Judicial Estoppel Doctrine Continues To Evolve
Judicial Estoppel Doctrine Continues To Evolve
The doctrine of judicial estoppel, which has become one of the most potent weapons against fraud (see Sharp Thinking No. 57 (February 2012), continues to evolve in the nation's federal courts. In some ways, the evolution is inconsistent with the per se approach seemingly taken in Berge v. Mader, 2011 IL App (1st) 103778, discussed in No. 57.
Trustees Generally Not Estopped: A consensus appears to be emerging that the doctrine generally does not apply to trustees. See Stephenson v. Malloy, 700 F.3d 265 (6th Cir. 2012); see also No. 57. This issue arises when the debtor fails to disclose a cause of action as an asset in the case, but the trustee somehow learns of it and pursues the action on behalf of the creditors. A majority of courts are refusing to impute the debtor's omission to the trustee.
Continuing Disclosure Duty Held: Most invokings of the doctrine occur after the debtor files schedules which were inaccurate when filed, but one recent case holds the doctrine can apply, at least in the Chapter 13 context, when the initial disclosures are accurate. See In re Adams, 481 B.R. 854 (Bankr. N.D. Miss. 2012). The issue arose in the Chapter 13 context because in Chapter 13 property of the estate includes property which the debtor acquires after the commencement of the case. 11 U.S.C. § 1306(a)(1). In Adams the personal injury/wrongful death at issue occurred after the was filed, and hence the original schedules were correct in not disclosing the claim. The court, however, held that there was a “continuing duty throughout the pendency of her case to disclose the state law cause of action.” Based upon the failure to make disclosure in accordance with the continuing duty, the court held judicial estoppel to apply and refused to allow the debtor to reopen the case to disclose the asset after the had been dismissed. (As to reopenings in general, see also Sharp Thinking No. 57). For an arguably similar case in the Chapter 11 context, see Guay v. Burack, 677 F.3d 10 (1st Cir. 2012).
Also invoking the “continuing duty” doctrine was Love v. Tyson Foods, Inc., 677 F.3d 258 (5th Cir. 2012), albeit in arguable dicta. (In Love, the alleged civil rights violation occurred prior to the Chapter 13 filing, but the right-to-sue letter wasn’t received until after.)
Estoppel From Disclosure: However, the doctrine is not limited to the debtor's omissions from her filings – it also can arise from her affirmative disclosures. In In re Rehman, 479 B.R. 238 (Bankr. D. Mass. 2012), the debtor had scheduled 13 creditors as creditors on her schedules, but then sought to dispute that capacity after they filed proofs of claim to which she objected. Invoking judicial estoppel based on her disclosures, the court rejected her objections to the claims.
Doctrine Flexibility Evolves: Continued evolution of the doctrine in federal courts also reveals a flexibility in its application which is in some ways inconsistent with the approach taken in Berge and may lead to further evolution in state courts as well. First, the 7th Circuit has reiterated its view that the doctrine “is a matter of equitable judgment and discretion,” to be applied, or not, according to principles of equity. See In re Knight-Celotex, LLC, 695 F.3d 714 (7th Cir. 2012). In that case, the Court of Appeals refused to impute an alleged failure to disclose by the trustee and his counsel to a creditor to which the trustee had assigned a claim.
Moreover, interpreting White v. Wyndham Vacation Ownership, Inc., 617 F.3d 472 (6th Cir. 2010), the court in Stephenson v. Malloy, 700 F.3d 265 (6th Cir. 2012), said that to support judicial estoppel requires (1) the plaintiff-debtor assumed a position that was contrary to the one asserted under oath in the proceeding, (2) the bankrupty court adopted the contrary position, and (3) the omission did not result from mistake or inadvertence. See also Love v. Tyson Foods, discussed above; In re Vioxx Prod. Liab. Lit., __ F. Supp. 2d __, 2012 WL 4097200 (E.D. La. 2012). Further, on element (3) Stephenson said the court considers whether (a) the debtor lacked knowledge of the factual basis of the undisclosed claim, (b) the debtor had a motive for concealment, and (c) the evidence indicates an absence of bad faith. On element (c), the decision imposed the burden of proof on the debtor, looking at factors such as whether he disclosed the omitted claim in other contexts (such as in discussions with the trustee or at the meeting of creditors). But see Guay v. Burack and Love v. Tyson Foods, both cited above, discounting belated disclosures.
Adopting a similarly-flexible but distinguishable approaches were Guay and In re Knigge, 479 B.R. 500 (8th Cir. BAP 2012). According to Knigge, judicial estoppel may be held where (1) a party's later position is clearly inconsistent with its earlier position, (2) the party has succeeded in persuading a court to accept that party's earlier position, and (3) the party would derive an unfair advantage or impose an unfair detriment on the opposing party if not estopped. See also Guay, indicating that the unfair- advantage element is not essential.
Bankruptcy Filing Without Signed Petition Violates Rule 9011
A lawyer’s electronic filing of a petition without possession of an original thereof signed by the debtor constitutes a violation of Federal Rule of Bankruptcy Procedure 9011 and justifies an order to disgorge all fees received in the matter, a judge in Nevada has ruled.
The decision in In re Sponhouse, 2012 WL 3682982 (Bankr. D. Nev. 2012), follows earlier decisions by other courts imposing hefty sanctions for filing of corporate and partnership petitions without appropriate organizational authorization. See Sharp Thinking No. 71 (September 2012).
Creditors May Do Nothing At Their Peril When Stay Applies
As we pointed out in Sharp Thinking No. 47 (May 2011), sometimes creditors do nothing at their peril when the stay applies. Now In re Herbst, 469 B.R. 299 (Bankr. W.D. Wis. 2012), has reiterated that point, finding a bank in contempt for merely continuing to hold collateral lawfully possessed prepetition. “In the Seventh Circuit, the act of passively holding an asset of the estate constitutes ‘exercising control’ over it in violation of [11 U.S.C.] § 362(a)(3), even when the asset was lawfully repossessed prepetition,” the court opined. It said it would assess attorney fees and costs against the bank for requiring that the contempt proceeding be brought.