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

• Publication year: 2003

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

Amber Nickell^**

I. Introduction

In bankruptcy circles, the year 2002 likely will be remembered as the year of the big bankruptcy case. Five of the ten biggest Chapter 11 cases ever filed were filed in 2002, including the biggest of them all, Worldcom, Inc.¹ Not one of them, however, arose in the Eleventh Circuit. Instead, consumer issues dominated the bankruptcy landscape in Alabama, Florida, and Georgia. Among the notable topics were state sovereign immunity, judicial estoppel, repossessed vehicles as property of the estate, modification of secured claims following stay relief and foreclosure, and discharge of student loans.

This Article does not attempt to address all of the more than two hundred bankruptcy cases decided and published in the Eleventh Circuit in 2002. Rather, it reviews the most significant of those cases and provides a general overview of legal developments.²

II. Preliminary Issues

A. State Sovereign Immunity

The Eleventh Amendment,³ as interpreted by the United States Supreme Court, grants states immunity from suits initiated against them by their own citizens or by citizens ofother states.⁴ Section 106(a) of the Bankruptcy Code⁵ purports to abrogate the sovereign immunity of governmental units, including states, as to virtually every significant portion of the Code.⁶ Last year, courts in Alabama, Georgia, and Florida found Sec. 106(a) to be unconstitutional as applied to the states.⁷

The courts based their decisions on Supreme Court cases holding that Congress cannot abrogate state sovereign immunity pursuant to various Article I powers,⁸ including the Commerce Clause,⁹ the Indian Commerce Clause,¹⁰ and the Patent Clause.¹¹ The Supreme Court has not specifically considered the Bankruptcy Clause in this context. Nevertheless, the courts in Alabama Department of Human Resources v. Lewis, King v. Florida Department of Revenue (In re King), and Venable v. Acosta (In re Venable) concluded that Congress cannot abrogate state sovereign immunity through any of its Article I powers, including the bankruptcy power.¹²

Although the Eleventh Circuit Court of Appeals has not decided the constitutionality ofSec. 106(a), the results in the above cases are consistent with the conclusion reached by the majority of circuit courts to consider the issue.¹³ The Eleventh Circuit's results conflict, however, with three earlier cases out of the Bankruptcy Court for the Southern District of Georgia, in which the court held that Congress passed Sec. 106(a) pursuant to its power to enforce the Privileges and Immunities Clause of the Fourteenth Amendment.¹⁴

Although the Supreme Court has held that Congress may abrogate state sovereign immunity pursuant to its power to enforce the Fourteenth Amendment, the Court has articulated a stringent test for doing so.¹⁵ As a result, the privileges and immunities argument has not gained widespread approval as the basis ofCongress's authority to pass Sec. 106(a).¹⁶

B. Judicial Estoppel

A debtor who fails to list a cause ofaction as an asset in his bankruptcy schedules may be foreclosed from pursuing that claim under the principle of judicial estoppel. This issue began to gain significant notice in Georgia in 2001.¹⁷ In 2002 both state and bankruptcy courts continued to shape the law in this area.

Judicial estoppel is intended to protect the integrity of the judicial system by preventing a party from asserting inconsistent positions in two different courts.¹⁸ The topic first gained the attention of bankrupt- cy practitioners when the Georgia Supreme Court issued Wolfork v. Tackett,¹⁹ holding that judicial estoppel prevents a debtor from pursuing a cause of action in state court when he has omitted that claim from his bankruptcy schedules.²⁰ However, Wolfork probably raised more questions than it answered, making it the target of criticism.²¹ More recent cases have helped clarify the court's position.

In IBF Participating Income Fund v. Dillard-Winecoff, LLC,²² the Georgia Supreme Court discussed the test for the applicability ofjudicial estoppel in the bankruptcy context.²³ First, it noted that when the prior proceeding is a bankruptcy case, federal law applies.²⁴ It then listed three factors for consideration:

(1) the party's later position must be "clearly inconsistent" with its earlier position; (2) the party must have succeeded in persuading a court to accept the party's earlier position; . . . and (3) "whether the party seeking to assert an inconsistent position would derive an unfair advantage or impose an unfair detriment on the opposing party if not estopped."²⁵

The Eleventh Circuit Court of Appeals further explained the requirements of judicial estoppel in Billups v. Pemco Aeroplex, Inc. (In re Burnes).²⁶ Courts must consider the totality of the circumstances, and the omission must have been intentional.²⁷ Furthermore, the court stated that "judicial estoppel protects the integrity of the judicial system, not the litigants" so that detrimental reliance by the defendant is not necessary.²⁸

Wolfork prompted several debtors to seek to reopen their bankruptcy cases to disclose a previously unscheduled cause of action. Like the court in Burnes, the bankruptcy courts have generally been concerned with intent and have been willing to aid the debtor when the omission was unintentional. For example, in In re Barger,²⁹ the debtor's litigation counsel had disclosed her employment discrimination claim to her bankruptcy attorney, and the debtor had informed the trustee of the claim at the meeting of creditors. However, her attorney had failed to list it on the bankruptcy schedules.³⁰ Finding that the circumstances indicated that the debtor had not "concealed" the cause of action, the court allowed the debtor to reopen her closed Chapter 7 case to amend her schedules.³¹

The nonbankruptcy courts have favored debtors when they have been allowed by the bankruptcy court to amend their schedules. In one case, a court indicated that the mere attempt to amend could prevent judicial estoppel.³² In Rowan v. George H. Green Oil, Inc.,³³ the Georgia Court of Appeals outlined a relaxed rule, stating that a debtor

"can avoid the application of judicial estoppel simply by filing a motion to amend the debtor's bankruptcy petition or a motion to reopen the debtor's bankruptcy case to declare the omitted claim or cause of action." Indeed, "amending the bankruptcy petition to include the claim, even after the bankruptcy case was closed, precludes judicial estoppel from barring the claim."³⁴

In Period Homes, Ltd. v. Wallick,³⁵ the Georgia Supreme Court concluded that even when a debtor fails to amend (or attempt to amend) his schedules to reveal a previously omitted cause of action, he may still avoid judicial estoppel.³⁶ The court rejected application of judicial estoppel in that case because the debtor had informally recognized the asset by telling the bankruptcy trustee about it.³⁷ In addition, because all the creditors were paid in full in the bankruptcy case, no benefit accrued to the debtor and no harm accrued to his creditors as a result of the omission.³⁸

The court of appeals deferred to the bankruptcy court's judgment in Chicon v. Carter.³⁹ The debtor in Carter filed a Chapter 13 petition. After her plan was confirmed, she was injured in an auto accident that gave rise to a tort claim. The debtor filed a motion to amend her schedules to avoid application of judicial estoppel to the tort claim.⁴⁰ The bankruptcy court denied the motion, stating that because the claim arose post-confirmation, it was not part of the bankruptcy estate; thus, the debtor did not have to amend her schedules, and judicial estoppel would not apply.⁴¹ The court of appeals relied on the bankruptcy court's conclusion to deny judicial estoppel: "'[I]t stands to reason that the Georgia court in which the tort claim is asserted should honor the bankruptcy court's actions.' . . . The bankruptcy court's conclusion that the Carters' tort claim never formed part of their bankruptcy estate forbids the application of judicial estoppel to their claim."⁴²

The court in Traylor v. Ford⁴³ reached a different result, allowing a defense of judicial estoppel even though the debtor had successfully amended his schedules.⁴⁴ Defendant claimed judicial estoppel in a discrimination action filed by the debtor on the ground that the debtor had not disclosed the claim in his bankruptcy schedules. In response, the debtor amended his schedules.⁴⁵ Nevertheless, the district court dismissed the debtor's discrimination case, reasoning that he had amended his schedules only after being forced to do so by the prospect of judicial estoppel.⁴⁶ Because the debtor, who had filed his bankruptcy petition pro se, had omitted the cause of action on his schedules and told the trustee he had no causes of action, the court was in "no doubt that [] plaintiff concealed the existence of this lawsuit."⁴⁷

In a similar case, the Eleventh Circuit Court of Appeals affirmed a district court's application of judicial estoppel to the debtor's employment discrimination claim.⁴⁸ Although the claim had arisen post-petition, the debtor failed to fulfill his continuing duty to amend his schedules.⁴⁹ The fact that he only sought to amend after judicial estoppel was raised showed a motive to conceal an "intent 'to make a mockery of the judicial system.'"⁵⁰ These cases are consistent with the determination of the court of appeals that amending schedules will not save a debtor who intentionally omitted a cause of action.⁵¹

C. Class Certification

In Chrysler Financial Corp. v. Powe,⁵² the Eleventh Circuit Court of Appeals refused to review a bankruptcy court's order certifying a class of plaintiffs.⁵³ The issue, raised sua sponte by the court of appeals, was whether the circuit court had jurisdiction over an interlocutory appeal from a bankruptcy court.⁵⁴ Federal Rule of Civil Procedure ("FRCP") 23(f) provides that the...