## In the



# U n ited S ta tes Co urt o f Ap p ea ls

F o rth eS e v e n th C ir cu it
N o. 11

- 3588 I N RE : K NI GHT -C ELOTE X, LLC etal. , D ebto rs . A PP E A L OF : J AM ES A. K NI GHT

Appeal from the United States District Court fo r the N o rthernDi stricto f Illino is, Eas tern Div isi on. No . 1:11- cv-01815

— SamuelD er-Yegh iayan, Judg e.
A RG UE D M AY 24, 2012

— D ECI DE D S EP TE MBE R 5, 2012

Befo re C UDAH Y, K ANN E , a nd H A MI L T ON, C ircu it Judges. H A MI L T ON, C ircu it Judge. U si ng a j ud i ci al e stopp el th eo r y, de bt o r - appe l l an t J ames Kn ight at te m pts t o tur n a harm l ess and see m i ngl y inadvert ent f ai l ure to discl ose an adver se i nter esti n a bankr up tcy proce edi ng i nto a potenti alm ult i m i l l i on dol l arw i nd f al l

. H e a pp eal s fro m an o rderi n the j oint ly adm i ni ste re d bankr up tcy case s o fKn i g ht

- Ce l o t e x, LL C a nd Kn i g htI nd us t r i e s I, LL C2 N o. 11

- 3588 ( col l ecti vel y, the “Com panie s”)
. That o rderper m i tte d the Com panie s’ chapter7 bankr up tcy tr ustee to as si gn t o B a n ko fA me r i c a c e r t a i n c a u s e s o fa c t i o n th a tth e C o mp a n i e s ’ e s t a t e h e l d a g a i n s tKn i g ht a s a n i n d i v i d u a l

. At the ti m e of the ass i gnm ent, the s am e t rust ee, Barr y Chatz, w as also serving as th e ch ap ter 7 t r u s tee in K nigh t’s o wn ba nk r upt cyc as e, a nd the l aw f irm of Fr eebo r n & Pe t e r s LL P r e pr e s e nt e d t r us t e e Ch a t z i n hi s a dmi ni s tr ati o n o fb o ththe Co m pan i es ’ b an k r upt cy esta te a nd K ni ght’ s ind i vi du ales tat e. Ch atz and Fre ebo rn & Peter s f ai l ed to d isc los e

— in Ch atz’ s appli cati on to re tai n Fr eebo rn & Peter s in K ni ght’ s ind i vi du albank ruptcy

— tha t Cha tz, a s th e Companies’ t r us te e, i nt en ded to c o nt i nue t o pur su e cl ai m s he l d by th e Compani es ag ains t Kni g ht

. K night co nt en ds th atthi s fai l ur e sh o ul d b e dee m ed th e tr ustee ’ s abandonm ent o ftho se claim s. On this theo ry, h e a rgues that the bank ruptcy cour t abused i ts disc re ti on wh en i t r efused to i nvoke the doctr i ne o fj ud i ci al e s t o p p e l t o p r e v e ntt h e l a t e r a s s i g n me n to fth o s e c l a i ms to the Bank. The di str i ct c ourtaffi rm ed the bankr up tcy cour t’ s r ej ecti on o fKn i ght’ s j ud i ci al e stopp eltheo ry, and w e do the s a me, fi nd i ngn o ab us e o fthe b a nk r uptcy co ur t’ s di sc r et i o n. F i r st, we r ev i ew th e f ac tu al ba ck g r o und of th e case and th e int er pla y o fthe var i ous b ankr up tcy proceedi ngs. W e then dis pose ofthe thre shol d questi on whethe r Kni g htha d s ta ndi ngt o o bj ec t t o the a ss i g nm en t of the cl ai m s aga i nst hi m to the Bank. Fi nal l y, w e r each the m er i ts ofKn i ght’ s a pp eal

. W e deta i l the j ud icialN o. 11

- 3588 3

es to ppelt r ap Kni g htt r i ed to s etf o r the t r us te e, a nd w e e xplai n w hy the bank ruptcy co urt’ s r efusalto spr i ngthe t ra p was a pr o pere xe r ci se o fi ts di sc r et i o n. Altho ug h we do no t co ndo ne Chatz’s a nd F r eebo r n & Peter s’ s f ai l ure to disc l ose Chatz’ s intent, as the Com pani es ’ b an k r upt cy t r u s t e e , t o p u r s u e ( o r a ss i g n) th e c l a i ms a g a i ns t Kni g ht, that f ai l ure did not h ar m K n i g h t, a n d ot h er rem ed ies are av aila b le. It w oul d be i nequit abl e a nd an i m properuse ofj ud i ci al es to p p el

— an e quit ab le rem edy

— t o pe r m i t Kni g ht t o r e a p a h ug e b e ne fi tfr o m a n o the r wi s e h a r ml e s s o mi ssi o n.

I. Fac t ual an d Pr oc e dural Backg r oun d K night C om panies ’ Bank ruptcy . Kn i ght, the i nd i vi du al deb to r, was the princ ipalo wnera nd CEO o fKni g ht I n d u s t r i e s I, L L C

. K n i g h tI n d u s t r i e s w a s a h o l di n gc o mpany thato w ned equity inter est in K ni ght- Celo tex LL C a n d otherenti ti es. Bank o fA m er i ca had pro vi ded secur ed c re d it ofm or e than $34 m i l l i on t o K ni ght Ind ustr i es Ia nd Kni g ht

- Cel o tex. On Apri l 6 , 2 00 9, Kni g htI ndu s t r i e s a nd Kn i g ht

- Ce l o t e x fi l e d v o l un t a r y p e t i t i o ns f or r e l i e fu n d e r c h a p t e r 1 1 o fth e b a n k r u p t c y c o d e . T h e C o mp an ies’ ban krup tcy p etition w as con verted to a chap ter 7 peti ti on t w o m onths l ate r, and Chatz was a pp oi nted as ch ap ter 7tr ustee o fthe Com panie s’ es tat es. The bank

ruptcy cour t a uthor i zed tr ustee Chatz t o re tai n the l aw firm of Fre eb or n & P et er s a s c ou n se l. I n Decem ber2009, C hatz and the Bank each s ent s i m i l ar l e t t e r s t o Kn i g ht

. T he y a l l e g e d tha tKn i g hth a d ma de4 N o. 11

- 3588 f ra ud ule nt and/o r prefer en tial tr ansfer s o fthe Com pani es ’ a ss et s, ha d b r ea ch ed th e dut y o fg o o d f aith a nd f ai r deal i ng, h ad bre ached dutie s Knight o w ed to cre dit or s, had m i sappropri ate d c or pora te opportunit i es, had com m i tte d conver si on, and had vi ol ate d stat e an d/or fede r als ec ur i ti es l aws , a m o ngother cl ai m ed ac ts a nd om i ssi ons. The l et te rs nam ed sev er alpote nti all ega l cl ai m s ag ains t Kni g ht, i nc l udi ngc l ai m s f or di r ec to r a nd offi cerl i abi l i ty

— for e as e o f refe re n c e , w e r e f er to all the al l ega ti ons against K ni ght a s the “D& O cl ai m s”

— a nd dem anded paym en t fro m Kn i ght o fatl eas t $ 27 m i l l i on (to the C om p an ies) an d $34 m il li on (to the Ba nk ). K night’s Pers ona l Bank ruptcy . On Febr uary23, 2 010, K nigh t fi led h is ow n volu nt ary p etition forcha p ter 7 ba nk r upt cy . Kni g ht l i st ed i n h i s sc he dul e o fa ss et s an d liab ilitie s t h e C om p an ies ’ D & O cla im s , d isc los in g t h eir potenti alval ue as “ u nknow n. ” Knighto ri gi nal l y fi l ed hi s ba nkruptcy peti ti on i n N ew H am pshir e, but i t was tr ansfer re d to the Northe rn Di str i ct of I l l i noi s a nd to th e jud ge p re sid in g ov er th e C o m p an ies ’ p et itio n . In g r an tingt r an sfer, the b an k r upt cyc o ur t no te d the exi ste nce o fthe D& O cl ai m s. S ee In re Knight

- Cel ot ex, LLC, 42 7 B. R. 69 7, 70 1 ( Bankr. N .D
. I l l

. 20 10)
. Chatz was ap p ointed to serve as the c h a p ter 7 trust ee of K nigh t’s est ate
. R et ent io n App li cation i n Kn ight’s B ank ruptcy . On M ay 19, 2010 , tr ustee Chatz a ske d the ba nkruptcy cour t t o al l ow him to retain Freeborn & Pe ters as his cou ns el in K nigh t’s i nd i vi du albank ruptcy, as well

. I n the re tenti on a pp l i cati on, Chatz s ai d that F re ebo rn & Peter s “ d oes nothaveN o. 11

- 3588 5

T he b an k ru p tcy cod e d efines “d isintere sted p erso n” as a 1 per s on that : “( A) i s no ta c re di t or, ane qui t y s ec ur i t y ho l der, or an i ns i der ; ( B) i s not and was not, withi n 2 ye ar s b efore the date ofthe fil ing ofthe peti ti on, a d ir ect or, offic er, or e m ployee of the d eb t o r ; a n d (C ) d oe s no t ha v e an intere st m ater ially adv ers e t o the int eres t ofthe es tat e or ofany c la ss ofcr editors ofequity secu ri ty holders , by reason ofany director i nd ir ect re l at i ons hi p t o, c onn ec t i on w ith, or i nt er es ti n, the debt or, or fo r a n y o th er re a so n .” 1 1 U .S.C . § 1 0 1 (1 4 ). any c onnecti on with [ K n igh t] , hi s cr edi tor s, o r othe r p ar tie s-in -in te re st or th eir res p ec tiv e a tt or n ey s . . . an d is a ‘d isin te re st ed p e r s on ’ ” a s t h at te rm is d efin ed in th e b a n k r u p t c y c o d e . I n s u p p o r to fth e a p p l i ca ti o n, 1 Ch atz sub m itt ed the “Decl ar ati on o fRi chard S

. Lauter i n Acc o r da nc e wi th S e c t i o n 3 2 7o fthe Ba nk r up t c y Co de an d R u le 2 014 ofthe Feder alRule s o fBankruptcy Pro

c ed ure. ” In the decl ar ati on, at torney Lauterexpl i citly sta ted that F re ebo rn & Peter s s er ved as bank ruptcy counselto Chatz in the Com panie s’ bank ruptcy. Lauter al so ass er ted that“t o the b esto fm y know l edge, Ihave det er m i ne d tha t F &P doe s no t cur r en tl y rep re se nta ny en tit y, or h old int er es ts ad ve rs e t o a n y e n tit y, in m at te rs rela te d to [K n igh t’s ] ch ap te r 7 c as e.” A t a hea ri ng o n the re tenti on a pp l i cati on o n M ay 25, 20 10 , the c ou r t as k ed i fa ny o ne o bj ec te d t o Cha tz ’ s r et en ti on o fFr eebo rn & Pe ters as counseli n the K ni ght b ankr up t c y . Kn i g ht ’ s c o un s e l r e pl i e d: There’ s no obj ecti on, Your H onor . I j ust
. . . w as cu rious. Idi d n ’t s ee i n her e where counseli nd i cate d he r epresen ted M r. Chatz a s t o hi s ca paci ty as cor po-6 N o. 11

- 3588

K night’ s counsel w as m is taken; as noted, the Lau terD ecl ara- 2 ti on d id disc los e the f acttha t F reebo rn & Peters repres ente d C ha tz as T ru stee of the C om p an ies. ra te tr ustee
. But si nce we al l kno w that’ s the cas e, Im ean, Idon’ t thi nk tha t’s a probl em thati t was o mi t t e d.

. . . As l o nga s th ey ’ r e st i l l di sint er ested, we’ r e fi ne , Yo ur H onor. 2 I n re sponse, Lautervo l unteer ed t o subm i t a supplem entaldecl ar ati on, wh i ch he di d the next day. Lauter re affi rm ed that Fr eebo rn & Peter s s er ved as co unsel to Ch atz i n the Com panie s’ bankr up tcy and a lso re affi rm ed that: Based on the f or ego i ng and the decl ar ati on pr ev i o us l y s ubmi tt ed i n s uppo r t o fthe [ Re te nt io n] A pp l i cati on, upon re aso nabl e inquir y a nd to the be st ofm y know led ge, Ihave deter m i ned that F& P does no t cur r en tl y r epr es ent a ny e nt i tyo r ho l d a ny i nter est s, adver se to the est ate , and is a “ disinter est ed p erson ” p urs ua nt to 11 U
. S. C

. § 101(14). W i thout furthero b j ecti on, the bankr up tcy cour t e nter ed an order au th orizi ng Ch atz to retain Freeborn & Pete rs as c o uns eli n the Kni g htb an k r upt cy, fi ndi ng thatthe fi rm was a “ disinter est ed pers on” as defined i n the bankruptcy code. Kn i ght’ s t ra p w as set
. Ass ignmentof

Knig ht C om pani e s ’Cl ai m s t o Bank

. M ore th anfi ve months l at er, o n Novem be r 3 , 2 01 0, the Ba nkN o. 11

- 3588 7 and C hatz j oi ntl y a ske d t h e cour t t o al l ow C hatz to as sign the Com panie s’ D& O cl ai m s t o the Bank. These w er e the sa m e cl ai m s that Chatz and the Bank had assert ed against K nigh t in the D ecem ber 2009 le t ters th atha d pr ec ede d Kni g ht ’ s per so na l b an k r upt cy . I n a separ ate fi l i ng, the Bank ass er te d t hat i t would s eek re cove ryo nl y a gai n st K ni ght’ s l i abi l i ty i nsurance pol i cy an d not again st K nigh t him self. K n igh t o b j ec te d . H e c on te n d ed th at C h at z s h ou ld be j ud i ci al l y e st op ped fr om as ser ti ng tha t the Com panie s had any cl aim s ag ainst hi m thatco uld be as si gned to the Bank. H e ba sed hi s co ntentio n on the f ol l owing l ogi c, tr yi ng to spring the tr ap he s et w hen he di d not obj ect to the t rust ee’ s r ete nti on o fFr eebo rn & Peter s: Fi rst, Fr eebo rn & Peter s had a sse rt ed i n i ts re tent ion appli cation th at it w as a “d isi nt erested pers on” i n K n ig h t’s i n d i v i d u a l b a n k r u p t c y p r o c e e d i n g e v e n th o u g h t he fi r m a l so r epr es en te d Cha tz i n h i s role as t r us te e f o r the Com p an i es. S eco nd , the bankr up tcy cour t had approv ed the r ete nti on a pp l i cati on, si gnal i ng tha t the co urt bel i eve d oras sum ed that Ch atz, as t he Com panie s’ tr ustee , h eld n o i nter est s a dvers e t o K ni ght. A ccor ding to K ni ght’ s theor y, thi s pos i ti on, as sum ed by the c ou rt, dir ectl y c onfl i cted w ith the prem i se ofthe l ate r- fi l ed ass i gnm ent m oti on, speci fi cal l y that the Com panie s had via b le c laim s a g ain st K n igh t t h at th eir tru st ee co u ld pu rs ue o r ass i gn to the Ban k. T hi rd, since the bank ruptcy cour t had approv ed the fi rm ’ s r ete nti on a pp l i cati on an d thus i m pl i citlyha d c o nc l ude d tha t th e tr us te e an d Fr eebo rn & Peter s had no i nter est s adverse to K ni ght, they8 N o. 11

- 3588

Once the aut om at i c s t ay was l i ft ed, the Bank s ued Knig htan d 3 s e v e r a l c o - de f e n da n t s b a s e d i n p a rton t he D& O c l a i ms . On J une 20 , 20 12 , the d istr i c tc our tdi s m i s s ed wi th pr ej udi c e the B a n k ’s sec o n d am en d ed co m p la in t i n t h a t a ct io n . Bank of A m er i ca, N.A
. v. K night, 201 2 W L 2368458 ( N
. D
. Il l. J une 20, 20 12 )
. The Bank ha s appe aled the di s m i s s al, whi c h i s pe ndi ng a s No
. 1 2

- 2 6 9 8
. T h e u l t i mat e o u t c o me o fth o s e p r o c e e di n gs m igh t ren d er this case acad em ic, b u t w e thin k the b etter co u rse is to res olve the s eparate app ea ls a s they have ari se n rather than t o postpone a decis ion i n thi s one. shoul d be j ud i ci al l y e sto pp ed fro m ta ki ng anyfurther acti on t o pu rs ue o r ass i gn tho se cl ai m s a gai nst Knight. The b an k r upt cyc o ur t o ve r r ul ed Kni g ht’ s o bj ec ti o n, fi nd i ng tha t the as si gnm ent was a p ro per exer ci se ofthe tr ustee ’ s business j ud gm ent. The co urt re 3 j ec ted Kn i ght’ s j ud i ci ales toppel theo ry, r eas oni ng tha t ap p lica tio n o ft h e d oc tr in e is d isc re tio n ar y, an d th at in th is in st an c e, Fr ee b or n & P et er s’s st at e m en ts sh ou ld no t pr ev en t t he Co m pan i es ’ c r edi to r s f r o m pur su i ng ot h er w ise legit im at e c laim s a ga in st th e K n igh t e st at e. If th e law firm acted i m p rop erly, the ba nk r up tcy cou rt re aso ned, o therr em edi es w er e a vai l ab le that w oul d not i m pose such a hardshi p on the es tat e’ s cr edi tor s. O n a p peal, the dist ri ct c ourtaffi rm ed. S ee Knightv. Ban k of Ame r i c a, N. A. , 201 1 W L 50 08 52 8, at *2-4 (N .D . Ill. Oct. 18 , 20 11)
. Even i fthe bankru p tc y c ourthad not ex p li citly ad d ressed allthe j ud ic ia l estop p el f acto rs id en tifie d inNe w H am ps hi r ev. M ai ne, 532 U
. S. 742 (2001), no th i ngr equi r ed th e cour t to do s o . The he ar i ng tr anscr i pt sat i sfi ed the d ist rict co urt that the b ankr up tcyN o. 11

- 3588 9

cour t had co nsi dered the e quit i es i n w ei ghi ng wh ether to ap p ly th e d oc tr in e o f j u d icia l es to p p el. K n igh t a p p ea ls that deci si on o f the dist ri ct c ourt
. W e hav e j uri sdic ti on un d er 28 U
. S. C

. § 158(d )( 1).

II. K night’s Standing t o O bje ct Befo re pro ceedi ng to the m er i ts, we m ust a dd re ss a th r es ho l d i ss ue : Kni g ht ’ s st an di ng . The trus te e an d the Bank p o i nto uttha t th e Ban kwoul d s ee kr ec o ve r y o n the D& O c l ai m s onl y f ro m K ni ght’ s i nsurer and n ot from Kn i g h tp er so na l l y . T h e y a r g u e , th e r e f o r e , th a tth e D &O cl ai m s were not actual l y a dvers e to K ni ght’ s e sta te. Acco r di ng l y, the y co nt en d th at Kni g ht m ayl ac ks ta ndi ng to obj ect to the ass i gnm ent of the cl ai m s. In res ponse, K ni ght points o ut thatthe i nsurance pol i cy w oul d not ne ce ss ar i l y c o ve r a l l o fhis p oten ti all i ab i l i tyo n the D& O cl ai m s f or t w o re aso ns. The pol i cy i s a “wasti ng” pol i cy w i th a l i m i t o f$5 m i l l i on o n c om b in ed defe nse an d i nd em n ification costs , and the p oli cy ex clud es cove rage f ori ntenti onalfra ud u lent acts , wh i ch have been al l ege d as par t o fthe D& O cl ai m s. Bankruptcy s tandi ng i s nar ro w er than c onst i tuti onal stan d ing an d requ ires th at a p erson “h ave a pec un iary i nter estin the o utcom e o fthe bankr up tcy proce edi ngs .” Cul tAware ne s s Ne t work, Inc . v. M ar t i no , 15 1 F
. 3d 6 05, 60 7 ( 7 th C i r . 1 9 9 8 )
. T h e p r o s p e c t th a t th e D& O c l a i ms mig ht not be ent irel y d ischa rged , at least to the ex ten t the y are base d on fra ud , i s s uffi ci ent to gi ve K ni ght s tandi ng her e. Se e, e . g. , 11 U
. S. C. §§ 523( a) ( 2) , ( 4) , ( 19) ( excep tio ns to10 N o. 11

- 3588 d ischa rge i n ba nk rup tcy). H e f a ced the p rosp ect of personall i abi l i ty on s om e o fthe cl ai m s. W e al so r ej ec t th e ba si c prem i se o n whi chthe s t a n d i n ga r g u me n ti s b a s e d , s p e c i fi c a l l y, th a tth e D &O cl ai m s were not “adver se” to K ni ght b ecause theyco uld be ult i m ate ly c ov er ed by l i abi l i ty i nsurance. The cas es on w hich the tru stee an d the B an k rel y for t h is p oint are i na ppo si te
. W e st at ed i n IBM v . F e r ns t r om St or agean d Van C o ., th a tp e r mi t t i nga c r e d i t o rt o s e e kr e c o v e r y fr o m a d ebtor’s insu rers “w il l ne ither d ep lete th e d ebtor’s ass ets o r othe rwis e inter fer e with th e a dm i ni str ati on o f th e b a nk r up t c y p r o c e e di ng, n o r h i nd e r the de b t o r ’ s f re sh sta rtatthe clo se o fthe proce edi ng. ” 9 38 F. 2d 731, 73 4 (7t h C ir. 19 91 ) (cr ed ito rs w h o d id n otfile p ro ofs of cla im i n a de bt o r ’ s ba nk r upt cyc as e were free to pur su e cl ai m s ag ains t deb to r ’ s i ns ur er s)
. And, i n In re Sh o nd el , 950 F. 2 d 1 3 0 1 , 1 3 0 4 , 1 3 0 7 ( 7 th Ci r . 1 9 9 1 ) , we he l d tha t a pla i nti ffco uld pro ceed with a wrongfuldeath a cti on agains t a de btor after disch arge, in sp ite ofthe d eb t or’s in te re s t i n a “fre sh st ar t,” be c au se an y re c ov er y w ou ld com e fro m the d eb to r’ s a utom obi l e l i abi l i ty i nsurance. Se e a l so He ndr ix v . Page, 98 6 F
. 2d 195, 19 7 ( 7th Ci r. 19 93) (c olle c tin g c as es an d n ot in g t h at co u rt s a re n ea r l y u n an im ous in hol ding that a pos t-d ischar ge i nj uncti on does not extend to suits in which r el i efi s s ought onl y a gai nst debtor ’ s insurer ; such s uit s do not cre ate a “pers onal li abili ty of th e d ebtor” ) (i nt e r n al ci tations om itted ). B u th e r e , th e r e w a s a s t r o n gp o s s ib i l i t y th a ta tl e a s ts o me of the D & O clai m s w ou ld n ot be d isch a r g e d i n K nigh t’s perso nal bank ruptcy. A ccor dingly, thes e pr ecedents d o n o t s u p p o r t th e c o n t e n t i o n th a t th e D &O c l a i msN o. 11

- 3588 11

wer e no t adv er se t o Kni g ht

. N or d o the y e xc us e th e f ai l ure to i denti fy the D& O c l ai m s, ass er ted by tr u ste e C h a t z , r e p r e s e n t e d b y F r e e b o r n & P e t e r s , as c l a i ms adv er se t o Kni g hta t ev er y a ppr o pr i at e tu r n. Forthe se r easons, the f act that the Bank i ntended to se ek p ay m en t u n d er K n igh t’s liab ility ins u ra n c e s h ou ld not have been consi dered bythe b an kr up tcy cour t o r the di str i ct c ourtin asses si ng the effect ofthe om i ssi on of t h e D & O cla im s fro m th e t ru st ee ’s d i s c los u re s in the r ete nti on m ot i on. H owever, bo th co urts co nsi dered th e i m pac t o fK night ’ s l i ab i l i tyi ns ur an ce o nl y i n the al ter nati ve. S ee Knight, 2 0 1 1 WL 5 0 0 8 528, a t* 5 ; S up p. A pp x. 5 ( bankr up tcy cour t desc ribi ng i nsuranc e cover ag e as a “m i nortwis t” that m i ght o r m i ght no t m ake a di ffer ence)
. A ccor dingl y, an y err ori n doi ng so was ha r m l es s. W i th st an di ngs ec ur e, a nd wi th o utc o nsi der i ng Kni g ht ’ s i ns ur an ce c o ve r ag e, we tu r n t o the m er its of h is a p p ea l an d th e is su e o f j u d icia l es to p p el.

III
. Jud icia l E stop pel J udici al e st o ppeli s a m at te r o fe qui tabl e j udg m en t an d discret ion, an d w e review the ba nk rup tcy cou rt’s de c i s i o n f o r a n a b us e o ftha tdi s c r e t i o n. S e e Wiese v
. C om m unity Bank o

f C ent ral Wis consin , 55 2 F
. 3d 584, 58 8 (7t h C ir. 20 09 ); C o m m o nw eal th Ins. C o . v. Tita n Tire C o rp . , 39 8 F.3 d 879, 88 7 ( 7th Ci r. 20 04)
. “[ A ] co urt abuses i ts discre ti on wh en i ts deci si on i s pre m i sed o n an i ncor re ct l ega l pri nci ple o r a cl ear l y e rr oneo us f actualfi nd i ng, o r when th e r ec o r d c o nt ains no e vi den ce on whi chthe cour t r ati onal l y coul d have re l i ed. ” Corp or at eAs s e t s , Inc . v.12 N o. 11

- 3588 Paloi an , 3 68 F
. 3d 76 1, 767 (7th Ci r . 2 00 4)
. W e fi nd tha t th e b an kr u p tc y cou rt p ro p er ly ex er c ise d its d isc re ti o n in rej ecting Knight’ s theor y a nd i n re fusi ng to i nvoke th e do ct r i ne o fj udi ci ale st o ppel t o pr ec l ude a ss i g nm en t ofthe D& O cl ai m s a gai nst Knight to the Bank. I n N e w H am ps hi r ev. M ai ne, 532 U
. S. 742 (2001), the S up re m e Cour t obser ved thatthe sta nd ar d fo r i nv o k i ngj udici ale st o ppeli s “n o t r edu cibl e to a ny gener alf or m ulatio n ofpri nci ple , ” but re cogni zed thr ee f a c t o r s tha t “ t y pi c a l l y i nfo r m the de c i s i o n whe the r to apply the doct ri n e in a parti cul arcas e. ” Id

. at75 0 ( i ntern al quotati on o m i tte d). Those f acto rs ar e fi rs t, that “a pa r ty ’s l at erpo si ti o n mustb e cl ea r l y i nc o ns i st en t w i th i ts ear l i erposi ti on; ” s eco nd , that“the par ty has su cce ede d i n pe r su adinga c o ur t to a cc epttha t par ty’s ea r l i erpo si ti on, so tha t j udi ci ala cc ept an ce o fa n i nc o nsi stent p osi ti o n i n a l at erpr o ce edingwoul d c r ea te the perce pti on that e i therthe fi rs t o r seco nd co urt w as m i sl ed; ” an d thi r d, tha t “the pa r tys ee k i ng to as se r t ani nc o nsi ste nt posi ti on would deri ve an u n fairadvantag e o r i m pose an unfa i r detri m en t on the opposi ng par ty i fnot est opped.” Id

. at 750-51 (i nt erna l qu otations om itted ). W e reject K nigh t’s argu m en t t ha t t he ban krup tcy cou rt’s f ai l ure to m ar ch thr ough the N e w H am ps hi r e v . M ai ne fa c t o r s one by one w as error i n itself. Th ese factors are no t a r i g i d t es t th atmustb e ap p li ed ev er y t i m e th e issu e of j ud ici al estop p el i s raised, but rather are g en eral g ui depo st s th atmustb e co ns i der ed i n the conte xt o fallthe re l evantequi ti es i n any gi ven ca se. S ee Bis e k v. So o L i neR. R. Co. , 44 0 F
. 3d 410, 413 (7 th Ci r. 20 06)N o. 11

- 3588 13 (re fu sin g to in vo ke j u d icia l es to p p el, w ith o u t ex p licit ly r el y i ngo n N ew Ha m psh ire v. M a ine f acto rs , w here d octr i ne would r en d er an inequit abl e r esul t by“l and[i ng] an oth er blow ” on ba n k rup t’s cred itors, w ho w ere victim s of his ban krup tcy fraud ). Returni ng to the N e w H a m pshirev. M ai nef acto rs , K n igh t a tt em p ts to sh ow th at th e t ru st ee to ok “c lea rly i nc o ns i st en t” po si ti o ns i n the r et en ti o n appl i ca ti o n a nd the a ssi gnm ent m oti on. S peci fi cal l y, he argues that Ch atz’ s a pp l i cati on t o re tai n Fr eebo rn & Peter s v i ol ate d 11 U
. S. C. § 3 27( a) a n d FederalRule o fBankruptcy Pro

cedure 2014 (a). Se cti on 3 27( a) per m i ts the t rust ee to re tai n att or neys “thatdo noth old o r re prese nt an i nter est advers e to the est ate , and that ar e d isinte re ste d perso ns. ” S ee, e. g., K ra v i t, Ga ss & Weber, S.C . v. M ich el (In re C ri vell o ) , 13 4 F
. 3d 831, 83 5- 36 ( 7th Ci r. 19 98) ( defini ng the phrase “ho l d orr epres ent a n i nter est advers e to the est ate ”) ( col l ecting case s)
. Ru le 2 014(a ) f aci l i tat es enf or cem ent o f s ec tio n 327 ( a) by r equi ri ng tha t profess i onal s s eek i ng to r epres ent the tr uste e in a bankr upt cypr o ce eding su bm i t a ve r i fi ca ti o n tha t ful l y a nd br o adl y di sc l o se s “the pe r so n’ s conn ect i o ns wi ththe deb to r, c r ed itors, [ o r ] a ny o th erpa r tyi n i nt er es t, ” among ot h er s. Se e F ed . R. B an kr . P. 20 14 (a); In re G luth B roth ers C onstr ucti on, Inc. , 4 59 B .R
. 35 1, 36 4 ( Bankr. N
. D. I l l

. 20 11) ( des cr ibi ng“ co nne ct i o ns ” th atmustb e di sc l o se d pur su an t to Rul e 20 14 ( a) a s “c o ns i der ab l y b road er ” th anthe disc l os u re s r equi re d fo r sect i on 3 27( a) )
. Fo r pu rpos es ofKn i ght’ s a pp eal, though, hi s a rgum ents on the m er i ts of t h o se rules an d the p reced en ts ap p lyi ng them are b es id e t h e p oin t.14 N o. 11

- 3588 I fa nyv i o l a t i o ns o fe i the r s e c t i o n 3 2 7 ( a ) o r R ul e 2 014( a) occu rred , t h e y occu rred w ith th e Freeborn & Pete rs re tenti on a p pli cati on. The o rdergr anti ng tha t a pp l i cati on was ente re d i n M ay 2010
. Pursuant to Bank ruptcy Rul e 80 02 ( a) , Kni g htha d f o ur te enda y s to fi l e an y appeal from thato rder, and that deadli ne has l ong si nce passed. S ee Fed . R. Bankr. P. 80 02( a)
. Kn i ght insi sts that he h a s n o t a p p e a l e d th e b a n k r u p t c y c o u r t ’ s g r a n t o ft he F r eebo r n & Pe te rs r et en ti o n a ppl i ca ti o n, o nl y i ts g r an t o fth e a s s i g n me n to r d e r . B u t, h a v i n ga p p e a l e d o n l y t he ass i gnm ent o rder, any i ssues r el ati ng t o the di scl osur es m ade ornotm ade duri ng the r ete n tio n appli cati on p ro c es s a r e o n ly ta n ge n tia l. T h e q u es tio n be for e u s is w h et h e r t h e b an kr u p tc y c ou rtab u se d its d isc re tio n in re fusi ng to fi nd the tr ustee ju dici al l y e sto pp ed fro m pu rs uingth e D& O cl ai m s, not, as Kn i ght c onte nd s, whe the r the di s c l o s ur e r ul e s we r e a c t ua l l y v i o l a t e d. Kni g hta r g ue s tha tb y a s s e r t i ng in t he r e t e nt i o n a ppli cati on t h at Fr eebo rn & Peter s was a “dis i nter est ed perso n, ” Chatz effecti vel y di savow ed the exi ste nce o f the D & O c l ai m s a gai nst Knight, and that i t was the n “c l ea r l y i nc o ns i st en t” t o s eek lat ert o a ss i g n tho se aba ndoned D & O cl ai m s t o th e Bank. H e cl ai m s that these “cl ear l y inconsi ste nt” posi ti ons supp or t hi s desi re d r emedy : the i m po si ti o n o fj udi ci ale st op p el to b ara ny p urs uit of the D & O claim s. I t is tru e th at Freeborn & Pete rs and C hatz f ai l ed to di scl ose expl i c i tl y the co nti nued e xi s tence ofthe D&O c l a i ms i n the r e pr e s e nt a t i o n a ppl i ca ti o n

— a re gr ett abl e l ap se , forthe om i ssi on has re sul ted i n thi s un n ec ess ar y l i ti gat i on. But, i t i s a l so t r u e th a tC h a t z n e v e r e x p l i c i t l y d i s a v o w e d th e D &ON o. 11

- 3588 15 cl ai m s o r e xpr es se d a ny int en t to aba ndo n the m a t an y ti m e be f o r e, dur i ng, o r a fte r the r et en ti o n a ppl i ca ti o n. The cour t, Kn i ght, and al l otheri nter est ed parti es par ticipat i ngi n the pr o ce eding s atthe t i m e o fthe re tenti on a pp l i cati on were aw ar e o fChatz’ s dual ro les , of Fre eb or n & P et er s’s rep re se n ta tio n of C h at z in each o ftho se ro l es, and ofthe continu ed exi ste nce o f th e D &O cl a i ms . T h e c o u r th a d t a k e n n o t e o fth e c l a i ms i n i t s o pi ni o n t r a ns fe r r i ngKn i g ht ’ s p e r s o na l b a nk r uptcy case to the N or ther n Dis tr i ct o f Illin ois, se e In re K nightC elo tex , 4 27B. R. a t 70 1, a nd Kni g htha d l isted the D& O cl ai m s on h i s ba nkruptcy schedule s. Trust ee Ch atz ha d t ak enno ne o fthe st eps ne ede d t o aba ndo n the cl ai m s bythe Com panie s’ es tat e. K n igh t a s s e rt s o n ap p ea l th at h is c ou n se l “e x p re ss ly so ug htc o nfi r m at i o n a t th e Re te nt i o n a ppl i ca ti o n h ea r i ng th at [Fre eb or n & P e t e r s ] w as , in fac t, d isin te re st ed , in o r dert o c o nfi r m tha t Cha tz ha d de ci ded not to pur su e the D& O cl ai m s a gai nst Knight. ” Thi s a sse rt i on i s be li ed b y the t ra nscri pt. W hat Knight’ s co unsel was see ki ng in hi s exc ha ng e wi ththe c o ur t was l es s th anc l ea r, a nd w hatev er he sought, he hardl y sought i t “expres sly .” See A p p x. 97 (“Th ere’s no obj ection
. . . . Iw as cu rious, Idid n’t se e i n her e where counseli nd i cate d he r epres ented M r . Cha tz a s to hi s ca pac i tya s co r po r ate t r us te e. But since w e all kn ow th at’s th e case . . . I d on’t t h in k th at’s a p roblem that i t w as om itte d .” ). H e plainly w as aw are o fF r eeborn & Pe te r s’ s r o l e as Cha tz ’ s co uns eli n the Com panie s’ bank ruptcy, and he r ai sed no obj ecti on to th e fi rm ’s du al r ep resen t a t io n. N o resp ons e to K nigh t’s16 N o. 11

- 3588

I f an as s et i s “bur dens om e” or of “i nc ons equen t i al val ue, ” the 4 t rustee m ay aba ndon pro per t y a ft erno t i c e and a he ar i ng under 11 U
. S. C. § 55 4( a)
. No not i c e was gi venor he ar i ng held, an d a t that s tage the D & O cl aim s could not have been d ee m ed “b u rd en so m e” o r o f “i n co n se q u en tia l v a lu e.” counsel ’ s no n-obj ecti on was r equi red. W e wil l not c o n s t r u e th e t r u s t e e ’ s s i l e n c e r e g a r d i n g th e D &O c l a i ms at thi s m om ent o fthe re tenti on a pp l i cati on hea ri ng as an aba nd onm ent o ftho se cl ai m s. I t defie s be l i efto thi nk tha t the tr ustee would have aba nd one d a poss ibl e m ultim il li on d oll ar rec overy o n b e h a l fo fth e C o mp a n i e s ’ c r e d i t o r s w i th o u ta w o r d, w i thout c om p l yi ng with the s tatutor y pr oce du re s f or ab an d on in g p ro p er ty , an d p ro b ab ly in vio lat io n o f h is du ti es as tr ustee. I fKn i ght r eal l y thought that r e- 4 tainin g F re ebo rn & Peter s in the i nd i vi du albank

ruptcy w as i n c on sis tent w i th pursui t o fthe D& O cl ai m s, he had am ple o pp or tuni ty to ra i se the i ssue explic i t l y at the ti me o fthe r e t e nt i o n a pp l i c a t i o n. He c ho s e i ns t ead to seta tr ap to be sprung w h en the tr ustee at tem pted to p urs ue or assign the D & O clai m s . U n d e r thes e circ um sta nces, the bankr up tcy cour t di d not abuse i ts discr et i o n b y fi ndi ngtha t the trus te e an d F r eebo r n & P et er s had notdone a nythi ng “c l ear l y inconsi ste nt” with the t rust ee’ s l ate r m oti on t o ass i gn the D& O c laim s t o th e Ba nk

. W e the r e f o r e a g r e e wi th the di s t r i c t c o ur tthat th e o m iss ion of ex p re ss refe re n c e t o t h e D & O cla im s in t h e r e t e n t i o n a p p l i c a t i o n mo t i o n w a s , o n th i s r e c o r d, at m osta harm l ess vio latio n ofthe disc l osur e obl i gatio n s o f se c tio n 32 7(a ) an d R u le 2 01 4(a ). I t c er ta in lyN o. 11

- 3588 17

w as n ota fou n d at ion for jud icia l es to p p el t o b a r p u rs u it ofthe cl ai m s. W e al so fi nd no s uppo r t i n th e r ec o r d f o r the r emai ni ng tw o N ew Ha m psh ire v. M a ine con side ration s. T he record does not supp or t the co ncl usi on that the t rustee orFr eebor n & Pete rs succe eded i n “per suading ” the bank ruptcy cour t t o accept t h e concl usi on that the Com panie s’ es tat e was aba ndo ni ngi ts D&O cl ai m s ag ains t Kni g ht

. The b a n k r u p t c y c o ur tn e v e r s u g g e s t e d i tv i e we d th e D &O cl ai m s a s aban d oned o r that i t had be en m i sl ed. S ee N e w H am ps hi r ev. M ai ne, 53 2 U. S

. a t 75 0. The i ss ue s i mpl y di d n o tc o me up . Si m i l arly, nothi ng i n the re cor d sugges ts that Ch atz, as t r u s t e e o f th e C o mp a n i e s , s t o o d t o d e r i v e a n u n f a i r a dvantag e o r i m pose an unfa i r detri m ent o n K ni gh t i fnot est opped. Se e id

. a t 75 1. Kni g htc o nt en ds th atthe a ss i g nm en t o r derf o r ce d hi m t o defend hi m se l fi n the D& O l i ti gat i on a nd put hi s e l i gibi l i ty f ora disc harg e i n qu e s t i o n, an d th a tth e e x i s t e n c e o fth e D &O c l a i ms “has casta consi derabl e pal l ” o verhi s pos t-bankr up tcy “fre sh s tart. ” W e a gr ee w i th the di str i ct c ourtthat K ni ght c oul d not hav e r eas onabl y b el i eve d that Chatz i nt en ded to aba ndo n s o c asu al l y the D&O cl ai m s an d th e m i l l i o ns o fdo l l ar s th atthe y c o ul d b r i ngi nt o the C om p a n ies ’ es ta te . Th e p ro sp ec t t h at K n igh t w ou ld h a v e to d e fe n d h i ms e l fa g a i n s tp o t e n t i a l l y v a l i d c l a i ms do es no t amoun t to e i th era n “u nfai r a dva nt ag e” t o the tr u st ee or th e C om p an ies ’ es ta te , or an “u n fair d e t rim ent” to K ni ght. E v e n i f we a s s u me f o r th e s a k e o f a r g u me n t th att he F r eebo r n & Pe te r s r et en ti o n a ppl i ca ti o n v i o l ated the18 N o. 11

- 3588 disc l osur e r equi re m ents of11 U
. S. C. § 3 27( a) and that th e fi r m s h o u l d h a v e be e n p r e c l u d e d fr o m i t s s i mult aneous re prese n ta ti on o fChatz in hi s dual tr ustee ro l es, i t was ent i re l y a pp ro pri ate f orthe bankr up tcy cour t t o consi der the f act that the b ankr up tcy code provi des a s ta tu to r y r emedy

. S ec ti o n 3 28 ( c) pe rm its the ban kr up tcy cour t t o deny profess i onalco m pensati on to a per son w ho has bee n re tai ned und erse cti on 3 27 i fi t i s det er m i ne d tha t th atpe r son is no t ac tu al l y di sinter est ed or“r epres ents orhol ds an in ter estadver se to the inter esto fthe est ate with r espec t to the m att ero n whi chs uchpr o fessio na l pe r so n i s empl o y ed. ” Kni g ht com pla i ns that thi s sancti on w oul d no t pr ov id e h i m w i th ane ffec ti ve r emedy f o r the t r us te e’ s a nd F r eebo r n & P e t e r s ’ s l a c ko fd i s c l o s u r e . ButKn i g h th a s n o ts h o wn th at h e s h ou l d be en tit led to an y re m ed y a t a ll. E ve n if w e p u t a sid e t h e fa c t t h at h e an d h is c ou n se l w er e fu lly aw ar e o fthe re l evantf acts , Kn i ght ha s no t sh own how he suffer ed any i nj ury by p u rs uito fthe D& O cl ai m s o r the hi ri ng o fFr eebo rn & Peter s o r the t rust ee. The bank

rup tcy cour t pr oper l y r ej ecte d K ni ght’ s j ud i ci ales toppel theo ry .
Concl us i on L ike the ban krup tcy cou rt and t h e d istri ct cou rt b efo re u s, w e fin d th at th e la rg er eq u itie s a t s ta ke in thi s m att ersuppo rt ed the bankr up tcy cour t’ s r efusalto i nv o k e the do c t r i ne o fj ud i c i a l est o pp e l

. Onthi s r e c o r d, th e o m i ss i o n o fthe D&O cl ai m s f r o m the F r eeborn& P et er s re te n tio n ap p lica tio n p ap er s w as a re gr et t a b leN o. 11

- 3588 19

m i sta ke thatl ed to thi s unneces sar y l i ti gat i on. That o m i ssi o n, h o we v e r, di d n o twa r r a ntKn i g ht ’ s a t t e mptt o f or eclose pu rsu it of the D & O clai m s altogeth er. A lli nt eres te d p ar tie s w er e a w ar e o f th e p er tin en t fa c ts , sp ec ifica lly of Ch atz’ s du al ro l es as tr ustee i n the Com panie s’ b an kruptcy and trust ee i n K n i ght’ s per sonalbank ruptcy, o f Fr eebo rn & Peter s’ s r epres entat i on ofChatz in both o ftho se r o l es , a nd o fthe e xi st en ce o f th e D& O cl ai m s. The o mi s s i o n o fa n e x p l i c i tr e fe r e n c e t o th e D&O c l a i ms i n the re tenti on a pp l i cati on was ther ef or e har m l ess . A ccor dingl y, ther e was no equi tabl e ba si s for the b ankru pt c y c o ur tt o i nv o k e the do c t r i ne o fj ud i c i a l e s t o ppel and to fi nd thatChatz abandoned the D& O cl ai m s, whi c h wo ul d pe r mi t Kni g ht t o e s c a pe up wards o f $34 m i l l i on i n potenti allia b ility

. Refusi ng to do s o w as a so und e xe r ci se o fthe b an k r upt cyc o ur t’ s di sc r et i o n. A FFI RMED .

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