Opinion ID: 30998
Heading Depth: 2
Heading Rank: 2

Heading: Doctrine of Judicial Estoppel and Coastal

Text: In Coastal, the Fifth Circuit provided a thorough analysis of the application of judicial estoppel arising from the failure to disclose a claim in a bankruptcy proceeding. The court explained that judicial estoppel is a common law doctrine that prevents a party who has successfully established one position from adopting an inconsistent position in the same or subsequent proceedings. See Coastal, 179 F.3d at 205. The purpose of the doctrine is to protect the integrity of the judicial process, rather than the litigants themselves. Id. (internal quotation marks omitted). The doctrine is generally applied where ‘intentional selfcontradiction is being used as a means of obtaining unfair advantage in a forum provided for suitors seeking justice.’ Id. at 206 (quoting Scarabo v. Central R. Co., 203 F.2d 510, 513 (3rd Cir. 1953)). In Coastal, the debtor, Coastal Plains, Inc., sued a lender shortly after it filed bankruptcy for turnover of property and damages arising from the lender’s prepetition possession of the property. The bankruptcy court ordered that the lender turnover the property, but did not adjudicate Coastal’s damages claim. Subsequently, Coastal’s claim against the lender was sold, along with all of its assets, to Coastal’s largest creditor. The 12 creditor, in turn, pursued the damages claim against the lender and eventually obtained a multi-million dollar verdict against the lender. 179 F.3d at 202-03. The lender appealed the verdict, arguing that the purchaser of the claim, as Coastal’s successor, was judicially estopped from pursuing the claim because Coastal had failed to list the claim on its bankruptcy schedules. Judicial estoppel was rejected by both the bankruptcy court and the district court based on the reasoning that Coastal’s failure to list the claim had been inadvertent. The Fifth Circuit reversed and held that the bankruptcy court abused its discretion in failing to apply judicial estoppel to bar the claim. 179 F.3d at 204. In applying judicial estoppel to the case before it, the Fifth Circuit first identified the two key elements that must exist for the doctrine to apply: (1) the position of the party to be estopped is clearly inconsistent with its previous position; and (2) that party must have convinced the court to accept the previous position. Coastal, 179 F.3d at 206. The Fifth Circuit went on to note that some courts impose additional requirements. Most notably, and at issue herein, many courts impose the additional requirement that the party to be estopped must have acted intentionally, rather than inadvertently. Id. (citing Johnson v. Oregon Dept. of Human Resources, 141 F.3d 1361 (9th Cir. 1998); Folio v. City of Clarksburg, W.V., 134 F.3d 1211 (4th Cir. 1998); McNemar v. Disney Store, Inc., 91 F.3d 610 (3d Cir. 1996). 13 Contrary to Fenasci and Butler’s arguments on appeal, the Fifth Circuit did not blanketly adopt other circuits’ requirement of intent or bad faith in order for judicial estoppel to apply. Without explicitly adopting or rejecting the possibility of an “inadvertence defense” to judicial estoppel generally, the Coastal Court found that in bankruptcy cases, the failure to comply with a statutory disclosure duty is “‘inadvertent’ only when, in general, the [party] either lacks knowledge of the undisclosed claim or has no motive for their concealment.” 179 F.3d at 210. The court went on to apply these elements to the case before it, finding that, first, the inconsistent positions prong was satisfied because “[b]y omitting the claims from its schedules and stipulation, Coastal represented that none existed.” Id. The second prong was also met as the bankruptcy court clearly accepted Coastal’s position that no claim existed when it was not listed on the schedules. Id. Turning to the question of Coastal’s claimed inadvertence, the Fifth Circuit found that it was not the type of “inadvertence” that precludes judicial estoppel, because Coastal both knew of the facts giving rise to the inconsistent positions and had a motive to conceal the claims. Coastal, 179 F.3d at 212. The court explained that Coastal’s CEO, who signed Coastal’s schedules, believed that Coastal had a claim against the lender when he signed the schedules even though the claims was not listed. Id. When asked by the bankruptcy court why the claim was not listed, the CEO responded 14 that Coastal relied on its attorneys who had more experience in bankruptcy proceedings to provide the appropriate information in the schedules. Id. He further testified that he was inexperienced with bankruptcy statements and that he followed his counsel’s advice and conclusion that the claim had no value. Coastal’s CEO concluded that the omission of the claim had probably been an oversight. Id. The Fifth Circuit was unimpressed with Coastal’s explanation, finding that it did not amount to a lack of knowledge of the undisclosed claim. Moreover, the Court found that Coastal had a motive for concealing the claim as well. Since Coastal believed the claim to be worth over ten million dollars, had the claim been disclosed, Coastal’s unsecured creditors may have opposed lifting the stay and the bankruptcy court may have decided the issue differently. Coastal, 179 F.3d at 213. For all of those reasons, the Fifth Circuit found that it was error for the bankruptcy court not to apply judicial estoppel in that case. C. Application of Judicial Estoppel to Fenasci and Butler’s Claims At the conclusion of the January 9, 2002, hearing on IG’s motion for summary judgment, the bankruptcy court granted the motion, explaining first that had it known of Fenasci and Butler’s substantial claims against West Delta, it would never have appointed them special counsel or any other kind of counsel in the 15 bankruptcy proceedings. Bankr. Doc. 630, at 32. The court went on to state: I’m convinced that the moving party is entitled to summary judgment. I’m disallowing the claims on the basis, first, that judicial estoppel as spelled out by the Fifth Circuit in the Coastal case bars these claims. I find specifically that those standards from the Coastal case are met in this case because there was a failure to disclose. And I don’t find that any bad faith is necessary but simple failure to disclose and a motive for not disclosing – well, I’m sorry. Knowledge of the claim and a motive for not disclosing it are sufficient under Coastal. And I find as a matter of fact that both existed here.