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this opinion should not be published and is not precedent except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
In Re: W Delta Oil
Combined Opinion