In the current economic climate, it seems as though more and more insurance claims and subsequent investigations involve insureds who have previously filed bankruptcy petitions. Oftentimes insurance claim representatives and/or investigators are left trying to interpret bankruptcy petitions, schedules, and financial affair disclosures. Many find themselves trying to determine what impact, if any, the prior bankruptcy petition may have on the current investigation. During many examinations under oath, insureds often tell me that prior bankruptcy petitions “have nothing to do with” their claim for reported fire loss, reported theft loss, etc. However, it appears from the reported decisions across the country, prior bankruptcy filings and the disclosures by insureds may have a large impact on what recovery they may receive, if any, from an insurer for a subsequent, and otherwise appearing, legitimate loss.
Property insurance claims involving a prior bankruptcy filing fall into two (2) categories, generally:
1. A debtor/insured fails to disclose ownership of items later claimed as stolen or damaged by fire, vandalism, etc.; or
2. A debtor/insured undervalues the property as listed on the bankruptcy petition for which they later submit a claim to an insurer for a much higher value.
When one of these situations arises, the question is, to what extent does the doctrine of judicial estoppel apply? The doctrine of judicial estoppel is intended to protect the integrity of the courts, not to punish adversaries or to protect litigants. The doctrine is to prevent a debtor from “playing fast and loose with the courts.” Simply put, when a debtor/insured successfully convinces a Court that he did not own the property in question previously and derives a benefit from that representation (i.e. his unsecured creditors are not paid as a result of this position), the insured receives an unfair advantage and the judicial system will not support it.
Application of the Doctrine of Judicial Estoppel
Our North Carolina Supreme Court first recognized the doctrine of judicial estoppel in Whitacre P’ship v. Biosignia, Inc., 358 N.C. 1, 591 S.E.2d 870 (2004), and noted that “the circumstances under which judicial estoppel may appropriately be invoked are probably not reducible to any general formulation of principle.” The purpose of this doctrine is “to protect the integrity of the judicial process by prohibiting parties from deliberately changing positions according to the exigencies of the moment.” “Judicial estoppel forbids a party from asserting a legal position inconsistent with one taken earlier in the same or related litigation.” Price v. Price, 169 N.C. App. 187, 191, 609 S.E.2d 450, 452 (2005).
In Whitacre P’ship, our Supreme Court set forth three factors which may be considered in determining whether the doctrine is applicable:
1. A party’s subsequent position must be clearly inconsistent with its earlier position.
2. Courts regularly inquire whether the party has succeeded in persuading a court to accept that party’s earlier position, so that judicial acceptance of an inconsistent position in a later proceeding might pose a threat to judicial integrity by leading to inconsistent court determinations or the perception that either the first or the second court was misled.
3. Courts consider 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.
See T-Wol Acquisition Co. v. ECDG South, LLC, 220 N.C. App. 189, 200-201 (N.C. Ct. App. 2012). In consideration of the fact that our North Carolina courts will clearly apply judicial estoppel, the question is, “How will this doctrine apply to those situations commonly encountered by the insurance industry?”
Application When Insured Fails to Disclose Property on Bankruptcy Petition
In 2005, the Georgia state Court of Appeals held that an insured was judicially estopped from claiming an insurable interest in a residence that he had previously failed to disclose on a bankruptcy petition he filed in 1995. Battle v. Liberty Mut. Fire Ins. Co., 2005 WL 2899846 (Ga. App. 2005). Pertinent factors considered by the court included the following:
1. The insured obtained the dwelling in question in 1985, ten (10) years prior to the filing of the bankruptcy.
2. The insured failed to list the property on his schedule of his Chapter 7 bankruptcy petition, despite listing two (2) other pieces of real property.
3. The insured listed approximately $118,000 in unsecured debts on his bankruptcy petition.
The Court ultimately held that when the insured failed to list property on a bankruptcy petition that results in no money being paid to his unsecured creditors, he cannot subsequently obtain reimbursement of a damage claim for the same property.
Application When Insured Undervalues Property on Bankruptcy Petition
Courts have also held that debtor/insureds who “undervalue” items of property on their bankruptcy petition are later judicially estopped from claiming a higher value. More recently, in the Ohio state Court of Appeals, the Court upheld the trial court’s ruling that a debtor/insured’s prior bankruptcy petition listing all items of personal property valued at $3,100.00 “capped” the amount of recovery that the insureds could later obtain as a result of a claimed covered cause of loss. Brown v. Nationwide Property & Cas. Ins. Co., 2014-Ohio-5057; 2014 Ohio App. LEXIS 4906 (2014). Pertinent factors considered by the Court included the following:
1. The insured stated that he did not authorize the values of the property listed on the bankruptcy petition. However, the insured did testify that he admitted “on the record” during the bankruptcy hearing that he had reviewed the petition with his attorney and electronically signed the petition “under the penalty of perjury” that the information was correct.
2. All items of personal property was valued at a total of $3,100.00. However, the insured later claimed that the items reportedly damaged were valued in excess of $145,000.00.
3. The insured admittedly testified that all items of personal property that are the subject of the claimed loss were purchased prior to the filing of the bankruptcy petition.
Based upon the foregoing, the Court upheld the holding of the trial court that the doctrine of judicial estoppel applied and the insured was limited to recovery of $3,100.00.
Does It Matter Whether the Debtor/Insured Received a Discharge or if the Petition was Dismissed?
The above referenced cases involved a debtor/insured that received a discharge in bankruptcy. There appears to be a distinction among the jurisdictions as to whether a insured/debtor receiving a discharge is dispositive of whether the doctrine applies:
• See Crawford v. Franklin Credit Management Corp., No. 09 C 3576, 2001 WL 1118584 (S.D.N.Y. 2010) (holding that, while the debtor was involuntarily dismissed from bankruptcy, the debtor’s conduct was unreasonable, they failed to appear at confirmation hearings, and failed to make plan payments, and failed to list any claims asserted on the bankruptcy petitions. The Court held the debtor had no intention to cooperate in a reasonable manner and therefore the doctrine of judicial estoppel applied).
• See IBF v. Dillard-Winecoff, 275 Ga. 765, 573 S.E.2d 58 (2002) (holding that if an earlier bankruptcy petition was dismissed, the debtor had not persuaded a court to accept their earlier inconsistent position and judicial estoppel did not apply).
• See also Period Homes v. Wallick, 275 Ga. 486, 569 S.E.2d 502 (2002) (holding that if a debtor left no unsecured creditors from the earlier bankruptcy, then the debtor derived no unfair advantage and judicial estoppel did not apply).
Based upon the foregoing, any insurance claim, particularly a property loss claim for reported fire and/or theft loss, that involves an insured with a prior bankruptcy filing, it is important to determine the following:
1) When was the bankruptcy petition filed?
2) What bankruptcy Court was the petition filed?
3) What property was listing on Schedule A – Real Property and Schedule B – Personal Property?
4) Does that property appear to be the same property that is the subject of the claimed loss (i.e. does the personal property inventory forms indicate an age of the property that would include the period at the time of the bankruptcy filing)
5) On the financial affairs disclosure, did the insured indicate that any gifts of property or other transfers had been made? If so, what property did that involve and are those items among those that are the subject of the claim?
6) Did the insured obtain a discharge in the bankruptcy? If so, when was that discharge entered? If not, for what reason was the bankruptcy dismissed (i.e. voluntarily by the insured or involuntarily by the Court)?
Upon receipt of this information, it may be necessary to review the information with coverage counsel to help determine to what extent judicial estoppel may apply to the pending claimed loss. Based upon the “current trend” and recent court decisions, the doctrine of judicial estoppel is very much “alive and well” and should be considered where applicable, if for no other purpose, to “protect the integrity of the judicial process.”