Winmark Ltd. Partnership v. Miles & Stockbridge

RODOWSKY, Judge. In this case we consider whether a debtor’s nondisclosure, as an asset, of a potential tort claim during a debtor in possession reorganization under Chapter 11 of the Bankruptcy Code bars the debtor from post-confirmation litigation of that ⁶¹⁷ claim against defendants who were not creditors in the bankruptcy. The petitioners are WinMark Limited Partnership (Win-Mark) and its two general partners, Jay A. Winer (Winer) and Mark Sapperstein (Sapperstein). WinMark was formed in 1987 for the purpose of owning, developing, and leasing two office buildings on two adjoining parcels of land (the Front Parcel and the Back Parcel), totalling 5.324 acres, in Odenton, Anne Arundel County.

The respondents are Miles & Stock-bridge, a law firm, and two of its attorneys (hereinafter collectively Miles). In September 1994, the petitioners sued Miles alleging professional negligence and breach of contract. The claims arise out of the background events hereinafter generally described. 1 In June 1988, WinMark borrowed $2,070,000 under a construction loan, secured by a first lien on the Front Parcel, from Sovran Bank/Maryland, later succeeded by NationsBank of Maryland, N.A. (the Bank).

On May 17, 1990, WinMark borrowed $300,000 from the Bank on a land loan that was secured by a first lien on the undeveloped Back Parcel. The land loan was due November 16, 1991. Winer and Sapper-stein personally guaranteed both loans. As the due date of the land loan approached in the fall of 1991, WinMark negotiated with the Bank for an extension of the land loan and for a restructuring of the construction loan to take advantage of lower prevailing interest rates.

Petitioners alleged that, during this period, Miles represented both petitioners and the Bank in the negotiations and that Miles did so until some time in December 1991 when Miles withdrew from representation of the petitioners, but continued representation of the Bank. Petitioners further allege that an agreement was reached in January 1992 with the Bank under which WinMark paid in full the $300,000 land loan and continued to make all timely payments on the construction loan but ⁶¹⁸ that the Bank nevertheless notified WinMark that it was in default on the construction loan. This precipitated an injunction action in the Circuit Court for Anne Arundel County by petitioners against the Bank resulting in an order in February 1992, enjoining the Bank from exercising any default remedies under the construction loan. 2 The petitioners allege that “[subsequent to the litigation in State Court, the Bank claimed that it was entitled to attorney’s fees [in] excess of $200,000.” Petitioners further aver that “[a]s a direct result of the Bank’s demand for attorney fees allegedly due from the State Court litigation, WinMark and the Bank were unable to agree on the terms of refinancing of the Construction Loan at maturity, and, consequently, WinMark was forced to file bankruptcy under Chapter 11 of the Bankruptcy Code on July 20,1993.” Neither Winer nor Sapperstein, the guarantors, petitioned in bankruptcy. WinMark’s second amended plan of reorganization (the Plan) was confirmed on March 14, 1994.

Under the Plan WinMark is a debtor in possession. On April 28, 1994, the petitioners and others executed a general release of the Bank, therein called the Lender. That release defines “Releasees” to mean, inter alia, “(iii) the Lender’s officers, ... agents, attorneys, ... but only in their respective capacities as such----” Six months after confirmation of the Plan, petitioners instituted in the Circuit Court for Baltimore City the instant action against Miles. The theory of the complaint is that the petitioners were deprived of zealous representation in their workout negotiations with the Bank because of the alleged conflict of interests on the part of Miles.

Accepting the allegations of the complaint as true for purposes of the responsive motion, Miles raised a number of legal ⁶¹⁹ defenses, including release and judicial estoppel. The defense of release was based on the document of April 28, 1994. The factual predicate for the judicial estoppel argument was the absence from WinMark’s filings in the Chapter 11 proceedings of any reference to the claim against Miles as an asset of the bankruptcy estate. For example, WinMark’s statement of financial affairs, filed with the bankruptcy court, included a schedule of personal property.

WinMark replied, “None,” in answer to the category: “Other contingent and unliquidated claims of every nature, including tax refunds, counterclaims of the debtor, and rights to setoff claims.” On the other hand, petitioners argued to the circuit court, inter alia, that the position asserted by Miles was not consistent with the policy of the Bankruptcy Code. Petitioners said that the claim “is an asset of the [bankruptcy] estate and our position is that policy dictates that [the] estate be there for the creditors. The purpose of disclosure in a Chapter 11 case is for the creditors. It is not for somebody not involved in the case.” WinMark also represented that the Plan had not been substantially completed and that the Plan was still subject to amendment.

The circuit court held that the claim was barred by judicial estoppel and by the release. In addition, the circuit court alternatively held that the factual allegations of the complaint were not sufficient to support petitioners’ claim for punitive damages. Petitioners appealed to the Court of Special Appeals. That court affirmed in an opinion that relied exclusively on the judicial estoppel defense, one of the two grounds on which the circuit court had relied in granting summary judgment for Miles on the entirety of the claims against it.

WinMark Ltd. Partnership v. Miles & Stockbridge, 109 Md.App. 149 , 674 A.2d 73 (1996). We granted the petitioners’ request for the writ of certiorari, primarily to consider the application to the instant matter of Adams v. Manown, 328 Md. 463 , 615 A.2d 611 (1992), which had not been cited to, or by, either of the courts below. ⁶²⁰ I The concept of judicial estoppel is perhaps best presented by an illustration. In Kramer v. Globe Brewing Co., 175 Md. 461 , 2 A.2d 684 (1938), Kramer had been injured when a beer truck in which he was riding as a helper overturned. Kramer considered that he had been hired by the driver, acting without any authority of the brewery, and that, as helper, he would be paid by the driver out of the driver’s wages from the brewery.

Id. at 463, 2 A.2d at 634 . When Kramer sued the brewery and the driver in a common law tort action, the brewery raised the defense of workers’ compensation exclusivity, averring that Kramer was its employee. After obtaining a voluntary dismissal without prejudice of the tort action, Kramer sought workers’ compensation. It was denied by the Workers’ Compensation Commission, and that denial was affirmed in the circuit court.

Id. at 466 , 2 A.2d at 636 . This Court reversed and remanded, setting forth the rationale behind the doctrine of judicial estoppel, as follows: “ ‘If parties in court were permitted to assume inconsistent positions in the trial of their causes, the usefulness of courts of justice would in most cases be paralyzed; the coercive process of the law, available only between those who consented to its exercise, could be set at-naught by all. But the rights of all men, honest and dishonest, are in the keeping of the courts, and consistency of proceeding is therefore required of all those who come or are brought before them. It may accordingly be laid down as a broad proposition that one who, without mistake induced by the opposite party, has taken a particular position deliberately in the course of litigation, must act consistently with it; one cannot play fast and loose.’ ” Id. at 469 , 2 A.2d at 637 (quoting Bigelow on Estoppel 783 (6th ed.) and citing Ohio & Mississippi Ry.

Co. v. McCarthy, 96 U.S. 258, 267-68 , 24 L.Ed. 693, 696 (1877) (“Where a party gives a reason for his conduct and decision touching anything involved in a controversy, he cannot, after litigation has begun, change his ground, and put his conduct upon another and a different consideration. He is not permitted thus to mend his ⁶²¹ hold. He is estopped from doing it by a settled principle of law.”)). This Court also applied judicial estoppel against a widower who, in the probate of his wife’s estate in Maine, had taken the position that certain securities were part of the corpus of a trust of which he was successor to his wife as trustee, but who, in an action in Maryland for distribution of those securities upon termination of that trust, took the position that the securities were his own individual property.

See Stone v. Stone, 230 Md. 248 , 186 A.2d 590 (1962). In the instant matter our inquiry is whether judicial estoppel applies when three circumstances are present: (1) the plaintiff in the civil action in which judicial estoppel is raised as a defense is or was a debtor in possession in a proceeding under Chapter 11 of the Bankruptcy Code, (2) the claim arose prior to commencement of the bankruptcy proceeding, and (3) the claim was not listed in the schedules and disclosure statements filed by the debtor in the bankruptcy proceeding. As the decisions hereinafter cited and discussed will illustrate, judicial estoppel is to be distinguished from equitable estoppel and res judicata. Where the defendant in the subsequent civil action was a substantial creditor in the Chapter 11 proceedings in which a plan of reorganization was confirmed, the debtor, as plaintiff in the civil action, may be equitably estopped because of the reliance by the creditor, in voting for the plan of reorganization, on the absence, as a disclosed asset, of any claim by the debtor against that creditor.

Similarly to be distinguished from the judicial estoppel issue are those cases in which the circumstances surrounding the confirmation of the plan of arrangement cause the order of confirmation to have claim or issue preclusion effect on the claim asserted in the subsequent civil action by the debtor against the creditor. The issue before us lies at the juncture of competing interests. As a result, the reported decisions fall into one of two categories. Cases in the numerically larger category emphasize maintaining the integrity of the judicial system by ⁶²² avoiding the- unseemly encouragement of litigants’ playing “fast and loose” with the judicial system.

A minority of cases give determinative weight to the interest of the bankruptcy creditors of the debtor, who should be the initial recipients of any net recovery on the asset represented by the undisclosed claim. The two views are respectively found in the majority and dissenting opinions in Oneida Motor Freight, Inc. v. United Jersey Bank, 848 F.2d 414 (3d Cir.), cert. denied, 488 U.S. 967 , 109 S.Ct. 495 , 102 L.Ed.2d 532 (1988). Oneida, in addition to presenting the three basic circumstances of the issue before us, also involved a principal bankruptcy creditor as the civil action defendant. Further, after the civil action was filed “the plan was modified in order that one-third of the net recovery that Oneida might obtain against the bank in [the] lawsuit be paid to the creditors.” Id. at 416 n.

I. 3 The court emphasized that 11 U.S.C. § 1125 (b) prohibits solicitation of approval of a plan of reorganization by a holder of a claim against the bankruptcy estate without transmitting “a written disclosure statement approved, after notice and a hearing, by the court as containing adequate information.” “Adequate information” is defined in § 1125(a)(1) to mean “information of a kind, and in sufficient detail ... that would enable a hypothetical reasonable investor typical of holders of claims or interests of the relevant class to make an informed judgment about the plan.... ” The Oneida majority first applied an equitable estoppel analysis. It pointed to “[t]he importance of full disclosure [as] ⁶²³ underlaid by the reliance placed upon the disclosure statement by the creditors and the [bankruptcy] court.” Id. The court, however, held that the informationally deficient plan was “not cured by the later modification.” Id. at 418 (footnote omitted). Creditors were not alerted by the original plan to “the possible financial benefits enuring to them upon the successful prosecution of the claim.” Id.

Further, had the civil action defendant known of the potential lawsuit, it might not have stipulated concerning its lien and voted for confirmation of the plan. Id. The majority in Oneida also applied judicial estoppel, which, it said, “looks to the connection between the litigant and the judicial system while equitable estoppel focuses on the relationship between the parties to the prior litigation.” Id. at 419. The majority concluded that the debtor’s “failure to list its claim against the bank worked in opposition to preservation of the integrity of the system which the doctrine of judicial estoppel seeks to protect.” Id.

This was because, in the Chapter 11 proceedings, the debtor, by silence, had treated the bank’s claim as undisputed. Id. Accordingly, the court affirmed the district court’s dismissal of the civil action. The dissent presented the case for the other interest involved in the problem, saying: “Concern for Oneida’s numerous unsecured creditors compels me to dissent from the court’s disposition.

Those creditors, as well as Oneida, stand to lose by virtue of that disposition. If Oneida had been able to foresee this court’s novel application of equitable and judicial estoppel, it would have been able to protect itself against the loss the court today imposes upon it. Oneida’s unsecured creditors, however, had no way of protecting themselves and should not be required to contribute towards a windfall for an alleged wrongdoer.” Id. at 420 (Stapleton, J., dissenting). The dissent further said: “The Code’s disclosure requirements are intended to protect those creditors whom a debtor’s failure to disclose hidden assets would prejudice.

A fortiori, a court’s re ⁶²⁴ sponse to nondisclosure should do likewise. Not only does the court fail to safeguard the interests of Oneida’s unsecured creditors, but it effectively penalizes them by foreclosing the prosecution of claims against the bank that would, if successful, result in a substantial enhancement of the estate and in their receiving more than the approximately thirty cents on the dollar for which they have been forced to settle. The only real winner in the case as