Reed v. City of Arlington

• Decision Date: 11 August 2011
• Docket Number: No. 08–11098.,08–11098.
• Citation: 66 Collier Bankr.Cas.2d 101,650 F.3d 571,18 Wage & Hour Cas.2d (BNA) 27,55 Bankr.Ct.Dec. 68
• Parties: Diane G. REED, Real party in Interest, Plaintiff–Appellee Cross–Appellant,v.CITY OF ARLINGTON, Defendant–Appellant Cross–Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

650 F.3d 571

66 Collier Bankr.Cas.2d 101

55 Bankr.Ct.Dec. 68

18 Wage & Hour Cas.2d (BNA) 27

Diane G. REED, Real party in Interest, Plaintiff–Appellee Cross–Appellant,

v.CITY OF ARLINGTON, Defendant–Appellant Cross–Appellee.

No. 08–11098.

United States Court of Appeals, Fifth Circuit.

Aug. 11, 2011.

Todd Alan Hoodenpyle (argued), Larry A. Levick, Singer & Levick, P.C., Addison, TX, for Plaintiff–Appellee Cross–Appellant.Michael A. McConnell (argued), Marianne Marsh Auld, Matt David Stayton, Kelly, Hart & Hallman, L.L.P., Fort Worth, TX, Denise V. Wilkerson, Asst. City Atty., Arlington, TX, for Defendant–Appellant Cross–Appellee.Stephen W. Sather (argued), Barbara M. Barron, Barron, Newburger & Sinsley, P.L.L.C., Austin, TX, for Commercial Law League of America, Amicus Curiae.Appeals from the United States District Court for the Northern District of Texas.Before JONES, Chief Judge, and KING, JOLLY, DAVIS, SMITH, GARZA, DeMOSS, BENAVIDES, STEWART, DENNIS, CLEMENT, PRADO, OWEN, ELROD, SOUTHWICK and HAYNES, Circuit Judges. ^*KING, Circuit Judge, joined by E. GRADY JOLLY, W. EUGENE DAVIS, JERRY E. SMITH, EMILIO M. GARZA, BENAVIDES, CARL E. STEWART, DENNIS, PRADO, OWEN, JENNIFER WALKER ELROD, LESLIE H. SOUTHWICK and HAYNES, Circuit Judges:

The question before the en banc court is whether judicial estoppel bars a blameless bankruptcy trustee from pursuing a judgment that the debtor—having concealed the judgment during bankruptcy—is himself estopped from pursuing. We hold that it does not. This result upholds the purpose of judicial estoppel, which in this context is to protect the integrity of the bankruptcy process, by adhering to basic tenets of bankruptcy law and by preserving the assets of the bankruptcy estate for equitable distribution to the estate's innocent creditors.

FACTUAL AND PROCEDURAL HISTORY

Kim Lubke, a former firefighter, won a judgment in excess of one million dollars against the City of Arlington (the “City”) pursuant to the Family Medical Leave Act (“FMLA”). During the City's appeal to this court, Lubke and his wife filed a Chapter 7 bankruptcy petition, but failed to disclose on their bankruptcy schedules either his judgment against the City (an asset of the estate) or his associated legal fees (a liability of the estate). Lubke did not inform his attorney in the FMLA case, Roger Hurlbut, about the bankruptcy filing. The Lubkes received a no-asset discharge and their bankruptcy case was closed.

Meanwhile, a panel of this court affirmed the FMLA judgment, but remanded to the district court to recalculate damages. Lubke v. City of Arlington, 455 F.3d 489 (5th Cir.2006). The City then offered Lubke a Rule 68 judgment. In the course of discussing the City's offer with his client, Hurlbut learned of the Lubkes' bankruptcy and immediately notified the trustee of the Lubkes' bankruptcy estate, Diane Reed (the “Trustee”), about the judgment. The Trustee had the bankruptcy case reopened, the Lubkes' discharge revoked, and herself substituted in the FMLA litigation as the real party in interest. She also sent the City a written acceptance of the City's offer of judgment, planning to distribute the recovered asset to the Lubkes' creditors.

The City had filed a petition for rehearing in this court two days prior to receiving Reed's letter of acceptance. When it learned of the Lubkes' bankruptcy, the City sought leave from the panel to argue that Lubke should be judicially estopped from collecting the judgment due to his failure to disclose the judgment in the bankruptcy proceedings. The panel denied the City's petition for rehearing on the FMLA judgment, but issued a mandate directing the district court to determine in the first instance whether judicial estoppel applied. Lubke v. City of Arlington, 473 F.3d 571 (5th Cir.2006) (per curiam).

In a very good opinion, the district court held that judicial estoppel should be applied against Lubke, but also held that estopping the Trustee from pursuing Lubke's judgment against the City would run counter to the provisions of the Bankruptcy Code and would be inequitable. Reed v. City of Arlington, ––– F.Supp.2d ––––, 2008 WL 8589782 (N.D.Tex.2008). The court therefore crafted the following remedy: Lubke was estopped from collecting or receiving any money from the judgment against the City. Id. at *13. The Trustee, however, would be free to collect the judgment on behalf of the estate for distribution to Lubke's creditors. Id. Any remaining funds after distribution would be refunded to the City, and not to Lubke. Id. The City appealed.

A panel of this court reversed, effectively vacating the judgment against the City. The panel held that the district court had abused its discretion by distinguishing Lubke's conduct from that of the Trustee in applying judicial estoppel, and concluding that the balance of equities “disfavor[ed] permitting this litigation to continue.” Reed v. City of Arlington, 620 F.3d 477, 482 (5th Cir.2010). This panel opinion was vacated by our court's decision to rehear the case en banc. See Reed v. City of Arlington, 634 F.3d 769 (5th Cir.2011). We now affirm the judgment of the district court and state a general rule that, absent unusual circumstances, an innocent trustee can pursue for the benefit of creditors a judgment or cause of action that the debtor fails to disclose in bankruptcy.

DISCUSSION

“The doctrine of judicial estoppel prevents a party from asserting a claim in a legal proceeding that is inconsistent with a claim taken by that party in a previous proceeding.” 18 James Wm. Moore et al., Moore's Federal Practice § 134.30 at 63 (3d ed.2011) (hereinafter “Moore's”). It is “an equitable doctrine invoked by a court at its discretion” to “protect the integrity of the judicial process.” New Hampshire v. Maine, 532 U.S. 742, 749–50, 121 S.Ct. 1808, 149 L.Ed.2d 968 (2001) (internal quotation marks and citations omitted). While enumerating several factors that typically inform the decision whether to apply the doctrine in a particular case, the Supreme Court has refused to “establish inflexible prerequisites or an exhaustive formula for determining the applicability of judicial estoppel,” stating instead that different considerations “may inform the doctrine's application in specific factual contexts.” Id. at 751, 121 S.Ct. 1808; see also 18 Moore's § 134.31 at 73 (“Because the doctrine is equitable in nature, it should be applied flexibly, with an intent to achieve substantial justice.... Application of the doctrine of judicial estoppel should be guided by a sense of fairness, with the facts of the particular dispute in mind.”); 18B Charles Alan Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice and Procedure § 4477 at 553 (2d ed. 2002) (“The concern [of judicial estoppel] is to avoid unfair results and unseemliness.”).

Here, we apply judicial estoppel “against the backdrop of the bankruptcy system and the ends it seeks to achieve.” Browning Mfg. v. Mims (In re Coastal Plains, Inc.), 179 F.3d 197, 208 (5th Cir.1999). These ends are to “bring about an equitable distribution of the bankrupt's estate among creditors holding just demands,” Kothe v. R.C. Taylor Trust, 280 U.S. 224, 227, 50 S.Ct. 142, 74 L.Ed. 382 (1930), and to “grant a fresh start to the honest but unfortunate debtor,” Marrama v. Citizens Bank of Mass., 549 U.S. 365, 367, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007) (citation and internal quotation marks omitted). Therefore, judicial estoppel must be applied in such a way as to deter dishonest debtors, whose failure to fully and honestly disclose all their assets undermines the integrity of the bankruptcy system, while protecting the rights of creditors to an equitable distribution of the assets of the debtor's estate.

In assessing whether judicial estoppel should apply, we look to see whether the following elements are present:

(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.

See Jethroe v. Omnova Solutions, Inc., 412 F.3d 598, 600 (5th Cir.2005); Superior Crewboats Inc. v. Primary P & I Underwriters (In re Superior Crewboats), 374 F.3d 330, 335 (5th Cir.2004). We have held that “[j]udicial estoppel is particularly appropriate where ... a party fails to disclose an asset to a bankruptcy court, but then pursues a claim in a separate tribunal based on that undisclosed asset.” Jethroe, 412 F.3d at 600.A. Our Result Follows from Bankruptcy Law

Judicial estoppel, as an equitable remedy, must be consistent with the law. See I.N.S. v. Pangilinan, 486 U.S. 875, 883, 108 S.Ct. 2210, 100 L.Ed.2d 882 (1988) (citations omitted). In this case, the relevant law is the Bankruptcy Code, which distinguishes between the debtor and the debtor's estate immediately upon the filing of a Chapter 7 bankruptcy. Therefore, while Lubke himself was properly estopped for his dishonesty, his post-petition misconduct does not adhere to the Trustee, who received the judgment asset free and clear of a defense that arose exclusively from Lubke's post-petition actions.

At the moment Lubke filed his petition, the judgment against the City became the property of Lubke's bankruptcy estate. See 11 U.S.C. § 541(a)(1) (property of the estate includes “all legal or equitable interests of the debtor in property as of the commencement of the case”); 5 Collier on Bankruptcy ¶ 541.07[4] at 41 (Alan N. Resnick & Henry J. Sommer eds., 16th ed.2011) (hereinafter “Collier”) (“Where a cause of action belonging to the debtor has been merged into judgment prior to bankruptcy, the estate succeeds to all rights under such judgment.”). The Trustee became the real party in interest upon filing, vested with the authority and duty to pursue the judgment against the City as an asset of the bankruptcy estate. See 11 U.S.C. § 323(a) and (b) (the trustee is the representative of the...