Opinion ID: 1786265
Heading Depth: 1
Heading Rank: 4

Heading: Application of the Doctrine of Judicial Estoppel

Text: Middleton argues on appeal that the trial court incorrectly applied the doctrine of judicial estoppel to his case because, he says, his failure to report on his Schedule B in his bankruptcy proceeding his claim against Caterpillar was unintentional and because, he says, his claim against Caterpillar was statutorily exempt from the bankruptcy estate under the laws of South Carolina. Although we do not agree with his reasoning, we agree that the trial court misapplied the doctrine of judicial estoppel, and its misapplication of the doctrine warrants reversal. In Ex parte First Alabama Bank, this Court embrace[d] the factors set forth in New Hampshire v. Maine[, 532 U.S. 742, 121 S.Ct. 1808, 149 L.Ed.2d 968 (2001),] and join[ed] the mainstream of jurisprudence in dealing with the doctrine of judicial estoppel. 883 So.2d at 1246. As this Court stated: The [New Hampshire v. Maine] Court held that for judicial estoppel to apply (1) `a party's later position must be clearly inconsistent with its earlier position'; (2) the party must have been successful in the prior proceeding so that `judicial acceptance of an inconsistent position in a later proceeding would create the perception that either the first or second court was misled' (quoting Edwards v. Aetna Life Ins. Co., 690 F.2d 595, 599 (6th Cir.1982)); and (3) the party seeking to assert an inconsistent position must `derive an unfair advantage or impose an unfair detriment on the opposing party if not estopped.' 532 U.S. at 750-51, 121 S.Ct. 1808. No requirement of a showing of privity or reliance appears in the foregoing statement of factors to consider in determining the applicability of the doctrine of judicial estoppel. 883 So.2d at 1244-45. However, this Court noted in Ex parte First Alabama Bank that  Jinright [v. Paulk, 758 So.2d 553 (Ala.2000)], with its discussion of the effect of an amendment to the ongoing bankruptcy plan and analysis of a detriment to the plaintiff and a windfall to the defendant as determinative factors, is not substantially different from considerations appropriate to factors (2) and (3) in New Hampshire v. Maine.  883 So.2d at 1245. In Jinright v. Paulk, 758 So.2d 553 (Ala. 2000), Paulk's company applied a product known as dryvit to the exterior of the Jinrights' house during construction. The Jinrights experienced problems with the dryvit and entered into negotiations with Paulk and his company in April 1996 to repair the house. On June 27, 1996, the Jinrights filed a voluntary petition in bankruptcy under Chapter 13 of the United States Bankruptcy Code. The Jinrights did not disclose to the bankruptcy court their potential claim against Paulk, and in August 1996 the bankruptcy court approved their plan under Chapter 13. On November 7, 1996, the Jinrights sued Paulk, but the Jinrights did not disclose the existence of the lawsuit to their bankruptcy trustee until January 22, 1998. Paulk then moved for a summary judgment on the basis of judicial estoppel; the trial court granted the motion. In reversing the summary judgment, this Court observed the distinguishing features of the varying types of bankruptcies: `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. . . . ' Jinright, 758 So.2d at 556 (quoting In re Griner, 240 B.R. 432, 436 (Bankr.S.D.Ala. 1999)). The Jinright Court noted that a Chapter 13 plan may be amended at any time and may last for up to five years. Thus, at the time the Court issued its decision the Jinrights had not yet received a discharge in bankruptcy. Holding 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, 758 So.2d at 559, this Court reasoned: The purpose of the doctrine of judicial estoppel will not be accomplished, but, rather will be frustrated if defendants are allowed to use this doctrine to their advantage at the expense of plaintiffs with valid claims. Paulk and Option Builders will receive a windfall if they are allowed to escape any potential liability to the Jinrights on the basis that the Jinrights failed to list their potential claim in their initial bankruptcy proceeding, even though the bankruptcy court and the trustee have now been fully informed about the lawsuit and the Jinrights' potential claim. 758 So.2d at 557. This Court has previously affirmed summary judgments for noncreditor defendants based upon the debtor-plaintiffs' previous failure to list the action as an asset in the bankruptcy schedules. This Court first addressed the issue in Luna v. Dominion Bank of Middle Tennessee, Inc., 631 So.2d 917 (Ala.1993). In Luna, a discharged Chapter 7 debtor sued Dominion Bank 18 months after he was discharged, alleging breach of contract, fraud, and negligence, based on the bank's alleged failure to distribute loan proceeds to which he claimed he was entitled. Dominion Bank argued that Luna was judicially estopped from suing it because Luna had not disclosed to the bankruptcy court the claim against the bank as a potential asset. Luna argued that he was unaware of his claim against the bank until after he had been discharged from bankruptcy. This Court, however, held that if the facts were as Luna claimed, then Luna, as a reasonable person, should have known when he filed for bankruptcy protection that he had a claim against Dominion Bank. Luna, however, is distinguishable from this case because Luna brought claims against a creditor of his and related entities, and the claims were related to a prepetition claim held by the creditor, which was discharged in Luna's bankruptcy case before Luna filed his action in the state court. Furthermore, the bankruptcy court relied on Luna's schedules in granting him a discharge. The bankruptcy court was never made aware of Luna's claim against the creditor before granting the discharge. This Court also upheld a summary judgment for a noncreditor-defendant in Bertrand v. Handley, 646 So.2d 16 (Ala.1994). In Bertrand a tenant sued, among others, her landlord for damages arising out of injuries sustained when she fell down an allegedly defective ramp. A default judgment was entered in favor of the tenant. Subsequently, the trial court set aside the default judgment. During the intervening period between the granting and the setting aside of the default judgment, the tenant filed for bankruptcy protection but did not disclose as a potential asset to the bankruptcy court the default judgment against the landlord. The trial court subsequently entered a summary judgment in favor of the landlord. This Court affirmed the summary judgment, holding that a debtor who does in fact know that a default judgment has been rendered in her favor and who does not disclose this fact in a bankruptcy proceeding is judicially estopped from pursuing the claim on which the judgment was based if the default judgment is later set aside. 646 So.2d at 19. However, Bertrand is also distinguishable from this case because the tenant in Bertrand filed her action before she filed for Chapter 7 bankruptcy protection, and the bankruptcy court discharged all the tenant's debts without ever knowing of the pending action against the landlord. In the present case, Caterpillar failed to establish all three of the New Hampshire v. Maine elements of judicial estoppel. As established in Luna and Bertrand, a debtor-plaintiff's failure to disclose the existence of his civil action as a potential asset of the bankruptcy estate meets the inconsistent-positions element of judicial estoppel. [4] Here it is undisputed that Middleton did not amend his bankruptcy petition to disclose the existence of the underlying action until after Caterpillar's summary-judgment motion had been filed. Caterpillar, however, has failed to prove the second prong of the New Hampshire test, i.e., that Middleton was successful in the bankruptcy proceeding. As noted in Griner, a Chapter 13 debtor remains in possession of his assets during the pendency of his bankruptcy. In addition, the Chapter 13 bankruptcy petition can be amended at any time, and the bankruptcy plan can last up to five years. When Caterpillar filed its motion for a summary judgment, Middleton had not been discharged from his bankruptcy. Because the bankruptcy plan may be amended at any time, we conclude that Middleton was not successful in the prior proceeding so that the acceptance of an inconsistent position in a later proceeding would create `the perception that either the first or second court was misled.' Ex parte First Alabama Bank, 883 So.2d at 1244 (quoting New Hampshire v. Maine, 532 U.S. at 750, 121 S.Ct. 1808). Similarly, because Middleton's bankruptcy plan may be amended at any time, Middleton did not `derive an unfair advantage or impose an unfair detriment on the opposing party,' Ex parte First Alabama Bank, 883 So.2d at 1245 (quoting New Hampshire v. Maine, 532 U.S. at 751, 121 S.Ct. 1808), and thus failed to meet the third prong to the New Hampshire test. As we noted in Ex parte First Alabama Bank, by adopting the New Hampshire test for the application of judicial estoppel, this Court did not abandon the concerns that a detriment may be imposed on a plaintiff with a potentially meritorious claim and that a defendant may receive an unwarranted windfall by the application of the doctrine of judicial estoppel. Should this Court permit the trial court's ruling to stand, Caterpillar would be the undeserving recipient of an unwarranted windfall, i.e., the dismissal of Middleton's potentially meritorious claim. Such a result would thwart the goals of our justice system. In reversing the trial court's judgment, this Court in no way condones Middleton's delay in amending his bankruptcy petition to notify the bankruptcy court of his potential claim against Caterpillar. The Bankruptcy Court for the District of South Carolina, the court in which Middleton filed his bankruptcy petition, has noted the responsibility of a debtor to promptly file with that court accurate petitions and amendments: The Bankruptcy Code provides that Debtors' foremost responsibility is to cooperate with the Court and the Trustee and to facilitate the accurate and proper performance of their duties. See 11 U.S.C. § 521. Since bankruptcy schedules and statements are carefully designed to elicit certain information necessary for the proper administration of cases, Debtors[ ] have a duty to complete these documents thoughtfully and thoroughly. See In re Phillips, C/A No. 02-10461, slip op. at 4 (Bankr.D.S.C. Feb. 21, 2003). Furthermore, accuracy, honesty, and full disclosure are critical to the functioning of a bankruptcy and are inherent in the bargain for a debtor's discharge. See id. at 3 (citing Kestell v. Kestell, 99 F.3d 146, 149 (4th Cir.1996)). Therefore, debtors are responsible for disclosing an accurate and complete schedule of assets with proper values and a truthful statement of affairs in order to convey a complete and accurate portrayal of their financial situation. See id. at 3 ('Debtors bear the burden of proving that their Plan meets the confirmation requirements of § 1325(a), and part of this burden includes proving that the values used in their Plan are adequate'); Siegel v. Weldon (In re Weldon), 184 B.R. 710, 715 (Bankr.D.S.C.1995) ('The critical time for disclosure is at the time of the filing of a petition and the Debtor has the responsibility to do so. Bankruptcy law requires debtors to be honest and to take seriously the obligation to disclose all matters.'). Furthermore, there is no allowance for selectivity in asset disclosure. Id. ('To allow the Debtor to use his discretion in determining the relevant information to disclose would create an end-run around this strictly crafted system.'). In re Simpson, 306 B.R. 793, 797-98 (Bankr.D.S.C.2003). Because Caterpillar did not meet its burden in proving the elements of judicial estoppel as set forth in New Hampshire v. Maine, as developed in Ex parte First Alabama Bank, supra, the trial court erred in entering the summary judgment.