Fornesa v. Fifth Third Mtg. Co., 897 F.3d 624 (5th Cir. 2018) –

A debtor and his son sued a bank for foreclosing on property that the debtor acquired from his son postpetition while the automatic stay was in effect. Litigation that began in state court and the bankruptcy court were removed, withdrawn and consolidated in the district court. After the district court ruled in favor of the bank, the debtor and his son appealed to the Fifth Circuit.

They waived some claims by failing to address them in their briefs. So, the only issue before the Fifth Circuit was the claim that the bank’s foreclosure violated the automatic stay.

As background, the son obtained a loan from the bank to purchase real estate in 2010. The debtor and his son then entered into an equity sharing arrangement that gave the debtor an equity interest in the property and required him to make loan payments for three years. They did not record anything documenting the arrangement, nor did they inform the bank.

The debtor filed bankruptcy in 2012. His bankruptcy schedules disclosed an “[e]quity sharing agreement in his son’s house,” but did not identify the property address and did not list the bank as a creditor.

During the bankruptcy the debtor surrendered his own home and moved in with his son. Subsequently they stopped making payments on the loan. A few months later the debtor’s son signed a quit claim deed transferring the property to the debtor. The deed was recorded, but the debtor did not amend his bankruptcy schedules to include the property, and no one informed the bank about the transfer.

The bank gave notice of default, accelerated the loan and posted the property for foreclosure. The debtor claims that he sent the bank a check for payment along with copies of his bankruptcy documents, the quit claim deed and the equity sharing agreement. However, the bank rejected the check since it was only partial payment, and disputed receiving the bankruptcy documents.

The bank proceeded with the foreclosure, and then notified the son that he had two weeks to redeem. The son declined, and instead he and the debtor began litigation against the bank.

With respect to the claim that the foreclosure violated the automatic stay, the district court ruled that they were judicially estopped because the debtor failed to amend his bankruptcy schedules to disclose his interest in the foreclosed property.

The Fifth Circuit noted that judicial estoppel is an equitable doctrine designed to prevent a party from taking a position inconsistent with a position taken in a prior proceeding. The three elements are:

• A party takes a position that is plainly inconsistent with a prior position.
• The prior position was accepted by a court.
• The party did not act “inadvertently.”

The court noted that estoppel is particularly appropriate where a party fails to disclose an asset in a bankruptcy and then pursues a claim in a separate forum based on that asset.

The Fifth Circuit concluded that the first two elements were met when the debtor failed to amend his bankruptcy schedules to disclose the quit claim deed or the supposed claims against the bank. In essence (citations omitted):

[The debtor’s] failure to fulfill his Chapter 13 duty by amending his asset schedules “impliedly represented” to the bankruptcy court that his financial status was unchanged. This was plainly inconsistent with his subsequent assertion of an undisclosed claim based on the undisclosed asset. The bankruptcy court, moreover, implicitly accepted the representation by operating as though [the debtor’s] financial status were [sic] unchanged.

That left the defense of inadvertence. The court held that this required the debtor to show that (1) he did not know about the inconsistency or (2) he did not have a motive for concealment. To satisfy the first test, it was not sufficient to show that he did not know about his duty to disclose but rather required showing that he was not aware of the relevant underlying facts. In this case the debtor obviously knew about the quit claim deed and the potential claims against the bank. Further, a motive to conceal is “self-evident” when a debtor fails to disclose assets the give rise to a potential financial benefit.

Accordingly, the Fifth Circuit concluded that the district court did not abuse its discretion in finding that the debtor and his son were judicially estopped from claiming that the bank violated the automatic stay.

Typically, one would expect to see an affirmative position in one forum and a contrary affirmative position in the subsequent forum. This case is interesting in that the inconsistent positions are established in a more indirect way. It seems likely that this decision is driven less by the finer points of judicial estoppel than by the view that concealing assets in a bankruptcy is a cardinal sin.

Vicki R Harding, Esq.