Browning Mfg v. Salisbury

• Court: Court of Appeals for the Fifth Circuit
• Decided: June 18, 1999
• Docket: 97-11118
• Status: Published

Opinion

UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT _____________________

No. 97-11118 _____________________

In The Matter of: COASTAL PLAINS, INC., Debtor.

BROWNING MANUFACTURING,

Appellant/Cross-Appellee,

versus

JEFFREY H. MIMS, Trustee for the Bankruptcy Estate of Coastal Plains, Inc.; INDUSTRIAL CLEARINGHOUSE, INC.,

Appellees/Cross-Appellants.

INDUSTRIAL CLEARINGHOUSE, INC., Successor in interest to Coastal Plains Inc.; JEFFREY H. MIMS, Trustee of The Estate of Coastal Plains, Inc.,

Appellees/Cross-Appellants,

BROWNING MANUFACTURING, formerly known as Emerson Electric Company, formerly known as Emerson Power Transmission Corporation,

Appellant/Cross-Appellee.

_____________________

No. 97-11119 _____________________

In The Matter Of: COASTAL PLAINS, INC.,

Debtor.

INDUSTRIAL CLEARINGHOUSE, INC.; JEFFREY H. MIMS, Trustee of The Estate of Coastal Plains, Inc.,

Appellees-Appellants,

BROWNING MANUFACTURING, formerly a Division of Emerson Electric Company,

Appellant-Appellee. _____________________

No. 98-10246 _____________________

Appellant,

JEFFREY H. MIMS, Trustee for the Bankruptcy Estate of Coastal Plains, Inc.; INDUSTRIAL CLEARINGHOUSE, INC.,

Appellees.

INDUSTRIAL CLEARINGHOUSE, INC., Successor in interest to Coastal Plains, Inc.; JEFFREY H. MIMS, Trustee for the Bankruptcy Estate of Coastal Plains, Inc.,

Appellees,

BROWNING MANUFACTURING, formerly known as Emerson Electric Company, formerly known as Emerson Power Transmission Corporation,

Appellant. __________________________________________________________________

Appeals from the United States District Court for the Northern District of Texas _________________________________________________________________ June 18, 1999

- 2 - Before REYNALDO G. GARZA, POLITZ, and BARKSDALE, Circuit Judges.

RHESA HAWKINS BARKSDALE, Circuit Judge:

For all but one of the claims at hand, the overarching issue

is whether the bankruptcy court abused its discretion by not

judicially estopping plaintiffs Industrial Clearinghouse and the

Trustee for the bankruptcy estate of Coastal Plains from pursuing

claims against Browning, Coastal’s largest unsecured creditor; the

linchpin being whether nondisclosure of those claims in Coastal’s

bankruptcy schedules or its stipulation for lifting the automatic

bankruptcy stay to allow Coastal’s largest secured creditor to

foreclose on Coastal’s assets, later purchased by Industrial

Clearinghouse (formed by Coastal’s CEO), falls under the exception

to judicial estoppel advanced by plaintiffs, Coastal’s successors

— that, even though Coastal had knowledge of the claims, the

nondisclosure was nevertheless “inadvertent”. For plaintiffs’ one

claim not subject to judicial estoppel (tortious interference), the

key issue is whether it is time-barred. Browning appeals the $5.2

million judgment on a jury verdict in favor of plaintiffs;

plaintiffs cross-appeal the substantial post-verdict reduction in

damages. We REVERSE and RENDER judgment for Browning.

I.

Coastal Plains, Inc., an equipment distributor, was purchased

by Bill Young in 1984 for approximately $9 million. The business

plan included making Browning Manufacturing, formerly a division of

Emerson Electric Company, Coastal’s leading supplier.

- 3 - In January 1986, Coastal acknowledged its financial problems

to its creditors and implicitly threatened bankruptcy if they did

not agree to a workout plan, pursuant to which Coastal would return

to its creditors inventory they had sold on credit to Coastal; the

creditors would pay Coastal 50 percent of the inventory’s cost and

write off Coastal’s debt; and the money so raised would be paid to

Coastal’s secured lender, Westinghouse Credit Corporation. Many

creditors rejected the proposal.

The next month, owed $1.3 million by Coastal, Browning agreed

to a transaction which tracked Coastal’s earlier proposed workout

plan. In late February 1986, Coastal began returning inventory to

Browning; this was soon discontinued because Browning’s parent,

Emerson, wanted to postpone the transaction until the next quarter.

Accordingly, in mid-March, Coastal and Browning agreed that,

if the transaction was not completed by 3 April, Browning would

transfer the returned-inventory back to Coastal. The inventory-

return to Browning was completed by the end of March.

Nevertheless, becoming more concerned about Coastal’s

potential bankruptcy, Browning did not complete the transaction

(payment, etc.) by 3 April. Therefore, Coastal demanded that

Browning return the inventory not later than 20 April.

But, on 16 April, Young, for Coastal, signed a voluntary

Chapter 11 bankruptcy petition, which was filed on 22 April.

Coastal advised its creditors that bankruptcy had become necessary

because all of them had not accepted its proposed workout plan.

Coastal owed in excess of $8.5 million to Westinghouse, and

- 4 - approximately $8 million to other creditors. Browning was

Coastal’s largest unsecured creditor.

A week after filing its petition, Coastal initiated an

adversary proceeding against Browning, seeking an order both

enjoining it from disposing of the returned-inventory and directing

its transfer to Coastal. Coastal also claimed conversion;

interference with contracts and/or business relationships because

of Browning’s failure to return inventory; punitive damages; and

violation of the automatic stay.

The complaint did not specify the amount of damages sought,

and there were no allegations that Browning’s actions caused the

failure of Coastal’s pre-bankruptcy workout plan. (Concerning this

critical point for judicial estoppel purposes, discussed infra,

Coastal’s bankruptcy attorney testified at a bankruptcy hearing

seven years later that the primary purpose of the adversary

proceeding was the inventory-return.)

Shortly after the adversary proceeding was filed, the

bankruptcy court found that Browning had violated the automatic

stay and ordered the inventory returned to Coastal; the other

claims were not addressed. Browning completed the inventory-return

before the end of May.

Soon thereafter, on 6 June, Wayne Duke, Coastal’s CEO,

executed sworn bankruptcy schedules for Coastal. But, although he

believed that Coastal had claims of up to $10 million against

Browning, they were not disclosed in the bankruptcy schedules and

statement of financial affairs. And, although Coastal’s $1.3

- 5 - million debt to Browning was listed in the schedule of liabilities,

it was not specified as contingent, disputed, or subject to setoff.

Three months later, on 9 September, in moving for relief from

the automatic stay so that it could foreclose on Coastal’s assets,

Westinghouse (secured lender) asserted that it was owed in excess

of $8 million by Coastal; that this debt was nearly equal to the

value of the collateral; and that reorganization was not possible.

On 18 September, Westinghouse and Coastal submitted in support of

the lift-stay motion a stipulation, prepared by Westinghouse, that

included estimates of the value of Coastal’s assets, including that

its general intangible assets consisted of computer software

programs, customer lists, and vendor lists, with a total worth less

than $20,000. No mention was made of any claims against Browning.

The stipulation showed more than a $5 million shortfall between the

value of Coastal’s assets and its debt to Westinghouse.

Browning withdrew its objection to lifting the stay. On 19

September, the day after the stipulation was filed, Westinghouse’s

lift-stay motion was granted; it foreclosed on Coastal’s assets,

conducting an auction on 7 October. No mention of Coastal’s claims

against Browning was made in the foreclosure notices or

advertisements, or at the auction.

A Browning representative attended the auction and bid on the

inventory. The highest bid on Coastal’s general intangibles

(which, again, were not described as including its claims against

Browning) was $2,000. Westinghouse was the successful bidder,

purchasing the assets for $3.25 million.

- 6 - On 8 October, the day after the auction, and pursuant to

negotiations the preceding month prior to executing the lift-stay

stipulation, Westinghouse entered into a consignment agreement with

Industrial Clearinghouse, Inc. (IC), to sell the assets

Westinghouse had purchased at the auction. IC had been formed by

Coastal’s CEO, Duke, who was also IC’s CEO; that same day, all of

Coastal’s employees became IC employees; and it used the same

computer software and customer lists that had been used by Coastal.

In February 1987, IC purchased the remaining Coastal assets

from Westinghouse for $1.24 million. Those assets expressly

included the previously undisclosed “potential cause of action

against Browning”.

The Chapter 11 reorganization was converted to a Chapter 7

liquidation that April. After the Trustee filed a no-asset report

and applied for closing the bankruptcy case, it was closed in

February 1988.

But, the case was re-opened that March, to address issues

unrelated to Browning. That April, after IC advised the Trustee

that it wanted the claims against Browning prosecuted, and the

Trustee refused, because a successful conclusion would benefit only

IC, IC advised it would pursue the adversary proceeding. In

October 1988, IC was substituted for Coastal in the long dormant

(since May 1986) adversary proceeding against Browning.

IC filed its first amended complaint in March 1989, alleging

that Browning’s breach of the return-inventory agreements and

return-delay caused Coastal’s bankruptcy and demise; and asserting

- 7 - claims for breach of contract, conversion, interference with

contracts and/or business relationships, fraud, and violation of

the automatic stay. A second amended complaint was filed in late

1989; a third, in early 1992.

In September 1992, the Trustee again moved to close the case

and for his discharge. IC filed its fourth amended complaint that

December.

The adversary proceeding was set for trial in May 1993 in the

district court, which had withdrawn the reference from the

bankruptcy court. But, on the eve of trial, the Trustee moved to

intervene, claiming that Coastal’s bankruptcy estate owned the

claims being pursued against Browning. The district court referred

the case to the bankruptcy court for the ownership determination.

In bankruptcy court, Browning asserted, inter alia, that,

based on Coastal’s nondisclosure in its bankruptcy schedules and

the lift-stay stipulation, IC and the Trustee were equitably and

judicially estopped. Regarding judicial estoppel, IC responded

that the claims had been omitted through counsel’s oversight.

Following a July 1993 hearing, the bankruptcy court ruled that

the estate owned the tort claims; IC, those in contract.

Contemporaneously, IC and the Trustee agreed to share any recovery

against Browning, with IC to receive 85 percent.

In May 1994, following a hearing that January, the bankruptcy

court approved the Trustee/IC (plaintiffs) sharing agreement and,

inter alia, rejected judicial estoppel. Browning appealed to the

district court, which affirmed; and to our court, which affirmed

- 8 - approval of the sharing agreement, but dismissed Browning’s appeal

as to judicial estoppel, holding that the ruling was interlocutory.

(Most unfortunately, Browning did not seek certification from the

district court that, pursuant to 28 U.S.C. § 1292(b), the judicial

estoppel ruling “involve[d] a controlling question of law as to

which there is substantial ground for difference of opinion and

that an immediate appeal from the order may materially advance the

ultimate termination of the litigation”.)

At trial in district court in early 1996 (ten years after the

adversary proceeding was filed), the jury found against plaintiffs’

fraud claim; but, inter alia, awarded them $5 million for breach of

contract, $2.5 million for conversion, $1.75 million for breach of

fiduciary duty, $1.3 million for tortious interference, and $7.5

million in punitive damages.

Browning’s new trial motion was denied; its motion for

judgment as a matter of law, granted in part. The court found

insufficient evidence for breach of fiduciary duty; ordered

plaintiffs to elect a recovery from among the three remaining

substantive awards; reduced punitive damages to $4 million; granted

Browning a $1.4 million setoff; denied its motion to set aside the

bankruptcy court’s judicial estoppel ruling; and limited

prejudgment interest.

Plaintiffs elected, under protest, to recover for breach of

contract (concomitantly, no punitive damages). The final judgment

awarded damages of $3.6 million ($5 million for contract breach

- 9 - less $1.4 million setoff), and $1.6 million for attorney’s fees and

costs.

II.

Among numerous issues presented, Browning claims judicial

estoppel, except for the tortious interference claim. Plaintiffs

cross-appeal. We hold that plaintiffs are judicially estopped,

except for the interference claim; it is time-barred.

A.

Although we are the second court to review the bankruptcy

court’s judicial estoppel ruling, we review it “as if this were an

appeal from a trial in the district court”. Phoenix Exploration,

Inc. v. Yaquinto (Matter of Murexco Petroleum, Inc.), 15 F.3d 60,

62 (5th Cir. 1994). Because judicial estoppel is an equitable

doctrine, and the decision whether to invoke it within the court’s

discretion, we review for abuse of discretion the bankruptcy

court’s rejection of the doctrine. See, e.g., Ergo Science, Inc.

v. Martin, 73 F.3d 595, 598 (5th Cir. 1996).

“[A]n abuse of discretion standard does not mean a mistake of

law is beyond appellate correction”, because “[a] district court by

definition abuses its discretion when it makes an error of law”.

Koon v. United States, 518 U.S. 81, 100 (1996). Accordingly,

“[t]he abuse of discretion standard includes review to determine

that the discretion was not guided by erroneous legal conclusions”.

Id. See also Latvian Shipping Co. v. Baltic Shipping Co., 99 F.3d

690, 692 (5th Cir. 1996) (“We will not find an abuse of discretion

unless the district court’s factual findings are clearly erroneous

- 10 - or incorrect legal standards were applied”); Meadowbriar Home for

Children, Inc. v. Gunn, 81 F.3d 521, 535 (5th Cir. 1996) (court

“abuses its discretion if it bases its decision on an erroneous

view of the law or on a clearly erroneous assessment of the

evidence”).

Because judicial estoppel was raised in the context of a

bankruptcy case, involving Coastal’s express duty under the

Bankruptcy Code to disclose its assets, we apply federal law. See

Johnson v. Oregon Dept. of Human Resources, 141 F.3d 1361, 1364

(9th Cir. 1998) (action under Americans with Disabilities Act;

“[f]ederal law governs the application of judicial estoppel in

federal courts”).

Judicial estoppel is “a common law doctrine by which a party

who has assumed one position in his pleadings may be estopped from

assuming an inconsistent position”. Brandon v. Interfirst Corp.,

858 F.2d 266, 268 (5th Cir. 1988).1 The purpose of the doctrine is

“to protect the integrity of the judicial process”, by

“prevent[ing] parties from playing fast and loose with the courts

to suit the exigencies of self interest”. Id. (internal quotation

1 See also Data General Corp. v. Johnson, 78 F.3d 1556, 1565 (Fed. Cir. 1996) (“The doctrine of judicial estoppel is that where a party successfully urges a particular position in a legal proceeding, it is estopped from taking a contrary position in a subsequent proceeding where its interests have changed”); Reynolds v. Commissioner of Internal Revenue, 861 F.2d 469, 472-73 (6th Cir. 1988) (internal quotation marks and citations omitted) (“Courts have used a variety of metaphors to describe the doctrine, characterizing it as a rule against playing fast and loose with the courts, blowing hot and cold as the occasion demands, or having one’s cake and eating it too. Emerson’s dictum that a foolish consistency is the hobgoblin of little minds cuts no ice in this context”).

- 11 - marks, parentheses, and citation omitted).2 Because the doctrine

is intended to protect the judicial system, rather than the

litigants, detrimental reliance by the opponent of the party

against whom the doctrine is applied is not necessary. See Matter

of Cassidy, 892 F.2d 637, 641 & n.2 (7th Cir.), cert. denied, 498

U.S. 812 (1990).3

“The policies underlying the doctrine include preventing

internal inconsistency, precluding litigants from playing fast and

loose with the courts, and prohibiting parties from deliberately

changing positions according to the exigencies of the moment.”

United States v. McCaskey, 9 F.3d 368, 378 (5th Cir. 1993). The

doctrine is generally applied where “intentional self-contradiction

is being used as a means of obtaining unfair advantage in a forum

2 See also United States v. McCaskey, 9 F.3d 368, 379 (5th Cir. 1993) (purpose of doctrine is “to protect the integrity of the judicial process and to prevent unfair and manipulative use of the court system by litigants”), cert. denied, 511 U.S. 1042 (1994); McNemar v. Disney Store, Inc., 91 F.3d 610, 616 (3d Cir. 1996) (“The doctrine of judicial estoppel serves a consistently clear and undisputed jurisprudential purpose: to protect the integrity of the courts.”), cert. denied, 519 U.S. 1115 (1997); Matter of Cassidy, 892 F.2d 637, 641 (7th Cir.), cert. denied, 498 U.S. 812 (1990) (“Judicial estoppel is a doctrine intended to prevent the perversion of the judicial process”); Reynolds, 861 F.2d at 472 (internal quotation marks and citation omitted) (“The purpose of the doctrine is to protect the courts from the perversion of judicial machinery”). 3 See also McNemar, 91 F.3d at 617 (rejecting contention that party seeking estoppel must show that it would be prejudiced unless opponent is estopped); Ryan Operations G.P. v. Santiam-Midwest Lumber Co., 81 F.3d 355, 360 (3d Cir. 1996) (“While privity and/or detrimental reliance are often present in judicial estoppel cases, they are not required”); Data General, 78 F.3d at 1565; Fleck v. KDI Sylvan Pools, Inc., 981 F.2d 107, 121-22 (3d Cir. 1992), cert. denied, 507 U.S. 1005 (1993).

- 12 - provided for suitors seeking justice”. Scarano v. Central R. Co.,

203 F.2d 510, 513 (3d Cir. 1953).4

Most courts have identified at least two limitations on the

application of the doctrine: (1) it may be applied only where the

position of the party to be estopped is clearly inconsistent with

its previous one; and (2) that party must have convinced the court

to accept that previous position. See United States for use of

American Bank v. C.I.T. Construction Inc. of Tex., 944 F.2d 253,

258 (5th Cir. 1991) (“The ‘judicial acceptance’ requirement

minimizes the danger of a party contradicting a court’s

determination based on the party’s prior position and, thus,

mitigates the corresponding threat to judicial integrity”); Matter

of Cassidy, 892 F.2d at 641; Folio v. City of Clarksburg, W.V., 134

F.3d 1211, 1217-18 (4th Cir. 1998).5

4 See also Taylor v. Food World, Inc., 133 F.3d 1419, 1422 (11th Cir. 1998) (internal quotation marks and citation omitted) (“Judicial estoppel is applied to the calculated assertion of divergent sworn positions ... and is designed to prevent parties from making a mockery of justice by inconsistent pleadings”); Ryan, 81 F.3d at 358 (“The basic principle ... is that absent any good explanation, a party should not be allowed to gain an advantage by litigation on one theory, and then seek an inconsistent advantage by pursuing an incompatible theory”). “[W]here a party assumes a certain position in a legal proceeding, and succeeds in maintaining that position, he may not thereafter, simply because his interests have changed, assume a contrary position.” Davis v. Wakelee, 156 U.S. 680, 689 (1895). 5 Cf. McNemar, 91 F.3d at 617 (rejecting contention that party seeking estoppel must show that prior statement was accepted by a judicial tribunal); Ryan, 81 F.3d at 361 (doctrine of judicial estoppel contains no requirement that “a party must have benefitted from her prior position in order to be judicially estopped from subsequently asserting an inconsistent one”; but, obviously, “threat to the integrity of the judicial process from subsequent assertion of an incompatible position is more immediate” when tribunal has acted in reliance on party’s initial assertion).

- 13 - The Sixth Circuit has explained that the “judicial acceptance”

requirement “does not mean that the party against whom the judicial

estoppel doctrine is to be invoked must have prevailed on the

merits. Rather, judicial acceptance means only that the first

court has adopted the position urged by the party, either as a

preliminary matter or as part of a final disposition”. Reynolds v.

Commissioner of Internal Revenue, 861 F.2d 469, 473 (6th Cir.

1988).

Some courts have imposed additional requirements. For

example, the Fourth Circuit holds that the position must be one of

fact instead of law. Folio, 134 F.3d at 1217-18. Contra, Matter

of Cassidy, 892 F.2d at 642 (“the change of position on the legal

question is every bit as harmful to the administration of justice

as a change on an issue of fact”).

And, many courts have imposed the additional requirement that

the party to be estopped must have acted intentionally, not

inadvertently. E.g., Johnson, 141 F.3d at 1369 (“If incompatible

positions are based not on chicanery, but only on inadvertence or

mistake, judicial estoppel does not apply”); Folio, 134 F.3d at

1217-18; McNemar v. Disney Store, Inc., 91 F.3d 610, 618 (3d Cir.

1996) (internal quotation marks and citation omitted) (part of

threshold inquiry for application of judicial estoppel is whether

party to be estopped “assert[ed] either or both of the inconsistent

positions in bad faith–i.e., with intent to play fast and loose

with the court”); Ryan Operations G.P. v. Santiam-Midwest Lumber

Co., 81 F.3d 355, 358, 362 (3d Cir. 1996) (internal quotation marks

- 14 - and citation omitted) (judicial estoppel doctrine “not intended to

eliminate all inconsistencies, however slight or inadvertent;

rather, it is designed to prevent litigants from playing fast and

loose with the courts”; doctrine “does not apply when the prior

position was taken because of a good faith mistake rather than as

part of a scheme to mislead the court”; inconsistency “must be

attributable to intentional wrongdoing”); Matter of Cassidy, 892

F.2d at 642 (judicial estoppel should not be applied “where it

would work an injustice, such as where the former position was the

product of inadvertence or mistake”); Johnson Serv. Co. v.

TransAmerica Ins. Co., 485 F.2d 164, 175 (5th Cir. 1973) (applying

Texas law on judicial estoppel; “the rule looks toward cold

manipulation and not an unthinking or confused blunder”).

Browning maintains that, because of the nondisclosure in

Coastal’s bankruptcy schedules and its lift-stay stipulation,

plaintiffs, as Coastal’s successors, are judicially estopped

(except for the tortious interference claim).

Despite the undisputed facts that Coastal was aware of, but

did not disclose, the claims, the bankruptcy court rejected

judicial estoppel, stating that, from the inception of Coastal’s

adversary proceeding, Browning, the Trustee, and Westinghouse were

aware of that action. That statement, however, is in the section

of the opinion addressing equitable estoppel (which, of course,

requires detrimental reliance; that defense is no longer at issue).

Because the nondisclosure is not discussed in the part on judicial

estoppel, it is unclear whether, in rejecting such estoppel, the

- 15 - court relied on the parties’ awareness of the adversary proceeding.

With respect to the lift-stay stipulation, the bankruptcy

court noted that it was prepared by Westinghouse’s attorneys and

reviewed by Coastal’s attorney, who “checked it with his client for

accuracy” when it was signed. The court stated that Westinghouse

and Coastal’s attorneys “overlooked” the adversary proceeding in

arriving at the $20,000 figure for Coastal’s general intangibles;

but ruled that it was not their “intent to omit mention of the

Browning lawsuit”; and concluded that “[s]uch omission appears to

have been inadvertent, as opposed to any outright conspiracy, or

intentional self-contradiction being used as a means to obtain

unfair advantage”. In this regard, the court concluded that the

lift-stay stipulation was not intended to be an “exhaustive listing

of assets”.

The bankruptcy court found that when the stipulation was

signed and the stay lifted, Duke, Coastal’s CEO and later IC’s,

believed that Browning’s actions had damaged Coastal in the $10

million range. The bankruptcy court stated that “[i]t appears that

such lawsuit did have value, but such value did not approach the

projected deficiency of approximately $5 million that

[Westinghouse] anticipated would exist after” it sold Coastal’s

assets.

Accordingly, the bankruptcy court held that Coastal’s tort

claims were not foreclosed upon and were not affected by judicial

estoppel. Likewise, the court concluded that there was

“insufficient factual or legal justification to show that [IC]

- 16 - should be judicially estopped ... from asserting ... contract

claims of Coastal ... [greater than] $20,000”; and that there was

insufficient proof that Coastal, IC, or Westinghouse participated

in a fraud on the court or creditors with respect to listing assets

on Coastal’s schedules, the lift-stay stipulation, or lifting the

stay.

On appeal, the district court summarily “agree[d] with the

Bankruptcy Court’s findings [, especially concerning inadvertence,]

and [held] that judicial estoppel should not be applied”.

It goes without saying that the Bankruptcy Code and Rules

impose upon bankruptcy debtors an express, affirmative duty to

disclose all assets, including contingent and unliquidated claims.

11 U.S.C. § 521(1) (“The debtor shall–(1) file a list of creditors,

and unless the court orders otherwise, a schedule of assets and

liabilities, a schedule of current income and current expenditures,

and a statement of the debtor’s financial affairs”). “The duty of

disclosure in a bankruptcy proceeding is a continuing one, and a

debtor is required to disclose all potential causes of action”.

Youngblood Group v. Lufkin Fed. Sav. & Loan Ass’n, 932 F. Supp.

859, 867 (E.D. Tex. 1996). “‘The debtor need not know all the

facts or even the legal basis for the cause of action; rather, if

the debtor has enough information ... prior to confirmation to

suggest that it may have a possible cause of action, then that is

a “known” cause of action such that it must be disclosed’”. Id.

(brackets omitted; quoting Union Carbide Corp. v. Viskase Corp. (In

re Envirodyne Indus., Inc.), 183 B.R. 812, 821 n.17 (Bankr. N.D.

- 17 - Ill. 1995)). “Any claim with potential must be disclosed, even if

it is ‘contingent, dependent, or conditional’”. Id. (quoting

Westland Oil Dev. Corp. v. MCorp Management Solutions, Inc., 157

B.R. 100, 103 (S.D. Tex. 1993)) (emphasis added).

Viewed against the backdrop of the bankruptcy system and the

ends it seeks to achieve, the importance of this disclosure duty

cannot be overemphasized. See generally Oneida Motor Freight, Inc.

v. United Jersey Bank, 848 F.2d 414 (3d Cir.) (discussing

importance of disclosure to creditors and to bankruptcy court),

cert. denied, 488 U.S. 967 (1988).

The rationale for ... decisions [invoking judicial estoppel to prevent a party who failed to disclose a claim in bankruptcy proceedings from asserting that claim after emerging from bankruptcy] is that the integrity of the bankruptcy system depends on full and honest disclosure by debtors of all of their assets. The courts will not permit a debtor to obtain relief from the bankruptcy court by representing that no claims exist and then subsequently to assert those claims for his own benefit in a separate proceeding. The interests of both the creditors, who plan their actions in the bankruptcy proceeding on the basis of information supplied in the disclosure statements, and the bankruptcy court, which must decide whether to approve the plan of reorganization on the same basis, are impaired when the disclosure provided by the debtor is incomplete.

Rosenshein v. Kleban, 918 F. Supp. 98, 104 (S.D.N.Y. 1996)

(emphasis added).6

6 See also Ryan, 81 F.3d at 362 (“disclosure requirements are crucial to the effective functioning of the federal bankruptcy system”); Louden v. Federal Land Bank of Louisville (In re Louden), 106 B.R. 109, 112 (Bankr. E.D. Ky. 1989) (“[w]ithout ... disclosure [required by 11 U.S.C. § 521], the basic system of marshalling of assets and the resulting distribution of proceeds to creditors

- 18 - As Coastal’s bankruptcy attorney admitted at the July 1993

bankruptcy court hearing, it is very important that a debtor’s

bankruptcy schedules and statement of affairs be as accurate as

possible, because that is the initial information upon which all

creditors rely. The significance of the undisclosed claims was

underscored by the testimony of Westinghouse’s counsel at that same

hearing. When asked why the claims against Browning were not

included with the assets described in the lift-stay stipulation, he

testified that it was not intended to be an exhaustive list of

Coastal’s assets; that, in order to determine Coastal’s assets,

creditors should have looked instead at, inter alia, Coastal’s

schedules and statement of financial affairs. (Of course, such

claims/assets were not there disclosed.)

Courts in numerous cases have precluded debtors or former

debtors from pursuing claims about which the debtors had knowledge,

but did not disclose, during the debtors’ bankruptcy proceedings.

See, e.g., Payless Wholesale Distributors, Inc. v. Alberto Culver

(P.R.) Inc., 989 F.2d 570 (1st Cir.), cert. denied, 510 U.S. 931

(1993); Oneida, 848 F.2d 414.7 It is along this line that Browning

would be an impossible task”). 7 See also Chandler v. Samford University, 35 F. Supp. 2d 861 (N.D. Ala. 1999); Youngblood Group, 932 F. Supp. 859; Rosenshein, 918 F. Supp. 98; Okan’s Foods, Inc. v. Windsor Associates Ltd. Partnership (In re Okan’s Foods, Inc.), 217 B.R. 739 (Bankr. E.D. Pa. 1998); Welsh v. Quabbin Timber, Inc., 199 B.R. 224 (D. Mass. 1996); Freedom Ford, Inc. v. Sun Bank & Trust Co. (Matter of Freedom Ford), 140 B.R. 585 (Bankr. M.D. Fla. 1992); State of Ohio, Dept. of Taxation v. H.R.P. Auto Center, Inc. (In re H.R.P. Auto Center, Inc.), 130 B.R. 247 (Bankr. N.D. Ohio 1991); Sure-Snap Corp. v. Bradford Nat’l Bank, 128 B.R. 885 (D. Vt.), aff’d, 948 F.2d 869 (2d Cir. 1991); Pako Corp. v. Citytrust, 109 B.R. 368 (D.

- 19 - takes its stand. It maintains that the bankruptcy court applied an

incorrect standard of law and, therefore, abused its discretion;

that, rather than basing its decision on lack of knowledge vel non,

the court improperly based it on self-serving claims of lack of

intent to conceal. Browning maintains that “inadvertence” should

preclude judicial estoppel only when the inconsistent positions

result from a lack of knowledge. We need not agree entirely with

Browning’s contention, in order to conclude, as discussed below,

that the bankruptcy court abused its discretion.

1.

Plaintiffs respond that the first judicial estoppel prong

(inconsistent positions) is not satisfied, because Coastal

Minn. 1989); Louden, 106 B.R. 109; Hoffman v. First Nat’l Bank of Akron, IA (In re Hoffman), 99 B.R. 929 (N.D. Iowa 1989); Galerie Des Monnaies of Geneva v. Deutsche Bank, A.G. (In re Galerie Des Monnaies of Geneva, Ltd.), 55 B.R. 253 (Bankr. S.D.N.Y. 1985), aff’d, 62 B.R. 224 (S.D.N.Y. 1986). Cf. Donaldson v. Bernstein, 104 F.3d 547 (3d Cir. 1997) (debtors’ principals judicially estopped from asserting that one of them had terminated relationship with debtor because debtor did not disclose alleged resignation prior to bankruptcy court’s approval of plan of reorganization); Cullen Center Bank & Trust v. Hensley (Matter of Criswell), 102 F.3d 1411 (5th Cir. 1997) (Chapter 7 trustee judicially estopped from asserting that creditor was not transferee of oil and gas properties that debtor fraudulently conveyed to children, because trustee succeeded in preference action based on assertion that creditor’s lien was a transfer); Eubanks v. F.D.I.C., 977 F.2d 166 (5th Cir. 1992) (res judicata effect of order confirming plan of reorganization barred debtors from asserting undisclosed claims); County Fuel Co., Inc. v. Equitable Bank Corp., 832 F.2d 290 (4th Cir. 1987) (debtor’s failure to assert breach of contract counterclaim to proof of claim filed by creditor barred subsequent breach of contract action against creditor based on “principles of waiver closely related to those that, in the interests of repose and integrity, underlie res judicata”); United Virginia Bank/Seaboard Nat’l v. B.F. Saul Real Estate Investment Trust, 641 F.2d 185 (4th Cir. 1981) (creditor judicially estopped from litigating issue based on earlier inconsistent position in bankruptcy proceedings).

- 20 - fulfilled its duty to disclose its claims against Browning by

initiating the adversary proceeding in April 1986, a week after

filing its Chapter 11 petition. According to plaintiffs, the

subsequent nondisclosure was inconsequential because, in the light

of the adversary proceeding, everyone involved in the bankruptcy

proceeding, including Browning, was aware of the claims.

The record contradicts that assertion; Browning, Westinghouse,

and Coastal’s bankruptcy counsel all believed that, after Browning

returned the inventory in May 1986, little remained of the

adversary proceeding. Coastal’s bankruptcy attorney testified at

the July 1993 bankruptcy court hearing that the primary purpose of

the adversary proceeding was to cause that inventory return. The

attorney who represented Westinghouse in connection with lifting

the stay testified similarly that Coastal’s claims against Browning

were not mentioned in the lift-stay stipulation, during the lift-

stay hearing, in the notice of the auction, or at the auction

because Westinghouse believed that the claims sought inventory

turnover from Browning, which had already been accomplished; and

that there was little left to be done in that adversary proceeding.

Likewise, at a bankruptcy hearing in January 1994, Browning’s

attorney testified that inventory turnover was the essence of the

adversary proceeding.

In the light of that consensus, it was particularly important

for Duke (Coastal) to disclose his vastly different view: that the

claims were worth millions. In sum, this silence led Browning, the

- 21 - other creditors, and the bankruptcy court to believe that Coastal’s

claims against Browning were resolved in May 1986, when it returned

the inventory.

b.

Moreover, Browning’s knowledge of the claims, or its non-

reliance on the nondisclosure, even if supported by the record, are

irrelevant. As discussed supra, unlike the well-known reliance

element for other forms of estoppel, such as equitable estoppel,

detrimental reliance by the party seeking judicial estoppel is not

required. Again, the purpose of judicial estoppel is not to

protect the litigants; it is to protect the integrity of the

judicial system.8

Accordingly, the inconsistent positions prong for judicial

estoppel is satisfied. By omitting the claims from its schedules

and stipulation, Coastal represented that none existed. Likewise,

in scheduling its debt to Browning, Coastal did not specify that it

was disputed, contingent, or subject to setoff. But in this

proceeding, plaintiffs have asserted claims for $10 million against

Browning for allegedly causing Coastal’s bankruptcy and demise.

2.

Plaintiffs do not seriously dispute that the second prong for

judicial estoppel (acceptance of Coastal’s first position by the

bankruptcy court) is satisfied. The stay was lifted based in part

8 Even if detrimental reliance were an element, there is evidence that Browning relied on the no-claims-existed representations in withdrawing its objection to lifting the stay and in not bidding at the auction on Coastal’s intangible assets.

- 22 - on the stipulation, which represented that Coastal’s intangible

assets were worth less than $20,000; and that its assets were

inadequate to satisfy its debt to Westinghouse.

3.

Nevertheless, plaintiffs maintain that judicial estoppel is

inapplicable because the nondisclosure was unintentional and

inadvertent. On this record, plaintiffs’ and the bankruptcy

court’s reliance on inadvertence to preclude judicial estoppel is

misplaced. Therefore, the court abused its discretion.

Our review of the jurisprudence convinces us that, in

considering judicial estoppel for bankruptcy cases, the debtor’s

failure to satisfy its statutory disclosure duty is “inadvertent”

only when, in general, the debtor either lacks knowledge of the

undisclosed claims or has no motive for their concealment.9

9 See, e.g., Brassfield v. Jack McLendon Furniture, Inc., 953 F. Supp. 1424 (M.D. Ala. 1996) (in Chapter 7 case, where claims accrued after filing petition, and where debtor was not aware of claims during bankruptcy, debtor not judicially estopped from asserting unscheduled claims); Dawson v. J. G. Wentworth & Co., Inc., 946 F. Supp. 394 (E.D. Pa. 1996) (although debtor disclosed claim in amended bankruptcy schedules, fact issue regarding debtors’ good or bad faith in not disclosing claims in original bankruptcy schedules precluded summary judgment based on judicial estoppel); Richardson v. United Parcel Serv., 195 B.R. 737 (E.D. Mo. 1996) (judicial estoppel inapplicable for undisclosed claim where debtor’s bankruptcy case was still pending, assets had not been distributed, and no plan had been confirmed); In re Envirodyne Industries, Inc., 183 B.R. 812 (where retention of jurisdiction in plan of reorganization put creditors on notice as to possibility of such actions, and debtor’s undisclosed counterclaim did not assert position contrary to listing of creditor’s claim as undisputed, judicial estoppel did not bar debtor from pursuing counterclaim and setoff request); Elliott v. ITT Corp., 150 B.R. 36 (N.D. Ill. 1992) (where debtor was unaware that claim against creditor existed, and amended schedule after discovery of potential claims, judicial estoppel inapplicable); Neptune World Wide Moving, Inc. v. Schneider Moving & Storage Co. (In re Neptune World Wide Moving,

- 23 - Two cases from the Third Circuit aptly illustrate the critical

distinction between nondisclosures based on a lack of knowledge,

and those where, as here, the debtor fails to satisfy its

disclosure duty despite knowledge of the undisclosed facts. In

Oneida, 848 F.2d 414, judicial estoppel barred a former Chapter 11

debtor from prosecuting against a bank claims not disclosed during

the bankruptcy proceedings. The excuse for nondisclosure was not

lack of knowledge; instead, that the bankruptcy case was never in

a procedural posture for the claims to be properly asserted. Id.

at 418. Although the court stopped short of holding that the

nondisclosure was equivalent to taking a position that the claims

did not exist, it concluded that the debtor’s acknowledgment of its

debt to the bank, without any indication that the debt was disputed

or subject to setoff (as is the situation here), constituted a

position inconsistent with its later action against the bank. Id.

at 419.

On the other hand, in Ryan, 81 F.3d 355, the Third Circuit

concluded that a Chapter 11 debtor’s earlier nondisclosure would

not judicially estop the debtor from pursuing the claims outside of

bankruptcy, because there was no evidence that the debtor acted in

bad faith. Id. at 362. The debtor, a builder, asserted claims

against the manufacturers and suppliers of an allegedly defective

Inc.), 111 B.R. 457 (Bankr. S.D.N.Y. 1990) (fact issue regarding debtor’s contention that defendants concealed and altered documents which prevented debtor from discovering and disclosing preferential or fraudulent transfer claims in disclosure statement precludes dismissal based on judicial estoppel).

- 24 - product; but it had not listed any potential claims regarding the

product in its bankruptcy schedules.

The court distinguished Oneida on the ground that the debtor

there not only failed to disclose its potential claim as a

contingent asset, but also scheduled its debt as a liability,

without disclosing an offset possibility. Id. at 363. The court

stated that the Oneida debtor had knowledge of its claim when it

filed for bankruptcy because the “gravamen of [its] case against

the bank was that the bank’s actions were responsible for forcing

[the debtor] into bankruptcy”, id.; and noted that the Oneida

debtor had a motive to conceal the claim because, had the bank

known that the debtor would seek restitution of the amount paid to

the bank under the plan, the bank “might well have voted against

approval of the plan”. Id. The Ryan court concluded that, in

Oneida, it was “[t]his combination of knowledge of the claim and

motive for concealment in the face of an affirmative duty to

disclose [that] gave rise to an inference of intent sufficient to

satisfy the [bad faith] requirements of judicial estoppel”. Id. at

363.

In contrast, the court stated that there was no basis for

inferring that the Ryan debtor “deliberately asserted inconsistent

positions in order to gain advantage”, id. at 363, because there

was “no evidence that the nondisclosure played any role in the

confirmation of the plan or that disclosure of the potential claims

would have led to a different result”, id.; and the debtor’s

failure to list claims against the manufacturers and suppliers as

- 25 - contingent assets was offset by its failure to list, as contingent

liabilities, claims asserted against the debtor by homeowners for

the defective product. Id. The court also noted that the debtor

would derive no appreciable benefit from the nondisclosure, because

creditors would receive 91 percent of any recovery on the claims,

id.; and that the debtor’s actions subsequent to filing its

schedules, including obtaining authorization from the bankruptcy

court to pursue the claims, were inconsistent with an intent to

deliberately conceal them. Id. at 364. The court concluded that

intent to mislead or deceive could not be inferred from the mere

fact of nondisclosure. Id. at 364-65.

In Okan’s Foods, Inc. v. Windsor Associates Ltd. Partnership

(In re Okan’s Foods, Inc.), 217 B.R. 739 (Bankr. E.D. Pa. 1998),

the bankruptcy court held that the “bad faith” element mandated by

Ryan was satisfied by “[s]tatements or conduct of the debtor

evincing a reckless disregard for the truth”. Id. at 755. There,

a Chapter 11 debtor, following plan confirmation, filed an

adversary complaint against its creditor-landlord, asserting claims

under 42 U.S.C. § 1983, and alleging that the creditor’s actions

caused its bankruptcy. The court found that, because “the

undisclosed claim involved allegations that a particular creditor’s

conduct precipitated the filing of the bankruptcy case and that

substantial damage to its business occurred as a result ..., all of

the facts underlying the claims were available and known to the

debtor well before confirmation”, id. at 756, and inferred that the

debtor’s motive for the pre-confirmation nondisclosure was “to

- 26 - preserve for its own uses, to the exclusion of its creditors, any

recovery it might obtain upon a successful prosecution of such

claim”. Id.

Coastal’s claimed “inadvertence” is not the type that

precludes judicial estoppel against plaintiffs, as Coastal’s

successors, from asserting in the instant litigation the previously

nondisclosed claims; Coastal both knew of the facts giving rise to

its inconsistent positions, and had a motive to conceal the claims.

It is undisputed that Duke, who, as Coastal’s CEO, signed

Coastal’s schedules, then believed that Coastal had claims for $10

million against Browning. And, as found by the bankruptcy court,

he continued to maintain that belief when he authorized Coastal’s

attorney to execute the lift-stay stipulation. At the July 1993

bankruptcy hearing, when asked why he did not disclose those claims

on Coastal’s schedules, Duke responded that “[w]e pretty much

relied on our attorneys. We had no experience in filling those

out, and we provided them the information, and maybe later on

during the process, ... a couple of months down the road we may

have filled them out ourselves.... We went to [a] library and

tried to find books on how to fill these forms out....” He

testified further: “[W]e had never done these kind of statements

before, and we depended upon our legal counsel ... about these

types of things, and he had kind of a check list for us.... [W]e

depended upon [him] to give us the guidance on what to put....”

Finally, Duke testified that he did not know what “contingent” and

“unliquidated” claims meant under bankruptcy law; that Coastal’s

- 27 - counsel told him “what to put” on the schedules; that it was

counsel’s conclusion that “there was no value” in the claims

against Browning; and that, if there was an error, it was “just an

oversight”.

But, at that July 1993 hearing, Coastal’s bankruptcy attorney

testified that the adversary proceeding against Browning was a

contingent or unliquidated claim that should have been included on

Coastal’s schedules; and conceded that Coastal’s debt to Browning

“probably” should have been listed as being disputed. Although the

attorney testified that it was his firm’s policy to discuss

schedules with clients, he did not recall his specific involvement

in preparing the schedules, could not recall any discussions with

Young or Duke about the claims against Browning, and could not

testify as to why the adversary proceeding was not listed as a

contingent or unliquidated claim.

Duke’s claimed lack of awareness of Coastal’s statutory

disclosure duty for its claims against Browning is not relevant.

See Chandler v. Samford University, 35 F. Supp. 2d 861, 865 (N.D.

Ala. 1999) (“Research reveals no case in which a court accepted

such an excuse for a party’s failure to comply with the requirement

of full disclosure”). In any event, no one testified that

Coastal’s bankruptcy attorney advised Coastal not to disclose the

claims.

Moreover, Coastal had a motive for concealing them. Had those

claims, believed to be worth $10 million (more than enough to

satisfy Coastal’s debt to Westinghouse) been disclosed, Coastal’s

- 28 - unsecured creditors might have opposed lifting the stay, and the

bankruptcy court might have reached a different decision in that

regard. Or, even had the stay been lifted, creditors, including

Browning, might have chosen to bid more at the foreclosure auction

for Coastal’s assets. Browning’s representative at the auction

testified that, had Browning been aware that Coastal’s claims

against it were then being sold, he “strongly suspect[ed]” that

Browning would have authorized him to bid on them.

Coastal avoided paying its debts by filing bankruptcy. Yet

IC, formed by Coastal’s CEO, purchased Coastal’s assets, including

the undisclosed $10 million claim against Browning, for only $1.24

million, and continued to sell Browning’s former inventory at

discounted prices, then obtained a net judgment of $3.6 million

against Browning on the undisclosed claims. For facts similar to

those at hand, the bankruptcy court’s interpretation of the

“inadvertence” exception for judicial estoppel would encourage

bankruptcy debtors to conceal claims, write off debts, purchase

debtor assets at bargain prices, and then sue on undisclosed claims

and possibly recover windfalls. This, of course, would be to the

detriment of creditors who decided not to bid on the debtor’s

assets at a foreclosure sale because they lacked knowledge about

the existence or value of the undisclosed claims.

Needless to say, judicial estoppel is intended to prevent just

such a process. As the First Circuit aptly stated in Payless:

The basic principle of bankruptcy is to obtain a discharge from one’s creditors in return for all one’s assets, except those exempt, as a result of which creditors release their own

- 29 - claims and the bankrupt can start fresh. Assuming there is validity in [debtor’s] present suit, it has a better plan. Conceal your claims; get rid of your creditors on the cheap, and start over with a bundle of rights. This is a palpable fraud that the court will not tolerate, even passively. [Debtor], having obtained judicial relief on the representation that no claims existed, can not now resurrect them and obtain relief on the opposite basis.

989 F.2d at 571.

4.

Finally, plaintiffs maintain that judicial estoppel would be

inequitable because Browning also took inconsistent positions on

issues related to its defense (regarding ownership of the claims

and whether they were foreclosed on by Westinghouse). We disagree.

Again, the purpose of judicial estoppel is to protect the integrity

of courts, not to punish adversaries or to protect litigants.

As noted, the only claim not barred by judicial estoppel is

that for tortious interference. Plaintiffs claimed that, around

the start of 1986, and but for Browning’s interference, Walter

Helms would have purchased Coastal for $10 million. Helms

testified that Browning’s president, Kooyman, told him (Helms) that

he had heard Helms was interested in purchasing Coastal; Helms

confirmed that he intended to do so; and Kooyman told Helms that

“he couldn’t divulge certain things that were going on, but it

probably would be a good idea if [Helms] held up a little bit”.

Browning presents, inter alia, a meritorious limitations bar.

- 30 - Although Coastal raised tortious interference claims against

Browning in its original complaint (filed in 1986), and IC did

likewise in several of its amended complaints, those claims were

premised on Browning’s failure to return inventory and its impact

on Coastal’s relationships with its customers and secured lender

(Westinghouse). It was not until late December 1993, over seven

years after the adversary proceeding was filed, that IC moved for

leave to file a fifth amended complaint which, for the first time,

claimed tortious interference based on the alleged Helms-purchase.

That amended complaint was not filed until almost two years later,

in 1995. And, plaintiffs subsequently restricted their tortious

interference claim to the Helms-purchase.

Under Texas law, a two-year limitations period applies to

tortious interference claims, TEX. CIV. PRAC. & REM. CODE ANN. §

16.003(a); First Nat’l Bank of Eagle Pass v. Levine, 721 S.W.2d

287, 289 (Tex. 1986); and, “[f]or the purposes of application of

the statute of limitations, a cause of action generally accrues at

the time when facts come into existence which authorize a claimant

to seek a judicial remedy.... Put another way, a cause of action

can generally be said to accrue when the wrongful act effects an

injury”. Murray v. San Jacinto Agency, Inc., 800 S.W.2d 826, 828

(Tex. 1990) (internal quotation marks and citation omitted); see

also Computer Associates Int’l, Inc. v. Altai, Inc., 918 S.W.2d

453, 458 (Tex. 1996) (“The traditional rule in Texas is that a

cause of action accrues and the two-year limitations period begins

to run as soon as the owner suffers some injury, regardless of when

- 31 - the injury becomes discoverable”). On the other hand, “[t]he

discovery rule exception defers accrual of a cause of action until

the plaintiff knew or, exercising reasonable diligence, should have

known of the facts giving rise to the cause of action”. Id. at

455.

But, the Texas Supreme Court has stated that “[t]he discovery

rule, in application, proves to be a very limited exception to

statutes of limitations”. Id. at 455 (internal quotation marks and

citation omitted); see also S.V. v. R.V., 933 S.W.2d 1, 25 (Tex.

1996) (“exceptions to the legal injury rule should be few and

narrowly drawn”). “Generally, application [of the discovery rule]

has been permitted in those cases where the nature of the injury

incurred is inherently undiscoverable and the evidence of injury is

objectively verifiable”. Altai, 918 S.W.2d at 456 (internal

quotation marks and citation omitted).

In seeking judgment as a matter of law, Browning asserted that

the interference claim was time-barred. Plaintiffs had to prove

applicability of the discovery rule: first, that tortious

interference claims are inherently undiscoverable; and second, that

their claim is objectively verifiable. See Woods v. William M.

Mercer, Inc., 769 S.W.2d 515, 518 (Tex. 1988).

Browning contends that the claim is not inherently

undiscoverable because the alleged injury is not, by its nature,

unlikely to be discovered within the limitations period. Along

this line, Browning maintains that Coastal became aware of its

- 32 - injury when the alleged sale did not materialize; and that, by

simply asking Helms, the putative purchaser, Coastal could have

discovered the alleged interference.

Plaintiffs counter that the claim was inherently

undiscoverable because of the difficulty of learning about secret

communications between third parties. They point out that Young,

Coastal’s former president and chairman, testified that he asked

Helms why he wanted to delay purchasing Coastal, and that Helms

refused to explain until his January 1993 deposition. Duke

testified similarly that, until January 1993, Helms never mentioned

why he did not complete the purchase.

“The requirement of inherent undiscoverability recognizes that

the discovery rule exception should be permitted only in

circumstances where it is difficult for the injured party to learn

of the negligent act or omission”. Altai, 918 S.W.2d at 456

(internal quotation marks and citation omitted). “Inherently

undiscoverable encompasses the requirement that the existence of

the injury is not ordinarily discoverable, even though due

diligence has been used”. Id. The Texas Supreme Court has stated

that “[t]he common thread in [the ‘inherently undiscoverable’]

cases is that when the wrong and injury were unknown to the

plaintiff because of their very nature and not because of any fault

of the plaintiff, accrual of the cause of action was delayed”.

S.V., 933 S.W.2d at 7.

“To be ‘inherently undiscoverable,’ an injury need not be

absolutely impossible to discover, else suit would never be filed

- 33 - and the question whether to apply the discovery rule would never

arise.” Id. “Nor does ‘inherently undiscoverable’ mean merely

that a particular plaintiff did not discover his injury within the

prescribed period of limitations; discovery of a particular injury

is dependent not solely on the nature of the injury but on the

circumstances in which it occurred and plaintiff’s diligence as

well”. Id. “An injury is inherently undiscoverable if it is by

nature unlikely to be discovered within the prescribed limitations

period despite due diligence”. Id.

Helms was listed in October 1989 as an expert witness for

plaintiffs, and so testified. There was also evidence that he was

a director of IC’s parent, Overline Corporation; that he had been

paid $50,000 annually as a consultant for Overline; that he had

owned ten percent of its stock; and that he was a creditor of IC.

Under these circumstances, Helms’ failure until his deposition in

January 1993 to inform plaintiffs of Browning’s alleged

interference is inexplicable.

We doubt that tortious interference is the type of conduct

that, by its nature, is unlikely, despite due diligence, to be

discovered within the limitations period. In any event, it is not

necessary for us to decide that question. The discovery rule is

inapplicable because, as discussed below, the claim is not

objectively verifiable.

Browning asserts that the claim is not objectively verifiable

because there is no objective or documentary evidence of either

- 34 - Helms’ alleged offer or Browning’s alleged interference.

Plaintiffs respond, based on Helms’ eyewitness account, that the

claim is objectively verifiable.

The Texas Supreme Court has stated that “the bar of

limitations cannot be lowered for no other reason than a swearing

match between parties over facts and between experts over

opinions”. S.V., 933 S.W.2d at 15. The requirement of objective

verifiability requires physical or other evidence, such as an

objective eyewitness account, to corroborate the existence of the

claim. See S.V., 933 S.W.2d at 15. “Objectively verifiable

evidence is the key factor for determining the discovery rule’s

applicability.” Askanase v. Fatjo, 130 F.3d 657, 668 (5th Cir.

1997).

There is no documentary evidence of Helms’ proposed purchase

or Kooyman’s alleged comment regarding it. The only evidence

concerning Helms’ alleged agreement to purchase Coastal is his and

Young’s testimony; the only evidence concerning interference is

Helms’ testimony. Kooyman, Browning’s president, did not testify

at trial; his testimony was presented by deposition. And, he was

not deposed about his alleged interference — his alleged comments

to Helms.

As stated, Helms testified as a paid expert witness for

plaintiffs, was a creditor of IC, and was a consultant, part owner,

and director of IC’s parent. He also had other close ties to the

Coastal and IC principals: at the time of Helms’ testimony, Young

was running a company for Helms; and both Young and Duke had served

- 35 - as expert witnesses for Helms in prior litigation involving one of

Helms’ companies.

Because the discovery rule does not apply to the interference

claim, it is time-barred unless it relates back to the complaints

filed within the limitations period. Rule 15(c) of the Federal

Rules of Civil Procedure provides, in pertinent part:

An amendment of a pleading relates back to the date of the original pleading when

(1) relation back is permitted by the law that provides the statute of limitations applicable to the action, or

(2) the claim or defense asserted in the amended pleading arose out of the conduct, transaction, or occurrence set forth or attempted to be set forth in the original pleading....

FED. R. CIV. P. 15(c).

“[U]nder Rule 15(c), an amendment to a complaint will relate

back to the date of the original complaint if the claim asserted in

the amended pleading arises out of the conduct, transaction, or

occurrence set forth or attempted to be set forth in the original

pleading”. F.D.I.C. v. Conner, 20 F.3d 1376, 1385 (5th Cir. 1994)

(internal quotation marks and citation omitted).

The theory that animates this rule is that once litigation involving particular conduct or a given transaction or occurrence has been instituted, the parties are not entitled to the protection of the statute of limitations against the later assertion by amendment of defenses or claims that arise out of the same conduct, transaction, or occurrence as set forth in the original pleading. Permitting such an augmentation or rectification of claims that have been asserted before the

- 36 - limitations period has run does not offend the purpose of a statute of limitations, which is simply to prevent the assertion of stale claims.

Id. (internal quotation marks and citation omitted).

Browning notes that the tortious interference claim is based

on a different transaction than the earlier claims, which are based

on Browning’s failure to return inventory to Coastal. Plaintiffs

counter that the relation-back doctrine applies because Browning

had ample notice, after more than seven years of litigation, that

plaintiffs were suing on all of Browning’s acts that caused

Coastal’s demise; and that Browning’s proposed-purchase

interference was merely part of its broader plan to destroy

Coastal.

We conclude that the claim does not arise out of the same

conduct, transaction, or occurrences presented in the timely-filed

complaints. As the district court stated in its post-verdict

order:

All of the claims asserted by plaintiffs revolve around two sets of occurrences. The tortious interference ... claim stems from an attempted sale of Coastal Plains to a third party.... The remaining claims involve the failure of Browning to return inventory to Coastal Plains.

And, in awarding attorney’s fees, the district court stated that

“[t]he tortious interference claim is not factually interrelated to

the other claims as it arose from a separate transaction”.

Moreover, plaintiffs’ contention that their tortious

interference claim is based on the same transaction or occurrence

as their other claims is not consistent with positions they have

- 37 - taken with respect to attorney’s fees and Browning’s right to

setoff. In seeking attorney’s fees, one of plaintiffs’ attorneys

stated by affidavit: “[w]ith the exception of the claim involving

tortious interference, all of the causes of action pled in this

case were dependent upon the same set of facts or circumstances”.

(Emphasis added.) In their appellate brief here, plaintiffs

contend that Browning’s tortious interference caused a separate

injury to Coastal; and assert that, if we affirm the judgment

solely on the basis of the interference claim, Browning will not be

entitled to a setoff because “[t]ortious interference is not

sufficiently connected with Browning’s claim to permit an offset”.

III.

For the foregoing reasons, the judgment is REVERSED, and

judgment is RENDERED in favor of Browning.

REVERSED and RENDERED

- 38 -