Bankruptcy - Hon. James D. Walker, Jr. and Amber Nickell

• Publication year: 2004

Bankruptcyby Hon. James D. Walker, Jr.^* and Amber Nickell^**

Since last year's article, the courts in the Eleventh Circuit have issued-with a few exceptions-mostly routine bankruptcy opinions. The United States Supreme Court, however, has been very busy, deciding six bankruptcy-related cases. It makes sense to begin with one of the most anticipated of those opinions.

I. Sovereign Immunity

The Supreme Court held in Tennessee Student Assistance Corp. v. Hood¹ that a student loan dischargeability proceeding under Sec. 523(a)(8) of the Bankruptcy Code² is not a suit within the meaning of the Eleventh Amendment³ and is, thus, not subject to a defense of sovereign immunity.⁴ Rather, it comes within the scope of the bankruptcy court's in rem jurisdiction.⁵ In so holding, the Court avoided the question of whether Congress has the power to abrogate state sovereign immunity in bankruptcy.⁶

Writing for a 7-2 majority, Chief Justice Rehnquist explained, "Bankruptcy Courts have exclusive jurisdiction over a debtor's property, wherever located, and over the estate."⁷ In a footnote, he indicated that there may be some instances in which the court's in rem jurisdiction intrudes upon state sovereignty.⁸ However, in the case of student loan dischargeability, "[a] debtor does not seek monetary damages or any affirmative relief from a State by seeking to discharge a debt; nor does he subject an unwilling State to a coercive judicial process."⁹ Therefore, the state's sovereignty is not offended.¹⁰

The dissent, after first asserting that "Congress lacks authority to abrogate state sovereign immunity under the Bankruptcy Clause,"¹¹ argued that while the in rem exception to sovereign immunity may be appropriate for matters initiated by motion, it should not apply to adversary proceedings, which are similar to civil litigation.¹² Unlike motion practice, adversary proceeds require, among other things, a complaint, service of process, and an answer.¹³ It is a coercive process subject to the Eleventh Amendment because "[i]n order to preserve its rights, the State is compelled either to subject itself to the Bankruptcy Court's jurisdiction or to forfeit its rights."¹⁴

The majority countered that the dissent is elevating form over substance.¹⁵ The granting of a discharge is an in rem proceeding, and the requirement of service of process does not change its essential nature, nor does it effect an exercise of personal jurisdiction over the state.¹⁶

While Hood represents a victory for the debtor, its scope is uncertain. For example, the majority opinion is unclear as to the extent of the bankruptcy court's in rem jurisdiction. After claiming that it covers all estate property, "wherever located,"¹⁷ the majority later suggests that a trustee's effort to recover estate property through a preference action is not within the court's in rem jurisdiction.¹⁸ Time will tell what, if any, new issues Hood creates. But, one old issue remains in play: that is the constitutionality of Sec. 106(a),¹⁹ which purports to abrogate state sovereign immunity.²⁰

II. Procedure

A. Deadlines

In a unanimous opinion, the United States Supreme Court in Kontrick v. Ryan²¹ decided that the deadline provided by Federal Rule of Bankruptcy Procedure 4004²² for filing a complaint objecting to discharge is not jurisdictional in nature.²³ Rather, it is merely a claim-processing rule.²⁴ Thus, a debtor cannot challenge the timeliness of the complaint after the adversary proceeding has been decided on the merits.²⁵

In Kontrick one count in the creditor's complaint objecting to discharge was filed after the filing deadline, but the debtor did not raise untimeliness of the complaint until after the bankruptcy court granted summary judgment for the creditor.²⁶ The debtor argued that, like subject matter jurisdiction, untimeliness of a complaint objecting to discharge could be raised "any time in the proceedings, even initially on appeal or certiorari."²⁷ The Court rejected this argument, distinguishing between subject matter jurisdiction, which "cannot be expanded to account for the parties' litigation conduct," and a claim-processing rule, which can "be forfeited if the party asserting the rule waits too long to raise the point."²⁸ The Court held that the Rule 4004 deadline created an affirmative defense.²⁹ "Ordinarily, under the Bankruptcy Rules as under the Civil Rules, a defense is lost if it is not included in the answer or amended answer . . . . Only lack of subject-matter jurisdiction is preserved post-trial."³⁰ Thus, because the filing deadline was not jurisdictional in nature, untimeliness of filing could not be raised after a judgment on the merits.³¹

The Court specifically left open the question of whether equitable doctrines, such as equitable tolling, may apply to the Rule 4004 deadline, but noted a split on the issue among the lower courts.³² In other words, if the debtor does raise untimeliness of the complaint in his answer, can the creditor rely on equity to save his complaint? A Georgia bankruptcy court said yes, holding that the deadline to file a complaint to determine dischargeability of a debt was in the nature of a statute of limitations and, thus, was subject to equitable tolling.³³

B. Judicial Estoppel

Judicial estoppel prevents a litigant from asserting a position that is inconsistent with one he successfully asserted in a prior judicial proceeding. Applying judicial estoppel in state courts based on a debtor's action in bankruptcy courts was fertile ground for legal developments in 2003. The Supreme Court of Alabama weighed in and transformed its test for judicial estoppel. In Ex parte First Alabama Bank,³⁴ plaintiff sued the bank for allowing his wife to remove $500,000 from a safe deposit box. The bank raised judicial estoppel as a defense because in a prior bankruptcy proceeding, plaintiff had claimed that the money did not exist.³⁵ Under existing Alabama law, judicial estoppel required, among other things, that "'the parties and questions [in both judicial proceedings] be the same'" (privity) and that "'the party claiming estoppel [was] misled and . . . changed his position.'"³⁶ In this case, the bank lacked both privity and reliance; thus, judicial estoppel should have been unavailable.³⁷ However, the court decided to reconsider its test because "[t]he conscience and feeling of justice of the overwhelming majority whose obedience is required to a rule that would permit [the debtor] to play fast and loose with the court would be, quite simply, shocked."³⁸ Because judicial estoppel "protects the integrity of the judicial system, not the litigants," reliance and privity "should not be essential elements of the doctrine of judicial estoppel."³⁹ Consequently, the court adopted a new test for judicial estoppel, relying on the standards set forth by the Supreme Court in New Hampshire v. Maine:⁴⁰

(1) "a party's later position must be 'clearly inconsistent' with its earlier position;" (2) the party must have been successful in the prior proceeding so that "judicial acceptance of an inconsistent position in a later proceeding would create 'the perception that either the first or second court was misled;'" and (3) the party seeking to assert an inconsistent position must "derive an unfair advantage or impose an unfair detriment on the opposing party if not estopped."⁴¹

The Eleventh Circuit Court of Appeals also added to its catalog of bankruptcy-related judicial estoppel cases. Barger v. Cartersville⁴² appears to deal a blow to debtors' efforts to avoid judicial estoppel by adding a previously undisclosed cause of action to their bankruptcy schedules.⁴³ In Barger the debtor was pursuing an employment discrimination claim for damages and reinstatement of employment when she filed a no-asset Chapter 7 case. She did not list the claim on her bankruptcy schedules. At the meeting of creditors, she told her attorney and the trustee about the claim, but indicated to the trustee that she was only seeking injunctive relief. During discovery in the discrimination case, she failed to disclose her bankruptcy when asked whether she was involved in any legal proceedings. The debtor was ultimately granted a discharge, and her creditors received no distribution. The defendant in the discrimination case learned of the discharge and raised judicial estoppel as a defense. In response, the debtor reopened her bankruptcy case and added the employment discrimination claim to her schedules. Nevertheless, her discrimination case was dismissed based on judicial estoppel and she appealed that decision.⁴⁴ The Eleventh Circuit affirmed.⁴⁵

Under the Eleventh Circuit's test for judicial estoppel, "a party's allegedly inconsistent positions must have been 'made under oath in a prior proceeding'" and "the 'inconsistencies must be shown to have been calculated to make a mockery of the judicial system.'"⁴⁶ In this case, the court focused on the debtor's intent to manipulate the system, which can be inferred when "the debtor has knowledge of the undisclosed claims and has motive for concealment."⁴⁷ It was undisputed that the debtor knew of the claim. However, she argued that her disclosure of the claim to her attorney and the trustee, and her attempt to amend her schedules, weighed against a finding of intent to manipulate.⁴⁸ The court disagreed.⁴⁹

Any error by the debtor's bankruptcy attorney should not be charged against the defendant in the nonbankruptcy case.⁵⁰ Rather, the debtor's remedy is to sue her attorney for malpractice.⁵¹ In addition, a debtor's omission can only be considered inadvertent if there is no motive to conceal the claim.⁵² In this case, the nondisclosure allowed the debtor to shield the proceeds of her cause of action from her creditors, which unquestionably provided the debtor with a motive to conceal.⁵³

The debtor's disclosure to the trustee did not save her claim because she told the trustee only about the claim for injunctive relief and failed to...