Yetter v. Wise Power Systems LLC Inc. et al

Filing 57

MEMORANDUM OPINION re 36 MOTION for Judgment on the Pleadings, and 54 MOTION to Intervene. Signed by Judge Richard G. Andrews on 3/14/2013. (nms)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
DAVID J. YETTER,
Plaintiff,
Civil Action No. 1:11-cv-00040-RGA

v.
WISE POWER SYSTEMS, INC.,
a Delaware corporation, and
WILLIAM and CECILIA RAWHEISER,
in the their individual capacity,
Defendants.

MEMORANDUM OPINION

Timothy J. Wilson, Esq., The Wilson Firm, LLC, Newark, DE, Attorney for the Plaintiff.
Kathleen Furey McDonough, Esq., Michael B. Rush, Esq., Potter Anderson & Corroon, LLP,
Wilmington, DE, Attorneys for the Defendant.

March

J!j__, 2013

Before the court is Defendants' motion for judgment on the pleadings pursuant to Federal
Rule of Civil Procedure 12(c). (D.I. 37). In March of2010, David Yetter filed a complaint in
Delaware Justice of the Peace Court 9 against William Rawheiser alleging non-payment of
commissions earned pursuant to Plaintiffs employment with Wise Power Systems, Inc. (D.I. 37,
Ex. B). The JP Court dismissed the complaint without prejudice as the cause of action was
against Wise Power Systems and not Rawheiser. (D.I. 37, Ex. C). In October of2010, Yetter
filed a Chapter 7 Voluntary Petition for Bankruptcy and completed the required Statement of
Financial Affairs form. (D.I. 37, Ex. D). Section 4(a) ofthe Statement required Yetter to list "all
suits and administrative proceedings to which the debtor is or was a party within one year
immediately preceeding the filing of this bankruptcy case." (ld.) In answer to Section 4(a) Yetter
indicated "none." (/d.) In the Voluntary Petition, Schedule B, question 21 requires a listing of
"contingent and unliquidated claims of every nature," and an estimated value for those claims.
Yetter indicated that there were none. (!d.) The Plaintiffs bankruptcy was discharged on January
11, 2011. (D.I. 37, Ex. H). On that same day, this complaint was brought against the Defendants
for non-payment of earnings. (D.I. 1).
The Defendents argue that the doctrine of judicial estoppel bars the complaint now before
the court. (D.I. 37). The Defendants contend the doctrine is invoked because Yetter had
knowledge of the claims in the current action prior to filing the Voluntary Petition in which he
indicated having no such pending claims. (/d.) It is Yetter's contention that this omission was a
good faith mistake resulting from following his attorney's advice. (D.I. 40).
On a motion for judgment on the pleadings pursuant to Federal Rule of Civil Procedure

12(c), the court applies the same standard as it does to a Federal Rule of Civil Procedure 12(b)(6)
motion. Turbe v. Gov't of Virgin Islands, 938 F.2d 427,428 (3d Cir. 1991). To survive a motion
to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), a complaint must contain,
"enough facts to state a claim to relief that is plausible on its face." Bell At/. Corp. v. Twombly,
550 U.S. 544, 570 (2007).
The doctrine of judicial estoppel bars a party that has previously asserted a legal position
from asserting an inconsistent or contrary legal position in a later proceeding. See Oneida Motor
Freight, Inc. v. United Jersey Bank, 848 F.2d 414, 419 (3d Cir. 1988). This equitable remedy is
applied to preserve the integrity of the system. Its focus is on the relationship between the litigant
(i.e., Yetter) and the judicial system. !d. The Third Circuit has established a three part test for
determining when judicial estoppel is warranted. See Montrose Medical Group Participating
Savings Plan v. Bulger, 243 F .3d 773, 777-78 (3d Cir. 1996). The two legal positions taken by
the party must be irreconcilably inconsistent, bad faith must be the basis for the change in
position, and judicial estoppel is not to be used unless that remedy is "tailored to address the
harm identified" and no lesser sanction is adequate for that purpose. !d. at 778.
Yetter asserted the legal position that he had no claims against the Defendants in his
submission ofboth Section 4(a) of the Statement of Financial Affairs and Section B of the
Voluntary Petition. A party has knowledge of a potential claim when the events underlying the
claim have occurred prior to the filing of the bankruptcy petition. See Krystal CadillacOldsmobile GMC Truck, Inc. v. GMC, 337 F.3d 314, (3d Cir. 2003). Yetter asserts numerous
claims against the Defendants based upon allegations ofunpaid wages and commissions. (D.I. 1).
The Plaintiffs complaint in the JP Court, which was filed prior to the Chapter 7 Voluntary
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Petition, was also based upon these unpaid earning claims. (D.I. 37, Ex. B). Yetter had
knowledge of the potential for this complaint while answering "none" on the bankruptcy
proceeding forms when required to disclose such claims. These two legal positions are
completely inconsistent.
There is a presumption ofbad faith when the party does not disclose in a bankruptcy
proceeding a potential claim of which the party had knowledge. See Oneida Motor Freight, Inc.,
848 F .2d at 416-18. Yetter did not disclose in the bankruptcy the potential claims of which he
had knowledge. Actual reaping of a benefit by the taking of two inconsistent legal positions is
not a requisite to finding bad faith. See Krystal Cadillac-Oldsmobile GMC Truck, Inc., 337 F.3d
at 320. Further, a party seeking the protection of bankruptcy has a motive for not disclosing
assets as the non-disclosure would shield those funds from creditors. See Hardee-Guerra v. Shire

Pharmaceuticals, 737 F. Supp.2d 318,329 (E.D. Pa. 2010). Plaintiff cites reliance upon his legal
counsel's advice against disclosing the potential claim to overcome this bad faith presumption.
(D.I. 40). 1 This excuse has been found to be insufficient. See Meisinger v. Prudential Ins.

Companies ofAmerica, 2011 WL 2036508, *3 (D.N.J. 2011); Hardee-Guerra, 737 F. Supp.2d
at 330.
Judicial estoppel should be applied only to "avoid a miscarriage of justice." Krystal

Cadillac-Oldsmobile GMC Truck, Inc., 337 F.3d at 319. Yetter's creditors were harmed by his
failure to disclose the potential for this complaint. In bankruptcy proceedings the integrity of the
disclosure requirements are crucial to the system as creditors must rely upon the debtor's asserted

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Plaintiff submitted an Affidavit. (D.I. 40, Ex. 1). Plaintiff submitted nothing from the
attorney Yetter alleges provided the advice.
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assets in determining whether to settle the debt for a lesser amount than owed. See Oneida Motor

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Freight, Inc., 848 F .2d at 41 7. This harm is not one that can be cured by a lesser sanction than
judicial estoppel. See Krystal Cadillac-Oldsmobile GMC Truck, Inc., 337 F.3d at 325.
Plaintiff's subsequent notice to the Trustee has resulted in the bankruptcy being reopened.
(D.I.

54,~

7). The Trustee has also filed a motion to intervene pursuant to Federal Rule of Civil

Procedure 24(a) so that the debtors can share in any damages awarded upon these claims. (D.I.
54). Plaintiff's proposal is that any recoveries go to the bankruptcy creditors, up to the value of
the claims, with the balance going to Yetter. This is not a sufficient remedy as it does not address
the harm to the integrity of the system.
The Bankruptcy rules were clearly not intended to encourage this kind of inadequate and
misleading disclosure by creating an escape hatch debtors can duck into to avoid
sanctions for omitting claims once their lack of candor is discovered.

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Krystal Cadillac-Oldsmobile, 337 F.3d at 321. Judicial estoppel is warranted in the present case
as the non-disclosure of the potential claims has been detrimental to Yetter's creditors and to the
integrity of the bankruptcy process. No appropriate lesser sanction against Yetter has been
suggested, and the court has not thought of one.
For the above stated reasons, the Defendant's motion for judgment on the pleadings will
granted.
Also before the court is the Chapter 7 Trustee's motion to intervene as the proper plaintiff
pursuant to Federal Rule of Civil Procedure 24(a). Pursuant to Fed. R. Civ. P. 24 (a):
(a) Intervention of Right. On timely motion, the court must permit anyone to intervene
who:
(1) is given an unconditional right to intervene by a federal statute; or
(2) claims an interest relating to the property or transaction that is the subject of the
action, and is so situated that disposing of the action may as a practical matter impair or

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impede the movant's ability to protect its interest, unless existing parties adequately
represent that interest.
Pursuant to 11 U.S.C. § 323, the Chapter 7 Bankruptcy Trustee of Yetter's estate has an interest
in the claim to the extent of recovering the value of what is owed the creditors. The motion to
intervene will be granted.

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