Opinion ID: 223014
Heading Depth: 2
Heading Rank: 2

Heading: This Result Also Follows from Equity

Text: Because judicial estoppel is an equitable doctrine, courts may apply it flexibly to achieve substantial justice. See New Hampshire, 532 U.S. at 750, 121 S.Ct. 1808; 18 Moore's § 134.31 at 73. The challenge is to fashion a remedy that does not do inequity by punishing the innocent. In re Cheng, 308 B.R. at 459. Estopping the Trustee from pursuing the judgment against the City would thwart one of the core goals of the bankruptcy systemobtaining a maximum and equitable distribution for creditorsby unnecessarily vaporizing the assets effectively belonging to innocent creditors. See Biesek v. Soo Line R.R. Co., 440 F.3d 410, 413 (7th Cir.2006). Lubke's unsecured creditors, including his FMLA attorney Roger Hurlbut, filed timely proofs of claim in the reopened bankruptcy case in the sum of $504,951.87. Other creditors filed late claims in the sum of $84,846.61. Those creditors having meritorious claims are entitled to an equitable distribution of the estate's assets, which include the judgment against the City. See 11 U.S.C. § 726(a)(3) (tardily filed claims may share in the distribution once timely filed claims are satisfied). As Judge Easterbrook so eloquently stated in Biesek: [The debtor's] nondisclosure in bankruptcy harmed his creditors by hiding assets from them. Using this same nondisclosure to wipe out his [tort] claim would complete the job by denying creditors even the right to seek some share of the recovery. Yet the creditors have not contradicted themselves in court. They were not aware of what [the debtor] has been doing behind their backs. Creditors gypped by [the debtor's] maneuver are hurt a second time by the district judge's decision. Judicial estoppel is an equitable doctrine, and using it to land another blow on the victims of bankruptcy fraud is not an equitable application. Instead of vaporizing assets that could be used for the creditors' benefit, district judges should discourage bankruptcy fraud by revoking the debtors' discharges and referring them to the United States Attorney for potential criminal prosecution. Biesek, 440 F.3d at 413 (emphasis added); see also In re Cheng, 308 B.R. at 460 (holding that the equitable balance compels consideration of whether the economic consequences of a judicial estoppel are borne by third parties because an unscheduled cause of action is not the debtor's property and ... the victims are the debtor's creditors). The City argues that equity does not favor the Trustee. Chief among its complaints is the fact that Roger Hurlbut, whose claim for legal fees stemming from the FMLA action makes him the primary creditor of Lubke's estate, is an attorney. Section 726 of the Bankruptcy Code requires the property of the estate to be distributed without considering whether the debt is owed to an attorney, a credit card company, or any other type of creditor. See 11 U.S.C. § 726. Unable to articulate why Hurlbut's occupation is relevant here, the City suggests that Hurlbut is somehow associated with Lubke's deception and is therefore not an innocent creditor. The district court explicitly found otherwise, see Reed, 2008 WL 8589782 at  & n. 5, and we find no reason to doubt its conclusion. The City also argues that Lubke will benefit if the Trustee is allowed to collect the judgment and distribute it in payment to Lubke's creditors. The City's concern appears to be that the creditors, having been satisfied through the bankruptcy process, will not pursue collection efforts against Lubke despite the revocation of his bankruptcy discharge. However, this is a benefit in theory only. Even if the Trustee were estopped from collecting the judgment, it is highly unlikely that Lubke's creditors will pursue him, both because their claims may be time-barred under state law, and because Lubke does not have any assets aside from the judgment with which to satisfy the creditors' claims. Finally, the City argues that it has been victimized by having to pay fees and expenses associated with litigating the issues resulting from Lubke's non-disclosure. See 29 U.S.C. § 2617(a)(3) (2006). These fees, however, resulted from the City's own efforts to avoid payment of the affirmed FLMA judgment by having the Trustee estopped in addition to Lubke. Furthermore, the City's argument is of doubtful relevance to the judicial estoppel analysis. See In re Coastal Plains, 179 F.3d at 213 (Again, the purpose of judicial estoppel is to protect the integrity of courts, not to punish adversaries or to protect litigants.). The district court tailored its remedy to address the facts and circumstances of this case. Its careful application of judicial estoppel protected the integrity of the bankruptcy system by deterring debtors from concealing assets; was consistent with the core bankruptcy goal of obtaining a maximum and equitable distribution for creditors; and abided by bankruptcy law and principles of equity.