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Fresno Rock Taco LLC, et al v. Ben Rodriguez

November 1, 2011

FRESNO ROCK TACO LLC, ET AL.,
PLAINTIFFS,
v.
BEN RODRIGUEZ, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Lawrence J. O'Neill United States District Judge

MEMORANDUM DECISION AND ORDER RE DEFENDANTS' MOTION FOR RECONSIDERATION (DOCS. 18 & 24)

I.INTRODUCTION

Plaintiffs Fresno Rock Taco, LLC, Zone Sports Center, LLC, The Fine Irishman, LLC, Milton Barbis, Heidi Barbis, and Heidi Barbis as guardian ad litem for Claire Barbis bring this civil rights action pursuant to 42 U.S.C. § 1983. Plaintiffs assert various Fourth and Fourteenth Amendment claims against Ben Rodriguez, a California Department of Insurance employee, Fresno Police Department Detective Brandon Rhames, and the City of Fresno arising out of the search of their businesses and home. First Amended Complaint ("FAC"), Doc. 9.

An August 8, 2011 Memorandum Decision denied Defendants' motion to dismiss the FAC. Doc. 17 ("8/8/11 Decision"). Among other things, Defendants argued that Plaintiffs', excluding Claire Barbis, filing for Chapter 7 bankruptcy protection resulted in their causes of action becoming property of their bankruptcy estates, meaning that only the bankruptcy Trustee has standing to bring this suit on their behalves. The district court determined that although Plaintiffs did not inform the Bankruptcy Court of their claims by including them on their schedule of assets, the Trustee did have an opportunity to examine Plaintiffs' claims but then gave notice of his decision to abandon them. As such, the claims reverted back to Plaintiffs. Id. at 5-10.

Moreover, because the Bankruptcy Court relied on the Trustee's decision to abandon the claims, rather than Plaintiffs' initial assertion that no such claims existed, judicial estoppel did not bar Plaintiffs from asserting their claims. Id. at 11.

Defendants now move for reconsideration of this ruling, arguing that Plaintiffs' counsel misled the district court into erroneously believing the instant claims had been considered by the Bankruptcy Court. Doc. 24.*fn1 The motion was originally calendared for November 3, 2011, but the hearing was vacated and the matter was taken under submission on the papers.

II.PREVIOUS RULING

The starting point for analysis of Defendants' motion for reconsideration is the relevant reasoning from the 8/8/11 Decision:

... Defendants contend that Plaintiffs', excluding Claire Barbis, filing for Chapter 7 bankruptcy resulted in their causes of action becoming the property of their bankruptcy estate. Defendants argue only the bankruptcy Trustee has standing to bring this suit. Plaintiffs counter that the bankruptcy Trustee has examined these claims and has determined, for bankruptcy estate purposes, they have no value and has abandoned them, resulting in the claims re-vesting to the Plaintiffs. Plaintiffs also argue that they were not aware of their potential claims until after they filed bankruptcy petitions. Additionally, Plaintiffs claim that even if this were not the case, Claire Barbis would still have standing to bring her claims as she never filed for bankruptcy. Finally, Plaintiffs contest that although Milton and Claire Barbis stated that they were referred to as the Plaintiff LLCs in their bankruptcy petition, the Plaintiff LLCs never declared bankruptcy and still have standing to bring their claims. "An 'estate' is created when a bankruptcy petition is filed." Cusano v. Klein, 264 F.3d 936 (9th Cir. 2001); 11 U.S.C. § 541(a). The property of the bankruptcy estate includes causes of action that accrue before the claimant declares bankruptcy. Sierra Switchboard co. v. Westinghouse Electric Corp., 789 F.2d 705, 707-709 (9th Cir. 1986). A § 1983 cause of action accrues at the time that, "the plaintiff knows or has reason to know of the injury which is the basis of the action." Maldonado v. Harris, 370 F.3d 945, 954 (9th Cir. 2004). A Chapter 7 debtor may only bring a cause of action if the debtor can show either

1) the action was not subject to the bankruptcy or 2) was abandoned by the bankruptcy trustee. Otherwise the claim belongs to the bankruptcy estate and only the Trustee has standing to litigate the cause of action. Rowland v. Novus Financial Corp., 949 F. Supp. 1447, 1453 (9th Cir. 1996).

A debtor must disclose any litigation likely to arise to the bankruptcy Trustee so that it may become a part of the bankruptcy estate. Failure to do so, or asserting a lack of any claim, may result in the debtor being judicially estopped from litigating the claim in a non-bankruptcy forum. Hay v. First Interstate Bank of Kalispell, N.A., 978 F.2d 555, 557 (9th Cir. 1992). However, the Ninth Circuit only recognizes judicial estoppel when the Bankruptcy Court relied on the assertion that the debtor did not intend to bring any litigation, and the litigation would result in a windfall to the debtor against her creditors. Donato v. Metropolitan Life Insurance Co., 230 B.R. 418, 421 (N.D. Cal. 1999) (citing Milgard Tempering, Inc. v. Selas Corp. of America, 902 F.2d 703, 715 (9th Cir. 1990)).

In Cusano v. Klein, 264 F.3d 936, 945 (9th Cir. 2001) the plaintiff sought to bring an action for unpaid royalties. However, the plaintiff had previously filed for bankruptcy and had not informed the Court in the bankruptcy proceedings of this cause of action, which had accrued prior to filing his petition for bankruptcy. Id. at 948. By the time of his suit for unpaid royalties, plaintiff's bankruptcy proceedings had been closed without the cause of action having been examined or administered for the benefit of any of the plaintiff's debts. Id. Normally this would result in the unadministered asset (the claim) being technically abandoned and reverting back to the plaintiff-debtor. Id. at 945. However, because the bankruptcy estate did not have the opportunity to examine the claim, the asset (claim) continues to belong to the bankruptcy estate and does not revert to the plaintiff-debtor. Id. at 946. The plaintiff had no standing to bring that particular claim. Defendants contend that the actions alleged in the FAC should have put Plaintiffs on notice of their claims well before their bankruptcy petition, and that those claims accrued before the filing of the bankruptcy petition, as in Cusano. Also like Cusano, the Plaintiffs bankruptcy estate closed prior to the filing of their complaint. Defendants argue that, like the plaintiff's claim in Cusano, the Plaintiffs' cause of action here was not technically abandoned and did not revert back to them, but, rather, still belongs to the bankruptcy estate, making the Trustee the only person with standing to bring any claims. Furthermore, because Plaintiffs never listed their potential claims on their bankruptcy petition nor informed the Trustee of the potential litigation, Defendant City of Fresno contends that Plaintiffs should be judicially estopped from bringing their claims outside of a bankruptcy forum. See Hay 978 F.2d 555, 557 (holding that a debtor's failure to inform the bankruptcy estate of potential causes of actions precluded him from bringing those claims against a former creditor outside of a bankruptcy proceeding).

Plaintiffs oppose the Defendants' position. Plaintiffs contend that the bankruptcy estate does not own their action. To prove this, Plaintiffs must show that the cause of action is either exempt from the bankruptcy proceedings, or was abandoned by the Trustee. Rowland, 949 F. Supp. 1447, 1453. Plaintiffs do not contend that the cause of action was exempt, but rather, they claim that it was abandoned by the Trustee. Plaintiffs point to the "United State Trustee's Ex Parte Motion to Reopen Case" (Doc. 12-2), dated October 20, 2010, which asks the Bankruptcy Judge to reopen the Plaintiffs' bankruptcy case after having learned of this lawsuit and another pending in the Northern District of California. The case was reopened by U.S. Bankruptcy Judge W. Richard Lee on October 21, 2010 (Doc. 12-3). However, after examining the claim, the U.S Trustee found, in his "Notice of Filing Report of No Distribution" ("Notice"), filed April 16, 2011 (Doc. 12-4) that there were no funds to distribute and that the estate had been fully administered. The Notice also provided an objection period for interested parties to request a hearing. No objection was filed and no hearing was held. Plaintiffs argue that this Notice abandoned the claims to the Plaintiffs.

11 U.S.C.A. § 554 governs the abandonment of estate property. Section 554 states:

[(a)] After notice and a hearing, the trustee may abandon any property of the estate that is burdensome to the estate or that is of ...


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