Steve Pasarow and Rob Brugge, using the doctrine of judicial estoppel recently recognized in California, successfully obtained a summary judgment in favor of the defendants on the basis that plaintiff's concealment of his personal injury cause of action from the United States Bankruptcy court precluded subsequent prosecution of the claim in state court.
In this case, a person was involved in a two vehicle traffic accident. He filed his personal injury action in pro per and two days later, with the assistance of a bankruptcy attorney, completed his application for Chapter 7 bankruptcy. In response to specific questions in the bankruptcy petition, the person falsely stated that he was not a party to any pending civil action, did not have any contingent or unliquidated claims against any third party and had no casualty losses within the last year. At his Rule 341a creditors' meeting, he testified this information was correct, and he had listed all his assets.
Plaintiff made no attempts to prosecute or serve his personal injury action until after he received his discharge in bankruptcy, some six months later. After receiving his discharge in bankruptcy, plaintiff served the defendants with his complaint and hired attorneys to represent him in the personal injury action. During the course of discovery, Mr. Pasarow found a subtle reference to this person's bankruptcy in the records of one of his treating physicians. Thereafter, a copy of his bankruptcy pleadings was obtained from the court, and it was verified that he had not disclosed to the bankruptcy court or the trustee in bankruptcy the existence of his pending personal injury action.
Counsel for defendants advised the trustee in bankruptcy of this fact and moved in state court for summary judgment based on his not having standing to prosecute the personal injury action and the doctrine of judicial estoppel barred prosecution of the claim.
By way of background, when a debtor files for Chapter 7 bankruptcy, any cause of action he has against any third person becomes property of the bankrupt estate and, absent an abandonment, may only be prosecuted by the trustee in bankruptcy. See Bostanian v. Liberty Savings Bank, 52 Cal.App.4th 1075 (1997).
When the trustee in bankruptcy learned of the concealed personal injury action, he petitioned the bankruptcy court to reopen the bankruptcy case so the court could administer the previously unknown personal injury cause of action.
While defendants' motion for summary judgment was pending, defendants offered to purchase plaintiff's cause of action from the trustee in bankruptcy for the sum of $50,000. A successful purchase of this asset would have precluded the plaintiff from being able to prosecute the action, as it belonged to the defendants, who thereafter could request the court dismiss the state action.
The trustee accepted the defendants' offer to purchase the plaintiff's cause of action and filed a motion with the bankruptcy court to approve the sale.
At the sale hearing, the plaintiff appeared through his attorney and made a counterbid which guaranteed the trustee in bankruptcy a $65,000 recovery secured by a letter of credit, plus a lien on the first $350,000 of the proceeds from the personal injury action.
The bankruptcy court rejected the defendants' bid and approved plaintiff's counterbid, thus allowing plaintiff to buy back his personal injury cause of action from the trustee.
After plaintiff posted the $60,000 letter of credit security in favor of the trustee, the Los Angeles Superior Court heard defendants' motion for summary judgment based on the remaining ground of judicial estoppel. The other ground asserted, lack of standing, was moot because of the purchase of plaintiff's cause of action.
Counsel for defendants argued that the trial court should invoke the doctrine of judicial estoppel in light of plaintiff, in bad faith, taking inconsistent positions in both actions.
The doctrine of judicial estoppel, recognized in several California decisions, "prevents a party from asserting a position in a judicial proceeding that is contrary or inconsistent with a position previously asserted in a prior proceeding." International Engine Parts, Inc. v. Federson & Company, 64 Cal.App.4th 345, 350 (1998). The doctrine has been specifically held to apply to a subsequent civil action, where the plaintiff in a prior bankruptcy failed to disclose the existence of a cause of action against a third party.
The purpose of judicial estoppel . . . "is to protect the integrity of the judicial process and not the parties to the lawsuit." [Citation.] "The doctrine of judicial estoppel, sometimes referred to as the doctrine of preclusion of inconsistent positions, is invoked to prevent a party from changing its position in the course of judicial proceedings when such positional changes have an adverse impact on the judicial process." [Citations.] The policies underlying preclusion of inconsistent positions are "general consideration[s] of the orderly administration of justice and regard for dignity of judicial proceedings." [Citations.] Judicial estoppel is "intended to protect against a litigant playing `fast and loose with the courts.'" [Citations.] Because it is intended to protect the integrity of judicial process, it is an equitable doctrine invoked by a court at its discretion. . . . Judicial estoppel is most commonly applied to bar a party from making a factual assertion in a legal proceeding which directly contradicts an earlier assertion made in the same proceeding or a prior one. [Citations.]
The doctrine of judicial estoppel is applied by the courts with caution. A bad faith nondisclosure or concealment is usually required before the court may impose the doctrine. Tina Cloud v. Northrup Grumman, 67 Cal.App.4th 995 (1998).
The trial court agreed that this was an appropriate case for imposition of judicial estoppel. The court specifically found that plaintiff, in bad faith, had failed to disclose his personal injury cause of action in the bankruptcy case with the intent of concealing this asset from the reach of his creditors. Because plaintiff had stated under oath in the prior action that he did not have any cause of action for a contingent or unliquidated claim against any third person, he could not now take the position that he had a viable cause of action against the defendants. The fact that plaintiff belatedly made arrangements to pay his creditors after he got caught did not persuade the trial court from invoking the defense of judicial estoppel.
The lesson here is that a plaintiff's failure to disclose his cause of action against a third party in bankruptcy can indeed be a very powerful defense tool. Claim representatives and defense counsel should consider inquiring of the plaintiff whether he is a party to any pending or recently concluded bankruptcy action. The failure to disclose a claim to the bankruptcy court could result in a successful defense of the case in state court based on judicial estoppel. Even if the claim was disclosed, a plaintiff who files a chapter 7 bankruptcy does not have standing to prosecute the action without an abandonment of the claim by the trustee. Absent an abandonment, the defendant or his insurer can attempt to negotiate for purchase of the claim (settle) from the trustee in bankruptcy.
Because the trustee does not usually wish to become involved in state court litigation and is looking for quick cash, he is usually open to settling the claim at a discount. Unless the plaintiff can offer more for his cause of action than defendant, the court will usually approve the sale in favor of the defendant.
Mr. Pasarow is a Director in the firm's Litigation Department, specializing in casualty defense litigation. E-mail: scp@kpclegal.com.
Mr. Brugge is a Principal in the firm's Coverage and Appellate Department. E-mail: rdb@kpclegal.com.