Eubanks v. Cbsk Financial Group, Inc.

• Decision Date: 01 October 2004
• Docket Number: No. 02-5902.,02-5902.
• Citation: 385 F.3d 894
• Parties: Mark A. EUBANKS; Teri Lynn Eubanks, Plaintiffs-Appellants, v. CBSK FINANCIAL GROUP, INC., d/b/a Am. Home Loans, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

385 F.3d 894

Mark A. EUBANKS; Teri Lynn Eubanks, Plaintiffs-Appellants, v. CBSK FINANCIAL GROUP, INC., d/b/a Am. Home Loans, Defendant-Appellee.

No. 02-5902.

United States Court of Appeals, Sixth Circuit.

Argued: April 23, 2004.

Decided and Filed: October 1, 2004.

Appeal from the United States District Court for the Western District of Kentucky, Thomas B. Russell, J.

Julia B. Barry (argued and briefed), Louisville, KY, for Appellants.

Richard B. Warne (argued), Wyatt, Tarrant & Combs, Lexington, KY, Palmer G. Vance II (briefed), Stoll, Keenon & Park, Lexington, KY, for Appellee.

Before: DAUGHTREY and CLAY, Circuit Judges; McCALLA, District Judge.^*

CLAY, J., delivered the opinion of the court, in which DAUGHTREY, J., joined. McCALLA, D.J. (pp. 899-901), delivered a separate dissenting opinion.

CLAY, Circuit Judge.

Plaintiffs, Mark A. Eubanks and Teri Lynn Eubanks, appeal from the district court's judgment granting Defendant, CBSK Financial Group, Inc.'s, motion to dismiss, by way of judicial estoppel, against Plaintiffs' lender-liability claim alleging a breach of contract, contractual bad faith, tortious interference with contract, negligent misrepresentation, constructive fraud, negligent supervision, breach of fiduciary duty, and intentional infliction of emotional distress. The district court held Plaintiffs were judicially estopped from pursuing a claim which they failed to disclose in a prior bankruptcy proceeding. Because this Court considers reasons of mistake and inadvertence, as well as an absence of bad faith, in determining judicial estoppel, we REVERSE the district court's decision and REMAND for further proceedings.

I. BACKGROUND

On January 9, 1998, Plaintiffs applied for a consolidation loan in the amount of $50,000 from Defendant, intended to be used to settle Plaintiffs' outstanding debt. The loan document contained language stating: "[t]he lender, its agent, successors and assigns will rely on the information contained in the application and I/We have a continuing obligation to amend and/or supplement the information provided in the application if any of the material facts which I/We represented herein should change prior to closing." Mark Eubanks subsequently changed jobs on February 2, 1998, taking a position providing a smaller base salary, but added bonus incentives. After Plaintiffs' loan was approved, Defendant re-produced for Plaintiffs copies of checks made out to Plaintiffs' various creditors and then mailed those checks to the creditors on February 14, 1998. On February 16, 1998, Plaintiffs were notified that Defendant would place a stop on all checks it had issued to Plaintiffs' creditors and cancel the loan, because of Plaintiffs' changed employment. Plaintiffs' attorney thereafter began correspondence with Defendant demanding that the loan be reinstated, and threatening a potential suit.

The loan cancellation forced Plaintiffs into bankruptcy proceedings, resulting in them filing a Chapter 7 petition on July 17, 1998. The initial bankruptcy filing omitted Defendant from the schedule as a creditor or potential claimant. On August 18, 1998, at a meeting of creditors, Plaintiffs orally informed the Trustee, J. Baxter Schilling, of the lender-liability claim Plaintiffs were in the process of filing against Defendant. The Trustee orally instructed Plaintiffs' counsel to forward to him all documents regarding the claim. The same day, the Trustee forwarded a letter to Plaintiffs memorializing his request for all documents regarding the claim, which Plaintiffs forwarded to the Trustee two days later.

On October 20, 1998, the bankruptcy court entered a "Discharge of Debtor" on Plaintiffs' Chapter 7 claim. Plaintiffs claim they contacted the Trustee several times over the next several months to inquire as to the status of their claim against Defendant, and as to whether the Trustee intended to pursue the claim on behalf of the estate; however, they received no definitive answer.

On March 5, 1999, Plaintiffs amended their schedules in the bankruptcy matter to include Defendant as a creditor on schedule F; they claim that Plaintiffs' counsel inadvertently failed to amend their schedules to include Defendant as a claim of potential assets on their schedule B. On September 23, 1999, Plaintiffs moved the court to set a status conference date regarding Plaintiffs' lender-liability claim against Defendant, which was then set for November 18, 1999. On November 2, 1999, however, Trustee Schilling filed a "Report of No Distribution" that stated there was no property available for creditor distribution and the debtor's estate was fully administered. Therefore, on November 19, 1999, the court remanded as moot "the status hearing relative to the Trustee's decision whether to pursue a potential lawsuit against [Defendant]," since the Trustee's statement and Report of No Distribution was filed. The Plaintiffs' Final Decree for their Chapter 7 action was issued on December 2, 1999.

Four days later, on December 6, 1999, Plaintiffs moved to reopen the bankruptcy action to resolve a previous disability claim Plaintiff Mark Eubanks had against a former employer. On March 15, 2000, the bankruptcy court issued a "Notice of Last Day to File Claims" form, which indicated that "assets exist in this case from which unsecured creditors may receive a dividend."

On August 14, 2000, Plaintiffs filed a complaint in the Circuit Court of Jefferson County, Kentucky against Defendant. Defendant removed the action to the district court under 28 U.S.C. § 1452(a) pursuant to the court's bankruptcy jurisdiction under 28 U.S.C. § 1334, and pursuant to 28 U.S.C. § 1441(a) based on the diversity of citizenship of the parties under 28 U.S.C. § 1332. Subsequent to removal, Defendant filed a motion to dismiss on September 13, 2000. A hearing regarding the motion occurred on October 13, 2000, after which the bankruptcy court issued an order on October 17, 2000, directing the Trustee to file a Motion to Abandon, stating that when the motion was received, the bankruptcy court would remand Plaintiffs' civil claim back to state court. Plaintiffs' counsel filed another motion for a status conference, citing the Trustee's unwillingness to file the Motion to Abandon. On December 4, 2000, the court ordered the Trustee to file the Motion to Abandon. Nevertheless, on December 22, 2000, the Trustee filed an Application by Trustee to Employ Julia Barry [Plaintiffs' attorney] to Litigate Lender Liability Claim, along with her affidavit. On December 27, 2000, the court issued a Notice for Objections regarding the employ of Barry as litigant in the Plaintiffs' civil action against Defendant, and mailed a copy to all scheduled creditors and parties in interest.

On April 27, 2001, Plaintiffs moved to allow the Trustee to be substituted as Plaintiff in the legal liability civil action and to remand the matter back to state court, which the court allowed on May 1, 2001. Defendant then moved to alter, amend and vacate the May 1, 2001 Order of Substitution and Remand. After a hearing on Defendant's motion, the court on December 3, 2001 issued an order which vacated the Order of Substitution and Remand, and continued to consider Defendant's motion to dismiss.

Plaintiffs filed an amendment to their original bankruptcy petition, on November 20, 2001, to add the claim against Defendant to their bankruptcy schedule B, and, Defendant responded with a motion to strike. On January 29, 2002, the bankruptcy court entered the Trustee's Final Report, which declared Plaintiffs' lender-liability claim fully administered and fully abandoned. On June 10, 2002, the district court granted Defendant's motion to dismiss, on grounds of judicial estoppel. Plaintiffs then filed this timely appeal.

II. DISCUSSION

This Court reviews de novo a motion to dismiss under Fed. R. Civ. Proc. 12(b)(6). U.S. ex rel. Bledsoe v. Community Health Systems, Inc., 342 F.3d 634, 643 (6th Cir.2003); see also Grindstaff v. Green, 133 F.3d 416, 421 (6th Cir.1998). The Court is required to construe the complaint in the light most favorable to the plaintiff, accept all of the complaint's factual allegations as true, and determine whether the plaintiff undoubtedly can prove no set of facts in support of the claims that would entitle plaintiff to relief. Meador v. Cabinet for Human Resources, 902 F.2d 474, 475 (6th Cir.1990), cert. denied, 498 U.S. 867, 111 S.Ct. 182, 112 L.Ed.2d 145 (1990). The Court, however, need not accept as true legal conclusions or unwarranted factual inferences. Morgan v. Church's Fried Chicken, 829 F.2d 10, 12 (6th Cir.1987); see also Blackburn v. Fisk University, 443 F.2d 121, 124 (6th Cir.1971) (the court is "required to accept only well-pleaded facts as true, not the legal conclusions that may be alleged or that may be drawn from the pleaded facts"). Additionally, we review a district court's application of judicial estoppel de novo. Browning v. Levy, 283 F.3d 761, 775 (6th Cir.2002).

The doctrine of judicial estoppel bars a party from asserting a position that is contrary to one the party has asserted under oath in a prior proceeding, where the prior court adopted the contrary position "either as a preliminary matter or as part of a final disposition." Teledyne Indus., Inc. v. NLRB, 911 F.2d 1214, 1218 (6th Cir.1990). Judicial estoppel is an "equitable doctrine meant to preserve the integrity of the courts by preventing a party from abusing the judicial process through cynical gamesmanship, achieving success on one position, then arguing the opposite to suit an exigency of the moment." Id. Judicial estoppel, however, should be applied with caution to "avoid impinging on the truth-seeking function of the court, because the doctrine precludes a contradictory position without examining the truth of either statement." Id.

Defendant argued in its Motion to Dismiss before the district court that Plaintiffs should be precluded from pursuing this...