Court Opinion

ID: 30998
Source: CourtListenerOpinion
Date Created: 2010-04-25 10:09:34+00
Date Added: 2024-06-11T09:55:47.342331
License: Public Domain

United States Court of Appeals
                                                               Fifth Circuit
                                                            F I L E D
              IN THE UNITED STATES COURT OF APPEALS
                      FOR THE FIFTH CIRCUIT                  April 10, 2003

                                                        Charles R. Fulbruge III
                                                                Clerk
                           No. 02-31121
                         Summary Calendar

IN THE MATTER OF:   WEST DELTA
OIL COMPANY, INC.

                                                              Debtor,

I.G. PETROLEUM, LLC,

                                                           Appellee,

versus

MICHAEL A. FENASCI; PERRIN C. BUTLER,

                                                        Appellants.

IN THE MATTER OF:   WEST DELTA
OIL COMPANY, INC.

                                                              Debtor,

BUTLER & BUTLER; PERRIN C. BUTLER;
MICHAEL A. FENASCI; FENASCI &
ASSOCIATES, INC.,

                                                        Appellants,

versus

I.G. PETROLEUM, LLC,

                                                           Appellee.

                       --------------------
          Appeal from the United States District Court
              for the Eastern District of Louisiana
              (01-CV-1163-J; 01-CV-1760-J; 02-CV-1228-J)
                         --------------------

Before DAVIS, WIENER, and EMILIO M. GARZA, Circuit Judges.

PER CURIAM:*

     This appeal arises in the context of the Chapter 11 bankruptcy

of the Debtor, West Delta Oil Company, Inc. (“Delta”) and pits

Appellee I.G. Petroleum, LLC (“I.G.”), a creditor of the Debtor,

against two attorneys and their respective law firms (collectively,

“Fenasci and Butler”) who, on the recommendation of the Debtor’s

primary bankruptcy counsel, applied to the Bankruptcy Court and

were authorized to serve as special counsel to the Debtor ——

Fenasci in connection with particular matters relating to I.G., and

Butler in connection with all matters regarding James Ingersoll, a

shareholder.         The   bone   of   contention      in   this    facet   of     the

bankruptcy proceedings is the ruling of the Bankruptcy Court,

affirmed by     the    district     court,     that   Fenasci      and   Butler    are

judicially     estopped     to    assert   claims     against   the      Debtor   for

prepetition attorneys’ fees purportedly owed to Fenasci and Butler

by the Debtor but not disclosed in counsel’s applications to be

retained, or in their affidavits filed with in support of those

applications, or in their postpetition applications for payment of

fees,    or   even    by   amending    their    applications        to   make     such

     *
        Pursuant to 5TH CIR. R. 47.5, the court has determined that
this opinion should not be published and is not precedent except
under the limited circumstances set forth in 5TH CIR. R. 47.5.4.

                                           2
disclosures after being advised to do so by Debtor’s primary

bankruptcy counsel.1

     In general, we review the rulings of the Bankruptcy Court

under the same standard as does the district court when hearing a

bankruptcy appeal. Questions of law are reviewed de novo; findings

of fact are reviewed for clear error.             As noted by the district

court, however, review of the denial of a claim on the basis of

judicial estoppel is reviewed for abuse of discretion.2

     On the issue of judicial estoppel, our opinion in Coastal

Plains3 is central to the rulings of the Bankruptcy Court and the

district court, as well as to the arguments of respective counsel

for the parties.         We have carefully reviewed the holdings and

implications of Coastal Plains, just as we have the rulings of the

Bankruptcy Court and the district court in the instant case, the

record on appeal, and the appellate briefs of counsel for the

parties.       As a result, we are convinced that, irrespective of the

standard       applied   in   our   review   of   the   Bankruptcy   Court’s

     1
      The Bankruptcy Court ruled against Fenasci and Butler on the
alternative ground of failure to support their claims with the
necessary documentation; but as we affirm the Bankruptcy Court’s
disallowance of the subject claims on judicial estoppel, we need
not and therefore do not address the absence of supporting
documentation. Neither do we address another basis asserted by
Fenasci and Butler, i.e., failure to take judicial notice of
matters in other proceedings; because even if noticed there would
be no change in results.
     2
         See In Re: Coastal Plains, Inc., 179 F.3d 197 (5th Cir.
1999).
     3
         Id.

                                       3
disallowance of the claims of Fenasci and Butler on grounds of

judicial    estoppel,   the   subject   ruling   should   be   affirmed.

Moreover, the reasons for affirming the Bankruptcy Court are

clearly, completely, and correctly set forth by the district court

in its craftsmanlike Order and Reasons filed August 21, 2002.         As

such, nothing would be gained by our writing further; rather, we

adopt the opinion of the district court, incorporate it herein by

reference, and append a copy hereto as the opinion of this court.

AFFIRMED.

                                   4
                  UNITED STATES DISTRICT COURT

                  EASTERN DISTRICT OF LOUISIANA

IN RE WEST DELTA OIL COMPANY                      CIVIL ACTION

(U.S. Bankruptcy Court No. 99-10406, Section B)

VERSUS                                            NO: 01-1163

                                                  c/w 01-1760

                                                  c/w 02-1228

RONALD J. HOF, ET AL., appellees                  SECTION: "J"(3)

                        ORDER AND REASONS

                                   5
       Before      the   Court      is   an    appeal     of    the    judgment     of   the

bankruptcy court, entered on January 24, 2002, granting summary

judgment in favor of I.G. Petroleum, L.L.C. ("IG"), appellees

herein, on the issue of prepetition attorneys’ fees claimed by

appellants, Butler & Butler and Perrin C. Butler (collectively,

"Butler"), and Fenasci & Associates, Inc. and Michael A. Fenasci

(collectively, "Fenasci"). Upon considering the record, the briefs

filed,      the    Bankruptcy       Court’s    orders        and    reasoning,     and   the

applicable law, the Court concludes that the judgment of the

bankruptcy court should be AFFIRMED.

                                         Background

       West Delta Oil Company (“West Delta”) filed a voluntary

petition for relief under Chapter 11 of the Bankruptcy Code on

January 26, 1999.4           In connection with the Chapter 11 proceeding,

West       Delta   employed        Ronald     Hof    as   its       bankruptcy     counsel.

Subsequently, the bankruptcy court authorized West Delta to retain

Butler and         Fenasci    as    special        counsel     to   handle   all    matters

regarding one particular shareholder, James Ingersoll.                           See Order,

Bankr. Doc. 39.          Later, the bankruptcy court authorized Fenasci to

also handle certain matters relating to I.G.

       4
       The general history of West Delta’s bankruptcy proceeding is
set forth in the Court’s Order and Reasons issued in another appeal
arising out of this case, and, therefore, need not be repeated in
full herein. West Delta Oil Co. v. Hof, NO. CIV A. 01-1163, 2002
WL 506814 (E.D.La., Mar 28, 2002).

                                               6
     As   required       by   bankruptcy         law,    Fenasci     and       Butler    each

executed affidavits in connection with their employment. See Fed.

R.   Bankr.    Pro.      2014(a).          Rule       2014(a)    requires         that       any

professional       to   be    employed     by     the    debtor      in    a     bankruptcy

proceeding provide "a verified statement ... setting forth the

person's connections with the debtor, creditors, any other party in

interest, their respective attorneys and accountants, the United

States trustee, or any person employed in the office of the United

States trustee."          The Bankruptcy Code further provides for the

employment    of    attorneys     for      the       debtor    who   “do    not       hold    or

represent     an   interest      adverse        to    the     estate,      and    that       are

disinterested persons.”          11 U.S.C. § 327(a).            Additionally, as was

the case with Fenasci and Butler, an attorney who has represented

the debtor may be employed “for a specified special purpose ... if

such attorney does not represent or hold any interest adverse to

the debtor or to the estate with respect to the matter on which

such attorney is to be employed.”                 11 U.S.C. § 327(e).

     Both Fenasci and Butler’s affidavits disclosed that they had

performed substantial prepetition legal work for West Delta.                                 See

Bankr. Doc. 36.         However, neither attorney disclosed they had any

prepetition claims of any kind in the motions to employ them as

bankruptcy counsel or in their accompanying affidavits.                                To the

contrary,     Fenasci        stated   in    his        affidavit     that        he    was     a

“disinterested person under 11 U.S.C. § 327," and both attorneys

stated that they did not represent any adverse interest to West

                                            7
Delta in the matters upon which they were to be engaged.                        The

bankruptcy        court    approved    the     appointments,     relying   on   the

information disclosed in the affidavits and the motions to employ.

       Despite the fact that neither Fenasci nor Butler disclosed

that       they   held    any   prepetition     claims   in    their   affidavits,

approximately one year later, on the March 30, 2000, bar date set

by the bankruptcy court for all creditors to file proofs of claim,

Fenasci      filed   a    proof   of   claim    for   $187,000    in   prepetition

attorney’s fees and Butler filed a similar claim for $69,400.                   IG

moved for summary judgment dismissing those claims on the grounds

that Fenasci and Butler were barred from recovering those fees

under the doctrine of judicial estoppel, or, alternatively, because

the claims lacked the necessary supporting documentation.5

       The bankruptcy court agreed with IG’s arguments, holding that

the requirements for application of judicial estoppel, as set forth

by the Fifth Circuit in In re: Coastal Plains, Inc., 179 F.3d 197

(5th Cir. 1999), were satisfied in this matter and that, therefore,

the attorneys were barred from recovering their prepetition claims.

       5
       The Court notes that in the schedules filed by West Delta
pursuant to its filing of Chapter 11 bankruptcy, no outstanding
claims of either Fenasci or Butler are listed among the 33
unsecured nonpriority claims. See Schedule F, Bankr. Doc. 9. In
fact, Fenasci is listed in these documents as a former creditor to
whom no amount is owed. See Statement of Financial Affairs, Bankr.
Doc. 9. These are not insignificant claims; Fenasci’s claim for
$187,000 would be the second-largest of the unsecured claims;
Butler’s claim for $69,400 is exceeded by claim of just three
creditors (excluding Fenasci).    See Schedule F, Bankr. Doc. 9.
Inclusion of these claims would increase the total liabilities of
West Delta by over 32%. See Summary of Schedules, Bankr. Doc. 9.

                                          8
See Bankr. Doc. 630, at 41.           In analyzing judicial estoppel, the

bankruptcy     court    further      held      that    neither    bad   faith    nor

intentional non-disclosure was a required element of the doctrine,

an argument advanced by the Fenasci and Butler to the bankruptcy

court    and   on   appeal    to   this       Court.     The     bankruptcy     court

additionally        agreed    with     IG’s      arguments        concerning     the

insufficiency of documentation of the claims.                    Having found that

the claims were judicially estopped, and, in the alternative,

barred by insufficient documentation, the court granted IG’s motion

for summary judgment.        See Judgment, Bankr. Doc. 615.             Fenasci and

Butler timely appealed that ruling.

                             Standard of Review

     This Court usually reviews a grant of summary judgment de

novo, applying the same standards as applied by the bankruptcy

court.    See In re Carney, 258 F.3d 415, 418 (5th Cir. 2001).

However, this matter is somewhat unique in that IG argued in its

motion for summary judgment that the bankruptcy court should apply

the doctrine of judicial estoppel to bar the attorneys’ claims.

The bankruptcy court granted the motion, concluding IG was correct

that judicial estoppel should apply.

     Whether to apply the doctrine of judicial estoppel lies

soundly within the bankruptcy court’s discretionary power, and,

therefore, is reviewed for abuse of discretion.                   See Coastal, 179

F.3d at 205. Accordingly, while the issue of judicial estoppel was

                                          9
raised in the context of a motion for summary judgment, the

bankruptcy court’s application of the doctrine to this matter is

reviewed under an abuse of discretion standard.6       A bankruptcy

court abuses its discretion if it fails to apply the proper legal

standard or bases an award on findings of fact that are clearly

erroneous.   In re U.S. Golf Corp., 639 F.2d 1197, 1201 (5th Cir.

1981).

                             Discussion

     A.   Duty to Disclose

     Fenasci and Butler do not dispute that they had an affirmative

duty under Fed. R. Bankr. P. 2014 to disclose their prepetition

claims, and that they failed to do so.    See App. Brief, Rec. Doc.

25, at 10.     As the Fifth Circuit discussed in Coastal, in a

bankruptcy case "the importance of this disclosure duty cannot be

overemphasized."   See Coastal, 179 F.3d at 208.7   According to the

Coastal Court’s reasoning, because of the heightened need for full

     6
       The Court notes that even if it were to review the
bankruptcy court’s grant of summary judgment on the issue of
whether judicial estoppel was appropriate de novo, the result on
appeal would be the same.
     7
        Although Coastal deals with the non-disclosure of the
debtor, the importance of full disclosure is not lessened in the
case of material non-disclosure of a creditor. The court notes
that "the integrity of the bankruptcy system depends on full and
honest disclosure by debtors...[t]he interests of both the
creditors...and the bankruptcy court...are impaired when the
disclosure provided by the debtor is incomplete." Coastal, 179 F.3d
at 208 (quoting Rosenshein v. Kleban, 918 F.Supp. 98, 104 (S.D.N.Y.
1996)(emphasis removed). This is no less true when the lack of
full and honest disclosure is on the part of a creditor.

                                 10
and honest disclosure in a bankruptcy proceeding, when these

attorneys failed to disclose their substantial claims as required

by law, Fenasci and Butler in effect averred that no such claims

existed.    See Coastal, 179 F.3d at 210.              Furthermore, in his

affidavit, Fenasci represents that he "is a disinterested person

under 11 U.S.C. § 327."        According to the definition of the term

"disinterested person," found in 11 U.S.C.A. § 101(14)(A), one

cannot be both a creditor and a disinterested person.             Therefore,

by representing that he is disinterested, Fenasci represented that

he was not a creditor of West Delta.

       The attorneys argue that their failure to disclose resulted

not from an intent to deceive the bankruptcy court, but out of

inexperience in bankruptcy proceedings and ignorance of bankruptcy

law.   They further assert that they relied on the guidance of Hof,

West Delta’s general bankruptcy counsel, in bankruptcy matters.

Regarding these contentions, the Court notes that there is evidence

in the record that Hof advised both Fenasci and Butler to amend

their affidavits to disclose the claims sometime in the fall of

2000, and, yet, no such amendments were ever made.          See Bankr. Doc.

425, at 45.      Therefore, the Court is skeptical of the attorneys’

argument.     However,   even    if    Fenasci   and   Butler’s   failure   to

disclose the prepetition fees resulted from inexperience or lack of

knowledge   of    bankruptcy    law,   as   demonstrated   herein,   such   a

                                       11
justification would not be sufficient to preclude the application

of judicial estoppel to their claims.

       B.   Doctrine of Judicial Estoppel and Coastal

       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     self-

contradiction     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.

                                ***

      I realize that this is a draconian remedy, but I’m
      convinced that there’s sound basis under the reasoning of
      Coastal to deny these claims in toto. A summary judgment
      to that effect will be entered.

Id.

      Upon reviewing the Fifth Circuit’s opinion in Coastal, this

Court concludes that the bankruptcy court applied the proper legal

standard for judicial estoppel.       As noted, despite Fenasci and

Butler’s arguments to the contrary, the Fifth Circuit does not

require bad faith or intentional non-disclosure in bankruptcy

cases.   The Coastal Court clearly stated that, if the first two

prongs of the judicial estoppel test are met, the only kind of

indadvertence that precludes the application of the doctrine is if

the party to be estopped had no knowledge of the undisclosed claim

or had no motive to conceal the claim.

      In this case, as a factual matter, the bankruptcy court found

that: (1) Fenasci and Butler took inconsistent positions regarding

                                 16
whether they had any claims against West Delta; (2) the bankruptcy

court relied on the attorneys’ first position that there were no

such claims in allowing them to be employed as special counsel; and

(3) the attorneys had knowledge of their claims and a motive for

not disclosing the claims when they sought to be employed.             The

bankruptcy court’s findings are clearly supported by record in this

matter, particularly by Fenasci and Butler’s failure to disclose in

the motions to employ and their affidavits filed in conjunction

therewith.

                                   Conclusion

       Based on the record in this case and the applicable law, the

Court finds that the bankruptcy court did not abuse its discretion

in applying the doctrine of judicial estoppel to disallow Fenasci

and Butler’s prepetition claims for attorneys’ fees.            In light of

that    finding,   it   is   not     necessary   to   address   appellants’

alternative argument that the bankruptcy court erred in concluding

that their applications for prepetition fees were not adequately

supported.    Accordingly;

       IT IS ORDERED that the judgment of the bankruptcy court

granting IG’s motion for summary judgment on the issue of judicial

estoppel is AFFIRMED.

       New Orleans, Louisiana, this _____ day of August, 2002.

                                            _______________________________
                                            CARL J. BARBIER

                                       17
     UNITED STATES DISTRICT JUDGE

18