A district judge in Dallas split with the Eleventh Circuit on a judicial estoppel issue. The question is: Does judicial estoppel apply to a claim that arose during a chapter 13 case that was later converted to chapter 7?
Reaching a different result from the Eleventh Circuit in a somewhat similar case and denying a motion to dismiss, District Judge David C. Godbey in Dallas held that judicial estoppel does not apply so long as conversion was in good faith.
The consumer debtor filed a chapter 13 petition. A few months later, she was fired by her employer. Due to the loss of income from losing her job, she converted the case to chapter 7 and later received a discharge.
Before conversion, the debtor spoke with three employment lawyers who all declined to help her or said she had no claim. Just before the chapter 7 discharge, she found an employment lawyer who filed a claim with the Equal Employment Opportunity Commission. A few months later, the same lawyer filed the lawsuit in Judge Godbey’s court.
After the employer raised the judicial estoppel defense, the bankrupt reopened her bankruptcy case and filed amended schedules to list the claim.
Given the continuing duty in chapter 13 to disclose newly obtained assets, judicial estoppel would have resulted in dismissal of the suit were the debtor still in chapter 13. The result was different because the case was converted, according to Judge Godbey.
Upon conversion, the assets of the debtor’s chapter 7 estate no longer included after-acquired property. In a converted case, assets of the chapter 7 estate are only those existing on the petition date, under Section 348(f)(1)(A). Consequently, the discrimination claim was not property of the chapter 7 estate because the claim arose after the chapter 13 filing.
Since the discrimination claim belonged to the debtor personally after conversion, “she did not have an affirmative duty to disclose it,” Judge Godbey said in his April 25 opinion. Judicial estoppel did not apply, and the motion to dismiss was denied.
As contrary authority, Judge Godbey cited the Eleventh Circuit’s 2002 decision in Burnes v. Pemco Aeroplex Inc., which applied estoppel to a claim that arose during chapter 13 in a case later converted to chapter 7. Although not mentioned by Judge Godbey, Burnes could be distinguished on the facts, because the debtor in that case pursued the undisclosed claim while he was in chapter 13.
Judge Godbey also declined to apply judicial estoppel because, while the debtor was in chapter 13, the bankruptcy court “never had an opportunity to accept her representation that she lacked a potential employment discrimination claim.”
Judicial estoppel also could have been held inapplicable under another theory not discussed in the opinion. Because the debtor consulted with counsel while she was in chapter 13 and was told she had no claim, the failure to amend her schedules could have been found excusable.