In re Fotouhi, Case No. 05-44839 N (Bankr. N.D. Cal. 3/24/2008)

• Decision Date: 24 March 2008
• Docket Number: Adv. No. 05-4487 AN.,Case No. 05-44839 N.
• Court: U.S. Bankruptcy Court — Northern District of California
• Parties: In re Shahab Eddin Fotouhi, Debtor. Phillips, Spallas & Angstadt, LLP, et al., Chapter 7, Plaintiffs, v. Shahab Eddin Fotouhi, Defendant.

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In re Shahab Eddin Fotouhi, Debtor.

Phillips, Spallas & Angstadt, LLP, et al., Chapter 7, Plaintiffs, v. Shahab Eddin Fotouhi, Defendant.

Case No. 05-44839 N.

Adv. No. 05-4487 AN.

United States Bankruptcy Court, N.D. California, Oakland Division.

March 24, 2008.

RANDALL NEWSOME, Bankruptcy Judge.

ORDER ON MOTION FOR NEW TRIAL, TO ALTER OR AMEND JUDGMENT, TO AMEND OR MAKE ADDITIONAL FINDINGS OF FACT, AND RECUSAL

This matter is before the Court upon the Debtor's Motion for a New Trial or to Alter or Amend a Judgment pursuant to Federal Rule of Civil Procedure 59(a) and (e), and/or to Amend or Make Additional Factual Findings pursuant to Federal Rule of Civil Procedure 52(b), and for recusal pursuant to 28 U.S.C. § 455(a), (herein the "Motion," docket entry #192) as that statue and such Rules apply here pursuant to Federal Rules of Bankruptcy Procedure 9023, 7052 and 5004(a).¹

On November 23, 2005, Phillips, Spallas & Angstadt (herein "Phillips") timely filed a complaint to deny the Debtor a discharge, pleading a cause of action pursuant to § 727(a)(4)(A) alleging that the Debtor knowingly and fraudulently made a false oath when he filed a Schedule B disclosing the value of his partnership interest in his present law firm as $0. (Complaint, docket entry #2).² As affirmative defenses, the Debtor's answer alleged 1) a failure to state a claim upon which relief may be granted, and 2) such further defenses the Debtor may assert at or prior to trial. (Answer, at 2, docket entry #7). Based upon an anticipated analysis by the Chapter 7 trustee concerning a valuation of the law firm, which the parties agreed "may be dispositive of the matter," the parties requested and were granted multiple continued status conferences. (Recording of Jan. 18, 2006 Status Conference, at 9:43:50 to 9:45:17; Letter of July 18, 2006 Requesting Additional Continuance, docket entry #14). After no progress was made in obtaining the Chapter 7 trustee's valuation analysis, at an August 30, 2006 status conference the Court scheduled a trial of this adversary proceeding for February 5, 2007. (Recording of Aug. 30, 2006 Status Conference, at 9:57:00 to 9:58:52).³

Thereafter, numerous discovery disputes arose concerning, inter alia, the Debtor's financial dealings and those of his law firm and partners, his partnership interest in his law firm, his income and "the nature and extent of [the Debtor's] personal assets," which Phillips asserted would show that the Debtor made "fraudulent, false oaths in his Chapter 7 papers." (Opposition to Motion to Quash, docket entry #23 at 1; Motion to Compel, docket entry #32 at 3; see also, docket entries #19-38, 41-50 and 53-55). At a January 24, 2007 hearing the Court adjudicated several discovery disputes, vacated the February 5 trial date, issued a scheduling order, and ordered that if Phillips intended to make additional assertions,

part of your [Phillips'] allegations under 727(a)(4), or anything else, because at this point you ought to have enough to know what it is that you're going to go forward on in this complaint. You've got ten days to amend that complaint, and you've got another ten days, counsel for the Debtor, to respond to that — to answer that amended complaint.

(Transcript of Jan. 24, 2007 Hearing, docket entry #63 at 12).

On February 2, 2007, Phillips filed a First Amended Complaint, asserting 16 additional claims for relief. (docket entry #61). In response, the Debtor filed an answer addressing each claim for relief and alleging the same two affirmative defenses as pled in his answer to the initial complaint. (Answer to First Amended Complaint, docket entry #66). About a month later, Phillips and the Debtor requested approval of a stipulation, which the Court granted, whereby they agreed that Phillips file "a Second Amended Complaint . . . to allege new claims based on information learned through discovery" and that the Debtor would thereafter "have 10 days . . . to file a response." (herein the Stipulation to File Second Amended Complaint, docket entry #83 at 2).

The Second Amended Complaint asserted 13 additional claims for relief. (docket entry #86). In response, the Debtor's answer again addressed each claim for relief, alleged the same two affirmative defenses as in his previous two answers, and added an affirmative defense that the Debtor relied upon the advice of legal counsel when valuing his law firm interest at $0. (docket entry #92 at 8-9). After the parties' unsuccessful attempt to settle this proceeding and the close of discovery, on June 20, 2007 the Court scheduled a trial for October 15 through 18, 2007.

At this same time, after the Debtor declined to stipulate to a third amendment to the complaint, Phillips filed a motion for leave to do so, which the Debtor opposed. (Motion to Amend, docket entry #111; Opposition to Plaintiffs' Motion to Amend, docket entry #118). At a hearing on July 2, 2007, the Court granted Phillips' motion, and shortly thereafter Phillips filed a Third Amended Complaint, alleging four additional claims for relief. (docket entry #123). As previously, the Debtor's answer to the Third Amended Complaint addressed each claim for relief and alleged the same three affirmative defenses as alleged in his answer to the Second Amended Complaint. (docket entry #124).

Thereafter, five days prior to the trial, the parties filed two stipulations which the Court granted, whereby they agreed to dismissal of 14 claims for relief, to Phillips filing a Fourth Amended Complaint to renumber the remaining claims, and to deem the Debtor's answer to the Third Amended Complaint to be his answer to that Fourth Amended Complaint. (herein the Stipulation to File Fourth Amended Complaint, docket entry #141 at 2; see also, docket entries #140, 143 and 147).

At the conclusion of the trial, the Court set deadlines to file post-trial briefs and motions and took the matter under submission. (Trial Transcript, docket entries 160-163, at 793-795). The Debtor then filed a post-trial brief and a motion to amend his answer to the Fourth Amended Complaint to extend the advice of counsel defense to a claim alleging failure to list income on his Statement of Financial Affairs and Schedule I that he received from the Fredrickson, Mazeika & Grant law firm (herein "FMG"), and to assert a defense of laches to a claim regarding a revenue sharing agreement between the Debtor and FMG. (docket entries #157 and 159).

A few days later, the Debtor filed a post-trial motion for judgment on the pleadings wherein the Debtor sought to "augment his failure to state a claim" affirmative defense as pled in his answer to assert, for the first time in this litigation, that pursuant to Federal Rule of Bankruptcy Procedure 4004(a) certain claims for relief should be time barred. (docket entry #165 at 4).⁴ The Court entered an order denying the Debtor's motion for judgment on the pleadings, finding that he had waived and forfeited the Rule 4004(a) timeliness defense, and thereafter denied his motion for reconsideration of that order. (docket entries #169, 170 and 173).⁵ On December 18, 2007, the Court entered its Findings of Fact, Opinion and Conclusions of Law, and a separate Judgment, denying entry of a discharge in this bankruptcy case. (docket entries 187 and 188). Thereafter, the Debtor timely filed the instant Motion.

Manifest Error of Law, Due Process, Waiver and Forfeiture

Pursuant to Rule 59(a)(2), in an action tried without a jury, to prevail on a motion for a new trial the moving party must demonstrate 1) a manifest error of fact, 2) a manifest error of law, or 3) newly discovered evidence. Janas v. Marco Crane & Rigging Co. (In re JWJ Contracting Co., Inc.), 287 B.R. 501, 514 (9^th Cir. BAP 2002), aff'd, 371 F.3d 1079 (9^th Cir. 2004).

Similarly, pursuant to Rule 59(e), a motion to alter or amend a judgment is appropriate if the court 1) is presented with newly discovered evidence, 2) committed clear error or the initial decision was manifestly unjust, or 3) there is an intervening change in controlling law. Circuit City Stores, Inc. v. Mantor, 417 F.3d 1060, 1064 n.1 (9^th Cir. 2005). Rule 52(b) applies to correct manifest errors of law or fact, or in limited circumstances, to present newly discovered evidence, but may not be asserted to re-litigate old issues, advance new theories, or to secure a rehearing on the merits. In re Tyrone F. Conner Corp. Inc., 140 B.R. 771, 784 (Bankr. E.D. Cal. 1992); In re St. Marie Development Corp. of Montana Inc., 334 B.R. 663, 675 n.3 (Bankr. D. Mont. 2005); Gutierrez v. Ashcroft, 289 F. Supp. 2d 555, 561 (D. N.J. 2003).

The Debtor asserts that the Court made an error of law and denied the Debtor due process at the January 24, 2007 hearing by allowing Phillips time to file an amended complaint. The Debtor also asserts that thereafter the Court made an error of law by finding that the Debtor had waived and forfeited the Rule 4004(a) time bar defense he asserted for the first time in the post-trial motion for judgment on the pleadings. (Memo. of Points and Authorities, attached to Motion). The Debtor's assertions are not well founded.⁶

The January 24 Hearing; Due Process

Federal Rule of Civil Procedure 15(a) provides that leave to amend a pleading "shall be freely given when justice so requires." Rule 15 is not, however, "itself a constitutional requirement," as due process and "the propriety of allowing a pleading alteration depends not only on the state of affairs prior to amendment but also on what happens afterwards." Nelson v. Adams USA, Inc., 529 U.S. 460, 466, 467 (2000). In the context of amending a pleading, due process is satisfied if the amended pleading is filed and served upon an adverse party, and if that adverse party is thereafter allowed an opportunity to be heard in response to the amended pleading. Nelson, 529 U.S. at 466-467 (10 days to respond to amended pleading comports with due process).⁷

Here, by January 2007 this...