Limiting or Disposing of Insurance Claims and Lawsuits by Utilizing Bankruptcy Records and the Doctrine of Judicial Estoppel

By David J. Oberly, Esq.*

Judicial estoppel precludes a party from assuming inconsistent positions in separate legal actions. If a party takes one position in a prior legal action, he or she cannot take a different position on the same issue in a subsequent action. The doctrine of judicial estoppel is intended to guard the judicial system against improper use. However, it also serves as a potential weapon that can be used to limit, or completely defeat, a wide variety of insurance-oriented claims and lawsuits. Unfortunately, it is an often overlooked tool that many claims professionals and defense attorneys fail to utilize in the course of their practices.

Judicial estoppel is an equitable doctrine governed by equitable principles. The doctrine “protects the integrity of the judicial process by preventing a party from taking a position inconsistent with one successfully and unequivocally asserted by the same party in a prior proceeding.” Judicial estoppel is applied in order to preserve the integrity of the courts by preventing a party from abusing the judicial process through cynical gamesmanship, achieving success on one position, then arguing the opposite in another suit. Under the doctrine of judicial estoppel, a party may not take a position in a court proceeding that is inconsistent with that party’s position in a previous court proceeding that he successfully advanced under oath. In Ohio, judicial estoppel applies where a plaintiff: (1) asserted a contrary position, (2) under oath in a prior proceeding, and where (3) the prior position was accepted by a court. However, judicial estoppel does not apply when the party’s prior inconsistent position was a result of mistake or inadvertence.

The United States Bankruptcy Code and the Federal Rules of Bankruptcy Procedure impose upon bankruptcy debtors an express, affirmative duty to disclose all assets, including contingent and unliquidated claims. Once the debtor initiates bankruptcy proceedings, the debtor’s assets, including legal claims, become the property of the bankruptcy estate rather than the debtor’s personal property. Statements or omissions by a debtor in his or her disclosure statement provide an appropriate basis for the imposition of judicial estoppel.

Judicial estoppel has been applied by Ohio courts in a variety of contexts. Importantly, judicial estoppel may be applied to foreclose a plaintiff from litigating a claim he or she failed to disclose as an asset in a prior bankruptcy proceeding. A longstanding tenet of bankruptcy law requires one seeking benefits under its terms to satisfy a companion duty to schedule, for the benefit of creditors, all his interests and property rights. “It has been specifically held that a debtor must disclose any litigation likely to arise in a non-bankruptcy context.” Moreover, “the debtor need not know all the facts or even the legal basis for the cause of action; rather, if the debtor has enough information (i.e., the material facts) prior to confirmation to suggest that he may have a possible cause of action, then that is a ‘known’ cause of action such that it must be disclosed.” Such a cause of action is property of the bankruptcy estate, whether or not the cause of action is substantively valid. In the context of the bankruptcy system and the duty to disclose all claims, even contingent ones:

The rationale for *** decisions [invoking judicial estoppel to prevent a party who fails to disclose a claim in a bankruptcy proceeding from asserting that claim after emerging from bankruptcy] is that the integrity of the bankruptcy system depends on full and honest disclosure by debtors of all of their assets. The courts will not permit a debtor to obtain relief from the bankruptcy court by representing that no claims exist and then subsequently to assert those claims for his own benefit in a separate proceeding. The interests of both the creditors, who plan their actions in the bankruptcy proceeding on the basis of information supplied in the disclosure statements, and the bankruptcy court, which must decide whether to approve the plan of reorganization on the same basis, are impaired when disclosure provided by the debtor is incomplete.

Thus, when a plaintiff fails to list a cause of action in sworn bankruptcy filings and then files a lawsuit to recover money damages in connection with that cause of action, courts will invoke the doctrine of judicial estoppel. Invocation of the doctrine will prevent the plaintiff from taking inconsistent positions in two court proceedings.

In Greer-Burger v. Temesi, 879 N.E.2d 174 (Ohio 2007), the Ohio Supreme Court invoked judicial estoppel to bar a civil action from being pursued after the plaintiff-debtor was found to have concealed her potential civil action throughout the course of her bankruptcy proceeding. Greer-Burger was judicially estopped from pursuing the civil action because her claim was not listed on her bankruptcy schedule in her bankruptcy petition. The Ohio Supreme Court found that Greer-Burger’s concealment violated the goal of the bankruptcy proceeding. Noting, “the disclosure obligations of consumer debtors are at the very core of the bankruptcy process and meeting these obligations is part of the price debtors pay for receiving the bankruptcy discharge,” the Ohio Supreme Court concluded that Greer-Burger undermined the bankruptcy trustee’s ability to perform his duties because the performance of those duties was contingent on an accurate and complete disclosure. Because “[a] discharge in bankruptcy is sufficient to establish a basis for judicial estoppel, even if the discharge is later vacated,” the court found Greer-Burger’s actions sufficient to support the application of judicial estoppel.

In making the determination that judicial estoppel was applicable, the Ohio Supreme Court in Greer-Burger relied on two main lines of reasoning to support the application of judicial estoppel to preclude the civil action from proceeding after the civil claim had been concealed from the bankruptcy court. First, the court examined whether the traditional elements of judicial estoppel were present. Answering this question in the affirmative, the Ohio Supreme Court found that the plaintiff-debtor took an inconsistent, yet successful, position in the prior bankruptcy proceeding.

Second, the court looked to determine if the inconsistent position was “inadvertent.” A disclosure may be deemed inadvertent where the debtor lacks factual knowledge of the undisclosed claim or the debtor has no motive for concealing the claim. The Ohio Supreme Court determined that it could be inferred that the failure to disclose the claim was not inadvertent because: (1) the plaintiff-debtor was aware of the claim when she filed for bankruptcy; (2) a motive to conceal the claim could be inferred because of the possibility of personally profiting from the claim; and (3) there was a lack of evidence that she timely took “affirmative action to fully inform the court and the trustee of the asset’s existence.” Thus, the Ohio Supreme Court found that Greer-Burger should not be able to receive the benefit of a discharge and subsequently obtain a windfall by recovering an award that flowed from the undisclosed asset.

Property value inconsistencies between bankruptcy cases and insurance claims also represent sufficient grounds to invoke the doctrine of judicial estoppel. In Brown v. Nationwide Property & Casualty Insurance Company, 2014 Ohio App. LEXIS 4906 (Ohio App. Nov. 10, 2014), the court ruled that debtors/litigants who undervalued items of property in their bankruptcy petitions were judicially estopped from claiming a higher value in subsequent litigation. In that case, vandals broke into the home of Mark and Kathleen Brown and caused extensive damage to the interior structure of their residence and their personal property. At the time of the incident, the Browns had a homeowner’s policy issued by Nationwide Property and Casualty Insurance Company. The insureds made a claim under the policy. The Nationwide adjuster estimated the damage to the insureds’ property at $155,678.65. However, it was later determined, during an examination under oath, that the Browns had listed the value of their personal property at $3,100.00 in a bankruptcy petition they had filed a year before the vandalism incident. As a result, Nationwide sent the Browns a reservation of rights letter stating that, due to judicial estoppel, they were unable to collect on some or all of the personal property they claimed for the loss. In response, the insureds filed suit. However, the court barred the insureds from taking a different position regarding the value of their property than they had in their prior bankruptcy. On appeal, the appellate court concurred that the Browns were judicially estopped from claiming in the case sub judice that the same property that they previously claimed was worth $3,100.00 in their bankruptcy was now worth $155,678.65.

Both claims professionals and defense attorneys should make it a habit to always investigate whether claimants/plaintiffs have filed bankruptcy close to the time that a claim or cause of action arose. In this respect, the applicability of this potentially game-changing affirmative defense should be fully explored and evaluated during both the pre-suit investigation of the claim, as well as throughout all stages of discovery process. To maximize the likelihood of success in invoking judicial estoppel, in addition to obtaining the individual’s bankruptcy application and other files, a copy of the transcript of the debtor’s meeting of the creditors—which ordinarily includes the debtor’s testimony that he or she understands the bankruptcy process and that his or her bankruptcy petition is accurate—should also be obtained. This transcript is vital to the success of asserting the affirmative defense because it can be utilized to defeat any attempt by the plaintiff to avoid judicial estoppel by claiming mistake or inadvertence. Armed with this evidence, where a plaintiff has undervalued his or her property in bankruptcy, any property damage claim or lawsuit filed by that individual can be limited to the value of the property claimed in the prior proceeding. And where the plaintiff has failed to disclose his or her legal claim altogether in bankruptcy, any lawsuit filed thereafter can be completely disposed of via a well-drafted motion for summary judgment.

*Dave, an associate in our Cincinnati, Ohio office, can be reached at 513.372.6817 or djoberly@mdwcg.com.

_{Defense Digest, Vol. 21, No. 3, September 2015}

_{Defense Digest is prepared by Marshall Dennehey Warner Coleman & Goggin to provide information on recent legal developments of interest to our readers. This publication is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. ATTORNEY ADVERTISING pursuant to New York RPC 7.1. © 2015 Marshall Dennehey Warner Coleman & Goggin. All Rights Reserved. This article may not be reprinted without the express written permission of our firm. For reprints, contact tamontemuro@mdwcg.com.}