In the last issue, part one of this article focused on the current status of the doctrine of judicial estoppel, particularly in the bankruptcy context, along with the defenses to the application of the doctrine. Part two returns to the story of the diligent practitioner and delves into some basic principles of bankruptcy law and practice implicated in the doctrine.
Applicable Principles of Bankruptcy Law (1)
In addition to the bankruptcy principles discussed in the first part of this article, there are some unique aspects of bankruptcy law that further complicate the application of judicial estoppel. These principles are discussed below. Ignorance of these provisions may, at a minimum, adversely impact the outcome of the case or, at worst, could result in sanctions against both the party and its counsel, regardless of whether they are intentionally violated. Therefore, it is important to be able to spot these issues when addressing the application of judicial estoppel.
* Presence of the Trustee--In bankruptcy practice, there are, in general, two types of trustees: Case trustees, typically bankruptcy practitioners who are appointed to administer the bankruptcy action, and the United States Trustee, a part of the Department of Justice created by Congress to oversee the bankruptcy system. While the United States Trustee is empowered to take an active role in any bankruptcy case, its main role in Ch. 7 and Ch. 13 bankruptcies is to prevent substantial abuse of the bankruptcy law in the discharge of debts, investigate bankruptcy fraud (such as fraudulently concealing assets), and appoint and supervise case trustees in the administration of the bankruptcy action. The United States Trustee is rarely, if ever, implicated in the judicial estoppel analysis. However, the case trustees can have a great impact on the analysis.
To demonstrate, let's return to the story of the diligent practitioner, who was last reviewing the principles of judicial estoppel to determine her applicability in the ADA action. After familiarizing herself with these principles, the practitioner prepared and filed a motion for summary judgment in the ADA action, arguing that the plaintiff was barred from proceeding with this action by the doctrine of judicial estoppel. Specifically, she argued that the debtor had knowledge of the lawsuit since it was filed two months before his petition in the Ch. 7 proceeding. The debtor also had a motive to conceal the action because he is seeking more than a million dollars, he received a discharge in the bankruptcy proceeding, and he would be able to keep any benefits realized from this lawsuit while, at the same time, avoiding his debts. The practitioner also noted that the totality of the circumstances supported the application of the doctrine, including that the debtor was represented by counsel in the bankruptcy proceeding; he disclosed several lawsuits filed against him in the petition; he repeatedly was warned of his obligation to provide complete and truthful information; and he obtained a complete discharge of all his debts while concealing this claim.
Immediately after receiving notice of this motion, the debtor amended his petition and schedules in the bankruptcy court to disclose this lawsuit, including the name of the case, case number, court in which the action was pending, and type of action. Although this amended disclosure was provided to the case trustee as a matter of course through the electronic filing system, the debtor did not provide any other notice to the case trustee of this action or inform the case trustee of the status of the action. However, subsequently, counsel for the debtor and the case trustee had several interactions and the trustee ultimately reported the lawsuit as an asset of the bankruptcy estate. The case trustee, however, did not file a notice of appearance in the ADA action or assert any other objection to the debtor's continued prosecution of the action.
Thereafter, the motion for summary judgment was fully briefed. Upon consideration of the parties' filings, the court granted the practitioner's motion for summary judgment, finding that the debtor was barred from proceeding with this claim based on the doctrine of judicial estoppel and it dismissed the case. But is this the end?
* Debtor's Lack of Standing--When a debtor files a petition for relief under Ch. 7, (2) all potential causes of action existing at that time become property of the bankruptcy estate, and the debtor's rights in those claims are extinguished. (3) This is true even if the debtor fails to disclose the claim in his or her petition. (4) The only exception is when the trustee has abandoned the property back to the debtor. (5)
After the commencement of the bankruptcy action under Ch. 7, a case trustee is appointed to marshal and liquidate the debtor's assets, including any potential causes of action. As a result, the 11th Circuit repeatedly has held the trustee "has exclusive standing to assert [these] claims." (6) While the court has used the term "standing," in this context, it is shorthand for the real party in interest. (7)
The 11th Circuit made this distinction clear in Borger v. City of Cartersville, Georgia, 348 F.3d 1289, 1292 (11th Cir. 2003), when it rejected the notion that the debtor lacked standing, in a constitutional sense, when she filed for bankruptcy protection under Ch. 7 less than two months after she instituted the discrimination lawsuit. The court concluded that the debtor had constitutional standing, and, thus, the district court's order was not infirm for lack of subject matter jurisdiction. It explained that the issue is one of real party in interest. (8) Although the court noted that the trustee was the real party in interest, it found that the debtor's prosecution of the action did not render the resulting order invalid. (9) Indeed, the court recognized that an action can only be dismissed for lack of prosecution by the real party in interest if there has been an objection to the prosecution of the action by the named party and the real party in interest fails to substitute in the action. (10)
Despite the clarity of the 11th Circuit's ruling in Barger, the use of the term "standing" in a number of subsequent 11th Circuit decisions has caused much confusion surrounding this issue. Criticism of the concept of "standing" is not unique. (11) Several commentators have noted the confused jurisprudence in this area. (12) Courts, including the U.S. Supreme Court, have long criticized the imprecise use of the term "standing." (13) It also is common for both courts and parties to confuse the concepts of constitutional standing and real party in interest, even though they are conceptually distinct. (14)
Subsequent to the Barger decision, there have been several unpublished decisions of the 11th Circuit suggesting that the concept of "standing" in this context is jurisdictional. (15) Additionally, there have been other decisions affirming the dismissal of the debtor's claim for a lack of "standing" without clarifying whether this dismissal is for a lack of standing in a jurisdictional sense or whether it is based on the lack of prosecution by the real party in interest after an objection. (16) Regardless, it is an untenable reading of these cases to suggest that the basis is a lack of constitutional or jurisdictional standing, as it would place these decisions in direct conflict with Barger and in violation of the well settled prior precedent rule. (17) Instead, while the language of these decisions is somewhat imprecise, these rulings appear to be based on the failure to prosecute the action by the real party in interest. Because of this confusion, some district court decisions in Florida likewise have suggested that the lacking of standing is jurisdictional when the debtor prosecutes a claim belonging to the bankruptcy estate; however, this interpretation would be in direct conflict with the 11th Circuit's decision in Barger. (18)
Although the courts could have been more precise in their use of the term "standing," certain principles are clear unless and until the 11th Circuit, sitting en banc, overrules the Barger decision. (19) While the trustee is indisputably the real party in interest, that fact does not invalidate or preclude the application of the doctrine of judicial estoppel to an action prosecuted by the debtor. It does not render any order issued by the district court while the debtor prosecuted the action to be infirm for lack of subject matter jurisdiction. The action, nonetheless, may be dismissed for failure to prosecute in the name of the real party after an objection is made. This is separate and apart from the application of the doctrine of judicial estoppel. Additionally, the trustee's status as the real party in interest provides him or her with the right to substitute for the debtor at any time, including on appeal. (20) Thus, the action may not be final by the entry of an order against the debtor.
* Trustee's Substitution on Appeal--When the trustee substitutes for the debtor on appeal, the trustee steps into the shoes of the debtor and is limited to the same arguments available to the debtor. (21) The trustee, however, cannot vacate the application of judicial estoppel to the debtor based on the lack of subject matter jurisdiction or due process. (22) Indeed, the 11th Circuit recently rejected both of these arguments in Dunn v. Advanced Medical Specialties, Inc., 556 F. Appx. 785, 789-90 (11th Cir. 2014), when the trustee substituted for the debtor on appeal and then argued that the order of dismissal based on judicial estoppel should be vacated. (23) In doing so, the court also rejected the trustee's argument that the defendant, in addition to the debtor, had an obligation to notify the trustee of the action and the pending motion for summary judgment. (24)
Thus, on appeal or after the entry of judgment against the debtor, the trustee is...