Business Law

Hughes v. Wisconsin Central, Ltd

The Eighth Circuit Court of Appeals (the Circuit Court) recently ruled that a debtor who suffered two different work-related injuries after he filed a chapter 13 case had standing to assert a claim against his employer based on the injury which occurred after he had completed payments under his plan, but was barred by the doctrine of judicial estoppel from asserting a claim based on the injury which happened before he completed his plan payments.  Hughes v. Wisconsin Central, Ltd., ___ F. 4th ___, 2024 WL 3154627 (8th Cir. June 25, 2024).  To view the opinion, click here:

https://ecf.ca8.uscourts.gov/opndir/24/06/231410P.pdf

FACTS:

Debtor/plaintiff Ricky Hughes filed a chapter 13 in May 2012.  The bankruptcy court confirmed his five-year plan in December 2012.  The debtor made his last required payment in the spring 2017, and the bankruptcy court entered an order in April 2017 recognizing the completion of payments.  In February 2018 the bankruptcy court entered the discharge order. While the chapter 13 was pending, Hughes, who worked for the railroad, was injured twice at work.  The fist injury occurred in October 2016 and the second happened in August 2017.  After each accident, he was temporarily unable to work and he promptly submitted application to the Railroad Retirement Board for sick benefits.  Both times he checked a box on the form that he expected to file a lawsuit for personal injury.

In October 2019 Hughes filed a personal injury suit against his employers in district court, alleging claims under the Federal Employers Liability Act.  The defendants moved for summary judgment, asserting that Hughes lacked standing to assert the claims and that they were barred by the doctrine of judicial estoppel because he failed to disclose either claim in his chapter 13 bankruptcy case. Hughes filed an opposition, arguing among other things that judicial estoppel did not apply because he gained no unfair advantage and induced no reliance on his failure to disclose.  He also asked the bankruptcy court to reopen his case in order to list the claims.  Once the case was reopened, he asked the bankruptcy court to approved an agreement with the chapter 13 trustee under which he agreed to distribute any funds received to his creditors.

The district court denied the summary judgment motion without prejudice and stayed the proceeding until the bankruptcy court made rulings.  The bankruptcy court denied the debtor’s sharing agreement with the trustee because it was essentially a motion to modify the plan.  Such motions must be brought pursuant to 11 U.S.C. § 1329(c) before the final payment is made under the plan, an event which had occurred in April 2017.  In doing so, the bankruptcy court noted that the nondisclosure created no harm to the creditors since any payments received would have been too late to modify the plan.

Based on this ruling, the district court granted summary judgment to the defendants.  It held that Hughes lacked standing and that judicial estoppel applied.  Hughes appealed to the Circuit Court, which affirmed as to the claim based on the first injury but reversed on the later claim.

REASONING:

The Circuit Court first noted that in a chapter 13 case, the definition of property of the estate under 11 U.S.C. §1306(a) includes wages and assets the debtor receives post petition.  Throughout the plan period, in this case five years, the debtor has an ongoing obligation to disclose new assets to the court.  The disclosure of new assets may inform the chapter 13 trustee and the court whether plan modification is appropriate.  Also, in a chapter 13, once the plan is confirmed the property of the estate revests in the debtor.  11 U.S.C. § 1327.  Because of this revesting provision, the Circuit Court answered the question of standing in favor of the debtor, since his assertion that he owned the injury claims was at stake.

Judicial estoppel is an equitable doctrine which generally prevents a party from prevailing in one phase of a case on an argument and then relying on a contradictory argument to prevail in another phase.  The doctrine has frequently been imposed in cases where a debtor fails to disclose a litigation claim (usually in a chapter 7), receives a discharge, then sues on that claim in state or federal court after discharge.  The Circuit Court acknowledged that the application of the doctrine was flexible.

Regarding the first accident claim which occurred in October 2016, the Circuit Court concluded judicial estoppel applied to bar debtor’s assertion of the claim in the district court proceeding.  When the accident happened, six months of plan payments remained and a motion to modify the plan would have been timely.  Debtor did not disclose the claim and received his discharge without a modification which might have increased payments to his creditors.  Thus, the bankruptcy court relied on the nondisclosure in granting the discharge and the debtor benefited from the discharge.  All the elements of judicial estoppel were met.

The outcome was different for the claim arising from the second accident in August 2017.  By then, the debtor had completed his plan payments and the court had issued an order deeming the plan completed.  It was too late to modify the plan under § 1329(c) to include funds from that asset.  The court had deemed the plan complete; the issuance of a discharge was only a ministerial act.  The nondisclosure no longer created reliance by the court in making a ruling and the debtor did not receive unwarranted benefits.  Therefore, judicial estoppel did not apply as to the claim from the later injury.

The Circuit Court affirmed in part and reversed in part, remanding with instructions.

AUTHOR’S COMMENTS:

This case discusses the classic application of judicial estoppel when a debtor fails to disclose a litigation claim and receives a discharge, although with the chapter 13 twist.  The Eighth Circuit’s analysis is clean and demonstrates a good understanding of chapter 13 principles.  The Circuit Court chose not to address whether the revesting of assets in the debtor made a difference. An argument could have been made however, that it did not make a difference except as to standing.  Section 1327(b) arguably only revests property of the estate which existed on the revesting date.  The after-acquired asset (here a litigation claim) was not yet property of the estate and therefore did not revest, remaining in the bankruptcy estate as an asset to be distributed to creditors. 

[The Commercial Financial Newsletter is written by an ad hoc group of the California Lawyers Association (CLA) Business Law Section.  This article was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, CD CA, ret.), a member of the ad hoc group.  The opinions contained herein are strictly those of the author.].                                                                      


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