Court Opinion

ID: 2788521
Source: CourtListenerOpinion
Date Created: 2015-03-23 19:01:02.104485+00
Date Added: 2024-06-11T13:23:33.395159
License: Public Domain

In the

         United States Court of Appeals
                       For the Seventh Circuit
                            ____________________  

No.  14-­‐‑8030  
PETER   METROU,   Trustee   of   the   Bankruptcy   Estate   of   David  
Matichak,  
                                                Plaintiff-­‐‑Appellant,  
                                           v.  

M.A.  MORTENSON  COMPANY  and  SCHUFF  STEEL  COMPANY,  
                                      Defendants-­‐‑Appellees.  
                            ____________________  

              Appeal  from  the  United  States  District  Court  for  the  
                Northern  District  of  Illinois,  Eastern  Division.  
                No.  11  C  9187  —  George  M.  Marovich,  Judge.  
                            ____________________  

        SUBMITTED  MARCH  2,  2015  —  DECIDED  MARCH  23,  2015  
                      ____________________  

        Before  FLAUM,  EASTERBROOK,  and  WILLIAMS,  Circuit  Judg-­‐‑
es.  
     EASTERBROOK,  Circuit  Judge.  David  Matichak  was  injured  
at   work   in   August   2009   and   filed   a   workers’   compensation  
claim.  Matichak  and  his  wife  filed  a  bankruptcy  petition  un-­‐‑
der  Chapter  7  in  September  2010;  he  disclosed  the  workers’  
compensation   claim   on   his   schedule   of   assets   and   valued   it  
2                                                                     No.  14-­‐‑8030  

at   $7,500.   The   bankruptcy   court   discharged   the   Matichaks’  
debts  that  December.  
     About   a   year   after   the   discharge,   Matichak   filed   a   tort  
suit   against   two   firms   that,   he   maintained,   had   contributed  
to   his   injury.   The   suit   sought   substantial   damages.   Defend-­‐‑
ants  asked  the  district  judge  for  summary  judgment,  observ-­‐‑
ing  that  Matichak  had  not  listed  any  tort  claim  on  his  sched-­‐‑
ule  of  assets  in  the  bankruptcy.  That  omission  bars  Matichak  
from  prosecuting  the  suit,  for  the  claim  belongs  to  the  Trus-­‐‑
tee  while  the  bankruptcy  case  is  open.  See,  e.g.,  Biesek  v.  Soo  
Line  R.R.,  440  F.3d  410  (7th  Cir.  2006).  We  added  in  Cannon-­‐‑
Stokes   v.   Potter,   453   F.3d   446   (7th   Cir.  2006),   that  a   debtor   is  
judicially  estopped  from  litigating  after  the  bankruptcy  ends;  
having   told   the   bankruptcy   court   implicitly   that   any   tort  
claim   had   no   value,   and   having   received   a   discharge   in   re-­‐‑
sponse,   the   debtor   is   estopped   from   contending   in   a   later  
suit   that   the   claim   is   valuable.   See   also,   e.g.,   Spaine   v.   Com-­‐‑
munity  Contacts,  Inc.,  756  F.3d  542  (7th  Cir.  2014).  
     In  response  to  the  defense  motion,  Matichak  notified  the  
Trustee,   who   reopened   the   bankruptcy   and   moved   to   re-­‐‑
place  Matichak  as  the  plaintiff  in  the  tort  suit.  This  is  the  ap-­‐‑
proach   we   had   contemplated   in   Biesek   as   the   appropriate  
way   to   deal   with   a   legal   asset   omitted   from   bankruptcy  
schedules.   The   district   court   allowed   the   substitution   but  
then   ruled,   in   response   to   a   further   motion   by   the   defend-­‐‑
ants,  that  the  Trustee’s  recovery  could  not  exceed  the  value  
of  the  debts  that  had  not  been  paid  in  2010.  In  other  words,  
the  district  judge  concluded  that,  although  Matichak’s  credi-­‐‑
tors  may  benefit  from  the  tort  suit,  Matichak  himself  cannot.  
     The  Trustee  asked  the  district  judge  to  certify  that  ruling  
for   an   interlocutory   appeal   under   28   U.S.C.   §1292(b).   The  
No.  14-­‐‑8030                                                                  3  

judge   did   so,   but   the   initial   order   omitted   the   findings   re-­‐‑
quired  by  that  statute.  (Section  1292(b)  permits  an  appeal  on-­‐‑
ly  if  the  district  judge  finds,  “in  writing”,  that  the  “order  in-­‐‑
volves  a  controlling  question  of  law  as  to  which  there  is  sub-­‐‑
stantial  ground  for  difference  of  opinion  and  that  an  imme-­‐‑
diate  appeal  from  the  order  may  materially  advance  the  ul-­‐‑
timate   termination   of   the   litigation”.)   In   response   to   a   re-­‐‑
minder,   the   judge   entered   a   proper   certification.   Within   ten  
days  the  Trustee  filed  a  motion  asking  for  our  permission  to  
appeal.  Defendants  maintain  that  the  request  is  jurisdiction-­‐‑
ally   late,   but   Fed.   R.   App.   P.   5(a)(3)   provides   that,   when   a  
district  judge’s  initial  order  lacks  essential  findings,  the  time  
runs  from  entry  of  a  revised  order  containing  them.  See  also  
Weir  v.  Propst,  915  F.2d  283,  287  (7th  Cir.  1990).  
     The  application  for  our  permission  to  appeal  therefore  is  
timely,   and   we   grant   permission.   The   district   court’s   ruling  
reduces   the   stakes   to   a   level   at   which   it   would   not   be  
worthwhile   financially   for   the   Trustee   to   pursue   the   claim.  
On   the   assumption   (which   we   must   indulge)   that   the   tort  
claim  is  valid,  cutting  the  maximum  recovery  to  the  amount  
of   Matichak’s   unpaid   debts   in   2010   would   injure   the   credi-­‐‑
tors   even   though   the   district   judge’s   target   was   Matichak  
himself.  Moreover,  the  question  the  district  judge  identified  
as  appropriate  for  review  is  one  on  which  there  is  no  appel-­‐‑
late  precedent  in  any  circuit.  
     The  district  judge  did  not  find  that  Matichak  deliberately  
hid  the  tort  claim  from  his  creditors  in  2010.  True,  he  did  not  
list  a  tort  claim  among  his  assets,  but  he  maintains  that  this  
was   because   he   thought   that   the   workers’   compensation  
claim   (which   he   did   list)   was   his   only   potential   source   of  
compensation.  Not  until  after  the  bankruptcy  had  ended  did  
4                                                                   No.  14-­‐‑8030  

his  lawyers  tell  him  that  he  might  be  able  to  recover  in  tort  
from   someone   other   than   his   employer.   Or   so   he   says.   The  
district   judge   did   not   hold   an   evidentiary   hearing   on   the  
subject,  and  we  therefore  must  assume  that  Matichak  is  tell-­‐‑
ing  the  truth.  
     The  district  judge  devised  a  categorical  rule  that  made  it  
unnecessary   to   decide   whether   Matichak   was   trying   to   de-­‐‑
ceive  his  creditors.  According  to  the  judge,  a  debtor’s  ability  
to   reopen   the   bankruptcy   and   turn   the   claim   over   to   the  
Trustee   expires   the   moment   defendants   in   a   later   suit   dis-­‐‑
cover  its  omission  from  the  bankruptcy  schedules  and  assert  
judicial  estoppel.  Otherwise,  the  judge  wrote,  debtors  would  
be  encouraged  to  conceal  their  assets  from  creditors,  because  
sometimes   (when   the   defendants   missed   the   problem)   they  
would  cut  out  the  creditors,  and  if  the  defendants  did  see  the  
problem  the  debtors  would  be  no  worse  off  than  if  they  had  
made   a   timely   disclosure   during   the   bankruptcy.   The   ques-­‐‑
tion  the  judge  certified  under  §1292(b)  is  whether  the  right  to  
turn   the   whole   tort   claim   over   to   the   Trustee   in   bankruptcy  
expires   as   soon   as   defendants   in   the   tort   suit   discover   the  
omission   from   the   bankruptcy   schedules.   (Although   we  
speak  here,  and  throughout,  of  a  tort  claim,  the  legal  issue  is  
the   same   for   all   kinds   of   claims,   be   they   tort,   contract,   em-­‐‑
ployment  discrimination,  or  anything  else.)  
     Debtors   could   gain   from   hiding   choses   in   action   only   if  
defendants  in  later  suits  rarely  inquire  whether  the  plaintiff  
passed  through  bankruptcy  between  the  time  the  claim  arose  
and  the  litigation  about  that  claim.  If  defendants  ask  routine-­‐‑
ly   about   bankruptcy,   as   they   have   a   powerful   incentive   to  
do,   then   the   omission   will   come   to   light.   Some   omissions  
will  be  culpable  and  should  be  punished,  if  that  can  be  done  
No.  14-­‐‑8030                                                                 5  

without   injuring   the   creditors   too.   But   other   omissions   will  
be   innocent—based   on   poor   communication   between   bank-­‐‑
ruptcy  counsel  and  tort  counsel,  or  based  on  a  belief  that  the  
tort  claim  will  not  be  valuable—and  should  not  be  punished.  
Matichak   contends   that   his   omission   is   among   the   innocent  
ones,   and   the   district   court   did   not   find   otherwise.   Instead  
the   district   court   adopted   an   approach   that   throws   out   all  
claims   omitted   from   bankruptcy   forms,   whether   or   not   the  
omission  was  culpable—and  even  if  that  will  injure  the  cred-­‐‑
itors  too,  by  reducing  the  stakes  to  the  point  where  the  suit  
must  be  abandoned  as  having  a  negative  value  (net  of  legal  
expenses).  
    Biesek  concludes  that  principles  of  judicial  estoppel  must  
not   be   applied   in   a   way   that   injures   innocent   creditors   as  
well   as   culpable   debtors.   We   now   add,   what   should   have  
been   apparent,   that   debtors   who   make   innocent   errors  
should   not   be   punished   by   loss   of   their   choses   in   action  
when  they  turn  the  claims  over  to  the  Trustees.  When  as  in  
Cannon-­‐‑Stokes  a  debtor  stubbornly  tries  to  cut  out  the  credi-­‐‑
tors,  then  the  claim  is  gone  forever.  But  a  debtor  who  errs  in  
good   faith,   and   tries   to   set   things   right   by   surrendering   the  
asset   to   the   Trustee,   remains   entitled   to   any   surplus   after  
creditors   have   been   paid,   just   as   would   have   occurred   had  
the  claim  been  disclosed  on  the  bankruptcy  schedules.  
     The  Trustee  is  entitled  to  pursue  this  litigation  as  an  asset  
of  the  estate  in  bankruptcy.  Whether  or  not  Matichak  should  
have   disclosed   the   claim   in   the   bankruptcy   does   not   matter  
to  a  suit  maintained  by  the  Trustee,  who  is  not  even  argua-­‐‑
bly  culpable  for  any  misconduct.  Reducing  the  stakes  in  the  
tort  suit  could  injure  the  creditors  along  with  the  debtor.  
6                                                                  No.  14-­‐‑8030  

    Whether   Matichak   tried   to   hide   the   claim   in   the   bank-­‐‑
ruptcy   is   a   question   more   appropriately   addressed   to   the  
bankruptcy  judge,  who  can  decide  (if  the  Trustee  prevails  in  
this  tort  suit)  what  disposition  to  make  of  any  proceeds  that  
remain  after  paying  counsel  and  the  creditors.  Allowing  the  
tort  suit  to  proceed  without  a  damages  cap  will  ensure  that  
the  creditors  receive  their  due—for  the  full  stakes  will  allow  
the   Trustee   to   hire   counsel   to   take   the   suit   on   a   contingent  
fee.   If   it   turns   out   that   Matichak   was   trying   to   deceive   his  
creditors,  the  bankruptcy  judge  may  decide  to  give  the  credi-­‐‑
tors  a  bonus,  or  perhaps  to  return  any  excess  to  the  defend-­‐‑
ants  in  this  tort  suit.  Either  way,  the  creditors  will  escape  in-­‐‑
jury  at  Matichak’s  hands  because  it  will  remain  economically  
feasible  to  prosecute  the  tort  suit.  
    The   application   for   leave   to   appeal   is   granted,   and   the  
district  court’s  decision  is  reversed.  (The  papers  filed  in  con-­‐‑
nection  with  the  application,  supplemented  at  our  request  by  
memoranda  addressing  two  additional  questions,  make  fur-­‐‑
ther  briefs  unnecessary.)  The  case  is  remanded  for  proceed-­‐‑
ings  consistent  with  this  opinion.