Sunday, August 5, 2018

FYI: 5th Cir Holds Automatic Stay Violation Claim Against Mortgagee Barred by Judicial Estoppel

The U.S. Court of Appeals for the Fifth Circuit recently held that a mortgagee's foreclosure action did not violate an automatic stay imposed during one of the plaintiff's Chapter 13 bankruptcy, where the debtor failed to amend his bankruptcy schedules to disclose his recent acquisition of the subject property from his son. 


In so ruling, the Fifth Circuit affirmed the trial court's judgment in favor of the mortgagee because father and son plaintiffs were judicially estopped from claiming a stay violation.


A copy of the opinion is available at:  Link to Opinion


A borrower ("Borrower") obtained a mortgage loan from a mortgage lender ("Lender").  The Borrower subsequently entered an equity sharing agreement with his father ("Father"), which provided his father with an equitable interest in the property.  The Father voluntarily made payments to the Lender for three years, but the Lender was never informed of the equitable interest and it was never recorded.


The father filed for Chapter 13 bankruptcy in 2012, wherein "an [e]quity sharing agreement in son's house" was listed in the bankruptcy schedules, but the schedules did not list the property's address or Lender as a creditor.  The equity sharing agreement expired on its own terms in February 2013.


In January 2014, the Father surrendered his own, separate homestead property in bankruptcy and moved into the Borrower son's property.  After the Borrower and his Father stopped making payments towards the Loan in November 2014, the property was conveyed from Borrower to Father via a quit claim deed ("QCD") in January 2015.  Although the QCD was recorded, the Father did not amend his bankruptcy schedules, nor provide Lender with notice of the transfer.


After Lender gave notice of default, the loan was accelerated and posted for foreclosure on April 6, 2015. 


The debtor contended that he sent Lender a check for the delinquent payments, along with copies of his bankruptcy documents, the QCD, and the equity sharing agreement on April 28, 2015.  Lender disputed receipt of the relevant bankruptcy documents, and returned the submitted funds as insufficient to bring the loan current as of May 1, 2015. 


The Father alleged that he resubmitted the bankruptcy package to Lender on May 4, 2015, but the property was sold at a foreclosure sale on May 5, 2018.  After the sale, the Lender contacted Borrower and provided him two weeks to redeem the property, which Borrower declined to do.


The Borrower and his Father (collectively, "Plaintiffs") instead filed suit against Lender alleging wrongful foreclosure and violations of the Emergency Stabilization Act and the bankruptcy automatic stay under § 362(a), seeking actual damages of $50,000 and punitive damages in the amount of $450,000.  After the Lender removed the action to federal court, Plaintiffs filed a second state court action against the Lender.  The two actions were eventually consolidated in federal court.


Following a bench trial, the trial court held that the Plaintiffs' claims lacked merit and that they were judicially estopped from pursing claims for violation of the automatic stay imposed by the Father's bankruptcy filing.  Accordingly, judgment was entered in Lender's favor, Plaintiffs were denied a motion for new trial, and several exhibits presented by Plaintiffs in the lower court were denied admittance upon review of Lender's objections following these Orders. 


This appeal followed.


Primarily, the Fifth Circuit noted that Plaintiffs waived their claims for wrongful foreclosure and violation of the Emergency Stabilization Act by failing to argue them in their appellate briefing.  See N.W. Enterprises, Inc. v. City of Houston, 352 F.3d 162, 183 n.24 (5th Cir. 2003).  Accordingly, the only issues on appeal were (i) the Lender's purported violation of the automatic stay under § 362(a); (ii) Plaintiff's request for a new trial, and; (iii) the post-judgment evidentiary rulings.


As you may recall, judicial estoppel has three elements: (1) the party against whom estoppel is sought has asserted a position plainly inconsistent with a prior position, (2) a court accepted the prior position, and (3) the party did not act inadvertently. Allen v. C & H Distribs., L.L.C., 813 F.3d 566, 572 (5th Cir. 2015).  (citing Flugence v. Axis Surplus Ins. Co. (In re Flugence), 738 F.3d 126, 129 (5th Cir. 2013)).


Here, the Fifth Circuit found that the first and second elements of judicial estoppel were satisfied by the Father's failure to amend his bankruptcy schedules to disclose the quitclaim deed or his putative claims against Lender.  See Love, 677 F.3d at 261-62 (quoting Jethroe v. Omnova Sols., Inc., 412 F.3d 598, 600 (5th Cir. 2005)) ("Judicial estoppel is particularly appropriate where… a party fails to disclose an asset to a bankruptcy court, but then pursues a claim in a separate tribunal based on that undisclosed asset"); Allen, 813 F.3d at 572 (quoting Flugence, 738 F. 3d at 129) (Chapter 13 debtors have a continuing obligation to amend financial schedules to disclose assets acquired post-petition).


As to the third element of judicial estoppel, in order to establish the defense of inadvertence, a party is require to prove (1) that it did not know about the inconsistency or (2) that it lacked a motive for concealment. See Allen, 813 F.3d at 573. 


Here, the Fifth Circuit concluded that the Father was aware he had received the QCD and his claims against Lender, and had a motive to conceal his changed financial status.  Id. at 574 (a motive to conceal is "self-evident" when a debtor fails to disclose an asset to the bankruptcy court due to the "potential financial benefit resulting from the nondisclosure").  Accordingly, because the Father could not establish the defense of inadvertence, the Court held that the third element of judicial estoppel was satisfied.


Because the trial court did not abuse its discretion in holding that the Father was judicially estopped from claiming Lender violated the automatic stay and entering judgment in Lender's favor, the Fifth Circuit held that did not abuse its discretion in denying his motion for a new trial for the same reason.


Lastly, the Fifth Circuit concluded that Plaintiffs failed to demonstrate, or even argue in their briefing that the lower court abused its discretion by excluding several of their exhibits over Lender's objections that such exhibits were either not adequately disclosed, irrelevant or unauthenticated.  Moreover, the excluded evidence had no bearing on lender's judicial estoppel defense.


Accordingly, the trial court's judgment in favor of Lender and against the Borrower and his Father was affirmed.




Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874


Admitted to practice law in Illinois




Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Indiana   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC   |   Wisconsin



NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:


Financial Services Law Updates




The Consumer Financial Services Blog








California Finance Law Developments