November 7, 2014
by Charles Pullium and William Holmes
Millsap & Singer, LLC
USFN Member (Missouri)
The legal concept of standing has been much litigated and much studied in the past few years. “Standing to sue” means a party has sufficient stake in an otherwise justiciable controversy to obtain judicial resolution on that controversy. In the context of a borrower who has previously filed a bankruptcy petition and, thus, transferred that borrower’s assets to the bankruptcy estate, the question is: Does the borrower later have standing to assert claims post-bankruptcy? The answer requires a tiered factual analysis, which may result in the borrower being barred from asserting particular claims.
Similarly, the related concept of “judicial estoppel” may bar a party from making certain claims. Under this doctrine, a party is bound by his judicial declarations and may not contradict them in a subsequent proceeding involving the same issues and parties. That is, a party who — by its pleadings, statements, or contentions, under oath — has assumed a particular position in a judicial proceeding is estopped from assuming an inconsistent position in a subsequent action. Although the concepts are related and are often discussed interchangeably, the two theories are distinctly separate. Each requires a different analysis.
Standing to sue — The U.S. Court of Appeals for the Second Circuit recently held that a borrower, who failed to disclose claims in bankruptcy, was not barred from bringing those claims at a later date in a separate action, because her bankruptcy petition was dismissed; the debtor had not been discharged. Dismissal or discharge is important: a borrower/debtor who does not schedule a claim in the bankruptcy schedules is barred from later asserting that claim after discharge and the closing of the case, because the claim is not abandoned to the debtor, but instead remains part of the estate. If a claim remains part of the estate after discharge and closure of the case, the borrower/debtor has no standing to assert the claim, [Crawford v. Franklin Credit Mgmt., 2014 U.S. App. LEXIS 13179 (2d Cir. N.Y. July 11, 2014)].
The analysis: the first question that must be asked is, was the claim that the borrower is now asserting scheduled in the prior bankruptcy proceeding? If yes, then the borrower’s claim is not barred by the doctrine of standing with regard to the earlier bankruptcy. If the claim was not scheduled, then it must be asked whether the bankruptcy case was dismissed prior to discharge, or whether the case resulted in a discharge and was then closed. If the case was dismissed prior to discharge, then the unscheduled claim would revert back to the borrower from the estate, and the claim would not likely be barred by the doctrine of standing with regard to the earlier bankruptcy. If the bankruptcy case resulted in a discharge and the case was then closed (as is a frequent bankruptcy case scenario), then the unscheduled claim does NOT revert back to the borrower, and the borrower lacks standing to later assert the claim. See 11 U.S.C. § 349. In that situation, the claim that was property of the estate was neither administered, nor abandoned; therefore, it remains property of the estate under 11 U.S.C. § 554(d).
Judicial estoppel — On the other hand, this is a doctrine that generally prevents a party from prevailing in a phase of a case on one argument, and then relying on a contradictory argument to prevail in another phase, [Pegram v. Herdrich, 530 U.S. 211, 227, n.8; 120 S. Ct. 2143 (2000)]. In deciding whether to invoke judicial estoppel, a court looks at whether “a party’s later position … [is] clearly inconsistent with its earlier position,” and whether the court in the first proceeding adopted the party’s position, [New Hampshire v. Maine, 532 U.S. 742, 750-51 (2001)].
The goal is to protect the integrity of the judicial system and to not allow parties to play fast and loose with the facts, the law, and the courts. Accordingly, investigating and reviewing the positions that the borrower has taken in earlier bankruptcy proceedings and prior litigation is critical. Then, examine whether those positions were to the borrower’s advantage, as well as whether it would be fundamentally inconsistent to allow the borrower to take a different position at a later date.
Under either a standing or judicial estoppel analysis, a prudent attorney will investigate all prior proceedings involving the borrower before litigating the case at hand.
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Autumn 2014 USFN Report