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Bankruptcy Trustee May Pursue Judgment Even When Debtor May Not, Fifth Circuit Rules - Reed v. City of Arlington

August 31, 2011

Our Claremont consumer bankruptcy attorneys strongly advise our clients to disclose everything in their financial situations -- both good and bad -- when they file for bankruptcy. Failing to do this can get you in trouble and possibly even cancel your bankruptcy. A debtor in Texas was in trouble for this reason in Reed v. City of Arlington, a Fifth U.S. Circuit Court of Appeals case involving a couple who did not disclose a pending lawsuit the husband had against the City of Arlington, Texas. The husband, Kim Lubke, won his case, but when the bankruptcy court and the City found out, the City argued that Lubke should be judicially estopped from pursuing the judgment because of his failure to disclose it. The Fifth Circuit eventually decided that while Lubke is judicially estopped, the bankruptcy trustee, Diane Reed, is not.

Lubke's lawsuit against the City was for Family and Medical Leave Act violations while he was employed as a firefighter. While the City appealed a judgment against it, the Lubkes filed for Chapter 7 bankruptcy and failed to disclose the FMLA case to the bankruptcy court, or the bankruptcy to their FMLA attorney. They eventually won the FMLA appeal and also received a no-assets discharge, which means the court believed they had no assets to pay to creditors. However, when their FMLA attorney called to discuss a settlement offer, he discovered the bankruptcy case and notified Reed. She reopened the bankruptcy case, revoked their discharge and accepted the settlement. The City petitioned for a rehearing of its appeal, and the Fifth Circuit directed the district court to determine whether Lubke should be judicially estopped from pursuing the judgment. The district court determined that Lubke was judicially estopped, but the Bankruptcy Code permitted Reed to collect. It ordered that any money left over from payments to creditors be returned to the city. The City appealed to a Fifth Circuit panel and got the decision reversed, and Reed appealed for an en banc rehearing.

The Fifth Circuit's decision agreed largely with the district court's opinion, which it described as "very good." Judicial estoppel is a legal doctrine allowing judges to prevent parties from taking positions inconsistent with positions they previously took, and to avoid unfair results. In a bankruptcy context, the court said, the goal of judicial estoppel should be to protect the creditors' rights and avoid rewarding a dishonest debtor. It also noted that in bankruptcy law, the debtors themselves -- in this case the Lubkes -- are separate and distinct from the bankruptcy estate being overseen by Reed. Thus, Kim Lubke's failure to disclose the judgment in the bankruptcy does not adhere to Reed. Judicial estoppel would have applied only if the events leading to it had taken place before the bankruptcy was filed, the Fifth said, but after, the trustee acts on her own. The court also found that equity favors no estoppel because bankruptcy law favors the innocent creditors' rights to collect, and that precedent in the Fifth and three other circuits supports its decision. A dissent signed by three judges of the panel excoriated Lubke for wasting the judicial system's time and money.

As Costa Mesa personal bankruptcy lawyers, we would like to take this opportunity to remind all of our clients and potential clients that hiding assets can get them into serious trouble. That includes assets that are only merely potential payouts, such as pending litigation or potential litigation claims. This opinion suggests that the Lubkes made an intentional choice to not disclose the pending FMLA case. This got them hauled back into bankruptcy court and will end with their legal judgment being distributed to creditors, rather than to themselves. In other circumstances, dishonest bankruptcy filers may have their bankruptcies dismissed with prejudice or even be criminally prosecuted for the fraud. A common consequence of dishonesty or mistakes is being unable to re-file the bankruptcy, while also having no protection from creditors. To avoid this, it's best to be as honest as possible with San Diego County individual bankruptcy attorneys like us.

If you're considering a bankruptcy to deal with overwhelming debt, you should call Howard Law, PC, for a free consultation on your rights and your legal options. For a free consultation, send us an email or call 1-800-872-5925 today.

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