Reversal of Bankruptcy Ruling Impacts Fifth Circuit
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Reversal of Bankruptcy Ruling Impacts Fifth Circuit

September 12, 2001

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A U.S. Appeals Court in New Orleans has overturned the ruling of bankruptcy judge Edith H. Jones in the case of Reed v. City of Arlington, which she heard last September, reports BusinessWeek.com. The new ruling establishes that judicial estoppel in bankruptcy cases must be applied "flexibly" in bankruptcy cases in order to make sure "substantial justice" is achieved.

The original bankruptcy case reportedly involved a fireman who filed for bankruptcy but failed to disclose a more than $1 million judgment he had received from the city for which he worked. His omission, it seems, was only discovered after an appeals court confirmed the judgment. The bankruptcy trustee for the original case requested that he be able to collect the judgment and use the money to repay creditors in full.

The original bankruptcy judge, Terry R. Means, designed a plan that would allow the trustee to collect enough to repay creditors in full and would have denied the bankruptcy filer from collecting any money. But Judge Jones overturned that decision, ruling that neither the filer nor the trustee had a right to collect the judgment money.

Her argument (which, sources note, failed to cite case-law precedent) was that a trustee's conduct shouldn't be distinguished from the filer's when applying the legal concept known as judicial estoppel. Judicial estoppel is, essentially, a concept that means no person is legally allowed to act in such a way that contradicts matters that have been proven true by law. In this case, it seems that the problem came from the trustee's failure to learn about the judgment soon enough.

The trustee didn't think Judge Jones' ruling best served the creditors in the original bankruptcy case and so requested a re-hearing before a panel of 16 judges. That 16-judge panel overturned Jones' ruling and granted permission to use the judgment money to repay creditors.

The panel reportedly decided that the trustee was not guilty of hiding anything from the court in initial proceedings, and that his request would in fact be in the best interest of the bankruptcy filer's creditors.

The Fifth Circuit Court's rulings make binding laws for Texas, Louisiana and Mississippi.


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