Martin et al v. United States of America
Filing
83
OPINION: Defendant's Motion to Dismiss Plaintiffs' 1996, 1997, and 2001 Claims for Refund (d/e 64 ) is DENIED. This case is set for a Final Pretrial Conference on March 6, 2017 at 3:30 p.m. This case is set for Bench Trial on March 21, 2017 at 9:00 a.m. (SEE WRITTEN OPINION.) Entered by Judge Sue E. Myerscough on 1/5/2017. (GL, ilcd)
E-FILED
Thursday, 05 January, 2017 03:35:08 PM
Clerk, U.S. District Court, ILCD
IN THE UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF ILLINOIS
SPRINGFIELD DIVISION
RANDOPLH MARTIN,
and CATHERINE MARTIN,
Plaintiffs,
v.
UNITED STATES OF AMERICA,
Defendant
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Case No.: 3:13-CV-03130
OPINION
SUE E. MYERSCOUGH, U.S. District Judge.
This cause is before the Court on Defendant United States’
Motion to Dismiss Plaintiffs’ 1996, 1997, and 2001 Claims for
Refund (d/e 64). In the Second Amended Complaint, Plaintiffs
Randolph Martin and Catherine Martin seek to recover excessive
taxes retained by Defendant for the years 1996, 1997, 2001, and
2002. Plaintiffs allege that, after allowing all proper adjustments on
Plaintiffs’ airplane business, which suffered losses in 2001,
Plaintiffs are entitled to a refund of $297,819 for 1996; $191,709
for 1997; $187,652 for 2001; and $5,675 for 2002, plus interest,
costs, and reasonable litigation costs. Sec. Am. Compl. ¶ 17.
Page 1 of 36
On June 3, 2016, Defendant filed a Motion to Dismiss
Plaintiffs’ 1996, 1997, and 2001 Claims for Refund. Defendant
argues that (1) this Court lacks jurisdiction to hear the 1996, 1997,
and 2001 refund claims; (2) Plaintiffs lack standing to bring the
1996, 1997, and 2001 refund claims before this Court; and (3) in
the alternative, Plaintiffs’ are judicially estopped from bringing the
1996, 1997, and 2001 refund claims.
The Motion to Dismiss is denied. The Court has jurisdiction
over the claims, and Plaintiffs have standing to bring the claims. As
for Defendant’s judicial estoppel argument, given the limited
materials the Court may consider on a motion to dismiss and the
need to draw all reasonable inferences in Plaintiffs’ favor, the Court
cannot conclude at this time whether judicial estoppel is
appropriate.
I. LEGAL STANDARD
Pursuant to Federal Rule of Civil Procedure 12(b)(1), a
defendant may move for dismissal of a claim for lack of subject
matter jurisdiction. Fed. R. Civ. P. 12(b)(1). When considering a
Rule 12(b)(1) motion, this Court accepts as true all well-pleaded
factual allegations and draws all reasonable inferences in favor of
Page 2 of 36
the plaintiff. Alicea-Hernandez v. Catholic Bishop of Chi., 320
F.3d 698, 701 (7th Cir. 2003). However, the plaintiff bears the
burden of proving the jurisdictional requirements have been met.
Ctr. for Dermatology & Skin Cancer Ltd. v. Burwell, 770 F.3d 586,
588 (7th Cir. 2014). “The court may look beyond the jurisdictional
allegations of the complaint and view whatever evidence has been
submitted on the issue to determine whether in fact subject matter
jurisdiction exists.” Alicea-Hernandez, 320 F.3d at 701.
The plaintiff also bears the burden of establishing standing. A
plaintiff must allege that (1) he suffered an injury that is concrete
and particularized and actual or imminent; (2) the injury is fairly
traceable to the challenged action of the defendant; and (3) that it is
likely that a favorable decision will redress the injury. Berger v.
Nat’l Collegiate Athletic Ass’n, 843 F.3d 285, 289 (7th Cir. 2016).
When standing is challenged as a factual matter, the plaintiff bears
the burden of supporting the allegations of standing with competent
proof. Reid L. v. Ill. State Bd. of Educ., 358 F.3d 511, 515 (7th Cir.
2004); Retired Chi. Police Ass’n v. City of Chi., 76 F.3d 856, 862
(7th Cir. 1996).
Page 3 of 36
When considering a motion to dismiss under Rule 12(b)(6), the
Court construes the complaint in the light most favorable to the
plaintiff, accepting all well-pleaded allegations as true and
construing all reasonable inferences in the plaintiff’s favor. Tamayo
v. Blagojevich, 526 F.3d 1074, 1081 (7th Cir. 2008). Rule 12(c)
motions are reviewed under the same standard as Rule 12(b)(6)
motions. St. John v. Cach, LLC, 822 F.3d 388, 389 (7th Cir. 2016).
A plaintiff opposing a Rule 12(b)(6) motion to dismiss “may submit
materials outside the pleadings to illustrate the facts the party
expects to be able to prove.” Geinosky v. City of Chi., 675 F.3d 743,
745 n.1 (7th Cir. 2012).
II. BACKGROUND
On May 24, 2002, Plaintiffs commenced a Chapter 7
bankruptcy proceeding in the United States Bankruptcy Court for
the Central District of Illinois, Case No. 05-72273 (Bankruptcy
Action). The Court takes judicial notice of the pleadings filed in the
Bankruptcy Action. See Geinosky, 675 F.3d at 745 n.1 (in ruling
on a motion to dismiss, courts can consider “information that is
subject to proper judicial notice”); Henson v. CSC Credit Servs., 29
F.3d 280, 284 (7th Cir.1994) (holding that district court may take
Page 4 of 36
judicial notice of matters of public record, including public court
documents, when considering a Rule 12(b)(6) motion to dismiss).
On October 31, 2002, the Bankruptcy Court entered an order
discharging Plaintiffs. See Resp., Ex. L (d/e 68-12) (Bankruptcy
Action docket sheet). The Bankruptcy Action remained pending
until July 12, 2005. See id.
Plaintiffs filed their original 2001 tax return on or about
January 18, 2003, two and a half months after they were
discharged in bankruptcy. See Resp., Ex. A (d/e 68-1) (2001 tax
return signed by Plaintiffs on January 18, 2003).1 On or about
February 15, 2005, approximately five months before the
Bankruptcy Action was closed, Plaintiffs filed an amended 2001 tax
return claiming overpayment of taxes in the amount of $163,124.
Sec. Am. Compl. ¶ 6. They also filed amended tax returns for 1996
and 1997 claiming overpayment of taxes in the amounts of
$297,819 and $191,709 respectively, and requesting a refund in
said amounts. Id. ¶ 10. Plaintiffs allege that the basis for the
The Second Amended Complaint alleges that Plaintiffs filed their original
2001 tax return on or about January 14, 2002. Sec. Am. Compl. ¶ 5. However,
Plaintiffs attached the 2001 tax return to their Response, which shows
Plaintiffs signed the returns on January 18, 2003.
1
Page 5 of 36
refund for the 2001 tax year was substantially due to losses from
Plaintiffs’ interest in Capital Aircraft, Inc., Capital Aircraft Parts,
LLC, Martin Leasing, Inc., and other related entities. Id. ¶ 9. The
basis for the refunds for years 1996 and 1997 was net operating
loss carrybacks from the 2001 tax year pursuant to the amended
tax return filed for 2001. Id. ¶ 11. On January 26, 2006, Plaintiffs
filed another amended 2001 tax return claiming an overpayment of
taxes in the amount of $187,652. Id. ¶ 7. Plaintiffs also filed an
amended tax return for 2002, but the 2002 refund claim is not at
issue in Defendant’s motion to dismiss.
Thereafter, the Internal Revenue Service (IRS) commenced an
audit of Plaintiffs’ income tax return for the years 1996, 1997,
2001, and 2002. Sec. Am. Compl. ¶ 14. On August 27, 2008, the
IRS issued a Notice of Disallowance of Plaintiffs’ requests for
refunds for calendar years 1996, 1997, and 2001. Id. ¶ 14; see also
Resp., Ex. H (d/e 68-8) (Notice of Disallowance only listing years
1996, 1997, and 2001). On February 12, 2009, Plaintiffs filed a
Protest Letter appealing the disallowance. Id. ¶ 15; see also Resp.,
Ex. I (d/e 68-9) (appealing years 1996, 1997, 2001, 2002, and
2003). On May 11, 2011, the IRS denied Plaintiffs’ claims for
Page 6 of 36
refund for calendar years 1996, 1997, 2001, and 2002. Sec. Am.
Compl. ¶ 16.
On May 6, 2013, Plaintiffs filed this lawsuit pro se alleging
that they are entitled to a refund of excessive tax paid for years
1996, 1997, and 2001. See Compl. (d/e 1). When Plaintiffs initially
filed this lawsuit, Plaintiffs had not disclosed the tax refund claims
in the Bankruptcy Action.
On January 29, 2014, the United States Trustee for Region 10
filed a Motion to Reopen Bankruptcy Estate and Appoint Trustee.
Resp., Ex. N (d/e 68-14). The motion indicated that Plaintiff
Randolph Martin, through his attorney, had recently contacted the
office of the United States Trustee to advise that past tax returns
may be amended to claim a substantial refund. Id. ¶ 3 (also noting
that the refund was first identified in 2005 and was disallowed by
the IRS but that the claim was preserved by the debtor). On
February 11, 2014, the Bankruptcy Action was reopened. See
Resp., Ex. O (d/e 68-15).
On March 7, 2014, the bankruptcy trustee filed a Notice of
Intent to Abandon that was sent to the creditors. See Resp., Ex. P
(d/e 68-16). The Notice indicated that if no objections were filed by
Page 7 of 36
the objection deadline, the potential claims for the refund of federal
income tax would be deemed abandoned. Id. No objections were
filed, and the bankruptcy trustee filed a report of no distribution on
April 15, 2014. See Resp., Ex. L (Bankruptcy Action docket sheet
also indicating that “Assets Abandoned (without deducting any
secured claims): $0.00”). On May 6, 2014, the Bankruptcy Action
was closed. Id.
Plaintiffs filed an Amended Complaint on April 7, 2014 (d/e
12). After Defendant’s Motion to Dismiss for insufficient service
was denied, Defendant filed an Answer (d/e 22) containing a “First
Defense” that, “[t]o the extent that the plaintiff has failed to comply
with the statutory period of limitations in which to file a claim for
refund, pursuant to 26 U.S.C. § 6511, the complaint must be
dismissed for lack of jurisdiction.”
On May 20, 2016, Plaintiffs filed a Second Amended
Complaint. Sec. Am. Compl. (d/e 63) (deleting the jury demand,
amending the refund amounts sought, and adding some additional
factual allegations). On June 3, 2016, Defendant filed an Answer
(d/e 66), raising several defenses including lack of jurisdiction; that
the 1996, 1997, and 2001 tax liabilities belonged to the bankruptcy
Page 8 of 36
estate when they were filed; that Plaintiffs lacked standing to bring
the 1996, 1997, and 2001 refund claims; and that Plaintiffs are
judicially estopped from pursuing the refund claims. Defendant
also filed the Motion to Dismiss at issue herein.
III. ANALYSIS
A.
This Court has Jurisdiction Over the 1996, 1997, and
2001 Refund Claims
Defendant argues that this Court lacks jurisdiction over the
1996, 1997, and 2001 refund claims because Plaintiffs did not
“duly file” their administrative claim with the IRS.
The United States may not be sued without its consent and
such consent must be “unequivocally expressed.” Kuznitsky v.
United States, 17 F.3d 1029, 1031 (7th Cir. 1994). The United
States may also attach conditions to its consent to be sued. Id.
The United States has consented to suits for a tax refund but
imposed certain conditions on its consent. Id. Specifically,
pursuant to Title 28, United States Code, Section 1346(a), a district
court has jurisdiction over civil actions against the United States for
the refund of internal revenue taxes alleged to have been
erroneously or illegally collected. 28 U.S.C. § 1346(a); United States
Page 9 of 36
v. Dalm, 494 U.S. 596, 601 (1990). Before a civil action for the
refund of taxes may be brought in the district court, however, a
claim for refund must have been “duly filed” with the Secretary of
the IRS in accordance with the law and IRS regulations. 26 U.S.C.
§ 7422(a) 2; United States v. Clintwood Elkhorn Mining Co., 553
U.S. 1, 4 (2008); see also 26 U.S.C. § 6511 (providing the time
within which a claim must be filed with the IRS). A district court
lacks subject matter jurisdiction over a suit for refund unless the
taxpayer has first filed a proper administrative claim with the IRS.
Bartley v. United States, 123 F. 3d 466, 468 (7th Cir. 1997).
Defendant asserts that, when the refund claims were filed by
Plaintiffs with the IRS, the claims did not belong to Plaintiffs but
belonged to the bankruptcy estate. Therefore, according to
Defendant, those claims were never “duly filed” as required by 26
U.S.C. § 7422, and this Court lacks jurisdiction.
26 U.S.C. § 7422(a): “No suit or proceeding shall be maintained in any court
for the recovery of any internal revenue tax alleged to have been erroneously or
illegally assessed or collected, or of any penalty claimed to have been collected
without authority, or of any sum alleged to have been excessive or in any
manner wrongfully collected, until a claim for refund or credit has been duly
filed with the Secretary, according to the provisions of law in that regard, and
the regulations of the Secretary established in pursuance thereof.”
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Page 10 of 36
When an individual debtor files for bankruptcy, the debtor’s
legal or equitable interest in property becomes part of the
bankruptcy estate (with certain exceptions not applicable here).
See 11 U.S.C. § 541(a)(1); Clark v. Rameker, 134 S. Ct. 2242, 2244
(2014). The definition of property extends to legal claims. In re
Smith, 640 F.2d 888, 890 (7th Cir. 1981) (causes of action are part
of the bankruptcy estate).
In addition, the bankruptcy estate includes property that “is
sufficiently rooted in the pre-bankruptcy past and so little
entangled with the bankrupts’ ability to make an unencumbered
fresh start[.]” Segal v. Rochelle, 382 U.S. 375, 380 (1966) (finding
that the debtors’ loss-carryback tax refund was property of the
estate where the debtors had both prior net income and net loss
when the petitions were filed); see also In re Meyers, 616 F.3d 626,
628 (7th Cir. 2010) (noting that even though Segal was decided
under the old Bankruptcy Act, the result of Segal is still followed
under the Bankruptcy Code). A claim for a refund of taxes that
were paid pre-petition constitutes property of the bankruptcy
estate. See Kokoszka v. Belford, 417 U.S. 642, 647-48 (1974)
(finding the income tax refund based on income tax payments
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withheld from the petitioner prior to his filing for bankruptcy and
based on earnings prior to filing for bankruptcy were “‘sufficiently
rooted in the prebankruptcy past’ to be defined as ‘property’”)
(quoting Segal, 382 U.S. at 380); Meyers, 616 F.3d at 628 (noting
that courts have recognized that tax refunds received after the
bankruptcy petition is filed may represent pre-petition assets and
be part of the bankruptcy estate); In re Lark, 438 B.R. 652, 655
(Bankr. W.D. Wis. 2010) (finding the debtors’ interest in or right to
tax refunds when they filed for bankruptcy “constituted an interest
in property”); In re Lock, 329 B.R. 856, 858 (Bankr. S.D. Ill. 2005)
(holding that “proceeds due from a tax overpayment, as in this case,
become property of the [bankruptcy] estate to the extent the
overpayment was made prepetition”).
Here, Plaintiffs seek a refund of taxes paid before they filed the
bankruptcy petition for tax years 1996 and 1997. As for the 2001
tax return, the income tax return suggests that the taxes were also
paid pre-petition. See Resp., Ex. A (d/e 68-1) (1040 U.S. Individual
Income Tax Return for 2001 showing $72,354 paid by way of 2001
estimated tax payments and applied from the 2000 return and
$100,000 paid with request for an extension of time to file, which
Page 12 of 36
was presumably filed before April 15, 2002). The basis for the
refunds was substantially due to losses from Plaintiffs’ interest in
various business entities for losses occurring in 2001. Sec. Am.
Compl. ¶¶ 9, 17. Even though the refund claims were discovered
post-petition (in 2004 or 2005)3 while the Bankruptcy Action was
still pending, the claims were sufficiently rooted in the prebankruptcy past that the claims were part of the bankruptcy estate.
See Ortega v. Bel Fuse, Inc., 546 B.R. 468, 471-72 (S.D. Fla. 2016)
(interpreting Eleventh Circuit case law to hold that all bankruptcy
debtors “must continuously disclose assets that form part of the
bankruptcy estate”) (emphasis omitted). Therefore, the 1996, 1997,
and 2001 refund claims were part of the bankruptcy estate.
Plaintiffs did not schedule their refund claims in the
bankruptcy case before the Bankruptcy Action was closed the first
time in July 2005. Therefore, when the Bankruptcy Action was
closed, the claims remained property of the estate. 11 U.S.C.
§ 554(d) (“Unless the court orders otherwise, property of the estate
that is not abandoned under this section and that is not
In their Response, Plaintiffs indicate they received “additional information in
2004,” after which they filed an amended tax return on February 15, 2005.
Resp. at 12 (d/e 68).
3
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administered in the case remains property of the estate.”);
Matthews v. Potter, 316 F. App’x 518, 521 (7th Cir. 2009) (an
unscheduled asset that is not administered by the time the
bankruptcy is closed remains property of the bankruptcy estate).
Because the refund claims remained property of the estate, the
trustee was the real party in interest when the Bankruptcy Action
closed. See Biesek v. Soo Line R. Co., 440 F.3d 410, 413 (7th Cir.
2006) (“Pre-bankruptcy claims are part of debtors’ estates” and,
therefore, the legal claim belonged to the trustee for the benefit of
the debtors’ creditors); Matthews, 316 F. App’x at 521 (until the
trustee abandons a legal claim, “only the trustee, as the real party
in interest, has standing to sue”); 11 U.S.C. § 323(a), (b) (the
bankruptcy trustee is the representative of the estate and has the
capacity to sue and be sued).
Although the 1996, 1997, and 2001 refund claims remained
assets of the bankruptcy estate when the Bankruptcy Action was
closed, Plaintiffs subsequently disclosed the refund claims. See
Resp., Ex. N (d/e 68-14) (Mot. to Reopen Bankruptcy Estate and
Appoint Trustee). The Bankruptcy Action was reopened, and the
bankruptcy trustee abandoned the refund claims after giving notice
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to the creditors. See Resp., Exs. O, P, L; see also 11 U.S.C. § 554(a)
(“After notice and a hearing, the trustee may abandon any property
of the estate that is burdensome to the estate or that is of
inconsequential value and benefit to the estate.”); Morlan v.
Universal Guar. Life Ins. Co., 298 F.3d 609, 618 (7th Cir. 2002)
(noting that the requirement of notice and a hearing means the
opportunity for a hearing). When the bankruptcy trustee
abandoned the refund claims in 2014, the claims reverted to
Plaintiffs nunc pro tunc, as if the bankruptcy case had never been
filed. See Morlan, 298 F.3d at 617 (holding that “when property of
the bankrupt is abandoned, the title ‘reverts to the bankrupt, nunc
pro tunc, so that he is treated as having owned it continuously’”)
(internal citations omitted).
Therefore, this Court must decide whether the bankruptcy
trustee’s abandonment of the claims in 2014 retroactively vested
Plaintiffs with the necessary standing to administratively file the
refund claims with the IRS in 2005. Defendant argues that the
effects of nunc pro tunc reversion are limited and cannot overcome
the strict jurisdictional hurdles set out in § 7422 (requiring that a
claim with the IRS be duly filed) and § 6511 (setting the limitation
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period for filing the claim with the IRS). The cases Defendant cites
in support, however, are distinguishable.
Both In re Bentley, 916 F.2d 431 (8th Cir. 1990) and In re
Perlman, 188 B.R. 704 (Bankr. S.D. Fla. 1995), involved the
abandonment of proceeds from the sale of bankruptcy estate
property. The courts held that the sale of the estate property
triggered a taxable event for which the bankruptcy estate was liable.
Bentley, 916 F. 2d at 433; Perlman, 188 B.R. at 708. The trustees’
abandonment of the sales proceeds “did not abrogate the tax
consequences of the sale.” Perlman, 188 B.R. at 707, 708 (citing
Bentley, 916 F.2d at 433) (and also noting “[t]here is simply no
retroactive escape from the tax consequences triggered by the
sales”). Here, no such taxable event occurred. The trustee simply
abandoned the property, which reverted nunc pro tunc to Plaintiffs.
Defendant also cites In re Folks, 211 B.R. 378 (9th Cir. BAP
1997), for the proposition that reversion nunc pro tunc cannot
defeat the timing requirement in Federal Rule of Bankruptcy
Procedure 4004. Fed. R .Bank. P. 4004 (which requires, in a
Chapter 7 case, that a complaint objecting to discharge be filed no
later than 60 days after the first date set for the meeting of
Page 16 of 36
creditors); see also 11 U.S.C. § 727(c)(1) (providing that the trustee,
a creditor, or the United States trustee may object to the granting of
a discharge). However, Folks involved abandonment of an asset to
a creditor. The court simply found that abandonment nunc pro
tunc to the creditor did not retroactively vest the creditor with
standing as of the time the creditor filed its objection under 11
U.S.C. § 727 and Rule 4004. Folks, 211 B.R. at 388-89 (noting that
“[n]ot even a nunc pro tunc abandonment order can retroactively
imbue [the creditor] with standing”). And even the Folks court
recognized that an abandonment of the asset “would relate back to
the time of filing of the [bankruptcy] petition, retroactively making
plaintiff [debtor] a proper party.” Id. at 388 (also noting that the
effect of the abandonment nunc pro tunc would retroactively make
the debtor a proper plaintiff in the § 727 action).
In the instant case, Plaintiffs were the debtors—not creditors—
and the abandonment retroactively made them the proper parties to
file the tax refund claims with the IRS. In that regard, Folks is
distinguishable.
Defendant also argues that the abandonment did not
retroactively revest Plaintiffs with standing to bring the
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administrative refund claims before the IRS because the
bankruptcy trustee abandoned the claims well beyond the statute of
limitations for filing a claim for refund. Def. Supp. Brief at 5 (d/e
81). Defendant asserts that standing can only be conferred nunc
pro tunc when the abandonment occurs before the running of the
applicable statute of limitations. According to Defendant, Plaintiffs
had to file their tax year 2001 refund claim with the IRS by 2008
and, therefore, the bankruptcy trustee had to abandon the 2001
claim before 2008 to confer retroactive standing on Plaintiffs. Id.
(citing 26 U.S.C. § 6511). Defendant argues that the only case that
allowed abandonment to retroactively provide standing involved a
case where the inaction of the trustee caused the debtor to file the
claim after the statute of limitations expired. Id. at 6 (citing
Barletta v. Tedeschi, 121 B.R. 669, 674 (N.D.N.Y. 1990)).
The case law does not establish whether abandonment nunc
pro tunc can confer standing on the debtor retroactively when the
abandonment occurs after the statute of limitations has expired.
See Sessions v. Romadka, 145 U.S. 29 (1892) (expressing no
opinion whether abandonment of property relates back to the
commencement of the bankruptcy case where the statute of
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limitations had run when the abandonment was made); but see,
e.g., Williams v. United Techs. Carrier Corp., 310 F. Supp. 2d 1002
(S.D. Ind. 2004) (rejecting the argument that the abandonment
must occur prior to filing suit; but, although the case did not
expressly discuss the statute of limitations, plaintiff filed the
lawsuit within 90 days of receiving the right-to-sue letter and those
90 days expired before the abandonment occurred); Southern
District of Indiana Case No. 1:02-cv-01036 (d/e 1) (accessed via
Public Access to Court Electronic Records (PACER)).
The only case that appears to expressly address the issue is
the case cited by Defendant. In Barletta, 121 B.R. 669, the
plaintiff-debtor disclosed a potential Fair Debt Collection Practices
Act (FDCPA) claim on his bankruptcy schedule. Id. at 671.
Although the bankruptcy trustee had expressed an intention to
abandon the claim, the trustee did not do so. After the plaintiff was
discharged in bankruptcy but eight months before the bankruptcy
case was closed, the plaintiff filed a timely lawsuit on the disclosed
claim. Id. at 671-72. By the time the bankruptcy case was closed
and title to the claim reverted to the plaintiff, the statute of
limitations on the FDCPA claim had expired.
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The defendant in the FDCPA lawsuit sought to dismiss the
lawsuit on the basis that the plaintiff lacked standing. Barletta,
121 B.R. at 671. The district court considered whether the plaintiff
could maintain the action when he did not have standing when he
filed suit and the statute of limitations had since expired. The court
found that dismissing the claim for lack of standing “would create
the inequitable result of extinguishing the plaintiff’s claim through
the inaction of the trustee, who did not intend to pursue the claim
but did not abandon it, while at the same time preventing the
plaintiff from taking action until it was too late.” Id. at 674. The
court rejected the defendant’s argument that the plaintiff could
have requested abandonment pursuant to 11 U.S.C. § 554(b)
because the request was no guarantee of abandonment and the
statute of limitations could have run even if the property had
eventually been abandoned. Id. The court ultimately concluded
that “upon the closing of plaintiff’s bankruptcy case, title in his
claim reverted to him as if no bankruptcy had ever been filed and
the plaintiff held title continuously.” Id.
The Bartletta case is distinguishable to the extent that the
plaintiff-debtor advised the bankruptcy trustee of the claim and the
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trustee’s inaction required that plaintiff file suit before title to the
claims revested in the plaintiff. Nonetheless, the court still
expressly found that the claims reverted to the debtors as if no
bankruptcy had ever been filed and that the plaintiff held the title
continuously. The Barletta case is persuasive authority that, upon
abandonment, title to the claims reverted to Plaintiffs nunc pro tunc
even though the statute of limitations expired before the
bankruptcy trustee abandoned the claims.
Moreover, the Seventh Circuit has recognized that one of the
purposes of retroactive vesting is to “protect against the running of
the statute of limitations.” Morlan, 298 F.3d at 617 (also noting
that the sequence of events in that case did not matter “for when
property of the bankrupt is abandoned, the title reverts to the
bankrupt, nunc pro tunc, so that he is treated as having owned it
continuously”) (internal quotation marks omitted).
The Court notes that nunc pro tunc reversion is a fiction of
convenience and not intended to be “blindly followed to a result that
is unjust.” Wallace v. Lawrence Warehouse Co., 338 F.2d 392, 394
n.1 (9th Cir. 1964); In re Hat, 363 B.R. 123, 141 (Bankr. E.D. Cal.
2007) (finding the equities favored abandonment nunc pro tunc to
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provide the debtor with the requisite insurable interest). However,
the equities favor applying nunc pro tunc reversion here because,
by doing so, the refund claim is preserved. In addition, the purpose
of the requirement that refund claims be filed with the IRS is to give
“the Government a full opportunity to address the problem
administratively.” Greene-Thapedi v. United States, 549 F.3d 530,
533 (7th Cir. 2008). That purpose was achieved by Plaintiffs filing
the claims in 2005 even though, at the time they filed those claims
and before abandonment by the trustee, they lacked standing to do
so.
In sum, Plaintiffs timely filed the claim with the IRS—even
though they technically lacked standing at the time because the
claims belonged to the bankruptcy trustee. The abandonment of
the claims by the bankruptcy trustee had the effect of reverting title
to Plaintiffs back to the date they filed the bankruptcy petition such
that they, by operation of the abandonment, actually had standing
all along. Morlan, 298 F. 3d at 617 (upon abandonment, title
reverts to the bankrupt nunc pro tunc and he is treated has having
owned the property continuously). Consequently, the refund claims
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were “duly filed” with the IRS, and this Court has jurisdiction over
the claims.
B.
Plaintiffs Have Standing to Maintain this Lawsuit
Defendant also argues that Plaintiffs lacked standing to file
this lawsuit for the 1996, 1997, and 2001 refund claims. According
to Defendant, Plaintiffs did not have standing to bring the claims
when this suit was filed because only the bankruptcy trustee could
bring the suit at that time and standing cannot be cured after suit
is filed.
Courts have generally recognized both constitutional and
prudential limitations on the federal courts’ jurisdiction. G & S
Holdings LLC v. Cont’l Cas. Co., 697 F.3d 534, 540 (7th Cir. 2012).
To establish Article III constitutional standing, a plaintiff must
demonstrate that he suffered an injury in fact, there is a causal
connection between the injury and the conduct complained of, and
it is likely that the injury will be redressed by a favorable decision.
Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992).
Constitutional standing must exist at the time the lawsuit is filed.
Friends of the Earth, Inc. v. Laidlaw Envtl. Servs. (TOC), Inc., 528
U.S. 167, 180 (2000).
Page 23 of 36
Courts have also recognized a type of non-constitutional
standing called “prudential standing,” which has been applied to
prohibit a litigant from raising another person’s legal right (thirdparty standing), to bar the adjudication of generalized grievances,
and to require that a plaintiff’s complaint fail within the zone of
interests protected by the law invoked. Lexmark Int’l, Inc. v. Static
Control Components, Inc., 134 S. Ct. 1377, 1386 (2014); see also
Hodei v. Irving, 481 U.S. 704, 711 (1987) (prudential standing
requires that a plaintiff assert his own legal rights and interests).
Prudential standing is a judge-made doctrine, is not jurisdictional,
and can be waived or forfeited. See Main Street Org. of Realtors v.
Calumet City, Ill., 505 F.3d 742, 745 (7th Cir. 2007) (“This doctrine
precludes the federal courts from exercising jurisdiction over some
types of case that Article III would not forbid the courts to
adjudicate.”); Edgewood Manor Apartment Homes, LLC v. RSUI
Indem. Co., 733 F.3d 761, 771 (7th Cir. 2013) (prudential standing
is not jurisdictional); G & S Holdings, 697 F.3d at 540 (prudential
standing can be waived). Prudential standing concerns can be
cured after the lawsuit is filed. Swearingen-El v. Cook Cnty.
Sheriff’s Dep’t, 456 F. Supp.2d 986, 989-90 (N.D. Ill. 2006)
Page 24 of 36
(distinguishing constitutional and prudential standing and finding
the plaintiff-debtor became the proper party in interest to bring the
lawsuit after he reopened his bankruptcy case and converted his
bankruptcy to a Chapter 13); Kurchack v. Life Ins. Co. of N. Am.,
725 F. Supp. 2d 855, 861 (D. Ariz. 2010) (lack of prudential
standing can be cured).
The Supreme Court recently criticized the prudential standing
doctrine, noting that the idea is in tension with the Supreme
Court’s recognition that a federal court had a “virtually unflagging”
obligation to hear and decide the cases within the court’s
jurisdiction. Lexmark, 134 S. Ct. at 1386 (citing cases); see also
United States v. Funds in the Amount of $239,400, 795 F.3d 639,
645 (7th Cir. 2015) (recognizing that Lexmark “cautioned that labels
like ‘prudential standing’ and ‘statutory standing’ are misleading
and should be avoided”). Nonetheless, the Lexmark case addressed
whether a particular plaintiff fell within the class of plaintiffs that
Congress authorized to sue under the statute. Lexmark, 134 S. Ct.
at 1387 (finding that courts “cannot limit a cause of action that
Congress has created merely because ‘prudence’ dictates”). The
Court expressly declined to address the issue of prudential
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limitations on third-party standing and held that “consideration of
that doctrine’s proper place in the standing firmament can await
another day.” Id. at 1387 n. 3. Because this case involves the
issue of third-party standing (i.e., whether Plaintiffs were raising
another person’s legal rights when they filed this lawsuit), which the
Supreme Court expressly declined to address the viability of in
Lexmark, this Court will consider whether Plaintiffs have
demonstrated constitutional standing and are proper parties in
interest to pursue this lawsuit.
Plaintiffs here have demonstrated constitutional standing.
They have alleged a concrete injury (overpayment of taxes), fairly
traceable to Defendant’s conduct (failure to refund the taxes), that
can be redressed by the Court if the Court awards the refund. See,
e.g., Dunmore v. United States, 358 F.3d 1107, 1112 (9th Cir.
2004) (finding the plaintiff had constitutional standing to pursue
his tax refund claims but lacked prudential standing when he filed
the action because the bankruptcy estate was the real party in
interest at that time and no abandonment had occurred); Williams
v. United Techs. Carrier Corp., 310 F. Supp. 2d 1002, 1010 (S.D.
Ind. 2004) (finding the plaintiff had constitutional standing because
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he was the individual who suffered discrimination but he did not
have prudential standing at the time he filed suit because was not
the real party in interest at that time due to the bankruptcy filing
and no abandonment had yet occurred; the plaintiff later obtained
prudential standing when the bankruptcy action was closed and the
scheduled claim reverted to the plaintiff).
What is truly at issue is prudential standing—whether
Plaintiffs were asserting their own legal rights and interests and
were, therefore, the proper parties to file the lawsuit. See, e.g.,
Swearingen-El, 456 F. Supp.2d at 989-990 (rejecting the argument
that the Chapter 7 debtor did not have Article III standing when
suit was filed and noting the issue was “a prudential standing one—
specifically the real party in interest doctrine”); Muhammad v.
Aurora Loan Servs., LLC, No. 13-cv-01915, 2015 WL 1538409, at *4
(N.D. Ill. Mar. 31, 2015) (finding that the debtor’s “lack of standing
raises issues of his own status as the real party in interest under
Federal Rule of Civil Procedure 17, not the Court’s power to
adjudicate the cause of action”). Defendant argues that Plaintiffs
were asserting the rights and interests of the bankruptcy trustee,
who had sole authority to bring the lawsuit when it was filed.
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Plaintiffs argue that Defendant forfeited the prudential
standing argument by failing to raise the argument until three years
after commencement of the case and only after discovery has
closed. As noted above, prudential standing is not jurisdictional
and can be forfeited. Edgewood, 733 F.3d at 771; G & S Holdings,
697 F.3d at 540. The record reflects that Defendant did not raise
lack of prudential standing as an affirmative defense until August
18, 2016. Compare Answer to Am. Compl. (d/e 22) (filed September
15, 2014) with Answer to Sec. Am. Compl. (d/e 66).
Even assuming Defendant did not waive its objection to
prudential standing, the Court finds, for the same reasons stated
above regarding standing to file the claims with the IRS, that the
bankruptcy trustee’s abandonment of the claims revested Plaintiffs
with prudential standing such that the complaint was properly
filed. See, e.g., Williams, 310 F Supp. 2d at 1012 (finding that the
plaintiff’s discrimination suit filed before the claim was abandoned
by the bankruptcy trustee reverted to him when the bankruptcy
case was closed, and treating the plaintiff as having continuously
owned the claim).
Page 28 of 36
Some courts describe the real party in interest requirement of
Rule 17 of the Federal Rules of Civil Procedure as a codification of
prudential standing. Rawoof v. Texor Petroleum Co., Inc., 521 F.3d
750 (7th Cir. 2008) (citing cases for that proposition without taking
a position). Rule 17(a)(3) provides:
The court may not dismiss an action for failure to
prosecute in the name of the real party in interest until,
after an objection, a reasonable time has been allowed for
the real party in interest to ratify, join, or be substituted
into the action. After ratification, joinder, or
substitution, the action proceeds as if it has been
originally commenced by the real party in interest.
Fed. R. Civ. P. 17(a)(3); see also 6A CHARLES ALAN WRIGHT & ARTHUR
R. MILLER, Federal Practice and Procedure § 1555 (3d ed.) (2016
update) (noting that a correction in parties under Rule 17 is
permitted even after the statute of limitations has run). The
Advisory Committee Notes indicate that this rule is intended to
“prevent forfeiture” when determination of the proper party is
difficult or when an understandable mistake has been made. Fed.
R. Civ. P. 17 Advisory Committee Notes, 1966 Amendment; see also,
Dunmore, 358 F.3d at 1112-13 (assuming that abandonment of the
asset by the trustee could constitute a ratification of the lawsuit,
the court concluded that ratification had the same effect as if the
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estate originally commenced the action, but only if the plaintiff’s
decision to sue in his own name was an understandable mistake
and not a strategic decision); Eaton v. Taskin, Inc., No. 07-3056,
2007 WL 2700554, at *6 (C.D. Ill. 2007) (granting the bankruptcy
trustee’s motion to be substituted as the real party in interest
where the defendant neither disputed that the plaintiff filed the
action as a result of an understandable mistake nor disputed the
absence of prejudice).
Defendant does not dispute that the mistake was
understandable or that Defendant will not be prejudiced. See Reply
at 4 (d/e 74) (only arguing that Rule 17 does not overcome the fact
that Plaintiffs did not acquire the claim until after the statute of
limitations ran and that Rule 17 cannot waive sovereign immunity).
Therefore, the Court finds that the abandonment nunc pro tunc
constituted ratification of the lawsuit such that the action proceeds
as if it has been originally commenced by the real party in interest.
C.
Resolution of Defendant’s Judicial Estoppel Argument is
Inappropriate in this Case on a Motion to Dismiss
Defendant last argues that Plaintiffs are judicially estopped
from bringing the 1996, 1997, and 2001 refund claims. Defendant
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asks the Court to draw the reasonable inference that Plaintiffs had
the motive to conceal their refund claims because Plaintiffs did not
advise the bankruptcy court of the refund claims until 2014,
roughly nine years from the date the claims were filed with the IRS
and after the lawsuit had been pending for almost one year.
Plaintiffs argue that they were not aware of the tax refund
claims until three years after the filing of their bankruptcy petition.
Plaintiffs claim they did not act in bad faith when they filed their
refund claims. Resp. at 15-16 (d/e 68). Finally, Plaintiffs assert
that the IRS did not issue a final decision on the claims until May
2011. Plaintiffs thereafter timely filed this lawsuit and gave notice
of the claims to the bankruptcy trustee. The bankruptcy trustee
then abandoned the claims.
In general, judicial estoppel prevents a party from prevailing
on a position in one litigation and then taking an inconsistent
position in another litigation. See Zedner v. United States, 547 U.S.
489, 504 (2006); Matter of Cassidy, 892 F.2d 637, 641 (7th Cir.
1990) (“Judicial estoppel is a doctrine intended to prevent the
perversion of the judicial process.”). Judicial estoppel may not be
appropriate, however, where the “party’s prior position was based
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on inadvertence or mistake.” New Hampshire v. Maine, 532 U.S.
742, 753 (2001) (internal quotation marks and citation omitted).
The decision whether to apply judicial estoppel is “a matter of
equitable judgment and discretion.” In re Knight-Celotex, LLC, 695
F.3d 714, 721 (7th Cir. 2012).
Courts have applied judicial estoppel where a debtor conceals
a legal claim and denies owning the asset in bankruptcy, receives a
discharge in bankruptcy, but then tries to recover on that legal
claim. See Cannon-Stokes v. Potter, 453 F.3d 446, 448 (7th Cir.
2006). While the Seventh Circuit has held that judicial estoppel is
appropriate where the plaintiff never disclosed her claim to the
bankruptcy court, see, id., the more difficult question is whether
judicial estoppel applies where the plaintiff-debtor attempts to
rectify his prior omission by amending his bankruptcy filings. See
Smith v. Am. Gen. Life Ins. Co., 544 F. Supp. 2d 732, 735 (C.D. Ill.
2008) (Mills, J.) (citing cases from other appellate courts that have
nonetheless rejected “such procedural chicanery”).
Courts in this district have held that judicial estoppel bars a
previously undisclosed claim—even where the debtor ultimately
discloses the claim—unless the prior omission was inadvertent or
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mistaken. See Smith, 544 F. Supp. 2d at 735 n. 6 (distinguishing
cases not applying judicial estoppel where the debtor reopened the
bankruptcy case to schedule a previously omitted claim on the
basis that the claims in those cases were being pursued for the
benefit of the creditors, not the plaintiffs); Bland v. Rahar, No. 063072, 2008 WL 109388, at *3 (C.D. Ill. Jan. 9, 2008) (Scott, J.)
(noting that it may be inappropriate to apply judicial estoppel where
the party innocently and inadvertently failed to disclose an existing
claim in his or her bankruptcy disclosures). The failure to disclose
a claim is deemed inadvertent or mistaken only when the debtor
lacked knowledge of the factual basis of the undisclosed claim at
the time of his bankruptcy or had no motive to conceal the claim.
Smith, 544 F. Supp. 2d at 735-36 (finding judicial estoppel barred
the plaintiff’s claim even though he reopened his bankruptcy case
and amended his schedules after his motion to dismiss the
defendant’s counterclaim was denied); Bland, 2008 WL 109388 at
*3 (finding judicial estoppel barred the plaintiff’s lawsuit where the
plaintiff sought to reopen the bankruptcy case and list the legal
claim only after the defendant filed a motion for summary judgment
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noting the plaintiff’s failure to list the claim in his bankruptcy
action).
Because the Court has to view the facts in the light most
favorable to Plaintiffs on a motion to dismiss, the Court will not
apply judicial estoppel at this time. David v. Wal-Mart Stores, Inc.,
No. 11 C 8833, 2014 WL 5510986, at *3 (N.D. Ill. Oct. 24, 2014)
(noting that the court could not find, on a motion to dismiss, that
the plaintiff was judicially estopped from pursuing his claim where
the plaintiff contended that his failure to disclose was inadvertent
and the materials considered on a motion to dismiss, when viewed
in the plaintiff’s favor, supported the factual premise that the failure
to disclose was inadvertent). Here, Plaintiffs essentially claim that
the failure to disclose the claim earlier was inadvertent. The
bankruptcy court documents, of which the Court may take judicial
notice, support this conclusion when taken in the light most
favorable to Plaintiffs.
Plaintiffs did not know about the refund claims until 2004 or
early 2005, well after Plaintiffs were discharged in bankruptcy in
October 2002, although before the Bankruptcy Action was closed in
July 2005. Plaintiffs eventually disclosed the refund claims to the
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bankruptcy trustee in 2014, apparently before the issue of judicial
estoppel was raised by Defendant. In that regard, this case is
unlike those applying judicial estoppel where the plaintiff only
disclosed the claim to the bankruptcy court after the defendant
raised the issue. See, e.g., Bland, 2008 WL 109388 at *3 (finding,
on summary judgment, that judicial estoppel barred the plaintiff’s
lawsuit where the plaintiff sought to reopen the bankruptcy case
and list the legal claim only after the defendant filed a motion for
summary judgment noting the plaintiff’s failure to list the claim in
his bankruptcy action). These facts, when taken in the light most
favorable to Plaintiffs, suggest that the failure to disclose the claims
was inadvertent.
On the materials properly before the Court on a motion to
dismiss, the Court cannot find that judicial estoppel clearly applies.
Therefore, the Court denies Defendant’s motion to dismiss on the
basis of judicial estoppel. Defendant may argue at trial that judicial
estoppel applies to bar Plaintiffs’ claims. See, e.g., Matthews, 316
F. App’x at 523 (finding judicial estoppel could not be resolved on a
motion to dismiss in that case and that an evidentiary hearing may
be necessary for the district court to make a factual determination
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regarding the nature and extent of the disclosures the debtor made
to the trustee).
IV. CONCLUSION
For the reasons stated, Defendant’s Motion to Dismiss
Plaintiffs’ 1996, 1997, and 2001 Claims for Refund (d/e 64) is
DENIED. This case is set for a Final Pretrial Conference on March
6, 2017 at 3:30 p.m. This case is set for Bench Trial on March 21,
2017 at 9:00 a.m.
ENTER: January 5, 2017
FOR THE COURT:
s/Sue E. Myerscough
SUE E. MYERSCOUGH
UNITED STATES DISTRICT JUDGE
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