Opinion
Civil No. 02CV760-B(AJB).
October 4, 2005
I. Introduction
The case is before the Court on remand from the Ninth Circuit for the Court to determine whether Plaintiff and Bankruptcy Debtor Michael Cullen lacked prudential standing to continue as the sole Plaintiff (1) at the time the Court issued a prior order dismissing the case with prejudice on January 21, 2003, and (2) at the time Plaintiff filed a Notice of Appeal to the Ninth Circuit. See Turner v. Cook, 362 F.3d 1219, 1225-26 (9th Cir. 2004). In particular, the Court must determine whether Bankruptcy Debtor Cullen's failure to include the bankruptcy estate in the lawsuit was an "understandable mistake" that cured his standing problem specifically in view of the bankruptcy trustee's later ratification of the lawsuit in favor of debtor Cullen. See Dunmore v. United States, 358 F.3d 1107, 1112-13 (9th Cir. 2004). As discussed below, the Court finds that Plaintiff Cullen lacked prudential standing at the two time periods in question because his decision to continue in his own name was not an understandable mistake. Accordingly, the Court vacates its prior order (Doc. No. 24) dated January 21, 2003, and the clerk's judgment (Doc. No. 25) dated January 24, 2003, dismissing the case with prejudice. Instead, the Court dismisses the case without prejudice nunc pro tunc to January 21, 2003.
II. Factual Background and Procedural History
Plaintiff Cullen filed suit against Defendant Bank One Corporation for violations of the Truth in Lending Act ("TILA") stemming from the refinancing of his residence. On November 15, 2002, Plaintiff filed a first amended complaint ("FAC"). On November 25, 2002, Defendant Bank One filed a motion to dismiss the FAC under Rule 12(b)(6) of the Federal Rules of Procedure. On January 16, 2003, Plaintiff Cullen filed for bankruptcy under Title 11 of the Bankruptcy Code and listed the Bank One lawsuit as an asset, thereby making the lawsuit the property of the bankruptcy estate. See Turner, 362 F.3d at 1225-26 (citing 11 U.S.C. § 541(a)(1)). Plaintiff Cullen also listed his residence as a bankruptcy asset and took a homestead exemption in his residence. On January 17, 2003, Plaintiff Cullen filed a Notice of Bankruptcy Stay in this Court, informing the Court about the bankruptcy filing and about an automatic stay that applies to all actions against the debtor or property of the bankruptcy estate. On January 21, 2003, i.e. after the bankruptcy petition was filed, the Court granted Defendant's Motion to Dismiss the FAC with prejudice. See Doc. No. 24. A Clerk's judgment was entered on January 24, 2003. See Doc. No. 25.
On February 18, 2003, Plaintiff's counsel contacted Bankruptcy Trustee Harold Taxel to inform him that Cullen intended to file a Notice of Appeal on February 20, 2003. Plaintiff's counsel asked Trustee Taxel to join in the appeal or abandon the claim to Cullen to pursue on his own. Trustee Taxel requested a written assessment of Cullen's claim before he would agree to abandon the claim. On February 19, 2003, Trustee Taxel, after receiving an assessment of the case, gave Plaintiff's counsel written notice that he did not wish to join the appeal and he intended to abandon the claim against Bank One. On February 20, 2003, Plaintiff Cullen filed a timely notice of appeal to the Ninth Circuit.
On February 21, 2003, Trustee Taxel filed in the Bankruptcy Court a Trustee Request for Notice of Proposed Abandonment of Cullen's Claim against Bank One. On The Clerk of the Bankruptcy Court notice the proposed abandonment of property and set March 26, 2003, as a deadline for objections to the proposed abandonment. This procedure is necessary since creditors of the debtor have standing to object to potential elimination of bankruptcy estate's assets. There were no objections to the proposed abandonment, and on April 1, 2003, the Bankruptcy Trustee filed a Report of Abandonment of Real Property for Cullen's claims against Bank One, thereby relinquishing the claim to debtor Cullen.
After the submission of appellate briefs and three days prior to oral arguments, the Court of Appeals sua sponte asked the parties to address the issue of standing. On December 11, 2004, the Court of Appeals heard oral arguments. On December 27, 2004, the Court of Appeals entered judgment dismissing Cullen's appeal for lack of standing to sue as plaintiff, citing to Turner, 362 F.3d at 1225-26. On January 7, 2005, Appellant Cullen filed a Petition for Rehearing For Panel With Suggestion For Rehearing En Banc. On June 17, 2005, the Court of Appeals remanded the case to the district court for "appropriate factual findings on the standing issue" in view of Dunmore and Turner. See Dunmore, 358 F.3d at 1112-13; Turner, 362 F.3d at 1225-26.
On September 1, 2005, both parties filed briefs on the standing issue. Oppositions were filed on September 19, 2005. On September 26, 2005, the Court heard oral arguments on the issue of standing.
III. Standing
A. In District Court
Pursuant to Federal Rule of Civil Procedure 12(h), "[w]henever it appears . . . that the court lacks jurisdiction of the subject matter, the court shall dismiss the action." Fed.R.Civ.P. 12(h)(3). The Ninth Circuit has interpreted this rule to permit district courts to raise the issue of subject matter jurisdiction sua sponte at any point in the litigation, even on appeal.See Snell v. Cleveland, Inc., 316 F.3d 822, 826 (9th Cir. 2002). The Court does not have subject matter jurisdiction to hear a case if a plaintiff lacks constitutional or prudential standing.
In order for a plaintiff to have constitutional standing, plaintiff must suffer an injury in fact that is redressable by a decision in plaintiff's favor. See Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61, 119 L. Ed. 2d 351, 112 S. Ct. 2130 (1992). In addition to constitutional standing, a plaintiff must have prudential standing whereby plaintiff asserts "his own legal interests as the real party in interest." Dunmore, 358 F.3d at 1112 (citing Warth v. Seldin, 422 U.S. 490, 499 (1975)).
Here, the issue is whether Plaintiff Cullen lacked prudential standing when this Court dismissed the case with prejudice on January 21, 2003. During the pendency of Plaintiff Cullen's case in district court, Cullen filed for bankruptcy protection, listing the Bank One lawsuit as property. As such, "all the legal or equitable interests" in the Bank One lawsuit became the property of the bankruptcy estate, not Cullen, and was "represented by the bankruptcy trustee." Turner, 362 F.3d at 1225-26 (citing 11 U.S.C. § 541(a)(1)). Because the lawsuit was part of the bankruptcy estate, only the estate, as the real party in interest, had standing to continue the suit. Cullen, however, lacked standing to continue as plaintiff because he was no longer the real party in interest.
Under Rule 17(a) of the Federal Rules of Civil Procedure, a plaintiff may cure defects in standing by obtaining the real party in interest's ratification to proceed with the cause of action. See Fed.R.Civ.P. 17(a) (2005). The ratification procedure requires notice to all creditors and an opportunity to object because of the potential diminution of the debtor's estate. Plaintiff did not follow this ratification procedure for the district court action.
In Dunmore, the Ninth Circuit suggested that a trustee's ratification of a lawsuit in favor of a debtor may "cure the standing problem so long as the debtor made an `understandable mistake' by proceeding in his own name, as opposed to some sort of strategic manipulation." 358 F.3d at 1112-13. Therefore, provided that Plaintiff Cullen's decision to sue in his own name was an "understandable mistake" and not a "strategic decision," Trustee Taxel's ratification of the Bank One lawsuit in favor of Plaintiff Cullen on April 1, 2003, relates back to the date the Court issued its ruling granting dismissal of the FAC ( i.e. to January 21, 2003). Id. at 1112. However, the Court finds that there was no understandable mistake at the district court level.
Plaintiff's counsel is an experienced bankruptcy attorney who handled both the bankruptcy filing and Cullen's suit against Bank One in this Court. An experienced bankruptcy attorney would presumably know that once the lawsuit in district court was listed as an asset in bankruptcy, it became property of the bankruptcy estate. Because the lawsuit belonged to the bankruptcy estate, it was not difficult for Plaintiff's counsel to identify the bankruptcy trustee as the real party in interest and proceed only after the required procedures in bankruptcy court were successful.
However, Plaintiff's counsel did not join the Bankruptcy Trustee in the district court case. About a month after the district court entered dismissal of the case with prejudice, Plaintiff's counsel contacted Bankruptcy Trustee Taxel solely for the purposes of filing an appeal. In particular, Plaintiff's counsel, a seasoned bankruptcy attorney, sought to join Trustee Taxel in the appeal or get him to abandon the claim in favor of debtor Cullen. However, there is no evidence that counsel contacted the Bankruptcy Trustee to get him to join in the district court case or obtain a Bankruptcy Order releasing the Bank One Claim from the estate so that debtor Cullen could pursue the district court case. If Plaintiff's counsel thought it necessary to contact the Bankruptcy trustee regarding the appellate case, counsel should have deemed it necessary to contact the Trustee regarding the district court case.
Plaintiff's counsel did file a Notice of Bankruptcy Stay in district court stating that "[p]ursuant to 11 U.S.C. § 362, an automatic stay applies to all actions against the debtor or property of the bankruptcy estate." However, this stay only applies to actions against the debtor or property of the bankruptcy estate. The stay does not address actions brought by the debtor or by the bankruptcy estate's property. Therefore, the present lawsuit, as an action brought by the debtor and the property of the bankruptcy estate, was not subject to an automatic stay. Additionally, Plaintiff's filing a Notice of Bankruptcy Stay in district court did not constitute substituting the bankruptcy estate as the real party in interest. Instead, Plaintiff's counsel took no steps in district court to cure her standing.
On January 21, 2003, five days after Cullen filed for bankruptcy protection, the Court dismissed the case on other grounds with prejudice. Even at this stage, Plaintiff's counsel did not file a motion for reconsideration or otherwise substitute the Bankruptcy Trustee as the real party in interest. Plaintiff's inaction with respect to curing his standing was not an understandable mistake.
The fact that Plaintiff Cullen was eventually successful (albeit over two months after the district court dismissed the case) in getting the Bankruptcy estate to release the Bank One claim is immaterial because there was no understandable mistake. Accordingly, the Court finds that Plaintiff lacked standing and failed to perfect her standing in district court. As such, at the time the Court entered its order dismissing the case with prejudice, the Court lacked subject matter jurisdiction. Therefore, the Court VACATES its order (Doc. No. 24) dated January 21, 2003, and the clerk's judgment (Doc. No. 25) dated January 24, 2003, dismissing the case with prejudice. Instead, the Court dismisses the case without prejudice nunc pro tunc to January 21, 20003, on the ground that Plaintiff lacked standing.
B. In the Appellate Court
In addition to lacking prudential standing in district court, Plaintiff Cullen lacked prudential standing at the time he filed the Notice of Appeal because he failed to include the bankruptcy trustee as the real party in interest or have a Bankruptcy Court Order releasing the Bank One claim. As discussed above, Plaintiff can cure his standing if his failure to include the Bankruptcy Trustee was an "understandable mistake" and not a "strategic decision." Dunmore, 358 F.3d at 1112. If there were an understandable mistake, Trustee Taxel's ratification of the Bank One lawsuit in favor of Plaintiff Cullen on April 1, 2003, would relate back to the date Cullen filed his Notice of Appeal ( i.e. to February 20, 2003). Id. However, the Court finds that there was no understandable mistake at the time Plaintiff filed the Notice of Appeal.
Here, Plaintiff's counsel contacted Bankruptcy Trustee Taxel on February 18, 2003, ( i.e. almost a month after this Court's dismissal of the case) to see if he wanted to join in Cullen's appeal or abandon the lawsuit so that Cullen could continue the lawsuit in his name. However, the fact that Plaintiff's counsel contacted the Trustee Taxel two days before Cullen filed the Notice of Appeal does not cure the prudential standing problem at the appellate level. First, based on her communication with Trustee Taxel on February 18, 2003, Plaintiff counsel was not reasonable in thinking she would definitely get the Trustee to abandon the Bank One lawsuit. For example, in his declaration, Trustee Taxel recalls his conversation with Plaintiff's attorney:
I informed her that it was not likely that I would be interested in pursuing any appeal on behalf of the bankruptcy estate and that it would be more likely that I would be abandoning the claim against Bank One. However, I requested that Ms. Raymond provide me with written assessment of the Debtor's claims before I would seek formal abandonment of the Bank One claim. Doc. No. 45 (Taxel Decl.) at 3.
Even after Plaintiff's counsel provided Trustee Taxel an assessment of the case, she did not receive formal abandonment of the case. Instead, Plaintiff's attorney received Trustee Taxel's "intent to abandon the debtor's claim described above against Bank One Corporation." Id., Exh. F. Experienced bankruptcy attorneys, such as Plaintiff's counsel, would know that Trustee Taxel's intent is insufficient to confer on Plaintiff the authority to prosecute the appeal. See Turner, 362 F.3d at 1226; see also Sierra Switchboard Co. v. Westinghouse Electric Corporation, 789 F.2d 705, 709 (9th Cir. 1985). Plaintiff's authority to prosecute the appeal must come from a Bankruptcy Order.
Moreover, experienced bankruptcy counsel would know that there is virtually no way to get a formal abandonment of Bank One lawsuit by the bankruptcy estate in two days ( i.e. time differential between her initial communication with Trustee Taxel and her filing the notice of appeal). Familiar with bankruptcy procedures, Plaintiff's counsel would presumably know that after Trustee Taxel filed notice of abandonment, the bankruptcy rules would require a waiting period so that creditors, who were notified of the request for abandonment of the Bank One claim, could raise objections. If the creditors had objected to the abandonment of the Bank One lawsuit, there may have been no ratification of the Bank One claim to relate back to the Notice of Appeal's filing date.
"Section 554 of title 11 of the United States Code requires notice and a hearing for abandonment to occur, and Bankruptcy Rule 6007 requires the trustee to give notice of a proposed abandonment to all creditors." Turner, 362 F.3d at 1226.
In essence, Plaintiff's counsel played Russian roulette with her case, hoping that the bankruptcy court would approve the abandonment. The fact that Plaintiff's counsel eventually secured release of the Bank One claim in favor of debtor Cullen does not make her failure to include the bankruptcy trustee in the Notice of Appeal understandable. In particular, Plaintiff's counsel could have filed for an extension to file the Notice of Appeal pending the outcome of the asset abandonment process, but counsel did not. Instead, Plaintiff Cullen continued as sole Plaintiff/Apellant based on mere assurances that the Bankruptcy Trustee would commence the abandonment process. The Court does not find this mistake to be understandable.
Plaintiff's counsel contends that the failure to include the bankruptcy trustee as the real party in interest was an understandable mistake because she mistakenly believed that Cullen was a real party in interest based on his homestead exemption in the residence that was the subject of the Bank One lawsuit.
In light of Cullen's bankruptcy filing, I recognized that the bankruptcy estate had an interest in the claim against Bank One. Based on my experience as a bankruptcy attorney, I also believed that Cullen continued to have an interest in the claim against Bank One because of the homestead exemption. In order to determine whether my belief was correct, I researched bankruptcy rules and codes[s], a practice guide published by NCLC and case law. My research provided no guidance directly on point. Doc. No. 44 (Raymond Decl.) at 3.
However, Cullen's residence exemption is listed as a separate and distinct asset from the Bank One law suit. Although Plaintiff's counsel requested an exemption in the residence, she did not request an exemption for the lawsuit. The fact that Cullen had an exemption interest in the house did not alter or negate the fact that the bankruptcy estate owned the lawsuit and was the real party in interest for the entire lawsuit. Accordingly, the Court finds that because Plaintiff's counsel (1) delayed in contacting the bankruptcy trustee, (2) only secured a promise from Trustee Taxel to initiate abandonment procedure, (3) did not ask for an extension to file the appeal, and (4) did not await the notice and hearing process required in Bankruptcy Court to release the Bank One Claim from the bankruptcy estate, Plaintiff's counsel's failure to name the bankruptcy estate in the Notice of Appeal was not an understandable mistake. Therefore, the Court finds that Plaintiff Cullen lacked standing at the time he filed the Notice of Appeal. However, because the Court has vacated its prior order dismissing the case with prejudice, Plaintiff's appeal is moot.
IV. Conclusion
For the reasons given above, the Court VACATES its order (Doc. No. 24) dated January 21, 2003, and the clerk's judgment (Doc. No. 25) dated January 24, 2003, dismissing the case with prejudice. Instead, the Court DISMISSES the case WITHOUT PREJUDICE nunc pro tunc to January 21, 2003, for lack of standing.
IT IS SO ORDERED.