Thursday, April 05, 2012

Fifth Circuit Tackles Judicial Estoppel Yet Again Resulting in a Split Decision

Failure to schedule causes of action appears to be an endemic problem as shown by the fact that the Fifth Circuit has been asked to apply judicial estoppel to a bankruptcy case once again. However, the latest decision, Love v. Tyson Foods, Inc., No. 10-60106 (5th Cir. 4/4/12), which can be found here, shows just how difficult it is to draw the line between fairness and integrity as Judges Carolyn King and Catarina Haynes disagreed on how the doctrine should apply to a chapter 13 debtor's untimely disclosure. The Court, with Judge King writing the opinion, held that the debtor failed to meet his burden of proof to show a non-disclosure was inadvertent.

What Happened

Willie Love was dismissed from Tyson Foods after he failed a drug test. When the company refused to re-test him based on his contention that an antibiotic caused him to erroneously positive, he filed a charge of discrimination with the EEOC. and later filed suit. Along the way, he filed chapter 13 and did not list the claim The defendant successfully moved for summary judgment based on judicial estoppel based on the non-disclosure.

While this synopsis is accurate, the following time line gives a more complete understanding of what occurred.

Willie Love was dismissed from Tyson on April 2, 2008.

He filed chapter 13 on May 1, 2008 and did not list a potential cause of action.

Love filed a complaint of discrimination with the EEOC on May 30, 2008.

On September 22, 2008, the Debtor confirmed a chapter 13 plan which did not provide for a distribution to unsecured creditors.

Love received a right to sue letter from the EEOC on December 16, 2008.

The Debtor filed suit on March 12, 2009.

On July 16, 2009, Tyson moved for summary judgment.

On July 22, 2009, the Debtor amended his schedules to disclose the claim and moved to employ special counsel to pursue the claim.

On January 7, 2010, the District Court granted the Motion for Summary Judgment.

The Majority Opinion

Judge Carolyn King, writing for herself and Judge Jacques Weiner, upheld the summary judgment, finding that the debtor had failed to raise a fact issue as to whether the failure to disclose the asset was inadvertent. The opinion noted that the debtor's brief discussed only two of the elements of judicial estoppel and did not address inadvertence.

There are three elements to judicial estoppel:

“(1) the party against whom judicial estoppel is sought has asserted a legal position which is plainly inconsistent with a prior position; (2) a court accepted the prior position; and (3) the party did not act inadvertently.”
Opinion, p. 4, citing Reed v. City of Arlington.

The debtor made the following argument to the District Court:
(1) “Plaintiff’s positions are no longer inconsistent as [Love] supplemented his Schedule to list the current case as an asset in his bankruptcy”; (2) “the Defendant has failed to show the bankruptcy court has accepted the Plaintiff’s prior position that he had no contingent claims”; (3) “Plaintiff will not derive any unfair advantage or impose any unfair detriment on any opposing party if not estopped”; and (4) “Plaintiff’s bankruptcy is still pending and any monies paid by Defendant through settlement or judgment in this case would go into the bankruptcy to pay Plaintiff’s creditors first.”
Opinion, p. 6.

The majority found this explanation to be insufficient, stating:
Critically, Love’s arguments before the district court did nothing to refute Tyson’s allegations or explain why Love did not disclose his claims when his disclosure obligations first arose. His first two arguments clearly do not speak to his motive to conceal his claims against Tyson. With respect to Love’s third argument, whether Tyson or Love would accrue an unfair detriment or benefit if the lawsuit were allowed to go forward after Tyson forced Love to disclose his claims is an entirely different issue than whether Love had a financial motive to conceal his claims against Tyson at the time Love failed to meet his disclosure obligations, which is the relevant time frame for the judicial estoppel analysis. (citations omitted). Regarding Love’s fourth argument, Love did state that he would pay his creditors before collecting any money from his claims against Tyson, but he made this assertion only after Tyson brought his nondisclosure to light. Love’s disclosure obligations arose long beforehand, and his statement about his post-disclosure conduct again fails to speak to his motivations while he was obligated to disclose his claims but had not yet done so. Consequently, we agree with the district court’s conclusion that Love ultimately provided “no basis for concluding that [the] failure to disclose th[e] litigation [against Tyson] to the bankruptcy court was ‘inadvertent.’” Thus, the district court did not abuse its discretion by applying judicial estoppel to Love’s claims.
Opinion, pp. 6-7. Thus, the Fifth Circuit affirmed the District Court. (The majority opinion included a thoughtful rejoinder to the dissent. While I am not discussing it here, I want to emphasize that the judges engaged each other in a respectful debate).

The Dissent

In a spirited fifteen-page dissent, Judge Catarina Haynes offered both procedural and substantive reasons why she believed the majority was wrong.

First, she argued that judicial estoppel is an affirmative defense. As a result, the Defendant had the burden of proof to show that there was no factual dispute as to any of the three elements. According to Judge Haynes:

As the party invoking judicial estoppel on summary judgment, Tyson thus bore the burden of proof and had to prove, not just hypothesize, that Love had knowledge and a motive for concealment. Tyson failed to do so.
Dissent, p. 14.

Judge Haynes went on to state that even if Tyson had met its burden of proof that the debtor's response was sufficient to raise a fact issue.

We should stop here, as I have shown that no summary judgment burden “shifted” to Love. However, even if it did, I disagree that Love failed to respond in kind, creating a material factual dispute on whether he had motive to conceal. Love’s summary judgment response set forth the Supreme Court’s judicial estoppel standard from New Hampshire v. Maine, 532 U.S. 742, 751 (2001). See also Hall v. GE Plastic Pac., 327 F.3d 391, 399 (5th Cir. 2003). There, he disclaimed the third prong of that standard. Indeed, he expressly responded to Tyson’s claim that his “motive” was to gain money “free and clear” by arguing in response that any recovery would not be paid to him but to the estate. He stated:

"Plaintiff will not derive any unfair advantage or impose any unfair detriment on any opposing party if not estopped. Plaintiff’s bankruptcy is still pending, and any monies paid by Defendant through settlement or judgment in this case would go into the bankruptcy to pay Plaintiff’s creditors first. To the contrary, if Plaintiff is judicially estopped his creditors would be injured, and would be prevented from receiving any monies from the current case."

Thus, if Tyson’s mere allegation that Love’s motive was to gain an unfair personal advantage by taking money “free and clear of creditors” is enough to satisfy its summary judgment burden on “motive,” then Love’s statement that any monies paid “would go into the bankruptcy to pay Plaintiff’s creditors first” should similarly discharge his non-movant’s burden. The majority opinion discounts Love’s argument because it does not use the “magic words” of “motive” or “inadvertence.” We have not so exalted form over substance, particularly in the face of a Supreme Court opinion using the exact language Love used. The majority opinion contends that whether the claim is “free and clear” or not, a potentially deviant debtor may always attempt to “collect any recovery on claims without his creditors’ knowledge.” I agree that there is something problematic about a debtor who conceals assets that do not belong to him in an effort to forever keep his creditors in the dark. This hypothetical deviant, however, does not, as a matter of law, establish Love’s intent to conceal where his only action was an omission and the claim remains property of the bankruptcy estate.
Dissent, pp. 17-19.

Judge Haynes went further and stated that under Reed v. City of Arlington and Kane v. National Union Fire Ins. Co., that the bankruptcy estate should not have been estopped. She wrote:
This case, though different in kind, is controlled by our decisions in Reed and Kane. Both concerned whether a Chapter 7 trustee is estopped from pursuing unscheduled claims on behalf of the estate where the debtor had wrongly concealed claims during the bankruptcy proceeding. (ctiations omitted). We held in both cases that the claims originally brought by the debtors were unabandoned assets of the estate and that “the only way the creditors would be harmed is if judicial estoppel were applied to bar the trustee from pursuing the claim on behalf of the estate.” (citations omitted).

It makes no difference under the circumstances of this case that Love is not a trustee as were the parties seeking to avoid estoppel in Reed and Kane. For our purposes, his role as essentially a debtor in possession puts him in an analogous position to a trustee. It follows that because the claim is the property of the estate, and the estate has not been administered, judicial estoppel should not apply to bar relief that would benefit creditors. (citation omitted). The debtors in Kane were virtually indistinguishable from Love in his position as debtor. While the Kanes’ lawsuit was pending in state court, they filed a Chapter 7 bankruptcy. (citation omitted). That bankruptcy resulted in a no-asset discharge. (citation omitted). It was not until a summary judgment motion was offered, arguing that judicial estoppel should apply, that the Kanes filed a motion to reopen the bankruptcy so the Trustee could administer the previously undisclosed lawsuit. (citation omitted). We reversed the district court’s summary judgment application of judicial estoppel, holding that equity did not compel barring the trustee from acting on behalf of the estate. (citation omitted). Indeed, we even highlighted the possibility that the debtors may recover in the event of surplus. (citation omitted).

It is true, as the majority opinion points out, that the claims in Reed and Kane were pursued by “innocent Chapter 7 trustees, and not by the debtors themselves.” But Love’s role as both debtor and protector does not make the analogy any less apt. The only real implication of the majority opinion’s distinction is that the trustees in Reed and Kane were “innocent.” This distinction is irrelevant, however, because the debtors in those cases were in the same position as Love, and the characterization of the trustee’s role as “innocent” has nothing to do with the imposition of judicial estoppel where that trustee’s duty, imposed post-disclosure, is to act on behalf of the estate.
Dissent, pp. 22-24.

In conclusion, she stated:
Unlike the litigants in our prior decisions concerning judicial estoppel, Love gains no potential legal advantage from his failure to disclose the claim against Tyson to the bankruptcy court. As Love explained to the district court—albeit somewhat ineloquently—the recovery sought against Tyson would aid his creditors, not defraud them. In this vein, Tyson has not established Love’s motive to conceal. Our precedent counsels against judicial estoppel in these circumstances.
Moreover, the court’s equitable discretion must be used against the backdrop of the bankruptcy system and the goals it espouses. The outcome affirmed by the majority opinion does not further those goals—either in dissuading future deviant bankruptcy litigants or in protecting third party creditors’ rights. At the very least, the remedy espoused in Reed could be utilized here in preventing unnecessary harm to creditors while preventing an allegedly deviant debtor from “playing fast and loose” with the courts.

None of the above represents some effort to “change the law.” Rather it seeks to hold alleged tortfeasors who would reap an admitted windfall to their summary judgment burden of proof. Further, while judicial estoppel certainly should be available in some circumstances, it should not be mechanically applied. It is an equitable doctrine, demanding nuance, not absolutes.

The majority opinion discusses a very real concern, that debtors may defraud the bankruptcy system by failing to schedule their claims. Using judicial estoppel to curtail this potential problem, however, is not the answer under all circumstances. There are other legal avenues to punish, and obtain relief from, fraudulent debtors without imposing a windfall on an alleged tortfeasor to the detriment of innocent creditors.

Accordingly, I respectfully dissent.
Dissent, pp. 26-27.

Who Got It Right?

This is a difficult opinion. Love v. Tyson Foods, Inc. presents a closer case because the debtor was both the person who failed to schedule the cause of action and later sought to pursue it. However, the case is more ambiguous because (i) the claim had not been filed on the petition date and (ii) the debtor promptly amended his schedules to disclose the claim once the omission was pointed out. In the balance between integrity and fairness implicated by judicial estoppel, is it more important to punish the initial omission or to encourage disclosure, however belated, for the benefit of the creditors?

I think that Judge Haynes has the better argument. At a minimum, this was not a case that should have been resolved on summary judgment.

First, although it was not clearly discussed by either opinion, the debtor unambiguously contested two out of the three elements of judicial estoppel. The debtor noted that while he had taken an inconsistent position, he had amended his ways. Further, he did not obtain a benefit from taking an inconsistent position. The majority glosses over this point, noting that the debtor had confirmed a plan which did not propose any distribution to the unsecured creditors. However, no chapter 13 plan is final until it is completed. Under 11 U.S.C. Sec. 1329(a), a chapter 13 plan may be modified after confirmation upon request of the debtor, the trustee or a creditor to increase the amount of payments under the plan. Thus, there was still time to include the litigation proceeds in the funds to be distributed to creditors under the plan. Because there were fact issues on the first two prongs of Tyson's affirmative defense, the court should not have reached the third prong.

With respect to the third prong, inadvertence, the facts detailed by the majority speak loudly to the practical realities. On the date the debtor filed bankruptcy, he had not filed a charge of discrimination with the EEOC, he had not received a right to sue letter and he had not actually filed suit. While he had an obligation to disclose the potential cause of action, it is far more more believable than not that an unsophisticated debtor could have missed this distinction. As a practicing attorney, I am often frustrated with the wooden terms employed in the schedules. Schedule B21 asks the debtor to disclose:

Other contingent and unliquidated claims of every nature, including tax refunds, counterclaims of the debtor, and rights to setoff claims.
This language is unlikely to resonate with the typical debtor. It would be much much more useful to ask:

Are you suing anyone? Do you want to sue anyone? Has anyone done anything wrong to you?
That would be much more useful than asking about "contingent" and "unliquidated" claims, setoffs and tax refunds. (Indeed, my spell check does not believe that "unliquidated" is even a word).

On procedural grounds, the court should have ruled that there were fact issues and that summary judgment was improvidently granted.

Substantively, Judge Haynes has the better argument as well. This decision does not punish the debtor. The debtor will receive a chapter 13 discharge if he completes his payments. However, the creditors will not receive any distribution. While there were only two unsecured creditors who filed claims in the aggregate amount of $2,305.74, I am sure they would have preferred to receive payment.

eCast Settlement Corporation was a creditor in both this case and in Reed. eCast makes its money by purchasing unsecured claims and seeking recovery in bankruptcy. By minimizing the recovery to creditors such as eCast, the Court reduces the amount that eCast and other debt buyers will pay for distressed debt, which will reduce the amount paid to the initial creditor.s While the individual case may only affect two small unsecured claims, it has the potential to affect millions of claims.

What Should Be Done?

Normally, when two intelligent, articulate judges reach different results, one would hope that the losing party would seek panel rehearing or rehearing en banc to allow the court to reconsider the issue. However, in this case, the court notes that while the debtor had one counsel in the bankruptcy case and another in the district court case, that the debtor was pro se on appeal. The fact that a pro se party made it this far is remarkable. However, it is less likely that an unrepresented party will take the next step, which would be a shame. It would be nice if the Court were to reconsider the matter on its own motion.


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