In a Chapter 7 bankruptcy, a debtor's assets are liquidated, with the exception of statutory exemptions. 11 U.S.C.A. § 522 (West 2006). It is the Trustee's duty to "collect and reduce to money the property of the estate…and close such estate as expeditiously as is compatible with the best interests of parties in interest." 11 U.S.C.A. § 704 (West 2006) (emphasis added). After liquidation, the creditors are paid pursuant to a statutory scheme, and the individual debtor is discharged from the remaining debt. 11 USCA § 727 (West 2006).
It is in the best interest of all parties that the trustee gets maximum value for assets liquidated. Issues arise when an asset's value cannot be determined. When a debtor lists a potential cause of action as an asset, creditors and Trustees should pay special attention and, if appropriate, object to exemption within 30 days of the § 341(a) meeting of creditors. Fed. R. Bankr. P. 4003. Without due diligence, the debtor may be allowed to retain a valuable asset after discharge, and the Trustee will have failed to act in the "best interests" of the creditors.
When bringing a voluntary petition for relief under Chapter 7 of the Bankruptcy Code, a debtor must file a schedule of assets and liabilities, including a schedule of personal property. 11 U.S.C.A. § 521 (West 2006). This includes an estimated value of contingent and unliquidated claims of every nature, including tax refunds, counterclaims of the debtor, and rights to setoff claims. As such, debtors must list any state tort claims to which they are the plaintiff. The problem arises when the value of the such unliquidated claims are unknown. As in all litigation, it is difficult to put a value on a pending or potential suit. Nonetheless, a debtor is required to list the case as an asset. Id.
Under these circumstances, and according to recent court decisions, it is reasonable to list the estimated value of the case as "unknown." Ingram v. Thompson, 141 Wn. App. 287 (Wash. Ct. App. 2007). The Court of Appeals of Washington determined that listing an asset as "unknown" was not only appropriate, but after discharge, the debtor was not limited to, nor liable for, any compensation beyond the given estimate. Id. at 288.
In Ingram, the plaintiff/appellant, Curtis Ingram ("Ingram"), was in an automobile accident with the defendants/respondents, a trucking company and its driver ("Defendants"). Id at 289. Ingram did not take immediate legal action against the defendants. Id. Approximately two years after the accident, Ingram filed for Chapter 7 bankruptcy. Id. In listing his assets on the bankruptcy forms, Ingram listed his claim against the Defendants as a personal injury lawsuit, "value unknown, but believed to be less than $5,000.00." Id. The bankruptcy trustee did not pursue the claim, and the court discharged Ingram's debts. Id.
After the discharge, Ingram filed the personal injury lawsuit seeking damages totaling almost $150,000.00. Id. at 290. The Defendants motioned for partial summary judgment, asking the court to cap damages recoverable at $5,000.00 based on the doctrine of judicial estoppel. Id. In their motion, the Defendants argued that the doctrine was violated when Ingram estimated the suit at $5,000.00 in his bankruptcy and later asked the court for approximately $150,000.00. Id. The trial court applied the judicial estoppel doctrine and capped Ingram's potential damages at $5,000.00. Id.
"Judicial estoppel is an equitable doctrine that precludes a party from gaining an advantage by asserting one position in a court proceeding and later seeking an advantage by taking a clearly inconsistent position." Cunningham v. Reliable Concrete Plumbing, Inc., 126 Wn. App. 222, 224-25 (Wash. Ct. App. 2005). Judicial estoppel has been applied to situations where a party accrues legal claims, files for bankruptcy, fails to list the claims among their assets, and attempts to pursue them after discharge. Bartley-Williams v. Kendall, 134 Wn. App. 95, 98-99 (Wash. Ct. App. 2006). The trial court agreed with Defendants' argument based on the decisions in Cunningham and Bartley- Williams and found that Ingram could not seek damages in excess of $5,000.00. Ingram, 141 Wn. App. 291.
The Court of Appeals in Ingram disagreed with the trial court's use of the judicial estoppel doctrine. Id. at 288-89. The Court found that there was a "substantial difference between non-disclosure and a disclosure undervaluing an asset." Id. at 291 (quoting Cusano v. Klein, 264 F.3d 936 (9th Cir. 2001) (finding that a former band member who, in bankruptcy listed "songrights" as an asset with value "unknown," was not limited in a postdischarge lawsuit)). A debtor is required to be "as particular as is reasonable under the circumstances." Ingram, 141 Wn. App. at 292 (quoting Cusano, 264 F.3d at 946).
The Court determined that Ingram's listing of the asset was sufficient to put the creditors and trustee on inquiry notice, and that the "bankruptcy trustee had the opportunity to inquire into the claim to decide whether the potential benefit to the creditors was worth the cost of litigating it." Ingram, 141 Wn. App. at 293.
Illinois decisions reflect a similar application of the judicial estoppel doctrine in cases similar to Ingram. "The doctrine of judicial estoppel precludes a plaintiff from pursuing claims about which [he] had knowledge, but did not disclose, during bankruptcy proceedings." Tidemann v. Schiff, Hardin & Waite, No. 03 C 998, 2005 U.S. Dist. LEXIS 5607, *20-21 (N.D. Ill. Feb. 14, 2005)(emphasis added).
In Thomas v. Guardsmark, Inc., No. 02 C 8848, 2005 U.S. Dist. LEXIS 7407 (N.D. Ill. Mar. 16, 2005), the plaintiff, Carl Thomas, listed a wrongful termination suit, value unknown, against the defendant, Guardsmark, Inc., in his bankruptcy proceedings. The Court in Thomas found that listing the value of the suit as "unknown" was not willfully false or misleading. Id. 2005 U.S. Dist. LEXIS 7407 at *7-8. "There is a distinction between unknown, as opposed to no value." Id.2005 U.S. Dist. LEXIS 7407 at *7. Guardsmark Inc.'s plea to bar the wrongful termination suit based on the doctrine of judicial estoppel was rejected by the Court and Thomas was allowed to seek $250,000 in compensatory damages and more than $1,000,000 in punitive damages post-bankruptcy. Id. 2005 U.S. Dist. LEXIS 7407 at *6-7.
Creditors and Trustees should be mindful of the trend found in Ingram, Cusano, and Thomas. When a debtor lists an asset as "unknown," the responsibility lies with the Trustee to investigate the value of the claim. If the Trustee finds the claim to be substantial, it should object to exemption and consider pursuing it on behalf of the estate. Courts will likely not limit a debtor's rights subsequent to a discharge in bankruptcy.
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Francisco E. Connell, an associate in our Chicago office working with our Bankruptcy and Creditor's Remedies and Intellectual Property practice groups, is a recent graduate of Loyola University School of Law, where he also served as a Student Clinician in the Business Law Center Clinic. Prior to joining the firm, Mr. Connell served as a Chicago Police Officer for nine years. If you have any questions regarding this article, please contact Francisco via fconnell@querrey.com, or via 312-540-7558. If you have questions regarding our Bankruptcy and Creditor's Remedies practice group, please contact Robert Benjamin, Chairperson, at rbenjamin@querrey.com. If you have questions regarding our Intellectual Property practice group, please contact Beverly Berneman, Chairperson, via bberneman@querrey.com.
