Coastal Plains, Inc., In re

Decision Date18 June 1999
Docket Number97-11119 and 98-10246,Nos. 97-11118,s. 97-11118
Citation179 F.3d 197
PartiesIn The Matter of: COASTAL PLAINS, INC., Debtor. Browning Manufacturing, Appellant/Cross-Appellee, v. Jeffrey H. Mims, Trustee for the Bankruptcy Estate of Coastal Plains, Inc.; Industrial Clearinghouse, Inc., Appellees/Cross-Appellants. Industrial Clearinghouse, Inc., Successor in interest to Coastal Plains Inc.; Jeffrey H. Mims, Trustee of The Estate of Coastal Plains, Inc., Appellees/Cross-Appellants, v. Browning Manufacturing, formerly known as Emerson Electric Company, formerly known as Emerson Power Transmission Corporation, Appellant/Cross-Appellee. In The Matter Of: Coastal Plains, Inc., Debtor. Industrial Clearinghouse, Inc.; Jeffrey H. Mims, Trustee of The Estate of Coastal Plains, Inc., Appellees-Appellants, v. Browning Manufacturing, formerly a Division of Emerson Electric Company, Appellant-Appellee. In The Matter Of: Coastal Plains, Inc., Debtor. Browning Manufacturing, Appellant, v. Jeffrey H. Mims, Trustee for the Bankruptcy Estate of Coastal Plains, Inc.; Industrial Clearinghouse, Inc., Appellees. Industrial Clearinghouse, Inc., Successor in interest to Coastal Plains, Inc.; Jeffrey H. Mims, Trustee for the Bankruptcy Estate of Coastal Plains, Inc., Appellees, v. Browning Manufacturing, formerly known as Emerson Electric Company, formerly known as Emerson Power Transmission Corporation, Appellant.
CourtU.S. Court of Appeals — Fifth Circuit

Harry M. Reasoner, Marie Roach Yeates, Penelope E. Nicholson, Scott J. Atlas, Gwendolyn Johnson Samora, William Richard Thompson, II, Vinson & Elkins, Houston, TX, Robbi B. Hull, Vinson & Elkins, Austin, TX, Edward F. Kohnke, IV, Joseph N. Mole, Michael Raudon, Phillips, Frilot, Partridge, Kohnke & Clements, New Orleans, LA, Raymond Arno Just, Howard, Rice, Nemerovski, Canady, Falk & Rabkin, San Francisco, CA, for Appellant/Cross-Appellee.

Michael Vance Powell, Morris Harrell, Cynthia Keely Timms, Locke, Liddell & Sapp, Dallas, TX, Jody Gene Sheets, Douglas Clay Holcomb, Amaarillo, TX, Stephen Wilson Elliott, Kline & Kline, Oklahoma City, OK, David Patrick Long, Patton Boggs, Dallas, TX, for Appellees/Cross-Appellants.

M. Bruce Peele, Plano, TX, for Mims.

Appeals from the United States District Court for the Northern District of Texas.

Before REYNALDO G. GARZA, POLITZ and BARKSDALE, Circuit Judges.

RHESA HAWKINS BARKSDALE, Circuit Judge:

For all but one of the claims at hand, the overarching issue is whether the bankruptcy court abused its discretion by not judicially estopping plaintiffs Industrial Clearinghouse and the Trustee for the bankruptcy estate of Coastal Plains from pursuing claims against Browning, Coastal's largest unsecured creditor; the linchpin being whether nondisclosure of those claims in Coastal's bankruptcy schedules or its stipulation for lifting the automatic bankruptcy stay to allow Coastal's largest secured creditor to foreclose on Coastal's assets, later purchased by Industrial Clearinghouse (formed by Coastal's CEO), falls under the exception to judicial estoppel advanced by plaintiffs, Coastal's successors--that, even though Coastal had knowledge of the claims, the nondisclosure was nevertheless "inadvertent". For plaintiffs' one claim not subject to judicial estoppel (tortious interference), the key issue is whether it is time-barred. Browning appeals the $5.2 million judgment on a jury verdict in favor of plaintiffs; plaintiffs cross-appeal the substantial post-verdict reduction in damages. We REVERSE and RENDER judgment for Browning.

I.

Coastal Plains, Inc., an equipment distributor, was purchased by Bill Young in 1984 for approximately $9 million. The business plan included making Browning Manufacturing, formerly a division of Emerson Electric Company, Coastal's leading supplier.

In January 1986, Coastal acknowledged its financial problems to its creditors and implicitly threatened bankruptcy if they did not agree to a workout plan, pursuant to which Coastal would return to its creditors inventory they had sold on credit to Coastal; the creditors would pay Coastal 50 percent of the inventory's cost and write off Coastal's debt; and the money so raised would be paid to Coastal's secured lender, Westinghouse Credit Corporation. Many creditors rejected the proposal.

The next month, owed $1.3 million by Coastal, Browning agreed to a transaction which tracked Coastal's earlier proposed workout plan. In late February 1986, Coastal began returning inventory to Browning; this was soon discontinued because Browning's parent, Emerson, wanted to postpone the transaction until the next quarter.

Accordingly, in mid-March, Coastal and Browning agreed that, if the transaction was not completed by 3 April, Browning would transfer the returned-inventory back to Coastal. The inventory-return to Browning was completed by the end of March.

Nevertheless, becoming more concerned about Coastal's potential bankruptcy, Browning did not complete the transaction (payment, etc.) by 3 April. Therefore, Coastal demanded that Browning return the inventory not later than 20 April.

But, on 16 April, Young, for Coastal, signed a voluntary Chapter 11 bankruptcy petition, which was filed on 22 April. Coastal advised its creditors that bankruptcy had become necessary because all of them had not accepted its proposed workout plan. Coastal owed in excess of $8.5 million to Westinghouse, and approximately $8 million to other creditors. Browning was Coastal's largest unsecured creditor.

A week after filing its petition, Coastal initiated an adversary proceeding against Browning, seeking an order both enjoining it from disposing of the returned-inventory and directing its transfer to Coastal. Coastal also claimed conversion; interference with contracts and/or business relationships because of Browning's failure to return inventory; punitive damages; and violation of the automatic stay.

The complaint did not specify the amount of damages sought, and there were no allegations that Browning's actions caused the failure of Coastal's pre-bankruptcy workout plan. (Concerning this critical point for judicial estoppel purposes, discussed infra, Coastal's bankruptcy attorney testified at a bankruptcy hearing seven years later that the primary purpose of the adversary proceeding was the inventory-return.)

Shortly after the adversary proceeding was filed, the bankruptcy court found that Browning had violated the automatic stay and ordered the inventory returned to Coastal; the other claims were not addressed. Browning completed the inventory-return before the end of May.

Soon thereafter, on 6 June, Wayne Duke, Coastal's CEO, executed sworn bankruptcy schedules for Coastal. But, although he believed that Coastal had claims of up to $10 million against Browning, they were not disclosed in the bankruptcy schedules and statement of financial affairs. And, although Coastal's $1.3 million debt to Browning was listed in the schedule of liabilities, it was not specified as contingent, disputed, or subject to setoff.

Three months later, on 9 September, in moving for relief from the automatic stay so that it could foreclose on Coastal's assets, Westinghouse (secured lender) asserted that it was owed in excess of $8 million by Coastal; that this debt was nearly equal to the value of the collateral; and that reorganization was not possible. On 18 September, Westinghouse and Coastal submitted in support of the lift-stay motion a stipulation, prepared by Westinghouse, that included estimates of the value of Coastal's assets, including that its general intangible assets consisted of computer software programs, customer lists, and vendor lists, with a total worth less than $20,000. No mention was made of any claims against Browning. The stipulation showed more than a $5 million shortfall between the value of Coastal's assets and its debt to Westinghouse.

Browning withdrew its objection to lifting the stay. On 19 September, the day after the stipulation was filed, Westinghouse's lift-stay motion was granted; it foreclosed on Coastal's assets, conducting an auction on 7 October. No mention of Coastal's claims against Browning was made in the foreclosure notices or advertisements, or at the auction.

A Browning representative attended the auction and bid on the inventory. The highest bid on Coastal's general intangibles (which, again, were not described as including its claims against Browning ) was $2,000. Westinghouse was the successful bidder, purchasing the assets for $3.25 million.

On 8 October, the day after the auction, and pursuant to negotiations the preceding month prior to executing the lift-stay stipulation, Westinghouse entered into a consignment agreement with Industrial Clearinghouse, Inc. (IC), to sell the assets Westinghouse had purchased at the auction. IC had been formed by Coastal's CEO, Duke, who was also IC's CEO; that same day, all of Coastal's employees became IC employees; and it used the same computer software and customer lists that had been used by Coastal.

In February 1987, IC purchased the remaining Coastal assets from Westinghouse for $1.24 million. Those assets expressly included the previously undisclosed "potential cause of action against Browning".

The Chapter 11 reorganization was converted to a Chapter 7 liquidation that April. After the Trustee filed a no-asset report and applied for closing the bankruptcy case, it was closed in February 1988.

But, the case was re-opened that March, to address issues unrelated to Browning. That April, after IC advised the Trustee that it wanted the claims against Browning prosecuted, and the Trustee refused, because a successful conclusion would benefit only IC, IC advised it would pursue the adversary proceeding. In October 1988, IC was substituted for Coastal in the long dormant (since May 1986) adversary proceeding against Browning.

IC filed its first amended complaint in March 1989, alleging that Browning's breach...

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