Plaintiffs Lacked Standing to Prosecute Class Action because Underlying Events Occurred Prior to Filing of Chapter 7 Bankruptcy Proceeding by Plaintiffs and Plaintiffs Failed to Disclose Existence of Class Action Claims in Bankruptcy California Federal Court Holds
Plaintiffs filed a class action against Washington Mutual and other defendants alleging inter alia violations of the federal Fair Debt Collection Practices Act (FDCPA); specifically, the class action complaint alleged that defendants improperly froze plaintiffs’ checking account funds. Yack v. Washington Mutual Inc., 389 B.R. 91, 93 (N.D. Cal. 2008). Plaintiffs each had medical problems, and used a credit card to pay for some of their medical bills, id. When plaintiffs fell behind on their payments, their credit card company hired a debt collector, defendant Sunlan, which obtained a $10,000 judgment against them and then levied on their Washington Mutual bank account. Id., at 93-94. Washington Mutual complied with the levy, forwarding funds from plaintiffs’ account to the County Sheriff and withdrawing a legal processing fee, id., at 94. Plaintiffs alleged that the funds were exempt from levy because they social security and pension benefits; a California Superior Court agreed and ordered the funds released, id. Several months later, plaintiffs filed a voluntary Chapter 7 bankruptcy proceeding, id., at 95. Plaintiffs thereafter filed their putative class action complaint alleging that defendants levied on their bank account despite knowing that the funds were exempt from attachment. Id., at 94. Defense attorneys filed a motion to dismiss for lack of subject matter jurisdiction and for failure to state a claim, id. The district court agreed and dismissed the class action.
The thrust of the defendants’ challenge to the class action complaint was that plaintiffs lacked standing to prosecute the claims because they “failed to list the claims in their bankruptcy proceeding, and because they are judicially estopped from pursuing claims held by the bankruptcy trustee.” Yack, at 95. Defense attorneys argued that plaintiffs filed their Chapter 7 proceeding many months after the events underlying the putative class action complaint, and that they did not disclose in that proceeding the claims they now sought to prosecute: “in doing so, plaintiffs effectively concealed from the bankruptcy their supposed claims against defendants.” Id. According to the district court, plaintiffs conceded “that they lack standing to assert those claims in federal court.” Id. The court found that plaintiffs’ efforts to re-open the bankruptcy and obtain abandonment from the trustee of the claims underlying the class action complaint failed, as the bankruptcy court affirmatively denied them that relief. Id., at 96. Accordingly, plaintiffs lacked standing to prosecute the class action, id. The federal court also agreed with defendants’ alternative argument, that plaintiffs were barred from prosecuting the class action claims by the doctrine of judicial estoppel. See id., at 96-97. Accordingly, the court dismissed with prejudice the class action complaint against defendants. Id., at 97.