LEGAL TRENDS

Failure to List Claim in Bankruptcy Schedule Does Not Require Dismissal of Claim Under Judicial Estoppel Doctrine

By Mark Trachtenberg

The Fifth Circuit recently elaborated on the scope of the judicial estoppel doctrine when a debtor fails to list an affirmative claim for damages in its bankruptcy schedule. In Kane v. National Union Fire Ins. Co., 535 F.3d 380 (5th Cir. 2008), Chapter 7 debtors, Stuart and Lisa Kane, brought a pre-petition personal injury action for injuries arising from an auto accident, but failed to list the lawsuit in their bankruptcy schedules. After the bankruptcy court granted the Kanes a no-argument discharge, the personal injury defendants moved for summary judgment on the Kanes’ claims, arguing that the Kanes should be judicially estopped from pursuing their lawsuit on account of their failure to list it as an asset in the bankruptcy proceedings.

The Kanes successfully moved the bankruptcy court to reopen the bankruptcy proceedings to allow the bankruptcy trustee to administer the lawsuit and other undisclosed debts on behalf of the estate. The trustee also moved to substitute himself for the Kanes as real parties in interest in the lawsuit. Nevertheless, the district court granted summary judgment for the defendants and denied the trustee’s motion to substitute as moot.

The Fifth Circuit reversed and remanded, finding that the Kanes’ personal injury claim became an asset of their bankruptcy estate when they filed their Chapter 7 petition and that the trustee never abandoned its interest in the lawsuit.

The Fifth Circuit distinguished its holding from its earlier decision in Superior Crewboats, Inc. v. Primary P & I Underwriters (In re Superior Crewboats, Inc.), 374 F.3d 330 (5th Cir. 2004), upon which the district court relied. In that case, debtors had brought a personal injury action after filing bankruptcy but failed to amend their bankruptcy schedules to reflect the claims. They ultimately told the trustee about the claim but represented to him that it was proscribed by the statute of limitations. The trustee formally abandoned the claim and the interest on the claim reverted to the debtors. The Fifth Circuit ultimately concluded that the debtors were judicially estopped from renewing their action against the personal injury defendants following their bankruptcy discharge, despite the trustee’s effort to substitute for the debtors.

The key distinction between the two cases was that the trustee in Superior Crewboats had abandoned the claim and was thus no longer the real party in interest. Further, if they were allowed to pursue the claim outside of bankruptcy, the Superior Crewboats debtors stood to collect a windfall from their failure to schedule the asset at the expense of their creditors. In contrast, the Kanes’ lawsuit remained an asset of the bankruptcy estate, and any recovery would have accrued to the benefit of the estate’s creditors, with the Kanes standing to benefit only if there was a surplus after all debts and fees have been paid. Consequently, the Fifth Circuit found that Superior Crewboats, Inc. did not require the application of judicial estoppel doctrine in this case.

Mark Trachtenberg is a partner at Haynes and Boone LLP and a member of The Houston Lawyer editorial board.

Connecting the Dots: Use of Non-Physician Expert Reports to Help Satisfy Chapter 74’s Expert Report Requirement

By Cynthia D. Rendon

The Texas Supreme Court recently denied review of the 14th Court of Appeals’ affirmance of a Houston trial court’s decision allowing physician experts in healthcare liability claims to rely on an expert report prepared by a non-physician when forming their opinions. Packard v. Guerra, 252 S.W.3d 511 (Tex.App.-Hous. (14 Dist.) 2008) (rehearing overruled (April 24, 2008), review denied (Aug 29, 2008), rehearing of petition for review denied (Oct 24, 2008). 

In Packard, plaintiffs Lillian Guerra, individually and as guardian for her daughter, Marcela Lillian Guerra, and Marcelino Guerra alleged that Marcela suffered permanent brain damages at birth due to medical negligence. Plaintiffs sued the attending emergency room physician, Clement Ugorji, M.D., for allegedly allowing the delivery to remain unattended, failing to intubate the newborn properly after delivery, and failing to monitor and respond to her low glucose levels. Plaintiffs also sued Dr. Ugorji’s employer, Emergency Health Services Associates, and sued EmCare, Inc., EmCare of Texas, Inc., EmCare Holdings, Inc., EmCare O.P., L.P., EmCare (a registered trademark), Emergency Medical Services, L.P. and chief executive and medical officers, Leonard M. Riggs, Jr., M.D., and Dighton Packard, M.D., asserting theories of vicarious, direct corporate, and individual liability and also alter ego and other theories of corporate disregard.

Healthcare liability claims are governed by Chapter 74 of the Texas Civil Practice and Remedies Code. Tex. Civ. Prac. & Rem. Code Ann. §74.001, et seq. (Vernon 2005). Under Section 74.351(a) of these provisions, a claimant is required to produce an expert report addressing the standard of care, breach of the standard of care and medical causation within 120 days of the date the healthcare liability claim is filed. Id at §74.351(a). Claimants can link multiple reports to satisfy the expert report requirement. Id. at §74.351(i). The statute also makes clear that, absent a finding of good cause, only physicians are qualified to offer opinions regarding whether another physician violated the standard of care and medical causation. Id at §74.351(r)(5)(A) and (C) and 74.401. It was against this statutory backdrop that the trial and lower appellate courts were presented with the novel issue of whether reports prepared by non-physician experts could be used and relied on by physicians in forming their opinions on the medical standard of care, breach and causation. 

In a majority opinion written by Justice Wanda McKee Fowler, the 14th Court of Appeals affirmed the trial court’s decision to allow physicians to rely on the expert report prepared by a non-physician lawyer in forming their own standard of care opinions. The trial court found that there was “good reason” to allow an expert report prepared by a non-physician to be used to help the plaintiffs satisfy the Chapter 74 expert report requirement. Specifically, the trial court found that the contractual and corporate inter-relationships of the defendants made it absolutely necessary for a lawyer with expertise in corporate law to sort through the documents and testimony in order to explain the respective duties owed among the defendants. The court noted that the lawyer did not address the standard of care, breach of the standard of care, or causation. Rather, her report was merely relied on by the Plaintiffs’ medical experts to help them “connect the dots” between the allegations and duties owed by the entities and individuals sued and form their opinions regarding the standard of care, breach and causation for the defendants. 

Connecting the dots for the future…after this decision, courts can expect to see more reports written by lawyers and other non-physicians addressing theories of corporate liability. 

Arbitration Takes a Blow in the Fifth Circuit

By Nelson S. Ebaugh

The Fifth Circuit has a reputation for being conservative. The Ninth Circuit, on the other hand, has a reputation for being somewhat liberal. But the Fifth Circuit’s recent decision in Galey v. World Marketing Alliance, No. 06-60715 (5th Cir. Dec. 12, 2007) may make you reconsider these stereotypes, at least a little.

In Galey, investors sued a brokerage firm in district court for making unsuitable investment recommendations. Because virtually all customer disputes between investors and brokerage firms must be arbitrated, the investors in Galey took a chance by suing the brokerage firm in court. Not surprisingly, the brokerage firm moved the court to compel arbitration.

The brokerage account agreement in Galey contained a clause requiring arbitration of all customer disputes. It read in relevant part:

any controversy arising out of or related to my (our) accounts, the transactions with WMAS, its officers, directors, agents. . . shall be settled by arbitration in accordance with the rules then in effect of the National Association of Securities Dealers, Inc. (NASD). Such arbitration shall follow the procedures as set forth by a national arbitration committee of the NASD.” . . . . “I (we) understand that: (1) ARBITRATION IS FINAL AND BINDING ON THE PARTIES (I.E., YOU AND WMAS). (2) YOU AND WMAS ARE WAIVING RIGHTS TO SEEK REMEDIES IN COURT, INCLUDING THE RIGHT TO JURY TRIAL.”

Despite this seemingly airtight arbitration clause, the investors in Galey seized upon a change in circumstances that made the clause not so impervious. In 2000, the brokerage firm allowed its membership with the NASD to lapse. And, as luck would have it, one of the NASD Rules of Arbitration Procedure provided that a brokerage firm loses its right to arbitrate before the NASD if it ever ceases to be a member of the NASD. These facts led the Fifth Circuit to hold that the investors could not be compelled to arbitrate their claims. The legal reasoning, however, that the Fifth Circuit used to arrive at this conclusion was somewhat of a surprise.

In Galey, the Fifth Circuit considered for the first time whether an arbitration clause could also be considered a forum selection clause. Because the arbitration clause in Galey did not contemplate any other forum besides the NASD, the Fifth Circuit concluded that the arbitration clause could be interpreted as a forum selection clause. In so holding, the Court joined a number of other appellate courts that have reached the same or similar conclusion.

Some courts, however, have reached an opposite conclusion when presented with the question posed in Galey. For instance, in Reddam v. KPMG LLP, 457 F.3d 1054 (9th Cir. 2006) the arbitration clause under consideration likewise contemplated that the NASD would serve as the exclusive forum. But when the NASD refused to arbitrate the dispute, the Ninth Circuit held that the parties must nevertheless arbitrate. The Ninth Circuit simply ordered the parties to arbitrate in another forum using the NASD Rules of Arbitration Procedure.

As anyone familiar with arbitration knows, in general, arbitration has been embraced by conservative courts (e.g. the Fifth Circuit) and viewed with a more jaundiced eye by courts with liberal reputations (e.g. the Ninth Circuit). So, it is ironic that the Fifth Circuit invalidated an arbitration clause in Galey that the Ninth Circuit would likely have enforced. Time will tell if the Fifth Circuit’s opinion in Galey is the beginning of a trend or is just an anomaly.

Nelson S. Ebaugh practices commercial litigation with an emphasis on securities litigation and arbitration. He is the principal of Nelson S. Ebaugh, P.C.

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