Fifth Circuit Applies Judicial Estoppel Doctrine

Posted by NCBRC - October 8, 2013

In a disturbing trend favoring personal injury defendants over debtors who, without actual intent to deceive, fail to inform the bankruptcy court of a potential lawsuit, the Fifth Circuit applied the doctrine of judicial estoppel to prevent the debtor from benefiting from her state lawsuit. Flugence v. Axis Surplus Ins.(In re Flugence), No. 13-30073 (5th Cir. Oct. 4, 2013). After the debtor’s chapter 13 plan was confirmed she was seriously injured in a car accident. On the advice of her bankruptcy counsel she did not inform the court or the trustee about the accident. Prior to discharge, the debtor filed suit against the other party to the accident. Her debts were subsequently discharged. Upon learning of her bankruptcy discharge, the defendants in the personal injury case sought to reopen the bankruptcy case and have the debtor judicially estopped from pursuing the personal injury claim. Relying on Reed v. City of Arlington, 650 F.3d 571 (5th Cir. 2011) (en banc), the bankruptcy court determined that, while the debtor was estopped from pursuing the claim, the trustee could do so for the benefit of the bankruptcy estate. The district court reversed, holding that because the cause of action did not exist prior to her petition and the law was unclear as to her duty to inform the court of it post-petition, the debtor should not be judicially estopped from pursuing the claim.

On appeal to the Fifth Circuit, the personal injury defendant argued that the bankruptcy court correctly found that judicial estoppel applied to the debtor. It further maintained that while the trustee could pursue the claim for the benefit of the estate, its potential liability should be limited to the amount of the estate debts. As judicial estoppel is an equitable doctrine, the court applied an “abuse of discretion” standard of review.

The court applied the three-part test for judicial estoppel set forth in Reed under which: “(1) The party against whom it is sought has asserted a legal position that is plainly inconsistent with a prior position; (2) a court accepted the prior position; and (3) the party did not act inadvertently.”

As to the third factor, the debtor argued that she acted inadvertently in that she was not aware of a duty to disclose, and in fact, such duty was not clearly established in the Fifth Circuit. The court rejected this argument finding that inadvertence may be shown by either of two methods: 1) lack of knowledge as to the facts (as opposed to the legal obligation) giving rise to the duty to disclose; or 2) lack of motive to conceal. As the debtor knew of the existence of the lawsuit she could not claim lack of the requisite knowledge, therefore, the court turned to her motive to conceal. Here, the court found that the bankruptcy court applied the correct analysis when it held that she had the requisite motive “because her claim, if disclosed, would be available to her creditors.” In so holding, the Fifth Circuit, without discussion, applied an objective test for motive under which an actual intent to deceive is not considered. See also Queen v. TA Operating, Nos. 11-8090, 11-8098 (Aug. 20, 2013) (motivation is an objective inquiry).

Some courts have moved away from the strictly objective approach to motivation, however. See, e.g., Ah Quin v. County of Kauai Dept. of Trans., No. 10-16000 (9th Cir. July 24, 2013) (motivation has subjective component of debtor’s actual intent); White v. Wyndham Vacation Ownership, Inc., 617 F.3d 472, 478 (6th Cir. 2010) (in addition to knowledge of facts and motive to conceal, court looks at whether evidence indicates an absence of bad faith); Stephenson v. Malloy (In re Al-Mansoob), 700 F.3d 265 (6th Cir. 2012) (applying White’s “slightly expanded” version of third prong of judicial estoppel test).

The court also rejected the personal injury defendant’s argument that the claim against it should be limited to the amount of debt in the bankruptcy estate, finding that Reed, permits the trustee to recover without limitation. “Reed sensibly requires only that, after a claim is prosecuted and the creditors and fees have been paid, any remaining recovery must be returned to the personal-injury defendants.”

The court summarily mentioned the issue of whether the lawsuit was property of the estate under sections 1306(a)(1) or whether it was beyond the reach of creditors under the workings of 1327(b) and (c) which provides that all post-confirmation property is vested in the debtor “free and clear of any claim or interest of any creditor provided for by the plan.” Although the court noted that there are four existing approaches to the inherent contradiction between these two sections (see California Franchise Tax Bd. v. Kendall (In re Jones), 657 F.3d 921, 927-28 (9th Cir. Sept 14, 2011) for a discussion of the approaches) it found that it did not need to reconcile them as the confirmation order specified that estate property would not revest in the debtor until completion of the plan.

Flugence opinion


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