Palaniappan et al v. United States of America

Filing 40

ORDER that Plaintiffs' Motion to Submit an Additional Response, construed by the Court as a motion to file a sur-reply, and to Request an Oral Argument 38 is DENIED. IT IS FURTHER ORDERED that the United States' Motion for Judgment on the Pleadings 30 is GRANTED. The Clerk is directed to enter judgment in favor of the United States and terminate this case. See document for complete details. Signed by Judge Douglas L Rayes on 3/27/2024. (KLG)

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1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8 9 Natarajan Palaniappan, et al., Plaintiffs, 10 11 v. 12 United States of America, 13 No. CV-22-01685-PHX-DLR ORDER Defendant. 14 15 16 Plaintiffs Natarajan Palaniappan and Satya Sree Dandamudi are suing the United 17 States for a refund of $67,104, which was withheld by the Internal Revenue Service 18 (“IRS”) as federal income taxes from a distribution of Palaniappan’s retirement plan. 19 Pending before the Court are the United States’ motion for judgment on the pleadings, 20 which is fully briefed (Docs. 30, 34, 35), and Plaintiffs’ motion to submit an additional 21 response, which the Court construes as a motion to file a sur-reply to United States’ motion 22 for judgment on the pleadings, and to request an oral argument (Doc. 38). 23 For the reasons that follow, the Court denies Plaintiffs’ motion to file a sur-reply 24 and request an oral argument1 (Doc. 38) and grants the United States’ motion for judgment 25 The Court denies Plaintiffs’ request to file a sur-reply because the United States’ reply does not raise arguments or issues for the first time. Furthermore, the Court does not find Plaintiffs’ proposed sur-reply helpful to the resolution of the pending motion. See Sebert v. Ariz. Dep’t of Corrections, No. CV-16-354-PHX-ROS, 2016 WL 3456909, at *1 (D. Ariz. June 17, 2016). As to the request for oral argument, the Court finds that the issues concerning the United States’ motion for judgment on the pleadings are adequately briefed, and oral argument will not assist the Court in reaching its decision. See Fed. R. Civ. P. 78(b); LRCiv. 7.2(f). 26 27 28 1 1 2 on the pleadings (Doc. 30). BACKGROUND2 I. 3 Gilbert Hospital hired Palaniappan in October 2009. (Doc. 1 ¶ 6.) While employed 4 there, Palaniappan elected to participate in the 26 U.S.C. § 409A deferred compensation 5 plan offered by Gilbert Hospital. Participation in the plan was voluntary, and employees 6 were informed that if they elected to participate in the 409A plan, they would no longer be 7 allowed to contribute to the Gilbert Hospital 401(k) plan. (Doc. 27-3 at 2.) 8 After experiencing financial difficulties, Gilbert Hospital filed for bankruptcy on 9 February 5, 2014. (Doc. 1 ¶ 7.) At some point, Gilbert Hospital determined that not all the 10 participants in the 409A plan, including Palaniappan, were qualified to participate in the 11 plan. Considering the pendency of the bankruptcy proceedings, Gilbert Hospital decided 12 not to subject these non-qualified participants’ 409A accounts to the claims of the 13 Hospital’s creditors. Instead, Gilbert Hospital chose to liquidate the 409A plan and make 14 secured claim distributions to the non-qualified 409A plan participants during the 15 bankruptcy proceedings. (Doc. 27-3 at 4.) 16 In doing so, Gilbert Hospital prepared a 409A proof of claim on behalf of the 409A 17 claimants, itemizing the value of each account to be paid to the non-qualified participants. 18 After Palaniappan filed a limited objection to the proof of claim, Gilbert Hospital prepared 19 an amended 409A proof of claim, showing the value of Palaniappan’s claim to be 20 $289,127.39, of which $72,298.60 was to be withheld as federal income tax. Palaniappan 21 again filed an objection to this proof of claim, arguing to the Bankruptcy Court that “his 22 409A account should not be treated like a non-qualified retirement account, for tax 23 purposes” and that “since he was never eligible to participate in the 409A Plan, any 24 2 25 26 27 28 This section draws from the allegations in the Complaint (Doc. 1), which are accepted as true for the purposes of this order. The Court also takes judicial notice of the filings made in the following cases: In re: Gilbert Hosp. LLC, No. 2:14-bk-01451-MCW (Bankr. D. Ariz.), and Palaniappan v. Gilbert Hosp. LLC, No. CV-17-00517-PHX-JJT (D. Ariz.). See Reyn’s Pasta Bella, LLC v. Visa USA, Inc., 442 F.3d 741, 746 n.6 (9th Cir. 2006) (“[The Court] may take judicial notice of court filings and other matters of public record.”). The United States attached both the Bankruptcy Court’s order in In re: Gilbert Hosp., and the District Court’s order in Palaniappan v. Gilbert Hosp., to the pending motion. (See Docs. 27-3, 27-4.) -2- 1 contributions he made . . . should have been directed to Gilbert Hospital’s 401(k) plan 2 instead.” Palaniappan requested that the Bankruptcy Court transfer the appropriate portion 3 of the 409A account to the Gilbert Hospital 401(k) plan or at least compensate Palaniappan 4 for the value of the tax deferral that Palaniappan lost. (Id. at 8–9.) 5 Palaniappan and Gilbert Hospital engaged in discovery on Palaniappan’s objection. 6 During this process, Gilbert Hospital liquidated Palaniappan’s 409A plan account, issuing 7 a check to Palaniappan in the amount of $216,895.81 and transmitting $72,298.60 to the 8 IRS as federal income tax withholding. (Id. at 10.) On September 30, 2018, following an 9 evidentiary hearing, the Bankruptcy Court overruled Palaniappan’s objection and denied 10 his request that the Bankruptcy Court order the IRS to transfer the 409A plan proceeds onto 11 a qualified retired account. (Id. at 20.) In so holding, the Bankruptcy Court noted that 12 Palaniappan voluntarily decided to participate in the 409A plan and that disclosures were 13 made to him that the 409A plan was not qualified and he would not be able to roll funds in 14 the 409A plan into other qualified accounts. The Court further found that because the 409A 15 plan was not a qualified retirement plan and the funds of the plan, upon a change in control 16 of the Hospital, could be disbursed in a lump sum, the 409A disbursement was subject to 17 withholding. (Id. at 24–25.) 18 While these bankruptcy proceedings were ongoing, Palaniappan filed ERISA 19 breach of fiduciary duty claims against Gilbert Hospital in the District of Arizona. 20 Palaniappan v. Gilbert Hosp. LLC, No. CV-17-00517-PHX-JJT (D. Ariz.). After Gilbert 21 Hospital failed to appear, the District Court granted Palaniappan’s motion for judgment on 22 the pleadings and ordered Palaniappan to file a detailed accounting of damages. 23 On April 20, 2020, the Court awarded Palaniappan $525,238 in damages. In a 24 written order, the Court explained that the award included $226,709 in damages for “the 25 loss [Palaniappan] suffered when [Gilbert Hospital] moved his retirement account from a 26 401k plan to a 409a plan.” The Court went on to deny Palaniappan’s request that it direct 27 the IRS “to refund the $72,231 wrongly paid to it when [Gilbert Hospital] shifted 28 [Palaniappan’s] retirement funds from the 401k account to the 409a account,” explaining -3- 1 that the IRS was not a party in the matter and so the Court could not compel the IRS to take 2 any action. The Court also concluded that ordering the IRS to issue a refund “would 3 constitute double counting of damages.” The Court noted that during a hearing on the 4 damages award, “[Palaniappan] clarified that the $72,231 he seeks to have the IRS return 5 is a component of the $226,709 that he lost as a result of [Gilbert Hospital’s] unlawful 6 transfer of his funds from a 401k account to a 409a account.” Because the Court already 7 accounted for and awarded Palaniappan that sum, ordering the IRS to issue such a refund 8 would constitute double recovery for Palaniappan. (Doc. 27-4.) After entry of judgment, 9 Palaniappan filed a notice of satisfaction of judgment on January 5, 2022. (Doc. 35-2.) 10 On March 27, 2020, Palaniappan and his wife, Dandamudi, filed an amended 2016 11 income tax return, asserting that the “Form W-2 issued by Gilbert Hospital was issued in 12 error” and that they “were due a refund in the amount of $67,104.”3 (Doc. 1 ¶14.) Plaintiffs 13 provided information to the IRS regarding Palaniappan’s judgment against Gilbert Hospital 14 as support for Plaintiffs’ claim for refund. (Doc. 1 ¶ 14.) The IRS denied Plaintiffs’ claim 15 for refund on October 7, 2020. (Id. ¶ 15.) Plaintiffs filed an administrative appeal, but the 16 IRS sustained its decision. (Id. ¶ 16.) 17 On October 4, 2022, Plaintiffs filed the instant action against the United States 18 raising a single claim: that the IRS owes them a refund in the amount of $67,104. (Doc. 1 19 ¶ 20.) Plaintiffs allege that “Palaniappan was not part of [Gilbert Hospital’s] section 409A 20 plan” and therefore it was improper for Gilbert Hospital to liquidate and send to the IRS 21 funds that were part of Palanniapan’s 401(k) qualified retirement plan. (Id. ¶¶ 10–11.) The 22 United States filed an amended Answer on May 12, 2023 (Doc. 13), and the pending 23 motion for judgment on pleadings on June 2, 2023 (Doc. 30.) 24 II. LEGAL STANDARD 25 A motion for judgment on the pleadings pursuant to Rule 12(c) is reviewed under 26 the same standard applicable to a Rule 12(b)(6) motion to dismiss for failure to state a 27 3 28 The United States notes in its pending motion that although Gilbert Hospital initially sent the IRS $72,298 as federal income tax withholding, the IRS refunded Plaintiffs $5,194, which explains why Plaintiffs are seeking $67,104 in the instant action. -4- 1 claim. Aldabe v. Aldabe, 616 F.2d 1089, 1093 (9th Cir. 1980). In ruling on a Rule 12(c) 2 motion, the Court must “accept all material allegations in the complaint as true and construe 3 them in the light most favorable to the [non-moving party].” Turner v. Cook, 362 F.3d 4 1219, 1225 (9th Cir. 2004). The Court must then consider whether the well-pleaded factual 5 allegations, taken as true, plausibly entitle Plaintiffs to relief. Ashcroft v. Iqbal, 556 U.S. 6 662, 679 (2009). “A claim for relief is plausible ‘when the plaintiff pleads factual content 7 that allows the court to draw the reasonable inference that the defendant is liable for the 8 misconduct alleged.’” Landers v. Quality Commc’ns, Inc., 771 F.3d 638, 641 (9th Cir. 9 2014) (citing Iqbal, 556 U.S. at 678). However, “where a complaint pleads facts that are 10 merely consistent with a defendant’s liability, it stops short of the line between possibility 11 and plausibility of entitlement to relief.” Iqbal, 556 U.S. at 67. In such a situation, “the 12 complaint should be dismissed, or judgment granted on the pleadings.” Strigliabotti v. 13 Franklin Res., Inc., 398 F. Supp. 2d 1094, 1097 (N.D. Cal. 2005). 14 III. DISCUSSION 15 A. Collateral estoppel bars Plaintiffs’ claim for a refund. 16 “Under collateral estoppel, once a court has decided an issue of fact or law necessary 17 to its judgment, that decision may preclude relitigation of the issue in a suit on a different 18 cause of action involving a party to the first case.” Dodd v. Hood River Cnty., 59 F.3d 852, 19 863 (9th Cir. 1995). Collateral estoppel applies when, 20 21 22 23 (1) the issue necessarily decided at the previous proceeding is identical to the one which is sought to be relitigated; (2) the first proceeding ended with a final judgment on the merits; and (3) the party against whom collateral estoppel is asserted was a party or in privity with a party at the first proceeding. Hydranautics v. FilmTec Corp., 204 F.3d 880, 885 (9th Cir. 2000). 24 Plaintiffs’ single claim for relief in this case is premised on whether Palaniappan’s 25 retirement plan at Gilbert Hospital was a 409A plan, thereby subjecting it to federal income 26 tax withholding, or a nontaxable 401(k) plan. This exact issue was already decided by the 27 Bankruptcy Court. In resolving Palaniappan’s objection to Gilbert Hospital’s 409A 28 amended proof of claim, the Bankruptcy Court addressed and overruled Palaniappan’s -5- 1 assertion—which he again raises before this Court—that the funds at issue were part of a 2 401(k) plan. Indeed, Plaintiffs concede that the “first and foremost” issue in this case is 3 whether “money forwarded by Gilbert Hospital to [the] IRS were . . . 401(k) [r]etirement 4 funds.” (Doc. 34 at 2.) As such, the issue necessarily decided at the bankruptcy proceedings 5 is identical to the one Plaintiffs raise here. 6 As to final judgment on the merits, Ninth Circuit precedent provides that “the 7 allowance or disallowance of a claim in bankruptcy is binding and conclusive on all parties 8 or their privies.” In re Bevan, 327 F.3d 994, 997 (9th Cir. 2003); see also In re Prestige 9 Ltd. Partnership-Concord, 234 F.3d 1108, 1113–14 (9th Cir. 2000) (holding that a district 10 court order overruling a debtor’s objections to a lender’s claim was final judgment on the 11 merits); Wright v. Wells Fargo Bank, N.A., No. 11-00212 SOM-RLP, 2012 WL 2973202, 12 at *7 (D. Haw. July 19, 2012) (holding that bankruptcy court’s order overruling objection 13 to secured claim was a final judgment on the merits). Accordingly, the Bankruptcy Court’s 14 order overruling Palaniappan’s objection to Gilbert Hospital’s amended proof of claim was 15 a final judgment on the merits. 16 Last, collateral estoppel is being asserted against Palaniappan, who was a party in 17 the bankruptcy proceeding, and his wife, Dandamundi, who is in privity with Palaniappan. 18 “Privity between parties exists when a party is so identified in interest with a party to the 19 prior litigation that he represents precisely the same right with respect to the subject matter 20 involved.” Stratosphere Litig. L.L.C. v. Grand Casinos, Inc., 298 F.3d 1137, 1143 n.3 (9th 21 Cir. 2002). Generally, “[s]pouses are in privity with each other where the cause of the 22 action in the prior litigation was community in nature and the proceeds of any judgment 23 that might have been recovered would have belonged to both husband and wife, as 24 community property.” Yang v. Fund Mgmt. Int’l, LLC, 847 F. App’x 419, 421 (9th Cir. 25 2021) (cleaned up). Arizona considers contributions made into a deferred compensation 26 plan to be community property. See e.g., Koelsch v. Koelsch, 713 P.2d 1234, 1244 (Ariz. 27 1986); Johnson v. Johnson, 638 P.2d 705, 708 (Ariz. 1981). Because the Bankruptcy 28 Court’s ruling affected the distribution of Palaniappan’s 409A plan, which is a deferred -6- 1 compensation plan, there is privity between Palaniappan and his wife and thus collateral 2 estoppel may be asserted against both. 3 The Court finds that all three requirements of collateral estoppel have been met. It 4 is clear Palaniappan had a full and fair opportunity to litigate the exact issue Plaintiffs raise 5 in this action, and the issue was decided in a final judgment. As such, collateral estoppel 6 precludes Plaintiffs from relitigating their refund claim before this Court. 7 B. The doctrine of double recovery also precludes Plaintiffs’ claim. 8 Double recovery of damages is disfavored. Kissell Co. v. Gregory, 591 F.2d 47, 51 9 (9th Cir. 1979); Kenny v. Lawseth, 198 F.3d 254 (9th Cir. 1999) (unpublished table 10 decision). In this case, Plaintiffs seek a refund of $67,104, constituting the amount withheld 11 as taxes from Palaniappan’s 409A distribution. Yet, the District Court already awarded 12 Palaniappan judgment in this amount in Palaniappan v. Gilbert Hosp. LLC, No. CV-17- 13 00517-PHX-JJT (D. Ariz.). (See Doc. 27-4 at 3.) In ruling on his ERISA claim against 14 Gilbert Hospital, the District Court awarded Palaniappian a total of $525,238, one 15 component of which accounted for “the loss [Palaniappan] claims he suffered when 16 [Gilbert Hospital] moved his retirement account from a 401k to a 409a plan.” And this loss 17 that Palaniappan claims he suffered specifically included the portion of his 409a 18 distribution that was sent to the IRS as federal income tax. Thus, the District Court went 19 on to deny Palaniappan’s request that, in addition to the damages award against Gilbert 20 Hospital, he be awarded a tax refund from the IRS. The District Court explained that to 21 enter an order directing the IRS to refund the amount wrongly paid to it “would constitute 22 double counting of damages.” (Id.) 23 That same reasoning holds true here.4 Merely initiating a new action does not entitle 24 Plaintiffs contend that the United States has placed them in “Double Jeopardy” by failing to recognize the District Court’s order and forcing Palaniappan to file a case against the IRS to retrieve these funds. Plaintiffs appear to read the District Court’s order as holding that the money the IRS has in its possession constitutes Palaniappan’s “retirement funds, not taxes” and as a result the IRS must refund such money to Palaniappan. Plaintiffs misunderstand both the District Court’s order and Double Jeopardy. First, the District Court neither held that Palaniappan was entitled to an IRS refund nor ordered the IRS to do so. Indeed, the Court recognized that the IRS was not party to the suit, and therefore the Court could not compel the IRS to take any action in the matter. Second, the Double Jeopardy Clause only applies to criminal penalties and thus is irrelevant to the case at bar. 25 26 27 28 4 -7- 1 Plaintiffs to seek judgment that Palaniappan has already been awarded. What’s more, after 2 the District Court entered judgment in Palaniappan’s favor, Palaniappan filed a Satisfaction 3 of Judgment with the Court. (Doc. 35-2.) As such, the relief Plaintiffs seek in this case has 4 not only been awarded but it also has been satisfied. 5 In sum, the Court finds that collateral estoppel bars relitigation of Plaintiffs’ claim 6 against the United States, and the doctrine of double recovery precludes Plaintiffs from 7 seeking relief that has been awarded and satisfied. As such, the United States is entitled to 8 judgment as a matter of law. 9 IT IS SO ORDERED that Plaintiffs’ Motion to Submit an Additional Response, 10 construed by the Court as a motion to file a sur-reply, and to Request an Oral Argument 11 (Doc. 38) is DENIED. 12 IT IS FURTHER ORDERED that the United States’ Motion for Judgment on the 13 Pleadings (Doc. 30) is GRANTED. The Clerk is directed to enter judgment in favor of the 14 United States and terminate this case. 15 Dated this 27th day of March, 2024. 16 17 18 19 20 Douglas L. Rayes United States District Judge 21 22 23 24 25 26 27 28 U.S. Const. amend. V; see Hudson v. United States, 522 U.S. 93, 99 (1997) (“The [Double Jeopardy] Clause protects only against the imposition of multiple criminal punishments for the same offense.”). -8-

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