Opinion
2:06-cv-2308-MCE-EFB.
March 8, 2007
MEMORANDUM AND ORDER
In this action, Plaintiff Robert Arruda ("Plaintiff") seeks to maintain discrimination claims against Defendants C H Sugar Company, Inc. and Kyle Stradleigh ("Defendants").
On September 22, 2006, Plaintiff filed claims in Sacramento Superior Court alleging that the Defendants discriminated against him based on his mental disability in violation of the California Fair Employment and Housing Act, California Government Code sections 12900 et seq. ("FEHA"); that Defendants violated the California Family Rights Act, Government Code section 12945.2 ("CFRA"); and that Defendants wrongfully terminated Plaintiff in violation of public policy. In addition, Plaintiff asserted that Defendants violated the Family Medical Leave Act, 29 U.S.C. sections 2601 et seq, ("FMLA"). Defendants removed the matter to this Court on October 17, 2006.
Defendants now move to dismiss Plaintiff's entire action for failure to state a claim upon which relief can be granted, pursuant to Federal Rule of Civil Procedure 12(b)(6), on grounds that Plaintiff is judicially estopped from bringing the present action because of his failure to properly disclose the underlying claim in earlier bankruptcy proceedings.
For the reasons set forth below, Defendants' Motion is granted.
BACKGROUND
Defendants allegedly fired Plaintiff in late 2004 after Plaintiff's mental condition made it impossible to work from July 2004 to October 2004. On January 19, 2005, Plaintiff filed a Complaint with the California Department of Fair Employment and Housing ("DFEH") alleging that Defendant had wrongfully fired him due to a mental disability.
Plaintiff received a right to sue notice for that complaint on January 27, 2005.
Plaintiff thereafter instituted bankruptcy proceedings, retained bankruptcy counsel, and prepared his bankruptcy schedules on September 20, 2005.
Defendants have requested that the Court take judicial notice of documents filed in the course of those bankruptcy proceedings pursuant to Federal Rule of Evidence 201(b). That request is unopposed and is granted.
Plaintiff indicated in his schedules that he had not been a party to any suit or administrative proceeding within a year prior to filing. Plaintiff also indicated that he had no contingent and no non-liquidated claims of any nature.
Plaintiff filed a First Amended Complaint with the DFEH on September 30, 2005 in which he named C H Sugar and Kyle Stradleigh as Defendants. Plaintiff received a right to sue notice as to that complaint on October 3, 2005.
On October 4, 2005, one day after receiving the right to sue notice on the First Amended Complaint filed with DFEH, Plaintiff filed for Chapter 7 bankruptcy.
On November 1, 2005, Plaintiff and bankruptcy counsel appeared before the bankruptcy trustee at a Meeting of the Creditors hearing pursuant to 11 U.S.C.S. Section 341(a). No creditors attended the meeting. During the hearing, Plaintiff informed the trustee of his potential wrongful termination claim, but no other claims. Plaintiff did not inform the trustee of his disability discrimination claim, his claim under the Family Medical Leave Act ("FMLA"), or his claim for a violation under California Family Rights Act ("CFRA").
The trustee and Plaintiff's bankruptcy counsel discussed receiving a right to sue letter, however there was no mention that Plaintiff had a potential discrimination claim. Plaintiff's bankruptcy counsel indicated to the trustee that the wrongful termination claim was for six to seven months of lost wages, but as an offset, Plaintiff had a recoupment claim for unemployment benefits he received in the amount of approximately $10,000.00.
On January 4, 2006, the Bankruptcy Court discharged Plaintiff's debts, and on January 12, 2006, Plaintiff's bankruptcy proceedings ended. On January 27, 2006, Plaintiff commenced this action.
STANDARD
On a motion to dismiss for failure to state a claim under Rule 12(b)(6), all allegations of material fact must be accepted as true and construed in the light most favorable to the nonmoving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996). A complaint will not be dismissed for failure to state a claim "`unless it appears beyond doubt that plaintiff can prove no set of facts in support of [his or] her claim that would entitle [him or] her to relief.'" Yamaguchi v. Dep't of the Air Force, 109 F.3d 1475, 1480 (9th Cir. 1997) (quoting Lewis v. Tel. Employees Credit Union, 87 F.3d 1537, 1545 (9th Cir. 1996)). A court may take judicial notice of facts outside the pleadings and doing so does not convert a Rule 12(b)(6) motion to one for summary judgement.
Mack v. S. Bay Beer Distrib., 798 F.2d 1279, (9th Cir. 1986), (abrogated on other grounds by Astoria Fed. Sav. and Loan Ass'n v. Solimino, 501 U.S. 104, (1991); Phillips v. Bureau of Prisons, 591 F.2d 966, 969 (D.C. Cir. 1979).
If the court grants a motion to dismiss a complaint, it must then decide whether to grant leave to amend. The court should "freely give" leave to amend when there is no "undue delay, bad faith[,] dilatory motive on the part of the movant, . . . undue prejudice to the opposing party by virtue of . . . the amendment, [or] futility of the amendment. . . ." Fed.R.Civ.P. 15(a);Foman v. Davis, 371 U.S. 178, 182 (1962). Generally, leave to amend is only denied when it is clear that the deficiencies of the complaint cannot be cured by amendment. DeSoto v. Yellow Freight Sys., Inc., 957 F.2d 655, 658 (9th Cir. 1992).
ANALYSIS
1. Plaintiff is judicially estopped from bringing his action against Defendants for alleged violations of the FEHA, CAFRA, FMLA, and for wrongful termination because Plaintiff failed to include these claims on his bankruptcy schedules.
The Ninth Circuit addressed the question of judicial estoppel in the bankruptcy context in Hamilton v. State Farm Fire and Casualty Co. 270 F.3d 778 (9th Cir. 2001). In Hamilton, the plaintiff, Hamilton, made a claim with his insurance company, State Farm, for a loss to his house which he alleged occurred immediately after tenants vacated the property. Hamilton, 270 F.3d at 780-82. Subsequent to the claim, Hamilton was unable to make the mortgage payments on the property. Id.
Hamilton's lawyers sent letters on August 4 and October 16, 1997 to State Farm indicating his need for the insurance money to maintain the mortgage payments. Id. In the letters, Hamilton threatened litigation and suggested that State Farm might be handling the claim in bad faith. Id. On October 31, 1997, Hamilton filed for Chapter 7 bankruptcy and failed to list the potential claim against State Farm on the bankruptcy schedules.Id. The bankruptcy court discharged Hamilton's debts in April 1998. Hamilton, 270 F.3d 778 at 780-782. Hamilton filed suit against State Farm in October 1998 alleging breach of covenant of good faith and fair dealing and breach of contract. Id.
In affirming the district court's grant of dismissal to State Farm, the Ninth Circuit relied on United States Supreme Court precedent and identified three factors to be considered in deciding whether judicial estoppel is warranted: (1) whether the party's later position in the judicial proceeding is clearly inconsistent with an earlier position before another court; (2) whether the party has succeeded in persuading the first court to accept the party's earlier position so that accepting an inconsistent position in the later proceeding would create the perception that one of the two courts had been misled; and (3) whether the party seeking to assert the inconsistent position would derive an unfair advantage or impose and unfair detriment if not estopped. Hamilton, 270 F.3d at 783, (citing N.H. v. Me., 532 U.S. 742, 121 S.Ct. 1808, 1815 (2001)).
This Court finds that Plaintiff's actions fall within the three factors identified by Hamilton, and that Plaintiff should accordingly be estopped from bringing this claim in its entirety. Each of these factors will now be separately addressed.
A. Plaintiff's later position is clearly inconsistent with his earlier position.
In Hamilton, the Ninth Circuit found that Hamilton asserted clearly inconsistent positions by failing to list his claims against State Farm on his bankruptcy schedules and then later suing State Farm on the same claims. Hamilton, 270 F.3d at 784. In the present case, Plaintiff failed to list the potential claim against Defendants on his bankruptcy schedules when he prepared them on September 20, 2005. In Hamilton, the Ninth Circuit held that "the debtor's duty to disclose potential claims as assets does not end when the debtor files schedules, but instead continues for the duration of the bankruptcy proceeding."Hamilton, F.3d at 785, citing Browning Mfg. v. Mims (In re Coastal Plains, 179 F.3d at 208; Youngblood Group v. Lufkin Fed. Sav. Loan Ass'n, 932 F. Supp. at 867; Fed.R.Bankr.P. 1009(a) (schedules may be amended as a matter of course before the case is closed). Plaintiff failed to amend his schedules throughout the course of his bankruptcy, and then later commenced this action on January 27, 2005, two weeks following the completion of his bankruptcy proceedings.
Plaintiff in the present case had a continuing duty to disclose the claim as a potential asset, and failed to do so. That shortcoming is clearly inconsistent with the instant lawsuit, where Plaintiff asserts claims not properly disclosed in his bankruptcy proceedings.
B. The bankruptcy court sufficiently accepted Plaintiff's earlier position.
In Hamilton, the Ninth Circuit held that the bankruptcy court sufficiently accepted Hamilton's position that he had no potential claim against State Farm by granting a discharge of Hamilton's debts. Hamilton, 270 F.3d at 784. Furthermore, the court held that judicial estoppel will be imposed when the debtor "has knowledge of enough facts to know that a potential cause of action exists during the pendency of the bankruptcy, but fails to amend his [or her] schedules or disclose statements to identify the cause of action as a contingent asset." Id. The court held that Hamilton had sufficient knowledge of enough facts to know that a potential claim existed because of the two letters he sent to State Farm threatening litigation.
In this case, Plaintiff was similarly aware of the potential claim against Defendants because of the two complaints he filed with DFEH and the two right to sue letters he received prior to filing for bankruptcy. As indicated above, Hamilton clearly found that "the duty to disclose potential claims as assets does not end when the debtor files his [or her] schedules, but instead continues for the duration of the bankruptcy proceeding." Hamilton, 270 F.3d at 785, citing In Re Coastal Plains, 179 F.3d 197, 207-208 (5th Cir. 1999). Plaintiff failed to amend his bankruptcy schedules during the course of and prior to the completion of his bankruptcy. The fact that Plaintiff was granted a no-asset discharge by the bankruptcy court suggests that the court was unaware of the potential value of Plaintiff's claim and accepted his representations (or lack thereof) in that regard.
C. Plaintiff would derive an unfair advantage if not estopped from bringing this action.
The Bankruptcy Code and Rules impose upon debtors "an express, affirmative duty to disclose all assets, including contingent and unliquidated claims." Hamilton, 270 F.3d at 785, quoting In Re Coastal Plains, 179 F.3d 197, 207-208 (5th Cir. 1999). This requirement protects the interest of the creditors by requiring debtors to be completely candid in regard to their asset disclosures in return for debt relief that may be given. Absent this requirement, the incentive created would be for debtors to conceal their assets and receive debt relief from the court based on false or misleading information.
Judicial estoppel in this case is necessary to protect the interest of the creditors. The creditors could not have known of this potential claim because Plaintiff failed to include it in his schedules. If Plaintiff is permitted to maintain this action, he will have unfairly received the debt relief benefit from the bankruptcy court at the expense of the creditors.
In Hamilton, the Ninth Circuit stated it agreed with the Fifth Circuit's analysis in Browning Mfg. v. Mims (In Re Coastal Plains), 179 F.3d 197 (5th Cir. 1999). Hamilton, 270 F.3d at 785. In Coastal Plains, the Fifth Circuit judicially estopped a bankrupt individual from bringing all claims against defendant not included in the plaintiff's schedules. According to the Fifth Circuit, "it is very important that a debtor's bankruptcy schedules and state of affairs be as accurate as possible, because that is the initial information upon which all creditors rely." Browning Mfg. v. Mims (In Re Coastal Plains), 179 F.3d 197, 208 (5th Cir. 1999).
In the bankruptcy at issue herein, no creditor appeared at the Meeting of the Creditors. Plaintiff's failure to disclose his discrimination claim in his bankruptcy schedules prevented his creditors from assessing that information in deciding whether to attend the Meeting of the Creditors. The creditors' interest were therefore impaired because they were unaware of the Plaintiff's potential discrimination claim. Plaintiff gained an unfair advantage by withholding the existence of that claim from his creditors and from subsequently receiving bankruptcy protection in the face of that non-disclosure.
2. The disclosure of the Plaintiff's potential claim to the bankruptcy trustee at the Section 341(a) meeting is insufficient to overcome judicial estoppel.
Plaintiff's sole contention in arguing that judicial estoppel should not apply rests with the argument that the claims asserted in the action were in fact disclosed during the course of the Meeting of Creditors pursuant to 11 U.S.C. Section 341(a). Plaintiff argues that his bankruptcy attorney did disclose the existence of a potential claim for lost wages against Defendants to the bankruptcy trustee during that meeting. That argument fails. The Ninth Circuit has expressly found that "notifying the trustee by mail or otherwise is insufficient to escape judicial estoppel. 11 U.S.C. Section 521(1) provides that `the debtor shall file a list of creditors, and unless the court orders otherwise, a schedule of assets and liabilities.'" Hamilton, 270 F.3d 788, 784. Accordingly, Plaintiff is estopped from maintaining the present claim despite having informed the trustee of his potential claim for lost wages.
Pursuant to Rule 201(b) of the Federal Rules of Evidence, this Court takes judicial notice of; the transcript of that hearing (is attached to the Declaration of Rosemary Morris in Support of Defendants' Reply), Exhibit A as well as the audio recording itself (attached as Exhibit B to the Declaration of Kathleen Mastagni) in Support of Plaintiff's Opposition to Defendant's Motion to Dismiss, Exhibit B (audio recording of meeting of creditors).
Other courts have addressed this issue and have held that judicial estoppel applies when disclosure of an asset is made to the trustee but not included in the schedules.
The Fifth Circuit has held that the debtor must truthfully list the claim on his schedule of assets, and . . . [a] failure to do so is not excused by disclosing the claim in the creditors' meeting." Superior Crewboats, Inc. v. Primary P I Underwriters, 374 F.3d 330 (5th Cir. 2004). The Arizona District Court similarly held that a disclosure to the bankruptcy trustee of a potential claim not listed in the schedules was not sufficient to overcome the judicial estoppel of the claims in district court.Wietecha v. Dollarhide Fin. Group, Inc., 2006 U.S. Dist. LEXIS 44562, 3, 7-8 (D. Ariz. 2006).
3. The omission of the claim on the schedule was not a mistake.
In Hamilton, the Ninth Circuit determined that Hamilton's omission was not a mistake because he had "knowledge of enough facts to know that a potential cause of action [existed] during the pendency of his bankruptcy." Hamilton, 270 F.3d at 784. InHamilton, the plaintiff was aware of his pending claim against his insurance company during his bankruptcy, as evidenced by his letters from his lawyers to State Farm. In the present case, Plaintiff cannot claim he was unaware of his pending claim against Defendants because of the two complaints he filed with DFEH and the two right to sue notices he received. Therefore, Plaintiff cannot claim he was unaware know of the potential claim because he possessed two right to sue letters prior to filing for bankruptcy.
In Hamilton, the district court determined that Hamilton's omission was intentional. Hamilton v. State Farm Fire Casuality Ins. Co., 2000 U.S. Dist. LEXIS 2564 (D. Cal. 2000), aff'd, 270 F.3d 788 (Ninth Cir. 2001). The court stated that the "circumstances of the instant case do not indicate . . . that his non-disclosures were mere oversights; to the contrary, he endeavors throughout his opposition to justify them or minimize their materiality." Hamilton, 2000 U.S. Dist. LEXIS 2564 at 28. In the present case, not only was Plaintiff well aware of his pending discrimination claim as stated above, his bankruptcy attorney also downplayed the value of the potential claim to the trustee during the Section 341(a) hearing by stating that it was for lost wages only. There was no mention of any other cause of action to the trustee.
In both Hamilton and the present case, Plaintiffs clearly had knowledge of undisclosed facts concerning their potential claims, and the possibility of receiving bankruptcy protection while at the same time asserting those claims supplied a motive to conceal them. The omission of the present claim during Plaintiff's bankruptcy was intentional because he had knowledge of the underlying facts giving rise to the potential claim and failed to disclose the claim. Also, there was motive to conceal the claim from the bankruptcy court as evidenced by Plantiff's attorney downplaying the value of potential claim in attempt to preserve it in the form Plaintiff now seeks to litigate in this Court.
While it may appear that the application of judicial estoppel is harsh or unfair, the integrity of the bankruptcy system and judicial comity is more important than any single case, including this one. However, Plaintiff is not without a remedy. To the extent the Plaintiff alleges that his attorney advised him not to provide any of the information in the bankruptcy proceedings, the attorney may be subject to malpractice liability. The Eastern District of Texas addressed this in Estel v. Bigelow Mgmt. Inc. et al., 323 B.R. 918 (E.D. Tex. 2005). In Estel, the court estopped the plaintiff from bringing a claim he had specifically told his bankruptcy attorney about, however had not been included on the plaintiff's bankruptcy schedules. Estel, 323 B.R. 918 at 923-24. Furthermore, the court found that the remedy for the plaintiff was a suit for malpractice. Estel, 323 B.R. at 923, (citing Link v. Wabash R.R. Co., 370 U.S. 626, 633-34 (1962).
CONCLUSION
Plaintiff failed to adequately disclose his potential discrimination claim in his bankruptcy proceedings. The integrity of the bankruptcy system relies on full disclosure of all assets, including potential but unlitigated claims. Plaintiff is therefore judicially estopped from maintaining the discrimination claim in this Court because of his failure to properly inform the bankruptcy court of the claims now asserted in this action.
Based on the foregoing, Defendant's Rule 12(b)(6) Motion to Dismiss is granted. No leave to amend will be permitted since the omission in which dismissed is based cannot be rectified through amendment.
Because oral argument will not be of material assistance, the Court orders this matter submitted on the briefs. E.D. Cal. Local Rule 78-230(h).
IT IS SO ORDERED.