In BPP Illinois, LLC v. Royal Bank of Scotland Group PLC, the US Court of Appeals for the Second Circuit affirmed the US District Court for the Southern District of New York (SDNY) and held that the debtor's fraud claims against a creditor were untimely and barred by judicial estoppel because they existed on the plan confirmation date but were not disclosed or pursued until post-confirmation.
On June 13, 2017, in BPP Illinois, LLC v. Royal Bank of Scotland Group PLC, the US Court of Appeals for the Second Circuit affirmed the US District Court for the Southern District of New York (SDNY District Court) and held that the debtor's fraud claims against a creditor brought post-confirmation were untimely and barred by judicial estoppel ( (2d Cir. Jun. 13, 2017)).
In 2008, BPP Illinois, LLC, as one of a consortium of single-purpose entities that own and manage hotels (collectively, BPP), borrowed $66 million from Citizens Bank of Pennsylvania (Citizens Bank) to finance the purchase of several hotel properties. The loan required BPP to pay an interest rate of a set percentage above the London Interbank Offered Rate (LIBOR). The Royal Bank of Scotland Group PLC (RBS) is on a panel of banks that provides information to the British Bankers' Association upon which the LIBOR rate is set.
In 2010, BPP filed voluntary Chapter 11 petitions in the US Bankruptcy Court for the Eastern District of Texas. Throughout BPP's bankruptcy proceedings, there were indications that RBS might be implicated in an improper manipulation of LIBOR, including:
May 2011, RBS disclosed that it was cooperating with investigations into LIBOR manipulation.
August 2011, numerous law suits alleging LIBOR manipulation had been filed against certain banks, including RBS.
In its schedule of assets, BPP did not include claims against RBS or against Citizens Bank on the basis of alleged LIBOR manipulation. On October 4, 2011, the bankruptcy court confirmed BPP's plan of reorganization. On November 15, 2012, the bankruptcy court ordered the proceeding closed, and BPP had still not disclosed any claim relating to LIBOR manipulation.
In 2013, BPP and its corporate affiliates (Affiliates) filed claims in the SDNY District Court that RBS, two of its subsidiaries, and Citizens Bank fraudulently induced BPP to enter a loan agreement with Citizens Bank, and that the loan agreement eventually pushed BPP into bankruptcy.
On remand, the SDNY District Court held that BPP lacked standing to assert its claims and was judicially estopped from bringing the claims regarding LIBOR manipulation because BPP failed to list them in its schedule of assets in its bankruptcy proceeding. The SDNY District Court also denied the Affiliates' request to amend its complaint because it would be untimely and barred by the law of the case.
BPP and the Affiliates appealed and the Second Circuit reviewed the issues of judicial estoppel and untimeliness.
The Second Circuit affirmed the SDNY District Court and held that BPP was judicially estopped from bringing its claim.
Applying Adelphia Recovery Trust v. Goldman, Sachs & Co., the Second Circuit ruled that judicial estoppel applies if:
A party's later position is "clearly inconsistent" with its earlier position (see Inconsistency).
The party's former position has been adopted in some way by the court in the earlier proceeding (see Adoption and Advantage).
The party asserting the two positions would derive an unfair advantage against the party seeking estoppel (see Adoption and Advantage).
The Second Circuit affirmed the SDNY District Court's finding that BPP advanced incompatible positions when it failed to list a LIBOR-fraud claim in its bankruptcy proceeding and then asserted the claim in the SDNY District Court after the bankruptcy proceeding closed.
Under In re Coastal Plains, Inc., the Second Circuit (applying Fifth Circuit law because BPP failed to list the claim in its bankruptcy proceeding in the Eastern District of Texas) held that when a bankruptcy debtor omits claims from its schedules and stipulations, the debtor represents that none exist (179 F.3d 197, 210 (5th Cir. 1999)).
The Second Circuit found that BPP's LIBOR-fraud claim was a "known cause of action" at the time of confirmation, therefore BPP's failure to list it in the schedule of assets was equivalent to a representation that no such claim existed.
To determine when a claim is a "known cause of action," the Second Circuit relied on Youngblood Grp. v. Lufkin Fed. Sav. & Loan Ass'n,, which held that when a debtor has enough information prior to confirmation to suggest that it may have a possible cause of action, even claims for which they do not know all the facts or even the legal basis for its cause of action, there is a known cause of action that must be disclosed (932 F.Supp. 859, 867 (E.D. Tex. 1996)).
The Second Circuit found that BPP had a sufficient amount of information to require it to list a potential cause of action. The information available to it, prior to confirmation, included:
RBS publicly disclosed in a Form 6-K , that US and European regulators were investigating LIBOR manipulation, and it was cooperating with the investigations.
Numerous news articles had reported on the possibility of LIBOR fraud, some years before, and several articles showed RBS participated in setting LIBOR and suggested RBS's participation resulted in lowering the rate.
RBS had been sued for LIBOR manipulation by other parties.
Adoption and Advantage
Relying on Adelphia Recovery Trust v. Goldman, Sachs & Co., which held that the adoption element of judicial estoppel is usually fulfilled when the bankruptcy court confirms the plan, the Second Circuit held that the bankruptcy court adopted BPP's position that it had no LIBOR-fraud claim against RBS when the bankruptcy court confirmed the plan (748 F.3d 110, 118 (2d Cir. 2014)).
The Second Circuit noted, relying on In re Adelphia Recovery Trust, that it often limits the application of judicial estoppel to cases in which the party asserting the two positions would derive an unfair advantage against the party seeking estoppel (634 F.3d 678 at 696). Here, the Second Circuit ruled that, regardless of BPP's knowledge of its possible LIBOR claims, or whether the claims were of great value, BPP's assertion of the claims at this point would allow it to enjoy an unfair advantage over its former creditors, who had a right to consider the claims before the confirmation hearing.
The Second Circuit's decision makes clear that debtors must include all potential claims in their schedule of assets prior to confirmation, even claims for which they do not know all the facts or even the legal basis for the cause of action, as these claims will likely be estopped if not filed or disclosed prior to confirmation.