Nice Discussion of Laches in a Non-Dischargeability Action from Judge Albert Tentative

I would not have thought that laches would come up in a non-dischargeability action.  The facts in issue are prepetition by definition.  The time to file the complaint is short.  Here, Judge Albert was dealing with an adversary proceeding that had been pending for at least a few years.  Plaintiff came up with a new brainstorm which apparently would work had Plaintiff not waited 3-4 years to make the argument.  This is part of Judge Albert’s tentative.  He also has a nice discussion of how res judiciata and collateral estoppel works in these matters.

Adv#: 8:11-01520

Laches is available as a defense in a proceeding seeking nondischargeability. 9 Collier on Bankruptcy ¶ 4007.03 (16th ed. 2015); see In re Beaty, 306 F.3d 914, 923 (9th Cir. 2002) (laches available as affirmative defense in Section 523(a)(2)(B) action, provided the defendant can establish the requisite elements); In re Baptiste, 430 B.R. 507, 512 (Bankr. N.D. Ill. 2010) (laches available as affirmative defense in Section 523(a)(2)(A) action). Laches is established when a defendant proves: 1) a lack of diligence or unreasonable delay by plaintiffs, and 2) that it has suffered prejudice as a result. Beaty at 926. However, “[b]ecause the application of laches depends on a close evaluation of all the particular facts in a case, it is seldom susceptible of resolution by summary judgment.” Beaty, at 928 (citing Couveau v. Am. Airlines, Inc., 218 F.3d 1078, 1083 (9th Cir. 2000)). But this case belongs in that rare minority.

Laches may be invoked against a party that sleeps on its rights. Jeffrey v. Pioneer Placer Dredging Co., 50 F. Supp. 43, 50 (D. Mont. 1943) (citations omitted). “In determining whether a party is guilty of laches barring equitable relief, neglect to learn what might be known is counted as knowledge, where there is suspicion of fraud.  The established principles as to the discovery of fraud are that the party defrauded must be diligent in making inquiry, that means of knowledge are equivalent to knowledge, that a clue to the facts, which, if diligently followed, would lead to a discovery, is, in law equivalent to a discovery. Mere ignorance of the facts will not excuse delay, but the party must be diligent and make such inquiry and investigation as the circumstances reasonably suggest, and means of knowledge are equivalent to actual knowledge.” Id. (citations omitted).

A complaint must provide “fair notice” to defendants of the facts and legal theories brought against them. Dream Games of Arizona, Inc. v. PC Onsite, 561 F.3d 983, 995 (9th Cir. 2009). Attempting to litigate the issue without amending the complaint with new allegations or claims robs the defendant of fair notice and unduly prejudices it. Id.  A court may not consider new allegations raised at the motion for summary judgment stage when those allegations were not part of the original complaint and plaintiff had not moved to amend the original complaint. Pickern v. Pier 1 Imports (U.S.), Inc., 457 F.3d 963, 969 (9th Cir. 2006); see Ansam Associates, Inc. v. Cola Petroleum, Ltd., 760 F.2d 442, 446 (2d Cir. 1985) (denying leave to amend complaint to bring in complete new facts allegedly discovered only recently because amendment would unduly prejudice defendant since discovery was completed and defendant had already filed a motion for summary judgment). The issues on summary judgment are framed by the complaint. United States v. Sierra Pac. Indus.,879 F. Supp. 2d 1096, 1108 (E.D. Cal. 2012).

Laches bars Plaintiffs from bringing in new allegations of Triple J’s involvement to establish its claim for fraud as the basis to determine the state court judgment nondischargeable. Though laches is not regularly the grounds for resolution by summary judgment because the defense usually requires resolution of factual issues, the facts providing the basis for resolving this matter under laches are undisputed. Plaintiffs’ Complaint fails to allege the existence of Triple J’s and its potential role in the alleged fraudulent scheme, or that Defendants were affiliated with an entity other than KRR in order to execute their scheme. Before this Motion, Plaintiffs did not seek the court’s leave to amend their Complaint to incorporate this new party or any of these new allegations.

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