The Eighth Circuit holds that judicial estoppel bars a chapter 13 debtor from recovering on an undisclosed personal injury claim that arose after filing but before the completion of plan payments. If the debtor had disclosed the claim, the opinion does not say whether the recovery would have been “disposable income” earmarked for creditors.

This writer believes that the understanding of the opinion should be limited to cases involving judicial estoppel and that it will not be cited for the idea that creditors are entitled to recoveries for personal injuries sustained by chapter 13 debtors.

Two Personal Injuries

Six months before completing payments under his five-year chapter 13 plan, the debtor sustained a personal injury on the job. At the time, he disclosed the PI claim in applying for worker’s compensation. However, the debtor did not disclose the PI claim in his chapter 13 case.

Several months after making his last plan payment, but before entry of his discharge, the debtor sustained a second personal injury on the job. He did not disclose the second claim to the bankruptcy court.

More than two years after the last plan payment and after discharge, the debtor sued his employer and others in federal district court. The defendants moved for summary judgment, alleging that the debtor did not have standing and that judicial estoppel barred the claims.

In response, the debtor reopened his chapter 13 case and listed the claims. He offered to have proceeds distributed to creditors. The bankruptcy court denied relief, saying that the debtor could not modify the plan after the last payment, citing Section 1329(c).

Subsequently, the district court granted the motion to dismiss, believing that the debtor lacked standing and that judicial estoppel barred both claims. The debtor appealed.

Standing

In his June 25 opinion, Circuit Judge Michael J. Melloy first dealt with standing and reversed the district court on de novo review. He described how chapters 7 and 13 differ in terms of estate property and how the estate revests in the chapter 13 debtor on plan confirmation, citing Section 1327(b). On the other hand, he said that the debtor has a continuing obligation after confirmation to disclose new assets, citing Section 1306(a)(1)-(2).

Viewing standing as the right to assert the claim, the defendants relied upon Section 554(d), which provides that undisclosed assets remain property of the estate. The debtor contended that Section 1327 bestowed standing on him by revesting the estate in the debtor on confirmation.

Judge Melloy held that Section 1327, the more specific, was the font of standing. Reversing the district court and deciding that the debtor had standing, he found “no textual support” for distinguishing between disclosed and undisclosed assets in the context of Section 1327.

Judicial Estoppel

Judge Melloy reviewed the decision on judicial estoppel for abuse of discretion and said that the doctrine is designed “to protect the integrity of judicial proceedings” and “should not be automatic.”

Three factors typically drive the outcome, Judge Melloy said. First, the party’s later position must be “clearly inconsistent” with the prior position. Second, did the party persuade the court to accept the prior position? Third, did the party enjoy an “unfair advantage” or impose an “unfair detriment” on the opposition?

Judge Melloy found no abuse of discretion in invoking judicial estoppel as to the claim that arose before the debtor’s last plan payment. He said it was “tantamount to a denial of the claim’s existence” and was “knowing” rather than “inadvertent,” when six months of plan payments remained during which time the plan could have been amended.

Regarding the injury after the last plan payment, Judge Melloy said that “the passage of time mandates a different outcome.” After the last payment, he said there was “no permissible basis to modify the plan.” Furthermore, the entry of discharge after the second injury was “mere happenstance,” and the defendants demonstrated on grounds for denial of discharge.

In addition, Judge Melloy said that the defendants were not prejudiced by the debtor’s failure to disclose the injury claim that arose after the last plan payment. Although a showing of prejudice “is not necessary,” he said that a showing of prejudice “makes the need for judicial estoppel stronger.”

Identifying an abuse of discretion, Judge Melloy set aside the application of judicial estoppel as to the second injury.

Observations

This writer does not believe that the opinion means that the creditors would have been entitled to receive the proceeds of the first injury had it been disclosed. The opinion does not discuss “disposable income” nor issues that would have been involved in deciding whether there should have been a plan amendment.

As to whether creditors are entitled to receive the proceeds of pre- or post-petition personal injury claims in chapter 13, the courts go both ways. To read recent ABI stories on the issue, click here, here and here.

Note: Circuit Judge Melloy was a bankruptcy judge before his elevation to the district court and then to the circuit court. During his service as a district judge, he was chair of the bankruptcy committee of the Judicial Conference of the U.S.