In its decision filed on February 19, 2016, the Court of Appeals of Indiana (“Appellate Court”) ruled in an Indiana medical malpractice case that where the bankruptcy trustee had re-opened the injured party’s bankruptcy case to amend the bankruptcy filing to include the medical malpractice claim and to be allowed to prosecute the medical malpractice case in the Indiana state court, the trial court had subject matter jurisdiction to rule on the Indiana medical malpractice defendants’ motions for preliminary determination but the trial court erred in dismissing the proposed Indiana medical malpractice complaint.
The Underlying Facts
A man living in Indiana began feeling ill on March 30, 2012 and sought treatment at a local Indiana hospital, where he was admitted for several days and incurred medical expenses of approximately $190,000.00. He was unable to continue working as a truck driver due to his disability.
On August 22, 2012, the man and his wife filed a Voluntary Petition for Chapter 7 bankruptcy protection in the United States Bankruptcy Court for the Southern District of Indiana in which they listed “none” under Schedule B’s inquiry regarding “other contingent and unliquidated claims of every nature.” Based on the Trustee’s report to the bankruptcy court that there was no property available for distribution, the bankruptcy court entered an Order in No Asset Case on November 2, 2012, ordering the scheduled property of the estate be abandoned, any secured creditors be granted relief from the stay, and the Trustee be discharged. On November 27, 2012, the bankruptcy court granted a discharge of debtors and the bankruptcy case was closed.
On March 28, 2014, the man filed with the Indiana Department of Insurance a proposed complaint for damages alleging medical malpractice by the defendant medical providers during their treatment of him in the hospital during March and April of 2012. The medical malpractice defendants filed various motions for preliminary determination, alleging that the man’s failure to list a cause of action for medical malpractice in his bankruptcy petition filed after the alleged negligence occurred meant that he had no standing to pursue his medical malpractice case and was also precluded on the basis of judicial estoppel.
One year later, the trustee of the man’s bankruptcy estate filed in the bankruptcy court a Motion to Reopen Bankruptcy Case and Motion for Relief from the November 2, 2012 Order in No Asset Case. On July 29, 2014, the bankruptcy court granted the Motion for Relief from Judgment and also granted the Motion to Reopen Bankruptcy Case. The case was reopened and the trustee was reappointed as Trustee of the bankruptcy estate. On August 1, 2014, the man filed in the bankruptcy court an amended Schedule B, which, under “other contingent and unliquidated claims of every nature,” now included “possible collection from proposed complaint for damages with the State of Indiana Department of Insurance for injuries sustained prior to the filing of the bankruptcy case, and which claim is an asset of this bankruptcy estate.”
On August 7, 2014, an Amended Proposed Complaint for Damages was filed with the Indiana Department of Insurance listing the Trustee of the Bankruptcy Estate as the plaintiff. On August 8, 2014, the man filed in the state trial court a Motion for Substitution of Real Party in Interest seeking to have the bankruptcy Trustee substituted for him.
The trial court held a hearing on December 8, 2014, at which it considered the two motions for preliminary determination and the motion for substitution. On January 14, 2015, the trial court issued an order granting the petitions for preliminary determination and ordering the proposed complaint be dismissed with prejudice but did not rule on the motion for substitution. The Trustee appealed,
The Appellate Court noted that the Bankruptcy Code provides that the bankruptcy estate consists of all legal or equitable interests of the debtor in property as of the commencement of the case, which includes any unliquidated assets, such as personal injury causes of action. 11 U.S.C. § 541(a)(1). The Appellate Court stated that in the wake of a Chapter 7 bankruptcy, the bankrupt party is not the real party in interest to a personal injury lawsuit arising before or during the bankruptcy – the trustee of the bankruptcy estate is. However, the bankrupt party does have standing to sue because he is the party who sustained a direct injury as a result of the conduct at issue.
Nonetheless, because the negligence took place—and the man’s cause of action accrued—before he filed for bankruptcy, his cause of action is an asset of his bankruptcy estate, and the Trustee is the real party in interest for purposes of prosecuting the action. The Appellate Court noted that to remedy this defect, the man’s bankruptcy was reopened, and he moved to substitute the Trustee as plaintiff on the proposed complaint.
Indiana Trial Rule 17(A)(2) states, “[n]o action shall be dismissed on the ground that it is not prosecuted in the name of the real party in interest until a reasonable time after objection has been allowed for the real party in interest to ratify the action, or to be joined or substituted in the action. Such ratification, joinder, or substitution shall have the same effect as if the action had been commenced initially in the name of the real party in interest.”
The Appellate Court stated that by its clear language, Trial Rule 17 encourages allowing the real party in interest to be joined or substituted in the action, and such substitution relates back to the date the initial complaint was filed. Because the man had standing to sue, he was allowed to amend his proposed complaint to name the Trustee as the real party in interest and have that amendment relate back to the time of the original filing. The Appellate Court held that to the extent the trial court granted the motions for preliminary determination based upon the man’s lack of standing or failure to prosecute in the name of the real party in interest, it erred.
Judicial estoppel is an equitable doctrine that prevents a litigant, absent a good explanation, from gaining an advantage by litigating on one theory and then pursuing an incompatible theory in subsequent litigation. Judicial estoppel can be applied where a bankruptcy debtor fails to schedule or otherwise disclose a cause of action to the bankruptcy court and later seeks to recover on that action in state court.
Because judicial estoppel applies only to intentional misrepresentation, the dispositive issue is the bad faith intent of the litigant. The Appellate Court stated that because bankruptcy law is exclusively federal, it preempts state law pursuant to the supremacy clause, and Indiana courts therefore have limited jurisdiction over matters relating to bankruptcy proceedings – when a bankruptcy court addresses a specific issue bearing on a state law claim, the Appellate Court should apply the bankruptcy court’s finding unless doing so would compromise Indiana’s legal framework.
In the present case, the Appellate Court held that because the bankruptcy court reopened the man’s bankruptcy at the Trustee’s request and allowed the filing of an amended schedule listing the pending medical malpractice action as an asset, for a state court to rule that the medical malpractice action is judicially estopped from going forward would frustrate the bankruptcy court’s intent in reopening the bankruptcy estate to permit the lawsuit to proceed. The Appellate Court stated that based upon the supremacy of federal law and the exclusive jurisdiction of the federal bankruptcy court, it may not and will not second-guess the bankruptcy court’s reasoning in entering an order that a bankruptcy could proceed with the trustee’s knowledge of a pending legal malpractice action that was not originally listed in the debtor’s bankruptcy petition.
Source Lorenz and any Successor Trustee, Trustee v. Anonymous Physician #1, et al., 28A01-1501-CT-14.
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