Summary:
Diggs Restaurant Group and other creditors argued that Oasis Cigar Club's Chapter 7 filing was unauthorized, as they claimed the company’s members had not voted to approve the filing. Oasis Cigar Club responded that its board of directors had authorized the filing, providing relevant documentation, though the movants questioned the legitimacy of the board’s authority and claimed judicial estoppel should prevent the company from asserting that the board had authority.
The court ruled that the burden of proof to show a lack of authority rested on the movants, who failed to provide sufficient evidence to meet this burden. The court also declined to apply judicial estoppel, citing a lack of evidence that Oasis Cigar Club had intentionally misled any court regarding its governance and “the longstanding principle that judicial estoppel applies only when ‘the party who is alleged to be estopped intentionally misled the court to gain unfair advantage,’ and not when ‘a party’s prior position was based on inadvertence or mistake.’” Martineau, 934 F.3d at 393 (quoting John S. Clark Co. v. Faggert & Frieden, P.C., 65 F.3d 26, 29 (4th Cir. 1995)).. Consequently, the motion to dismiss was denied, allowing the bankruptcy case to proceed.
Commentary:
The portion of this opinion requiring a showing that a party "intentionally misled the court to gain unfair advantage" in order for judicial estoppel to apply is useful for the recurring cases where defendants in personal injury or mass tort cases attempt to block Plaintiff Debtors from maintaining their undisclosed claims. They must both show that the debtor intentionally misled a court, not merely inadvertently failed to disclose the often long-forgotten claim, but that such nondisclosure was to gain unfair advantage. With an unlimited North Carolina exemption for personal injury claims, finding that unfair advantage would be difficult.
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