Thursday, March 01, 2012

Texas State Court Gets Judicial Estoppel Right

The Dallas Court of Appeals has published a new decision correctly applying the doctrines of judicial estoppel and standing relating to a cause of action omitted from a bankruptcy filing. Norris v. Brookshire Grocery Company, ___. S.W.3d ___ (Tex. App.--Dallas, 2/29/12, no pet.). You can find the opinion here.

In Norris, the plaintiff filed suit against Brookshire Grocery prior to filing bankruptcy. Upon filing bankruptcy, the plaintiff/debtor neglected to mention the suit in either the Schedules or the Statement of Financial Affairs. However, just thirteen days after filing bankruptcy, the debtors filed a motion to dismiss their bankruptcy case on the ground that they "desire to work a payout with creditors." No party objected and the case was dismissed.

After the bankruptcy case was dismissed, Brookshire moved for summary judgment based on judicial estoppel and lack of standing. The trial court granted the motion.

On appeal the Dallas Court of Appeals reversed finding:

1. In order for judicial estoppel to apply, the Bankruptcy Court must have "actually accepted" the debtors' non-disclosure of the asset. Where the debtors dismissed their case without receiving a discharge, there was not an opportunity for the bankruptcy court to "actually accept" their position.

2. Normally, an undisclosed asset remains property of the bankruptcy estate and is not abandoned when the trustee closes the case. This is not the case when the case is dismissed, since the estate ceases to exist. As a result, the debtors had standing to pursue their cause of action.

The opinion by the Dallas Court of Appeals should be commended for correctly applying difficult principles of bankruptcy law. The purpose of judicial estoppel is to prevent debtors from gaming the system and reaping a benefit from taking inconsistent positions. Reading between the lines, it seems likely that when debtors' counsel learned of the cause of action, he gave them a choice: proceed with the bankruptcy and lose the cause of action or dismiss the bankruptcy and keep the cause of action. Because the debtors effectively undid the omission by dismissing their bankruptcy, judicial estoppel did not apply.

Hat tip to St. Clair Newbern.

1 comment:

Lahore said...

A legal malpractice plaintiff in an underlying patent suit is not judicially estopped from refiling its lawsuit in federal court after initially filing it in state court.

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