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)
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-
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?