Dailey v. Smith

THIRD DIVISION
SEPTEMBER 3, 1997

No. 1-94-4387

MICHAEL DAILEY,

Plaintiff-Appellant,

v.

RICHARD SMITH, JOHN BITTNER, and PLASTIC
FILM CORPORATION, INC., an Illinois
corporation,

Defendants-Appellees.)
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)Appeal from the
Circuit Court of
Cook County

Honorable
Thomas P. Quinn,
Judge Presiding.


JUSTICE LEAVITT delivered the opinion of the court:
Plaintiff Michael Dailey sued the defendants Richard Smith,
John Bittner, and their company, Plastic Film Corporation (PFC),
for profits allegedly owed plaintiff as a result of an oral
partnership agreement with defendants. A jury returned a verdict
in favor of plaintiff and against defendants Smith and Bittner for
$288,000. The trial court granted defendants' motion for judgment
notwithstanding the verdict, and plaintiff now appeals. We affirm.
In July 1982, plaintiff founded Overlay Systems (Overlay), an
Illinois corporation, through which he intended to create a line of
decorative wall covering designs. Plaintiff's wife, mother-in-law,
and a friend were shareholders in plaintiff's corporation.
Plaintiff was the president of Overlay and operated the business
out of his own home.
Plaintiff alleged that in October 1982, he entered into an
oral "partnership" with defendants Smith and Bittner, who ran and
operated PFC. Basically, plaintiff alleged that the three
"partners" agreed to buy customized vinyl from one party, resell it
for profit, and then split the profits in thirds. Plaintiff
alleged he never received his share of profits from defendants and
that, as a result, he was forced to seek bankruptcy protection.
In September 1986, plaintiff filed for bankruptcy in the
United States Bankruptcy Court for the Northern District of
Illinois. In his bankruptcy petition, plaintiff did not list the
instant claim against defendants, and he denied having any interest
in any partnership at the time. In June 1988, a "Finding of No
Assets" was entered, and the bankruptcy trustee was dismissed.
Plaintiff filed his "Amended Complaint for Accounting and For
Other Relief" in this matter in May 1988. Following a trial in
February 1994, a jury awarded plaintiff $288,000. Defendants then
made a motion for judgment notwithstanding the verdict, arguing,
among other things, that plaintiff lacked standing to assert his
claims following the bankruptcy action and that he was otherwise
judicially estopped from now asserting the claims that he had
earlier failed to disclose to the bankruptcy court. The trial
court granted defendants' motion.
A motion for judgment non obstante veredicto (n.o.v.)
should be granted only where all of the evidence, when viewed in a
light most favorable to the opponent, so overwhelmingly favors the
movant that no contrary verdict based on that evidence could ever
stand. Pedrick v. Peoria & Eastern R.R. Co., 37 Ill. 2d 494, 510,
229 N.E.2d 504 (1967); Chicago Title and Trust Co. v. Brescia, 285
Ill. App. 3d 671, 679, 676 N.E.2d 230 (1996). We review de novo
the granting of a judgment n.o.v. City of Mattoon v. Mentzer, 282
Ill. App. 3d 628, 633, 668 N.E.2d 601 (1996); Arellano v. SGL
Abrasives, 246 Ill. App. 3d 1002, 1009, 617 N.E.2d 130 (1993).
We agree with the trial court that, under the principles of
standing and judicial estoppel, the jury's verdict could not have
been allowed to stand. Plaintiff clearly did not have standing to
bring the instant claim against defendants, in light of the prior
bankruptcy proceedings. The filing of a bankruptcy petition is an
assertion of the jurisdiction of the bankruptcy court over all the
assets and property of the alleged bankrupt. Wright v. Abbott
Capital Corp., 79 Ill. App. 3d 986, 990, 398 N.E.2d 1147 (1979).
Section 541 of the Bankruptcy Code broadly defines what property
belongs to the bankruptcy estate as "all legal or equitable
interests of the debtor in property as of the commencement of the
case." 11 U.S.C.  541(a)(1) (1986); Aspling v. Ferrall, 232 Ill.
App. 3d 758, 762, 597 N.E.2d 1221 (1992); Koch Refining v. Farmers
Union Central Exchange, Inc., 831 F.2d 1339, 1343 (7th Cir. 1987).
The reach of this section is extensive; section 541 has been found
to encompass "every conceivable interest of the debtor, future,
non-possessory, contingent, speculative, and derivative ***." In
re Yonikus, 996 F.2d 866, 869 (7th Cir. 1993). See generally In re
Plunkett, 23 B.R. 392, 393-94 (Bankr. E.D. Wis. 1982) (explaining
the broad reach of section 541 and Congress' reasons for
expansively defining the bankruptcy estate of a debtor). The
preceding principles apply regardless of whether the bankruptcy
petitioner has scheduled the property or assets. Once a debtor
files for bankruptcy, any unliquidated lawsuits become part of the
bankruptcy estate, and, even if such claims are scheduled, a debtor
is divested of standing to pursue them upon filing his petition.
See Wright, 79 Ill. App. 3d at 990; Hammes v. Brumley, 659 N.E.2d 1021, 1025-26 (Ind. 1995) (holding that in such cases suit must be
brought by the bankruptcy trustee).
In Wright, the plaintiff brought a derivative suit on behalf
of T-O-W Industries against various corporate and individual
defendants, including T-O-W. The plaintiff alleged breach of a
fiduciary duty and commission of constructive fraud by the
defendants, as well as malicious interference with the plaintiff's
rights under an employment contract. Wright, 79 Ill. App. 3d at
989. The trial court found the plaintiff lacked standing to bring
his claims, since he had earlier filed for bankruptcy and had been
adjudicated bankrupt. On appeal, the plaintiff did not contest the
general proposition that filing a bankruptcy petition relieved him
of standing to pursue his claims. Rather, he argued that he did
have standing in light of the fact that a trustee was never
appointed in the bankruptcy proceedings. Wright, 79 Ill. App. 3d
at 989. The Wright court rejected this contention and held the
plaintiff lost his standing to pursue his claims when he petitioned
for bankruptcy. The court found, even in the absence of a trustee,
that the plaintiff was divested of his interest in the claims, as
the claims became in custodia legis when the petition was filed.
Wright, 79 Ill. App. 3d at 990.
Similarly, plaintiff in the present case was divested of
standing to pursue his claims against defendants at the moment he
filed his petition for bankruptcy in September 1986. Plaintiff
does not contest the fact that the claims which he now pursues were
in existence at the time he commenced the bankruptcy proceedings--
he admits that his claims should have been disclosed but blames his
failure to disclose them on his reliance on the advice of his
bankruptcy counsel.
Plaintiff's attempt to avoid the standing deficiency by
claiming reliance on advice of counsel does not avail him. We
first note that plaintiff fell well short of proving that his
bankruptcy attorney ever advised him not to disclose the present
claims. Although she could not remember plaintiff at trial,
plaintiff's former counsel testified that she would have listed
plaintiff's "partnership" and claims against defendants on his
bankruptcy schedules had she been informed of them. Further, she
testified it would have been "unthinkable" for her not to include
such information, since knowingly failing to include it would have
amounted to aiding and abetting a fraud upon a tribunal, for which
she could have lost her license. Regardless, the failure to
schedule a claim in bankruptcy (as well as the reasons for such
failure) can have no relevance to the bankrupt's standing to bring
a subsequent claim. Once a bankruptcy petition is filed, all
claims belong to the estate, and the bankruptcy trustee alone has
standing to pursue them. See generally 8A C.J.S. Bankruptcy  27
(1988) ("No one other than the [bankruptcy] estate representative
has standing to pursue the estate's causes of action ***"); 8A
C.J.S. Bankruptcy  117 (1988) (noting that "[a]ll claims and
causes of action held by the debtor at the commencement of the case
are included in the [bankruptcy] estate" and that "[w]hen the
estate acquires a cause of action from the debtor, the cause of
action no longer belongs to the debtor ***" and may be dismissed
for lack of standing).
In advancing his reliance on the advice of counsel argument,
plaintiff relies on cases holding that the omission of a claim from
a bankruptcy petition or schedule, if done in good faith reliance
upon advice of counsel, does not invalidate a debtor's discharge in
bankruptcy. See In re Breitling, 133 F. 146 (7th Cir. 1904); In re
Montgomery, 86 B.R. 948 (Bankr. N.D. Ind. 1988). With these
assertions we fully agree, and we would find them relevant were
this an action challenging the validity of a debtor's discharge in
bankruptcy, which it plainly is not. See 11 U.S.C.  727(a)(4)(A)
(1988) (court may grant a debtor a discharge in bankruptcy unless
"the debtor knowingly and fraudulently *** made a false oath or
account"). Plaintiff is bringing an action for money allegedly
owed to him by defendants, not fending off a challenge to his
earlier discharge in bankruptcy.
Plaintiff next attempts to sidestep his lack of standing by
arguing that he had an oral "partnership" with Smith and Bittner
(the jury so found), but he fails to explain how such a finding
helps his cause. Even were we to accept such a finding (the
overwhelming evidence established that any claims plaintiff had
against defendants belonged to Overlay, if not to plaintiff
personally), plaintiff ignores several relevant principles of
partnership law. While it is true that the only "partnership
property" before a bankruptcy court during an individual partner's
bankruptcy is the debtor partner's personal property interest in
the partnership, see In re Pentell, 777 F.2d 1281, 1285 (7th Cir.
1985); Turner v. Central Nat'l Bank, 468 F.2d 590, 591 (7th Cir.
1972), a partner's share of partnership profits is the personal
property of the partner. See 805 ILCS 205/26 (West 1994) ("A
partner's interest in the partnership is his share of the profits
and surplus, and the same is personal property"). See also Lindley
v. Murphy, 387 Ill. 506, 514, 56 N.E.2d 832 (1944); In re Funneman,
155 B.R. 197, 199 (Bankr. S.D. Ill. 1993). Since partnership
profits are personal property, any claim to such profits falls
within the ambit of section 541 of the Bankruptcy Code and becomes
the property of the bankruptcy estate upon the filing of a
bankruptcy petition. See Samson v. Prokopf (In re Smith), 185 B.R. 285, 290-91 (Bankr. S.D. Ill. 1995) (acknowledging that limited
partner's right to share profits is personal property of the
partner which is included in the bankruptcy estate). See also 805
ILCS 210/701 (West 1994) ("A partnership interest [in a limited
partnership] is personal property"); 805 ILCS 210/101(10) (West
1994) (defining "partnership interest" as "a partner's share of the
profits and losses of a limited partnership and the right to
receive distributions of partnership assets").
In the present case, plaintiff is seeking his share of profits
supposedly generated by his partnership with defendants. Assuming
arguendo that the alleged oral partnership existed and was proven,
plaintiff's right to share such profits was personal property which
became the property of the bankruptcy estate when plaintiff filed
for bankruptcy in 1986. Divested of such property, he had no
standing to pursue the instant claims. See also 805 ILCS 205/31(5)
(West 1994) (stating that dissolution of a partnership is caused
"[b]y the bankruptcy of any partner or the partnership"); In re
Gadberry, 30 B.R. 13, 13-14 (Bankr. C.D. Ill. 1983) (permitting
bankruptcy trustee to sell debtor's interest in a partnership,
since such an interest--including a partner's right to share
profits--is personal property unaffected by the bankruptcy of the
debtor and the subsequent dissolution of the partnership). The
trial court's grant of defendants' j.n.o.v. motion was, therefore,
required.
The trial court was equally justified in finding that
plaintiff was judicially estopped from bringing the instant claims.
Judicial estoppel prevents a party from asserting inconsistent
positions before courts in separate proceedings in the hope of
receiving favorable judgments in each proceeding. Bidani v.
Lewis, 285 Ill. App. 3d 545, 550, 675 N.E.2d 647 (1996); Ceres
Terminals v. Chicago City Bank and Trust Co., 259 Ill. App. 3d 836,
849-50, 635 N.E.2d 485 (1994). "At its heart, this doctrine
prevents chameleonic litigants from 'shifting positions to suit the
exigencies of the moment.'" Ceres Terminals, 259 Ill. App. 3d at
850, quoting Cashmore v. Builders Square, Inc., 211 Ill. App. 3d
13, 18, 569 N.E.2d 1353 (1991). Judicial estoppel is designed to
protect the integrity of the courts; it does not focus on the
fairness of the relationship between the litigants. Bidani, 285
Ill. App. 3d at 551. Although judicial estoppel is flexible and
not reducible to a single formula, Illinois courts have generally
required the following five elements be established for application
of the doctrine: (1) the two positions must be taken by the same
party; (2) the positions must be taken in judicial proceedings; (3)
the positions must be given under oath; (4) the party must have
successfully maintained the first position and thereby received
some benefit; and (5) the two positions must be totally
inconsistent. Bidani, 285 Ill. App. 3d at 551; Ceres Terminals,
259 Ill. App. 3d at 850. Application of the doctrine is within the
discretion of the trial court. Bidani, 285 Ill. App. 3d at 550.
The trial court clearly acted within the bounds of its
discretion in applying judicial estoppel here. Plaintiff's
position in the present case--that he entered an oral "partnership"
with defendants and is now entitled to his share of profits--is
diametrically opposed to the position he maintained in the course
of the bankruptcy proceedings. With his creditors waiting in the
wings, plaintiff disclosed neither his alleged interest in this
"partnership" nor his claim to profits. On his Schedule B-2,
plaintiff was asked to list "[c]ontingent and unliquidated claims
of every nature, including counterclaims of the debtor ***."
Plaintiff failed to list the present claims, responding, under
penalty of perjury, only with "Possible Counter Claims vs. Mark
Products [one of plaintiff's creditors], of dubious value."
Plaintiff was asked whether he had "been in any partnership with
anyone, or engaged in any business during the six years immediately
preceding the filing of the original [bankruptcy] petition ***."
Plaintiff declared, again under penalty of perjury, only that he
had been "[e]mployed by Overlay Systems, Inc." Plaintiff obviously
benefitted from his failure to disclose his claims against
defendants, inasmuch as he was able to avoid his creditors by doing
so. See Payless Wholesale Distribs., Inc. v. Alberto Culver, Inc.,
989 F.2d 570, 571 (1st Cir. 1993) (characterizing Payless' "plan"
in bringing 20 claims against defendants following Payless'
discharge in bankruptcy as "Conceal[ing] your claims; get[ting] rid
of your creditors on the cheap, and start[ing] over with a bundle
of rights"). Thus, plaintiff took totally inconsistent positions
in separate judicial proceedings, under oath, to his benefit, and
the trial court correctly concluded judicial estoppel was
applicable. See Luna v. Dominion Bank, 631 So. 2d 917, 919 (Ala.
1993) (where the plaintiff filed suit against defendant eighteen
months after the plaintiff's bankruptcy, judicial estoppel was
applicable, since plaintiff had failed to disclose the claims in
the course of his bankruptcy); Oneida Motor Freight, Inc. v. United
Jersey Bank, 848 F.2d 414, 419-20 (3rd Cir. 1988) (holding the
plaintiff was judicially estopped from bringing claims against the
defendant which should have been disclosed in the plaintiff's
earlier bankruptcy).
Relying on various federal decisions, plaintiff insists
judicial estoppel was inapplicable here since no bad faith on his
part was demonstrated. See In re Envirodyne Industries v. Viskase
Corp., 183 B.R. 812, 823 (Bankr. N.D. Ill. 1995) (collecting cases
in which intentional misconduct has been found a necessary
requirement for application of judicial estoppel); Forty-Eight
Insulations v. Aetna Casualty & Surety Co., 162 B.R. 143, 147-48
(N.D. Ill. 1993); Elliott v. ITT Corp., 150 B.R. 36, 40 (N.D. Ill.
1992) (refusing to apply judicial estoppel against a plaintiff who
failed to dislose a claim in an earlier bankruptcy proceeding,
since plaintiff had simply been unaware of the claim). See also
Ceres Terminals, 259 Ill. App. 3d at 850 (judicial estoppel
intended to prevent litigants from "engaging in 'cynical
gamesmanship' [citation] or 'hoodwinking' a court [citation]" and
is to be applied where there has been intentional self-
contradiction); Cashmore, 211 Ill. App. 3d at 18 (doctrine designed
to prevent litigants from "deliberately shifting positions").
However, plaintiff did not sufficiently demonstrate that his
failure to disclose the instant claims in bankruptcy was the result
of inadvertence or mistake. See Chaveriat v. Williams Pipe Line
Co., 11 F.3d 1420, 1428 (7th Cir. 1993); In re Cassidy, 892 F.2d 637, 642 (7th Cir. 1990); Comment, Precluding Inconsistent
Statements: The Doctrine of Judicial Estoppel, 80 Nw. U.L. Rev.
1244, 1264-65 (1986). Plaintiff admits he was aware of the claims
at the time he filed his bankruptcy petition, and he had an obvious
motive for concealing such claims from his creditors. His attempt
to pass the blame onto his bankruptcy counsel was thoroughly
refuted by his former counsel's own testimony. We believe this
combination of pre-existing knowledge of the claims, a motive for
concealment, and a failed attempt to establish reliance on the
advice of counsel, in the face of an affirmative duty to disclose
the claims in bankruptcy, was sufficient to infer that plaintiff
has acted in bad faith--i.e., that he has "played fast and loose
with the courts." See Ryan Operations G.P. v. Santiam-Midwest
Lumber Co., 81 F.3d 355, 363 (3rd Cir. 1996) (holding the
plaintfiff was judicially estopped from bringing claim which he had
earlier failed to disclose in bankruptcy, finding the combination
of knowledge of the claim and motive for concealment in the face of
an affirmative duty to disclose gave rise to an inference of bad
faith).
For the foregoing reasons, the judgment of the trial court is
affirmed.
Affirmed.