In a new opinion, the Fifth Circuit has taken a big step
backward in sorting out the doctrine of judicial estoppel. Reed v. City of
Arlington, No. 08-11098 (5th Cir. 9/16/10). While adopting the principle
that one panel of the Fifth Circuit cannot overrule another one, the opinion
appears to be inconsistent with the Fifth Circuit's most recent prior ruling on
judicial estoppel, thus indicating the need for en banc review. The opinion can
be found here.
Two Wrongs and Two Rights Make a Mess
The first wrong in this case originated with the City of Arlington. It violated
the Family Medical Leave Act with regard to Kim Lubke, a former firefighter.
Lubke obtained a one million dollar judgment against the City.
A year later, while the judgment was on appeal, Lubke filed chapter 7. He
forgot that he had a valuable judgment and apparently omitted a number of other
assets as well. The Trustee closed the case as a no-asset filing.
The Fifth Circuit remanded the case for recalculation of damages. Subsequent to
the remand, the City offered to enter into a Rule 68 judgment for $580,000. In
discussing this offer with his client, the Debtor's non-bankruptcy attorney,
Roger Hurlbut first learned about the bankruptcy. He promptly informed the
Trustee's counsel. The Debtor and the Trustee successfully reopened the
bankruptcy case and the Trustee sought to be substituted as plaintiff. The
Debtor also agreed to have his discharge vacated.
Let's recap who behaved well and who behaved badly at this point:
The City of Arlington behaved badly when it violated the FMLA.
The Debtor behaved badly when he lied on his schedules.
The Debtor's nonbankruptcy lawyer performed blamelessly, representing the
Debtor competently in the FMLA action and promptly notifying the Bankruptcy
Trustee once he learned upon the bankruptcy.
The Bankruptcy Trustee did what she was supposed to do by moving promptly to
reopen the bankruptcy case and pursue the litigation.
So at this point, we have two wrongs and two rights. For their part, the
creditors did nothing wrong.
The District Court Tries to Follow the Fifth Circuit
The District Court considered the issue of judicial estoppel. After considering
the Fifth Circuit's conflicting precedents on judicial estoppel, it found that
the Debtor was subject to judicial estoppel. However, it found that the Trustee
and the creditors should not be punished for the Debtor's wrongdoing. It
allowed the Trustee to proceed with the case, but provided that once creditors
were paid, any excess funds would go back to the City of Arlington rather than
to the Debtor. Had the District Court been affirmed, the bad would have been
punished and the blameless would not.
However, the Fifth Circuit chose not to affirm the District Court.
The Law of Judicial Estoppel
The Supreme Court has fashioned a three pronged test for whether judicial
estoppel should apply:
(1) whether a party's later position is clearly
inconsistent with its position in a prior case; (2) whether the party succeeded
in persuading the first court to accept its position, creating "the perception
that either the first or the second court was misled;"and (3) whether the party
espousing the inconsistency has gained an unfair advantage or imposed an unfair
detriment on an opposing party by that means.
City of Arlington v. Reed,
slip op., p. 5, discussing New Hampshire v. Maine, 532 U.S. 742 (2001).
Prior to Reed, the Fifth Circuit had completed a trilogy of cases on
judicial estoppel in bankruptcy.
The first of the recent Fifth Circuit cases was In re Coastal Plains, Inc.,
179 F.3d 197 (5th Cir. 1999). In that case, the Debtor's CEO formed a company
which acquired the assets of the debtor corporation. The insider purchaser then
filed suit on a claim which had not been disclosed in the schedules. The
purchaser recovered $3.6 million on the undisclosed claim. The Fifth Circuit
reversed on appeal, finding that accepting the argument that the claims were
inadvertently left off the schedules "would encourage bankruptcy debtors to
conceal claims, write off debts, and then sue on undisclosed claims and
possibly recover windfalls." In re Coastal Plains at 213.
Next came In re Superior Crewboats, 374 F. 330 (5th Cir. 2004). In that
case, it was the debtor who was estopped. In that case, one of the debtors was
injured prior to bankruptcy. During their chapter 13 case, they filed suit on a
claim which was not listed in their schedules. After their case was converted
to chapter 7, the debtors told the trustee about their claim, but represented
that it was barred by limitations. As a result, the trustee abandoned the claim
which the debtors continued to pursue. When the trustee learned about the case,
he attempted to substitute in. However, the court granted summary judgment for
The third component of the trilogy was Kane v. Nat'l Union Fire Ins. Co.,
535 F.3d 380, 384 (5th Cir. 2008). That case looked a bit like Superior
Crewboats, but with one major distinction. In Kane, the Debtor
failed to disclose a claim. However, the Trustee did not abandon the claim.
Instead, once the Trustee learned of the deception, the Trustee sought to
pursue the claim on behalf of the creditors. The District Court granted summary
judgment, relying on Superior Crewboats. However, the Fifth Circuit said
not so fast. In its opinion, it stated:
There, because the trustee had abandoned the claim, he
was not the real party in interest and was not entitled to be substituted as
such. Rather, following the trustee's abandonment, the interest in the claim
had reverted to the debtors,who stood to collect a windfall from the asset at
the expense of the creditors. In the case before us, the Kanes' personal injury
claim became an asset of their bankruptcy estate when they filed their Chapter
7 petition. The Trustee became the real party in interest in the Kanes' lawsuit
at that point and never abandoned his interest therein.
The Fifth Circuit noted that the Kane case did not
present any equitable concerns. Indeed, the creditors would be harmed if
judicial estoppel was applied to preclude the trustee from pursuing the claims.
The court quoted from a great Seventh Circuit opinion which made the obvious
[The debtor's] nondisclosure in bankruptcy harmed his
creditors by hiding assets from them. Using this same nondisclosure to wipe out
[the debtor's claim against the defendant] would complete the job by denying
creditors even the right to seek some share of the recovery. Yet the creditors
have not contradicted themselves in court. They were not aware of what [the
debtor] was doing behind their backs. Creditors gypped by [the debtor's]
maneuver are hurt a second time by the district judge's decision. Judicial estoppel
is an equitable doctrine and using it to land another blow on the victims of
bankruptcy fraud is not an equitable application.
Kane, quoting Biesek v. Soo
Line R.R. Co., 440 F.3d 410, 413 (7th Cir. 2006).
The Fifth Circuit's Ruling in Reed
Given that Reed and Kane involved nearly
identical circumstances, the Trustee could have reasonably expected a similar
result. However, that was not to be.
The Court acknowledged that its precedents might be a bit
hard to follow. However, it insisted that it was necessary to disregard Kane
and follow Coastal Plains and Superior Crewboats. Writing for the
panel, Chief Judge Edith Jones stated:
What are the bankruptcy courts, which confront these
problems regularly in our circuit, to make of these decisions? The grounds on
which Kane distinguished In re Coastal Plains are that, in In
re Coastal Plains, a corporate officer's misdeeds detrimentally influenced
the corporate reorganization process as well as depriving creditors of the
concealed cause of action. Id. Kane purports to
distinguish In re Superior Crewboats, moreover, based on the differing
procedural consequences between a trustee's abandonment of a claim (to the
debtor) and the non-disclosure of assets that are not administered although
still within the debtor's estate. Id. at 386-87. Whether these distinctions are
correct in principle or on the facts are matters for another debate. Absent en
banc harmonization, we must endeavor to reconcile the authorities. We are also
guided by the principle that one panel of this court cannot overrule another
panel decision. (citation omitted). Thus, judicial estoppel remains applicable
to litigation claims that are undisclosed in bankruptcy, and the doctrine's
essential ingredients remain the same.
Reed at 7 (emphasis added). When
one judge within the circuit contends that an opinion by another panel
"purports" to distinguish a prior precedent, these are very strong
words. Why does Judge Jones believe that the per curiam opinion from Judges
King, Wiener and Elrod merely "purports" to distinguish the prior
Judge Jones makes it seem as though it were a mere procedural distinction, the
difference between abandonment and non-abandonment. However, it rests on
something much more substantive. In order for judicial estoppel to apply, the
case must involve the same parties. The trustee is not the same party as the
debtor. Therefore, judicial estoppel should NEVER apply to the trustee
based on the Debtor's actions.
Read the rest of the article at A Texas
Bankruptcy Lawyer's Blog