Judicial Estoppel: Is Judicial Estoppel Proper when a Debtor Neglects to Enter a Pending Lawsuit as an Asset in Their Bankruptcy Proceedings?
Case Note Re: Caillouet v. First Bank and Trust (In re Entringer Bakeries, Inc.), No. 07-30499, 2008 WL 4821613 (5th Cir. Nov. 6, 2008) The Fifth Circuit in Kane v. Nat'l Union Fire Ins. Co. v. Caillouet determined that Stuart and Lisa Kane (collectively "Debtors") were not barred by judicial estoppel from pursuing litigation arising from an automobile accident (the "P.I. Suit"), where Debtors had failed to disclose the P.I. Suit in their separate, no-asset bankruptcy case. In coming to this conclusion, the Fifth Circuit reasoned that unlike the undisclosed litigation in In re Superior Crewboats, Inc., 374 F.3d 300 (5th Cir. 2004), relied on by the district court, the P.I. Suit, if allowed to proceed, would be an asset to the bankruptcy estate and its creditors, not a windfall for Debtors. On April 18, 2002 Stuart Kane was involved in an automobile accident with Daniel Comstock ("Comstock"), who at the time of the accident was acting in the course and scope of his employment with Qwest Communications ("Qwest"). On July 19, 2002, Debtors filed the P.I. Suit, seeking damages from Comstock, Quest, and Qwest's insurer, National Union Fire Insurance Company. On October 13, 2005, Debtors filed for relief under chapter 7 of the Bankruptcy Code (the "Code").1 Debtors, however, failed to disclose the P.I. Suit in their bankruptcy schedules. On July 10, 2006, Comstock and Quest (collectively, "Defendants")2 filed a motion for summary judgment in the P.I. Suit on the basis that Debtors should be barred from pursuing the P.I. Suit on the basis of judicial estoppel because of their failure to list the suit in the bankruptcy case, which ultimately resulted in a discharge. Debtors subsequently filed a motion in the bankruptcy case to reopen their case, so that the trustee could pursue the P.I. Suit on behalf of the estate. The bankruptcy court granted the motion. Despite the reopening of the bankruptcy case, the district court granted Defendants' motion for summary judgment in the P.I. Suit, finding In re Superior Crewboats, Inc. controlling. In In re Superior Crewboats, Inc., one of two debtors was injured on a ship owned and operated by the defendant. The debtor and his wife subsequently filed bankruptcy and failed to disclose their potential suit. While their bankruptcy case was pending, the debtors sued the defendant in state court without ever amending their bankruptcy schedules to disclose their claim. The bankruptcy case was then converted from a chapter 13 case to a chapter 7 case and a trustee was appointed. At the section 341 meeting of creditors, the debtors told the trustee about the suit, and the trustee formally abandoned the claim. Later, the defendants informed the trustee that debtors had decided to continue to pursue their prepetition claim, and the defendants then filed a motion for summary judgment. In moving for summary judgment, the defendants argued that the debtors were barred by judicial estoppel and Federal Rule of Civil Procedure 17(a), which requires a suit to be brought by the real party in interest. In response to the motion, the trustee filed a motion to substitute himself as the proper party in interest under Rule 17(a). On appeal, the Fifth Circuit found that the "debtors were barred from pursuing their claim by the equitable doctrine of judicial estoppel, and that the trustee's Rule 17(a) motion was moot after [the court] granted summary judgment for defendants."3 In light of the district court's determination that In re Superior Crewboats, Inc. was controlling in the instant case, it granted summary judgment in favor of Defendants. On appeal, the Fifth Circuit held that the district court erred in concluding Debtors were barred by judicial estoppel. In making this ruling, the Fifth Circuit first articulated a few basic principles governing judicial estoppel. In particular, the court explained that judicial estoppel applies, in the context of a scheduled claim, when a debtor, or other inside party, benefits "to the detriment of creditors if the claim were permitted to proceed."4 The Fifth Circuit then turned to the district court's reliance on In re Superior Crewboats, Inc., finding the case distinguishable from the facts in the case before it. Specifically, the Fifth Circuit determined that unlike In re Superior Crewboats—where the trustee had abandoned the claim, the trustee was not the real party in interest, and the debtors' pursuit of the claim would have resulted in a windfall—in this case, the inclusion of the P.I. Suit would be an asset to the bankruptcy estate and its creditors because the P.I. Suit became part of the estate at conversion, the trustee never abandoned the claim, and the trustee was the real party in interest.5 Given that the P.I. Suit constituted an asset of the estate and would benefit creditors, if allowed to proceed, the Fifth Circuit determined that the district court erred and reversed its decision. Kane v. Nat'l Union Fire Ins. Co. v. Caillouet, No. 07-30611, 2008 WL 2721157 (5th Cir. July 14, 2008). 1 11 U .S .C. §§101 et al. (2008). |