Biesek, Eugene v. Soo Line RR Co ( 2006 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
Nos. 04-4070 & 05-3960
EUGENE K. BIESEK,
Plaintiff-Appellant,
v.
SOO LINE RAILROAD COMPANY and
CANADIAN PACIFIC RAILWAY,
Defendants-Appellees.
____________
Appeals from the United States District Court
for the Western District of Wisconsin.
No. 04-C-0223-S—John C. Shabaz, Judge.
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ARGUED FEBRUARY 16, 2006—DECIDED MARCH 6, 2006
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Before BAUER, EASTERBROOK, and MANION, Circuit
Judges.
EASTERBROOK, Circuit Judge. Eugene Biesek filed a
bankruptcy petition in September 2002 and three months
later received a discharge from liability on his remaining
debts. The schedule of assets did not list any potential
litigation, and in response to a form inquiring about
“other contingent and unliquidated claims of every na-
ture” Biesek checked “none.” That was a lie. Biesek had
been injured on the job in December 2000 and through
retained counsel had demanded compensation from his
employer under the Federal Employers’ Liability Act, 45
U.S.C. §§ 51-60. In June 2002, only three months before the
2 Nos. 04-4070 & 05-3960
bankruptcy began, the employer (Soo Line Railroad) had
offered $62,500 in settlement. Failure to reveal this poten-
tial recovery could not have been inadvertent— especially
as this offer, if accepted, made Biesek solvent, and he would
have been required to satisfy all of his debts. (According to
the bankruptcy schedules, Biesek’s debts exceeded his listed
assets by about $9,000.) Biesek had a lawyer in the bank-
ruptcy as well as in the FELA matter and cannot attribute
his answer to the legal jargon about “contingent and
unliquidated claims.”
In August 2003 Biesek filed this FELA action. He asked
the court to “enforce” Soo Line’s offer of June 2002. The
railroad answered that the offer had been rejected as
inadequate and was no longer on the table. Soo Line
maintained that Biesek, who sought and retained a bene-
fit (the discharge) based on a representation that he had no
contingent and unliquidated claims, is stuck with that
position. The district court granted summary judgment in
the employer’s favor, invoking the doctrine of judicial
estoppel. The judge thought that Biesek should not benefit
by his fraud on the creditors in the bankruptcy. (The fraud
was Biesek’s alone. To her credit, Biesek’s bankruptcy
lawyer Nancy A. Thome, who had not known about the
FELA claim until June 2003, promptly notified the Chapter
7 Trustee about the problem in his disclosures.)
Nine months after the district court dismissed the
suit, and while an appeal (No. 04-4070) was pending, Biesek
and the Trustee signed a “stipulation” providing that Biesek
would turn over the first $7,000 of any recovery to the
Trustee for the creditors’ benefit; in exchange the Trustee
represented that he agrees with Biesek’s position that the
omission of the FELA claim from the bankruptcy schedules
had been inadvertent. This stipulation was the basis of a
motion under Fed. R. Civ. P. 60(b)(2) to reopen the judg-
ment. Biesek has filed a separate appeal (No. 05-3960) from
Nos. 04-4070 & 05-3960 3
the decision, 2005 U.S. Dist. LEXIS 19380 (W.D. Wis. Sept.
7, 2005), denying that motion.
Rule 60(b)(2) authorizes a district judge to modify a
judgment in response to “newly discovered evidence
which by due diligence could not have been discovered in
time to move for a new trial under Rule 59(b)”. As the
district judge remarked, the evidence (if the stipulation can
be called “evidence” about Biesek’s thinking when he
completed the bankruptcy schedules) was newly created
rather than newly discovered. Biesek knew his own mental
state; if the omission reflected inadvertence rather than
intent to deceive, Biesek could have provided supporting
evidence either before the district court’s grant of summary
judgment or via a timely motion under Rule 59. Yet he not
only failed to adduce evidence before the district court acted
on Soo Line’s motion but also did not accept the Trustee’s
invitation (extended in October 2003) to amend the bank-
ruptcy schedules, make the FELA claim available to the
creditors, and use any personal exemption available under
state law to shelter part of the recovery. Failure to take
that opportunity implies determination that the creditors
receive not a penny from any recovery. The “stipulation” is
Biesek’s last-ditch effort to save something for himself; it
does not demonstrate that he has tried all along to honor
his debts. The district court’s order under Rule 60(b)(2)
cannot be labeled an abuse of discretion. We must decide
whether, on the record as it stood at the time of the district
court’s initial decision, Biesek was entitled to pursue a
FELA action against the Soo Line.
Plenty of authority supports the district judge’s conclusion
that a debtor in bankruptcy who receives a discharge (and
thus a personal financial benefit) by representing that he
has no valuable choses in action cannot turn around after
the bankruptcy ends and recover on a supposedly nonexis-
tent claim. See In re Superior Crewboats, Inc., 374 F.3d 330(5th Cir. 2004); Burnes v. Pemco Aeroplex, Inc., 291 F.3d
4 Nos. 04-4070 & 05-3960
1282 (11th Cir. 2002); Hamilton v. State Farm Fire &
Casualty Co., 270 F.3d 778 (9th Cir. 2001); In re Coastal
Plains Inc., 179 F.3d 197 (5th Cir. 1999); Charles Alan
Wright, Arthur R. Miller & Edward H. Cooper, 18B Federal
Practice & Procedure §4477 at 621 (3d ed. 2002). See also
New Hampshire v. Maine, 532 U.S. 742, 749-51 (2001)
(discussing the rationale and scope of judicial estoppel);
Astor Chauffeured Limousine Co. v. Runnfeldt Investment
Corp., 910 F.2d 1540, 1547-48 (7th Cir. 1990) (same). Our
circuit has yet to decide whether judicial estoppel blocks a
debtor from denying that an asset exists, obtaining a
discharge, and then attempting to realize on the concealed
asset.
Judges understandably favor rules that encourage full
disclosure in bankruptcy. Yet pursuing that end by applying
judicial estoppel to debtors’ self-contradiction would have
adverse effects on third parties: the creditors. Biesek’s
nondisclosure in bankruptcy harmed his creditors by hiding
assets from them. Using this same nondisclosure to wipe
out his FELA claim would complete the job by denying
creditors even the right to seek some share of the recovery.
Yet the creditors have not contradicted themselves in court.
They were not aware of what Biesek has been doing behind
their backs. Creditors gypped by Biesek’s maneuver are
hurt a second time by the district judge’s decision. Judicial
estoppel is an equitable doctrine, and using it to land
another blow on the victims of bankruptcy fraud is not an
equitable application. Instead of vaporizing assets that
could be used for the creditors’ benefit, district judges
should discourage bankruptcy fraud by revoking the debt-
ors’ discharges and referring them to the United States
Attorney for potential criminal prosecution.
Decisions that have relied on judicial estoppel assume
that the tort claim belongs to the debtor. Only then is one
person on both sides of the same issue. Yet why would
Biesek own this chose in action? Pre-bankruptcy claims are
Nos. 04-4070 & 05-3960 5
part of debtors’ estates; this FELA claim therefore belongs
to the Trustee, for the benefit of Biesek’s creditors. See 11
U.S.C. §541(a)(1); Pease v. Production Workers Local 707,
386 F.3d 819, 821-22 (7th Cir. 2004). Looking at the subject
this way makes estoppel seem less appropriate—but it also
raises the question: Where’s the Trustee? This litigation is
captioned Biesek v. Soo Line R.R., not Michael E. Kepler,
Trustee in Bankruptcy v. Soo Line. Attorney Steven P.
Garmisa, who filed the notice of appeal and the appellate
briefs, represents Biesek rather than Kepler. So the
threshold issue is not whether to apply an estoppel but
whether Biesek is the real party in interest. He appears to
be an interloper, trying to prosecute a claim that belongs to
his estate in bankruptcy.
A Trustee in bankruptcy may abandon worthless or low-
value assets, including legal claims, see 11 U.S.C. §554, and
if the Trustee had abandoned this claim then Biesek could
have prosecuted the suit in his own name. Then it would
have been necessary to consider judicial estoppel. But this
claim is not worthless, and the Trustee (who has known
about the claim since 2003) has not abandoned it—a step
that requires notice to the creditors, which has never been
given, and the opportunity for a hearing. 11 U.S.C. §554(a).
Instead of abandoning the claim, the Trustee has asserted
an interest in the proceeds.
That step raises the question whether the Trustee
may have appointed Garmisa to prosecute the claim on
behalf of the bankruptcy estate. Yet, as we have al-
ready explained, the “stipulation” post-dates the district
court’s decision, and the judge was entitled to ignore it.
Should the “stipulation” be understood as abandoning
the FELA action to the extent that its value exceeds $7,000,
it would be invalid for lack of notice to the creditors.
A bankruptcy court may allow a Trustee to abandon a
chose in action with retroactive effect and so prevent the
6 Nos. 04-4070 & 05-3960
dismissal of a suit that the Trustee could not re-file with-
in the period of limitations. See Morlan v. Universal
Guarantee Life Insurance Co., 298 F.3d 609, 617 (7th Cir.
2002). But this Trustee has not proposed to do that, the
creditors have not been alerted, and the bankruptcy
court has not employed its power under §554. No sur-
prise, then, that Biesek has never contended that the
Trustee has abandoned this claim. Nor has Biesek argued
that the claim is an asset that is covered by a personal
exemption under state law and thus passed through the
bankruptcy unimpaired, as in In re Polis, 217 F.3d 899 (7th
Cir. 2000). It is too big to be wholly exempted. So it does not
belong to him, and he cannot pursue it in litigation.
Neither Biesek nor the Trustee has asked for a remand so
that the Trustee could intervene and take over the suit on
behalf of the estate. We therefore need not decide whether
that step would have been proper.
AFFIRMED
A true Copy:
Teste:
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Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—3-6-06