UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA
February 14, 2011
IDEARC MEDIA LLC, PLAINTIFF,
DAVID J. GLASSMAN, DEFENDANT.
The opinion of the court was delivered by: Pollak, J.
Plaintiff Idearc Media LLC ("Idearc") publishes the Verizon Print Directories. In 2007, Idearc began publishing advertisements, in various phone directories, for defendant David Glassman's law office. On March 31, 2009, Idearc filed for Chapter 11 bankruptcy. In re Idearc Media LLC, No. 09-31836 (Bankr. N.D. Tex.). In May of 2009, Idearc's petition was consolidated with the bankruptcy proceedings of its parent company, Idearc, Inc. Id. (docket no. 4); see also In re Idearc, Inc., No. 09-31828 (Bankr. N.D. Tex. filed March 31, 2009). On December 22, 2009, the bankruptcy court confirmed a Joint Plan of Reorganization. In re Idearc Inc., et al.(docket no. 1639).
On February 17, 2010, Idearc filed a breach of contract action against Glassman in the Court of Common Pleas of Philadelphia County, demanding over $90,000 in damages. Idearc alleges that Glassman failed to pay any part of the fees he owed Idearc for advertising services.
The action was properly removed to this court on March 19, 2010, on diversity grounds, and Glassman filed a motion to dismiss under Federal Rule of Civil Procedure 12(b)(1), asserting that this court lacks subject matter jurisdiction because Idearc does not have standing. Glassman alternatively argues that Idearc's suit should be dismissed under the doctrine of judicial estoppel.
Glassman contends that Idearc does not have standing because it failed to disclose this cause of action during the bankruptcy proceedings. Thus, Glassman contends, the cause of action remains property of the bankruptcy estate and cannot be asserted by Idearc. Idearc concedes that it did not schedule this cause of action in its bankruptcy proceedings, but it argues that it was under no obligation to do so because the claim did not accrue until after it filed for bankruptcy.
Glassman's Rule 12(b)(1) motion is a factual attack on subject matter jurisdiction because he alleges that certain facts outside the scope of the complaint demonstrate that Idearc lacks standing. See Mortensen v. First Fed. Sav. & Loan Ass'n, 549 F.2d 884, 891 (3d Cir. 1977) ("[W]e must emphasize a crucial distinction, often overlooked, between 12(b)(1) motions that attack the complaint on its face and 12(b)(1) motions that attack the existence of subject matter jurisdiction in fact, quite apart from any pleadings."). In assessing a factual attack on jurisdiction, "[t]he court may consider and weigh evidence outside the pleadings to determine if it has jurisdiction." Gould Elecs., Inc. v. United States, 220 F.3d 169, 178 (3d Cir. 2000).
Glassman's standing argument rests on an incomplete reading of the Bankruptcy Code and on caselaw that applies to Chapter 7 debtors and not to Idearc, a Chapter 11 debtor. The distinction in the standing analysis for each type of debtor was discussed extensively by the Bankruptcy Appellate Panel for the Ninth Circuit in Diamond Z Trailer Inc. v. JZ L.L.C., 371 B.R. 412 (9th Cir. BAP 2007). Under 11 U.S.C. § 521(1), a bankruptcy debtor-whether under Chapter 7 or Chapter 11-must file, inter alia, a schedule of assets and liabilities as well as a statement of financial affairs. Moreover, § 554(d), which also applies to both Chapter 7 and Chapter 11 debtors, mandates that, at the close of bankruptcy proceedings, unscheduled property is "not abandoned" to the debtor, and thus remains part of the estate. For Chapter 7 debtors, this means that failure to schedule a pre-petition asset or cause of action deprives the debtor of standing to pursue that claim for his or her own benefit in a non-bankruptcy proceeding. See In re Kane, __ F.3d __, 2010 U.S. App. LEXIS 25899, no. 09-4254, * 11 (3d Cir. 2010) ("[C]courts have held that where a [Chapter 7] debtor conceals an asset or fails to schedule it, the asset remains the property of the bankruptcy estate and, accordingly, the debtor can be found to lack standing to pursue its further disposition."); Hutchins v. I.R.S., 67 F.3d 40, 43 (3d Cir. 1995) ("[T]he failure to schedule the refund is fatal to [plaintiff's] claim."). However, as the Diamond Z court noted, § 1141(b)-which applies to Chapter 11 debtors, but not Chapter 7 debtors-precludes the same standing analysis for Chapter 11 debtors such as Idearc. Section 1141(b) mandates that "Except as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor." 11 U.S.C. § 1141(b) (emphasis added). Thus, even if a Chapter 11 debtor fails to schedule a cause of action during bankruptcy proceedings, that cause of action vests in the debtor and the debtor has standing to sue. Diamond Z Trailer Inc., 371 B.R. at 418. The Diamond Z court concluded that [t]he effect of presumptively vesting all of the property of the estate in the chapter 11 . . . debtor upon plan confirmation means that decisions holding that chapter 7 debtors lacks standing to sue on a claim owned by the estate are limited to chapter 7 cases and to those chapter 11 . . . cases in which the plan or the order confirming the plan alters the § 1141(b) . . . vesting rule. When property of the estate has been vested in the debtor, it cannot be said that the chapter 11 debtor has no standing after the case is closed.
Diamond Z Trailer Inc., 371 B.R. at 419.
The Diamond Z analysis is persuasive, and Glassman has not cited to any controlling precedent to the contrary. Accordingly, Glassman's 12(b)(1) motion to dismiss for lack of standing is denied.*fn1
Glassman frames his judicial estoppel argument as part of his 12(b)(1) motion to dismiss for lack of subject matter jurisdiction. Because judicial estoppel is an affirmative defense that does not attack jurisdiction, his argument is more properly considered under Rule 12(b)(6). See Bethel v. Jendoco Constr. Corp., 570 F.2d 1168, 1174 (3d Cir. 1978) ("[A]n affirmative defense may be raised on a 12(b)(6) motion if the predicate establishing the defense is apparent from the face of the complaint."); Kehr Packages v. Fidelcor, Inc., 926 F.2d 1406, 1409 (3d Cir. Pa. 1991) ("A plaintiff may be prejudiced if what is, in essence, a Rule 12(b)(6) challenge to the complaint is treated as a Rule 12(b)(1) motion.").
In order to survive a motion to dismiss for failure to state a claim, a complaint need only include "'a short and plain statement of the claim showing that the pleader is entitled to relief,' in order to 'give the defendant fair notice of what the . . . claim is and the grounds upon which it rests.'" Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). Thus a plaintiff must include sufficient facts to "state a claim to relief that is plausible on its face." Twombly, 550 U.S. at 570. In reviewing a 12(b)(6) motion, "the facts alleged [in the complaint] must be taken as true and a complaint may not be dismissed merely because it appears unlikely that the plaintiff can prove those facts or will ultimately prevail on the merits." Phillips v. County of Allegheny, 515 F.3d 224, 231 (3d Cir. 2008). Reasonable inferences must be drawn in favor of the plaintiff. Id.
"The basic principle of judicial estoppel . . . is that absent any good explanation, a party should not be allowed to gain an advantage by litigation on one theory, and then seek an inconsistent advantage by pursuing an incompatible theory." Ryan Operations G.P. v. Santiam-Midwest Lumber Co., 81 F.3d 355, 358 (3d Cir. 1996). The party asserting judicial estoppel must show that 1)"the party to be estopped must have taken two positions that are irreconcilably inconsistent;" 2) the change in position was undertaken in bad faith; and 3) "no lesser sanction would adequately remedy the damage." Krystal Cadillac--Olds GMC Truck v. General Motors, 337 F.3d 314, 319 (3d Cir. 2003) (quoting Montrose Medical Group Participating Savings Plan v. Bulger, 243 F.3d 773, 779--80 (3d Cir. 2001)). The doctrine may be applied to preclude a bankruptcy debtor, who has failed to disclose a cause of action during bankruptcy proceedings, from later asserting that claim. See Krystal Cadillac--Olds GMC Truck, 337 F.3d at 320--26. In the bankruptcy context, "a rebuttable inference of bad faith arises when averments in the pleadings demonstrate both knowledge of a claim and a motive to conceal that claim in the face of an affirmative duty to disclose." Id. at 321.
Glassman's judicial estoppel argument must be rejected at this stage of the litigation. Idearc concedes that it did not schedule "this cause of action" in its bankruptcy proceedings, and argues that it was under no obligation to do so. See Pl.'s Supplemental Mem. at 1.*fn2 But even if Idearc did have an obligation to disclose, and even if it failed to do so, judicial estoppel might not apply because Idearc may be able to rebut the inference of bad faith. For example, it may be that Idearc "derived and intended no appreciable benefit from its nondisclosure," that the bankruptcy court has authorized or approved of this litigation, or that the creditors will receive a portion of the recovery in this action. See Ryan Operations G.P., 81 F.3d at 363--64. These possibilities reinforce the principle that "[t]he applicability of judicial estoppel is fact-specific." In re: Kane, 2010 U.S. App. Lexis 25899 at *17.
Accordingly, it is not apparent from the face of the complaint that judicial estoppel should apply here, and as of now Glassman's motion to dismiss on the basis of judicial estoppel must be denied. Denial of this motion to dismiss, challenging the complaint on its face, is without prejudice to reconsideration of the judicial estoppel issue in the light of future factual development.*fn3
An appropriate order accompanies this memorandum.