Kurchack v. Life Insurance Company of North America et al, No. 2:2009cv01766 - Document 23 (D. Ariz. 2010)
Court Description: ORDER denying 13 Motion for Summary Judgment; denying 20 Motion for Leave to File a Sur-Reply. Signed by Judge G Murray Snow on 7/26/10.(LAD)
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Kurchack v. Life Insurance Company of North America et al 1 Doc. 23 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8 9 10 11 12 13 14 15 ) ) ) Plaintiff, ) ) vs. ) ) Life Insurance Company of North) America; RBC Wealth Management) ) Disability Plan, ) ) Defendants. ) ) Bruce Kurchack, No. CV-09-1766-PHX-GMS ORDER 16 17 Pending before the Court are Defendants’ Motion for Summary Judgment (Doc. 13) 18 and Plaintiff’s Motion for Leave to File a Sur-reply (Doc. 20). For the following reasons, 19 the Court denies both motions.1 BACKGROUND 20 21 Plaintiff Bruce Kurchack began working as the senior vice president of RBC Wealth 22 Management (“RBC”) on July 14, 2006. As an employee, Kurchack was eligible to receive 23 protection under the RBC Wealth Management Disability Plan (“RBC Plan”), which is a 24 qualified plan under the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. 25 § 1001, et seq. At some point, Kurchack became disabled due to severe depression and 26 27 28 1 Arizona Local Rule of Civil Procedure 7.2 generally does not allow sur-replies. Plaintiff’s Motion for Leave does not provide a compelling reason, sufficient under the Local Rules, to allow a sur-reply. The Court, therefore, denies the Motion for Leave. Dockets.Justia.com 1 anxiety, and Kurchack ceased working for RBC on August 20, 2008. Kurchack made a 2 claim for disability benefits, but the claim was denied both initially and on appeal. 3 Kurchack’s Complaint seeks unpaid disability benefits under the RBC Plan from September 4 14, 2008 forward. 5 On April 20, 2009, Kurchack filed a voluntary petition for Chapter 7 personal 6 bankruptcy in the United States Bankruptcy Court for the District of Arizona (“Bankruptcy 7 Court”). When Kurchack filed the Schedules to his bankruptcy, he did not list his claimed 8 disability insurance benefits from RBC as an “[i]nterest in insurance polic[y]” or as any 9 “[o]ther contingent and unliquidated claim.” (Dkt. # 13, Ex. B.) Kurchack later filed an 10 amendment to his bankruptcy Schedules, but again did not list his interest in the disability 11 benefits. On August 3, 2009, the Bankruptcy Court entered a discharge order in favor of 12 Kurchack. Shortly thereafter, on August 24, 2009, Kurchack then filed this lawsuit. As of 13 the date of this Order, Kurchack’s bankruptcy case remains open. 14 DISCUSSION 15 Summary judgment is appropriate if the evidence, viewed in the light most favorable 16 to the nonmoving party, shows “that there is no genuine issue as to any material fact and that 17 the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c). 18 I. Kurchack Is Not Judicially Estopped From Raising His Claim. 19 Judicial estoppel is an equitable doctrine that prevents a party from benefitting by 20 taking one position, but then later seeking to benefit by taking a clearly inconsistent position. 21 Hamilton v. State Farm Fire & Cas. Ins. Co., 270 F.3d 778, 782 (9th Cir. 2001). Three main 22 factors help determine whether judicial estoppel applies. Id. (citing New Hampshire v. Maine, 23 532 U.S. 742, 750–51 (2001)). “‘First, a party’s later position must be ‘clearly inconsistent’ 24 with its earlier position’” Id. (quoting New Hampshire, 532 U.S. at 750). In the bankruptcy 25 context, this inconsistency may result “from asserting a cause of action not raised in a 26 reorganization plan or otherwise mentioned in the debtor’s schedules or disclosure 27 statements.” Id. at 783. Second, the party must have “‘succeeded in persuading a court to 28 accept that party’s earlier position.’” Id. at 782 (quoting New Hampshire, 532 U.S. at 750). -2- 1 “‘Third, the party seeking to assert an inconsistent position would derive an unfair advantage 2 or impose an unfair detriment on the opposing party if not estopped.’” Id. (quoting New 3 Hampshire, 532 U.S. at 751). 4 An additional relevant factor is whether the party to be estopped merely acted 5 inadvertently, or whether the party acted with an intent to defraud the court or creditors. 6 Johnson v. Or. Dep’t of Human Res. Rehab. Div., 141 F.3d 1361, 1369 (9th Cir. 1998) 7 (holding that judicial estoppel does not apply if based “only on inadvertence or mistake” 8 rather than on “chicanery”) (citing In re Corey, 892 F.2d 829, 836 (9th Cir. 1989)); see also 9 Hefland v. Gerson, 105 F.3d 530, 536 (9th Cir. 1997) (“It is inappropriate [to apply estoppel] 10 when a party’s prior position was based on inadvertence or mistake.”).2 Furthermore, in the 11 bankruptcy context, judicial estoppel may be necessary “to protect the integrity of the 12 bankruptcy process.” Id. at 785. These factors, however, are not “‘inflexible prerequisites 13 or an exhaustive formula,’” as “‘[a]dditional considerations may inform the doctrine’s 14 application in specific factual contexts.’” Id. at 783 (quoting New Hampshire, 532 U.S. at 15 751). 16 It is inappropriate to apply judicial estoppel in this case. The parties do not dispute 17 that Kurchack’s later position—that he has a claim to benefits from the RBC Plan—is clearly 18 inconsistent with his earlier position in Bankruptcy Court that he had no such claim. Nor do 19 the parties dispute that the Bankruptcy Court relied on the prior statement in granting 20 Kurchack a discharge. 21 22 23 24 25 26 27 28 2 The Court rejects Defendants’ assertion that Johnson, 141 F.3d at 1369, is inapplicable. While Johnson, 141 F.3d at 1361, was not a bankruptcy case and was decided before Hamilton, 270 F.3d at 782, Defendants do not explain a meaningful distinction between judicial estoppel generally and judicial estoppel in the bankruptcy context. As this Court has explained in another case, a party’s inadvertence is a relevant factor when considering whether to apply judicial estoppel in bankruptcy. See Meda v. Snell & Wilmer, LLP, 2009 WL 3132932 at *3–4 n. 6–7 (D. Ariz. Sept. 28, 2009) (holding that Johnson is meaningful precedent in bankruptcy and that a Court may consider a party’s inadvertence). Regardless, none of the factors are dispositive, and the Court may weigh these factors to determine if judicial estoppel is appropriate. -3- 1 The remaining factors, however, do not favor judicial estoppel. Kurchack would not 2 derive an unfair advantage from being allowed to progress with this case, even though the 3 Bankruptcy Court granted Kurchack a discharge based on the incomplete bankruptcy 4 Schedules. Rather, because the RBC Plan benefits are appear to be exempt, Kurchack gained 5 no benefit by omitting the claim from his Schedules.3 For the same reason, declining to 6 apply judicial estoppel would not risk substantial prejudice to any entity. Even if Kurchack’s 7 initial Schedules had included the RBC Plan benefits, they would have revested to Kurchack 8 and would have been unavailable to creditors. See In re Kretzer, 48 B.R. 585, 587 (Bankr. 9 D. Nev. 1985) (“Unless a party in interest timely objects, property claimed as exempt is 10 exempted from the bankruptcy estate. . . . Property exempted from the estate revests in the 11 debtor.”) (citing 11 U.S.C. § 522). Further, the fact that Kurchack amended his Schedules 12 to list the property as exempt also suggests that his omission of the RBC Plan benefits from 13 the initial Schedules was inadvertent, as Kurchack would have had no incentive to hide an 14 asset that would have reverted back to him in any event. 15 This case is analogous to another district court case within the Ninth Circuit. 16 Schneider v. Unum Life Ins. Co. of Am., 2008 WL 1995459 (D. Or. May 6, 2008). In 17 Schneider, the debtor failed to disclose a potential cause of action against the defendant as 18 an asset in bankruptcy and then subsequently brought a separate cause of action against that 19 defendant. Id. at *3–4. Because the asset would have been exempt, however, the court did 20 not apply judicial estoppel. Id. at *5–7. The court explained that a debtor’s failure to disclose 21 an exempt asset poses little threat to creditors and to the integrity of the judicial system 22 because the omission of an exempt asset has only a small effect on the bankruptcy court’s 23 determination of the bankruptcy estate. See id. at *6. Similarly, Kurchack’s initial failure to 24 list the RBC Plan benefits as an asset poses little concern for creditors or for the judicial 25 system, as the exempt benefits would not have been available to creditors. The Schneider 26 27 28 3 As explained below, the RBC Plan benefits are exempt as a function of bankruptcy law. -4- 1 court also noted that the defendant had not offered evidence of the debtor’s bad faith. Id. at 2 *7. Likewise, Defendants in this case have not offered evidence of Kurchack’s bad faith, and 3 the Court finds no reason to infer such a motive. 4 Defendants assert that judicial estoppel applies because Kurchack’s amendment was 5 insufficient to make the RBC Plan benefits exempt. Defendants’ arguments, however, are 6 unpersuasive. The Bankruptcy Court, not the district court, is charged with determining 7 whether the benefits are exempt. See Mergia v. Adams, 2009 WL 1604706 at *8 (E.D. Cal. 8 June 5, 2009) (“Whether or not plaintiff could have claimed an exemption for [certain 9 property], his failure to make such a claim in the bankruptcy proceedings precluded the 10 trustee from objecting to such an exemption and having a determination made as to whether 11 this asset was in fact exempt.”); Acuna, 560 F. Supp.2d at 556 (implying that the bankruptcy 12 court, not the district court, determines in the first instance whether property is exempt). 13 Nonetheless, 11 U.S.C. § 522(l) provides, “Unless a party in interest objects, the property 14 claimed as exempt on [the list of the debtor’s property] is exempt.” Any objection to prevent 15 the property from being classified as exempt must be made within thirty days of the 16 amendment. See Fed. R. Bankr. P. 4003(b)(1) (“[A] party in interest may file an objection 17 to the list of property claimed as exempt within 30 days after the meeting of creditors held 18 under § 341(a) is concluded or within 30 days after any amendment to the list or 19 supplemental schedules is filed, whichever is later. The court may, for cause, extend the time 20 for filing objections if, before the time to object expires, a party in interest files a request for 21 an extension.”).4 Kurchack amended his bankruptcy Schedule to list the RBC Plan benefits 22 as exempt on March 11, 2010. By April 11, 2010, no objection or request to extend the time 23 for filing objections had been filed. Therefore, the rights to the RBC Plan benefits are 24 exempt as a matter of law. 25 It is further immaterial that Kurchack amended his Schedules only in response to the 26 27 28 4 Bankruptcy Rule 4003(b) also allows for longer deadlines to file objections in other situations, which are not relevant here. -5- 1 Motion for Summary Judgment and only after receiving a discharge. “Under Bankruptcy 2 Rule 1009(a), a voluntary petition, list or schedule may be amended by the debtor as a matter 3 of course any time before the case is closed.” In re Magallanes, 96 B.R. 253, 255 (B.A.P. 9th 4 Cir. 1988). Because Kurchack’s bankruptcy case was still open at the time of amendment, 5 Kurchack’s amendment to list the RBC Plan benefits as exempt should be allowed unless 6 Defendants can demonstrate either bad faith or prejudice to third parties. See id. at 256 7 (“Amendments are and should be liberally allowed at any time absent a showing of bad faith 8 or prejudice to third parties.”); see also In re Arnold, 252 B.R. 778, 784 (B.A.P. 9th Cir. 9 2000) (explaining that bad faith and prejudice must be shown, at a minimum, by 10 preponderance of the evidence, and potentially by clear and convincing evidence); In re 11 Myatt, 101 B.R. 197, 200 (Bankr. E.D. Cal. 1989) (holding that a debtor could amend his 12 bankruptcy schedule even after receiving a discharge because the defendants had 13 demonstrated neither bad faith nor prejudice). 14 Like the defendants in Myatt, 101 B.R. at 200, Defendants have provided no evidence 15 that Kurchack acted in bad faith when correcting his bankruptcy Schedules. While the Court 16 is mindful that debtors should not be neglectful when filing their initial bankruptcy 17 Schedules, this case presents a unique factual scenario in which exempt property appears to 18 have been inadvertently left off of Kurchack’s initial Schedules. Defendant also has failed 19 to demonstrate prejudice, as a “‘[s]imple delay in filing an amendment . . . where the case is 20 not closed does not alone prejudice creditors.’” In re Myatt, 101 B.R. 197, 200 (Bankr. E.D. 21 Cal. 1989) (quoting Matter of Doan, 672 F.2d 831, 833 (11th Cir. 1982)). It is unlikely that 22 Kurchack would unfairly benefit himself or that any interested parties would be unfairly 23 prejudiced by considering Kurchack’s listing of the RBC Plan benefits as exempt.5 Cf. 24 25 26 27 28 5 The Court need not speculate whether the RBC Plan benefits would have been found exempt had a party objected to the amendment. Nevertheless, Arizona is an “opt-out” state, whose residents are not entitled to the exemptions listed in 11 U.S.C. § 522(d). In re McNabb, 326 B.R. 785, 786 (Bankr. D. Ariz. 2005) (citing A.R.S. § 33-1133(B)). For Arizona residents, the exemption of personal property in bankruptcy is governed by A.R.S. § 33-1126; see also 9A Am. Jur. 2d Bankruptcy § 1397 (2010) (“If a state has ‘opted out’ of -6- 1 Schneider v. UNUM Life Ins. Co. of Am., 2008 WL 109065, at *3–4, 6 (D. Or. Jan 8, 2008) 2 (holding that creditors were not prejudiced when the plaintiff-debtor failed to list a potential 3 cause of action against the defendants as an asset in bankruptcy because the asset would have 4 been exempt and thus unavailable to creditors). 5 Moreover, it is not inequitable for Kurchack to amend his bankruptcy Schedules only 6 in response to Defendants’ Motion for Summary Judgment. The delay in correcting the 7 Schedules does not suggest that Kurchack’s initial failure to provide accurate schedules was 8 purposeful. Rather, the Motion for Summary Judgment may have simply pointed Kurchack 9 to his previous error. While Kurchack may have known facts underlying his claim to the 10 RBC Plan benefits, this alone does not make Kurchack’s prior omission anything more than 11 inadvertent. See Johnson, 141 F.3d at 1369 (“Judicial estoppel applies when a party’s 12 position is tantamount to a knowing misrepresentation to or even fraud on the court.”) 13 (internal quotations omitted). 14 To be sure, several courts have applied judicial estoppel where a plaintiff amended 15 his or her bankruptcy Schedules only after being served with a motion for summary 16 judgment. See, e.g., Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282, 1288 (11th Cir. 2002) 17 (holding that, where a plaintiff amends his or her bankruptcy filings only after having the 18 prior omission challenged by motion, judicial estoppel bars the plaintiff’s case because this 19 “so-called remedy would only diminish the necessary incentive to provide the bankruptcy 20 court with a truthful disclosure of the debtors’ assets”); Allers-Petrus v. Colom. Recovery 21 22 23 24 25 26 27 28 the federal exemption scheme, debtors who file in that state must claim exemptions pursuant to that state’s laws, for while federal law controls exemptions generally and exemption procedures, state law governs specific property that may be exempted and the value of those exemptions.”). Under A.R.S. § 33-1126(A)(4), “[a]ll money, proceeds or benefits of any kind to be paid . . . to the insured or any beneficiary under any policy of . . . disability insurance . . . benefits in use by any employer” are generally “exempt from execution, attachment or sale on any process issued from any court[.]” Because the benefits at issue are disability insurance benefits, they likely would have been found exempt on the merits. Finally, to the extent Defendants assert that A.R.S. § 33-1126(A) is preempted based on In re Siegel, Plaintiffs have offered insufficient authority to support such an argument. See 105 B.R. 556 (Bankr. D. Ariz. 1989) (preempting only subsection B of the same statute). -7- 1 Group, LLC, 2009 WL 799676 at *3 (W.D. Wash. Mar. 24, 2009) (applying judicial estoppel 2 where the plaintiff “did not seek to amend her schedule of assets until after her plan had been 3 confirmed and [the defendant] filed the . . . motion for summary judgment in [the] 4 [p]laintiff’s subsequent lawsuit”); Acuna v. Conn. Gen. Life Ins. Co., 560 F. Supp.2d 548, 5 555 (E.D. Tex. 2008) (holding that judicial estoppel barred plaintiff’s lawsuit where the 6 plaintiff amended her bankruptcy schedule after the defendants filed their motion for 7 summary judgment). None of these cases, however, dealt with a debtor who amended his 8 or her petition both when the bankruptcy case was still open and who listed an asset as 9 exempt. In a situation like this, bankruptcy law allows the debtor to file amended schedules 10 before the case closes. And when an asset is validly amended to become exempt, the late 11 amendment is unlikely to present any inequity. See Schneider, 2008 WL 109065 at *5–7 12 (holding that judicial estoppel does is inappropriate when the asset would have been exempt). 13 II. Kurchack Has Cured Any Prudential Standing Defect. 14 Kurchack has standing to assert his claim to benefits from the RBC Plan, even though 15 he may have lacked standing when he first filed his Complaint. When a debtor files for 16 bankruptcy, “all the ‘legal or equitable interests’ he [or she] had in his [or her] property 17 became the property of the bankruptcy estate and are represented by the bankruptcy trustee.” 18 Turner v. Cook, 362 F.3d 1219, 1225–26 (9th Cir. 2004) (quoting 11 U.S.C. § 541(a)(1)). 19 When a party fails to schedule a claim in bankruptcy, that claim remains the property of the 20 bankruptcy estate even after discharge, and the debtor lacks prudential standing to pursue it. 21 See Dunmore v. United States, 358 F.3d 1107, 1110–12 (9th Cir. 2004); see also Holland & 22 Knight, LLP v. Deatley, 357 F. App’x 83, 85 (9th Cir. 2009). A plaintiff’s lack of prudential 23 standing, however, can be cured if the property is exempt from the estate. See Schneider, 24 2008 WL 1995459, at *3 (holding that plaintiff could remedy prudential standing defects by 25 having the bankruptcy trustee either insert itself as the real party in interest or abandon the 26 claim to allow the plaintiff to pursue it); Lucent Tech. Inc. v. Gateway, Inc., 2007 WL 27 1306535, at *4 (S.D. Cal. Apr. 27, 2007) (holding that a “party may cure” prudential standing 28 defects in patent litigation); Brockington v. Jones, 2007 WL 4812205, at *3 (D. S.C. Nov. -8- 1 28, 2007) (holding that a plaintiff lacks standing to pursue a civil matter unless the “claim 2 was exempt from the state or abandoned by the trustee”). 3 When Kurchack initially filed his Complaint, he may have lacked prudential standing 4 because any claim to the RBC Plan benefits became part of the bankruptcy estate upon 5 Kurchack’s failure to list the property as exempt. Nonetheless, Kurchack now has cured the 6 prudential standing defect by amending his bankruptcy Schedules to list his claim to the RBC 7 Plan benefits as exempt. See Schneider, 2008 WL 1995459, at *3; Lucent Tech., 2007 WL 8 1306535, at *4; Brockington, 2007 WL 4812205, at *3. As previously explained, the 9 Bankruptcy Court has functionally decided that the RBC Plan benefits are exempt. Because 10 his bankruptcy case had not yet been closed, Kurchack had the right to amend his bankruptcy 11 Schedules to list the RBC Plan benefits as exempt. See Magallanes, 96 B.R. at 255 (“Under 12 Bankruptcy Rule 1009(a), a voluntary petition, list or schedule may be amended by the 13 debtor as a matter of course any time before the case is closed.”). This amendment had the 14 result of exempting Kurchack’s claim to the RBC Plan benefits because thirty days passed 15 without any objection to the amendment being filed. See 11 U.S.C. § 522(l) (“Unless a party 16 in interest objects, the property claimed as exempt on [the list of the debtor’s property] is 17 exempt.”); Fed. R. Bankr. P. 4003(b)(1) (providing that, in general, a party in interest must 18 file an objection within 30 days after an amendment is filed). Kurchack amended his 19 bankruptcy Schedule to list the RBC Plan benefits as exempt on March 11, 2010, and no 20 objection was filed before April 11. Therefore, the rights to the RBC Plan benefits are 21 exempt, and Kurchack has cured any prudential standing defect. 22 23 24 25 26 IT IS THEREFORE ORDERED that Defendants’ Motion for Summary Judgment (Doc. 13) is DENIED. IT IS FURTHER ORDERED that Plaintiff’s Motion for Leave to File a Sur-reply (Doc. 20) is DENIED. DATED this 26th day of July, 2010. 27 28 -9-
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