Kathleen A. McCALLISTER, in her capacity as the bankruptcy trustee, Plaintiff-Appellant, v. Gordon DIXON, M.D., Blackfoot Medical Clinic, Inc., Defendants-Respondents, and Blackfoot Medical Center, LLC, Defendant.
No. 38196.
Supreme Court of Idaho, Boise, September 2012 Term.
Feb. 1, 2013.
303 P.3d 578
Moffat, Thomas, Barrett, Rock & Fields, Chtd., Pocatello, attorneys for Respondent, Julian Gabiola argued.
W. JONES, Justice.
I. NATURE OF THE CASE
This is an appeal from a district court order dismissing Plaintiff-Appellant (Jerry Doherty) as a party in a medical malpractice action against Respondents (Dr. Gordon E. Dixon and Blackfoot Medical Clinic). The judgment was certified under
II. FACTUAL AND PROCEDURAL BACKGROUND
On September 12, 2004, Doherty sought treatment from Blackfoot Medical Clinic and Dr. Dixon—a general practitioner—for an
Doherty filed a motion in limine on August 11, 2009, seeking to exclude evidence of his bankruptcy. In response to the motion, on August 18, 2009, Respondents raised the issue of Doherty‘s failure to amend his bankruptcy asset schedule after filing this lawsuit. Respondents’ response was treated by both Doherty and the district court as a motion for summary judgment.
On August 26, 2009, Doherty reopened his bankruptcy case and filed an Amended Schedule B (asset schedule), which reflected the current lawsuit as a potential asset. The bankruptcy court permitted Doherty to reopen his bankruptсy case on March 4, 2010. Doherty moved to join Kathleen McCallister (“McCallister“) as a party-plaintiff to the lawsuit in her official capacity as bankruptcy trustee.
On September 16, 2010, the district court granted Respondents’ motion for summary judgment and substituted McCallister as a party-plaintiff. After disposing of issues not raised on this appeal, the district court concluded that a debtor filing for bankruptcy must list all existing and potential assets and that this duty continues while the bankruptcy is pending. The district court found that by October 28, 2004, Doherty believed that Dr. Dixon‘s failure to refer him earlier to a specialist resulted in his loss of vision. Also, the district court found that when Doherty filed suit against Respondents on September 6, 2006, Doherty was fully aware that he had a claim against them. Yet, Doherty failed to list this asset or to amend his asset schedule with the bankruptcy court until Respondents objected.
The district court rejected the reasoning used in a string of Georgia cases that permit a subsequent reopening of a bankruptcy proceeding and disclosure of a non-disclosed asset to avoid application of judicial estoppel. It relied instead on federal precedent holding that the reopening cure encourages gamesmanship. The district court reasoned that the Georgia law was not persuasive because it failed to recognize the allocation of assets during bankruptcy. During bankruptcy, assets and causes of action belong entirely to the bankruptcy trustee. The Georgia approach—by permitting a debtor to maintain a lawsuit that does not belong to him or her as a debtor in bankruptcy—undermines the bankruptcy code. Also, permitting the debtor to “undo” his lack of disclosure encourages non-disclosure. Therefore, the district court found that such a cure is not a defense to judicial estoppel.
Doherty filed an affidavit asserting his non-disclosure of this lawsuit in his bankruptcy proceeding was a good-faith mistake. The district court found that good faith is insufficient to avoid application of judicial estoppel, because judicial estoppel is based upon knowledge of the asset and the potential incentive to conceal the asset. The district court found that the alleged mistake was the result of either a failure of counsel, which does not amount to inadvertence or mistake, or to ignorance of the law, which is not a defense. As to the two issues the district cоurt found dispositive—knowledge and incentive—it found that Doherty knew of the claim, benefited from the discharge by the bankruptcy proceeding, and had a potential motive to conceal the claim from the bankruptcy court.
Doherty now argues that Respondents in the current matter are not prejudiced by his non-disclosure because it is primarily Doherty‘s creditors who were prejudiced. But the prejudice caused to Respondents did not weigh heavily on the district court‘s decision: it is the integrity of the judicial system, not individuals, that is protected by judicial estoppel.
III. ISSUES ON APPEAL
- Whether the district court abused its discretion in imposing judicial estoppel.
- Whether either Dоherty or Respondents are entitled to attorney‘s fees and costs on appeal.
IV. STANDARD OF REVIEW
Though the district court called its dismissal of Doherty‘s claims “summary judgment,” in actuality it merely dismissed Doherty‘s action on the basis of judicial estoppel. Therefore, the dismissal of Doherty will properly be reviewed under the abuse of discretion standard, not the summary judgment standard. The doctrine of judicial estoppel sounds in equity and is invoked at the discretion of the court. Sword v. Sweet, 140 Idaho 242, 252, 92 P.3d 492, 502 (2004). A reviewing court will examine an alleged abuse of discretion based on “(1) whether the trial court correctly perceived the issue as one оf discretion; (2) whether the trial court acted within the outer boundaries of its discretion and consistently with legal standards applicable to the specific choices available to it; and (3) whether the trial court reached its decision by an exercise of reason.” Riley v. W.R. Holdings, LLC, 143 Idaho 116, 121, 138 P.3d 316, 321 (2006).
V. DISCUSSION
A. The District Court Did Not Abuse Its Discretion When It Judicially Estopped Doherty From Pursuing His Claim.
Doherty argues the imposition of judicial estoppel was improper because Doherty‘s claim against Respondents has nothing to do with his bankruptcy; does not involve the same parties; and does not arise out of the same transaction. Also, Dоherty contends the district court improperly weighed inferences from the record that Doherty had no intent to conceal the lawsuit as an asset in the bankruptcy proceeding and his reopening and amending of bankruptcy asset avoids application of judicial estoppel. Doherty maintains that it is inequitable to both him and his bankruptcy creditors to dismiss him as a party, because the failure to report the claim did not prejudice Respondents, and prevents Doherty and his creditors from recovering.
1. Judicial Estoppel Applies to Bankruptcy Proceedings.
Idaho adopted the doctrine of judicial estoppel in Loomis v. Church, 76 Idaho 87, 277 P.2d 561 (1954). Judicial estoppel precludes a party from advantageously taking one position, then subsequently seeking a second position that is incompatible with the first. A & J Const. Co. v. Wood, 141 Idaho 682, 684, 116 P.3d 12, 14 (2005). The policy behind judicial estoppel is to protect “the integrity of the judicial system, by protecting the orderly administration of justice and having regard for the dignity of the judicial proceeding.” Id. at 685, 116 P.3d at 15 (quoting Robertson Supply Inc. v. Nicholls, 131 Idaho 99, 101, 952 P.2d 914, 916 (Ct.App. 1998)). Broadly accepted, it is intended to prevent parties from playing fast and loose with the legal system. Id.; see also 31 C.J.S. Estoppel and Waiver § 186 (2012). Judicial estoppel protects the integrity of the judicial system, not the litigants; therefore, it is not necessary to demonstrate individual prejudice. Wood, 141 Idaho at 686, 116 P.3d at 16 (citing Hamilton v. State Farm Fire & Cas. Co., 270 F.3d 778 (9th Cir.2001)). Judicial estoppel aрplies to inconsistent positions taken in bankruptcy proceedings. Id. (relying on decisions from numerous courts holding “privity . . . [though] often present in judicial estoppel cases, [is] not required.” Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282, 1286 (11th Cir.2002)).
This Court was not alone when in 2005 we extended judicial estoppel to bankruptcy proceedings. Compare Wood, 141 Idaho at 688, 116 P.3d at 18, with Benjamin J. Vernia, Annotation, Judicial Estoppel of Subsequent Action Based on Statements, Positions, or Omissions as to Claim or Interest in Bankruptcy Proceeding, 85 A.L.R.5th 353 (2001). Full disclosure is crucial to the effective functioning of the bankruptcy system: “[T]he importancе of full and honest disclosure cannot be overstated.” Wood, 141 Idaho at 685, 116 P.3d at 15 (citing
In this matter, Doherty asserts malpractice against Respondents and seeks damages. The alleged malpractice occurred before his bankruptcy action, but it was not disclosed on his asset schedule. The question of whether it was Doherty‘s intent to conceal his claim until bankruptcy proceedings closed—so he can keep any potential recovery instead of satisfying his creditors—is not material; there is certainly a motive and an incentive to try concealing the asset for personal gain. Such concealment undermines the effectiveness of the bankruptcy system. Therefore, the district court did not abuse its discretion when it properly recognized judicial estoppel as applicable to situations of non-disclosure of an asset in an earlier bankruptcy proceeding.
2. Doherty is Charged With Knowledge of His Claim Against Respondents.
Judicial estoppel “takes into account . . . what the [estopped] party knew, or should have known, at the time the original position was adopted. Thus, the knowledge that the party possesses, or should have possessed, at the time the statement is made is determinative as to whether that person is ‘playing fast and loose’ with the court.” Heinze v. Bauer, 145 Idaho 232, 236, 178 P.3d 597, 601 (2008). Judicial estoppel, however, should “only be applied when the party maintaining the inconsistent position either did have, or was chargeable with, full knowledge of the attendant facts prior to adopting the initial position.” McKay v. Owens, 130 Idaho 148, 155, 937 P.2d 1222, 1229 (1997). Bankruptcy rules require disclosing all existing and potential assets.
In Wood, A & J Construction (the debtor) was involved in a joint venture with Wood and subsequently filed for bankruptcy. 141 Idaho at 683-84, 116 P.3d at 13-14. A & J Construction maintained that it honestly did not believe its interest in the joint venture was an asset. Id. This Court found that the corporation was aware оf the joint venture and should have disclosed the asset. Id. at
The case of McKay v. Owens involves a suit by a parent against the attorney she hired to represent her child in a medical malpractice suit. 130 Idaho at 150, 937 P.2d at 1224. After agreeing to a settlement on the medical malpractice claim, the parent sued her attorney asserting that the agreement was signed without her consent and that the damages were insufficient. Id. at 151, 937 P.2d at 1225. The parent in McKay had knowledge of the agreement because in court and on the record she “agreed to the settlement,” and “clearly registered [her] agreement to the settlement.” Id. But in opposition to judicial estoppel, the parent asserted that she never “meant” to approve the settlement but “intended” to file the legal malpractice claim. Id. at 154, 937 P.2d at 1228 (emphasis added). We upheld imposition of judicial estoppel, because the knowledge of a party is relevant, not the party‘s intent. See id. at 154-56, 937 P.2d at 1228-30.
In Heinze v. Bauer, a client sued his divorcе attorney for negligently recommending that he accept the property division settlement in his divorce proceeding. Again, the question was whether the party was “chargeable with full knowledge” 145 Idaho at 239, 178 P.3d at 604 (emphasis in original). The client accepted the property division agreement in court, but he subsequently argued that he failed to understand the settlement agreement, and that the agreement lacked clarity because of notations and strikeouts. Id. Nonetheless, the client was “chargeable with full knowledge of the attendant facts prior to the in court stipulation. [He] was intimately familiar with the assets and liabilities of the community estate prior to the settlement.” Id. at 239, 178 P.3d at 604. Furthermore, he met with his attorney about the settlement, he reviewed his wife‘s credit card purchases, he notated the settlement with his concerns, and he had opportunity to ask the magistrate questions. Id. Consequently, judicial estoppel was appropriate despite the client‘s subjective state of mind.
In the current matter, the district court found that, eight months before Doherty filed for bankruptcy, he believed that but for Dr. Dixon‘s alleged malpractice he would have retained full eyesight in his injured eye. When Doherty filed bankruptcy, before filing this suit аgainst Respondents, Doherty failed to list his potential claim as an asset. At no time while the bankruptcy was pending did Doherty seek to amend his asset schedule—even after the lawsuit was filed. Doherty signed an affidavit asserting that his non-disclosure was made in good faith and without the intent to deceive. Doherty contends that the district court did not read the assertions in his affidavit in the light most favorable to him as the non-moving party and therefore abused its discretion by finding that he possessed the requisite knowledge for judicial estoppel. Even assuming that Doherty is correct that the district court failed to properly weigh the inferences in his affidavit (or even if the district court discounted Doherty‘s assertions altogether), the inferences drawn from Doherty‘s affidavit do not implicate the knowledge that Doherty is charged with having, because it speaks to his intent to conceal. Doherty‘s own brief articulates the inference drawn from his affidavit as follows: “[H]e had no intention to conceal his lawsuit against Dr. Dixon and [Blackfoot Medical Clinic] as an asset in the bankruptcy proceeding.” Yet, nowhere does Doherty claim that he was unaware of his claim against Respondents. Based on this inference, Doherty creatеd an issue of fact with his affidavit, but hardly a material fact: Doherty‘s subjective intent is irrelevant.
There is a distinction between a party‘s intent to play fast and loose with the judicial system and the knowledge that they are charged with possessing. We have consistently rejected opportunities to inquire into a party‘s subjective state of mind, and instead question whether the party seeking to avoid judicial estoppel was sufficiently aware of the facts giving rise to application of judicial estoppel. The fact that the bankruptcy pro-
3. Doherty‘s Subsequent Reopening and Amending of His Bankruptcy Assets Does Not Avoid Application of Judicial Estoppel.
Whether a party‘s reopening of his or her bankruptcy proceeding and amending his or her asset schedule to reveal an undisclosed cause of action avoids application of judicial estoppel in the non-disclosed proceeding is an issue of first impression in Idaho. But numerous other jurisdictions—including many federal circuits—have examined this issue and held that reopening bankruptcy proceedings will not cure non-disclosure to a bankruptcy court so as to avoid application of judicial estoppel.1
Doherty urges us to adopt the Georgia approach. But the Georgia approach is incompatible with the current state of Idaho law. First, the Georgia approach considers which court is manipulated by non-disclosure and leaves it to that court to impose sanctions. However, judicial estoppel protects the judicial system—not merely the enforcing court. See Wood, 141 Idaho at 686, 116 P.3d at 16. Permitting the reopening cure as a defense to judicial estoppel provides an incentive for debtors to conceal potential causes of action until the opposing party identifies the concealment and objects, but no incentive to disclose all assets: If the cause of action is disclosed and goes unnoticed, then the debtor can recover free from the claims of his discharged creditors. But if the non-disclosure is noticed, the debtor simply needs to reopen and amend his schedule. Indeed, Doherty‘s concealment of this cause of action from the bankruptcy court nearly went unnoticed. Respondents only discovered Doherty‘s bankruptcy filing less than two months before the jury trial was set to begin.
Second, Doherty and Georgia make an unpersuasive argument that it is inequitable to deny the reopening cure. Georgia permits the reopening cure so bankruptcy creditors will not lose their potential recovery. Jowers v. Arthur, 245 Ga.App. 68, 537 S.E.2d 200, 201 (2000). The Bankruptcy
As the district court properly noted, once Doherty filed for bankruptсy, the potential tort claim he had against Respondents was no longer Doherty‘s to assert. It became an asset of the bankruptcy estate for the bankruptcy trustee to assert. The district court recognized that this cause of action belongs to the trustee of the bankruptcy estate and substituted the trustee as a plaintiff to this claim. Such a result is equitable because Doherty‘s bankruptcy creditors can potentially recover; it moots the concerns expressed by Georgia that alleged tortfeasors would not be held responsible for their torts, Jowers, 537 S.E.2d, 200, 203; and it maintains the integrity of the judicial system by eliminating the incentive to conceal an asset in bankruptcy until discovered. Therefore, Doherty‘s reopening and amending of his bankruptcy assets does not avoid application of judicial estoppel.
4. The Inadvertence-or-Mistake Exception to Judicial Estoppel is Satisfied Only if the Debtor Lacks Knowledge of the Undisclosed Claim or has No Motive to Conceal the Claim.
The final question regarding the application of judicial estoppel is whether the inadvertence-or-mistake exception to judicial estoppel is applicable. Doherty maintains that his nondisclosure is the result of mistake or inadvertence because his non-disclosure was made in “good faith,” and without the intent to conceal. Doherty equates inadvertence or mistake with the absence of intent.
Judicial estoppel is intended to prevent abuse of the judicial process. Heinze, 145 Idaho at 235, 178 P.3d at 600. Judicial estoppel will not be applied if the inconsistent positions are based only on inadvertence or mistake. Id. It is widely recognized that judicial estoppel does not apply to good faith mistakes. 31 C.J.S. Estoppel and Waiver § 186 (2012). Following the advice of counsel is not the equivalent of inadvertence or mistake. Wood, 141 Idaho at 688, 116 P.3d at 16; see also Cannon-Stokes v. Potter, 453 F.3d 446, 448-49 (7th Cir.2006); In re Coastal Plains, Inc., 179 F.3d 197, 213 (5th Cir. 1999); Tokheim v. Ga.-Pac. Gypsum LLC, 606 F.Supp.2d 988, 998 (2009). Thus, the inadvertence-or-mistake exception is only applicable where it negates the knowledge that the estopped party actually had, or that he or she is reasonably charged with having at the time the estopped party adopted his or her original position. See Heinze, 145 Idaho at 239, 178 P.3d at 604 (examining whether the estopped party “should have recognized any mistakes” in his original position).
Doherty asserts that because his omission was made in good faith, it satisfies the inadvertence-or-mistake exception to judicial estoppel. It is true that some сourts have interpreted the inadvertence-or-mistake exception as denoting bad faith. See Thompson v. Cont. Airlines, 18 S.W.3d 701 (Tex. App. San Antonio 2000). But the majority of jurisdictions apply the inadvertence-or-mistake exception only if the debtor lacks knowledge of the undisclosed claim or has no motive for its concealment. Eastman, 493 F.3d 1151 (finding the “overwhelming weight of authority” as supporting this position); Jethroe v. Omnova Solutions, Inc., 412 F.3d 598 (5th Cir.2005) (holding that debtor must demonstrate that she was unaware of the of facts giving rise to her claim during bankruptcy, not merely disclosure requirements); Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282 (11th Cir.2002); In re Coastal Plains, Inc., 179 F.3d 197 (5th Cir.1999). Courts examining this exception apply an objective standard. See Benton v. Ryan‘s Family Steakhouse, 222 F.R.D. 112 (S.D.Miss.2004)
In Heinze, the estopped party sought to sue his attorney for negligently recommending he accept a property division settlement in his divorce. Heinze, 145 Idaho at 234, 178 P.3d at 599. The estopped party in Heinze claimed that he failed to recognizе mistakes in the agreement and that he did not understand the agreement he was entering. Id. at 239-40, 178 P.3d at 604-05. Whether these circumstances negated the knowledge he was charged with having, this Court found that he had the opportunity to ask the magistrate questions, he examined the settlement and made notations, and he tracked his wife‘s purchases. Id. The knowledge that the estopped party is charged with having is determinative. Id. at 235, 178 P.3d at 600 (citing McKay, 130 Idaho at 155, 937 P.2d at 1229). Therefore, judicial estoppel was appropriate.
In Wood, a joint venture was not disclosed to the bankruptcy court. The estopped party argued that the non-disclosure “was not because of deliberate intention . . . to mislead the bankruptcy court.” Wood, 141 Idaho at 686, 116 P.3d at 16. Rather, the joint venture was not disclosed because of the efforts and advice of the attorneys. Id. The estopped party sought the relief of the inadvertence or mistake exception. See id. We held “that following the advice of counsel is not equivalent to inadvertence or mistake. . . .” Id. at 687, 116 P.3d at 17. In that case, regardless of the estopped party‘s intentions, the estopped party was ultimately aware of the potential asset and did not disclose it. Id.
Here, even though Doherty claims inadvertence or mistake, Doherty had knowledge of the facts giving rise to his claim against Respondеnts at the time he filed for bankruptcy, and during his bankruptcy proceeding. Therefore, he did not lack knowledge. Also, whether or not he intended to conceal this potential asset is irrelevant: objectively, there was a motive for Doherty to conceal this claim. Doherty‘s affidavit does not raise any facts that negate the knowledge he was charged with having and therefore his lack of bad faith alone is not sufficient to avoid judicial estoppel. The only two inferences the district court could draw from Doherty‘s affidavit were (1) that he was unaware he was required to disclose this causе of action on his asset schedule (i.e., he was ignorant of the law), or (2) that his legal counsel failed him. The district court reasonably disposed of these two inferences, which was unnecessary because neither of these inferences negates the knowledge with which Doherty is charged nor his potential motive to conceal.
Therefore, the inadvertence-or-mistake exception does not apply to Doherty‘s non-disclosure.
B. Neither Party is Entitled to Attorney Fees, But Costs are Awarded to Respondents.
Doherty claims he is entitled to attorney fees pursuant to
The Court is permitted to award fees to a prevailing party in certain limited circumstances as authorized by
In the present case, Doherty argued the elements of judicial estoppel were not met in the current matter dеspite very clear and very heavy authority holding that judicial estoppel will apply to interests not disclosed in a prior bankruptcy proceeding. But Doherty made a good faith argument that his omission was not intentional and therefore fell within the ambit of the inadvertence-or-mistake exception. Since this issue is unsettled in Idaho and other courts have addressed this exception in terms of intentionality, attorney fees will not be awarded. Respondents in this case defended what they saw as a proper order from the district court. Thus, neither party is entitled to attorney fees.
VI. CONCLUSION
We affirm the district court‘s dismissal of Doherty‘s claims under the doctrine of judicial estoppel. Costs on appeal are awarded to Respondents as the prevailing party.
Chief Justice BURDICK, Justices EISMANN, J. JONES and HORTON, concur.