Stickrath et al v. Globalstar, Inc.

Filing 146

ORDER by Judge Thelton E. Henderson vacating 95 Motion to Certify Class; granting 114 Motion for Summary Judgment.(tehlc4, COURT STAFF) (Filed on 12/22/2008)

1 2 3 4 5 6 7 8 9 10 KENNETH STICKRATH, et al., Plaintiffs, v. GLOBALSTAR, INC., Defendant. NO. C07-1941 TEH ORDER GRANTING DEFENDANT'S SUMMARY JUDGMENT MOTION IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA

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For the Northern District of California

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This matter came before the Court on Wednesday, October 29, 2008, on Defendant's Motion for Summary Judgment. Having carefully considered the parties' written and oral arguments, Defendant's Motion is GRANTED for the reasons set forth below.

FACTUAL AND PROCEDURAL HISTORY Plaintiff Kenneth Stickrath purchased a satellite phone from Defendant Globalstar. He sued Globalstar, alleging that Defendant failed to disclose known defects in its service that prevented him from using the service in the intended fashion. Stickrath seeks to represent a nationwide class of individuals who purchased a satellite telephone and related service from Defendant between April 2003 and 2007. Although Stickrath initially alleged that he had purchased his phone in 2004, Mr. Stickrath's deposition revealed that he actually purchased it in August or September of 2003. He cancelled his service on July 2, 2006. Plaintiff alleges that Defendant's satellite telephone service is extremely poor, but the gravamen of the complaint is that Defendant knew about material defects in its satellite

1 telephone service and failed to disclose such information. Plaintiff claims that Defendant 2 knew its service was unusable for his purpose, and that he would not have purchased the 3 service or suffered damage had he known of these flaws. Plaintiff asserts two causes of 4 action: one under California's Unfair Competition Law ("UCL"), Cal. Bus. & Prof. Code 5 §§ 17200 et seq., and another under California's Consumers Legal Remedies Act ("CLRA"), 6 Cal. Civ. Code §§ 1750 et seq. Plaintiff contends that Defendant's failure to disclose 7 material information is unfair, unlawful, and fraudulent in violation of the UCL, and that it 8 constitutes prohibited practices under two sections of the CLRA: "[r]epresenting that goods 9 or services have sponsorship, approval, characteristics, ingredients, uses, benefits, or 10 quantities which they do not have," Cal. Civ. Code § 1770(a)(5), and "[r]epresenting that

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11 goods or services are of a particular standard, quality, or grade . . . if they are of another."
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12 Cal. Civ. Code § 1770(a)(7). 13 On September 17, 2007, the Court held a hearing on Globalstar's motion to dismiss

14 Plaintiffs' first amended complaint. The Court orally granted in part and denied in part 15 Defendant's motion at the conclusion of the hearing and issued a written order explaining its 16 ruling on September 25, 2007. The Court granted Plaintiffs leave to amend their complaint, 17 which they timely filed on October 17, 2007. On February 6, 2008, the Court granted in part 18 and denied in part Defendant's motion to dismiss the second amended complaint. Plaintiffs 19 filed a class certification motion on April 25, 2008. On May 12, 2008, both parties stipulated 20 to the dismissal without prejudice of three of the named plaintiffs, leaving only Mr. Stickrath 21 as Plaintiff. Defendant filed a motion for summary judgment on July 22, 2008. Both the 22 class certification and summary judgment motions are now pending before the Court. 23 24 25 26 27 28 2 3) Defendant moves for summary judgment based on three primary arguments: 1) 2) that Plaintiff's claims are barred because they were discharged in bankruptcy; that Plaintiff's claim under the Consumer Legal Remedies Act is time-barred under the Act's three-year statute of limitations; and that Stickrath's claims fail because he cannot establish causation.

1 LEGAL STANDARD 2 Summary judgment is proper when there is no genuine dispute as to material facts and

3 the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); Toscano v. 4 Prof'l Golfers Ass'n, 258 F.3d 978, 982 (9th Cir. 2001). "A dispute as to a material fact is 5 genuine if there is sufficient evidence for a reasonable jury to return a verdict for the 6 non-moving party." Long v. County of Los Angeles, 442 F.3d 1178, 1185 (9th Cir. 2006). 7 A party seeking summary judgment bears the initial burden of informing the court of

8 the basis for its motion, and of identifying those portions of the pleadings and discovery 9 responses that demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. 10 Catrett, 477 U.S. 317, 323 (1986). Where the moving party will have the burden of proof at

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11 trial, it must affirmatively demonstrate that no reasonable trier of fact could find other than
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12 for the moving party. Id. at 322-23. However, on an issue for which its opponent will have 13 the burden of proof at trial, the moving party can prevail merely by "pointing out to the 14 district court . . . that there is an absence of evidence to support the nonmoving party's case." 15 Id. at 325. If the moving party meets its initial burden, the opposing party must then "set 16 forth specific facts showing that there is a genuine issue for trial" in order to defeat the 17 motion. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986) (citing Fed. R. Civ. P. 18 56(e)). 19 20 DISCUSSION 21 I. 22 Discharge in Bankruptcy Defendant contends that the June 17, 2004, order of the Delaware bankruptcy court

23 discharged all of Stickrath's claims. Defendant interprets that order to mean that all "persons 24 who had any claims against the former Globalstar entities as of June 29, 2004 were forever 25 barred from pursuing those claims against the new Globalstar that emerged from bankruptcy. 26 That entity­ Globalstar, Inc., which is sued here­ is thus immune from suit based on actions 27 prior to June 29, 2004." Def.'s Mem. Supp. Summ. J. 5-6. Plaintiff rejects this contention, 28 arguing that although discharge occurred, Stickrath "could not fairly have contemplated his 3

1 claims prior to Globalstar's reorganization because Globalstar fraudulently concealed 2 material information from him about its satellites and service prior to its discharge." Pl.'s 3 Mem. Opp. Summ. J. 1. Plaintiff suggests that he did not know of Defendant's failure to 4 disclose until information regarding the defects in its satellites came to light in early 2007 5 through its filing of form 8-K in February and through its disclosures of malfunctions on its 6 website in April of that year. He rejects Defendant's contention that he was on notice of his 7 claim due to the malfunctioning of his phone; he instead argues that Globalstar's 8 concealment of its fraud should not permit it to avoid liability for its fraudulent conduct. He 9 maintains that without knowledge of his claim, it cannot be said to have arisen prior to the 10 discharge; he therefore argues that his claim against Defendant was not discharged. The

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11 remaining legal question is when Stickrath's claim arose.
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The Globalstar bankruptcy order reads in relevant part: [A]ll Entities who have held, hold or may hold Claims (whether or not allowed) against or Interests or GLP Partnership Interests in any of the Debtors or the Estates are, with respect to any such Claims (whether or not allowed) or Interests or GLP Partnership Interests, permanently enjoined from and after the Confirmation Date from: (a) commencing, conducting or continuing in any manner, directly or indirectly, any suit, action or other proceeding of any kind (including any proceeding in a judicial, arbitral, administrative or other forum) against or affecting New Globalstar[.] Edmondson Decl., Ex. A, ¶ 16. The Bankruptcy Code defines a "claim" as (A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or (B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.

24 11 U.S.C. § 101(5). As a general matter, what qualifies as a "claim" for purposes of 25 discharge in bankruptcy "is a straightforward issue of statutory construction" controlled by 26 the bankruptcy code. Johnson v. Home State Bank, 501 U.S. 78, 83 (1991). 27 28 4 The Ninth Circuit has further explained the definition of a claim:

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It is well-established that a claim is ripe as an allowable claim in a bankruptcy proceeding even if it is a cause of action that has not yet accrued. . . . In Jensen, we held that once the California Department of Health Services ("Department") inspector discovered a serious environmental hazard on the debtors' property, its claim against the debtors was ripe for filing under the bankruptcy code as a pre-petition, contingent claim even though its CERCLA cause of action had not yet accrued. See 995 F.2d at 928, 931. After the Jensens' bankruptcy proceedings closed, the Department filed a claim in bankruptcy court for cleanup costs under CERCLA. See id. at 926-27. We held the claim was filed too late. The Department's right to payment under CERCLA originated from the Jensens' "`prepetition conduct'" of which the Department had knowledge before the petition was filed and could "`fairly contemplate[ ]'" would result in a CERCLA claim. Id. at 930-31. Thus, it should have been filed in the bankruptcy proceeding as a contingent claim; because it was not, it was discharged in the bankruptcy proceeding.

9 In re Cool Fuel, Inc., 210 F.3d 999, 1006-07 (9th Cir. 2000) (internal citations omitted). Yet 10 as Judge Breyer declared in In re Hexcel Corp., 239 B.R. 564, 570 (N.D. Cal. 1999), "the

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11 common thread running through the case law is that the [Bankruptcy] Code does not suggest
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12 that a creditor's claim is to be discharged if the parties could not reasonably contemplate the 13 existence of that claim prior to the reorganization." He further explained: 14 15 16 17 18 the definition of a "claim" for bankruptcy purposes is not boundless. For example, this section does not include future rights to payment that are "unknown" and "unforeseeable." . . . [A] claim cannot fall within the purview of section 101(5)-and thus cannot be discharged as a pre-petition claim-unless that claim could have been contemplated by the parties prior to the bankruptcy proceedings. Any future, unknown claim that could not have been reasonably contemplated does not fall within the purview of section 101(5) and must not be discharged, even if the conduct giving rise to the claim took place before the bankruptcy proceedings.

19 Id. at 566-67 (italics in the original). Plaintiff urges the Court to adopt this "fair 20 contemplation" rule to hold that Globalstar's concealment of its fraud prevented Stickrath's 21 claim from being discharged in bankruptcy.1 22 Stickrath relies on In re Morgan, 197 B.R. 892 (N.D. Cal. 1996) to justify his

23 adherence to the fair contemplation test. In that case, the court applied the fair contemplation 24 test to resolve whether a fraud claim was discharged in bankruptcy. Id. at 898. The court 25
1 Another test for whether discharge has occurred is the "conduct approach," under 26 which "if a debtor's conduct forming the basis of liability occurred prepetition, a claim arises when that conduct occurs, even though the injury resulting from this conduct was not 27 manifest at the commencement of the case." In re Hassanally, 208 B.R. 46, 51 (B.A.P. 9th Cir. 1997). As the conduct test focuses on when negligence claims arise, the fair 28 contemplation test is better used in this fraud matter.

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1 reasoned that the "adoption of this test will prevent bankruptcy from being used as a shield 2 for fraud by allowing fraud claims to go forward against debtors who concealed their fraud 3 prior to discharge." Id. There, the court indicated that negotiations preceding a contract in 4 which the parties mutually decided to omit a term about the allegedly fraudulent conduct 5 suggested that the plaintiff should have fairly contemplated the claim prior to discharge; this, 6 combined with other factors, led the court to conclude that the plaintiff's claims were 7 discharged in bankruptcy. Id. at 899. 8 The rule articulated in Morgan is intended to avoid rewarding defendants for

9 concealing their fraud. But, it does not apply to the current case because, like in Morgan, 10 there were enough facts to show that Stickrath had notice of the harm he subsequently

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11 alleged to be fraudulent. As in Morgan, Stickrath's claim cannot survive summary judgment
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12 as he has not identified facts demonstrating how this claim was outside his reasonable 13 contemplation based on his early knowledge of the phone's defective operation.2 Although 14 prior to the bankruptcy discharge Stickrath lacked knowledge of the specific satellite defects 15 that Defendant later disclosed, his deposition testimony clearly demonstrates that he knew 16 the phone worked poorly shortly after he purchased it. This knowledge suffices under the 17 caselaw for the purposes of "fair contemplation." He offers no case that holds that 18 reasonable contemplation requires complete knowledge of all pertinent facts to avoid 19 discharge. Rather, the point of the fair contemplation rule is that plaintiffs must act when 20 they have notice of facts that would support a legal claim; otherwise, their legal claim is 21 discharged in bankruptcy. Globalstar has identified the absence of an issue of material fact 22 on this count, and Stickrath has not met his burden of showing a genuine issue remaining for 23 trial. 24 Therefore, as a matter of law the Court concludes that Stickrath's claims related to

25 Defendant's pre-discharge conduct were within Stickrath's reasonable contemplation prior to 26
2 Among other statements that demonstrated this early knowledge, at his deposition, 27 Stickrath stated: "You know, the first year, it was probably the year that [the phone] worked the best. My best estimate would be it probably­when we had a signal, would work about 50 28 percent of the time." Edmondson Decl., Ex. D, at 49:20-23.

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1 the entry of the bankruptcy order in June, 2004. Accordingly, the Court holds that 2 Stickrath's claims from this time period were discharged in the bankruptcy order. 3 4 II. 5 Statute of Limitations Defendant claims that because Stickrath purchased his phone in 2003, the statute of

6 limitations had run before he commenced suit in April 2007; on this ground, Defendant 7 asserts that Plaintiff's CLRA claim is time-barred on its face. Plaintiff argues that because 8 the Court has previously held that his claim sounds in fraud, the statute did not begin to run 9 until he learned of the facts constituting Defendant's fraud. Stickrath further argues that 10 Defendant should be estopped from pleading the statute of limitations because of

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11 Defendant's acts of fraudulent concealment.
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California Civil Code § 1783 states that "[a]ny action brought under the specific

13 provisions of [the CLRA] shall be commenced not more than three years from the date of the 14 commission of such method, act, or practice." The CLRA declares unlawful a wide array of 15 specific conduct, which it generally characterizes as "unfair methods of competition and 16 unfair or deceptive acts or practices undertaken by any person in a transaction intended to 17 result or which results in the sale or lease of goods or services to any consumer." Cal. Civ. 18 Code § 1770(a). Plaintiff specifically alleges that Defendant committed violations of two 19 subsections of CLRA by fraudulently omitting material facts about the phone's defects at the 20 time of sale. 21 However, "[t]he statute of limitations for a claim sounding in fraud is similarly three

22 years and `is not deemed to have accrued until the discovery, by the aggrieved party, of the 23 facts constituting fraud or mistake.'" Falk v. General Motors Corp., 496 F. Supp. 2d 1088, 24 1100 (N.D. Cal. 2007) (citing Cal. Civ. Proc. Code § 338(d)). Plaintiff asks the Court to 25 apply the discovery rule since this case sounds in fraud, and urges the Court to adopt a 26 formulation of that rule under which the statute does not begin to run until discovery of all 27 elements of the cause of action, instead of applying the standard three-year period. 28 7

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The California Court of Appeal has held that "the discovery rule may be applied to

2 breaches which can be, and are, committed in secret and, moreover, where the harm flowing 3 from those breaches will not be reasonably discoverable by plaintiffs until a future time." 4 April Enters., Inc. v. KTTV, 147 Cal. App. 3d 805, 832 (1983). Under the discovery rule, a 5 "limitation period does not begin until a cause of action accrues, i.e., all essential elements 6 are present and a claim becomes legally actionable. Developed to mitigate the harsh results 7 produced by strict definitions of accrual, the common law discovery rule postpones accrual 8 until a plaintiff discovers or has reason to discover the cause of action." Glue-Fold, Inc. v. 9 Slautterback Corp., 82 Cal. App. 4th 1018, 1029 (Cal. Ct. App. 2000). The discovery rule 10 does not require all facts to be discovered for accrual to occur. It only postpones accrual

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11 until the fraud is discovered or reasonably discoverable. Furthermore, the discovery rule is
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12 to be applied in limited circumstances that justify the temporary suspension of the statute of 13 limitations: 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 A common thread seems to run through all the types of actions where courts have applied the discovery rule. The injury or the act causing the injury, or both, have been difficult for the plaintiff to detect. In most instances, in fact, the defendant has been in a far superior position to comprehend the act and the injury. And in many, the defendant had reason to believe the plaintiff remained ignorant he had been wronged. Thus, there is an underlying notion that plaintiffs should not suffer where circumstances prevent them from knowing they have been harmed. And often this is accompanied by the corollary notion that defendants should not be allowed to knowingly profit from their injuree's ignorance. April Enters, 147 Cal. App. 3d at 831. Other judges of the Northern District California have applied similar logic in contemplating consumer knowledge in the context of class action cases. In Falk, the plaintiff class had purchased trucks with a latent defect in the speedometer that only became apparent after the expiration of the warranty. Falk, 496 F. Supp. 2d at 1092, 1100. The statute of limitations question was whether plaintiffs were on notice of the defect in their vehicles' speedometers at the time of purchase, based on undated internet postings that simultaneously informed both defendant and members of the plaintiff class of the defect. Id. at 1100. The defendant there argued that websites put both parties on notice at the same time; plaintiffs 8

1 maintained that the defendant had superior knowledge of the defect. Id. The court held that 2 plaintiffs' case should survive the statute of limitations argument at the pleadings stage 3 because of the latency of the defect and the defendant's superior knowledge. Id. 4 In another case regarding defects in automobiles, the court applied the discovery rule

5 to deny defendant's motion for summary judgment with regard to the claims of certain class 6 members. Chamberlan v. Ford Motor Co., 369 F. Supp. 2d 1138, 1148 (N.D. Cal. 2005). 7 There, the court concluded that although the discovery rule means that the "statute of 8 limitations runs `from the time a reasonable person would have discovered the basis for a 9 claim[,]' [t]he mere fact that a consumer's manifold failed does not necessarily mean that that 10 person should have discovered Defendant's alleged non-disclosure at that time." Id. The

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11 court acknowledged, however, that customers' suspicions that defendant was responsible for
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12 the defects showed a dispute of fact as to whether defendants were on notice of their claim. 13 Id. 14 The facts in the instant matter indicate a situation removed from that in Falk and

15 Chamberlan, and lacking the factors articulated by the California Court of Appeal as 16 justification for application of the discovery rule. Here, Stickrath was immediately on notice 17 of his phone's poor functioning upon purchase. As a result, that it was defective was not 18 difficult for Plaintiff to detect; it was patently obvious and lacked the latency present in Falk. 19 Stickrath simply was not ignorant of the consumer harm he experienced. Although 20 Globalstar possessed more technical knowledge of the cause of the failed calls, the 21 malfunctioning of the phone was apparent to a casual consumer/user. Stickrath's deposition 22 testimony demonstrates this to be the case, as he rapidly realized the phone did not work. 23 That he lacked technical knowledge of the cause of his phone's defective operation does not 24 mean he lacked knowledge of the phone's defects. 25 These facts all militate against the application of the discovery rule, and instead

26 indicate that the appropriate statute of limitations period runs three years from the date of the 27 commission of the method, act, or practice that allegedly violated the CLRA. In this case, as 28 Plaintiff asserts that Defendant's nondisclosure at the point of sale qualified as the primary 9

1 violation of the CLRA, the statute had clearly run at the time Plaintiff filed suit. 2 Accordingly, Plaintiff's claim as to the point-of-sale violation of the CLRA is time-barred. 3 Plaintiff also argues that Defendant's fraudulent concealment should estop Globalstar

4 from relying on the statute of limitations. In order to claim an equitable estoppel or 5 fraudulent concealment theory, the plaintiff "must plead with particularity the circumstances 6 surrounding the concealment and state facts showing his due diligence in trying to uncover 7 the facts." Deirmenjian v. Deutsche Bank, A.G., No. CV 06-00774 MMM, 2006 WL 8 4749756, at *43 (C.D. Cal. 2006) (unpublished). Plaintiff's case does not reach this bar. In 9 reality, as Stickrath had access to full knowledge of the defect of the phone, he has not 10 offered adequate facts to show concealment and due diligence, which would be necessary to

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11 support a theory of equitable estoppel. Tolling the statute for fraudulent concealment is
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12 inappropriate. 13 14 III. Claim Based on Contract Renewal 15 In his opposition memo, Stickrath asserts that he "maintains separate claims against"

16 Globalstar arising from his renewal of his contract and purchase of additional minutes in 17 2005, at which time he alleges that Globalstar again failed to disclose material defects in its 18 satellite and service and told Plaintiff that service was to improve. Stickrath asserts that 19 claims arising from this conduct accrued after the discharge in bankruptcy, and within the 20 three-year statutory period, and that these claims should survive summary judgment. A 21 careful review of the second amended complaint reveals that Plaintiff pleaded facts only 22 regarding the initial purchase of his phone­ what Defendant calls a "point-of-sale" theory. 23 Without having pleaded a cause of action related to this secondary sale, Plaintiff cannot 24 survive summary judgment on this basis. 25 26 IV. Class Certification 27 Defendant urges this Court that it is proper to close this case after granting Defendant

28 summary judgment in light of the lack of a class representative. Globalstar relied in oral 10

1 argument on Lierboe v. State Farm Mut. Auto. Ins. Co., 350 F.3d 1018 (9th Cir. 2003), for 2 the proposition that a class action case without a class representative must be closed. In that 3 case, the Ninth Circuit held that where class certification had already occurred, the 4 determination that the class representative lacked standing to bring the suit required the court 5 to vacate the certification and dismiss the suit. Id. at 1022-23. There, the standing defect 6 related to whether the plaintiff had a substantive legal claim; in the absence of the claim that 7 was the legal issue unifying class members, a class representative without standing was never 8 "a member of the class she was named to represent" since standing is a threshold issue, and 9 thus the case had to be dismissed. Id. The court distinguished the Lierboe factual scenario 10 from one in which the class representative was removed from the case due to mootness, in

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11 which case "substitution or intervention" may be possible. Id. at 1023. Thus, whereas the
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12 dismissal of a putative class representative whose claim is found to be barred on the basis of 13 time does not invalidate the claims of the entire class, a standing defect invalidates the entire 14 case. Discharge in bankruptcy and statue of limitations issues are likewise time-bars that do 15 not reflect on whether Stickrath was ever properly a member of the class he sought to 16 represent. 17 The Court thus concludes that it is appropriate, both legally and as a matter of judicial

18 economy, to grant the purported Plaintiff class leave to amend. An amended complaint will 19 be due no later than January 19, 2009. Plaintiff counsel emphasized on October 29, 2008 at 20 oral argument that she has "a database filled with people who have called us, irate about their 21 service and their problems. . . . But we had people who were ready and raring to go, because 22 they're mad." Rep. Tr. at 27:12-14, 17-18. In light of the apparently ready availability of a 23 substitute class representative and Plaintiff counsel's failure to timely note the defects in Mr. 24 Stickrath's claim, the Court will grant no additional time to amend the complaint. 25 26 CONCLUSION 27 For the reasons discussed above, Defendant's motion for summary judgment is

28 GRANTED. Plaintiff's motion for class certification is VACATED as moot. The Court 11

1 grants Plaintiff leave to amend until January 19, 2009, in order to substitute a new class 2 representative. 3 4 IT IS SO ORDERED. 5 6 Dated: December 22, 2008 7 8 9 10 THELTON E. HENDERSON, JUDGE UNITED STATES DISTRICT COURT

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