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S.D.N.Y. Tells Plaintiffs: “Stop! You Cannot Sue, You Changed Your Story”

Posted in Asbestos Litigation

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On Friday, April 28, 2017, the United States District Court for the Southern District of New York dismissed, in its entirety, John and Michele Clark’s asbestos personal injury action based on the doctrine of judicial estoppel. In short, the Court ruled that the Plaintiffs’ lawsuit could not proceed without damaging the integrity and proper functioning of the judicial system. The reason: Plaintiffs did not disclose their personal injury claims before receiving their Chapter 13 Bankruptcy discharge.

The background of Plaintiffs’ personal injury lawsuit is entwined with two other actions. First, Plaintiffs filed for a Chapter 13 bankruptcy petition in Connecticut in February 2010. A Bankruptcy Plan was confirmed approximately five months later, in July 2010. In March 2016, Plaintiffs declared that they had made all their payments as prescribed by their bankruptcy plan and requested that the bankruptcy court issue an order discharging their debts. The bankruptcy court entered such an order in August 2016.

Second, in August 2015—a year before the Chapter 13 petition was discharged—Plaintiffs filed an asbestos-related personal injury action in Illinois state court. The Illinois suit came about one month after Mr. Clark was diagnosed with mesothelioma. Plaintiffs alleged that Mr. Clark’s illness was caused by exposure to asbestos during his service in the United States Air Force as well as his employment with an aircraft manufacturer. Plaintiffs, however, did not inform the bankruptcy court of their asbestos claims, as bankruptcy law requires. Indeed, in a Chapter 13 bankruptcy, petitioners have an ongoing obligation to disclose any asset that accrues between the initiation and closing of their bankruptcy case as “[e]very conceivable interest of the debtor, future, nonpossessory, contingent, speculative, and derivative, is within the reach of [the bankruptcy estate].” Chartschlaa v. Nationwide Mut. Ins. Co., 538 F.3d 116, 122 (2d Cir. 2008). Thus, by not amending their Chapter 13 schedules, Plaintiffs, in effect, were concealing an asset that rightfully belonged in their bankruptcy trustee’s care. Accordingly, after a defendant informed Plaintiffs of its intention to file a motion to dismiss based on judicial estoppel owing to their failure to disclose the existence of their Illinois action, Plaintiffs’ voluntarily dismissed the Illinois lawsuit.

Then, in July 2016—again, while Plaintiffs’ bankruptcy case was still open—Plaintiffs filed a second asbestos personal injury suit raising the same claims as those raised in Illinois, but this time in New York state court. Shortly thereafter, the defendants in the New York action removed the case to the Southern District and Plaintiffs’ bankruptcy case closed, without Plaintiffs ever amending their Chapter 13 schedules. The New York defendants then promptly filed their motion to dismiss based on judicial estoppel.

The defendants argued that Plaintiffs’ claims had to be judicially estopped as a matter of law because Plaintiffs took inconsistent positions before the Bankruptcy Court and the Southern District. On the one hand, Plaintiffs, by not fulfilling their statutory obligation to amend their schedule of assets in the bankruptcy case, declared that they had no foreseeable assets owing to them. On the other hand, Plaintiffs claimed in their New York action that they were entitled to monetary damages as a result of Mr. Clark’s asbestos exposure. In granting the defendants’ motion, the Southern District noted that “judicial estoppel is a harsh rule.” Clark, et al. v. Advanced Composites Group, et al., No. C.A. 16 Civ. 6422 (GBD), *10 (S.D.N.Y., Apr. 28, 2017). But, its application was appropriate and essential. The Court explained that:

Plaintiffs’ duty to disclose assets did not terminate upon confirmation of their bankruptcy plan or when payments were completed. Rather, the disclosure duty was a ‘continuing one’ which continued until the bankruptcy case was closed.

Id. at *8.

To allow Plaintiffs to continue with their personal injury action after failing to disclose potential assets to the bankruptcy court would be intolerable as they unfairly would have benefitted from a windfall. For example, “had Plaintiffs’ cause of action been disclosed during the bankruptcy proceeding, their creditors might have pursued a higher interest rate, or taken a different view of the appropriateness and viability of the [bankruptcy plan].” Id. at *9. Moreover, because the integrity of the bankruptcy system predominately relies on debtors’ “full and honest disclosures,” Plaintiffs were not permitted to change their story.