By Kevin A. Griffiths
Declaring bankruptcy requires a disclosure of all of your “assets,” and this requirement is broad, necessitating the identification of lawsuits both actual and potential. Failing to identify pending lawsuits—or, on the more difficult front, potential lawsuits—can have dramatic consequences. As a result, a pitfall that can befall any litigator arises when the client has declared bankruptcy immediately before, during, or after the injury that gave rise to the litigation. At its most basic this implicates the equitable defense of judicial estoppel, which can prove a complicated issue to litigate.
While this issue is well settled for claims arising prior to the bankruptcy petition, questions remain concerning claims arising during (or after) the pendency of the bankruptcy. This article will explore two recent decisions from the Bankruptcy Court for the District of Idaho which provide valuable guidance on ownership of claims arising during the pendency of bankruptcy as well as the need to amend bankruptcy schedules to disclose those claims in order to avoid a subsequent judicial estoppel issue.
The Intersection of Bankruptcy, Estoppel, and Civil Litigation
“Judicial estoppel precludes a party from gaining an advantage by taking one position, and then seeking a second advantage by taking an incompatible position.”[i] The purpose of the doctrine is to protect the integrity of the judicial system by preventing a party from gaining an advantage through misrepresentations to the court.
This defense often arises in response to claims pursued by those who have been through bankruptcy and is based upon a debtor in bankruptcy’s obligation (or failure) to disclose all potential claims to the bankruptcy trustee. “In the bankruptcy context, a party is judicially estopped from asserting a cause of action not raised in a . . . plan [or petition] or otherwise mentioned in the debtor’s schedules or disclosure statements.”[ii]
Judicial estoppel “will be imposed when the debtor has knowledge of enough facts to know that a potential cause of action exists during the pendency of the bankruptcy but fails to amend his schedules or disclosure statements to identify the cause of action as a contingent asset.”[iii] This is because non-disclosure, by implication, would indicate that the claim has no value, which is a position that is inconsistent with later pursuit of the claim.[iv]
The Idaho Supreme Court’s decisions concerning judicial estoppel in the bankruptcy context have made clear that when a party is chargeable with knowledge of a claim prior to the filing of the bankruptcy petition, i.e., when an injury occurs prior to bankruptcy, judicial estoppel applies.[v] The issue, however, is more nuanced. The Idaho Supreme Court has yet to address the treatment of claims that arise after the initial filing of the bankruptcy petition and property schedule, but before discharge is granted. Fortunately, two recent decisions from the U.S. Bankruptcy Court for the District of Idaho shed some light on this subject: Wisdom v. Gugino (In re Wisdom)[vi] and Avery v. Mikkelsen (In re Mikkelsen).[vii] In re Wisdom lays a foundation, later built upon by In re Mikkelson, which suggests that the relevant inquiry in determining whether judicial estoppel applies turns on whether the claim would have belonged to the bankruptcy estate. Each of these cases, their interplay, and the conclusions to be drawn therefrom are discussed below.
In re Wisdom
The issue presented by In re Wisdom required the bankruptcy court to deal with a variety of claims asserted by the debtor against his legal counsel arising out of his representation during the bankruptcy to determine whether it had jurisdiction over those claims. The debtor’s claims were based upon three specific incidents—(1) liquidation of the debtor’s insurance policies, (2) sale or compromise of the debtor’s pro se lawsuits, and (3) counsels’ withdrawal from representation of the debtor—all of which the Court determined arose post-petition.[viii]
In the context of determining whether it had subject-matter jurisdiction over the malpractice claims asserted by the debtor, the bankruptcy court was required to determine whether those claims were sufficiently related to the bankruptcy case to render them “core” proceedings.[ix] The bankruptcy court found that the claims were unrelated, and it lacked jurisdiction over them, because they were based upon post-petition conduct and belonged to the debtor, not the bankruptcy estate, and could be pursued by the debtor under state law outside of the bankruptcy court. In making this finding, the Court found that the claims presented, arising as they did from post-petition conduct, “have no impact upon the administration of the bankruptcy case, or on property of the estate, or on the distribution to creditors. . . .”[x]
In re Mikkelsen
In re Mikkelsen builds on the concepts explored by In re Wisdom to determine ownership of claims against the debtors’ former attorneys arising from both pre- and post-petition conduct. The procedural history of In re Mikkelsen reflects a somewhat complicated invocation of the principles underlying judicial estoppel (although the term is never explicitly invoked). In re Mikkelsen was an adversary action against the debtors brought by their former attorneys in bankruptcy court seeking a determination that a state court malpractice filed against the attorneys was property of the bankruptcy estate and could not be pursued by the debtors in state court.[xi] This course of action, presumably, was pursued in lieu of simply raising the defense of judicial estoppel in the state court action, as the principle remains.
The claims against the debtors’ former attorneys were based upon alleged negligent preparation of a homestead declaration prior to the filing of the bankruptcy petition which allowed the trustee to successfully avoid the debtors’ homestead exemption claim. The debtors also alleged that their former attorneys had negligently advised them to pay off certain financial obligations prior to filing the bankruptcy petition, which resulted in the debtors being required to reimburse the bankruptcy estate for those payments.
In its decision, the bankruptcy court expanded on its reasoning from Wisdom by again focusing on the issue of whether the claims in question were property of the bankruptcy estate. The bankruptcy court found that even though it was dealing with claims based upon conduct that occurred pre-petition, that fact alone did not make the claims the property of the estate. Instead, the relevant inquiry was whether the cause of action in question accrued pre- or post-petition.[xii] In short, claims that have accrued prior to the filing of the petition are property of the bankruptcy estate while those accruing post-petition are not.
The bankruptcy court noted accrual is to be determined according to state law, which for negligence claims requires the occurrence of “some damage.”[xiii] Under this legal framework, the bankruptcy court determined that even though the debtors’ claims were based upon pre-petition conduct, the claims accrued post-petition because the debtors were not damaged until the trustee avoided their homestead exemption and successfully sought reimbursement for pre-petition debt payments. Thus, the bankruptcy court determined that the malpractice claims were not the property of the estate and could be properly pursued in state court, granting the debtors’ motion to dismiss.
Although neither In re Wisdom nor In re Mikkelsen use the term “judicial estoppel,” they are dealing with the underlying concept—benefit to the bankruptcy estate and its impact on a debtor’s ability to pursue claims arising around the time of filing the petition. Those decisions indicate that if the claim does not belong to the bankruptcy estate, non-disclosure is not per se inconsistent with later pursuit of the claim by the debtor.
In re Mikkelsen, in particular, indicates that the deciding factor is claim ownership, which is to be determined based upon when the cause of action accrued. That is, if the claim accrued post-petition, a debtor has a strong argument that judicial estoppel does not apply even if the claim was not disclosed on the debtor’s bankruptcy petition. This does not mean, however, that a debtor who has made the determination that a claim has not yet accrued should not disclose the claim to the bankruptcy court as the Idaho Supreme Court has made clear that there is a continuing “duty to disclose all assets and potential assets.”[xiv] Instead, these decisions show that one of the key factors to be taken into account when dealing with a judicial estoppel defense is whether the claim(s) in question had accrued at the time bankruptcy was declared.
Kevin A. Griffiths is an attorney with the law firm of Duke Scanlan & Hall, PLLC, where he has practiced since 2012. Kevin’s practice is focused on insurance coverage and bad faith litigation, commercial litigation, e-discovery management, construction defect litigation, professional liability and medical malpractice litigation, and product liability claims.
[i] A & J Const. Co. v. Wood, 141 Idaho 682, 684 (2005)
[ii] Id. at 685 (quoting Hamilton v. State Farm Fire & Cas. Co., 270 F.3d 778, 783 (9th Cir. 2001).
[iii] Id. at 686 (quoting Hamilton, 270F.3d at 784).
[iv] See id. at 688, 116 P.3d at 18 (“It is undisputed that A & J succeeded in persuading the bankruptcy court to accept its prior position, in which it failed to disclose any interest in either the real property subject to the dispute or the joint venture agreement. Now, A & J takes an inconsistent position by seeking to have the courts determine the existence, nature and extent of its interest in the nondisclosed real property and joint venture agreement.”).
[v] See, e.g., id. (holding that plaintiff seeking accounting of a joint venture was judicially estopped from doing so because he knew of the interests before his bankruptcy filing and did not disclose that interest to the trustee); see also Strong v. Intermountain Anesthesia, P.A., 160 Idaho 27 (2016) (finding that plaintiff was judicially estopped from pursuing undisclosed medical malpractice claim arising from procedure performed prior to bankruptcy); Mowrey v. Chevron Pipe Line Co., 155 Idaho 629 (2013) (finding that plaintiff was estopped from pursing personal injury claim arising from undisclosed pre-bankruptcy injury); McAllister v. Dixon, 154 Idaho 891 (2013) (finding that undisclosed malpractice claim based upon medical procedure performed over a year before the bankruptcy was barred by the doctrine of judicial estoppel.)
[vi] Wisdom v. Gugino (In re Wisdom), Case No. 11-01135-JDP, Adv. No. 13-06045-TLM, 2016 WL 872102 (D. Idaho Bankr. Mar. 7, 2016).
[vii] Avery v. Mikkelsen (In re Mikkelsen), Case No. 16-01489, Adv. No. 18-06018-TLM, 2018 WL 4182448 (D. Idaho Bankr. Aug. 30, 2018).
[viii] In re Wisdom, 2016 WL 872102 at *1.
[ix] Id. at *1-2.
[x] Id. at *2.
[xi] In re Mikkelsen, 2018 WL 4182448, at *1.
[xii] Id. at *2.
[xiii] Id. at *3.
[xiv] A & J Const., 141 Idaho at 686, 116 P.3d at 16.