No. 89-526
IN THE SUPREME COURT OF THE STATE OF MONTANA
1990
ELWOOD W. CLEASBY d/b/a WESTERN
HERITAGE and MARGE M. CLEASBY,
Plaintiffs and Appellants,
SECURITY FEDERAL SAVINGS BANK, a/k/a
SECURITY FEDERAL SAVINGS AND LOAN
ASSOCIATION, a Banking Corporation,
and JAMES E. HIGGENBOTHAM,
Defendants and Respondents.
APPEAL FROM: District Court of the Thirteenth Judicial District,
In and for the County of Yellowstone
The Honorable Todd G. Baugh, Judge presiding.
COUNSEL OF RECORD:
For Appellants:
Don Vernay, Attorney at Law, Kalispell, Montana
C 3
-2 For Respondents:
Jon T. Drye, Attorney at Law, Billings, Montana
Submitted on briefs: 4/12/90
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7 - Decided: June 28, 1990
F&ed: a_;
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Clerk
Justice John C. Sheehy delivered the Opinion of the Court.
Plaintiffs (Cleasbys) appeal from an order of the Thirteenth
Judicial District, Yellowstone County, granting defendants1 motion
for partial summary judgment. We affirm the District Court's
order.
The Cleasbys raise two issues on appeal:
(1) Whether the Cleasbysl failure to adequately disclose the
existence of claims against Security Federal in the bankruptcy
proceeding estops them from now pursuing those claims.
(2) Whether the Cleasbysl claims are barred by the doctrine
of res judicata.
On June 3, 1988, the Cleasbys filed a complaint against
Security Federal and James Higgenbotham alleging breach of
contract, tortious interference with their business affairs, and
a breach of the implied covenant of good faith and fair dealing.
A review of the complaint shows that most of these allegations were
grounded on events occurring in the spring and summer of 1986,
prior to the Cleasbys filing for bankruptcy under Chapter 11 of the
Bankruptcy Code.
According to the record, the Cleasbys filed their petition for
a Chapter 11 reorganization on October 29, 1986. Attached to the
bankruptcy petition was a list of personal property officially
designated as llSchedule B-2." Part (q) of Schedule B-2 requests
the debtor to list "contingent and unliquidated claims of every
nature including counterclaims of the debtor." In response, the
Cleasbys listed the following:
Potential claim for bad faith or tortious interference
against Security Federal Savings and Loan Association
The Cleasbys stated the value of their potential claim as
llundetermined." Subsequent to the filing of the petition and the
Schedule B-2, the Cleasbys prepared three disclosure statements and
three bankruptcy plans. Each disclosure statement contained a list
of the debtors1 assets, but the Cleasbys failed to mention the
potential claim against Security Federal. The bankruptcy plan also
specifically listed potential sources of revenue which could be
used to pay creditors. Again, the Cleasbysl potential claim
against Security Federal was not included in any of the three
plans. Also the Cleasbys never disclosed, in the disclosure
statements or the schedule of assets, their potential claims
against co-defendant James Higgenbotham.
On October 12, 1987, Security Federal stipulated to the third
bankruptcy plan filed by the Cleasbys. That stipulation provided
that Security Federal's claims against the Cleasbys were I1settled
and satisfied." On October 26, 1987, the bankruptcy entered an
order confirming the Cleasbyls Chapter 11 plan.
As previously stated plaintiffs filed on June 3, 1988, their
complaint against the defendants. Security Federal filed a motion
for summary judgment arguing that the confirmation of the Chapter
11 bankruptcy plan now bars the Cleasbysl claims, which are based
on events that took place prior to the Cleasbysl bankruptcy, under
the doctrines of equitable estoppel, judicial estoppel and res
judicata. The District Court agreed and found the Cleasbys barred
by equitable estoppel and res judicata from bringing their claims
in District Court. The Cleasbys now appeal the District Court
order.
The effect of a debtor's failure to disclose potential
lawsuits in a bankruptcy proceeding has been the subject of limited
judicial review. The courts addressing this issue, however, found
that failure of a debtor to disclose a potential lawsuit in the
bankruptcy proceeding prevents the debtor in possession from later
maintaining that lawsuit. In Re Hoffman (N.D. Iowa 1989), 99 B.R.
929; Oneida Motor Freight, Inc. v. United Jersey Bank (3d Cir.
1988), 848 F.2d 414, cert.denied 109 S.Ct. 495, 102 L.Ed. 532
(1988); In Re Galerie Des Monnaies of Geneva, Ltd. (S.D. N.Y.
1986), 62 B.R. 224. The various legal theories employed by these
courts to reach this conclusion include equitable estoppel,
judicial estoppel, and res judicata.
In each of the above cited decisions, the debtors failed to
provide any notice of claims or potential lawsuits in their
bankruptcy plans. In the present case, the Cleasbys listed the
potential claim against Security Federal in their B-2 schedule of
assets. However, in three subsequent disclosure statements the
Cleasbys did not provide any information regarding their
counterclaim against Security Federal. The District Court held
that the mere listing of a potential lawsuit in the schedule of
assets was not adequate disclosure as required by the bankruptcy
code. Thus, the District Court barred the Cleasbysl claims under
the doctrine of equitable estoppel and res judicata.
I.
Whether the Cleasbysl failure to adequately disclose the existence
of claims against Security Federal in the bankruptcy proceeding
estops them from now pursuing those claims.
The doctrine of equitable estoppel is applied to promote
justice, honesty, fair dealing and to prevent injustice. Keneco
v. Cantrell (1977), 174 Mont. 130, 135, 568 P.2d 1225, 1228. We
have long held that equitable estoppel is founded in equity and
good conscience. Its objective is to prevent a party from taking
an unconscionable advantage of his own wrong while asserting his
strict legal right. In the Matter of Shaw (1980), 189 Mont. 310,
316, 615 P.2d 910, 914; Leno v. General-Shea-Morrison (1955), 128
Mont. 570, 576, 280 P.2d 1086, 1090. The Court in Oneida, above,
strictly applied these equitable principles to a debtor who failed
to disclose the existence of a potential lawsuit in a prior
bankruptcy proceeding. Oneida, 848 F.2d at 418. See also, In Re
Hoffman (N.D. Iowa 1989), 99 B.R. 929.
In Oneida, a former Chapter 11 debtor brought suit against a
bank for breach of contract, misrepresentation, and breach of the
bank's duty of good faith. The plaintiff failed to disclose the
lawsuit in the Chapter 11 proceeding. Because of this failure to
disclose, the Court held that the subsequent lawsuit was barred by
the doctrine of equitable estoppel:
We can assume that revealing the potential action may
also have impacted upon the bank's decision to enter into
the stipulation establishing the extent and validity of
its lien against Oneida [the debtor] and to vote for
confirmation. The practical effect of a successful
prosecution of Oneida's claim would be to require the
bank to make restitution of the amount realized on its
bankruptcy claim, since Oneida's present action calls
into question the bank's right to collect its secured
debt. This would also constitute a successful collateral
attack on the Bankruptcy Court's order confirming the
reorganization plan. In such circumstances, employment
of equitable estoppel is required to preserve the
integrity of the earlier proceeding, particularly where,
as here, the creditors have reasonably acted in reliance
upon the assumed finality and integrity of those
adjudications. (Citations omitted.)
Oneida, 848 F.2d at 418.
Recently, in Mellem v. Kalispell Laundry (1989), 237 Mont.
439, 442, 774 P.2d 390, 392, we listed the following six elements
of equitable estoppel:
1. There must be conduct--acts, language, or silence--
amounting to a representation or a concealment of material facts.
2. These facts must be known to the party estopped at the
time of his said conduct, or at least the circumstances must be
such that knowledge of them is necessarily imputed to him.
3. The truth concerning these facts must be unknown to the
other party claiming the benefit of the estoppel, at the time when
it was acted upon by him.
4. The conduct must be done with the intention, or at least
with the expectation, that it will be acted upon by the other
party, or under such circumstances that it is both natural and
probable that it will be so acted upon. ...
5. The conduct must be relied upon by the other party, and,
thus relying, he must be led to act upon it.
6. He must in fact act upon it in such a manner as to change
his position for the worse. ...
Security Federal contends the facts of Oneida and Hoffman and
the instant case are similar, and thus, this Court should apply
the doctrine of equitable estoppel as set forth in Mellem. The
Cleasbys attempt to distinguish the cases relied on by Security
Federal by arguing that Oneida and Hoffman contained no disclosure
whatsoever of the potential claims to the creditors during the
6
bankruptcy proceeding, whereas, the Cleasbys disclosed their
potential claims against Security Federal in their petition for
bankruptcy. The Cleasbys contend that listing claims with their
schedule of assets provided Security Federal with sufficient notice
to allow it to raise any questions or objections regarding the
claim.
The question presented, then, is whether this initial
disclosure was sufficient to escape a finding of llconcealmentll
as
required by the first element of equitable estoppel. Therefore,
we must review the Bankruptcy Code's requirements of disclosure to
determine whether the Cleasbys concealed their potential claim
against Security Federal.
As the Court in Onieda properly notes, section 521 of the
Bankruptcy Code list the debtor's duties in a bankruptcy case. The
Code requires the debtor to "file a ... schedule of assets and
liabilities . . . and a statement of the debtor's financial affairs
. . ." 11 U.S.C. 5 521(1); Oneida, 848 F.2d at 417.
The Cleasbys complied with 5 521 and listed a ''potential claim
for bad faith or tortious interference against Security Federal
Savings & Loan ~ssociation~~ their schedule of assets.
in The
Cleasbys contend that by listing the claim as an asset, they are
excused from any further disclosure. The duty to list pending
litigation as an asset is, however, only the first of the specific
statutes mandating disclosure.
The second such statute is 11 U.S. C. 5 1125 (b) , which mandates
the filing of a disclosure statement containing "adequate
information." Section 1125(a) defines adequate information as
follows:
5 1125. Postpetition disclosure and solicitation
(a) In this section -
(1) "adequate information" means information of a kind,
and in sufficient detail, as far as is reasonably
practicable in light of the nature and history of the
debtor ...that would enable a hypothetical reasonable
investor typical of holders of claims or interests of the
relevant class to make an informed judgment about the
plan.
The importance of full disclosure is intensified by the
reliance placed upon the disclosure statement by the creditors and
the court. Oneida, 848 F.2d at 417. The duty to provide "adequate
inf~rmation~~ the disclosure statement has been interpreted as
in
requiring an explanation of pending or contemplated litigation.
In Re Malek (Bkrtcy. Mich. 1983), 35 B.R. 443, 444; In Re Route 202
Corp. (Bkrtcy. Penn. 1984), 37 B.R. 367, 375-6. The Court in Malek
required the debtor to set forth the following information,
regarding potential litigation, the disclosure statement:
B. A HISTORY OF THE DEBTOR PRIOR TO FILING.
The Chapter 11 Debtor should describe, in detail, his
activities before filing, including the reasons for filing the
Chapter 11.. . . Litigation issues are to be described in an
objective professional tone, free of any mischaracterization
of the issues to be resolved in such litigation. Where
possible, the Debtor should provide an evaluation of the
probable success of any litigation and its effects on the
Debtor's business or his plans for reorganization under
Chapter 11.
I. LITIGATION
All pending or contemplated litigation of whatever nature
must be described fully, completely and in detail. . .
In Re Malek, 35 B.R. at 444.
The disclosure statement filed by the Cleasbys contained no
reference to the contemplated suit against Security Federal.
Clearly, the listing of potential litigation against Security
Federal, especially a potential counterclaim, would have affected
Security Federal's decision to approve or disapprove of the
Cleasbysl bankruptcy plan. Considering the importance of the
disclosure statement in the bankruptcy proceedings, we are not
swayed by the Cleasbysl contention that merely listing the
potential lawsuit in the schedule of assets was sufficient notice
to preserve their lawsuit, and that they were not required to list
the claim on their disclosure statement. The debtor must provide
"adequate informationv1in order for creditor to make an informed
decision on the bankruptcy plan. In this case, the Cleasbys were
remiss in their duty to provide "adequate informationI1 in their
bankruptcy plan.
The Cleasbys attempt to excuse their failure to include the
claim against Security Federal in the disclosure statement by
arguing that the creditors had a duty to look beyond the disclosure
statement, and reexamine the schedule of assets, thus discovering
the reference to a llpotential
claiml1 against Security Federal. The
Cleasbysl contention is in direct contradiction of the Bankruptcy
Code s mandate to provide "adequate informationt1 the creditors.
to
11 U.S.C. 5 1125(a), requires the debtor to provide "adequate
informationn in its plan. The Code does not require a creditor to
9
sift through the bankruptcy plan to find an inadequately potential
described lawsuit.
The Cleasbys also argue that Security Federal had an
affirmative duty to seek out additional information regarding their
potential claim against Security Federal. Again, this argument
contradicts the rule that the debtor in possession owes a fiduciary
duty to the creditors, particularly with respect to assets of the
bankruptcy estate. Natco Industries v. Federal Ins. Co. (S.D. N.Y.
1987), 69 B.R. 418, 419. The assets of the estate include any
cause of action which has accrued to a debtor as of the filing of
the bankruptcy petition. 11 U.S.C. 541(a). The Cleasbys, as
debtors in possession, had a fiduciary duty to safeguard the assets
of the estate which include causes of action, and had a statutory
obligation to identify fully the claims against Security Federal.
Under the Bankruptcy Code, reorganization is dependent upon the
debtor's full disclosure of all relevant information. The
Bankruptcy Code and the courts have placed the obligation to ensure
full disclosure on the debtor in possession, not the creditors.
Our conclusion that the Cleasbys failed adequately to disclose
the existence of a potential lawsuit in their disclosure statement
establishes that the first element of equitable estoppel-
concealment-has been met in this case. The second element of
equitable estoppel, that the facts must be known to the party
estopped, is more easily met. The fact that the Cleasbys listed
the potential lawsuit in the schedule of assets reveals that
requisite knowledge was present. The third element, that the truth
concerning these facts must be unknown to the party claiming
estoppel, is established through the absence of disclosure in the
bankruptcy proceeding. As previously noted, the disclosure
statement is the method to provide creditors such as Security
Federal with pertinent knowledge. That disclosure was not made,
and there is no allegation that any other means was provided by the
Cleasbys.
The fourth element of equitable estoppel requires that the
conduct must be done with the intention, or at least the
expectation, that it will be acted upon by the other party. We
find this element is satisfied by the very purpose of the
disclosure statement, which is to provide creditors with the
necessary information to approve or disapprove the bankruptcy plan.
The fifth element is that the conduct must be relied upon by the
other party. This requirement, also, is met. Security Federal
relied upon the Cleasbys' bankruptcy plan when Security Federal
agreed to settle all claims against the Cleasbys. Lastly, it must
be shown that the party seeking estoppel changed its position to
its detriment. In this case, Security Federal agreed to a
restructuring of its debt which provided more beneficial terms to
the Cleasbys. By rewriting the debt, Security Federal changed its
position to its detriment.
Each of the elements of equitable estoppel is present in this
case. Therefore, we affirm the District Court's conclusion that
the Cleasbys are now estopped from bringing those claims in
District Court.
Whether the Cleasbys' claim is barred by the doctrine of res
j udicata.
We need not address the issues of res judicata, since we have
already found that the Cleasbys are barred from bringing their
District Court claims through equitable estoppel.
Accordingly, we affirm the District Court's order that the
Cleasbys are equitably estopped from pursuing their claims in
District Court.
Justice 4
Justice Diane G. B a r z did not participate.