JUDICIAL ESTOPPEL AFTER CHAPTER 7 BANKRUPTCY

            The Bankruptcy Code is a highly technical area of the law. Most practicing in bankruptcy make it their specialty or niche. State court litigation does not often encounter the Bankruptcy Code, but when it does attorneys often find themselves out of their element. One common intersection between the Bankruptcy Code and state court litigation that practitioners should be aware of is the defense of judicial estoppel after a Plaintiff’s bankruptcy. 

            The typical situation arises when a Plaintiff has a potential lawsuit (usually a personal injury claim) prior to filing a bankruptcy, files a bankruptcy but does not disclose the potential litigation to the bankruptcy court. After the bankruptcy, the Plaintiff files the lawsuit. The failure to disclose the litigation in the bankruptcy might cause Plaintiff to be judicially estopped or barred from maintaining the lawsuit because litigation possessed by the debtor is considered property of the bankruptcy estate. In re FBN Food Services, Inc., 185 B.R. 265, 273 (N.D. Ill. 1995), citing In re Geise, 992 F.2d 651, 655 (7th Cir.1993) and In re Marriage of Burt, 144 Ill.App.3d 177 (1986).

“The law of judicial estoppel prevents a party who makes a representation in one case from taking a contrary position in another case.” Berge v. Mader, 2011 IL App. (1st) 103778, 957 N.E.2d 968, ¶ 12 (Sept. 30, 2011). Judicial estoppel serves “to preserve and protect the integrity of our system of justice.” Berge, 2011 IL App (1st) 103778 ¶ 12. It applies where a party takes inconsistent positions, under oath, in two judicial proceedings if the party successfully maintained the first position and received a benefit. Berge, 2011 IL App (1st) 103778 ¶ 13.

The First District Appellate Court addressed a similar scenario and held that, when a plaintiff failed to list state court litigation in her bankruptcy petition, her subsequent suit should be dismissed based upon judicial estoppel.  Berge v. Mader, 2011 IL App. (1st) 103778, 957 N.E.2d 968 (Sept. 30, 2011). In Berge, Plaintiff filed for bankruptcy under Chapter 13 in April of 2006. Id. at ¶ 3. One month later the Plaintiff was involved in a car accident which formed the basis of a personal injury lawsuit which she filed in November of 2007.  Id.  Plaintiff thereafter converted her Chapter 13 petition into a Chapter 7 petition in May of 2009.  Id.  Plaintiff received a “no asset” discharge order, and her Chapter 7 petition was closed in October of 2009.  Id.  Plaintiff never listed her personal injury complaint as an asset in her bankruptcy petition.  Id.  The court in Berge held that Plaintiff was judicially estopped from later asserting her personal injury claim, and affirmed the trial court's dismissal of the action pursuant to Section 2-619(a)(9).  Id.  at ¶ 21.  See also, Dailey v. Smith, 292 Ill. App. 3d 22, 28 (1997).

In Cannon-Stokes v. Potter, 453 F.3d 446, 448 (7th Cir. 2006), the 7^th Circuit Court held that “a debtor in bankruptcy who denies owning an asset, including a chose in action or other legal claim, cannot realize on that concealed asset after the bankruptcy ends.” The Berge court agreed, holding that a bankruptcy debtor who failed to disclose a cause of action in her sworn submissions to the bankruptcy court was bound by those submissions and barred under the doctrine of judicial estoppel from later pursuing the undisclosed cause of action. Berge, 2011 IL App (1st) 103778 ¶¶ 16-17, 21.  See also Dailey v. Smith, 292 Ill. App. 3d 22, 28 (1997).

It should be noted that judicial estoppel is an equitable defense, so different fact patterns may have different results. Additionally, defenses based on judicial estoppel are often paired with a lack of standing arguments, as can be seen in Dailey v. Smith. 292 Ill.App.3d 22 (Ill. App. Ct. 1997).

If you have any questions or concerns related how a bankruptcy may impact state court litigation, or any state court litigation matter in general, please feel free to contact the attorneys at Perl & Goodsnyder (312/243-4500) or visit our website www.perlandgoodsnyder.com/. We have over 50 years combined experience and are eager to use our experience to assist you reach the best available outcome.