STANDING TO LITIGATE AFTER BANKRUPTCY

            A client’s bankruptcy can have a significant impact on state litigation. One common situation is what happens when a client with a personal injury case fails to disclose said case in her bankruptcy petition. One issue might be judicial estoppel, but another potential problem is that the failure to schedule a personal injury claim may divest your client of standing to pursue the case.

            The failure to schedule a cause of action in a bankruptcy petition divests a Plaintiff of standing to bring the claim. Dailey v. Smith, 292 Ill.App.3d 22, 24 (Ill. App. Ct. 1997). Filing a bankruptcy petition creates an estate compromising all “legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. 541(a)(1). The bankruptcy estate is extensive and “has been found to encompass every conceivable interest of the debtor, future, non-possessory, contingent, speculative, and derivative.” Dailey, 292 Ill.App.3d at 24 (internal citations omitted). “The preceding principles apply regardless of whether the bankruptcy petitioner has scheduled the property or assets.” Id. Lawsuits are included in this definition of the bankruptcy estate, and, “even if such claims are scheduled, a debtor is divested of standing to pursue them upon filing his petition.” Id. Instead, the bankruptcy trustee is the representative of the bankruptcy estate who has the capacity to sue or be sued. 11 U.S.C. 323(a) and (b) (see also Dailey, 292 Ill.App.3d at 26 “Once a bankruptcy petition is filed, all claims belong to the estate, and the bankruptcy trustee alone has standing to pursue them.”). Most importantly, if an asset is not scheduled in a bankruptcy petition, it remains property of the bankruptcy estate after the close of the bankruptcy. 11 U.S.C. 554 (See also Aspling v. Ferrall, 232 Ill.App.3d 758, 767 (Ill. App. Ct. 1992), which held that even property not scheduled in a bankruptcy petition remains property of the bankruptcy estate at the close of the bankruptcy case).

            The principle is explained clearly in Dailey v. Smith. 292 Ill.App.3d 22 (Ill. App. Ct. 1997). In Dailey, the Plaintiff and Defendants had an oral partnership to sell decorative wall coverings. Dailey, 292 Ill.App.3d at 24. Plaintiff alleged Defendants withheld profits which ultimately led him to seek bankruptcy protection. Id. Plaintiff filed for bankruptcy in September 1986 but did not schedule his claim against Defendants as an asset. Id. The bankruptcy case concluded in June 1988. Id. Plaintiff pursued the cause of action for partnership profits and in February 1994 won a jury verdict for $288,000. Id. However, after trial Defendants were awarded a judgment notwithstanding the verdict based on Plaintiff’s lack of standing to bring the cause of action and judicial estoppel. Id. As for the standing issue, the appellate court held that Plaintiff “clearly did not have standing” to pursue the cause of action. Id. The cause of action belonged to the bankruptcy trustee and said trustee “alone [had] standing to pursue” the claim. Id at 26.

            This blog post is intended to offer readers a general discussion of state court standing issues related to bankruptcy. Hopefully, this blog provides some issue spotting for state court litigators dealing with the complexities of the bankruptcy code. 

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.