Opinion
CIVIL ACTION NO. 02-161, SECTION "L" (1)
January 14, 2003
ORDER REASONS
Before the Court are the following motions: (1) the Motion to Dismiss of Petitioner Superior Crewboats, Inc. ("Superior"); and (2) Claimant Arthur Hudspeath's ("Hudspeath") Motion for Leave to File Third Supplemental and Amending Complaint naming Hudspeath's bankruptcy trustee as the proper party to this lawsuit. For the following reasons, the Court DENIES the Petitioner's Motion to Dismiss and GRANTS the Claimant's Motion for Leave to File Third Supplemental and Amending Complaint.
I. BACKGROUND
The facts giving rise to this litigation began on August 26, 1999, when Hudspeath was allegedly injured while disembarking the M/V STACEY D, a vessel owned and operated by Superior in Fourchon, Louisiana. Hudspeath was returning from his duties offshore at the time of the accident. Hudspeath took no action as a result of his injuries until January 28, 2001, when he filed a personal injury action in Civil District Court for Orleans Parish against Superior for the injuries received on the STACEY D. On January 18, 2002, Superior filed a petition for exoneration from or limitation of liability for all claims arising out of the accident on August 26, 1999. In connection with the limitation proceeding, the Court issued a monition staying the state court action pending the outcome of the limitation proceeding. Ten days later, Mr. Hudspeath, in his own name, filed a claim in the limitation proceeding.
Other events also transpired during the time in which these claims were filed that have a direct bearing on the motions before this Court. On August 28, 2001, more than one year after Hudspeath's alleged accident but before filing suit in state court, Hudspeath and his wife filed for bankruptcy in the Eastern District of Louisiana under Chapter 13 of the Bankruptcy Code. At the time of their filing, the Hudspeaths declared on a bankruptcy claim form that they had no unliquidated claims. The following month, the Bankruptcy Court confirmed the Chapter 13 plan and ordered the debtors to provide the trustee with a report on the status of any lawsuit to which they may be a party. Such notice was required to be updated every six months.
In May, 2001, the bankruptcy proceeding was converted from Chapter 13 to Chapter 7, upon motion of the Hudspeaths. Thereafter, in July, 2001, the Hudspeaths together with their bankruptcy attorney met with their Chapter 7 Trustee, Willbur Babin. The minutes of that meeting, as well as the transcript of the meeting (both of which are in the record of this case), reveal that the Hudspeaths and Babin discussed the pending action against Superior. The Hudspeaths told Babin that Hudspeath was injured while stepping off a vessel and suit was filed, but, because it was filed over a year from the accident, the claim was prescribed when they filed it. As a result of that representation in which the trustee and Hudspeath's bankruptcy attorney apparently agreed, the trustee listed the lawsuit as property he intended to abandon; and in due course, he did so, describing it as "being unworthy of administration; and, otherwise, as being a burden to the estate to pursue." The transcript also reveals that Babin instructed the Hudspeaths to amend their schedules to reflect the lawsuit; however, this was not done. Finally, on September 19, 2001, the Bankruptcy Court ordered Mr. and Mrs. Hudspeath discharged from bankruptcy as having "no assets." An amended schedule of assets was filed, but the pending action against Superior was not included. The bankruptcy proceeding was then closed on October 1, 2001.
The basis for the apparent confusion is the differing prescriptive periods that may have been applicable to Hudspeath's claims. If Louisiana law governed, the tort action would prescribe in one year. This is allegedly the view taken by the Hudspeaths and the trustee in their meeting. However, the general maritime law governs this case, so the claim did not prescribe for three years from the date of the accident; thus, this lawsuit was timely filed and clearly should have been listed on the schedule of assets form in the bankruptcy proceeding.
During discovery of the instant litigation, counsel for Superior learned of the Hudspeaths' bankruptcy petition and notified the trustee, who thereafter sought to reopen the bankruptcy to include the pending suit as an unliquidated claim. Finally, on September 18, 2002, the Hudspeaths filed an amended Chapter 7 asset schedule listing the claim in the limitation proceeding as property of the estate; it was the first time the schedules included any mention of the claim against Superior.
Superior then moved to dismiss Hudspeath's claims asserting that the proper plaintiff in the matter was the Trustee, Babin, acting on behalf of the bankruptcy estate and not Hudspeath in his own name. Hudspeath countered with a motion for leave to amend his complaint to substitute Babin as plaintiff; he further opposed Superior's motion arguing that if leave to amend was granted, Superior's motion would be rendered moot. In considering these motions, the Court became concerned with additional issues pertaining to standing and relation back under Rule 17 and ordered the parties to file supplemental briefs addressing these issues. The matter was set for oral arguments on November 27, 2002.
Although issues relating to standing and substitution of parties were discussed in these briefs and with the Court, it became apparent to the Court and counsel during the course of oral arguments that the only issue for resolution in these motions is the application of judicial estoppel to Hudspeath's claims. In its supplemental brief, Superior argues that the claims should be dismissed and the Hudspeaths should be judicially estopped from proceeding with the instant claim. Superior argues that judicial estoppel is appropriate because the Hudspeaths knew of the existence of their claim at the time they filed for bankruptcy but failed to disclose the existence of such claim in a schedule of assets. Superior notes that Mrs. Hudspeath is a paralegal who works with the attorney who filed the personal injury suit for her husband as well as the claim in this limitation proceeding. Superior argues that the bankruptcy court relied on these representations and granted the Hudspeaths a "no asset" discharge. Thus, Hudspeath cannot now come into this Court and argue that they possess a valid and enforceable claim against Superior. Hudspeath opposes the motion arguing that he was in good faith at all times and acted properly in notifying the trustee of the claims despite the Hudspeath's failure to amend his and his wife's schedules. Thus, the Court must determine whether the absence of the present claim on the schedule is sufficient to judicially estop the Hudspeaths from proceeding with their claim. After reviewing the briefs and having the benefit of oral arguments from the parties, the Court is now ready to rule on these motions.
II. JUDICIAL ESTOPPEL
A. Controlling principles of Judicial Estoppel
The Court begins its analysis by discussing the facts and holding of the leading case on the application of judicial estoppel to bankruptcy: the Fifth Circuit's decision in In re Coastal Plains, Inc., 179 F.3d 197 (5th Cir. 1999). The debtor, Coastal Plains, prior to filing for bankruptcy, asked its creditors to agree to a return of inventory it had sold Coastal on credit. In exchange, the creditors would pay Coastal 50% of the cost and write off Coastal's debt. Browning, one of Coastal's unsecured creditors, agreed to the plan and began exchanging inventory. However, a disagreement arose, and Browning failed to make its payments by the set date. Thereafter, Coastal demanded a return of the inventory.
At this time, Coastal filed its bankruptcy petition. It then filed suit against Browning seeking an order enjoining it from disposing of the inventory and compelling its return to Coastal. Coastal also claimed damages for conversion, interference with contractual/ business relationships, and punitive damages. The bankruptcy court then found that Browning had violated the automatic stay and ordered the inventory returned but did not address the other claims for damages. Thereafter, Coastal's CEO executed a bankruptcy schedule that did not disclose his personal belief that the damages claims against Browning were worth $10 million.
Coastal's secured creditor then entered into an agreement with Coastal to foreclose on its assets and auction them off based on the belief that the assets were insufficient to repay Coastal's debts. No mention of the claim against Browning was included. The secured creditor then sold Coastal's assets, this time expressly including the claim against Browning in the list, to a company formed by Coastal's former CEO. The successor company then re-instituted the suit against Browning, amending its complaint. The matter went to trial with Coastal receiving more than $18 million in damages for breach of contract, conversion, tortious interference, and punitive damages. Browning appealed, contending that Coastal was judicially estopped form proceeding with its claims.
The Fifth Circuit held that a finding of judicial estoppel would prevent a party from asserting inconsistent positions in his pleadings as a means of obtaining an unfair advantage. Id. at 205-06. The court determined that two elements must be met for judicial estoppel to apply: (1) it may be applied only where the position in the legal proceeding of the party to be estopped is clearly inconsistent with its position in a previous legal proceeding; and (2) that party must have convinced the court to accept that previous position. Id. at 206.
In applying this test, the court noted first that Coastal had an affirmative to duty to disclose all assets, including the claim against Browning. Id. at 207. The Court found that since Coastal's CEO believed the claims against Browning, after return of the inventory, were potentially worth millions of dollars, he should have disclosed it because his silence led Browning, the other creditors, and the bankruptcy court to believe the claims were worthless. Further, the court found that this failure to disclose the estimated value of the claim was relied on by the bankruptcy court when it permitted the foreclosure on inadequate intangible assets.
Coastal continued to maintain that judicial estoppel should not apply because its actions were neither intentional nor inadvertent, but the Fifth Circuit rejected this view. It held: "Our review of the jurisprudence convinces us that, in considering judicial estoppel for bankruptcy cases, the debtor's failure to satisfy its statutory duty is `inadvertent' only when, in general, the debtor either lacks knowledge of the undisclosed claims or has no motive for their concealment." Id. at 210. The Court then found that Coastal's CEO knew the true value of the claim, and had a motive for concealing them because the unsecured creditors may have opposed the lifting of the bankruptcy stay had it known of the value of the claim. Accordingly, the Court reversed the verdict and rendered judgment for Browning. Id. at 202.
B. Applying Coastal Plains to Hudspeath's claims
Applying Coastal Plains to the case before this Court, Superior Crewboats argues first that the inconsistent positions prong is satisfied because Mr. Hudspeath was aware of his claim at the time he filed his petition, having filed suit in CDC a mere five months after his bankruptcy petition. Superior further argues that Mr. Hudspeath had a motive to conceal the claim because it would have potentially increased the value of his estate, and any recovery would go to his creditors. As support for this contention, Superior relies on Mr. Hudspeath's claim in this limitation proceeding, filed after the bankruptcy petition and conversion to Chapter 7, in which he seeks general damages of $2.5 million. Superior further suggests that Mrs. Hudspeath, as a paralegal, was aware of the vitality of the claim. As for the judicial acceptance prong, Superior points out that the court discharged Mr. Hudspeath as having "no assets" after relying on his schedules and statements, and that he had no assets and outstanding debts of $20,000.
Superior refers this Court to the Eleventh Circuit's decision in Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282 (5th Cir. 2002), a case it claims is very similar, factually, to the Hudspeath's claims. The debtor in Burnes filed for Chapter 13 bankruptcy and did not report any contingent or unliquidated claims at that point. Six months later, he filed discrimination charges with the EEOC, and later filed suit in the district court. He never amended his schedule of claims. Almost 10 months later, he converted his bankruptcy petition to Chapter 7 but still did not report any the pending litigation. It was undisputed that the bankruptcy court and the trustee were unaware of the pending discrimination suit. The plaintiff/ debtor then received a "no asset" complete discharge of his debts.
The defendants in the discrimination suit then filed a motion for summary judgment on all of his claims, asserting that the plaintiff was judicially estopped from pursuing his claim because he failed to notify the bankruptcy court of his actions. The district court granted the motion, and the plaintiff appealed. The Eleventh Circuit relied on the Fifth Circuit's decision in Coastal Plains and affirmed the district court as to the plaintiff's claims for monetary relief. Id. at 1283. The court found that the plaintiff was aware of his claim during the pendency of the bankruptcy petition as evidenced by his filing the discrimination suit. Further, the court found that the plaintiff had a motive in concealing the claim because his creditors would have had an interest in any monetary damages the plaintiff received if he was successful. Id. at 1288. Specifically, the court found that "[a]llowing [the plaintiff] to 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. Superior contends that this language requires that the case be dismissed.
In Coastal and Burnes, the debtors made no mention was made of a claim or lawsuit to the bankruptcy courts until confronted by opposing counsel in the lawsuits. In the present case, the debtor, Hudspeath, admitted having a claim and filing a suit to the trustee only about six months after filing the suit and only a couple of months after Hudspeath converted to Chapter 7 and lost standing to pursue his claim in his own name. In addition, the Hudspeaths mentioned the claim resulted from injuries sustained while disembarking from a vessel. They told this to the attorney-trustee in the presence of their bankruptcy attorney both of whom apparently joined in the erroneous conclusion that the suit was governed by Louisiana law and was prescribed. To dismiss the current lawsuit on the basis of judicial estoppel under these circumstances is not appropriate or required by Coastal or Barnes.
Furthermore, parts of the Hudspeaths' bankruptcy court record, which were made a part of the record in this limitation proceeding, indicate that the creditors were aware of the existence of the state court action arising out of Mr. Hudspeath's injuries. Following the trustee meeting, the trustee filed with the bankruptcy court his minutes of that meeting on July 13, 2001. The bottom of that page requires the trustee to list any claims or property the trustee intends to abandon. The trustee wrote the following on one of the lines: "Int. in lawsuit — prescribed in LA." On July 18, 2001, the trustee then filed with the bankruptcy court a formal Petition of Disclaimer and Abandonment in which he listed the property he intended to abandon; included in this list was the following notation: "Interest in lawsuit, as being unworthy of administration; and, otherwise, as being a burden to the estate to pursue." The following day, the bankruptcy court signed an order confirming and approving the trustee's abandonment of certain estate property, including the lawsuit, using the same language as indicated above.
There is no dispute that the lawsuit to which these documents refer is the state court action that was stayed when the instant limitation proceeding was commenced. Therefore, the creditors and the bankruptcy court were on notice of the existence of the lawsuit. Unlike Coastal or Burnes, it cannot be argued that there was insufficient awareness on the part of the creditor or the court about the existence of a claim. Both had notice of the lawsuit, albeit from noting the trustee's abandonment of the claims and not from the debtors' schedules. Nonetheless, the Court finds that is enough to preclude application of judicial estoppel as a matter of law.
The scenario of In re Barger, 279 B.R. 900 (Bankr. N.D. Ga. 2002), is more relevant to the present case than Coastal or Burnes. The debtor in Barger filed suit against her former employer for wrongful discharge shortly before filing a petition for Chapter 7 bankruptcy. The litigation was not listed on her schedule of assets. However, at the trustee meeting, the debtor was asked about the lawsuit and told the trustee that she was not expecting a huge settlement and was seeking return to employment. Following the meeting, her schedules were never amended to reflect the bankruptcy as a result of her attorney's oversight; she was subsequently discharged by the bankruptcy court. Her employer then sought dismissal of the suit and opposed re-opening of the bankruptcy on the grounds that the debtor should be judicially estopped from further proceedings.
The court, relying on the holding of Burnes but carefully distinguishing it on the facts, refused to bar the suit finding that the trustee was aware of the claims, and that the debtor had not sought to mislead him. The court found important the difference between the mere failure to schedule the claim and the intent to conceal the claim as well as no evidence of an intent to deceive. Id. at 906. Further, the Barger court found that the voluntary admission to the trustee had the same effect as an amendment of their schedules. Id. The court also concluded that even if the debtor had amended her schedule, the result would have been the same because the trustee would have abandoned the claim. Id. The court then concluded that the trustee should have investigated the claim further, beyond relying only on the debtor's statements. The court said:
It is the responsibility of a Chapter 7 trustee to investigate a potential claim once it is disclosed and to pursue it if there is benefit to the estate in doing so. A bankruptcy trustee should not rely on an individual debtor's ability to determine what relief a debtor is entitled to in litigation any more than competent litigation counsel should accept a client's understanding of the law and facts in framing the client's demand for relief in the litigation.Id. at 906.
In this case, the trustee clearly knew that Hudspeath's accident had occurred over navigable waters. At the very least, he could have inquired into whether the Louisiana prescriptive period or the general maritime law statute of limitations would have governed the action. He did neither. He merely relied on the Hudspeaths' statements to him. Had he made an inquiry, he may have concluded that the claim was worth pursuing. Further, the Court finds, in line with the Barger court, that simply scheduling the claim, without more, would not have changed the result. The trustee had still determined that he was going to abandon the property because he believed that the matter had prescribed. Thus, scheduling the asset would not have affected the creditor once the claim was abandoned. The mere absence of a technical, although important, step should not be cause for dismissal. See Tschirn v. Secor Bank, 123 B.R. 215, 217-18 (E.D. La. 1991) (holding that the failure to amend the debtor's schedule was not cause to revoke abandonment where the trustee was aware of the nature of the plaintiff's claim and made an informed decision). Here, the trustee failed to make an informed decision, but it is his fault that caused the failure to act, not the Hudspeath' fault. Finally, the creditors and the bankruptcy court were aware of the existence of the state court action, as evidenced by the trustee's filings in the bankruptcy court, and that court's own order. Therefore, the Court cannot conclude at this time that the Hudspeaths took inconsistent positions before the bankruptcy court and this Court, and it will not penalize the Hudspeaths. of course, if the facts disclose that there was fraud or specific intent on the part of the Hudspeaths to mislead the trustee, they may well be estopped. But this is a question of fact to be determined at trial and not a matter of law to be decided summarily.
III. CONCLUSION
In conclusion, the Court finds that the Hudspeaths' failure to amend their bankruptcy schedules is not enough to judicially estop them from proceeding with the instant litigation. Accordingly, IT IS ORDERED that Superior's Motion to Dismiss is DENIED, and Claimant's Motion for Leave to File a Third Supplemental and Amending Complaint is GRANTED.