Page 3 - John Hundley 2012

Sharp Thinking

No. 57 Perspectives on Developments in the Law from The Sharp Law Firm, P.C. February 2012

State Courts Now Recognize Doctrine
Judicial Estoppel Proves Potent

Weapon Against Bankruptcy Fraud

By John T. Hundley, Jhundley@lotsharp.com, 618-242-0246

The judicial estoppel doctrine, which has emerged as one of the most potent weapons against
bankruptcy fraud in federal courts, finds equally fertile ground in Illinois’ state courts, a recent
Appellate Court decision shows.

Under the doctrine, federal courts increasingly have been holding that when a bankrupt fails to
disclose in his bankruptcy case that he has a claim which might lead to a financial recovery,
he becomes estopped to assert that claim in a separate legal action.

Now Berge v. Mader, 2011 IL App (1st) 103778, has made clear that the doctrine may be used in
state courts as well. However, a recent decision of U.S. Court of Appeals for the 5th Circuit suggests
the doctrine may not be effective when the claim is discovered and brought by the bankruptcy trustee.
Reed v. City of Arlington, 650 F.3d 571 (5th Cir. 2011).

In Berge, the bankrupt originally filed for reorganization of her debts under Bankruptcy Code
Chapter 13 (11 U.S.C. §§ 1301 et seq.). Chapter 13 includes as property of the estate not only “all
legal or equitable interests . . . as of the commencement of the case” (11 U.S.C. § 541), but also all
such interests “that the debtor acquires after the commencement of the case but before the case is
closed, dismissed, or converted to a case under Chapter 7. . .” (§ 1306).

While Ms. Berge’s case was pending under Chapter 13, she was involved
in an auto accident. She filed a tort case as a result of the accident, but never
amended her bankruptcy papers to reflect it. Her bankruptcy case was
converted to Chapter 7 (liquidation) and she was given a “no assets”
discharge, which defendants then used as the basis for seeking summary
judgment in the tort case under the judicial estoppel doctrine. The circuit court
accepted defendants’ argument and dismissed her case.

On appeal, Ms. Berge first argued that the exclusive jurisdiction of the
federal courts over bankruptcy matters meant that the state court lacked
jurisdiction to determine whether she had in the bankruptcy court the “bad
faith” which she claimed was necessary for judicial estoppel to apply. The
First District found that bad faith was not a requirement for the doctrine, and
that if it was, her concealment of the claim which could bring her financial

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Sharp Thinking is an occasional newsletter of The Sharp Law Firm, P.C. addressing developments in the law which may be of interest. Nothing contained in Sharp
Thinking shall be construed to create an attorney-client relation where none previously has existed, nor with respect to any particular matter. The perspectives herein
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