The Fifth Circuit issued an important opinion on an issue (i.e., judicial estoppel) that arises frequently when litigating employment disputes. The issue is whether an innocent bankruptcy trustee is judicially estopped from collecting assets, on behalf of the creditors, that were not disclosed by the debtor in his bankruptcy filings. The court of appeals held that, like the debtor, the innocent trustee and creditors were also judicially estopped from recovery by the debtor’s misconduct.
The appeal arose from a $1 million-plus judgment an Arlington firefighter obtained against the City on a claim arising under the Family Medical Leave Act (FMLA). The Fifth Circuit Court of Appeals affirmed the jury’s verdict but remanded the case for a recalculation of damages. You can read the opinion from the original appeal here. During the appeal of the judgment, the firefighter filed a Chapter 7 bankruptcy petition seeking a discharge of $300,000 in debt. Importantly, the firefighter failed to disclose million dollar judgment from his bankruptcy filings and schedules leading the creditors, the trustee and the bankruptcy court to believe it was "no asset" case. The firefighter obtained a discharge of the debt.
When the City learned of the bankruptcy filing, it requested the court of appeals apply the doctrine of judicial estoppel to prevent the debtor-firefighter from collecting on the judgment. The Fifth Circuit remanded the case to the trial court for a determination of whether judicial estoppel applied. After several evidential hearings, the trial court concluded that the elements of judicial estoppel had been met. However, because the doctrine of judicial estoppel is an equitable doctrine, the court concluded that it would be inequitable to penalize the trustee and the innocent creditors because of the firefighter’s misconduct. The trial court then fashioned a remedy that permitted the creditors to recover the amounts owed to them, but denied any recovery to the firefighter and ordered that any sums due pursuant to the judgment against the City over and above the debts owed the creditors reverted to the City –not the firefighter.
The City appealed arguing that the trustee should also be judicially estopped recovering on the undisclosed judgment. The question raised by the appeal is whether the doctrine of judicial estoppel prevents not only the debtor who fails to disclose assets on his bankruptcy schedules, but also the innocent trustee and creditors. The court held that, to protect the integrity of the judicial process, judicial estoppel bars both the debtor and the trustee from recovering on the assets that were not disclosed.
You can access a full copy of Reed v. City of Arlington here. Congratulations to my partner, Mike McConnell, who represented the City of Arlington.
UPDATE: On August 11, 2011, an en banc panel of the Fifth Circuit reversed the panel’s decision and held that judicial estoppel does not bar a blameless bankruptcy for pursuing a judgment that the debtor concealed during the bankruptcy and that the debtor is barred from pursuing. You can read a copy of the opinion here.