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WBK Industry News - Litigation Developments

5th Circuit: Misrepresentations Made to Bankruptcy Court Estop Plaintiffs from Claiming Stay Violation

The Fifth Circuit recently affirmed a district court opinion which held that plaintiffs were judicially estopped from claiming a bankruptcy stay violation because of misrepresentations one plaintiff made to the bankruptcy court.

As background, the plaintiffs—a father and son—entered into an equity sharing agreement on a secured loan for the purchase of real property that the son obtained from the defendant bank.  The father made voluntary payments to the bank pursuant to the son’s loan for three years.  About two years into the three-year agreement, the father filed for bankruptcy.  In his application, the father listed the equity sharing agreement, but he did not list the property’s address or list the bank as a creditor.  About a year later, the father and son stopped making payments on the loan, and two months thereafter, the son signed a quitclaim deed conveying the property to his father.  The deed was recorded, but the father did not amend his bankruptcy schedules.  Additionally, the defendant bank was not notified about the transfer.  The bank gave notice of default and intent to accelerate the loan.  After a series of unsatisfactory attempts made by the father to pay off the loan balance, the bank foreclosed on the home.

The plaintiffs sued the defendant bank, claiming that the bank foreclosed on their property in violation of the automatic stay imposed during the father’s Chapter 13 bankruptcy.  However, the bank claimed that the father failed to satisfy his Chapter 13 obligation to amend financial schedules to disclose assets acquired post-petition when he (1) failed to notify the bankruptcy court about a quitclaim deed he acquired on the property from his son post-petition, and (2) failed to disclose his putative claims against the bank.  The district court granted judgment for the bank, holding that the plaintiffs were judicially estopped from claiming a bankruptcy stay violation because the father failed to adequately disclose his assets.

The Fifth Circuit affirmed, explaining that judicial estoppel is appropriate when a party fails to disclose an asset to a bankruptcy court but then pursues a claim in a separate court based on that undisclosed asset.  The circuit court found that the father’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.

Further, the circuit court rejected the father’s argument that he acted inadvertently.  To prove inadvertence and avoid judicial estoppel, the father was required to prove (1) that he did not know about the inconsistency in his representations to the bankruptcy court, or (2) that he lacked a motive for concealment.  He failed to do so.  The Fifth Circuit found that the father was aware of the quitclaim deed and had a “self-evident” motive to conceal his changed financial status from the bankruptcy court due to the “potential financial benefit resulting from [his] nondisclosure.”  The Fifth Circuit held that the district court did not abuse its discretion in holding that the father was judicially estopped from claiming a bankruptcy stay violation.

The case, Fornesa v. Fifth Third Mortgage Company, is accessible here.