as to the amounts paid.

3 Sunwest releases its collateral securing the loans. Haden Decl. 16:1—3, ECF No. 70.

December 10, 2019: The Schmalenbergs' bankruptcy case is re-opened to hear the

Schmalenbergs' motion for entry of a chapter 11 discharge.

December 23, 2019: The Schmalenbergs’ counsel files a letter requesting the Court

keep their case open after the discharge is entered in order to pursue an adversary

proceeding to recoup inflated pay-off amounts made to creditors. ECF No. 598 (Bankr. Case

No. 12-45274). Sunwest files a letter in opposition. ECF No. 599 (Bankr. Case No. 12-

45274).

12 January 21, 2020: The Schmalenbergs file the current adversary proceeding alleging

13 one cause of action for breach of contract and damages.

14 January 20, 2020: Defendants Sunwest and Timberland Bank each file an Answer,

15 Defenses, Affirmative Defenses and Counterclaims.

January 22, 2020: The Court enters a Stipulated Order Re Entry of Discharge between

Sunwest and the Schmalenbergs, granting the Debtors’ discharge and ordering that “any

determination or award of an entitlement to attorneys’ fees and costs awarded in any

subsequent action filed by Debtors, in favor of Sunwest Bank or Timberland Bank, whether

arising out of a prepetition contract or otherwise, are excepted from said discharge.” ECF No.

607 (Bankr. Case No. 12-45274).

January 30, 2020: The Schmalenbergs’ bankruptcy case is re-closed.

24 April 28, 2020: Sunwest files a Motion for Judgment on the Pleadings, seeking

25 dismissal of the Schmalenbergs’ complaint with prejudice.

1 May 26, 2020: The Court enters stipulated order dismissing Timberland Bank with

2 prejudice.

3 May 28, 2020: The Court converts Sunwest's motion to dismiss into a motion for

summary judgment to be heard after the parties have an opportunity to conduct limited

discovery, the Schmalenbergs have an opportunity to seek to amend their complaint, and both

parties have an opportunity to file new summary judgment pleadings and/or motions.

June 1, 2020: The Schmalenbergs file a motion to amend complaint.

July 1, 2020: After an objection by Sunwest and a contested hearing on June 25,

2020, the Court enters an order granting the Schmalenbergs' motion to amend complaint.

ECF No. 58. The Schmalenbergs file a First Amended Complaint ("FAC") the same day. In

12 the FAC, the Schmalenbergs assert one cause of action for "estoppel/waiver or breach of

13 contract and breach of the plan of reorganization."

14 July 15, 2020: Sunwest files an Amended Answer, Defenses, Affirmative Defenses

15 and Counterclaims.

August 6, 2020: The Schmalenbergs file a motion for partial summary judgment

regarding preconfirmation fees and charges and requesting the Court require Sunwest

disgorge the disputed preconfirmation fees and charges.

August 11, 2020: The Schmalenbergs file an Answer to Sunwest’s Amended

Counterclaims.

August 19, 2020: Sunwest files a motion for summary judgment, seeking to dismiss

the FAC with prejudice.

24 September 17, 2020: The Court hears argument on the parties' cross-motions for

25 summary judgment and takes the matter under advisement.

1 III. DISCUSSION AND CONCLUSIONS OF LAW

2 A. Introduction.

3 The party seeking summary judgment bears the burden of demonstrating that there are

no genuine issues of material fact and that the movant is entitled to judgment as a matter of

law. Fed. R. Civ. P. 56(a), made applicable by Fed. R. Bankr. P. 7056;3 Celotex Corp. v.

Catrett, 477 U.S. 317, 322—23, 106 S. Ct. 2548 (1986). Summary judgment should be

granted if, after taking all reasonable factual inferences in the nonmoving party's favor, the

court finds that no reasonable jury could find for the nonmoving party. Anderson v. Liberty

Lobby, Inc., 477 U.S. 242, 255, 106 S. Ct. 2505 (1986). The responding party must present

affirmative evidence in order to defeat a properly supported motion for summary judgment.

12 The responding party may not rest upon mere allegations or denials of his pleadings, but must

13 set forth specific facts showing that there is a genuine issue for trial. Liberty Lobby, 477 U.S.

14 at 256.

15 "'[W]hen simultaneous cross-motions for summary judgment on the same claim are

before the court, the court must consider the appropriate evidentiary material identified and

submitted in support of both motions, and in opposition to both motions, before ruling on each

of them.'" Tulalip Tribes of Wash. v. Washington, 783 F.3d 1151, 1156 (9th Cir. 2015) (quoting

Fair Hous. Council of Riverside Cnty., Inc. v. Riverside Two, 249 F.3d 1132, 1134 (9th Cir.

2001)); see also 10A Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure

§ 2720 (4th ed.) ("The court must rule on each party's motion on an individual and separate

basis, determining, for each side, whether a judgment may be entered in accordance with the

24 Rule 56 standard."); see also ACLU of Nev. v. City of Las Vegas, 466 F.3d 784, 790—91 (9th

3 Unless otherwise indicated, all chapter, section and rule references are to the Federal Bankruptcy Code,

11 U.S.C. §§ 101—1532, and to the Federal Rules of Bankruptcy Procedure, Rules 1001—9037.

1 Cir. 2006) ("We evaluate each motion separately, giving the nonmoving party in each instance

2 the benefit of all reasonable inferences.") (citations and internal quotation marks omitted).

3 B. Sunwest's Motion for Summary Judgment.

In the FAC, the Schmalenbergs assert one cause of action alleging what appears to be

three different theories in support of their prayer for relief to have Sunwest disgorge at least

$135,000 in fees and costs: estoppel/waiver, violation of the Confirmation Order, and breach

of contract of the Confirmed Plan, for failure to promptly produce full payoff amounts including

accrued postpetition preconfirmation interest and fees.

It is undisputed that during the course of the summary judgment litigation, the

Schmalenbergs' theories on which they predicate their motion for partial summary judgment—

12 and defend against Sunwest's cross-motion—have shifted for both preconfirmation and

13 postconfirmation fees. According to the Schmalenbergs, this is in large part due to new

14 documents provided during discovery. Based on the representations of Schmalenbergs'

15 counsel at the September 17, 2020 hearing and in the Plaintiffs' Reply in Support of Their

Motion for Summary Judgment ("Plaintiffs' Reply"), ECF No. 92, the Court understands the

Schmalenbergs' final argument regarding preconfirmation fees to be as follows: The

Confirmation Order required Sunwest to promptly provide a current payoff quote of all

preconfirmation fees and costs. While Sunwest arguably complied with the Confirmation

Order by providing payoff quotes on January 26, 20154—within four months of confirmation—

it failed to promptly disclose preconfirmation attorney's fees of $28,426.25,5 accrued interest

24 4 The Demand Statements are in fact dated January 29, 2015.

25 5 The $28,426.25 number appears to come from a payment history prepared by Sunwest's counsel listing

payments received by the law firm from Sunwest related to the Schmalenbergs' case. The actual amount listed is

$28,426.75. Ellison Decl. Ex. F, ECF No. 65. The Court notes that this number differs slightly from the number

1 of $9,543.13 for the Class II-L loan xxxx-5393, and late fees of $5,699.21 for the Class II-I

2 loan xxxx-4012.6 As such, they argue Sunwest is estopped from asserting preconfirmation

3 fees in excess of those disclosed at that time.

Regarding postconfirmation fees, the Court understands from the pleadings that the

Schmalenbergs assert Sunwest improperly charged postconfirmation attorneys' fees to the

secured loans even though those fees arose primarily from litigation relating to the

Schmalenbergs' unsecured loans with Sunwest. The Schmalenbergs contend that to the

extent the fees were attributable to the unsecured loan and Sunwest failed to charge them

when the Schmalenbergs paid off the unsecured loan, Sunwest must disgorge these fees.7

To support its motion for summary judgment, and in defense of the Schmalenbergs'

12 motion for partial summary judgment, Sunwest contends that under the voluntary payment

13 doctrine, the Schmalenbergs are precluded from seeking reimbursement of any amounts they

14 paid off with the secured loans. Sunwest argues that for this reason, it is entitled to dismissal

15 of the FAC with prejudice. To the extent Sunwest establishes that the voluntary payment

doctrine applies as a matter of law, this will resolve both the Schmalenbergs' motion for partial

summary judgment and Sunwest's motion for summary judgment.

21 provided by Sunwest in its Supplemental Interrogatory Responses of $28,461.90. Ellison Decl. Ex. H, ECF No.

65. As the difference is minimal and nonmaterial, the Court will rely on the number as stated by Schmalenbergs'

22 counsel for purposes of this decision.

6 These are the only preconfirmation fees disputed by the Schmalenbergs.

7 The Schmalenbergs are not seeking summary judgment as to these postconfirmation fees. Sunwest, however,

seeks summary judgment dismissing the FAC entirely. As discussed subsequently, if the Court concludes that

the voluntary payment doctrine applies, Schmalenbergs are precluded from seeking reimbursement of all

25 amounts, incurred both preconfirmation and postconfirmation, paid to Sunwest to payoff the secured loans. See

Speckert v. Bunker Hill Arizona Mining Co., 6 Wn.2d 39, 52 (1940) (holding that money voluntarily paid cannot

be recovered on the ground that the claim was illegal or that there was no liability to pay in the first instance.)

1 The voluntary payment doctrine is a "well-settled" rule in Washington State. See

2 Maxwell v. Provident Mut. Life Ins. Co. of Philadelphia, 180 Wash. 560, 567 (1935). Under

3 the voluntary payment doctrine, a person cannot "either by way of set-off or counterclaim, or

by direct action, recover back money which he has voluntarily paid with a full knowledge of all

the facts, and without any fraud, duress, or extortion, although no obligation to make such

payment existed." Maxwell, 180 Wash. at 567 (quoting 48 C.J. § 280, pp. 734—736). "This

doctrine exists because of 'the stabilizing legal principle preventing payors from disturbing the

status quo by demanding reimbursement subsequently of payments made by them voluntarily

with full knowledge of [the] facts.'" Sanders v. Washington Mut. Home Loans, Inc. ex rel.

Washington Mut. Bank, 248 F. App'x 513, 516 (5th Cir. 2007) (quoting Whitehall Oil Co. v.

12 Boagni, 255 La. 67, 229 So. 2d 702, 705 (1969)). The voluntary payment doctrine is an

13 affirmative defense. Armer v. OpenMarket, Inc., No. C08-1731RSL, 2009 WL 2475136, at *3

14 (W.D. Wash. July 27, 2009). As such, Sunwest has the burden of proving it applies. See

15 Kastanis v. Educ. Employees Credit Union, 122 Wn.2d 483, 493 (1993) (en banc) (holding

that the defendant bears the burden of proof where it asserts an affirmative defense). Once

the defendant shows the doctrine applies, "the burden shifts to [the Schmalenbergs] to

demonstrate that an exception to the voluntary payment doctrine applies." Bank of N.Y.

Mellon Trust Co. v. SFR Invs. Pool 1, LLC, No. 2:18-cv-00978, 2019 WL 6307606, at *2 (D.

Nev. Nov. 25, 2019). "The question whether a payment is voluntary or involuntary is one of

law where the facts are undisputed . . . ." Speckert, 6 Wn.2d at 52.

Sunwest contends that the Schmalenbergs' claim for disgorgement, for both

24 preconfirmation and postconfirmation amounts and under any legal theory asserted, is

25 prohibited because the Schmalenbergs voluntarily paid the loans in full, with full knowledge of

1 all of the facts, and without any evidence of fraud or duress. Sunwest relied on such

2 payments in releasing its liens in the collateral. The Schmalenbergs respond by arguing that

3 (1) the voluntary payment doctrine is inapplicable, and (2) if applicable, does not preclude

their claim under the facts of this case.

1. Schmalenbergs' Arguments that the Voluntary Payment Doctrine is

6 Inapplicable.

7 The Schmalenbergs challenge the applicability of the voluntary payment doctrine under

8 the law of the case and because the doctrine is not applicable to the claims asserted.

9 As ruled by the Court at the September 17 hearing, the Schmalenbergs are incorrect

that it is the law of the case that the voluntary payment doctrine does not apply. Under the

law of the case doctrine, "a court is ordinarily precluded from reexamining an issue previously

decided by the same court, or a higher court, in the same case." Richardson v. U.S., 841

F.2d 993, 996 (9th Cir. 1988). Schmalenbergs assert that this Court ruled that the voluntary

payment doctrine does not apply when it allowed the Schmalenbergs to file the FAC.

Although the Schmalenbergs are correct that Sunwest objected to the Schmalenbergs' motion

to amend the complaint and raised futility as a basis for denying the motion, the Court did not

18 render a ruling on the merits of the voluntary payment doctrine in allowing the amendment.

19 See Askins v. US Dep't of Homeland Sec., 899 F.3d 1035, 1042—43 (9th Cir. 2018) (holding

20 that the law of the case doctrine does not preclude a court from reassessing its own legal

21 rulings in the same case, particularly where a final judgment has not been entered). To the

contrary, at previous hearings held in this case, the Court made it clear that the voluntary

payment doctrine has relevance to the Court's determination of the legal issues in this case.

The voluntary payment doctrine was clearly set forth in Sunwest’s answer to the FAC.

Amended Answer ¶ 89, ECF No. 60.

1 The Schmalenbergs further assert that the voluntary payment doctrine does not apply

2 in this case because it is really a violation-of-a-court-order case as opposed to a breach-of-

3 contract case. No matter how the issue is framed, it is undisputed that Washington State

contract law applies to interpretation of the Confirmed Plan as incorporated into the

Confirmation Order. See Hillis Motors, Inc. v. Hawaii Auto. Dealers' Assoc., 997 F.2d 581,

588 (9th Cir. 1993). It is also undisputed that Washington State has adopted the voluntary

payment doctrine. Accordingly, the voluntary payment doctrine is applicable to this case.8

2. Application to the Facts of this Case.

It is undisputed that the Schmalenbergs paid the amounts it seeks to recover when

they paid off the Class II-M loan on May 2, 2018, and the Class II-I and Class II-L loans on

12 August 31, 2018. It is also undisputed that Sunwest released its collateral securing the loans

13 after receiving the payoffs. Despite these undisputed facts, the Schmalenbergs contend that

14 the voluntary payment doctrine should not be applied in this case because the payments were

15 (1) made under "protest," (2) not made with full knowledge of all of the facts, and (3) made

under duress.

The record is devoid of any evidence to support the Schmalenbergs' allegation that

they made the payments to Sunwest under "protest." It is undisputed that Jan Schmalenberg

is a sophisticated business person with extensive experience in the banking industry and was

8 The cases cited by the Schmalenbergs in opposition to application of the voluntary payment doctrine are

22 factually distinguishable and do not control. In Indoor Billboard/Washington, Inc. v. Integra Telecom of

Washington, Inc., 162 Wn.2d 59, 85—86 (2007), the Washington Supreme Court recognized that the voluntary

23 payment doctrine generally is applied in a contract context and determined that the doctrine is inappropriate as

an affirmative defense in the Consumer Protection Act ("CPA") context. The Schmalenbergs have not alleged a

CPA claim. Rather, the issue here is the Confirmed Plan, which is construed as a contract. In In re Cascade

Roads, Inc., 34 F.3d 756, 760 (9th Cir. 1994), the Ninth Circuit Court of Appeals determined that an appeal was

not moot even though the appealing party had already paid a judgment in full. The voluntary payment doctrine

25 was not an issue before the Ninth Circuit. Moreover, the Confirmation Order, while a court order, contains terms

of the Confirmed Plan—again, construed as a contract—on which the Schmalenbergs base their FAC.

1 represented by counsel throughout the time period at issue. It is also undisputed that the

2 payoffs were completed without any reservations of rights.9 Although the Schmalenbergs

3 raised concerns regarding Sunwest's payoff figures at various times, including in the May 25,

2018 letter from the Schmalenbergs' counsel to Sunwest's counsel (Haden Decl. Ex. 17, ECF

No. 70) and in the filing of the Declaratory Action, the Declaratory Action was later voluntarily

dismissed by the Schmalenbergs just two days prior to the payoffs on the Class II-I and Class

II-L loans. Even if the Schmalenbergs could establish that the payments were made under

protest, Washington courts hold that "the fact that the person making the payments files a

written protest at the time does not change its character." Speckert, 6 Wn.2d at 52 (referring

to the voluntary/involuntary character of the payment).

12 The Court further concludes that the record supports and Sunwest has established as

13 a matter of law that the Schmalenbergs paid off the secured loans with full knowledge of all

14 the facts. It is undisputed that the parties' loan agreements contractually obligated the

15 Schmalenbergs to pay attorneys' fees and late fees. Haden Decl. Ex 1, ECF No. 70. It is

further undisputed that on July 12, 2016, Sunwest's counsel sent Debtor's counsel a letter

about approaching Mr. Schmalenberg to "address[] the outstanding attorneys' fees and costs

as part of its secured claim." Haden Decl. Ex 6, ECF No. 70; Donahue Decl. Ex. 2, ECF No.

71. While one subsequent Demand Statement for the Class II-M loan only, dated December

29, 2016, omitted attorneys' fees, there is no dispute that the Schmalenbergs had full

knowledge that Sunwest sought to recover the disputed charges as part of its claim as of the

time of the January 11 and 24, 2018 Demand Statements. The Schmalenbergs

25 9 This is in stark contrast to the Confirmed Plan, which specifically included a reservation of rights regarding the

unsecured obligation of Sunwest, thereby evidencing the Schmalenbergs' and their counsels' knowledge of the

ability to preserve such rights. Confirmation Order 7, ECF No. 446.

1 acknowledged receipt of these Demand Statements by email dated January 25, 2018. Haden

2 Decl. Ex. 14, ECF No. 70. Execution of the Forbearance Agreement on the unsecured loans

3 took place less than two months after receipt of the Demand Statements and payoff on the

Class II-M loan took place approximately three months after receipt of these Demand

Statements. The updated Demand Statements provided for the Class II-I and II-L loans dated

August 24, 2018, also contained deferred interest, late charges, and attorneys' fees and costs

in the final payoff amounts. The Class II-I and Class II-L loans were paid off a week after

these final Demand Statements were provided.

The Schmalenbergs' final argument is that the voluntary payment doctrine does not

apply because the payments were made under "coercive circumstances." Specifically, the

12 Schmalenbergs assert:

13 Here, the Court could certainly find that the last minute assertion of fees in

January 2018, eight months before final payoff was due in September 2018, was

14 inappropriate on this basis, because were the Debtors to reopen the bankruptcy

case at that point to challenge the newly-disclosed fees, they would lose the very

15 refinancing they were trying [to] protect, thereby putting their discharge at risk.

Plaintiffs' Mot. for Partial Summ. J. 19:5—10, ECF No. 64.

Not only did the Schmalenbergs fail to provide any evidence beyond mere speculation

of the alleged consequences they would face if the payments were not made, such allegations

even if true, do not rise to the level of duress or business compulsion, nor do they raise a

factual issue that would preclude summary judgment. A party seeking to establish duress has

the burden of doing so by clear, cogent, and convincing evidence. In re Welfare of J.N., 123

Wn. App. 564, 577 (2004). Proof of more than "reluctance to accept or financial

24 embarrassment" is required and the "mere fact that a contract is entered into under stress or

25 pecuniary necessity is insufficient." Retail Clerks Health & Welfare Tr. Funds v. Shopland

1 Supermarket, Inc., 96 Wn.2d 939, 944 (1982) (en banc) (citations omitted). "Generally,

2 circumstances must demonstrate a person was deprived of his free will at the time he entered

3 into the challenged agreement in order to sustain a claim of duress." Retail Clerks, 96 Wn.2d

at 944. The fact that the Schmalenbergs could potentially lose refinancing opportunities if

they reopened their bankruptcy to challenge the disputed amounts is insufficient to establish

that the Schmalenbergs were deprived of their free will when they tendered the payments. It

is also irrelevant that the payoffs were due in September 2018. Although the Schmalenbergs

were undeniably cognizant of this deadline, such concerns are again, even if true, insufficient

evidence of duress. "[A] mere threat to exercise a legal right made in good faith is neither

duress nor coercion in law." Pleuss v. City of Seattle, 8 Wn. App. 133, 137 (1972). The

12 Schmalenbergs' argument also ignores the fact that the Schmalenbergs did in fact raise

13 challenges to such fees in multiple forums and on multiple occasions. Despite pursuing such

14 challenges, the Schmalenbergs later voluntarily dismissed the lawsuits and made the

15 payments without filing any additional requests for relief until this adversary proceeding was

filed almost a year and a half later. Accordingly, even if the Schmalenbergs' allegations could

be established, the Schmalenbergs are unable to demonstrate that the payments were made

under duress.

For each of the reasons stated above, the Court concludes that Sunwest has

established as a matter of law that the voluntary payment doctrine prohibits the

Schmalenbergs from recovering any amounts paid to Sunwest. This includes all of the

preconfirmation and postconfirmation fees and costs at issue under any theory asserted in the

1 FAC. Accordingly, Sunwest is entitled to summary judgment dismissing the Schmalenbergs'

2 FAC.10

3 C. Schmalenbergs' Motion for Partial Summary Judgment.

Even if Sunwest did not establish that it is entitled to summary judgment on the

voluntary payment doctrine, the Court concludes that the Schmalenbergs have not

established that they are entitled to partial summary judgment as a matter of law on their

claim for Sunwest's disgorgement of preconfirmation attorneys' fees, accrued interest on the

Class II-L xxxx-5393 loan, and late fees on the Class II-I xxxx-4012 loan. As mentioned

above, the Schmalenbergs' legal theories in support of their requested relief have shifted

throughout this adversary proceeding. Based on the Schmalenbergs' counsel's argument at

12 the September 17 hearing, the Court understands that the Schmalenbergs now rely solely on

13 estoppel to support their FAC.11

14 The burden is on the moving party to demonstrate it is entitled to summary judgment as

15 a matter of law. Stanley v. Novartis Pharm. Corp., 11 F. Supp. 3d 987, 994 (C.D. Cal. 2014)

(citing Margolis v. Ryan, 140 F.3d 850, 852 (9th Cir.1998); Retail Clerks Union Local 648 v.

Hub Pharmacy, Inc., 707 F.2d 1030, 1033 (9th Cir.1983)). "The moving party bears the initial

burden of identifying the elements of the claim or defense and evidence that it believes

demonstrates the absence of an issue of material fact." Stanley, 11 F. Supp. at 994 (citing

21 10 In its pleadings and the [Proposed] Order Granting Sunwest Bank's Motion for Summary Judgment (ECF No.

69-2), Sunwest seeks dismissal of the FAC with prejudice. A grant of summary judgment resolves the issues on

22 the merits and thus is necessarily with prejudice. See Rivera v. PNS Stores, Inc., 647 F.3d 188, 191 (5th Cir.

2011).

11 In the Plaintiffs' Reply, the Schmalenbergs acknowledge that Sunwest did provide payoff quotes early and

often, thereby complying with the terms of the Confirmation Order, albeit "imperfectly." Plaintiffs' Reply 8, ECF

No. 92. According to the Schmalenbergs, as represented both in their pleadings and at the September 17

hearing, their breach of contract claim became "obsolete." Plaintiffs' Reply 8:1, ECF No. 92. Based on this

25 concession, and the Schmalenbergs' decision not to pursue the breach of contract theory, the Court concludes

that the Schmalenbergs have not established that they are entitled to partial summary judgment for breach of

contract.

1 Celotex, 477 U.S. at 323). "In other words, the moving party must show that, on all the

2 essential elements of its case on which it bears the burden of proof at trial, no reasonable jury

3 could find for the nonmoving party. "If the moving party makes such an affirmative showing, it

is entitled to summary judgment unless the nonmoving party, in response, 'come[s] forward

with significant, probative evidence demonstrating the existence of a triable issue of fact.'"

United States v. Four Parcels of Real Prop. in Greene & Tuscaloosa Ctys. in State of Ala.,

941 F.2d 1428, 1438 (11th Cir. 1991) (quoting Chanel, Inc. v. Italian Activewear of Florida,

Inc., 931 F.2d 1472, 1477 (11th Cir. 1991) (citing Celotex, 477 U.S. at 331 (Brennan, J.

dissenting)).

Despite having included estoppel in their FAC, briefing, and oral argument, the

12 Schmalenbergs at no point have set forth the elements required to establish estoppel. Nor

13 have the Schmalenbergs stated with any particularity what type of estoppel they are relying on

14 in seeking Sunwest's disgorgement of the amounts paid. As such, the Schmalenbergs have

15 failed to meet their burden on summary judgment. Nonetheless, the Court concludes that the

Schmalenbergs are not entitled to summary judgment under any of the types of estoppel

typically raised in the bankruptcy context: collateral, judicial, equitable, and promissory.

Collateral estoppel is inapplicable to the facts of this case because it is invoked when

an issue has already been litigated and decided in a prior proceeding. See Stephens v.

Bigelow (In re Bigelow), 271 B.R. 178 (9th Cir. BAP 2001). Although the issues raised in the

FAC have been the subject of prior legal proceedings, the issues raised in the FAC have not

previously been litigated and decided.

24 Judicial estoppel is an equitable doctrine invoked by a court at its discretion to "'prohibit

25 a party from prevailing in one phase of a case on an argument and then relying on a

1 contradictory argument to prevail in another phase.'" Cont'l Cas. Co. v. Chatz as Tr. for

2 CFB/WFB Liquidating Tr., 591 B.R. 396, 411 (N.D. Cal. 2018) (quoting New Hampshire v.

3 Maine, 532 U.S. 742, 749 (2001)). The Ninth Circuit "invokes judicial estoppel not only to

prevent a party from gaining an advantage by taking inconsistent positions, but also because

of 'general consideration[s] of the orderly administration of justice and regard for the dignity of

judicial proceedings,' and to 'protect against a litigant playing fast and loose with the courts.'"

Hamilton v. State Farm Fire & Cas. Co., 270 F.3d 778, 782 (9th Cir. 2001) (quoting Russell v.

Rolfs, 893 F.2d 1033, 1037 (9th Cir. 1990)). The doctrine of judicial estoppel, however, is an

affirmative defense, Copelan v. Techtronics Indus. Co., 95 F. Supp. 3d 1230, 1240 (S.D. Cal.

2015) (citations omitted), thus, it cannot serve as an affirmative theory for relief to support the

12 Schmalenbergs' cause of action against Sunwest. See Fid. & Guar. Life Ins. Co. v. Albertson,

13 No. 07cv00045 BTM(LSP), 2007 WL 4224628, at *1 (S.D. Cal. Nov. 26, 2007) (waiver and

14 estoppel are affirmative defenses, not causes of action); Fed. R. Civ. P. 8(c).

15 Equitable estoppel is unavailable to the Schmalenbergs as a theory of recovery

because equitable estoppel also is a defense, not a cause of action.

The differences between the doctrines can best be explained by observing that

18 promissory estoppel is used to create a cause of action, whereas equitable

estoppel is used to bar a party from raising a defense or objection it otherwise

19 would have, or from instituting an action which it is entitled to institute.

Promissory estoppel is a sword, and equitable estoppel is a shield.

Jablon v. United States, 657 F.2d 1064, 1068 (9th Cir. 1981). See also McCormick v. Lake

Washington School Dist., 99 Wn. App. 107, 117 (1999) (equitable estoppel is only available

as a defense to claims against enforcement of a contract).

24 Finally, promissory estoppel, although a cause of action, does not apply where a

25 contract governs. Westcott v. Wells Fargo Bank, N.A, 862 F. Supp. 2d 1111, 1116 (W.D.

1 Wash. 2012) (citing Klinke v. Famous Recipe Fried Chicken, Inc., 94 Wn.2d 255, 261 n.4

2 (1980)). Because a confirmed chapter 11 plan is construed as a contract, Hillis Motors, Inc.,

3 997 F.2d at 588, promissory estoppel does not apply in this case.

For the reasons stated above, the Schmalenbergs have failed to identify and establish

a theory of estoppel that applies. As this is the only theory upon which the Schmalenbergs

base their claim for preconfirmation fees and costs, the Schmalenbergs have not established

that they are entitled to summary judgment as a matter of law, and their motion is denied.

More importantly, as set forth above, all claims for relief contained in the FAC are precluded

based on the Court's holding that the voluntary payment doctrine applies.

In their Amended Answer to the FAC, Sunwest asserted two counterclaims against the

12 Schmalenbergs: rescission and unjust enrichment. Both of these counterclaims appear to be

13 predicated on the Schmalenbergs prevailing on their claim requiring Sunwest to disgorge the

14 disputed fees and costs. Based on the Court's ruling herein granting Sunwest's motion for

15 summary judgment on the voluntary payment doctrine, Sunwest's counterclaims are now

moot.

If a party intends to seek costs and/or attorney's fees, such claim must be made by

motion filed no later than 14 days after entry of the judgment in accordance with Fed. R. Civ.

P. 54, made applicable to this adversary proceeding pursuant to Fed. R. Bankr. P. 7054.

/// End of Memorandum Decision ///

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.