UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
June 25, 2009
IN RE: TRACE INTERNATIONAL HOLDINGS, INC., ET AL., DEBTORS.
JOHN S. PEREIRA, AS TRUSTEE OF TRACE INTERNATIONAL HOLDINGS, INC., ET AL., PLAINTIFF-APPELLANT,
DOW CHEMICAL COMPANY, DEFENDANT-APPELLEE.
The opinion of the court was delivered by: Kimba M. Wood, U.S.D.J.
OPINION AND ORDER
Plaintiff-Appellant John S. Pereira, as Chapter 7 Trustee (the "Trustee") of Trace International Holdings, Inc., and its related entities (collectively "Trace"), appeals a decision of the United States Bankruptcy Court for the Southern District of New York, granting summary judgment in favor of Defendant-Appellee Dow Chemical Company ("Dow"). (D.E. 23.)
For the reasons stated below, the Court vacates the decision of the Bankruptcy Court and remands the case for further proceedings.
On appeal, the parties dispute whether the Bankruptcy Court abused its discretion by judicially estopping the Trustee from characterizing as dividends payments Trace made to Dow.*fn1
These payments arose out of a transaction between Trace and Dow that was brokered via a third party, BSI Acquisitions Corp. ("BSI"). BSI's transaction with Trace was structured as a purchase of preferred stock; Trace's payments to BSI were characterized as dividends on that stock; Dow's transaction with BSI was structured as a loan; and BSI's payments to Dow were characterized as payments on that debt. In the instant action, this BSI brokered transaction has been collapsed such that payments from Trace to BSI and from BSI to Dow are treated as payments directly from Trace to Dow.*fn2 The question arises whether these payments from Trace to Dow (the "Payments") should be characterized as payments on a debt (also referred to as "liabilities"), as dividends, or as both.
In the instant action, the Trustee characterized the Payments as both liabilities and dividends (the Trustee's "Bankruptcy Court Position"). Specifically, the Trustee argued both that the Payments should be treated as liabilities for the purposes of determining Trace's insolvency ("valuation purposes"),*fn3 and that the Payments should be treated as dividends for the purpose of determining whether the Payments were illegal ("legality purposes").*fn4
After commencing the instant action, the Trustee brought a separate lawsuit before Judge Sweet, Pereira v. Cogan, 294 B.R. 449, 539-40 (S.D.N.Y. 2003) ("Cogan"), which involved the same set of facts as the instant action. The Trustee advanced the same position before Judge Sweet, that the Payments were liabilities for valuation purposes and dividends for legality purposes (the Trustee's "Cogan Position").
During the instant action's pendency before the Bankruptcy Court, Judge Sweet adopted both of the Trustees' arguments in Cogan, holding that the Payments were debts for valuation purposes but were dividends for legality purposes.*fn5 Judge Sweet did so notwithstanding that his findings appeared inconsistent with one another.
Thereafter, the Bankruptcy Court, in deciding a motion by Dow for summary judgment, judicially estopped the Trustee from arguing that the Payments were dividends for legality purposes. The Bankruptcy Court did so on the ground that the Trustee had argued to Judge Sweet that the Payments were liabilities for valuation purposes, and Judge Sweet had adopted this characterization of the Payments.*fn6
The Trustee, on appeal to this Court, argues that the Bankruptcy Court abused its discretion. The Trustee contends that his Bankruptcy Court and Cogan Positions are consistent and thus judicial estoppel is inappropriate. According to the Trustee, the inconsistency between one part of his Cogan Position (that the Payments were liabilities for valuation purposes) and one part of his Bankruptcy Court Position (that the Payments were dividends for legality purposes) does not warrant judicial estoppel as long as the Trustee's overall position before both courts (that the Payments were both liabilities for valuation purposes and dividends for legality purposes) was consistent.
The Court holds that judicial estoppel is not applicable, and remands the case to the Bankruptcy Court for further proceedings.
I. Standard of Review
Judicial estoppel is an equitable doctrine that can be evoked at a court's discretion.*fn7 See New Hampshire v. Maine, 532 U.S. 742, 750 (2001); Societe General v. Federal Ins. Co., 856 F.2d 461, 467 (2d Cir. 1988). Where a decision is committed to a bankruptcy court's discretion, a reviewing court will not overturn the decision absent an abuse of that discretion. See Endico Potatoes, Inc. v. CIT Grp./Factoring, Inc., 67 F.3d 1063, 1071-72 (2d Cir. 1995).
A court abuses its discretion when "(1) its decision rests on an error of law (such as application of the wrong legal principle) or a clearly erroneous factual finding, or (2) its decision--though not necessarily the product of a legal error or a clearly erroneous factual finding--cannot be located within the range of permissible decisions." Zervos v. Verizon New York, Inc., 252 F.3d 163, 169 (2d Cir. 2001); see also Prayze FM v. F.C.C., 214 F.3d 245, 249 (2d Cir. 2000) (abuse of discretion occurs "when the court applies an incorrect legal standard, makes clearly erroneous factual findings, or errs in the substance or form of its order").
II. Legal Standard
"The doctrine of judicial estoppel prevents a party from asserting a factual position in a legal proceeding that is contrary to a position previously taken by him in a prior legal proceeding." Bates v. Long Island R.R. Co., 997 F.2d 1028, 1037 (2d Cir. 1993). A party invoking judicial estoppel must show (1) the party against whom the estoppel is asserted argued a clearly inconsistent position in a prior proceeding, and (2) that position was adopted by the court in some manner. See Maharaj v. Bankamerica Corp., 128 F.3d 94, 98 (2d Cir. 1997); see also Bridgeway Corp. v. Citibank, 201 F.3d 134, 141 (2d Cir. 2000).
In applying judicial estoppel, courts should be guided by the doctrine's purposes. Courts can apply judicial estoppel only where doing so will protect judicial integrity. See Simon v. Safelite Glass Corp., 128 F.3d 68, 72 (2d Cir. 1997) (noting that the Second Circuit, unlike some other circuits, limits the doctrine of judicial estoppel to situations that threaten judicial integrity); see also New Hampshire v. Maine, 532 U.S. 742, 749 (2001) (noting that the purpose of judicial estoppel is to "protect the integrity of the judicial process") (internal quotations omitted).
When deciding whether judicial estoppel will advance the purpose of judicial integrity, courts consider several factors. The first factor is mandatory. According to the Second Circuit, the risk of inconsistent results must be certain. See Safelite, 128 F.3d at 72. In determining whether the risk of inconsistent results is certain, courts should ensure that the allegedly inconsistent positions "cannot be reconciled with any amount of explanation." Rodal v. Anesthesia Group of Onondaga, P.C., 369 F.3d 113, 119 (2d Cir. 2004) (internal quotations and alterations omitted). In determining whether apparently inconsistent positions are truly irreconcilable, a court must carefully consider the contexts in which the positions were taken. See id.
Second, courts should consider whether accepting the inconsistent position "'would create the perception that either the first or the second court was misled.'" Usdavines v. Weeks Marine, Inc., 418 F.3d 138, 147 (2d Cir. 2005) (quoting New Hampshire v. Maine, 532 U.S. 742, 749 (2001)).
Third, courts should weigh whether denying judicial estoppel will result in an unfair advantage for the party seeking to assert an inconsistent position, or will impose an unfair detriment on the opposing party. See id.
The Bankruptcy Court erred in its application of the judicial estoppel doctrine. Specifically, the Bankruptcy Court erroneously found that the position the Trustee took before Judge Sweet was inconsistent with the position he took before the Bankruptcy Court. This error amounted to abuse of the Bankruptcy Court's discretion.
The Bankruptcy Court, in finding judicial estoppel appropriate, isolated one part of the Trustee's Cogan Position, which Judge Sweet had adopted in full: that the Payments should be treated as a liability for valuation purposes. The Bankruptcy Court then deemed this part of the Trustee's Cogan Position and of Judge Sweet's decision inconsistent with one part of the Trustee's Bankruptcy Court Position: that the Payments should be treated as dividends for legality purposes. The Bankruptcy Court's approach amounts to abuse of discretion because it "cannot be located within the range of permissible decisions." Zervos, 252 F.3d at 169.
The Bankruptcy Court's approach satisfies neither the logic nor the purposes of judicial estoppel. The Trustee's Cogan Position, which Judge Sweet adopted, is consistent with the Trustee's Bankruptcy Court Position. In Cogan, the Trustee successfully argued that the Payments should be treated as liabilities for valuation purposes, and that the Payments were dividends for the purpose of determining the Payments' legality.*fn8
In the instant case, the Trustee made the same argument on which he prevailed before Judge Sweet.*fn9 In other words, the position taken by the Trustee in one court was consistent with the position the Trustee took in the other court.
To follow the Bankruptcy Court's approach would be place the Trustee in a Catch-22. No matter what the Trustee were to argue, whether that the Payments were dividends or liabilities, the Trustee would have successfully advanced a different position before Judge Sweet. Therefore, under the Bankruptcy Court's reasoning, the Trustee could be estopped regardless of which way he characterized the Payments.
Furthermore, deeming the Trustee's Cogan and Bankruptcy Court Positions consistent comports with the purposes of the doctrine of judicial estoppel. First, under the circumstances of this case, applying judicial estoppel would increase, rather than decrease, the risk of inconsistent results in the bankruptcy and district court actions; in fact, applying judicial estoppel ensures inconsistent results in the two proceedings.
Under the laws governing the Trustee's claims in both Cogan and the Bankruptcy Court, the Payments could be illegal only if they were dividends.*fn10 Judge Sweet deemed the Payments illegal dividends. If the Bankruptcy Court now estops Trace from arguing that the Payments were dividends, then the Bankruptcy Court will necessarily deem the Payments legal. Thus, applying judicial estoppel ensures an inconsistent result in the two proceedings.*fn11
Applying judicial estoppel will not protect judicial integrity by minimizing the risk of an inconsistent result in the two proceedings; instead, estopping the Trustee from arguing before the Bankruptcy Court that the Payments were illegal dividends ensures an inconsistent result in the two proceedings.*fn12
Second, judicial estoppel will not prevent the appearance that either Judge Sweet or the Bankruptcy Court was misled. To the extent that finding the Payments to be both a liability and a dividend leads to the appearance that a court was misled, that appearance has already arisen as a result of Judge Sweet's decision. If anything, estopping the Trustee from arguing before the Bankruptcy Court that the Payments should be treated as dividends augments, rather than minimizes, that appearance.
Third, judicial estoppel is not needed to prevent an unfair advantage on the part of the Trustee, or an unfair detriment on the part of Dow. If treating the Payments as both liabilities and as dividends is truly inconsistent,*fn13 then the Trustee already reaped his unfair advantage when Judge Sweet adopted the Trustee's Cogan Position. Applying judicial estoppel in the instant action will not undo that fact.
At the same time, allowing the Trustee to argue that the Payments were both liabilities and dividends before the Bankruptcy Court will not compound the Trustee's unfair rewards or cause Dow unfair detriment. Instead, the Bankruptcy Court will have to determine what the Payments were.*fn14
Estopping the Trustee from arguing that the Payments were dividends for valuation purposes satisfies neighter the logic nor the purposes of the judicial estoppel doctrine.
The bankruptcy Court's application of judicial estoppel in this case constituted an abuse of discretion. The Trustee's Cogan and Bankruptcy Court Positions were consistent; this determination is confirmed by the fact that estopping the Trustee would not serve the purposes of the doctrine.*fn15 Accordingly, the Bankruptcy Court's decision to estop the Trustee is vacated and the Court remands the case for further proceedings.*fn16