The Fourth Circuit widened an existing split of circuits by holding that the doctrine of judicial estoppel does not include a presumption of bad faith. In the same opinion, the appeals court said that a debtor’s assertion of a claim that might belong to the estate implicates “real party in interest,” not Article III standing.
The August 12 opinion by Circuit Judge Pamela Harris is debtor-friendly in both respects. Nominated by President Obama, she was confirmed by a vote of 50-43 after the Senate in substance revoked the filibuster rule for judicial nominations.
The Facts
The facts were typical for a case involving judicial estoppel, although perhaps more favorable to the debtor than most. In substance, the debtor had settled a claim against third parties before bankruptcy. In advance of her chapter 7 petition, the debtor discovered facts that might have led her to believe that she could rescind the settlement and seek additional damages from the third parties. Initially, however, she did not list the potential claims in her schedules.
After receiving her discharge, the debtor filed suit in district court against three defendants who had allegedly been released by the pre-bankruptcy settlement. After the defendants moved to dismiss, the debtor reopened her case and amended the schedules to include her claims. The trustee abandoned the claims and closed the chapter 7 case a second time.
Although the trustee had abandoned the claims, the district court dismissed the suit for two reasons. First, the district court said the debtor lacked Article III standing when she filed the suit. Second, the presumption of bad faith required dismissal under the doctrine of judicial estoppel.
In the Fourth Circuit, Judge Harris reversed on both grounds and remanded for the district court to reconsider judicial estoppel.
Standing
Judge Harris said that the district court had “conflated” Article III standing with “real party in interest.” The district judge had worked from the proposition that standing is determined on the day when the suit is filed and cannot be cured later.
Right off the bat, Judge Harris said that the debtor satisfied the requisites of Article III standing because she alleged a “distinct injury” at the hands of the defendants. The real question, she said, was “real party in interest,” governed by Federal Rule 17.
Rule 17 is “clear,” Judge Harris said, that the facts on the date of filing do not control. Rather, Rule 17(a)(3) allows the proper party to join or be substituted. Consequently, the trustee’s abandonment of the claims made the debtor “the real party in interest, with the right to bring the claims on her own.”
Judicial Estoppel
Moving on to judicial estoppel, Judge Harris described the split of circuits. The Fifth and Tenth Circuits, she said, hold that judicial estoppel in the bankruptcy context includes a presumption of bad faith by the debtor. As a result, she said, the only question is “knowledge” of the unscheduled claims, because “debtors always have a motive to conceal.” In the case at hand, the debtor undoubtedly had knowledge of facts before filing that might have allowed her to rescind the settlement and release.
Employing no presumption, the Eleventh and Ninth Circuits sit on the opposite sides of the fence. See Slater v. U.S. Steel Corp., 871 F.3d 1174 (11th Cir. 2017) (en banc); and Ah Quin v. City of Kauai Dep’t of Transp., 733 F.3d 267 (9th Cir. 2013). For ABI’s discussion of the Eleventh Circuit’s en banc opinion, click here.
Judge Harris said that the two circuits rejected the presumption “in thoroughly reasoned opinions.” She said that the presumption of bad faith “runs the risk of producing a decidedly non-equitable result, counter to the very underpinnings of judicial estoppel.”
Judge Harris remanded the case for the district judge to “consider all relevant factors and take account of all facts and circumstances in determining whether it is appropriate to invoke judicial estoppel against [the debtor] without reliance on a presumption of bad faith.”
The Fourth Circuit widened an existing split of circuits by holding that the doctrine of judicial estoppel does not include a presumption of bad faith. In the same opinion, the appeals court said that a debtor’s assertion of a claim that might belong to the estate implicates “real party in interest,” not Article III standing.
The August 12 opinion by Circuit Judge Pamela Harris is debtor-friendly in both respects. Nominated by President Obama, she was confirmed by a vote of 50-43 after the Senate in substance revoked the filibuster rule for judicial nominations.
The Facts
The facts were typical for a case involving judicial estoppel, although perhaps more favorable to the debtor than most. In substance, the debtor had settled a claim against third parties before bankruptcy. In advance of her chapter 7 petition, the debtor discovered facts that might have led her to believe that she could rescind the settlement and seek additional damages from the third parties. Initially, however, she did not list the potential claims in her schedules.
After receiving her discharge, the debtor filed suit in district court against three defendants who had allegedly been released by the pre-bankruptcy settlement. After the defendants moved to dismiss, the debtor reopened her case and amended the schedules to include her claims. The trustee abandoned the claims and closed the chapter 7 case a second time.
Although the trustee had abandoned the claims, the district court dismissed the suit for two reasons. First, the district court said the debtor lacked Article III standing when she filed the suit. Second, the presumption of bad faith required dismissal under the doctrine of judicial estoppel.
In the Fourth Circuit, Judge Harris reversed on both grounds and remanded for the district court to reconsider judicial estoppel.