Fifth Circuit Bludgeons Debtors with Judicial Estoppel Ruling

Posted by NCBRC - January 10, 2019

The district court did not abuse its discretion in dismissing the plaintiff’s case under the False Claims Act where he had failed to disclose the cause of action in his pending chapter 13 case. Bias v. Tangipahoa Parish School Board, No. 17-30982 (5th Cir. Dec. 5, 2018) (unpublished, per curiam opinion).

After his chapter 13 case was confirmed in bankruptcy court, debtor, Ronald Bias, learned that his retirement from the Marine Corps had mistakenly been permitted two years earlier than it should have been. The Marine Corps offered him the option of continuing his teaching position in the Junior Reserve Officer’s Training Corp (JROTC), Tangipahoa Parish School District, as a way of fulfilling his pre-retirement obligations. While teaching, Mr. Bias learned of a fellow marine and teacher at the school whom he believed was submitting false reimbursement requests to the Marine Corps. After he reported his suspicions, Mr. Bias was offered the opportunity to retire or be transferred to a new school district.

Believing this action by the school board to be in retaliation for his whistle-blowing, Mr. Bias filed an action in district court under the False Claims Act, 42 U.S.C. section 1983, and state law, against the school board, the school principal and the marine who sought the reimbursements. The court dismissed all the claims that were not separately settled, and Mr. Bias appealed. The Fifth Circuit reversed and remanded the dismissal of Mr. Bias’s FCA retaliation claim against the Board. On remand, the Board argued that Mr. Bias’s claim should be dismissed on judicial estoppel grounds because Mr. Bias failed to disclose the action to the bankruptcy court where his chapter 13 case was pending. The district court agreed and granted the Board’s motion to dismiss.

On appeal, the Fifth Circuit found that the district court did not abuse its discretion in applying judicial estoppel to Mr. Bias’s case.

Applying the three elements necessary for application of judicial estoppel, the circuit court found first that Mr. Bias had an ongoing duty to report post-petition causes of action to the bankruptcy court and that, by failing to do so, he impliedly misrepresented to the court that no such litigation existed. Mr. Bias, and NACBA/NCBRC as amici, argued that Mr. Bias had no duty to disclose the litigation, as section 541(a), and Rule 1007(h) delineate the debtor’s duty of disclosure and neither the Code nor the Rule impose that duty. Mr. Bias and amici distinguished Flugence v. Axis Surplus Insurance Co. (In re Flugence), 738 F.3d 126 (5th Cir. 2013), which involved a chapter 13 plan specifying that property would not re-vest in the debtor until discharge. In contrast, Mr. Bias’s plan provided that upon confirmation, property would re-vest in him. Mr. Bias and amici argued, therefore, that because a post-petition cause of action would not enter the bankruptcy estate, he had no obligation to disclose it.

Citing its own precedents, the court found that Fifth Circuit law has established that a debtor’s duty to disclose is not dependent upon the whether the asset acquired post-confirmation entered the bankruptcy estate or was otherwise subject to disclosure requirements as set forth in the Code. Rather, under judicially-created law, debtors in the Fifth Circuit have an obligation of disclosure beyond what is required by Congress. The court summarily rejected the argument that its disclosure obligation is unduly burdensome.

The court next found that the bankruptcy court’s reliance on Mr. Bias’s misrepresentation was evidenced by its grant of discharge. It rejected Mr. Bias’s argument that the bankruptcy court could not have relied on a representation of which it was not aware, as not having been raised below.

Finally, the court found the third element of intentionality and motive to conceal, was satisfied. In so holding, the court held that, under its precedents, Mr. Bias’s lack of awareness of the law requiring disclosure is irrelevant. Inadvertence can be shown only by a lack of awareness of the facts giving rise to the duty to disclose, i.e. the existence of the cause of action. With respect to motive, the court applied an objective analysis under which the mere fact that Mr. Bias would have had to disclose any settlement or award arising out of the litigation to the bankruptcy court thereby possibly exposing himself to increased plan payments or shorter plan period, was sufficient to infer motive to delay the FCA litigation and keep the bankruptcy court in the dark.

In the face of amici’s argument that the “Fifth Circuit has begun using the doctrine [of judicial estoppel] as a per se rule as a perfunctory bludgeon with which to punish dishonest and honest debtors alike,” the court fell back on its position as a reviewing court. It held that the district court based its holding on a correct statement of the facts and reasonable interpretation of circuit law and, therefore, did not abuse its discretion.

Mr. Bias has filed a petition for rehearing en banc.

Bias 5th Cir Dec 2018

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