Browning Mfg v. Salisbury ( 1999 )

UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_____________________
No. 97-11118
_____________________
In The Matter of: COASTAL PLAINS, INC.,
Debtor.
BROWNING MANUFACTURING,
Appellant/Cross-Appellee,
versus
JEFFREY H. MIMS, Trustee for the Bankruptcy
Estate of Coastal Plains, Inc.;
INDUSTRIAL CLEARINGHOUSE, INC.,
Appellees/Cross-Appellants.
INDUSTRIAL CLEARINGHOUSE, INC., Successor in
interest to Coastal Plains Inc.; JEFFREY H.
MIMS, Trustee of The Estate of Coastal Plains, Inc.,
Appellees/Cross-Appellants,
versus
BROWNING MANUFACTURING, formerly known as
Emerson Electric Company, formerly known
as Emerson Power Transmission Corporation,
Appellant/Cross-Appellee.
_____________________
No. 97-11119
_____________________
In The Matter Of: COASTAL PLAINS, INC.,
Debtor.
INDUSTRIAL CLEARINGHOUSE, INC.; JEFFREY H. MIMS,
Trustee of The Estate of Coastal Plains, Inc.,
Appellees-Appellants,
versus
BROWNING MANUFACTURING, formerly a
Division of Emerson Electric Company,
Appellant-Appellee.
_____________________
No. 98-10246
_____________________
In The Matter Of: COASTAL PLAINS, INC.,
Debtor.
BROWNING MANUFACTURING,
Appellant,
versus
JEFFREY H. MIMS, Trustee for the Bankruptcy
Estate of Coastal Plains, Inc.;
INDUSTRIAL CLEARINGHOUSE, INC.,
Appellees.
INDUSTRIAL CLEARINGHOUSE, INC., Successor in
interest to Coastal Plains, Inc.; JEFFREY H. MIMS,
Trustee for the Bankruptcy Estate of Coastal Plains, Inc.,
Appellees,
versus
BROWNING MANUFACTURING, formerly known as Emerson
Electric Company, formerly known as
Emerson Power Transmission Corporation,
Appellant.
__________________________________________________________________
Appeals from the United States District Court
for the Northern District of Texas
_________________________________________________________________
June 18, 1999
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Before REYNALDO G. GARZA, POLITZ, and BARKSDALE, Circuit Judges.
RHESA HAWKINS BARKSDALE, Circuit Judge:
For all but one of the claims at hand, the overarching issue
is whether the bankruptcy court abused its discretion by not
judicially estopping plaintiffs Industrial Clearinghouse and the
Trustee for the bankruptcy estate of Coastal Plains from pursuing
claims against Browning, Coastal’s largest unsecured creditor; the
linchpin being whether nondisclosure of those claims in Coastal’s
bankruptcy schedules or its stipulation for lifting the automatic
bankruptcy stay to allow Coastal’s largest secured creditor to
foreclose on Coastal’s assets, later purchased by Industrial
Clearinghouse (formed by Coastal’s CEO), falls under the exception
to judicial estoppel advanced by plaintiffs, Coastal’s successors
— that, even though Coastal had knowledge of the claims, the
nondisclosure was nevertheless “inadvertent”. For plaintiffs’ one
claim not subject to judicial estoppel (tortious interference), the
key issue is whether it is time-barred. Browning appeals the $5.2
million judgment on a jury verdict in favor of plaintiffs;
plaintiffs cross-appeal the substantial post-verdict reduction in
damages. We REVERSE and RENDER judgment for Browning.
I.
Coastal Plains, Inc., an equipment distributor, was purchased
by Bill Young in 1984 for approximately $9 million. The business
plan included making Browning Manufacturing, formerly a division of
Emerson Electric Company, Coastal’s leading supplier.
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In January 1986, Coastal acknowledged its financial problems
to its creditors and implicitly threatened bankruptcy if they did
not agree to a workout plan, pursuant to which Coastal would return
to its creditors inventory they had sold on credit to Coastal; the
creditors would pay Coastal 50 percent of the inventory’s cost and
write off Coastal’s debt; and the money so raised would be paid to
Coastal’s secured lender, Westinghouse Credit Corporation. Many
creditors rejected the proposal.
The next month, owed $1.3 million by Coastal, Browning agreed
to a transaction which tracked Coastal’s earlier proposed workout
plan. In late February 1986, Coastal began returning inventory to
Browning; this was soon discontinued because Browning’s parent,
Emerson, wanted to postpone the transaction until the next quarter.
Accordingly, in mid-March, Coastal and Browning agreed that,
if the transaction was not completed by 3 April, Browning would
transfer the returned-inventory back to Coastal. The inventory-
return to Browning was completed by the end of March.
Nevertheless, becoming more concerned about Coastal’s
potential bankruptcy, Browning did not complete the transaction
(payment, etc.) by 3 April. Therefore, Coastal demanded that
Browning return the inventory not later than 20 April.
But, on 16 April, Young, for Coastal, signed a voluntary
Chapter 11 bankruptcy petition, which was filed on 22 April.
Coastal advised its creditors that bankruptcy had become necessary
because all of them had not accepted its proposed workout plan.
Coastal owed in excess of $8.5 million to Westinghouse, and
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approximately $8 million to other creditors. Browning was
Coastal’s largest unsecured creditor.
A week after filing its petition, Coastal initiated an
adversary proceeding against Browning, seeking an order both
enjoining it from disposing of the returned-inventory and directing
its transfer to Coastal. Coastal also claimed conversion;
interference with contracts and/or business relationships because
of Browning’s failure to return inventory; punitive damages; and
violation of the automatic stay.
The complaint did not specify the amount of damages sought,
and there were no allegations that Browning’s actions caused the
failure of Coastal’s pre-bankruptcy workout plan. (Concerning this
critical point for judicial estoppel purposes, discussed infra,
Coastal’s bankruptcy attorney testified at a bankruptcy hearing
seven years later that the primary purpose of the adversary
proceeding was the inventory-return.)
Shortly after the adversary proceeding was filed, the
bankruptcy court found that Browning had violated the automatic
stay and ordered the inventory returned to Coastal; the other
claims were not addressed. Browning completed the inventory-return
before the end of May.
Soon thereafter, on 6 June, Wayne Duke, Coastal’s CEO,
executed sworn bankruptcy schedules for Coastal. But, although he
believed that Coastal had claims of up to $10 million against
Browning, they were not disclosed in the bankruptcy schedules and
statement of financial affairs. And, although Coastal’s $1.3
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million debt to Browning was listed in the schedule of liabilities,
it was not specified as contingent, disputed, or subject to setoff.
Three months later, on 9 September, in moving for relief from
the automatic stay so that it could foreclose on Coastal’s assets,
Westinghouse (secured lender) asserted that it was owed in excess
of $8 million by Coastal; that this debt was nearly equal to the
value of the collateral; and that reorganization was not possible.
On 18 September, Westinghouse and Coastal submitted in support of
the lift-stay motion a stipulation, prepared by Westinghouse, that
included estimates of the value of Coastal’s assets, including that
its general intangible assets consisted of computer software
programs, customer lists, and vendor lists, with a total worth less
than $20,000. No mention was made of any claims against Browning.
The stipulation showed more than a $5 million shortfall between the
value of Coastal’s assets and its debt to Westinghouse.
Browning withdrew its objection to lifting the stay. On 19
September, the day after the stipulation was filed, Westinghouse’s
lift-stay motion was granted; it foreclosed on Coastal’s assets,
conducting an auction on 7 October. No mention of Coastal’s claims
against Browning was made in the foreclosure notices or
advertisements, or at the auction.
A Browning representative attended the auction and bid on the
inventory. The highest bid on Coastal’s general intangibles
(which, again, were not described as including its claims against
Browning) was $2,000. Westinghouse was the successful bidder,
purchasing the assets for $3.25 million.
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On 8 October, the day after the auction, and pursuant to
negotiations the preceding month prior to executing the lift-stay
stipulation, Westinghouse entered into a consignment agreement with
Industrial Clearinghouse, Inc. (IC), to sell the assets
Westinghouse had purchased at the auction. IC had been formed by
Coastal’s CEO, Duke, who was also IC’s CEO; that same day, all of
Coastal’s employees became IC employees; and it used the same
computer software and customer lists that had been used by Coastal.
In February 1987, IC purchased the remaining Coastal assets
from Westinghouse for $1.24 million. Those assets expressly
included the previously undisclosed “potential cause of action
against Browning”.
The Chapter 11 reorganization was converted to a Chapter 7
liquidation that April. After the Trustee filed a no-asset report
and applied for closing the bankruptcy case, it was closed in
February 1988.
But, the case was re-opened that March, to address issues
unrelated to Browning. That April, after IC advised the Trustee
that it wanted the claims against Browning prosecuted, and the
Trustee refused, because a successful conclusion would benefit only
IC, IC advised it would pursue the adversary proceeding. In
October 1988, IC was substituted for Coastal in the long dormant
(since May 1986) adversary proceeding against Browning.
IC filed its first amended complaint in March 1989, alleging
that Browning’s breach of the return-inventory agreements and
return-delay caused Coastal’s bankruptcy and demise; and asserting
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claims for breach of contract, conversion, interference with
contracts and/or business relationships, fraud, and violation of
the automatic stay. A second amended complaint was filed in late
1989; a third, in early 1992.
In September 1992, the Trustee again moved to close the case
and for his discharge. IC filed its fourth amended complaint that
December.
The adversary proceeding was set for trial in May 1993 in the
district court, which had withdrawn the reference from the
bankruptcy court. But, on the eve of trial, the Trustee moved to
intervene, claiming that Coastal’s bankruptcy estate owned the
claims being pursued against Browning. The district court referred
the case to the bankruptcy court for the ownership determination.
In bankruptcy court, Browning asserted, inter alia, that,
based on Coastal’s nondisclosure in its bankruptcy schedules and
the lift-stay stipulation, IC and the Trustee were equitably and
judicially estopped. Regarding judicial estoppel, IC responded
that the claims had been omitted through counsel’s oversight.
Following a July 1993 hearing, the bankruptcy court ruled that
the estate owned the tort claims; IC, those in contract.
Contemporaneously, IC and the Trustee agreed to share any recovery
against Browning, with IC to receive 85 percent.
In May 1994, following a hearing that January, the bankruptcy
court approved the Trustee/IC (plaintiffs) sharing agreement and,
inter alia, rejected judicial estoppel. Browning appealed to the
district court, which affirmed; and to our court, which affirmed
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approval of the sharing agreement, but dismissed Browning’s appeal
as to judicial estoppel, holding that the ruling was interlocutory.
(Most unfortunately, Browning did not seek certification from the
district court that, pursuant to 28 U.S.C. § 1292(b), the judicial
estoppel ruling “involve[d] a controlling question of law as to
which there is substantial ground for difference of opinion and
that an immediate appeal from the order may materially advance the
ultimate termination of the litigation”.)
At trial in district court in early 1996 (ten years after the
adversary proceeding was filed), the jury found against plaintiffs’
fraud claim; but, inter alia, awarded them $5 million for breach of
contract, $2.5 million for conversion, $1.75 million for breach of
fiduciary duty, $1.3 million for tortious interference, and $7.5
million in punitive damages.
Browning’s new trial motion was denied; its motion for
judgment as a matter of law, granted in part. The court found
insufficient evidence for breach of fiduciary duty; ordered
plaintiffs to elect a recovery from among the three remaining
substantive awards; reduced punitive damages to $4 million; granted
Browning a $1.4 million setoff; denied its motion to set aside the
bankruptcy court’s judicial estoppel ruling; and limited
prejudgment interest.
Plaintiffs elected, under protest, to recover for breach of
contract (concomitantly, no punitive damages). The final judgment
awarded damages of $3.6 million ($5 million for contract breach
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less $1.4 million setoff), and $1.6 million for attorney’s fees and
costs.
II.
Among numerous issues presented, Browning claims judicial
estoppel, except for the tortious interference claim. Plaintiffs
cross-appeal. We hold that plaintiffs are judicially estopped,
except for the interference claim; it is time-barred.
A.
Although we are the second court to review the bankruptcy
court’s judicial estoppel ruling, we review it “as if this were an
appeal from a trial in the district court”. Phoenix Exploration,
Inc. v. Yaquinto (Matter of Murexco Petroleum, Inc.), 15 F.3d 60,
62 (5th Cir. 1994). Because judicial estoppel is an equitable
doctrine, and the decision whether to invoke it within the court’s
discretion, we review for abuse of discretion the bankruptcy
court’s rejection of the doctrine. See, e.g., Ergo Science, Inc.
v. Martin, 73 F.3d 595, 598 (5th Cir. 1996).
“[A]n abuse of discretion standard does not mean a mistake of
law is beyond appellate correction”, because “[a] district court by
definition abuses its discretion when it makes an error of law”.
Koon v. United States, 518 U.S. 81, 100 (1996). Accordingly,
“[t]he abuse of discretion standard includes review to determine
that the discretion was not guided by erroneous legal conclusions”.
Id. See also Latvian Shipping Co. v. Baltic Shipping Co., 99 F.3d
690, 692 (5th Cir. 1996) (“We will not find an abuse of discretion
unless the district court’s factual findings are clearly erroneous
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or incorrect legal standards were applied”); Meadowbriar Home for
Children, Inc. v. Gunn, 81 F.3d 521, 535 (5th Cir. 1996) (court
“abuses its discretion if it bases its decision on an erroneous
view of the law or on a clearly erroneous assessment of the
evidence”).
Because judicial estoppel was raised in the context of a
bankruptcy case, involving Coastal’s express duty under the
Bankruptcy Code to disclose its assets, we apply federal law. See
Johnson v. Oregon Dept. of Human Resources, 141 F.3d 1361, 1364
(9th Cir. 1998) (action under Americans with Disabilities Act;
“[f]ederal law governs the application of judicial estoppel in
federal courts”).
Judicial estoppel is “a common law doctrine by which a party
who has assumed one position in his pleadings may be estopped from
assuming an inconsistent position”. Brandon v. Interfirst Corp.,
858 F.2d 266, 268 (5th Cir. 1988).1 The purpose of the doctrine is
“to protect the integrity of the judicial process”, by
“prevent[ing] parties from playing fast and loose with the courts
to suit the exigencies of self interest”. Id. (internal quotation
1
See also Data General Corp. v. Johnson, 78 F.3d 1556, 1565
(Fed. Cir. 1996) (“The doctrine of judicial estoppel is that where
a party successfully urges a particular position in a legal
proceeding, it is estopped from taking a contrary position in a
subsequent proceeding where its interests have changed”); Reynolds
v. Commissioner of Internal Revenue, 861 F.2d 469, 472-73 (6th Cir.
1988) (internal quotation marks and citations omitted) (“Courts
have used a variety of metaphors to describe the doctrine,
characterizing it as a rule against playing fast and loose with the
courts, blowing hot and cold as the occasion demands, or having
one’s cake and eating it too. Emerson’s dictum that a foolish
consistency is the hobgoblin of little minds cuts no ice in this
context”).
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marks, parentheses, and citation omitted).2 Because the doctrine
is intended to protect the judicial system, rather than the
litigants, detrimental reliance by the opponent of the party
against whom the doctrine is applied is not necessary. See Matter
of Cassidy, 892 F.2d 637, 641 & n.2 (7th Cir.), cert. denied, 498
U.S. 812 (1990).3
“The policies underlying the doctrine include preventing
internal inconsistency, precluding litigants from playing fast and
loose with the courts, and prohibiting parties from deliberately
changing positions according to the exigencies of the moment.”
United States v. McCaskey, 9 F.3d 368, 378 (5th Cir. 1993). The
doctrine is generally applied where “intentional self-contradiction
is being used as a means of obtaining unfair advantage in a forum
2
See also United States v. McCaskey, 9 F.3d 368, 379 (5th Cir.
1993) (purpose of doctrine is “to protect the integrity of the
judicial process and to prevent unfair and manipulative use of the
court system by litigants”), cert. denied, 511 U.S. 1042 (1994);
McNemar v. Disney Store, Inc., 91 F.3d 610, 616 (3d Cir. 1996)
(“The doctrine of judicial estoppel serves a consistently clear and
undisputed jurisprudential purpose: to protect the integrity of
the courts.”), cert. denied, 519 U.S. 1115 (1997); Matter of
Cassidy, 892 F.2d 637, 641 (7th Cir.), cert. denied, 498 U.S. 812
(1990) (“Judicial estoppel is a doctrine intended to prevent the
perversion of the judicial process”); Reynolds, 861 F.2d at 472
(internal quotation marks and citation omitted) (“The purpose of
the doctrine is to protect the courts from the perversion of
judicial machinery”).
3
See also McNemar, 91 F.3d at 617 (rejecting contention that
party seeking estoppel must show that it would be prejudiced unless
opponent is estopped); Ryan Operations G.P. v. Santiam-Midwest
Lumber Co., 81 F.3d 355, 360 (3d Cir. 1996) (“While privity and/or
detrimental reliance are often present in judicial estoppel cases,
they are not required”); Data General, 78 F.3d at 1565; Fleck v.
KDI Sylvan Pools, Inc., 981 F.2d 107, 121-22 (3d Cir. 1992), cert.
denied, 507 U.S. 1005 (1993).
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provided for suitors seeking justice”. Scarano v. Central R. Co.,
203 F.2d 510, 513 (3d Cir. 1953).4
Most courts have identified at least two limitations on the
application of the doctrine: (1) it may be applied only where the
position of the party to be estopped is clearly inconsistent with
its previous one; and (2) that party must have convinced the court
to accept that previous position. See United States for use of
American Bank v. C.I.T. Construction Inc. of Tex., 944 F.2d 253,
258 (5th Cir. 1991) (“The ‘judicial acceptance’ requirement
minimizes the danger of a party contradicting a court’s
determination based on the party’s prior position and, thus,
mitigates the corresponding threat to judicial integrity”); Matter
of Cassidy, 892 F.2d at 641; Folio v. City of Clarksburg, W.V., 134
F.3d 1211, 1217-18 (4th Cir. 1998).5
4
See also Taylor v. Food World, Inc., 133 F.3d 1419, 1422
(11th Cir. 1998) (internal quotation marks and citation omitted)
(“Judicial estoppel is applied to the calculated assertion of
divergent sworn positions ... and is designed to prevent parties
from making a mockery of justice by inconsistent pleadings”); Ryan,
81 F.3d at 358 (“The basic principle ... is that absent any good
explanation, a party should not be allowed to gain an advantage by
litigation on one theory, and then seek an inconsistent advantage
by pursuing an incompatible theory”). “[W]here a party assumes a
certain position in a legal proceeding, and succeeds in maintaining
that position, he may not thereafter, simply because his interests
have changed, assume a contrary position.” Davis v. Wakelee, 156
U.S. 680, 689 (1895).
5
Cf. McNemar, 91 F.3d at 617 (rejecting contention that party
seeking estoppel must show that prior statement was accepted by a
judicial tribunal); Ryan, 81 F.3d at 361 (doctrine of judicial
estoppel contains no requirement that “a party must have benefitted
from her prior position in order to be judicially estopped from
subsequently asserting an inconsistent one”; but, obviously,
“threat to the integrity of the judicial process from subsequent
assertion of an incompatible position is more immediate” when
tribunal has acted in reliance on party’s initial assertion).
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The Sixth Circuit has explained that the “judicial acceptance”
requirement “does not mean that the party against whom the judicial
estoppel doctrine is to be invoked must have prevailed on the
merits. Rather, judicial acceptance means only that the first
court has adopted the position urged by the party, either as a
preliminary matter or as part of a final disposition”. Reynolds v.
Commissioner of Internal Revenue, 861 F.2d 469, 473 (6th Cir.
1988).
Some courts have imposed additional requirements. For
example, the Fourth Circuit holds that the position must be one of
fact instead of law. Folio, 134 F.3d at 1217-18. Contra, Matter
of Cassidy, 892 F.2d at 642 (“the change of position on the legal
question is every bit as harmful to the administration of justice
as a change on an issue of fact”).
And, many courts have imposed the additional requirement that
the party to be estopped must have acted intentionally, not
inadvertently. E.g., Johnson, 141 F.3d at 1369 (“If incompatible
positions are based not on chicanery, but only on inadvertence or
mistake, judicial estoppel does not apply”); Folio, 134 F.3d at
1217-18; McNemar v. Disney Store, Inc., 91 F.3d 610, 618 (3d Cir.
1996) (internal quotation marks and citation omitted) (part of
threshold inquiry for application of judicial estoppel is whether
party to be estopped “assert[ed] either or both of the inconsistent
positions in bad faith–i.e., with intent to play fast and loose
with the court”); Ryan Operations G.P. v. Santiam-Midwest Lumber
Co., 81 F.3d 355, 358, 362 (3d Cir. 1996) (internal quotation marks
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and citation omitted) (judicial estoppel doctrine “not intended to
eliminate all inconsistencies, however slight or inadvertent;
rather, it is designed to prevent litigants from playing fast and
loose with the courts”; doctrine “does not apply when the prior
position was taken because of a good faith mistake rather than as
part of a scheme to mislead the court”; inconsistency “must be
attributable to intentional wrongdoing”); Matter of Cassidy, 892
F.2d at 642 (judicial estoppel should not be applied “where it
would work an injustice, such as where the former position was the
product of inadvertence or mistake”); Johnson Serv. Co. v.
TransAmerica Ins. Co., 485 F.2d 164, 175 (5th Cir. 1973) (applying
Texas law on judicial estoppel; “the rule looks toward cold
manipulation and not an unthinking or confused blunder”).
Browning maintains that, because of the nondisclosure in
Coastal’s bankruptcy schedules and its lift-stay stipulation,
plaintiffs, as Coastal’s successors, are judicially estopped
(except for the tortious interference claim).
Despite the undisputed facts that Coastal was aware of, but
did not disclose, the claims, the bankruptcy court rejected
judicial estoppel, stating that, from the inception of Coastal’s
adversary proceeding, Browning, the Trustee, and Westinghouse were
aware of that action. That statement, however, is in the section
of the opinion addressing equitable estoppel (which, of course,
requires detrimental reliance; that defense is no longer at issue).
Because the nondisclosure is not discussed in the part on judicial
estoppel, it is unclear whether, in rejecting such estoppel, the
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court relied on the parties’ awareness of the adversary proceeding.
With respect to the lift-stay stipulation, the bankruptcy
court noted that it was prepared by Westinghouse’s attorneys and
reviewed by Coastal’s attorney, who “checked it with his client for
accuracy” when it was signed. The court stated that Westinghouse
and Coastal’s attorneys “overlooked” the adversary proceeding in
arriving at the $20,000 figure for Coastal’s general intangibles;
but ruled that it was not their “intent to omit mention of the
Browning lawsuit”; and concluded that “[s]uch omission appears to
have been inadvertent, as opposed to any outright conspiracy, or
intentional self-contradiction being used as a means to obtain
unfair advantage”. In this regard, the court concluded that the
lift-stay stipulation was not intended to be an “exhaustive listing
of assets”.
The bankruptcy court found that when the stipulation was
signed and the stay lifted, Duke, Coastal’s CEO and later IC’s,
believed that Browning’s actions had damaged Coastal in the $10
million range. The bankruptcy court stated that “[i]t appears that
such lawsuit did have value, but such value did not approach the
projected deficiency of approximately $5 million that
[Westinghouse] anticipated would exist after” it sold Coastal’s
assets.
Accordingly, the bankruptcy court held that Coastal’s tort
claims were not foreclosed upon and were not affected by judicial
estoppel. Likewise, the court concluded that there was
“insufficient factual or legal justification to show that [IC]
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should be judicially estopped ... from asserting ... contract
claims of Coastal ... [greater than] $20,000”; and that there was
insufficient proof that Coastal, IC, or Westinghouse participated
in a fraud on the court or creditors with respect to listing assets
on Coastal’s schedules, the lift-stay stipulation, or lifting the
stay.
On appeal, the district court summarily “agree[d] with the
Bankruptcy Court’s findings [, especially concerning inadvertence,]
and [held] that judicial estoppel should not be applied”.
It goes without saying that the Bankruptcy Code and Rules
impose upon bankruptcy debtors an express, affirmative duty to
disclose all assets, including contingent and unliquidated claims.
11 U.S.C. § 521(1) (“The debtor shall–(1) file a list of creditors,
and unless the court orders otherwise, a schedule of assets and
liabilities, a schedule of current income and current expenditures,
and a statement of the debtor’s financial affairs”). “The duty of
disclosure in a bankruptcy proceeding is a continuing one, and a
debtor is required to disclose all potential causes of action”.
Youngblood Group v. Lufkin Fed. Sav. & Loan Ass’n, 932 F. Supp.
859, 867 (E.D. Tex. 1996). “‘The debtor need not know all the
facts or even the legal basis for the cause of action; rather, if
the debtor has enough information ... prior to confirmation to
suggest that it may have a possible cause of action, then that is
a “known” cause of action such that it must be disclosed’”. Id.
(brackets omitted; quoting Union Carbide Corp. v. Viskase Corp. (In
re Envirodyne Indus., Inc.), 183 B.R. 812, 821 n.17 (Bankr. N.D.
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Ill. 1995)). “Any claim with potential must be disclosed, even if
it is ‘contingent, dependent, or conditional’”. Id. (quoting
Westland Oil Dev. Corp. v. MCorp Management Solutions, Inc., 157
B.R. 100, 103 (S.D. Tex. 1993)) (emphasis added).
Viewed against the backdrop of the bankruptcy system and the
ends it seeks to achieve, the importance of this disclosure duty
cannot be overemphasized. See generally Oneida Motor Freight, Inc.
v. United Jersey Bank, 848 F.2d 414 (3d Cir.) (discussing
importance of disclosure to creditors and to bankruptcy court),
cert. denied, 488 U.S. 967 (1988).
The rationale for ... decisions [invoking
judicial estoppel to prevent a party who
failed to disclose a claim in bankruptcy
proceedings from asserting that claim after
emerging from bankruptcy] is that the
integrity of the bankruptcy system depends on
full and honest disclosure by debtors of all
of their assets. The courts will not permit a
debtor to obtain relief from the bankruptcy
court by representing that no claims exist and
then subsequently to assert those claims for
his own benefit in a separate proceeding. The
interests of both the creditors, who plan
their actions in the bankruptcy proceeding on
the basis of information supplied in the
disclosure statements, and the bankruptcy
court, which must decide whether to approve
the plan of reorganization on the same basis,
are impaired when the disclosure provided by
the debtor is incomplete.
Rosenshein v. Kleban, 918 F. Supp. 98, 104 (S.D.N.Y. 1996)
(emphasis added).6
6
See also Ryan, 81 F.3d at 362 (“disclosure requirements are
crucial to the effective functioning of the federal bankruptcy
system”); Louden v. Federal Land Bank of Louisville (In re Louden),
106 B.R. 109, 112 (Bankr. E.D. Ky. 1989) (“[w]ithout ... disclosure
[required by 11 U.S.C. § 521], the basic system of marshalling of
assets and the resulting distribution of proceeds to creditors
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As Coastal’s bankruptcy attorney admitted at the July 1993
bankruptcy court hearing, it is very important that a debtor’s
bankruptcy schedules and statement of affairs be as accurate as
possible, because that is the initial information upon which all
creditors rely. The significance of the undisclosed claims was
underscored by the testimony of Westinghouse’s counsel at that same
hearing. When asked why the claims against Browning were not
included with the assets described in the lift-stay stipulation, he
testified that it was not intended to be an exhaustive list of
Coastal’s assets; that, in order to determine Coastal’s assets,
creditors should have looked instead at, inter alia, Coastal’s
schedules and statement of financial affairs. (Of course, such
claims/assets were not there disclosed.)
Courts in numerous cases have precluded debtors or former
debtors from pursuing claims about which the debtors had knowledge,
but did not disclose, during the debtors’ bankruptcy proceedings.
See, e.g., Payless Wholesale Distributors, Inc. v. Alberto Culver
(P.R.) Inc., 989 F.2d 570 (1st Cir.), cert. denied, 510 U.S. 931
(1993); Oneida, 848 F.2d 414.7 It is along this line that Browning
would be an impossible task”).
7
See also Chandler v. Samford University, 35 F. Supp. 2d 861
(N.D. Ala. 1999); Youngblood Group, 932 F. Supp. 859; Rosenshein,
918 F. Supp. 98; Okan’s Foods, Inc. v. Windsor Associates Ltd.
Partnership (In re Okan’s Foods, Inc.), 217 B.R. 739 (Bankr. E.D.
Pa. 1998); Welsh v. Quabbin Timber, Inc., 199 B.R. 224 (D. Mass.
1996); Freedom Ford, Inc. v. Sun Bank & Trust Co. (Matter of
Freedom Ford), 140 B.R. 585 (Bankr. M.D. Fla. 1992); State of Ohio,
Dept. of Taxation v. H.R.P. Auto Center, Inc. (In re H.R.P. Auto
Center, Inc.), 130 B.R. 247 (Bankr. N.D. Ohio 1991); Sure-Snap
Corp. v. Bradford Nat’l Bank, 128 B.R. 885 (D. Vt.), aff’d, 948
F.2d 869 (2d Cir. 1991); Pako Corp. v. Citytrust, 109 B.R. 368 (D.
- 19 -
takes its stand. It maintains that the bankruptcy court applied an
incorrect standard of law and, therefore, abused its discretion;
that, rather than basing its decision on lack of knowledge vel non,
the court improperly based it on self-serving claims of lack of
intent to conceal. Browning maintains that “inadvertence” should
preclude judicial estoppel only when the inconsistent positions
result from a lack of knowledge. We need not agree entirely with
Browning’s contention, in order to conclude, as discussed below,
that the bankruptcy court abused its discretion.
1.
Plaintiffs respond that the first judicial estoppel prong
(inconsistent positions) is not satisfied, because Coastal
Minn. 1989); Louden, 106 B.R. 109; Hoffman v. First Nat’l Bank of
Akron, IA (In re Hoffman), 99 B.R. 929 (N.D. Iowa 1989); Galerie
Des Monnaies of Geneva v. Deutsche Bank, A.G. (In re Galerie Des
Monnaies of Geneva, Ltd.), 55 B.R. 253 (Bankr. S.D.N.Y. 1985),
aff’d, 62 B.R. 224 (S.D.N.Y. 1986). Cf. Donaldson v. Bernstein,
104 F.3d 547 (3d Cir. 1997) (debtors’ principals judicially
estopped from asserting that one of them had terminated
relationship with debtor because debtor did not disclose alleged
resignation prior to bankruptcy court’s approval of plan of
reorganization); Cullen Center Bank & Trust v. Hensley (Matter of
Criswell), 102 F.3d 1411 (5th Cir. 1997) (Chapter 7 trustee
judicially estopped from asserting that creditor was not transferee
of oil and gas properties that debtor fraudulently conveyed to
children, because trustee succeeded in preference action based on
assertion that creditor’s lien was a transfer); Eubanks v.
F.D.I.C., 977 F.2d 166 (5th Cir. 1992) (res judicata effect of
order confirming plan of reorganization barred debtors from
asserting undisclosed claims); County Fuel Co., Inc. v. Equitable
Bank Corp., 832 F.2d 290 (4th Cir. 1987) (debtor’s failure to
assert breach of contract counterclaim to proof of claim filed by
creditor barred subsequent breach of contract action against
creditor based on “principles of waiver closely related to those
that, in the interests of repose and integrity, underlie res
judicata”); United Virginia Bank/Seaboard Nat’l v. B.F. Saul Real
Estate Investment Trust, 641 F.2d 185 (4th Cir. 1981) (creditor
judicially estopped from litigating issue based on earlier
inconsistent position in bankruptcy proceedings).
- 20 -
fulfilled its duty to disclose its claims against Browning by
initiating the adversary proceeding in April 1986, a week after
filing its Chapter 11 petition. According to plaintiffs, the
subsequent nondisclosure was inconsequential because, in the light
of the adversary proceeding, everyone involved in the bankruptcy
proceeding, including Browning, was aware of the claims.
a.
The record contradicts that assertion; Browning, Westinghouse,
and Coastal’s bankruptcy counsel all believed that, after Browning
returned the inventory in May 1986, little remained of the
adversary proceeding. Coastal’s bankruptcy attorney testified at
the July 1993 bankruptcy court hearing that the primary purpose of
the adversary proceeding was to cause that inventory return. The
attorney who represented Westinghouse in connection with lifting
the stay testified similarly that Coastal’s claims against Browning
were not mentioned in the lift-stay stipulation, during the lift-
stay hearing, in the notice of the auction, or at the auction
because Westinghouse believed that the claims sought inventory
turnover from Browning, which had already been accomplished; and
that there was little left to be done in that adversary proceeding.
Likewise, at a bankruptcy hearing in January 1994, Browning’s
attorney testified that inventory turnover was the essence of the
adversary proceeding.
In the light of that consensus, it was particularly important
for Duke (Coastal) to disclose his vastly different view: that the
claims were worth millions. In sum, this silence led Browning, the
- 21 -
other creditors, and the bankruptcy court to believe that Coastal’s
claims against Browning were resolved in May 1986, when it returned
the inventory.
b.
Moreover, Browning’s knowledge of the claims, or its non-
reliance on the nondisclosure, even if supported by the record, are
irrelevant. As discussed supra, unlike the well-known reliance
element for other forms of estoppel, such as equitable estoppel,
detrimental reliance by the party seeking judicial estoppel is not
required. Again, the purpose of judicial estoppel is not to
protect the litigants; it is to protect the integrity of the
judicial system.8
Accordingly, the inconsistent positions prong for judicial
estoppel is satisfied. By omitting the claims from its schedules
and stipulation, Coastal represented that none existed. Likewise,
in scheduling its debt to Browning, Coastal did not specify that it
was disputed, contingent, or subject to setoff. But in this
proceeding, plaintiffs have asserted claims for $10 million against
Browning for allegedly causing Coastal’s bankruptcy and demise.
2.
Plaintiffs do not seriously dispute that the second prong for
judicial estoppel (acceptance of Coastal’s first position by the
bankruptcy court) is satisfied. The stay was lifted based in part
8
Even if detrimental reliance were an element, there is
evidence that Browning relied on the no-claims-existed
representations in withdrawing its objection to lifting the stay
and in not bidding at the auction on Coastal’s intangible assets.
- 22 -
on the stipulation, which represented that Coastal’s intangible
assets were worth less than $20,000; and that its assets were
inadequate to satisfy its debt to Westinghouse.
3.
Nevertheless, plaintiffs maintain that judicial estoppel is
inapplicable because the nondisclosure was unintentional and
inadvertent. On this record, plaintiffs’ and the bankruptcy
court’s reliance on inadvertence to preclude judicial estoppel is
misplaced. Therefore, the court abused its discretion.
Our review of the jurisprudence convinces us that, in
considering judicial estoppel for bankruptcy cases, the debtor’s
failure to satisfy its statutory disclosure duty is “inadvertent”
only when, in general, the debtor either lacks knowledge of the
undisclosed claims or has no motive for their concealment.9
9
See, e.g., Brassfield v. Jack McLendon Furniture, Inc., 953
F. Supp. 1424 (M.D. Ala. 1996) (in Chapter 7 case, where claims
accrued after filing petition, and where debtor was not aware of
claims during bankruptcy, debtor not judicially estopped from
asserting unscheduled claims); Dawson v. J. G. Wentworth & Co.,
Inc., 946 F. Supp. 394 (E.D. Pa. 1996) (although debtor disclosed
claim in amended bankruptcy schedules, fact issue regarding
debtors’ good or bad faith in not disclosing claims in original
bankruptcy schedules precluded summary judgment based on judicial
estoppel); Richardson v. United Parcel Serv., 195 B.R. 737 (E.D.
Mo. 1996) (judicial estoppel inapplicable for undisclosed claim
where debtor’s bankruptcy case was still pending, assets had not
been distributed, and no plan had been confirmed); In re Envirodyne
Industries, Inc., 183 B.R. 812 (where retention of jurisdiction in
plan of reorganization put creditors on notice as to possibility of
such actions, and debtor’s undisclosed counterclaim did not assert
position contrary to listing of creditor’s claim as undisputed,
judicial estoppel did not bar debtor from pursuing counterclaim and
setoff request); Elliott v. ITT Corp., 150 B.R. 36 (N.D. Ill. 1992)
(where debtor was unaware that claim against creditor existed, and
amended schedule after discovery of potential claims, judicial
estoppel inapplicable); Neptune World Wide Moving, Inc. v.
Schneider Moving & Storage Co. (In re Neptune World Wide Moving,
- 23 -
Two cases from the Third Circuit aptly illustrate the critical
distinction between nondisclosures based on a lack of knowledge,
and those where, as here, the debtor fails to satisfy its
disclosure duty despite knowledge of the undisclosed facts. In
Oneida, 848 F.2d 414, judicial estoppel barred a former Chapter 11
debtor from prosecuting against a bank claims not disclosed during
the bankruptcy proceedings. The excuse for nondisclosure was not
lack of knowledge; instead, that the bankruptcy case was never in
a procedural posture for the claims to be properly asserted. Id.
at 418. Although the court stopped short of holding that the
nondisclosure was equivalent to taking a position that the claims
did not exist, it concluded that the debtor’s acknowledgment of its
debt to the bank, without any indication that the debt was disputed
or subject to setoff (as is the situation here), constituted a
position inconsistent with its later action against the bank. Id.
at 419.
On the other hand, in Ryan, 81 F.3d 355, the Third Circuit
concluded that a Chapter 11 debtor’s earlier nondisclosure would
not judicially estop the debtor from pursuing the claims outside of
bankruptcy, because there was no evidence that the debtor acted in
bad faith. Id. at 362. The debtor, a builder, asserted claims
against the manufacturers and suppliers of an allegedly defective
Inc.), 111 B.R. 457 (Bankr. S.D.N.Y. 1990) (fact issue regarding
debtor’s contention that defendants concealed and altered documents
which prevented debtor from discovering and disclosing preferential
or fraudulent transfer claims in disclosure statement precludes
dismissal based on judicial estoppel).
- 24 -
product; but it had not listed any potential claims regarding the
product in its bankruptcy schedules.
The court distinguished Oneida on the ground that the debtor
there not only failed to disclose its potential claim as a
contingent asset, but also scheduled its debt as a liability,
without disclosing an offset possibility. Id. at 363. The court
stated that the Oneida debtor had knowledge of its claim when it
filed for bankruptcy because the “gravamen of [its] case against
the bank was that the bank’s actions were responsible for forcing
[the debtor] into bankruptcy”, id.; and noted that the Oneida
debtor had a motive to conceal the claim because, had the bank
known that the debtor would seek restitution of the amount paid to
the bank under the plan, the bank “might well have voted against
approval of the plan”. Id. The Ryan court concluded that, in
Oneida, it was “[t]his combination of knowledge of the claim and
motive for concealment in the face of an affirmative duty to
disclose [that] gave rise to an inference of intent sufficient to
satisfy the [bad faith] requirements of judicial estoppel”. Id. at
363.
In contrast, the court stated that there was no basis for
inferring that the Ryan debtor “deliberately asserted inconsistent
positions in order to gain advantage”, id. at 363, because there
was “no evidence that the nondisclosure played any role in the
confirmation of the plan or that disclosure of the potential claims
would have led to a different result”, id.; and the debtor’s
failure to list claims against the manufacturers and suppliers as
- 25 -
contingent assets was offset by its failure to list, as contingent
liabilities, claims asserted against the debtor by homeowners for
the defective product. Id. The court also noted that the debtor
would derive no appreciable benefit from the nondisclosure, because
creditors would receive 91 percent of any recovery on the claims,
id.; and that the debtor’s actions subsequent to filing its
schedules, including obtaining authorization from the bankruptcy
court to pursue the claims, were inconsistent with an intent to
deliberately conceal them. Id. at 364. The court concluded that
intent to mislead or deceive could not be inferred from the mere
fact of nondisclosure. Id. at 364-65.
In Okan’s Foods, Inc. v. Windsor Associates Ltd. Partnership
(In re Okan’s Foods, Inc.), 217 B.R. 739 (Bankr. E.D. Pa. 1998),
the bankruptcy court held that the “bad faith” element mandated by
Ryan was satisfied by “[s]tatements or conduct of the debtor
evincing a reckless disregard for the truth”. Id. at 755. There,
a Chapter 11 debtor, following plan confirmation, filed an
adversary complaint against its creditor-landlord, asserting claims
under 42 U.S.C. § 1983, and alleging that the creditor’s actions
caused its bankruptcy. The court found that, because “the
undisclosed claim involved allegations that a particular creditor’s
conduct precipitated the filing of the bankruptcy case and that
substantial damage to its business occurred as a result ..., all of
the facts underlying the claims were available and known to the
debtor well before confirmation”, id. at 756, and inferred that the
debtor’s motive for the pre-confirmation nondisclosure was “to
- 26 -
preserve for its own uses, to the exclusion of its creditors, any
recovery it might obtain upon a successful prosecution of such
claim”. Id.
Coastal’s claimed “inadvertence” is not the type that
precludes judicial estoppel against plaintiffs, as Coastal’s
successors, from asserting in the instant litigation the previously
nondisclosed claims; Coastal both knew of the facts giving rise to
its inconsistent positions, and had a motive to conceal the claims.
It is undisputed that Duke, who, as Coastal’s CEO, signed
Coastal’s schedules, then believed that Coastal had claims for $10
million against Browning. And, as found by the bankruptcy court,
he continued to maintain that belief when he authorized Coastal’s
attorney to execute the lift-stay stipulation. At the July 1993
bankruptcy hearing, when asked why he did not disclose those claims
on Coastal’s schedules, Duke responded that “[w]e pretty much
relied on our attorneys. We had no experience in filling those
out, and we provided them the information, and maybe later on
during the process, ... a couple of months down the road we may
have filled them out ourselves.... We went to [a] library and
tried to find books on how to fill these forms out....” He
testified further: “[W]e had never done these kind of statements
before, and we depended upon our legal counsel ... about these
types of things, and he had kind of a check list for us.... [W]e
depended upon [him] to give us the guidance on what to put....”
Finally, Duke testified that he did not know what “contingent” and
“unliquidated” claims meant under bankruptcy law; that Coastal’s
- 27 -
counsel told him “what to put” on the schedules; that it was
counsel’s conclusion that “there was no value” in the claims
against Browning; and that, if there was an error, it was “just an
oversight”.
But, at that July 1993 hearing, Coastal’s bankruptcy attorney
testified that the adversary proceeding against Browning was a
contingent or unliquidated claim that should have been included on
Coastal’s schedules; and conceded that Coastal’s debt to Browning
“probably” should have been listed as being disputed. Although the
attorney testified that it was his firm’s policy to discuss
schedules with clients, he did not recall his specific involvement
in preparing the schedules, could not recall any discussions with
Young or Duke about the claims against Browning, and could not
testify as to why the adversary proceeding was not listed as a
contingent or unliquidated claim.
Duke’s claimed lack of awareness of Coastal’s statutory
disclosure duty for its claims against Browning is not relevant.
See Chandler v. Samford University, 35 F. Supp. 2d 861, 865 (N.D.
Ala. 1999) (“Research reveals no case in which a court accepted
such an excuse for a party’s failure to comply with the requirement
of full disclosure”). In any event, no one testified that
Coastal’s bankruptcy attorney advised Coastal not to disclose the
claims.
Moreover, Coastal had a motive for concealing them. Had those
claims, believed to be worth $10 million (more than enough to
satisfy Coastal’s debt to Westinghouse) been disclosed, Coastal’s
- 28 -
unsecured creditors might have opposed lifting the stay, and the
bankruptcy court might have reached a different decision in that
regard. Or, even had the stay been lifted, creditors, including
Browning, might have chosen to bid more at the foreclosure auction
for Coastal’s assets. Browning’s representative at the auction
testified that, had Browning been aware that Coastal’s claims
against it were then being sold, he “strongly suspect[ed]” that
Browning would have authorized him to bid on them.
Coastal avoided paying its debts by filing bankruptcy. Yet
IC, formed by Coastal’s CEO, purchased Coastal’s assets, including
the undisclosed $10 million claim against Browning, for only $1.24
million, and continued to sell Browning’s former inventory at
discounted prices, then obtained a net judgment of $3.6 million
against Browning on the undisclosed claims. For facts similar to
those at hand, the bankruptcy court’s interpretation of the
“inadvertence” exception for judicial estoppel would encourage
bankruptcy debtors to conceal claims, write off debts, purchase
debtor assets at bargain prices, and then sue on undisclosed claims
and possibly recover windfalls. This, of course, would be to the
detriment of creditors who decided not to bid on the debtor’s
assets at a foreclosure sale because they lacked knowledge about
the existence or value of the undisclosed claims.
Needless to say, judicial estoppel is intended to prevent just
such a process. As the First Circuit aptly stated in Payless:
The basic principle of bankruptcy is to obtain
a discharge from one’s creditors in return for
all one’s assets, except those exempt, as a
result of which creditors release their own
- 29 -
claims and the bankrupt can start fresh.
Assuming there is validity in [debtor’s]
present suit, it has a better plan. Conceal
your claims; get rid of your creditors on the
cheap, and start over with a bundle of rights.
This is a palpable fraud that the court will
not tolerate, even passively. [Debtor], having
obtained judicial relief on the representation
that no claims existed, can not now resurrect
them and obtain relief on the opposite basis.
989 F.2d at 571.
4.
Finally, plaintiffs maintain that judicial estoppel would be
inequitable because Browning also took inconsistent positions on
issues related to its defense (regarding ownership of the claims
and whether they were foreclosed on by Westinghouse). We disagree.
Again, the purpose of judicial estoppel is to protect the integrity
of courts, not to punish adversaries or to protect litigants.
B.
As noted, the only claim not barred by judicial estoppel is
that for tortious interference. Plaintiffs claimed that, around
the start of 1986, and but for Browning’s interference, Walter
Helms would have purchased Coastal for $10 million. Helms
testified that Browning’s president, Kooyman, told him (Helms) that
he had heard Helms was interested in purchasing Coastal; Helms
confirmed that he intended to do so; and Kooyman told Helms that
“he couldn’t divulge certain things that were going on, but it
probably would be a good idea if [Helms] held up a little bit”.
Browning presents, inter alia, a meritorious limitations bar.
1.
- 30 -
Although Coastal raised tortious interference claims against
Browning in its original complaint (filed in 1986), and IC did
likewise in several of its amended complaints, those claims were
premised on Browning’s failure to return inventory and its impact
on Coastal’s relationships with its customers and secured lender
(Westinghouse). It was not until late December 1993, over seven
years after the adversary proceeding was filed, that IC moved for
leave to file a fifth amended complaint which, for the first time,
claimed tortious interference based on the alleged Helms-purchase.
That amended complaint was not filed until almost two years later,
in 1995. And, plaintiffs subsequently restricted their tortious
interference claim to the Helms-purchase.
Under Texas law, a two-year limitations period applies to
tortious interference claims, TEX. CIV. PRAC. & REM. CODE ANN. §
16.003(a); First Nat’l Bank of Eagle Pass v. Levine, 721 S.W.2d
287, 289 (Tex. 1986); and, “[f]or the purposes of application of
the statute of limitations, a cause of action generally accrues at
the time when facts come into existence which authorize a claimant
to seek a judicial remedy.... Put another way, a cause of action
can generally be said to accrue when the wrongful act effects an
injury”. Murray v. San Jacinto Agency, Inc., 800 S.W.2d 826, 828
(Tex. 1990) (internal quotation marks and citation omitted); see
also Computer Associates Int’l, Inc. v. Altai, Inc., 918 S.W.2d
453, 458 (Tex. 1996) (“The traditional rule in Texas is that a
cause of action accrues and the two-year limitations period begins
to run as soon as the owner suffers some injury, regardless of when
- 31 -
the injury becomes discoverable”). On the other hand, “[t]he
discovery rule exception defers accrual of a cause of action until
the plaintiff knew or, exercising reasonable diligence, should have
known of the facts giving rise to the cause of action”. Id. at
455.
But, the Texas Supreme Court has stated that “[t]he discovery
rule, in application, proves to be a very limited exception to
statutes of limitations”. Id. at 455 (internal quotation marks and
citation omitted); see also S.V. v. R.V., 933 S.W.2d 1, 25 (Tex.
1996) (“exceptions to the legal injury rule should be few and
narrowly drawn”). “Generally, application [of the discovery rule]
has been permitted in those cases where the nature of the injury
incurred is inherently undiscoverable and the evidence of injury is
objectively verifiable”. Altai, 918 S.W.2d at 456 (internal
quotation marks and citation omitted).
In seeking judgment as a matter of law, Browning asserted that
the interference claim was time-barred. Plaintiffs had to prove
applicability of the discovery rule: first, that tortious
interference claims are inherently undiscoverable; and second, that
their claim is objectively verifiable. See Woods v. William M.
Mercer, Inc., 769 S.W.2d 515, 518 (Tex. 1988).
a.
Browning contends that the claim is not inherently
undiscoverable because the alleged injury is not, by its nature,
unlikely to be discovered within the limitations period. Along
this line, Browning maintains that Coastal became aware of its
- 32 -
injury when the alleged sale did not materialize; and that, by
simply asking Helms, the putative purchaser, Coastal could have
discovered the alleged interference.
Plaintiffs counter that the claim was inherently
undiscoverable because of the difficulty of learning about secret
communications between third parties. They point out that Young,
Coastal’s former president and chairman, testified that he asked
Helms why he wanted to delay purchasing Coastal, and that Helms
refused to explain until his January 1993 deposition. Duke
testified similarly that, until January 1993, Helms never mentioned
why he did not complete the purchase.
“The requirement of inherent undiscoverability recognizes that
the discovery rule exception should be permitted only in
circumstances where it is difficult for the injured party to learn
of the negligent act or omission”. Altai, 918 S.W.2d at 456
(internal quotation marks and citation omitted). “Inherently
undiscoverable encompasses the requirement that the existence of
the injury is not ordinarily discoverable, even though due
diligence has been used”. Id. The Texas Supreme Court has stated
that “[t]he common thread in [the ‘inherently undiscoverable’]
cases is that when the wrong and injury were unknown to the
plaintiff because of their very nature and not because of any fault
of the plaintiff, accrual of the cause of action was delayed”.
S.V., 933 S.W.2d at 7.
“To be ‘inherently undiscoverable,’ an injury need not be
absolutely impossible to discover, else suit would never be filed
- 33 -
and the question whether to apply the discovery rule would never
arise.” Id. “Nor does ‘inherently undiscoverable’ mean merely
that a particular plaintiff did not discover his injury within the
prescribed period of limitations; discovery of a particular injury
is dependent not solely on the nature of the injury but on the
circumstances in which it occurred and plaintiff’s diligence as
well”. Id. “An injury is inherently undiscoverable if it is by
nature unlikely to be discovered within the prescribed limitations
period despite due diligence”. Id.
Helms was listed in October 1989 as an expert witness for
plaintiffs, and so testified. There was also evidence that he was
a director of IC’s parent, Overline Corporation; that he had been
paid $50,000 annually as a consultant for Overline; that he had
owned ten percent of its stock; and that he was a creditor of IC.
Under these circumstances, Helms’ failure until his deposition in
January 1993 to inform plaintiffs of Browning’s alleged
interference is inexplicable.
We doubt that tortious interference is the type of conduct
that, by its nature, is unlikely, despite due diligence, to be
discovered within the limitations period. In any event, it is not
necessary for us to decide that question. The discovery rule is
inapplicable because, as discussed below, the claim is not
objectively verifiable.
b.
Browning asserts that the claim is not objectively verifiable
because there is no objective or documentary evidence of either
- 34 -
Helms’ alleged offer or Browning’s alleged interference.
Plaintiffs respond, based on Helms’ eyewitness account, that the
claim is objectively verifiable.
The Texas Supreme Court has stated that “the bar of
limitations cannot be lowered for no other reason than a swearing
match between parties over facts and between experts over
opinions”. S.V., 933 S.W.2d at 15. The requirement of objective
verifiability requires physical or other evidence, such as an
objective eyewitness account, to corroborate the existence of the
claim. See S.V., 933 S.W.2d at 15. “Objectively verifiable
evidence is the key factor for determining the discovery rule’s
applicability.” Askanase v. Fatjo, 130 F.3d 657, 668 (5th Cir.
1997).
There is no documentary evidence of Helms’ proposed purchase
or Kooyman’s alleged comment regarding it. The only evidence
concerning Helms’ alleged agreement to purchase Coastal is his and
Young’s testimony; the only evidence concerning interference is
Helms’ testimony. Kooyman, Browning’s president, did not testify
at trial; his testimony was presented by deposition. And, he was
not deposed about his alleged interference — his alleged comments
to Helms.
As stated, Helms testified as a paid expert witness for
plaintiffs, was a creditor of IC, and was a consultant, part owner,
and director of IC’s parent. He also had other close ties to the
Coastal and IC principals: at the time of Helms’ testimony, Young
was running a company for Helms; and both Young and Duke had served
- 35 -
as expert witnesses for Helms in prior litigation involving one of
Helms’ companies.
2.
Because the discovery rule does not apply to the interference
claim, it is time-barred unless it relates back to the complaints
filed within the limitations period. Rule 15(c) of the Federal
Rules of Civil Procedure provides, in pertinent part:
An amendment of a pleading relates back to the
date of the original pleading when
(1) relation back is permitted by the
law that provides the statute of limitations
applicable to the action, or
(2) the claim or defense asserted in the
amended pleading arose out of the conduct,
transaction, or occurrence set forth or
attempted to be set forth in the original
pleading....
FED. R. CIV. P. 15(c).
“[U]nder Rule 15(c), an amendment to a complaint will relate
back to the date of the original complaint if the claim asserted in
the amended pleading arises out of the conduct, transaction, or
occurrence set forth or attempted to be set forth in the original
pleading”. F.D.I.C. v. Conner, 20 F.3d 1376, 1385 (5th Cir. 1994)
(internal quotation marks and citation omitted).
The theory that animates this rule is that
once litigation involving particular conduct
or a given transaction or occurrence has been
instituted, the parties are not entitled to
the protection of the statute of limitations
against the later assertion by amendment of
defenses or claims that arise out of the same
conduct, transaction, or occurrence as set
forth in the original pleading. Permitting
such an augmentation or rectification of
claims that have been asserted before the
- 36 -
limitations period has run does not offend the
purpose of a statute of limitations, which is
simply to prevent the assertion of stale
claims.
Id. (internal quotation marks and citation omitted).
Browning notes that the tortious interference claim is based
on a different transaction than the earlier claims, which are based
on Browning’s failure to return inventory to Coastal. Plaintiffs
counter that the relation-back doctrine applies because Browning
had ample notice, after more than seven years of litigation, that
plaintiffs were suing on all of Browning’s acts that caused
Coastal’s demise; and that Browning’s proposed-purchase
interference was merely part of its broader plan to destroy
Coastal.
We conclude that the claim does not arise out of the same
conduct, transaction, or occurrences presented in the timely-filed
complaints. As the district court stated in its post-verdict
order:
All of the claims asserted by plaintiffs
revolve around two sets of occurrences. The
tortious interference ... claim stems from an
attempted sale of Coastal Plains to a third
party.... The remaining claims involve the
failure of Browning to return inventory to
Coastal Plains.
And, in awarding attorney’s fees, the district court stated that
“[t]he tortious interference claim is not factually interrelated to
the other claims as it arose from a separate transaction”.
Moreover, plaintiffs’ contention that their tortious
interference claim is based on the same transaction or occurrence
as their other claims is not consistent with positions they have
- 37 -
taken with respect to attorney’s fees and Browning’s right to
setoff. In seeking attorney’s fees, one of plaintiffs’ attorneys
stated by affidavit: “[w]ith the exception of the claim involving
tortious interference, all of the causes of action pled in this
case were dependent upon the same set of facts or circumstances”.
(Emphasis added.) In their appellate brief here, plaintiffs
contend that Browning’s tortious interference caused a separate
injury to Coastal; and assert that, if we affirm the judgment
solely on the basis of the interference claim, Browning will not be
entitled to a setoff because “[t]ortious interference is not
sufficiently connected with Browning’s claim to permit an offset”.
III.
For the foregoing reasons, the judgment is REVERSED, and
judgment is RENDERED in favor of Browning.
REVERSED and RENDERED
- 38 -