Judicial estoppel, also known as estoppel by inconsistent positions of law, precludes a party from taking a position in a case that is contrary to a position it has taken in earlier legal proceedings. Often, it is asserted as an affirmative defense in a personal injury lawsuit where the plaintiff failed to disclose the existence of the personal injury lawsuit as an asset in a prior bankruptcy. A plaintiff’s failure to disclose a personal injury cause of action in the bankruptcy proceeding deprives the trustee, and by proxy, the plaintiff’s creditors, of an asset that the creditors were legally entitled to. When such a concealment or failure to disclose occurs, and the plaintiff receives a discharge in bankruptcy, the doctrine of judicial estoppel can be applied to shield future defendants from litigation brought by that plaintiff on the undisclosed cause of action.
The bar for invoking judicial estoppel was raised after the Illinois Supreme Court’s decision in Seymour v. Collins, 39 N.E.3d 961 (2015). In Seymour, the plaintiff filed suit for injuries arising out a of a 2010 motor vehicle accident. At the time her personal injury action was filed, Ms. Seymour also had pending a Chapter 13 bankruptcy. In her bankruptcy matter, she failed to disclose the existence of her personal injury lawsuit as an asset, which is a requirement under the U.S. Bankruptcy Code. Upon discovering the nondisclosure, the motor vehicle defendant moved for summary judgment, arguing that Ms. Seymour was judicially estopped from pursuing the injury lawsuit. Both the trial and appellate court agreed and upheld the grant of summary judgment.
On review, the Illinois Supreme Court reversed and found defendant must prove that the plaintiff knowingly concealed the existence of the lawsuit, or potential lawsuit in her bankruptcy petition in order to prevail on a judicial estoppel argument. The Seymour Court continued: “Judicial estoppel, like all estoppels, must be proved by clear and convincing evidence… [E]ven if all factors are found, intent to deceive or mislead is not necessarily present, as inadvertence or mistake may account for positions taken and facts asserted. Second, if all prerequisites have been established, the trial court must determine whether to apply judicial estoppel – an action requiring the exercise of discretion. Multiple factors may inform the court’s decision, among them the significance or impact of the party’s action in the first proceeding and, as noted, whether there was an intent to deceive or mislead, as opposed to the prior position having been the result of inadvertence or mistake. The fact that the plaintiffs had a legal duty to disclose this suit, and failed to do so, does not, given the facts of this case, establish the intent to deceive and/or manipulate the bankruptcy court… [T]his reasoning diminishes the application of judicial estoppel to a rigid formula and fails to consider the specific circumstances of each case.” Seymour, 39 N.E.3d at 982.
Recently, however, the Illinois Appellate Court Third District authored an opinion that provides a new avenue to defend such lawsuits where plaintiffs fail to disclose the potential cause of action as an asset in their bankruptcy petition. In Barnes v. Lolling, 80 N.E.3d 727 (3rd Dist. 2017), the plaintiff filed for Chapter 13 bankruptcy protection to resolve her personal and business debts. She was placed on a five-year debt repayment program and, upon completion, was discharged from bankruptcy. However, approximately 18 months prior to the discharge of her bankruptcy, the plaintiff was involved in a motor vehicle accident. Roughly two years after the accident and six months after the bankruptcy discharge, plaintiff filed a personal injury action. During the five-year repayment period, the plaintiff never informed the bankruptcy court of this new asset – i.e. the potential personal injury lawsuit. Barnes, 80 N.E.3d 729-31.
The defendants in the subsequent injury litigation discovered the concealment and moved for summary judgment on judicial estoppel, but also asserted a new argument – standing. The defendants contended that the plaintiff lacked standing to sue because the personal injury action accrued while the bankruptcy case was pending and was therefore property of the bankruptcy estate. The Barnes court affirmed the judicial estoppel ruling from the trial court and also affirmed the standing argument. Id.
Specifically, the appellate court held that the personal injury lawsuit was an asset of the bankruptcy estate, and the only person with standing to sue to recover on that asset was the bankruptcy trustee. The court explained that debtors have a continuing duty to schedule newly acquired assets while their bankruptcy case is pending. Unless the bankruptcy court orders otherwise, property of the estate that is not expressly abandoned by the bankruptcy trustee or administered in the bankruptcy case “remains property of the estate.” The court elaborated that undisclosed assets, including undisclosed legal claims accruing while the bankruptcy is ongoing, remain property of the estate even after the bankruptcy case is closed. Id. at 732.
Citing cases from a variety of state and federal courts, the court noted that although there is a trustee in a bankruptcy case, the trustee acts as an advisor and administrator while the debtor remains in possession of the estate. Accordingly, a bankruptcy debtor can pursue legal claims for the benefit of the estate and its creditors. However, the debtor lacks standing to bring such claims for his or her own benefit. Thus, if a legal claim that belongs to the estate is not disclosed and abandoned or administered by the trustee in the prior bankruptcy proceeding, a former bankruptcy debtor lacks standing to bring that claim in their individual capacity and for their own benefit after the bankruptcy proceedings have closed. Id. at 733.
The Barnes court held that to have standing, the plaintiff would be required to reopen the bankruptcy matter and disclose the asset, which could then be pursued on behalf of her creditors, or, if abandoned by the trustee, by the plaintiff. Id. Moving forward, and following Seymour’s heightened standard of proof necessary to invoke judicial estoppel, a new, more pragmatic approach from the Third District provides an additional means to defend against undisclosed lawsuits prior to bankruptcy petitions by attacking the standing of the plaintiff to bring such suits in the first place.