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Bankruptcy Case Analysis

On its face, the decision appears to create a conflict in the circuits, providing better protection for creditors in the Seventh Circuit than elsewhere in the nation, but the distinction is largely procedural rather than substantive.

The court did refuse to apply judicial estoppel to debtors who, having obtained discharge in bankruptcy, then try to recover on a claim they failed to acknowledge on their schedules of assets, as the courts did in the Fifth, Eleventh, and Ninth Circuits. See Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282 (11th Cir. 2002).

However, other circuits have previously recognized that such a claim actually belongs to the trustee. In Parker v. Wendy’s International, Inc., 365 F.3d 1268 (11th Cir. 2004), a debtor sued her employer for discrimination, and while the case was pending, sought and obtained discharge in Chapter 7, without listing the claim against her employer as an asset.

Her employer moved for summary judgment, citing Burnes. However, in the interim, the bankruptcy trustee had reopened the bankruptcy case, and successfully intervened in the discrimination action. Nevertheless, the district court granted judgment to the employer, relying on Burnes.

The Eleventh Circuit reversed, holding that Burnes is distinguishable, and that judicial estoppel should not be applied at all. Id., at 1272.

The court wrote, “Parker’s discrimination claim became an asset of the bankruptcy estate when she filed her petition. Reynolds, as trustee, then became the real party in interest in Parker’s discrimination suit. He has never abandoned Parker’s discrimination claim and he never took an inconsistent position under oath with regard to this claim. Thus, Reynolds cannot now be judicially estopped from pursuing it.” Id.

The same conclusion — the bankruptcy trustee is the real party in interest, and judicial estoppel cannot be applied against the trustee because of the plaintiff’s actions — was also recognized by the United States Court of Federal Claims in Aaron v. U.S., 65 Fed.Cl. 29 (2005), when it held that the trustee should be substituted for one of the plaintiffs.

So, even though the Eleventh Circuit does consider judicial estoppel to be applicable to plaintiffs in these sorts of cases, it also recognizes that the real party in interest is the trustee, and the end result is the same.

When it is discovered that the plaintiff is not the real party in interest, the solution is not what the trustee did in this case — negotiate with the plaintiff for an interest in the case — but reopen the bankruptcy and then intervene in the plaintiff’s case, as the trustee in Parker did.

The question remains unanswered whether judicial estoppel would be applied to the plaintiff if the value of the claim exceeds the claims of the creditors.

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In this case, for example, the court found that the $62,500 offered by Soo Line before the suit was filed is enough to pay all the creditors. Suppose the trustee had reopened the bankruptcy, intervened in this case, and $62,500 was awarded as damages.

Could Biesek receive the surplus, after the creditors were paid, or would judicial estoppel bar recovery of the surplus?

The answer would appear to be that judicial estoppel would apply. The weight of authority from other circuits holds that estoppel applies. And the concern of the Seventh Circuit — that creditors are shorted twice — would not be present.

Furthermore, it could be inferred from the Seventh Circuit’s dicta — exhorting district judges to refer such debtors to the U.S. Attorney for criminal prosecution — that it would hardly shy away from applying judicial estoppel to bar recovery of any surplus by the debtor.

– David Ziemer

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David Ziemer can be reached by email.

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