Kane v. National Union Fire Ins. Co.

• Decision Date: 14 July 2008
• Docket Number: No. 07-30611.,07-30611.
• Citation: 535 F.3d 380
• Parties: Stuart KANE; Lisa Phillips Kane, Plaintiffs-Appellants, v. NATIONAL UNION FIRE INSURANCE COMPANY; Qwest Communications, Inc.; David A. Comstock, Defendants-Appellees, v. Aaron Caillouet, Trustee-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

535 F.3d 380

Stuart KANE; Lisa Phillips Kane, Plaintiffs-Appellants, v. NATIONAL UNION FIRE INSURANCE COMPANY; Qwest Communications, Inc.; David A. Comstock, Defendants-Appellees, v. Aaron Caillouet, Trustee-Appellant.

No. 07-30611.

United States Court of Appeals, Fifth Circuit.

July 14, 2008.

Lloyd Raner Walters, Slidell, LA, for Plaintiffs-Appellants.

Wayne Robert Maldonado, William Harry Eckert, Karen Godail Arena (argued), Ungarino & Eckert, Metairie, LA, for Defendants-Appellees.

Fernand L. Laudumiey, IV (argued), David J. Messina, Gordon, Arata, McCollam,

Duplantis & Eagan, New Orleans, LA, for Trustee-Appellant.

Appeal from the United States District Court for the Eastern District of Louisiana.

Before KING, WIENER, and ELROD, Circuit Judges.

PER CURIAM:

Plaintiffs-appellants Stuart and Lisa Phillips Kane and trustee-appellant Aaron Caillouet appeal the district court's grant of summary judgment for defendants-appellees on the grounds that the Kanes were judicially estopped from pursuing their personal injury action after failing to include it in their Chapter 7 bankruptcy schedules, and consequently that the trustee's motion to be substituted for the Kanes in that action was moot, relying entirely on our decision in Superior Crewboats, Inc. v. Primary P & I Underwriters (In re Superior Crewboats, Inc.), 374 F.3d 330 (5th Cir.2004). We REVERSE and REMAND.

I. FACTUAL AND PROCEDURAL BACKGROUND

On April 18, 2002, Stuart Kane was involved in a car accident with a vehicle driven by Daniel Comstock while Comstock allegedly was acting in the course and scope of his employment with Qwest Communications ("Qwest"). On July 19, 2002, Stuart and Lisa Kane (the "Kanes") filed this lawsuit in Louisiana state court seeking damages from Comstock and Qwest (collectively, "Defendants"), and Qwest's insurer, National Union Fire Insurance Company,¹ arising out of the car accident. On October 13, 2005, while their lawsuit was pending in state court, the Kanes filed a Chapter 7 bankruptcy. They failed to list their personal injury claim on the relevant bankruptcy schedules as is required. The Kanes' bankruptcy trustee, Aaron Caillouet (the "Trustee"), was never informed of the claim during the pendency of the bankruptcy proceedings. On March 13, 2006, the Kanes' bankruptcy resulted in a no-asset discharge.

On July 10, 2006, Defendants filed a motion for summary judgment in state court arguing that the Kanes should be judicially estopped from pursuing their lawsuit due to their failure to list it as an asset in their bankruptcy proceedings. Subsequently, the Kanes filed a motion in the bankruptcy court to reopen their bankruptcy proceedings so that the Trustee could administer this previously undisclosed lawsuit and other undisclosed debts on behalf of the estate and the creditors, which Defendants opposed. The bankruptcy court granted the Kanes' motion to reopen on September 28, 2006.

Defendants removed the case to federal court on October 20, 2006, invoking the federal district court's "related to" bankruptcy jurisdiction under 28 U.S.C. §§ 1334(c)(2) and 1452. On November 22, 2006, Defendants moved for summary judgment in federal district court, again arguing that the Kanes should be judicially estopped from pursuing their claim as a matter of law, citing this court's decision in In re Superior Crewboats, Inc., 374 F.3d 330. On January 30, 2007, the Trustee moved to substitute himself for the Kanes as the real party in interest in the lawsuit. On May 29, 2007, the district court granted Defendants' motion for summary judgment, applying judicial estoppel to bar the Kanes from pursuing their claim and summarily dismissing as moot the Trustee's motion to be substituted as the real party in interest, a result the district court perceived In re Superior Crewboats, Inc. prescribed. This timely appeal followed.

II. STANDARD OF REVIEW

"We review a grant of summary judgment de novo, viewing all evidence in the light most favorable to the nonmoving party and drawing all reasonable inferences in that party's favor." In re Katrina Canal Breaches Litig., 495 F.3d 191, 205-06 (5th Cir.2007) (citing Crawford v. Formosa Plastics Corp., 234 F.3d 899, 902 (5th Cir.2000)), cert. denied, Xavier Univ. of La. v. Travelers Cas. Prop. Co. of Am., ___ U.S. ___, 128 S.Ct. 1230, 170 L.Ed.2d 63 (2008) and Chehardy v. Allstate Indem. Co., ___ U.S. ___, 128 S.Ct. 1231, 170 L.Ed.2d 63 (2008). Summary judgment is proper when "the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." FED.R.CIV.P. 56(c). But, because "judicial estoppel is an equitable doctrine, and the decision whether to invoke it [is] within the court's discretion, we review for abuse of discretion" the lower court's decision to invoke it. Browning Mfg. v. Mims (In re Coastal Plains, Inc.), 179 F.3d 197, 205 (5th Cir.1999). "However, an abuse of discretion standard does not mean a mistake of law is beyond appellate correction, because [a] district court by definition abuses its discretion when it makes an error of law." In re Superior Crewboats, Inc., 374 F.3d at 334 (internal citations and quotation marks omitted). "Accordingly, the abuse of discretion standard includes review to determine that the discretion was not guided by erroneous legal conclusions." In re Coastal Plains, Inc., 179 F.3d at 205 (internal quotation marks omitted).

We also review for abuse of discretion a district court's denial of a motion to substitute the trustee for the debtor as the party plaintiff. Wieburg v. GTE Sw. Inc., 272 F.3d 302, 308 (5th Cir.2001) (addressing a motion to substitute as the proper party in interest under Rule 17(a) of the Federal Rules of Civil Procedure) (citing Collateral Control Corp. v. Deal (In re Covington Grain Co.), 638 F.2d 1357, 1360 (5th Cir.1981) (holding that a Rule 25 motion to substitute the real party in interest following a transfer of interest while the litigation is pending is reviewed for abuse of discretion)). Questions of law, including interpretation and application of the Bankruptcy Code, are reviewed de novo. State Farm Life Ins. Co. v. Swift (In re Swift), 129 F.3d 792, 795 (5th Cir. 1997).

III. DISCUSSION

The district court relied on this court's decision in In re Superior Crewboats, Inc., 374 F.3d 330, to conclude as a matter of law that the equitable doctrine of judicial estoppel should apply to bar the Kanes from pursuing their claim, and as a result, that the Trustee's motion to substitute himself as the real party in interest is moot. Also, Defendants argue for the first time on appeal that even if the Trustee's motion to substitute himself as the real party in interest was improperly denied as moot, relying on our decision in Wieburg, 272 F.3d 302, it should be denied as untimely under Rule 17(a). Because we conclude that the district court asked too much of our decision in In re Superior Crewboats, Inc., we reverse and remand. Defendants' Rule 17(a) argument should be presented first to the district court.

A. Background Legal Principles

Pursuant to the Bankruptcy Code, debtors are under a continuing duty to disclose all pending and potential claims. 11 U.S.C. § 521(1); In re Coastal Plains, Inc., 179 F.3d at 207-08. Generally, if a debtor fails to schedule an asset, and the trustee later discovers it, the trustee may reopen the bankruptcy case to administer the asset on behalf of the creditors. 11 U.S.C. § 350(b); 3 COLLIER ON BANKRUPTCY § 350.03[1] (Alan N. Resnick & Henry J. Sommer eds., 15th ed. rev.2008). As one of our bankruptcy courts has observed:

It is not serendipitous that the Bankruptcy Code has an explicit provision that prevents the loss of assets that a debtor fails to disclose in [b]ankruptcy [s]chedules. It happens all the time, especially with claims. And when it does, cases are routinely reopened, in accordance with the statute, to administer those assets.

In re Miller, 347 B.R. 48, 53 (Bankr. S.D.Tex.2006) (citations omitted).

Section 541 of the Bankruptcy Code provides that virtually all of a debtor's assets, including causes of action belonging to the debtor at the commencement of the bankruptcy case, vest in the bankruptcy estate upon the filing of a bankruptcy petition. 11 U.S.C. § 541(a)(1); In re Swift, 129 F.3d at 795; 5 COLLIER ON BANKRUPTCY § 541.08. Thus, a trustee, as the representative of the bankruptcy estate, is the real party in interest, and is the only party with standing to prosecute causes of action belonging to the estate once the bankruptcy petition has been filed. 11 U.S.C. §§ 323, 541(a)(1); Wieburg, 272 F.3d at 306.

"Once an asset becomes part of the bankruptcy estate, all rights held by the debtor in the asset are extinguished unless the asset is abandoned" by the trustee to the debtor pursuant to § 554.² Parker v. Wendy's Int'l, Inc., 365 F.3d 1268, 1272 (11th Cir.2004); see 11 U.S.C. § 554; 5 COLLIER ON BANKRUPTCY §§ 541.04, 541.08. In a Chapter 7 case, "[a]t the close of the bankruptcy case, property of the estate that is not abandoned under § 554 and that is not administered in the bankruptcy proceedings"—including property that was never scheduled—"remains the property of the estate." Parker, 365 F.3d at 1272; 11 U.S.C. § 554(d); 5 COLLIER ON BANKRUPTCY § 541.08. But, "upon abandonment ... the trustee is ... divested of control of the property because it is no longer part of the estate .... Property abandoned under [§] 554 reverts to the debtor, and the debtor's rights to the property are treated as if no bankruptcy petition was filed." 5 COLLIER ON BANKRUPTCY § 554.02[3]; 11 U.S.C. § 554; see In re Lair, 235 B.R. 1, 22 (Bankr.M.D.La.1999).

"Judicial estoppel is a common law doctrine that prevents a party from assuming inconsistent positions in litigation." In re Superior Crewboats, Inc., 374 F.3d at 334 (citing Brandon v. Interfirst...