Bankruptcy

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A discharged debtor can’t turn around and file a lawsuit based on a claim he failed to list as an unliquidated asset.

Instead, the Seventh Circuit suggested on March 6 that he should be referred to the U.S. Attorney for potential criminal prosecution.

Eugene Biesek filed a bankruptcy petition in September 2002 and three months later received a discharge. The schedule of assets did not list any contingent and unliquidated claims.

In fact, however, Biesek had been injured on the job in 2000, and was seeking compensation from his employer, Soo Line Railroad Co., under the Federal Employers’ Liability Act (FELA). Just three months before he filed for bankruptcy, Soo Line had offered $62,500 in settlement.

Had Biesek accepted this offer, he would not have been insolvent, and he would have been able to satisfy all of his debts.

In August 2003, Biesek filed suit against Soo Line in Wisconsin federal court under FELA. Soo Line moved for summary judgment, arguing that Biesek was judicially estopped from pursuing the claim by his prior representation in the bankruptcy action that he had no contingent and unliquidated claim.

U.S. District Court Judge John C. Shabaz granted the motion, and Biesek appealed.

Biesek and the trustee in his earlier bankruptcy case then signed a stipulation providing that Biesek would turn over the first $7,000 of any recovery under FELA to the Trustee for the creditors’ benefit, and the trustee agreed that the omission of the FELA claim from the bankruptcy schedules was inadvertent.

Armed with this stipulation, Biesek moved to reopen the judgment under FRCP 60(b)(2). Judge Shabaz denied this motion, and Biesek appealed this order as well.
The Seventh Circuit affirmed both orders in a decision by Judge Frank H. Easterbrook, but it did not rely on judicial estoppel.

Motion to Reopen

The court first affirmed the denial of the motion to reopen. Rule 60(b)(2) authorizes a district judge to modify a judgment in response to “newly discovered evidence which by due diligence could not have been discovered in time to move for a new trial under Rule 59(b).”

However, the court found that the stipulation was not “newly discovered evidence,” but was “newly created evidence.”

The court reasoned, “Biesek knew his own mental state; if the omission reflected inadvertence rather than intent to deceive, Biesek could have provided supporting evidence either before the district court’s grant of summary judgment or via a timely motion under Rule 59.”

The court also faulted Biesek for declining the trustee’s invitation to amend his asset schedules so that the FELA claim could be available to creditors.

Having found that the denial of the Rule 60(b)(2) motion was not an abuse of discretion, the court turned to whether Biesek was even entitled to bring the FELA action against Soo Line.

Judicial Estoppel

The court acknowledged extensive authority to support the district court’s decision. The Fifth Circuit, Eleventh Circuit, Ninth Circuit, and Wright, Miller & Cooper, 18B Federal Practice & Procedure, sec. 4477 at 621 (3d ed. 2002), all hold that judicial estoppel bars a debtor, who has received a discharge in bankruptcy after representing that he has no valuable causes of action, from recovering on a supposedly nonexistent claim.

The Seventh Circuit disagreed with that line of authority, because it has an adverse effect on the creditors.

The court reasoned, “Biesek’s nondisclosure in bankruptcy harmed his creditors by hiding assets from them. Using this same nondisclosure to wipe out his FELA claim would complete the job by denying creditors even the right to seek some share of the recovery.”

Noting that the creditors had not contradicted themselves in court, the court wrote, “Judicial estoppel is an equitable doctrine, and using it to land another blow on the victims of bankruptcy fraud is not an equitable application.”

The court recommended, “Instead of vaporizing assets that could be used for the creditors’ benefit, district judges should discourage bankruptcy fraud by revoking the debtors’ discharges and referring them to the United States Attorney for potential criminal prosecution.”

	Related Links 7th Circuit Court of Appeals Related Article Case Analysis

Rejecting the assumption of the courts in the other circuits — that the tort claim belongs to the debtor — the court found instead, “Pre-bankruptcy claims are part of debtors’ estates; this FELA claim therefore belongs to the Trustee, for the benefit of Biesek’s creditors (cites omitted).”

The court determined, “the threshold issue is not whether to apply an estoppel but whether Biesek is the real party in interest. He appears to be an interloper, trying to prosecute a claim that belongs to his estate in bankruptcy.”

The court acknowledged that a bankruptcy trustee may abandon a claim, and that Biesek could pursue the claim if the trustee abandoned it, but found that had not happened. Instead, the trustee is seeking $7,000. Accordingly, the court affirmed the judgment in favor of Soo Line, albeit on different grounds.

Click here for Case Analysis.

David Ziemer can be reached by email.