Opinion
CV-02-449-ST.
December 11, 2002
OPINION AND ORDER
INTRODUCTION
Plaintiffs, Barbara Anne Froshiesar and Danny John Froshiesar, filed this action on April 4, 2002, against defendants, Roman J. Babij, M.D., the Dominican Sisters of Ontario, Inc., an Oregon corporation dba Holy Rosary Medical center, and Catholic Health Initiatives, a Colorado corporation dba Holy Rosary Medical Center, to recover damages for medical negligence. Plaintiffs allege that Barbara Froshiesar underwent a laparoscopic surgery of her colon that became infected and resulted in the eventual complete removal of the large intestines and rectum. Accordingly, plaintiffs seek $900,000 for Barbara Froshiesar's noneconomic damages; $100,000 for Danny Froshiesar's loss of companionship, society, support and services; all medical and hospital expenses; and costs and disbursements.
This court has diversity jurisdiction under 28 U.S.C. § 1332. All parties have consented to allow a Magistrate Judge to enter final orders and judgment in this case in accordance with FRCP 73 and 28 U.S.C. § 636(c).
Defendants' Motions to Amend (dockets #30 and #34) are now before the court. For the reasons that follow, the motion is granted.
LEGAL STANDARDS
Under FRCP 15(a), leave to amend "shall be freely given when justice so requires." In general, whether to grant or deny a motion to amend the pleadings is a matter of the court's discretion. Sweaney v. Ada County, 119 F.3d 1385, 1392 (9th Cir 1997). However, the Supreme Court has cautioned that:
In the absence of any apparent or declared reason — such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, futility of amendment, etc. — the leave sought should, as the rules require, be "freely given." Of course, the grant or denial of an opportunity to amend is within the discretion of the District Court, but outright refusal to grant the leave without any justifying reason appearing for the denial is not an exercise of discretion; it is merely [an] abuse of that discretion and inconsistent with the spirit of the Federal Rules.
Foman v. Davis, 371 U.S. 178, 182 (1962); see also Bowles v. Reade, 198 F.3d 752, 757 (9th Cir 1999); Sisseton-Wahpeton Sioux Tribe v. United States, 90 F.3d 351, 355-56 (9th Cir 1996).
These factors, however, "are not of equal weight" in that delay, by itself, is insufficient to justify "denial of leave to amend." United States v. Webb, 655 F.2d 977, 980 (9th Cir 1981). Instead, the court should apply the rule's "policy of favoring amendments . . . with extreme liberality." DCD Programs, Ltd. v. Leighton, 833 F.2d 183, 186 (9th Cir 1987) (internal quotation omitted).
DISCUSSION
Defendants seek to add two new affirmative defenses. The proposed Third Affirmative Defense alleges that:
Judicial estoppel bars plaintiffs' claim. Plaintiffs obtained a discharge in bankruptcy without listing their claim against Defendant Babij as an asset.
The proposed Fourth Affirmative Defense alleges that:
Plaintiffs are not the real party in interest. The trustee in bankruptcy is the real party in interest in this action.
Plaintiffs oppose adding these new defenses because they fail as a matter of law. Because plaintiffs do not challenge defendants' motive or argue that allowing amendment will cause undue prejudice, this court's analysis addresses only the viability of the additional affirmative defenses. It is well-settled that "[a]n amendment is deemed futile where the plaintiff would be unable to prove facts under the amended complaint that would entitle the plaintiff to relief." Qualcomm, Inc. v. Motorola, Inc., 989 F. Supp. 1048, 1050 (S.D. Cal 1997), citing Miller v. Rykoff-Sexton, 845 F.2d 209, 214 (9th Cir 1988).
With respect to the viability of these two defenses, the parties have submitted affidavits establishing the following facts. Barbara Froshiesar underwent surgery on March 28, 2000. Amended Complaint, ¶ 7. On May 17, 2000, plaintiffs filed for Chapter 7 bankruptcy in the District of Idaho. Mautz Aff, ¶ 3; Burnham Aff, ¶ 3. They did not list the medical negligence claim as an asset in their bankruptcy proceeding. Id. On June 14, 2000, before the bankruptcy petition was discharged, plaintiffs' bankruptcy attorney sent a letter to the bankruptcy trustee, Richard Crawforth ("Crawforth"), advising him of the potential contingent claim for medical malpractice. This letter explained as follows:
Citations to affidavits, declarations, and depositions are identified by the last name of the affiant, declarant, or deponent, and citations are to the paragraph(s) of the affidavit, declaration or page(s) of the deposition. All other citations are to the exhibit number of the parties' submissions.
To give you a little background, my client, Barb Froshiesar, went into the hospital for an operation for colon blockage on March 28, 2000 and apparently acquired some infection during the course of that operation. She was released from the hospital on April 2, but again returned to the hospital on April 4 for repair surgery caused by the infection and other problems. We have recently learned that the initial and second surgeries may not have been done properly. This development caused her to remain in the hospital from April 4 until April 7 when a surgery took place in Boise with different doctors who tried to correct the problem that was caused by the . . . improper surgeries and resultant infection. After the April 7 operation she was in the hospital until May 4, giving rise to a substantial amount of medical and hospital bills that she has listed in the amended Schedule F.
You should note that we have filed this amended Schedule F listing some of these medical expenses that became known after my clients filed the bankruptcy on May 17.
My clients contend that there was some medial malpractice involved in both the March 28 and April 4 procedures . . . .
I realize this is all uncertain, but because the actual negligence took place on either March 28 and/or April 4, and even though it was not known until after the bankruptcy was filed, I wanted to disclose this information to you so you can determine whether or not you will claim an interest in that potential litigation. I have to say that if you claim an interest in that potential litigation, then we will simply tender not only the litigation to you, but all the potential costs and expenses involved. Either way, I think this decision should be made before the bankruptcy proceeds any further.
Crawforth Aff, Ex A.
Crawforth discussed the potential medical negligence claim at a subsequent meeting of creditors. Id, ¶ 3. After researching the claim and considering the costs and likelihood of recovery for the creditors, Crawford decided that it would not be prudent as trustee to administer the asset and pursue the claim. Id, ¶ 4. He orally communicated his decision to plaintiffs and their attorney and completed administration of the estate without further regard to the contingent medical malpractice claim. Id.
The bankruptcy schedules were not amended to list the asset and a motion for abandonment of the asset was never filed. Id, ¶ 5. However, it was Crawford's intention to abandon the asset and have it remain in the possession of the debtors. Id. Defendants first learned of this bankruptcy proceeding during discovery on August 27, 2002. Mautz Aff, ¶ 2; Burnham Aff, ¶ 2.
I. Third Affirmative Defense
Defendants' affirmative defense of judicial estoppel is based on the plaintiffs' failure to list the medical malpractice claim as an asset in their bankruptcy schedules. They argue that plaintiffs are precluded from pursuing a non-disclosed claim after the bankruptcy court allows discharge based on the representation that they had no assets. Plaintiffs respond that the affirmative defense of judicial estoppel is unwarranted because plaintiffs did disclose the medical malpractice claim as an asset to the trustee who decided to abandon the claim.
A. Legal Standards
It is well-settled that the equitable doctrine of judicial estoppel "precludes a party from gaining an advantage" by asserting one position, and then later seeking an advantage by taking a clearly inconsistent position in a separate case. Rissetto v. Plumbers Steamfitters Local 343, 94 F.3d 597, 600-01 (9th Cir 1996) (citations omitted). Courts invoke 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).
When considering whether to apply the doctrine, courts consider three factors:
First, a party's later position must be "clearly inconsistent" with its earlier position. . . . Second, courts regularly inquire whether the party has succeeded in persuading a court to accept that party's earlier position, so that judicial acceptance of an inconsistent position in a later proceeding would create "the perception that either the first or the second court was misled[.]" . . . A third consideration is whether the party seeking to assert an inconsistent position would derive an unfair advantage or impose an unfair detriment on the opposing party if not estopped. . . . In enumerating these factors, we do not establish inflexible prerequisites or an exhaustive formula for determining the applicability of judicial estoppel. Additional considerations may inform the doctrine's application in specific factual contexts.
New Hampshire v. Maine, 532 U.S. 742, 750-51 (2001) (citations omitted).
The Ninth Circuit "has restricted the application of judicial estoppel to cases where the court relied on, or `accepted,' the party's previous inconsistent position." Hamilton, 270 F.3d at 783, quoting Interstate Fire Cas. Co. v. Underwriters at Lloyd's, London, 139 F.3d 1234, 1239 (9th Cir 1998); Masayesva v. Hale, 118 F.3d 1371, 1382 (9th Cir 1997). Additionally, "[m]ost courts have identified at least two limitations on the application of the doctrine: (1) it may be applied only where the position of the party to be estopped is clearly inconsistent with its previous one; and (2) that party must have convinced the court to accept that previous position." In re Coastal Plains, Inc. v. Mims, 179 F.3d 197, 206 (5th Cir 1999) ("Coastal Plains") (citations and footnote omitted).
"In the bankruptcy context, a party is judicially estopped from asserting a cause of action not raised in a reorganization plan or otherwise mentioned in the debtor's schedules or disclosure statements." Hamilton, 270 F.3d at 783 (citations omitted). "[N]otifying the trustee by mail or otherwise is insufficient to escape judicial estoppel." Id at 784.
B. Analysis
Although courts have invoked judicial estoppel to bar claims not disclosed during bankruptcy proceedings, plaintiffs contend that the doctrine does not apply to the facts here. In Hamilton, cited by plaintiffs, the debtor listed a residential vandalism loss on his bankruptcy schedules, but failed to list a claim for that loss against his insurance company as an asset. The trustee discovered the insurance claim only after the debtor had obtained a discharge. As a result, the trustee filed a successful motion to dismiss the bankruptcy, citing the debtor's bad faith, lack of truthfulness, and failure to cooperate. In a later civil action by the debtor against his insurance company, the Ninth Circuit held that the claims were barred by judicial estoppel. Similarly in Coastal Plains, also cited by plaintiffs, the trustee did not know of a contingent claim while the bankruptcy was pending.
In contrast, plaintiffs did disclose their medical malpractice claim to the trustee, and only failed to disclose the claim on the bankruptcy schedules. Plaintiffs argue that this oversight had no effect on the trustee's actions since he knew about the claim, treated it as listed, discussed it at the meeting of creditors, researched whether to administer the claim as part of the bankruptcy estate, and decided to abandon the claim. However, the trustee did not comply with the procedural prerequisites of 11 U.S.C. § 554 to abandon property of the estate. "A professed intent to abandon cannot constitute abandonment, as 11 U.S.C. § 554(a) requires notice and a hearing prior to abandonment." In re Baudoin, 981 F.2d 736, 739 n4 (5th Cir 1993).
Although neither Hamilton nor Coastal Plains are directly on point, the language in both cases support application of judicial estoppel to a claim that is not disclosed in the bankruptcy schedules. "`[I]t is very important that a debtor's bankruptcy schedules and statement of affairs be as accurate as possible, because that is the initial information upon which all creditors rely.'" Hamilton, 270 F.3d at 785, quoting Coastal Plains, 179 F.3d at 208. The interested parties include not only the debtor and the trustee, but also the court and "the creditors, who plan their actions in the bankruptcy proceeding on the basis of information supplied in the disclosure statements . . . ." Id (emphasis in original). Because the facts have not yet been fully developed, it is unclear whether the creditors received full and accurate information concerning the medical malpractice claim to determine what action, if any, they would take.
In sum, it is too early at the pleading stage to decide whether the lack of formalities in plaintiffs' bankruptcy proceeding may be overlooked for the purpose of avoiding the equitable doctrine of judicial estoppel. The only issue before the court today is whether the doctrine of judicial estoppel is a potentially viable defense for defendants. Through the discovery process, defendants may unearth additional evidence to support this affirmative defense, or may conclude that such a defense is unwarranted. At any rate, the judicial estoppel doctrine may be challenged again before trial.
Accordingly, defendants are allowed to amend their answer to include the proposed Third Affirmative Defense.
II. Fourth Affirmative Defense
Plaintiffs object to the proposed Fourth Affirmative Defense because the bankruptcy proceeding is closed. Hence, they argue that the trustee cannot be the real party in interest.
The fact that the bankruptcy is closed is not dispositive. Even though not listed in the bankruptcy schedules, all claims become property of the bankruptcy estate, and property that is neither abandoned nor administered remains property of the estate even after the case is closed. 11 U.S.C. § 541 (property of the estate) 554(d) (property not abandoned or administered remains property of estate); Pace v. Battley, 146 B.R. 562, 564-66 (9th Cir BAP 1992), aff'd, 17 F.3d 395 (9th Cir 1994). Because the trustee did not follow the formalities of abandonment, it is arguable that the medical malpractice claim still belongs to the bankruptcy estate. In that event, plaintiffs are not the real parties in interest. See Wolfe v. Gilmour Mfg. Co., 143 F.3d 1122, 1126-27 (8th Cir 1998).
Potentially the debtor or another party in interest may reopen the bankruptcy case to amend the schedules. 11 U.S.C. § 350(b). "[T]he court has the duty to reopen an estate whenever prima facie proof is made that it has not been fully administered." Kozman v. Herzig, 96 B.R. 264, 266 (9th Cir BAP 1989) (citations omitted). If the case is reopened, a trustee can be appointed to investigate the claim and then prosecute it, settle it, abandon it, or arrange for plaintiffs to prosecute it in exchange for the estate receiving a share of the proceeds. See Lopez v. Speciality Rests. Corp., 283 B.R. 22, 28 (9th Cir BAP 2002) (holding that court abused discretion to deny motion to reopen to amend schedule to add omitted sexual harassment claim).
Accordingly, defendants' request to add their proposed Fourth Affirmative Defense is granted.
ORDER
For the reasons stated above, defendants' Motions to Amend (dockets #30 and 34) are GRANTED. Defendants shall file an Amended Answer by December 30, 2002.