In its opinion filed on December 21, 2018, the Supreme Court of New Hampshire (“New Hampshire Supreme Court”) held: “the trial court erred in dismissing the medical malpractice claim against the defendants on the basis of judicial estoppel. That claim belongs to the bankruptcy estate … The representative of that estate, the bankruptcy trustee, is vested with the authority to pursue that claim and is the real party in interest … The trustee ‘did not make any inconsistent statements to the courts,’ and the trustee is ‘not tainted or burdened’ by the plaintiff’s inconsistent statements … Furthermore, it would be inequitable to apply judicial estoppel to a trustee pursuing a claim on behalf of innocent creditors, and doing so would undermine, rather than protect, the integrity of the judicial process. For all of these reasons, we hold that the trustee is not judicially estopped from pursuing the medical malpractice claim against the defendants.”
The Underlying Facts
In July 2013, the plaintiff experienced persistent and severe lower back pain as well as numbness and weakness in her right leg. In July and August of 2013, she visited the emergency departments of the two defendant hospitals, was evaluated by the defendant doctors, and underwent two back surgeries. Throughout these attempts to treat her symptoms, the plaintiff’s pain remained consistent and at times worsened. Thereafter, she suffered from severe pain, bilateral weakness, and numbness, and both bowel and urinary incontinence, and was unable to work.
Following her second back surgery, the plaintiff consulted with two different New Hampshire medical malpractice attorneys about a potential medical malpractice claim. Ultimately, both attorneys advised the plaintiff that they were unwilling to represent her in a medical malpractice action against the treating physicians and hospitals. As a result, the plaintiff believed that her potential claim had no value. The plaintiff consulted with a bankruptcy attorney in April 2015. She informed him about her potential medical malpractice claim and that other attorneys had declined to pursue it.
When the bankruptcy attorney drafted the plaintiff’s petition for chapter 7 bankruptcy, he did not list the potential medical malpractice claim on the plaintiff’s schedule of assets. He also failed to advise the plaintiff that she needed to disclose this potential claim to the bankruptcy trustee. Using the documents prepared by the bankruptcy attorney, the plaintiff filed for chapter 7 bankruptcy on July 23, 2015. The United States Trustee appointed an attorney as the chapter 7 trustee. On December 22, 2015, the bankruptcy court granted the plaintiff a discharge under 11 U.S.C. § 727 (2012).
In February 2016, at her ex-husband’s suggestion, the plaintiff consulted with a third law firm, which agreed to represent her and pursue the medical malpractice claim. The plaintiff filed the New Hampshire medical malpractice action against the defendants in superior court on June 27, 2016. The plaintiff did not understand or know that she needed to advise the bankruptcy court or the trustee of the change of status of the potential claim. On June 13, the bankruptcy trustee had filed a Report of No Distribution with the bankruptcy court, in which he certified that there is no property available for distribution from the estate over and above that exempted by law, and requesting to be discharged from further duties as trustee. On July 14, the bankruptcy court issued an order closing the case and discharging the trustee.
On October 28, the New Hampshire medical malpractice defendants moved to dismiss, arguing that the plaintiff should be judicially estopped from pursuing her medical malpractice claim because she failed to disclose it on her schedule of assets. The plaintiff immediately consulted with new bankruptcy counsel, who filed a motion to reopen her bankruptcy case to administer a potential asset and requested the appointment of a trustee to protect the interests of creditors and the plaintiff. The bankruptcy court granted the motion on November 14 and the United States Trustee appointed the prior trustee as the trustee.
The plaintiff then filed an objection to the defendants’ motion to dismiss, asserting that her failure to list the malpractice claim on her bankruptcy schedule was the product of inadvertence or mistake, and citing federal cases recognizing that judicial estoppel should not apply under those circumstances. The plaintiff also asserted that the defendants’ judicial estoppel argument was “moot” in light of the fact that the bankruptcy court had granted her motion to reopen and a trustee had been appointed to administer the potential asset.
The trial court granted the defendants’ motion to dismiss, concluding that the plaintiff was judicially estopped from pursuing her medical malpractice claim. The court ruled that the plaintiff’s failure to disclose her malpractice claim to the bankruptcy court was not due to inadvertence or mistake. The court also disagreed that the issue of judicial estoppel was rendered moot by the reopening of the bankruptcy case. The plaintiff appealed.
New Hampshire Supreme Court Opinion
The New Hampshire Supreme Court stated that “[t]he application of judicial estoppel to a trustee pursuing a claim on behalf of a bankruptcy estate presents an issue of first impression in this jurisdiction.”
The New Hampshire Supreme Court stated that because the bankruptcy court has not administered the plaintiff’s medical malpractice claim, and the trustee has not abandoned it, the claim is the property of the bankruptcy estate. The trustee, as the representative of the estate, is vested with the authority to pursue that claim against the defendants as an asset of the estate. Thus, by operation of law, the trustee is the real party in interest.
The New Hampshire Supreme Court stated that in this case, the bankruptcy trustee has clearly expressed his intent to pursue the claim on behalf of the estate, and the trustee authorized the plaintiff’s counsel to pursue the medical malpractice claim, including prosecuting the appeal, on behalf of the estate. Therefore, the absence of such a substitution is not a basis for applying judicial estoppel to the trustee.
In New Hampshire, the following three factors typically inform the decision whether to apply the doctrine of judicial estoppel: (1) whether the party’s later position is clearly inconsistent with its earlier position; (2) whether the party has succeeded in persuading a court to accept that party’s earlier position; and (3) whether the party seeking to assert an inconsistent position would derive an unfair advantage or impose an unfair detriment on the opposing party if not estopped.
The New Hampshire Supreme Court stated that in the bankruptcy context, the bankruptcy court is quite capable of fashioning a punishment which will redress the debtor’s lack of timely disclosure if the omission was intentional: “Thus, we agree that ‘alternative mechanisms exist to more equitably protect the integrity of the bankruptcy system (and prevent undue benefit to the debtor) than the harsh rule imposed’ by applying judicial estoppel to the bankruptcy trustee … [w]e also agree with courts that have recognized how the application of judicial estoppel under these circumstances would be inequitable and would undermine, rather than promote, judicial integrity … we conclude that ‘[i]mposing the doctrine of judicial estoppel on an innocent bankruptcy trustee, which, in turn, punishes innocent creditors for the mistakes of a debtor, does not further the purpose of protecting the integrity of the judicial process’ … we agree, that it would be inequitable to bar the trustee from pursuing the medical malpractice claim ‘for the benefit of the estate’s creditors.'”
The New Hampshire Supreme Court further stated “we think the better rule is that followed by several federal appellate courts: ‘where the defense of judicial estoppel arises from a debtor’s failure to disclose a claim in his bankruptcy filings and his subsequent pursuit of that claim, the trustee receives the asset free of [the judicial estoppel] defense’ … because the plaintiff’s conduct giving rise to the defendants’ judicial estoppel defense did not occur until after the bankruptcy petition was filed and the potential claim had passed into the bankruptcy estate, the estate received the asset free of this defense.”
Source Alward v. Johnston, No. 2017-0080.
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