Fifth Circuit Finds no Judicial Estoppel under Section 349(b)

Posted by NCBRC - October 12, 2012

The Fifth Circuit ignored its own rules of judicial estoppel, disregarded the purposes of section 349(b), and overrode the factual findings and discretionary decision of the Bankruptcy Court in reversing the lower court’s finding that Wells Fargo was judicially estopped from claiming substantially greater arrearages in a second bankruptcy than it had claimed in the first, dismissed, bankruptcy. Wells Fargo v. Oparaji (In re Oparaji), No. 11-20871 (5th Cir. Oct. 5, 2012).

In the debtor’s earlier chapter 13 case Wells Fargo filed several proofs of claim in which it consistently represented arrearages at a certain amount. The court confirmed debtor’s plan based upon that representation. When the debtor was unable to maintain payments under the plan the case was dismissed. Later, the debtor filed a second chapter 13 plan and Wells Fargo filed a proof of claim asserting a significantly higher amount in arrearages including arrearages that would have been incurred prior to the bankruptcy court’s confirmation of the debtor’s plan in the first case. The bankruptcy court in the second case found that Wells Fargo was judicially estopped from seeking arrearages that it could have included but did not include in the first case.

The district court affirmed and the Fifth Circuit reversed.

Contrary to the finding of the Oparaji panel, the lower courts accurately followed Fifth Circuit law on judicial estoppel applying that doctrine in cases where “a party took a clearly inconsistent position in earlier litigation, the court accepted the position, and the inconsistency was not inadvertent.” Jethroe v. Omnova Solutions, Inc., 412 F.3d 598, 600 (5th Cir. 2005). The bankruptcy court correctly held that although under 1305, a creditor has no affirmative obligation to file a proof of claim, if it does choose to file it must do so accurately. The trigger for estoppel was the reliance of the court in confirming a plan in presumed resolution of the claim. In re Burford, 231 B.R. 913 (Bankr. N.D. Tex. 1999). As Wells Fargo was always in possession of the facts relating to arrearages, its failure to include the new claimed amounts, was not inadvertent.

Application of section 349(b), which provides that an order of dismissal reinstates certain conditions as they were prior to the bankruptcy, does not alter that analysis. Section 349(b) does not simply erase an earlier case. Rather, “[t]he objective of section 349(b) is to restore all property rights, as far as practicable, to the positions they occupied at the commencement of a case that was dismissed.” 3 Alan N. Resnick & Henry J. Sommer, Collier on Bankruptcy ¶ 349.03[1] (16th ed. 2011) (emphasis added). The Fifth Circuit’s finding to the contrary is not supported by the text of the statute or its purpose.

“Generally, an abuse of discretion only occurs where no reasonable person could take the view adopted by the trial court.” Whitehead v. Food Max of Mississippi, Inc., 332 F.3d 796, 803 (5th Cir.). In reversing the lower court’s decisions, the Fifth Circuit created an over-expansive rule of law with respect to estoppel and failed to honor the discretionary findings of the bankruptcy court.

Oparaji opinion


Post a Comment

You must be logged in to post a comment.