Case: 08-11098 Document: 00511235709 Page: 1 Date Filed: 09/16/2010
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
No. 08-11098 September 16, 2010
Lyle W. Cayce
Clerk
DIANE G. REED, Real party in Interest,
Plaintiff - Appellee Cross-Appellant
v.
CITY OF ARLINGTON,
Defendant - Appellant Cross-Appellee
Appeals from the United States District Court
for the Northern District of Texas
Before JONES, Chief Judge, and DeMOSS and CLEMENT, Circuit Judges.
EDITH H. JONES, Chief Judge:
Kim Lubke, formerly an Arlington, Texas, firefighter, obtained a large
verdict against the City of Arlington pursuant to the Family Medical Leave Act
(FMLA). Lubke v. City of Arlington, 455 F.3d 489 (5th Cir. 2006). During the
City’s appeal to this court, Lubke and his wife filed a Chapter 7 bankruptcy case
but omitted the pending $1 million-plus judgment from his sworn statements
and bankruptcy filings. He obtained a discharge of $300,000 in debt, while the
creditors were led to believe his was a “no asset” case. The principal question
raised in this appeal is whether judicial estoppel should prevent not only Lubke
but his bankruptcy trustee from collecting the judgment against the City. Under
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all the facts and circumstances, we conclude that to protect the integrity of
judicial processes, judicial estoppel bars the trustee from collecting the
judgment. The judgment of the district court is REVERSED.
Background
Lubke’s deception spawned a convoluted series of court proceedings.
Initially, Lubke sued the City of Arlington, Texas, alleging, inter alia, that his
firing violated the FMLA. On April 15, 2004, a jury found in Lubke’s favor and
awarded him $395,000 in damages. On May 13, 2004, the district court also
awarded Lubke $300,000 in liquidated damages and approximately $315,000 in
fees and costs, for a total judgment of over $1 million. After post-trial briefing,
the 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
sizeable judgment on his schedule of assets and repeatedly violated bankruptcy
law by omitting the judgment from his sworn statements and filings. He also
omitted several other items of nonexempt property that could have been
available for distribution to his creditors.1 The Lubkes had approximately
$300,000 in mostly credit card debt. The bankruptcy court deemed their case a
“no-asset” case on September 28, 2005. The Trustee, Diane Reed, then closed the
case and the Lubkes were discharged from their debts.
Without knowing of Lubke’s bankruptcy, a panel of this court heard oral
argument on December 7, 2005, and, on June 30, 2006, issued an opinion
affirming the verdict against the City, but remanding to recalculate damages.
1
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.
2
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Lubke, 455 F.3d at 500. On July 31, 2006, the City offered Lubke a Rule 68
judgment for $580,000. When Hurlbut called Lubke to discuss the offer, Lubke
apparently told Hurlbut about his prior bankruptcy for the first time. On
August 3, 2006, Hurlbut informed Reed’s counsel of Lubke’s bankruptcy and, on
August 7, Reed and Lubke agreed to seek reopening of the Chapter 7 case. The
bankruptcy court granted reopening on August 10.2 Reed attempted to accept
the City’s Rule 68 offer. Finally, Reed filed a motion to substitute herself for
Lubke in district court, which the court, although divested of jurisdiction by the
appeal, granted anyway.
After being the last party informed of Lubke’s undisclosed bankruptcy, the
City filed a supplement to its petition for rehearing, which was still pending
before us. The City sought a take-nothing judgment against Lubke, arguing that
he should be judicially estopped from collecting due to his failure to schedule the
judgment in his bankruptcy case. This panel held a special hearing on
September 6, 2006. Meanwhile, on December 5, 2006, the bankruptcy court
revoked Lubke’s discharge on a motion that, by agreement with Reed, did not
contain findings of fraud. On December 19, 2006, we denied the City’s petition
for rehearing of the FMLA judgment but remanded the case for the district court
to recalculate damages and to rule initially on the City’s judicial estoppel claim.
On remand, the district court ratified its earlier order substituting Reed
for Lubke, and Reed has since pursued Lubke’s judgment on behalf of the
bankruptcy estate. After several hearings, the district court made three discrete
rulings—finding a novel remedy for judicial estoppel; reducing damages per our
instructions on remand; and awarding additional attorney’s fees. Because of our
conclusion on judicial estoppel, the parties’ appellate issues on the other two
rulings need not be reached.
2
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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The District Court’s Judicial Estoppel Ruling
The district court applied this court’s three requirements for judicial
estoppel: (1) inconsistent positions, (2) the court’s acceptance of inconsistent
positions, 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.
2004).3 The court found that, although the elements of judicial estoppel were
satisfied regarding Lubke, they were not satisfied regarding Reed, the Trustee,
and she should thus be permitted to pursue Lubke’s judgment. The court then
crafted an unusual remedy. It ordered the City to pay the entire FMLA
judgment to Reed, but, concerned that Lubke would benefit from any remaining
funds not disbursed to creditors, the court ordered any remaining funds returned
to the City.
Despite finding that Lubke’s recovery on his claim must be judicially
estopped, the court balanced the bankruptcy policies of requiring the bankrupt
to disclose all of his assets and of satisfying creditors’ claims to the extent
possible. Because judicial estoppel is an equitable doctrine, the court reasoned,
its novel remedy was justified. The court supported this ruling by pointing out
that after Lubke sought bankruptcy relief, the judgment was no longer his
property, but the estate’s, until administered or abandoned. See 11 U.S.C.
§§ 541, 554. A take-nothing judgment, the court reasoned, would deprive
Lubke’s creditors of their remedy.
The City appeals the judicial estoppel ruling. Reed’s arguments defend the
ruling and the remedy. Both parties avail themselves of our disparate
authorities.
3
“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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The district court's decision regarding judicial estoppel is reviewed for
abuse of discretion. Kane v. Nat’l Union Fire Ins. Co., 535 F.3d 380, 384 (5th Cir.
2008). Erroneous application of the governing legal principles here constitutes
such an abuse.
Judicial estoppel is a doctrine that protects the integrity of court
proceedings by preventing “a party from asserting a claim in a legal proceeding
that 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
Practice, § 134.30, pp. 134-62 (3d ed. 2000)). Because it is an equitable doctrine,
judicial estoppel is not rigidly defined, but the Supreme Court has articulated
three factors that generally inform its application: (1) whether a party's later
position is clearly inconsistent with its position in a prior case; (2) whether the
party succeeded in persuading the first court to accept its position, creating “the
perception that either the first or the second court was misled;”and (3) whether
the party espousing the inconsistency has gained an unfair advantage or
imposed an unfair detriment on an opposing party by that means. Id. at 750-51.
This court's decisions applying judicial estoppel to claims concealed from
bankruptcy 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
debtor's successor from upholding the judgment it obtained by pursuing, outside
of 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)
(cited with approval in New Hampshire v. Maine, 532 U.S. at 750). In the second
case, a debtor misinformed the bankruptcy trustee that her personal injury
claim against Superior Crewboats was prescribed, but she filed suit against that
company while she remained in bankruptcy nonetheless. This court, on
interlocutory appeal in the tort suit, held the debtor judicially estopped from
pursuing the suit. In re Superior Crewboats, 374 F.3d at 332-33. The trustee's
motion to substitute as plaintiff in the tort suit was denied as moot. Id. at 336.
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The third case also involved a tort claim that the debtor failed to reveal to the
trustee, but this court distinguished both In re Coastal Plains and In re Superior
Crewboats and held that despite the presence of intentional concealment and
duplicitous conduct in the bankruptcy court, “equity favors the Trustee.” Kane,
535 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
distinguished In re Coastal Plains are that, in In re Coastal Plains, a corporate
officer's misdeeds detrimentally influenced the corporate reorganization process
as well as depriving creditors of the concealed cause of action. Id. Kane
purports to distinguish In re Superior Crewboats, moreover, based on the
differing procedural consequences between a trustee's abandonment of a claim
(to the debtor) and the non-disclosure of assets that are not administered
although still within the debtor's estate. Id. at 386-87. Whether these
distinctions are correct in principle or on the facts are matters for another
debate. Absent en banc harmonization, we must endeavor to reconcile the
authorities. We are also guided by the principle that one panel of this court
cannot overrule another panel decision. Teague v. City of Flower Mound,
179 F.3d 377, 383 (5th Cir. 1999). Thus, judicial estoppel remains applicable to
litigation claims that are undisclosed in bankruptcy, and the doctrine's essential
ingredients remain the same.
The lowest common denominator appears to lie in a holistic, fact-specific
consideration of each claim of judicial estoppel that arises from litigation claims
undisclosed to a bankruptcy court. In In re Coastal Plains, this court carefully
reviewed the complex business consequences following from the inconsistent
positions that the debtor's CEO deliberately undertook and refused to
“encourage bankruptcy debtors to conceal claims, write off debts, purchase
debtor assets at bargain prices, and then sue on undisclosed claims and possibly
recover windfalls.” In re Coastal Plains, 179 F.3d at 213. In In re Superior
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Crewboats, this court rejected the proposition that the debtor, whose ruse had
been discovered, could re-open the bankruptcy case later on, amend her
schedules to include the claim in litigation, and proceed even after the statute
of limitations had run against the defendant. In re Superior Crewboats, 374 F.3d
at 336. Kane, in contrast, must be viewed as a “simple” case in which “the only
way the Kanes' creditors would be harmed is if judicial estoppel were applied to
bar the Trustee from pursuing the claim against Defendants on behalf of the
estate.” Kane, 535 F.3d at 387.
In this case, the factual basis for applying judicial estoppel was found by
the district court and is not even challenged on appeal by Reed. Thus, it is
undisputed that Lubke repeatedly misrepresented his assets and concealed from
the trustee, the creditors, and the court his million dollar judgment against the
City; that he benefitted from the existence of the judgment and the discharge of
debts he received; and that parties were harmed by the duplicitous conduct. As
a college graduate, Lubke’s actions were far from “inadvertent.” The district
court declined to apply judicial estoppel against Reed, however, on the Kane-like
rationale that Reed had not engaged in inconsistent conduct and “the creditors”
would 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
that Lubke may under no circumstances profit from the judgment while Reed
may continue to represent the estate's interests.
The district court erred in two ways. First, it is not sufficient to
distinguish the debtor’s conduct from that of the trustee in applying judicial
estoppel. Even though Reed herself takes no inconsistent legal positions, she
succeeds to the debtor’s claim with all its attributes, including the potential for
judicial estoppel. For this reason, “splitting the baby” in both the analysis of
fault and the proposed remedy is not an acceptable substitute for thorough
review of the effects of the misconduct. Second, contrary to the district court's
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assumption, this was not a simple “Kane” case. The balance of harms disfavors
permitting this litigation to continue.
The creditors are not materially advantaged if this case proceeds further.
Only about one-sixth of the original creditors (reckoned in amount of claims)
timely refiled when the case was re-opened a year after they were informed there
were no non-exempt assets to distribute. See supra note 2. The untimely filers
have little if any hope of recovery from the bankruptcy estate; the timely filers'
recovery will be contingent on the payment of large priority administrative
expenses caused by the ongoing litigation. True, Lubke agreed to revoke his
discharge, but most creditors will have foregone alternative collection strategies
at this point. The principal remaining bankruptcy “claimants” are Reed herself
and Lubke's trial attorney Roger Hurlbut, who has already received from Lubke
some payment for his services. Reed’s claim has been substantially increased
because of this judicial estoppel litigation. Here, equity does not favor ignoring
Lubke’s misuse of the court system for the primary benefit of attorneys.
It is also possible to conclude that the City, despite being adjudged guilty
of an FMLA violation against Lubke, has been victimized by the non-disclosure
of his bankruptcy. The City is statutorily liable for Lubke's attorney fees, but
this liability stems from the need to vindicate an employee's rights, not to suffer
the consequences of the employee's deception of others. Lubke's concealment of
the judgment in bankruptcy court created numerous complications that have
dramatically increased the fees charged by Reed, and have cost the City and its
taxpayers far more than they would have had to bear because of an ordinary
appeal.
Finally, Lubke, although deprived of a discharge and the proceeds of the
FMLA judgment, has effectively been rid of his creditors. By entangling the
creditors in his web, he has hindered and delayed their efforts to seek
reimbursement of his debts. He has also benefitted from his continued
possession and enjoyment of other unscheduled assets—a retail business, farm
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income, livestock and a mineral lease that Reed evidently chose not to pursue for
the creditors’ benefit while the FMLA judgment loomed large.
Considering all of the costs and consequences that Lubke's inconsistent
positions have engendered, we conclude that equity does not support further
continuation of this litigation and that both Lubke and Reed must be judicially
estopped from pursuing it. The district court abused its discretion by failing to
consider the doctrine from a fact-specific perspective concerning all parties
involved. Not to uphold judicial estoppel in this instance would send debtors the
message that they “ ‘should consider disclosing personal assets only if [they are]
caught concealing them.’ ” In re Superior Crewboats, 374 F.3d at 336 (quoting
Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282, 1288 (11th Cir. 2002)).
The judgment of the district court is REVERSED.
9