Judicial Estoppel Bankruptcy Alabama
The inquiry regarding the applicability of the doctrine of judicial estoppel to a particular case will raise some questions of fact in addition to questions of law. Among those questions of fact often will be whether a debtor who is engaged in bankruptcy proceedings knew or should have known about claims or causes of action that should be disclosed as assets.
We note with approval that the Court of Civil Appeals has so held in Underwood v. First Franklin Financial Corp., 710 So. 2d 424 (Ala. Civ. App. 1997).
In that case, the court reversed a summary judgment entered on the basis of judicial estoppel, because a question of fact existed as to whether the plaintiff, during her bankruptcy proceedings, had known or should have known that she had causes of action against the defendants she sued approximately eight months after she had obtained a hardship bankruptcy discharge.
United States Bankruptcy Judge Margaret A. Mahoney provides an excellent discussion in In re Griner, 240 B.R. 432 (Bankr. S.D. Ala. 1999):
"Chapter 13 is a hybrid of chapters 7 and 11. Chapter 13 is more like chapter 11 (the reorganization chapter used primarily by business debtors) than chapter 7 (the liquidation chapter of the Bankruptcy code). Chapter 13 is available to individuals who earn a regular income.
Debtors propose a plan by which they will repay some or all of their debts through regular payments to a chapter 13 trustee. the trustee pays the sums collected to creditors according to the plan for a period of up to five years.
The trustee is not involved in the daily lives of the debtors. He or she does not take possession of debtors' nonexempt assets or monitor ordinary course usage of assets. the trustee does not receive any of the debtors' earnings except what is paid to him or her as prescribed by the chapter 13 plan.
"In chapter 11 cases, unless a trustee has been appointed by the court, there is no trustee. the debtor handles all of his or her own affairs. This includes use, sale or lease of all assets.
In chapter 7, a trustee is automatically appointed in each case. the debtor relinquishes all authority over his or her nonexempt assets.
"A chapter 7 trustee has one power which is specifically not given to a chapter 13 trustee. Under 11 U.S.C. 704(l), a chapter 7 trustee 'shall collect and reduce to money property of the estate.' 'Property of the estate' is all nonexempt assets in which the debtor had an interest before bankruptcy, such as a cause of action for a work related injury. 11 U.S.C. 541. This power therefore compels a chapter 7 trustee to take over all nonexempt lawsuits of the debtor.
"In a chapter 13 case, unless otherwise specifically provided by the debtor's plan, a debtor remains in possession of all of his or her assets pre- and postconfirmation. 11 U.S.C. 1306(b). This is in contrast to chapter 7 cases where the trustee 'collects (takes control of) and reduces to money' all nonexempt assets. ..."240 B.R. at 436.
The debtor in Luna filed a Chapter 7 bankruptcy proceeding; in such a proceeding the bankruptcy court liquidates the debtor's assets, if any, and pays creditors whatever funds are available.
Most Chapter 7 plans are concluded quickly, and the debtors are discharged when the funds obtained from the liquidation of their assets have been distributed. Luna did not file his lawsuit until some 18 months after he had received his bankruptcy discharge.
Furthermore, the defendant in Luna's action was one of the creditors in the bankruptcy proceeding, a proceeding in which Luna had failed to disclose his potential claim against the defendant.
This Court applied the doctrine of judicial estoppel to prevent the debtor from suing his creditor after the conclusion of earlier bankruptcy proceedings in which he failed to disclose his claim. Luna, 631 So. 2d at 918-19.
The debtor in Bertrand obtained a default judgment in her lawsuit against the defendant, before she commenced her bankruptcy proceedings.
She initially filed for bankruptcy protection under Chapter 13, but dismissed that case and refiled, the second time under Chapter 7. After she received her bankruptcy discharge, the defendant sought to set the default judgment aside.
This Court applied the doctrine of judicial estoppel to prevent her from pursuing the claim on which the judgment was based, because she had not disclosed the default judgment in her bankruptcy proceeding. Bertrand, 646 So. 2d at 19.
Judge Mahoney discussed this problem in In re Griner. We find her order to be well reasoned and instructive:
"Defendants also contend that the doctrine of judicial estoppel bars Sidney Griner from prosecuting or continuing the state court action.
This doctrine precludes a party from assuming a position in a legal proceeding inconsistent with a position previously asserted. Luna v. Dominion Bank of Middle Tennessee, Inc., 631 So. 2d 917, 918 (Ala. 1993).
"In Luna, the Supreme Court of Alabama stated that, 'judicial estoppel applies, where a debtor in bankruptcy proceedings fails to disclose any claim that may be presented in a nonbankruptcy context, to estop the debtor from presenting the claim.' Id. at 919.
Luna was precluded from pursuing his state court suit because it arose prepetition and he failed to disclose it in his bankruptcy proceedings. Travelers contends that the Luna decision governs this case. the Court finds Luna distinguishable for the following reasons:
"First, Luna brought claims against a creditor of his and related entities. Luna's claims were related to a prepetition claim held by the creditor which was discharged in Luna's bankruptcy case prior to his filing suit in state court.
If the creditor knew about Luna's claim against it, the creditor may have been able to offset the claims or take some other action in Luna's bankruptcy case that was not available because it was unaware that the bankruptcy estate included a claim against it. Travelers is not a creditor in the Griners' bankruptcy case.
Travelers and all of the defendants in Sidney Griner's state court suit are not prejudiced by Griner's failure to list the suit against them as an asset. See, Donato v. Metropolitan Life Ins. Co., 230 B.R. 418 (N.D. Cal. 1999) (judicial estoppel found not to bar debtor's lawsuit because defendant was not a creditor in debtor's case and debtor would not benefit by omission of suit from her schedules).
"Second, the bankruptcy court relied on Luna's schedules in granting him a discharge. Prior to granting the discharge, the court was never made aware of Luna's claim against the creditor.
Thus, the court's integrity was impinged by Luna's failure to list the suit as a prepetition asset. Consolidated Stores, Inc. v. Gargis, 686 So. 2d 268, 274 (Ala. Civ. App. 1996) (judicial estoppel serves to protect the integrity of the judicial proceedings). In this case, the Griners have not yet received a discharge and they amended their bankruptcy papers to include the state court suit.
The initial omission of the suit did not impinge upon this Court's integrity.
"The fact that Luna, unlike the Griners, never amended his bankruptcy schedules and chapter 13 plan is also an important distinction. See, Selma Foundry and Supply Co., Inc. v. Peoples Bank and Trust Co., 598 So. 2d 844, 847 (Ala. 1992) (debtor not judicially estopped from asserting a suit which was not included in its original disclosure statement since debtor listed the suit in an amended disclosure statement); Chandler v. Samford University, 35 F. Supp. 2d 861 (N.D. Ala. 1999) (court judicially estopped debtor from pursuing discrimination action in part because she deliberately manipulated the courts when she chose not to amend her schedules to reflect the action as an asset of her bankruptcy estate).
The Griners' amendment corrects their initial mistake and makes any nonexempt amount recovered from the state court suit available for distribution to creditors. Their election to amend their schedule of exemptions to include an 'unknown' portion of Mr. Griner's state court suit does not change the Court's conclusion.
The Griners have the right to amend their schedule of exemptions 'at any time before the case is closed.' Fed. R. Bankr. P. 1009. True, such amendments are precluded if the debtors concealed the asset. Doan v. Hudgins (In re Doan), 672 F.2d 831, 833 (11th Cir. 1982).
However, there is no evidence that the Griners attempted to conceal the suit. In fact, they listed it in their initial statement of affairs. Id. (debtors disclosed tax refund in initial filing and they therefore were permitted to amend schedules to claim tax refund as exempt).
"Finally, Luna failed to indicate that he had a cause of action in any of his bankruptcy documents. Luna, 631 So. 2d at 919. the Griners initially listed their suit against Travelers in their statement of affairs.
This supports the conclusion that the Griners mistakenly omitted their suit from their bankruptcy schedules and did not intentionally conceal a possible asset from their creditors.
"Travelers contends that whether the Griners attempted to conceal the lawsuit is irrelevant and the Griners should be judicially estopped merely because they were aware of the cause of action prior to filing bankruptcy and did not include it as an asset in their schedules.
The Court finds that whether Alabama or federal common law governs, mere knowledge or awareness on the part of the debtor is not sufficient to find that judicial estoppel applies.
Judicial estoppel requires an intent that the court accept the truth of the facts alleged coupled with the receipt of an advantage from the assertion, Consolidated Stores, Inc., 686 So. 2d at 274, 275 (Alabama law), or that the debtor obtains a benefit by deliberate manipulation. Chandler v. Samford University, 35 F. Supp. 2d 861, 863 (N.D. Ala. 1999) (federal law); In re Daniel, 205 B.R. 346, 348 (Bankr. N.D. Ga. 1997) (judicial estoppel found not to preclude debtor's amendment because no evidence was presented that debtor intentionally or fraudulently concealed lawsuit).
For the reasons mentioned above, especially because the Griners initially listed the suit in their statement of affairs, Travelers did not prove that the Griners intended to conceal Mr. Griner's state court suit or received a benefit from their initial omission of the suit. Consequently, Sidney Griner is not judicially estopped from continuing his state court suit.
"Travelers' position is overly harsh and inequitable as well. Everyone, except Travelers, loses under its theory. If a debtor fails to include assets on his schedules and later seeks to add them, the Bankruptcy Rules allow it 'as a matter of course at any time before the case is closed.' Fed. R. Bankr. P. 1009(a).
A bankruptcy court has ample powers to punish debtors who wrongfully conceal assets, i.e., sanctions under Fed. R. Bankr. P. 9011, conversion of the case to chapter 7 ( 1307(c)), revocation of discharge ( 1328(e)), referral for criminal charges (18 U.S.C. 152(1), (2), (3), (7)).
Travelers' position punishes the creditors of the nondisclosing debtor, not just the debtor. the better result is to allow the claim to be prosecuted and collected, order the funds paid toward claims filed in the case, and punish the debtor another way."
240 B.R. at 438-39. See also Donato v. Metropolitan Life Ins. Co., 230 B.R. 418 (Bankr. N.D. Cal. 1999).
We agree with the Griner court that a debtor's mere knowledge or awareness of a potential claim and the debtor's failure to include the claim as an asset on the bankruptcy schedules filed with the court, without more, are not sufficient to invoke the application of the doctrine of judicial estoppel.
Other courts that recognize the doctrine of judicial estoppel as a bar to a debtor's assertion of a claim not identified as an asset in an earlier bankruptcy proceeding require that the party seeking to apply the doctrine demonstrate:
(1) that the positions asserted by the party against whom the estoppel is sought are in fact inconsistent,
(2) that the inconsistency would allow a party to benefit from the deliberate manipulation of the courts. Chandler, 35 F. Supp. 2d at 863-64. See, also, Ryan Operations, G.P. v. Santiam-Midwest Lumber Co., 81 F.3d 355 (3d Cir. 1996); In re Tippins, 221 B.R. 11 (Bankr. N.D. Ala. 1998).
Factors such as the chapter under which the debtor sought bankruptcy protection, whether the debtor has been discharged in bankruptcy, and whether the debtor amended the bankruptcy schedules to include the omitted asset should be significant to an inquiry regarding whether to apply the doctrine of judicial estoppel to bar the debtor's claim.
Furthermore, under this Court's decision in Porter and the United States bankruptcy court's decision in Griner, a defendant seeking to apply the doctrine must prove prejudice to the defendant. See Porter, 564 So. 2d at 437; and Griner, 240 B.R. at 438.