- No. 11-8048 (B.A.P. 6th Cir. 2012), decided March 20, 2012 (limited precedential effect per 6th Cir. BAP LBR 8013-1(b))
- Before the bankruptcy court may assert judicial estoppel to prevent a Chapt. 7 debtor from amending schedules and exemptions to increase asset valuations, the debtor must be given the opportunity to present evidence that the differing valuations were due to mistake or inadvertence and not bad faith. The BAP reversed and remanded the bankruptcy court’s order with regard to the issues of judicial and equitable estoppel. The BAP here dealt with 3 issues on appeal: (1) whether the trustee abandoned the insurance claim, (2) whether the bankruptcy court was prevented by the law of the case doctrine and the First BAP Appeal from deciding whether the insurance claim was property of the estate, and (3) whether the bankruptcy court properly applied the doctrines of (a) judicial estoppel and (b) equitable estoppel with regard to the Debtor’s amendments. With regard to issue (1), the BAP held that the claim was not abandoned. When an asset is not disclosed on the schedules and is not otherwise administered, it is not considered to have been abandoned. The Debtor did not list the insurance policy on the schedules. With regard to issue (2), the law of the case doctrine holds that when a court decides a rule of law that decision should govern the same issue in later stages of the case. The court can reconsider its decision later if it was clearly erroneous and would work a manifest injustice. The First BAP Appeal did not reach the merits of the case, so it cannot be considered law of the case on the issue of estate property. As for the bankruptcy court, its remand decision appears to have been based on a lack of subject matter jurisdiction. Regardless, the law of the case doctrine does not prevent the court from changing its mind on the basis for its conclusion, particularly here with regard to whether the court thought the Insurance Litigation would impact the estate. As for issue (3)(a), a court may prevent a debtor from amending exemptions when, on the basis of specific evidence, it finds the debtor acted in bad faith. Judicial estoppel prevents a party from using contradictory arguments to prevail in different phases of a case, but it does not apply where the party’s conduct amounts only to a mistake. The bankruptcy court did not allow the Debtor to present evidence on the reasons for the differing valuations. It should be given the opportunity to present exculpatory evidence that the differing valuations were due to mistake or inadvertence and not bad faith. Finally, as for issue (3)(b), equitable estoppel applies where a party claiming estoppel reasonably relied on the representations of another party to its detriment. The court and the trustee did not rely solely on the Debtor’s representations in the schedules because the trustee knew about the insurance claim before the Chapt. 7 case was closed. Furthermore, the case has now been re-opened, so any detriment suffered has been erased.
- Procedural context:
- The bankruptcy court held a combined hearing on all motions and objections. In its order, the court sustained the Exemption Objection on grounds of equitable and judicial estoppel. It rejected the Continuing Employment Motion because the insurance contract was an asset of the estate and to the extent the litigation was based on the contract the Chapter 7 trustee was the proper party to maintain it. The Debtor filed a motion to alter, amend or vacate that order, which was denied, and the Debtor appealed.
- Fire destroyed the house of Cary and Dana Rossi (“Debtor”) while their Chapt. 7 bankruptcy was pending in the Eastern District of Kentucky. The Debtor valued some assets differently on the bankruptcy schedules and the insurance claim. On the schedules, household goods, furnishings and wearing apparel were valued at $2,200. On the insurance claim the same assets plus medical equipment and living expenses were valued at $45,924.88. (The insurance policy and the medical equipment were not listed as assets on the schedules.) Before the case was closed but after issuance of a Report of No Distribution, the insurance company offered to pay the bankruptcy trustee $22,000 for the Debtor’s personal property claim. The trustee rejected the offer, believing that the payment would be encumbered or exempt. The trustee issued a second Report of No Distribution, and the case was closed. A number of actions followed. The Debtor sued the insurance company in Kentucky state court seeking payment of the claim (“Insurance Litigation”). The case was moved to bankruptcy court then remanded back to state court. In an earlier appeal, the Sixth Circuit Bankruptcy Appellate Panel (“BAP”) held that it was barred by statute and precedent from reviewing the bankruptcy court’s remand decision (“First BAP Appeal”). Next, the U.S. Trustee filed an adversary proceeding seeking to revoke the discharge due to fraud. The Debtor then amended the schedules, increasing the value of the property in question to $24,309.88, adding the medical equipment valued at $13,145.00, and claiming all of these assets as exempt. The new bankruptcy trustee, Westenhoefer, objected (“Exemption Objection”), arguing that allowing the amendments would unduly depreciate the integrity of the bankruptcy process. Finally, the Debtor filed a motion seeking an order permitting the continued employment of counsel in the Insurance Litigation (“Continued Employment Motion”) and clarifying that only compensation awarded in that litigation relating to household goods and furnishings, wearing apparel, and medical equipment owned by the Debtor at the time of the petition would be considered property of the estate.
- Fulton, Harris, and Preston
In re Edwin Earl Elliott
Summarizing by Bradley Pearce
In re Donald and Jane Nichols
Summarizing by Lars Fuller
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