Reed v. City of Arlington

Filing

PUBLISHED OPINION FILED. [08-11098 Affirmed 08-11099 Affirmed ] Judge: EHJ , Judge: HRD , Judge: EBC Mandate pull date is 10/07/2010 [08-11098, 08-11099]

Reed v. City of Arlington

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Case: 08-11098

Document: 00511235709

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Date Filed: 09/16/2010

IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit

FILED
N o . 08-11098 September 16, 2010 Lyle W. Cayce Clerk

D I A N E G. REED, Real party in Interest, P la in t iff - Appellee Cross-Appellant v. C I T Y OF ARLINGTON, D e fe n d a n t - Appellant Cross-Appellee

A p p e a ls from the United States District Court fo r the Northern District of Texas

B e fo r e JONES, Chief Judge, and DeMOSS and CLEMENT, Circuit Judges. E D I T H H. JONES, Chief Judge: K im Lubke, formerly an Arlington, Texas, firefighter, obtained a large v e r d ic t against the City of Arlington pursuant to the Family Medical Leave Act (F M L A ). Lubke v. City of Arlington, 455 F.3d 489 (5th Cir. 2006). During the C it y 's appeal to this court, Lubke and his wife filed a Chapter 7 bankruptcy case b u t omitted the pending $1 million-plus judgment from his sworn statements a n d bankruptcy filings. He obtained a discharge of $300,000 in debt, while the c r e d it o r s were led to believe his was a "no asset" case. The principal question r a is e d in this appeal is whether judicial estoppel should prevent not only Lubke b u t his bankruptcy trustee from collecting the judgment against the City. Under

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a ll the facts and circumstances, we conclude that to protect the integrity of ju d ic ia l processes, judicial estoppel bars the trustee from collecting the ju d g m e n t . The judgment of the district court is REVERSED. B ackgrou n d L u b k e 's deception spawned a convoluted series of court proceedings. Initially, Lubke sued the City of Arlington, Texas, alleging, inter alia, that his fir in g violated the FMLA. On April 15, 2004, a jury found in Lubke's favor and a w a r d e d him $395,000 in damages. On May 13, 2004, the district court also a w a r d e d Lubke $300,000 in liquidated damages and approximately $315,000 in fe e s and costs, for a total judgment of over $1 million. After post-trial briefing, t h e City appealed on September 29, 2004. On June 10, 2005, while the appeal was pending, Lubke and his wife filed a voluntary Chapter 7 bankruptcy petition. Lubke did not inform his attorney in the FMLA case, Roger Hurlbut, about the filing. Lubke failed to list the s iz e a b le judgment on his schedule of assets and repeatedly violated bankruptcy la w by omitting the judgment from his sworn statements and filings. He also o m it t e d several other items of nonexempt property that could have been a v a ila b le for distribution to his creditors.1 The Lubkes had approximately

$ 3 0 0 ,0 0 0 in mostly credit card debt. The bankruptcy court deemed their case a " n o -a s s e t " case on September 28, 2005. The Trustee, Diane Reed, then closed the c a s e and the Lubkes were discharged from their debts. Without knowing of Lubke's bankruptcy, a panel of this court heard oral a r g u m e n t on December 7, 2005, and, on June 30, 2006, issued an opinion a ffir m in g the verdict against the City, but remanding to recalculate damages.
The omitted required disclosures were: 1) an oil and gas lease on which the Lubkes had not been paid any royalties, 2) ownership of five goats, 3) the Lubkes' flea market business, its inventory, and any other assets, and 4) all of the businesses, no longer operating, the Lubkes operated during the past six years and their trade names. Regarding the businesses, the district court mentions a lawn-mowing business that closed a year before the petition date, and the court states some evidence exists that the Lubkes were involved in farming at some point.
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L u b k e , 455 F.3d at 500. On July 31, 2006, the City offered Lubke a Rule 68 ju d g m e n t for $580,000. When Hurlbut called Lubke to discuss the offer, Lubke a p p a r e n t ly told Hurlbut about his prior bankruptcy for the first time. On

A u g u s t 3, 2006, Hurlbut informed Reed's counsel of Lubke's bankruptcy and, on A u g u s t 7, Reed and Lubke agreed to seek reopening of the Chapter 7 case. The b a n k r u p t c y court granted reopening on August 10.2 Reed attempted to accept t h e City's Rule 68 offer. Finally, Reed filed a motion to substitute herself for L u b k e in district court, which the court, although divested of jurisdiction by the a p p e a l, granted anyway. After being the last party informed of Lubke's undisclosed bankruptcy, the C it y filed a supplement to its petition for rehearing, which was still pending b e fo r e us. The City sought a take-nothing judgment against Lubke, arguing that h e should be judicially estopped from collecting due to his failure to schedule the ju d g m e n t in his bankruptcy case. This panel held a special hearing on

S e p t e m b e r 6, 2006. Meanwhile, on December 5, 2006, the bankruptcy court r e v o k e d Lubke's discharge on a motion that, by agreement with Reed, did not c o n t a in findings of fraud. On December 19, 2006, we denied the City's petition fo r rehearing of the FMLA judgment but remanded the case for the district court t o recalculate damages and to rule initially on the City's judicial estoppel claim. On remand, the district court ratified its earlier order substituting Reed f o r Lubke, and Reed has since pursued Lubke's judgment on behalf of the b a n k r u p t c y estate. After several hearings, the district court made three discrete r u lin g s -- fin d in g a novel remedy for judicial estoppel; reducing damages per our in s t r u c t io n s on remand; and awarding additional attorney's fees. Because of our c o n c lu s io n on judicial estoppel, the parties' appellate issues on the other two r u lin g s need not be reached.

After the case was reopened, only $55,000 of the prior $300,000 in unsecured claims were timely filed; approximately $45,000 in claims were filed late; and Hurlbut asserted two claims for attorney's fees totaling $449,095.

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T h e District Court's Judicial Estoppel Ruling T h e district court applied this court's three requirements for judicial e s t o p p e l: (1) inconsistent positions, (2) the court's acceptance of inconsistent p o s it io n s , and (3) absence of inadvertence. Superior Crewboats, Inc. v. Primary P & I Underwriters (In re Superior Crewboats, Inc.), 374 F.3d 330, 335 (5th Cir. 2 0 0 4 ).3 The court found that, although the elements of judicial estoppel were s a t is fie d regarding Lubke, they were not satisfied regarding Reed, the Trustee, a n d she should thus be permitted to pursue Lubke's judgment. The court then c r a ft e d an unusual remedy. It ordered the City to pay the entire FMLA

ju d g m e n t to Reed, but, concerned that Lubke would benefit from any remaining fu n d s not disbursed to creditors, the court ordered any remaining funds returned t o the City. D e s p ite finding that Lubke's recovery on his claim must be judicially e s t o p p e d , the court balanced the bankruptcy policies of requiring the bankrupt t o disclose all of his assets and of satisfying creditors' claims to the extent p o s s ib le . Because judicial estoppel is an equitable doctrine, the court reasoned, it s novel remedy was justified. The court supported this ruling by pointing out t h a t after Lubke sought bankruptcy relief, the judgment was no longer his p r o p e r t y , but the estate's, until administered or abandoned. See 11 U.S.C. § § 541, 554. A take-nothing judgment, the court reasoned, would deprive

L u b k e 's creditors of their remedy. T h e City appeals the judicial estoppel ruling. Reed's arguments defend the r u lin g and the remedy. a u th o r itie s . Both parties avail themselves of our disparate

"This circuit . . . has recognized three particular requirements [for judicial estoppel]: (1) the party is judicially estopped only if its position is clearly inconsistent with the previous ones; (2) the court must have accepted the previous position; and (3) the non-disclosure must not have been inadvertent." 374 F.3d at 335.

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T h e district court's decision regarding judicial estoppel is reviewed for a b u s e of discretion. Kane v. Nat'l Union Fire Ins. Co., 535 F.3d 380, 384 (5th Cir. 2 0 0 8 ). Erroneous application of the governing legal principles here constitutes s u c h an abuse. J u d ic ia l estoppel is a doctrine that protects the integrity of court p r o c e e d in g s by preventing "a party from asserting a claim in a legal proceeding t h a t is inconsistent with a claim taken by that party in a previous proceeding." New Hampshire v. Maine, 532 U.S. 742, 749 (2001) (quoting 18 Moore's Federal P r a c t ic e , § 134.30, pp. 134-62 (3d ed. 2000)). Because it is an equitable doctrine, ju d ic ia l estoppel is not rigidly defined, but the Supreme Court has articulated t h r e e factors that generally inform its application: (1) whether a party's later p o s it io n is clearly inconsistent with its position in a prior case; (2) whether the p a r ty succeeded in persuading the first court to accept its position, creating "the p e r c e p t io n that either the first or the second court was misled;"and (3) whether t h e party espousing the inconsistency has gained an unfair advantage or im p o s e d an unfair detriment on an opposing party by that means. Id. at 750-51. T h is court's decisions applying judicial estoppel to claims concealed from b a n k r u p t c y courts uniformly cite these criteria, but their results create, to put it kindly, a mosaic. In the first of these cases, judicial estoppel prevented a d e b to r 's successor from upholding the judgment it obtained by pursuing, outside o f bankruptcy, an undisclosed claim that had accrued to the debtor's estate. Browning Mfg. v. Mims (In re Coastal Plains, Inc.), 179 F.3d 197 (5th Cir. 1999) (c it e d with approval in New Hampshire v. Maine, 532 U.S. at 750). In the second c a s e , a debtor misinformed the bankruptcy trustee that her personal injury c la im against Superior Crewboats was prescribed, but she filed suit against that c o m p a n y while she remained in bankruptcy nonetheless. This court, on

in t e r lo c u t o r y appeal in the tort suit, held the debtor judicially estopped from p u r s u in g the suit. In re Superior Crewboats, 374 F.3d at 332-33. The trustee's m o t io n to substitute as plaintiff in the tort suit was denied as moot. Id. at 336. 5

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T h e third case also involved a tort claim that the debtor failed to reveal to the t r u s t e e , but this court distinguished both In re Coastal Plains and In re Superior C r e w b o a ts and held that despite the presence of intentional concealment and d u p lic it o u s conduct in the bankruptcy court, "equity favors the Trustee." Kane, 5 3 5 F.3d at 387. Judicial estoppel was refused. Id. What are the bankruptcy courts, which confront these problems regularly in our circuit, to make of these decisions? The grounds on which Kane

d is t in g u is h e d In re Coastal Plains are that, in In re Coastal Plains, a corporate o ffic e r 's misdeeds detrimentally influenced the corporate reorganization process a s well as depriving creditors of the concealed cause of action. Id. Kane

p u r p o r t s to distinguish In re Superior Crewboats, moreover, based on the d iffe r in g procedural consequences between a trustee's abandonment of a claim (t o the debtor) and the non-disclosure of assets that are not administered a lt h o u g h still within the debtor's estate. Id. at 386-87. Whether these

d is t in c t io n s are correct in principle or on the facts are matters for another d e b a t e . Absent en banc harmonization, we must endeavor to reconcile the a u t h o r it ie s . We are also guided by the principle that one panel of this court c a n n o t overrule another panel decision. Teague v. City of Flower Mound,

1 7 9 F.3d 377, 383 (5th Cir. 1999). Thus, judicial estoppel remains applicable to lit ig a t io n claims that are undisclosed in bankruptcy, and the doctrine's essential in g r e d ie n t s remain the same. T h e lowest common denominator appears to lie in a holistic, fact-specific c o n s id e r a t io n of each claim of judicial estoppel that arises from litigation claims u n d is c lo s e d to a bankruptcy court. In In re Coastal Plains, this court carefully r e v ie w e d the complex business consequences following from the inconsistent p o s it io n s that the debtor's CEO deliberately undertook and refused to " e n c o u r a g e bankruptcy debtors to conceal claims, write off debts, purchase d e b to r assets at bargain prices, and then sue on undisclosed claims and possibly r e c o v e r windfalls." In re Coastal Plains, 179 F.3d at 213. In In re Superior 6

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C r e w b o a ts , this court rejected the proposition that the debtor, whose ruse had b e e n discovered, could re-open the bankruptcy case later on, amend her s c h e d u le s to include the claim in litigation, and proceed even after the statute o f limitations had run against the defendant. In re Superior Crewboats, 374 F.3d a t 336. Kane, in contrast, must be viewed as a "simple" case in which "the only w a y the Kanes' creditors would be harmed is if judicial estoppel were applied to b a r the Trustee from pursuing the claim against Defendants on behalf of the e s t a t e ." Kane, 535 F.3d at 387. I n this case, the factual basis for applying judicial estoppel was found by t h e district court and is not even challenged on appeal by Reed. Thus, it is u n d is p u t e d that Lubke repeatedly misrepresented his assets and concealed from t h e trustee, the creditors, and the court his million dollar judgment against the C it y ; that he benefitted from the existence of the judgment and the discharge of d e b ts he received; and that parties were harmed by the duplicitous conduct. As a college graduate, Lubke's actions were far from "inadvertent." The district c o u r t declined to apply judicial estoppel against Reed, however, on the Kane-like r a t io n a le that Reed had not engaged in inconsistent conduct and "the creditors" w o u ld be unduly harmed by Reed's inability to pursue the appeal to fruition. The court's strategy for serving the doctrine's equitable purpose led it to order t h a t Lubke may under no circumstances profit from the judgment while Reed m a y continue to represent the estate's interests. The district court erred in two ways. First, it is not sufficient to

d is t in g u is h the debtor's conduct from that of the trustee in applying judicial e s t o p p e l. Even though Reed herself takes no inconsistent legal positions, she s u c c e e d s to the debtor's claim with all its attributes, including the potential for ju d ic ia l estoppel. For this reason, "splitting the baby" in both the analysis of fa u lt and the proposed remedy is not an acceptable substitute for thorough r e v ie w of the effects of the misconduct. Second, contrary to the district court's

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a s s u m p t io n , this was not a simple "Kane" case. The balance of harms disfavors p e r m it t in g this litigation to continue. T h e creditors are not materially advantaged if this case proceeds further. Only about one-sixth of the original creditors (reckoned in amount of claims) t im e ly refiled when the case was re-opened a year after they were informed there w e r e no non-exempt assets to distribute. See supra note 2. The untimely filers h a v e little if any hope of recovery from the bankruptcy estate; the timely filers' r e c o v e r y will be contingent on the payment of large priority administrative e x p e n s e s caused by the ongoing litigation. True, Lubke agreed to revoke his d is c h a r g e , but most creditors will have foregone alternative collection strategies a t this point. The principal remaining bankruptcy "claimants" are Reed herself a n d Lubke's trial attorney Roger Hurlbut, who has already received from Lubke s o m e payment for his services. Reed's claim has been substantially increased b e c a u s e of this judicial estoppel litigation. Here, equity does not favor ignoring L u b k e 's misuse of the court system for the primary benefit of attorneys. I t is also possible to conclude that the City, despite being adjudged guilty o f an FMLA violation against Lubke, has been victimized by the non-disclosure o f his bankruptcy. The City is statutorily liable for Lubke's attorney fees, but t h is liability stems from the need to vindicate an employee's rights, not to suffer t h e consequences of the employee's deception of others. Lubke's concealment of t h e judgment in bankruptcy court created numerous complications that have d r a m a tic a lly increased the fees charged by Reed, and have cost the City and its t a x p a y e r s far more than they would have had to bear because of an ordinary a p p e a l. Finally, Lubke, although deprived of a discharge and the proceeds of the F M L A judgment, has effectively been rid of his creditors. By entangling the c r e d it o r s in his web, he has hindered and delayed their efforts to seek r e im b u r s e m e n t of his debts. He has also benefitted from his continued

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in c o m e , livestock and a mineral lease that Reed evidently chose not to pursue for t h e creditors' benefit while the FMLA judgment loomed large. Considering all of the costs and consequences that Lubke's inconsistent p o s it io n s have engendered, we conclude that equity does not support further c o n t in u a t io n of this litigation and that both Lubke and Reed must be judicially e s t o p p e d from pursuing it. The district court abused its discretion by failing to c o n s id e r the doctrine from a fact-specific perspective concerning all parties in v o lv e d . Not to uphold judicial estoppel in this instance would send debtors the m e s s a g e that they " `should consider disclosing personal assets only if [they are] c a u g h t concealing them.' " In re Superior Crewboats, 374 F.3d at 336 (quoting B u r n e s v. Pemco Aeroplex, Inc., 291 F.3d 1282, 1288 (11th Cir. 2002)). The judgment of the district court is REVERSED.

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