Riggins v. Ambrose
Filing
5
ORDER AND OPINION reversing the bankruptcy court's decision to reopen the case and remanding the case. The bankruptcy court should hold an evidentiary hearing to address the factors as outlined in the order. Signed by Judge Julie E. Carnes on 9/30/13. (ekb)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION
ERIN RIGGINS,
Appellant,
CIVIL ACTION NO.
v.
1:12-cv-03015-JEC
MERRITT MAYNARD AMBROSE, JR.,
Appellee.
ORDER & OPINION
This action is presently before the Court on appellant’s appeal
of bankruptcy court’s order to reopen a closed bankruptcy proceeding.
For the reasons set forth below, the Court REVERSES the bankruptcy
court's
decision
to
reopen
the
case
and
REMANDS
for
further
proceedings consistent with this opinion.
BACKGROUND
The facts of this case are largely undisputed.
Merritt
Ambrose
(“the
debtor”)
sent
a
letter
On May 6, 2010,
to
Erin
Riggins
demanding the recovery of unpaid distributions pursuant to his
membership in Pharmaceutical Grade Health Products, LLC and Global
Processing Systems, LLC (collectively, the “Companies”). (Demand
Letter, attached as Ex. D to Objection to Debtor’s Mot. To Reopen [1
AO 72A
(Rev.8/82)
7].)
In this letter, the debtor argued that, as a member of the
Companies, he was entitled to an equitable share of all earnings of
the Companies to date.
(Id. at 1.)
On May 28, only twenty-two days after his attorneys had sent
this demand letter, the debtor filed a Chapter 7 bankruptcy petition.
(Bankr. Pet., attached to Bankr. R. [1-4] at 3.)
Under penalty of
perjury, the debtor swore that his bankruptcy was a “no asset” case
by indicating that he believed “no funds would be available for
distribution to unsecured creditors.”
(Id. at 1.)
Further, the
debtor indicated that he had no stock in or interests in any
business, (id. at 34), and did not list himself as owning more than
a 5% share in either of the Companies. (Id. at 27.)
Of course, both
statements appear to be lies.
On August 19, 2010, the appointed Chapter 7 trustee, Robert
Trauner, issued his report of “no distribution.” (See Bankr. Dkt.
Sheet,
attached
to
Bankr.
R.
[1-1]
at
3.)
Based
on
this
recommendation, the bankruptcy court issued an order approving the
trustee’s report of “no distribution,” closing the estate, and
discharging the debtor under 11 U.S.C. § 727. (Discharge of Debtor
Order, attached to Bankr. R. [1-5].)
Only three months after his
bankruptcy case was discharged, the debtor turned around and filed
suit against Riggins in the Superior Court of Cobb County (“state
action”).
(Debtor’s Mot. to Reopen, attached to Bankr. R. [1-6] at
2
AO 72A
(Rev.8/82)
¶ 3.)
In the state action, the debtor demands unpaid distributions
owed to him because of his 25% ownership stake in the Companies.
(Id.)
After discovering that the debtor had previously filed for
bankruptcy and had failed to mention the stake in the Companies he
now alleges in the state action, Riggins filed for summary judgment
in the state action.
(Id. at ¶ 5.)
In his motion, Riggins argued
that the debtor is judicially estopped from maintaining the case for
failing to disclose his ownership interests in the Companies.
(Id.)
On November 29, the state court stayed its case pending the final
disposition of the reopening of the bankruptcy proceeding.
Ambrose
v. Riggins, Civ. No. 11-1-721-34, Order Approving Consent Mot. to
Stay (Cobb County Super. Ct. Nov. 29, 2012)(Ingram, J.).
I.
HEARING
On June 21, 2012, the bankruptcy court held a hearing on the
debtor’s motion to reopen.
(Hr’g Tr., attached to Bankr. R. [1-9].)
Debtor’s counsel appeared on behalf of his client but stated that he
had not asked, and did not know, the reason why the debtor had failed
to disclose this potential asset, and thereby had made a false
statement in his bankruptcy case.
(Id. at 9.)
Debtor’s incurious
counsel argued, however, that the intentions of his client should not
have any weight on whether to open the bankruptcy, because doing so
would unfairly penalize the trustee.
3
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(Id. at 9-10.)
Bankruptcy counsel for appellant Riggins appeared along with
Riggins’ counsel in the state action, should any facts of that case
need to be discussed.
(Id. at 6-7.)
Appellant argued that debtor
was being disingenuous in his argument that he had filed his motion
for
the
benefit
of
the
creditors.
(Id.
at
4-5.)
Appellant
maintained that the only reason the debtor wants to reopen the case
is to prevent summary judgment in his state action. (Id.)
Since he had been discharged as trustee, Mr. Trauner was not
present at the hearing, but a representative for the United States
Trustee did appear.
(Hr’g Tr. [1-9] at 7.)
This representative
wanted to make the judge aware of all of the factors to be considered
and that “one of the primary factors for [a] court to look at is
whether it was intentional or a bad faith failure to disclose.” (Id.
at 8.)
After listening to all of the parties’ arguments, the bankruptcy
judge noted some decisions she had found particularly helpful.
(Id.
at 15-16.) She discussed the relationship between good faith and the
appellant’s judicial estoppel argument and noted her belief that
reopening the case would not moot any estoppel argument that Riggins
wished to pursue in the state action.
(Id. at 16.)
Ultimately, the
judge concluded that, given the pending lawsuit, there appeared to be
a potential asset of sufficient value to justify reopening the case
and allowing the trustee to evaluate what to do.
4
AO 72A
(Rev.8/82)
(Id. at 17.)
On July 17, 2012, the bankruptcy court issued its written order
reopening the case.
The order found that the omitted asset was
property of the estate and that the Chapter 7 trustee is the real
party in interest. (Bankr. Order, attached to Bankr. R. [1-3] at 2.)
The court ordered the trustee to decide how to administer the claim,
but reserved ruling on any issue involving judicial estoppel.
(Id.)
Riggins has appealed the bankruptcy court’s order and filed a
brief in support.
(Appellant’s Br. [3].)
Debtor-appellee filed no
response, thereby suggesting no opposition to Riggins’ efforts to
prevent a reopening of the case.1
DISCUSSION
I.
LEGAL STANDARD
Riggins appeals the bankruptcy court’s decision to reopen the
present bankruptcy proceeding.
R. [1-2].)
(Not. of Appeal, attached to Bankr.
Jurisdiction over appeals from final orders2 by a
bankruptcy court is vested in federal district courts. 28 U.S.C. §
158(a).
The district court is bound by the findings of fact made by
the bankruptcy court unless it finds them clearly erroneous.
In re
1
Of course, a refusal to reopen the case could represent a
“win-win” for the apparently dishonest debtor if the Cobb County
court rules against appellant on the judicial estoppel argument.
Then, the debtor would be able to keep his litigation winnings, with
no need to share with his former creditors.
2
This Court has assumed that the bankruptcy court order was
final.
5
AO 72A
(Rev.8/82)
Sunshine-Jr. Stores, Inc., 198 B.R. 823, 825 (M.D. Fla. 1996).
However, the court must do an independent, de novo review of all
conclusions of law and the legal significance of any facts.
II.
Id.
APPELLANT’S APPEAL OF ORDER REOPENING BANKRUPTCY
The appellant asks this Court do decide whether the bankruptcy
court
erred
in
Specifically,
reopening
appellant
the
argues
debtor’s
that
the
Chapter
court
7
bankruptcy.
erred
when
it
determined that the debtor’s lack of good faith was irrelevant in
deciding whether to reopen the case and thus did not require the
debtor to present evidence of good faith or cause.3
[3] at 3.)
(Appellant’s Br.
The written order does not fully explain the reasons
leading to the bankruptcy court’s conclusion or which considerations
ultimately played a factor in its decision.
[1-3].)
(See Bankr. Order
The transcript from the hearing similarly does not disclose
exactly which factors were eventually considered by the bankruptcy
judge.
While the judge’s statements provide some insight into which
arguments she found more persuasive, the only explicit reason given
was that the claim “on its face [] appears to be of value.”
(Hr’g
Tr. [1-9] at 18.)
3
Appellant argues that the bankruptcy court erred when it
failed to require any evidence from the debtor because no “cause” to
reopen could be shown. (Appellant’s Br. [3] at 12.) This argument is
without merit. A bankruptcy court may reopen a case for “cause,” but
it may also reopen a case to administer assets. 11 U.S.C. § 3(b).
6
AO 72A
(Rev.8/82)
At the hearing, the bankruptcy judge correctly observed that
“there are cases all over the board on this question of reopening,
and judicial estoppel, and good faith, and exactly what the standard
should be, even by the Eleventh Circuit.”
(Id. at 15.)
These cases
indicate that the decision whether to reopen a bankruptcy case in a
situation such as this is particularly fact-intensive.
This Court
cannot properly evaluate the specific issues presented in this appeal
in the absence of factual findings and a fuller explanation of the
reasons underlying the bankruptcy court’s decision to reopen.
a fuller record must be developed.
Thus,
For this reason, the Court
REVERSES the decision to reopen this proceeding and REMANDS the case
back to the bankruptcy court for a fuller evidentiary hearing.
III. FACTORS TO BE CONSIDERED ON REMAND
A.
Eleventh Circuit Decisions On Judicial Estoppel
The
Eleventh
Circuit
has
addressed
the
issue
of
judicial
estoppel and the failure to disclose a potential legal claim in a
bankruptcy petition on several occasions in recent years. In Burnes,
the circuit issued a stern warning to bankruptcy petitioners who
failed to disclose a potential legal claim as an asset by barring a
debtor’s
employment
discrimination
claim
because
he
failed
to
disclose the potential discrimination lawsuit in his bankruptcy
filing.
Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282, 1289 (11th
Cir. 2002).
The Burnes court found that “[a]llowing [a debtor] to
7
AO 72A
(Rev.8/82)
back-up, re-open the bankruptcy case, and amend his bankruptcy
filings, only after his omission has been challenged by an adversary,
suggests that a debtor should consider disclosing potential assets
only if he is caught concealing them.”
Id. at 1287.
This sort of
perverse incentive undermines the goals of a bankruptcy proceeding,
which
requires
“the
full
and
honest
disclosure
of
the
debtor
concerning any potential assets that could increase the value of the
estate for the creditors.”
Id. at 1288-89.
However, a debtor’s bad faith does not necessitate a finding
that judicial estoppel applies.
See Parker v. Wendy’s Int’l, Inc.,
365 F.3d 1268 (11th Cir. 2004).
In Parker, the Eleventh Circuit
appeared to back away from the strict ruling in Burnes.
1272.
See id. at
Parker also involved a situation where the defendant invoked
judicial estoppel because the plaintiff failed to disclose the suit
in his previously-filed and administered bankruptcy petition.
The
district court found its case indistinguishable from Burnes and thus
barred the claim.
Id. at 1270.
The Eleventh Circuit, however,
reversed, finding that the trustee, not the debtor, was the true
owner
of
the
claim
and
that
the
trustee
had
made
no
false
representations to the bankruptcy court for which judicial estoppel
should now apply.
Id. at 1273.
Although Parker and Burnes appear to be in conflict, a few
factual distinctions may explain their differing conclusions. First,
8
AO 72A
(Rev.8/82)
in Parker, the debtor moved to reopen her bankruptcy petition before
the defendant had made its motion arguing judicial estoppel. Parker,
365 F.3d at 1270.
That evidence arguably supported a finding that
the non-disclosure was inadvertent and that the reopening was more
about correcting this error than a litigation ploy.
Second, and
perhaps more importantly, in Parker, the trustee, not the debtor,
moved to reopen the bankruptcy proceeding and had already intervened
in the non-bankruptcy action.
Id.
Thus, it was already clear that
the trustee would be pursuing the action, which necessarily suggested
that the undisclosed asset had potential value.
Although these decisions explicitly discuss the reopening of the
bankruptcy proceedings, the bankruptcy court below correctly noted
that these Eleventh Circuit decisions came through appeals on the
issue of judicial estoppel in the undisclosed legal action, not
through an appeal of a bankruptcy court’s decision to reopen its
case.
(Hr’g Tr. [1-9] at 15.)
Thus, albeit informative, these
decisions do not dictate the decision that a bankruptcy court should
make in deciding whether to reopen a case.
See In re Upshur, 317
B.R. 446 (Bankr. N.D. Ga. 2004); In re Rochester, 308 B.R. 596
(Bankr. N.D. Ga. 2004).
B.
Factors To Consider
A bankruptcy case may be reopened to administer assets, accord
relief to the debtor, or for other cause.
9
AO 72A
(Rev.8/82)
11 U.S.C. § 350(b).
The
power afforded to the court to reopen a case is great and the
bankruptcy court contains broad discretion.
B.R. at 600.
In re Rochester, 308
“When considering whether to reopen a bankruptcy case
in the context of an undisclosed cause of action, courts have []
considered the following three interests: 1) the benefit to the
debtor; 2) the prejudice or detriment of the defendant in the pending
litigation; and 3) the benefit to the debtor’s creditors.
601.
Additionally,
courts
look
intentionally committing fraud.”
to
“whether
the
Id. at
debtor
was
In re Upshur, 317 B.R. at 450.
Bankruptcy courts in this district emphasize that when the
motion to reopen is to add an asset, the most important consideration
is the benefit to the creditors.
B.R. at 601.
Id.; see also In re Rochester, 308
Therefore, a court may deny a motion to reopen “where
the chance of any substantial recovery for creditors appears too
remote to make the effort worth the risk.”
27 (B.A.P. 9th
In re Lopez, 283 B.R. 22,
Cir. 2002)(internal quotations omitted).
In this
case, the possibility that the previously-undisclosed asset could
become
available
for
disbursement
likelihood of that outcome.
to
creditors
depends
on
the
The appellant has argued that the
benefit to creditors may be insubstantial, if there is any benefit at
all.
(Hr’g Tr. [1-9] at 6.)
A fuller hearing should flesh out this
fact.
Whether or not the creditors may benefit, the intent of the
10
AO 72A
(Rev.8/82)
debtor remains a factor and the concerns voiced in Burnes and its
progeny4 are still relevant and to be considered.
See
Rochester,
intentions
308
B.R.
at
605
(considering
debtor’s
In
re
underlying his failure to disclose); In re Barger, 279 B.R. 900, 906
(Bankr. N.D. Ga. 2002)(reopening bankruptcy after considering and
finding that debtor’s failure to disclose was not intentional and did
not amount to concealing claim).
When weighing the competing interests, it is evident that most
bankruptcy courts wrestle with a way to ensure that creditors may
reach a potential asset, while also not encouraging debtors to profit
by gaming the system.
See, e.g. In re McMellon, 448 B.R. 887, 895
(S.D. W.Va. 2011)(reversing bankruptcy court’s ruling and denying
debtor’s motion to reopen without prejudice but remanding “with . .
. instruction[s] to consider whether the trustee would pursue this
claim on behalf of the estate” in order to allow trustee to file its
own motion to reopen); In re Upshur, 317 B.R. at 453 (discussing ways
debtor would be prevented from profiting from any alleged fraud even
if bankruptcy was reopened).
The court below similarly articulated
the competing interests, (see Bankr. Order [1-3] at 2), and appears
4
Shortly after Burnes, the Eleventh Circuit decided two similar
cases where it used similar reasoning to support a finding that
judicial estoppel was warranted. See Barger v. City of Cartersville,
348 F.3d 1289 (11th Cir. 2003) and De Leon v. Comcar Indus., Inc.,
321 F.3d 1289 (11th Cir. 2003).
11
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to take an approach similar to the Upshur court.
(See Hr’g Tr. [1-9]
at 16-17.)5
Nevertheless, this Court concludes that, at the least, some lip
service should be paid to the debtor’s intent and that he should, at
a minimum, be forced to appear and, under oath, explain himself.
This was the approach in the case cited by the United States Trustee
at the hearing: In re Rochester.
While recognizing that the issue
before him was whether to reopen the bankruptcy proceeding, and not
whether judicial estoppel applied, Judge Drake found that, in order
to achieve the policy goal of encouraging full disclosure in the
bankruptcy process, he must consider whether the debtor’s failure to
disclose was intentional.
In re Rochester, 308 B.R. at 604-05.
Ultimately, Judge Drake found that the conduct by the debtor in his
case did not warrant denying his motion, id. at 608, and the court
below is similarly free to make such a finding.
If it finds that the
debtor acted in bad faith, such a finding would not require denial of
the motion because “a former debtor’s alleged bad faith is never a
sufficient basis by itself to deny a motion to reopen.”
5
In re Lopez,
This case and the Upshur case differ in one potentially
significant aspect: the underlying legal action in Upshur was a
federal claim residing in this district.
Thus, in Upshur, Judge
Bihary was acutely aware of the standard that would be applied in the
district court (i.e., the Burnes and Parker decisions).
In this
case, the underlying claim resides in state court and Georgia courts’
approach to judicial estoppel could differ from the Eleventh
Circuit’s approach.
12
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283 B.R. at 24 (emphasis added).
The bankruptcy court is also free
to find that any bad faith on the part of the debtor is outweighed by
the consideration of other factors, but a hearing should be held to
establish these facts.
With a complete record, the bankruptcy court
will be better able to explain its reasoning.
The Court recognizes that “the decision whether to reopen should
not become a battleground for the litigation of the underlying
merits,” id. at 28, and that the issue being decided is not judicial
estoppel.6
However, “the success of our bankruptcy laws requires a
debtor’s full and honest disclosure,” and these considerations should
be taken into account when ruling on the debtor’s instant motion.
See Burnes, 291 F.3d at 1288.
CONCLUSION
For these reasons, the Court REVERSES the bankruptcy court’s
decision to reopen the case and REMANDS the case.
The bankruptcy
court should hold an evidentiary hearing to address the factors
discussed above and thereafter issue a written setting out the
court’s
specific
facts
and
legal
conclusions
pertinent
to
its
decision. Any such hearing should permit a finding as to whether the
debtor purposely lied and a finding as to the likelihood that the
6
As noted, in its written order, the bankruptcy court “reserves
ruling on the issue of judicial estoppel” to a later date, but also
recognized that the proper venue for the judicial estoppel decision
will be in the Cobb Superior Court. See Burnes, 291 F.3d at 1282.
13
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Trustee
would
pursue
the
state-law
action,
and
the
Trustee’s
reasoning on that point.
SO ORDERED, this 30th day of September, 2013.
/s/ Julie E. Carnes
JULIE E. CARNES
CHIEF UNITED STATES DISTRICT JUDGE
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