• Failure to Disclose Pending Lawsuit in a Bankruptcy Filing Causes Personal Injury Lawsuit to be Dismissed
  • May 22, 2015 | Author: Rick Hammond
  • Law Firm: Johnson & Bell, Ltd. - Chicago Office
  • “Debtors have a continuing duty to disclose a legal claim while the bankruptcy case remains open.”

    Background

    A bankruptcy petition requires the debtor to make full disclosure of any interest in or ownership of all assets or property. These petitions are signed under a penalty of perjury, and are relied upon by the court and creditors for their truthfulness and accuracy. When a bankruptcy petitioner fails to make full disclosure of their assets or possible legal claims, an allegation of judicial estoppel may arise.

    Until recently, most court decisions that analyzed an insurer’s coverage rights based on judicial estoppel occurred when an insured failed to disclose their ownership of real, business and/or personal property in a bankruptcy petition. However, when a person files for bankruptcy under Chapter 13, they are required to make full disclosure of all owned property, including legal claims, acquired after the petition is filed but before the case is closed. Thus, debtors have a continuing duty to disclose their assets during the pendency of the bankruptcy.

    A recent appellate court decision out of Illinois addressed the issue of whether a defendant in a personal injury case can assert a defense based on judicial estoppel when the plaintiff has failed to disclose that lawsuit after their bankruptcy petition is filed, but before the case is closed.

    Terry and Monica Seymour v. Bradley A. Collins, Rockford Country Club, ATS Medical Services, Inc., Shaun P. Branney, and Leo j. Verzani - Appellate Court of Illinois, Second District - IL App (2d) 140100; 19 N.E.3d 674; 2014 Ill. App. LEXIS 698; 385 Ill. Dec. 742 - (September 29, 2014)

    On April 24, 2008, Terry and Monica Seymour filed a petition for Chapter 13 Bankruptcy in the U. S. District Court for the Northern District of Illinois. Their Chapter 13 plan was confirmed and modified on several occasions between 2008 and 2010 during which, on June 3, 2010, Terry was injured in an automobile accident. On May 20, 2011, they were granted a discharge of the bankruptcy, and on July 17, 2012, the Seymours filed a 16-count second amended complaint against the defendants alleging negligence and loss of consortium regarding the automobile accident.

    The defendants moved for summary judgment contending that the Seymours should be judicially estopped from proceeding with their negligence claims because they failed to disclose the personal injury lawsuit in their bankruptcy proceeding. The Seymours responded by stating that judicial estoppel did not apply in their bankruptcy proceeding because they did not intentionally fail to disclose the lawsuit or their claims; and that they did not obtain a benefit in their bankruptcy proceeding by failing to disclose the claims.

    The trial court conducted a hearing on the motion and issued a written order granting Summary Judgment finding that it was undisputed that plaintiffs never amended their bankruptcy schedules nor their statement of financial affairs that required the disclosure of any pending personal injury case. Thereupon, the Seymours appealed.

    A Chapter 13 Debtor has a Continuing Duty to be Forthcoming About all Assets

    The Illinois Appellate Court began its review by noting that a party who assumes a particular position in a legal proceeding is judicially estopped from assuming a different position in a subsequent legal proceeding. The doctrine's purpose is to promote the truth and protect the integrity of the court system by prohibiting litigants from deliberately shifting positions to suit their needs of the moment. The doctrine's five elements require that the party to be estopped: (1) took two positions; (2) that were factually inconsistent; (3) in separate judicial proceedings; (4) intending for the trier of fact to accept the truth of the facts alleged; and (5) succeeded in the first proceeding and received some benefit from the factual position taken therein. Judicial estoppel, like all estoppels, must be proved by clear and convincing evidence.

    The Appellate Court further noted that a Chapter 13 bankruptcy estate encompasses all property, including legal claims, acquired after the petition is filed but before the case is closed. Thus, debtors have a continuing duty to disclose newly acquired assets or a legal claim while the bankruptcy case remains open. Moreover, a Chapter 13 debtor has a continuing duty to be truthful and forthcoming about all of their assets so that the bankruptcy court, the trustee, and the allowed creditors can track any change in the debtor's ability to pay their debts. The creditors must be able to rely on the financial disclosures of the debtor throughout the bankruptcy so that they can decide whether to object to, or seek modification of, the confirmed plan. That ability is impaired when disclosure by the debtor is incomplete, untruthful, or less than forthcoming.

    In this case, the Seymours argued that they did not take inconsistent positions in the bankruptcy court, that the trial court did not make any false statements under oath or otherwise withheld information about their personal injury lawsuit with the intent to deceive the bankruptcy court, nor that they benefited from their failure to disclose their personal injury action in the bankruptcy proceeding.

    In Virtually All Cases - Judicial Estoppel Will Seem Harsh

    The court noted that when it was to their benefit, the Seymours promptly notified the bankruptcy court of their changed financial condition and sought a lower payment schedule via a modification of the plan. Yet, when Mr. Seymour went back to work and was injured again, only a few months after receiving the plan modification, he and his wife never notified the bankruptcy trustee or the court. Therefore, the court held that the Seymours can not now claim that they were oblivious to their continuing duty to disclose all assets acquired during the pendency of the bankruptcy proceeding.

    According to the Illinois Appellate Court, one of the reasons that ongoing disclosure is required in a Chapter 13 plan is so that creditors can object to, or seek modification of, a confirmed plan:

    [In this case], the plaintiff benefited from his nondisclosure "by having his repayment plan established and performed without giving his creditors knowledge of his potential to recover damages in his personal-injury action." Likewise, by failing to reveal the existence of their pending personal injury action, plaintiffs here avoided having the creditors potentially object to, or seek modification of, the plan. That alone was sufficient to satisfy the benefit-received requirement of judicial estoppel. Plaintiffs also benefited because they obtained a discharge of their debts without disclosing to their creditors the existence of their personal injury claims.

    In virtually all cases in which Judicial Estoppel is applied, the result will seem harsh to the party against whom the doctrine is invoked. However, as we have explained, the underlying purpose of Judicial Estoppel is to protect the integrity of the courts by disallowing parties from manipulating the judicial system to serve their own ends. As long as the doctrine is properly applied under the facts of a given case, such as it was here, that laudable purpose is served. Thus, in this case there is no injustice.

    In closing, the Illinois Appellate Court held that the Meyers knowingly took inconsistent positions in the bankruptcy court and the trial court regarding the existence of their personal injury claims, and that they did so in a way that benefited them in each of those courts. As the court found, “that is a classic situation to which the doctrine of judicial estoppel applies.”

    Conclusion

    It should come as no surprise that on January 28, 2015, the Illinois Supreme Court granted the Plaintiffs in this case leave to appeal. Therefore, the ending to this story has yet to be written. However, if the Illinois Supreme Court upholds this opinion, it will have a long-lasting and strong adverse impact on the Plaintiffs’ bar. Thus, the Appellate Court’s ruling in this case creates a very strong weapon for those involved in the defense of third-party personal injury litigation. On that note, a consideration should be give to the issuance of written discovery that seeks the disclosure of prior bankruptcy filings.

    It is important to note, however, that for a limited time following the discharge of a bankruptcy, a petitioner can usually move the court to reopen the case in order to amend their bankruptcy petition and, thereby, potentially moot any claims of Judicial Estoppel. Therefore, coverage decisions and any defense litigation strategies must be based on the merits of the claim and case, and with an attitude of good faith and objectivity.