Tort Claims possible despite intervening bankruptcy

Although the plaintiff failed to list her potential tort claims on her bankruptcy schedule, that omission does not necessarily preclude the plaintiff from bringing those claims if the district court concludes on remand the omission was the result of a mistake or inadvertence.

Background

Years after entering into a settlement that released certain tort claims, Paige Martineau filed for Chapter 7 bankruptcy. After her debts were discharged and the bankruptcy proceedings closed, Martineau brought this case in federal district court, seeking to rescind her settlement agreement as fraudulently induced and to pursue a tort action.

The district court rejected that effort and entered judgment in favor of the defendants. First, the district court held, Martineau lacked standing because her tort claims were the property of her bankruptcy estate when she filed this action. And in any event, the court found, judicial estoppel precluded Martineau’s suit: because Martineau had not disclosed her future legal claims when she filed for bankruptcy, the court reasoned, she had effectively disavowed them, and could not now take a contrary position.

Standing

The district court concluded Martineau lacked standing by adopting the magistrate’s recommendation that “the bankruptcy trustee alone had exclusive standing to pursue this action at the time [Martineau] filed her complaint.” This was so, the magistrate judge reasoned, because when Martineau filed for bankruptcy in June of 2015, her potential claims became assets that belonged to the bankruptcy estate. Although those claims later were abandoned by the bankruptcy trustee and reverted to Martineau, that did not happen until 2017, well after Martineau filed this action, and courts “have an obligation to assure [themselves] . . . [of] Article III standing at the outset of the litigation.”

The problem with this analysis is that it conflates Article III standing with the distinct issue of whether Martineau or her bankruptcy trustee was the “real party in interest,” legally entitled to pursue these claims. There is no question in this case that Martineau’s allegations satisfy the Article III requirements for standing.

Instead, the question in this case—on which the magistrate judge and district court did focus—is whether Martineau was legally entitled to pursue these tort claims on her own behalf, or whether the claims belonged solely to her estate. That question implicates not Article III standing doctrine, but rather the “real-party-in-interest” requirement. Because the district court miscategorized this question as one of constitutional standing, it improperly limited its focus to whether Martineau had the right to sue at the time of filing. And this was a critical error, because events that transpired after the date of Martineau’s filing made Martineau, and not the bankruptcy trustee, the real party in interest under Rule 17, legally entitled to pursue her tort claims on her own behalf.

Accordingly, we reverse the district court’s determination that Martineau lacked standing to pursue her tort claims against the defendants.

Judicial estoppel

We turn now to the district court’s alternative holding: that judicial estoppel bars Martineau from proceeding on her claims.

Typically, judicial estoppel is reserved for cases where the party to be estopped—here, Martineau—has taken a later position that is “clearly inconsistent” with her earlier one; has persuaded a court to adopt the earlier position, creating a perception that “either the first or the second court was misled” and would “derive an unfair advantage or impose an unfair detriment on the opposing party if not estopped.” Finally, there is the longstanding principle that judicial estoppel applies only when “the party who is alleged to be estopped intentionally misled the court to gain unfair advantage,” and not when “a party’s prior position was based on inadvertence or mistake.”

Martineau argues her initial failure to list her legal claims against the defendants in her bankruptcy filings—at a time when she had done nothing to pursue those claims, believing them to be barred by her settlement agreement—was a matter of “inadvertence or mistake.” The district court found to the contrary, according to Martineau, only by relying on a presumption of bad faith that this court never has endorsed. We agree, and find that the district court improperly applied a presumption of bad faith that is at odds with our case law and with the very nature of judicial estoppel.

Vacated and remanded.

Martineau v. Wier (Lawyers Weekly No. 001-158-19, 23 pp.) (Pamela Harris, J.) Case No. 18-2294. Aug. 12, 2019. From D.S.C. (Margaret B. Seymour, J.) Matthew James Greer for Appellant, Bess J. DuRant for Appellees.