James A. Knight v. Bank of America ( 2012 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 11-3588
IN RE:
K NIGHT-C ELOTEX, LLC et al.,
Debtors.
A PPEAL OF:
JAMES A. K NIGHT
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 1:11-cv-01815—Samuel Der-Yeghiayan, Judge.
A RGUED M AY 24, 2012—D ECIDED S EPTEMBER 5, 2012
Before C UDAHY, K ANNE, and H AMILTON, Circuit Judges.
H AMILTON, Circuit Judge. Using a judicial estoppel
theory, debtor-appellant James Knight attempts to turn a
harmless and seemingly inadvertent failure to disclose
an adverse interest in a bankruptcy proceeding into a
potential multimillion dollar windfall. He appeals from
an order in the jointly administered bankruptcy cases
of Knight-Celotex, LLC and Knight Industries I, LLC
2 No. 11-3588
(collectively, the “Companies”). That order permitted
the Companies’ chapter 7 bankruptcy trustee to assign
to Bank of America certain causes of action that the Com-
panies’ estate held against Knight as an individual. At
the time of the assignment, the same trustee, Barry Chatz,
was also serving as the chapter 7 trustee in Knight’s
own bankruptcy case, and the law firm of Freeborn &
Peters LLP represented trustee Chatz in his administra-
tion of both the Companies’ bankruptcy estate and
Knight’s individual estate.
Chatz and Freeborn & Peters failed to disclose — in
Chatz’s application to retain Freeborn & Peters in
Knight’s individual bankruptcy — that Chatz, as the
Companies’ trustee, intended to continue to pursue
claims held by the Companies against Knight. Knight
contends that this failure should be deemed the
trustee’s abandonment of those claims. On this theory,
he argues that the bankruptcy court abused its discre-
tion when it refused to invoke the doctrine of judicial
estoppel to prevent the later assignment of those claims
to the Bank. The district court affirmed the bankruptcy
court’s rejection of Knight’s judicial estoppel theory,
and we do the same, finding no abuse of the bankruptcy
court’s discretion.
First, we review the factual background of the
case and the interplay of the various bankruptcy pro-
ceedings. We then dispose of the threshold question
whether Knight had standing to object to the assignment
of the claims against him to the Bank. Finally, we reach
the merits of Knight’s appeal. We detail the judicial
No. 11-3588 3
estoppel trap Knight tried to set for the trustee, and
we explain why the bankruptcy court’s refusal to
spring the trap was a proper exercise of its discretion.
Although we do not condone Chatz’s and Freeborn &
Peters’s failure to disclose Chatz’s intent, as the Compa-
nies’ bankruptcy trustee, to pursue (or assign)
the claims against Knight, that failure did not
harm Knight, and other remedies are available. It
would be inequitable and an improper use of judicial
estoppel — an equitable remedy — to permit Knight
to reap a huge benefit from an otherwise harmless omis-
sion.
I. Factual and Procedural Background
Knight Companies’ Bankruptcy. Knight, the individual
debtor, was the principal owner and CEO of Knight
Industries I, LLC. Knight Industries was a holding com-
pany that owned equity interest in Knight-Celotex
LLC and other entities. Bank of America had provided
secured credit of more than $34 million to Knight Indus-
tries I and Knight-Celotex. On April 6, 2009, Knight In-
dustries and Knight-Celotex filed voluntary petitions for
relief under chapter 11 of the bankruptcy code. The Com-
panies’ bankruptcy petition was converted to a chapter 7
petition two months later, and Chatz was appointed as
chapter 7 trustee of the Companies’ estates. The bank-
ruptcy court authorized trustee Chatz to retain the law
firm of Freeborn & Peters as counsel.
In December 2009, Chatz and the Bank each sent similar
letters to Knight. They alleged that Knight had made
4 No. 11-3588
fraudulent and/or preferential transfers of the Compa-
nies’ assets, had breached the duty of good faith and
fair dealing, had breached duties Knight owed to
creditors, had misappropriated corporate opportunities,
had committed conversion, and had violated state and/or
federal securities laws, among other claimed acts and
omissions. The letters named several potential legal
claims against Knight, including claims for director and
officer liability — for ease of reference, we refer to all
the allegations against Knight as the “D&O claims”— and
demanded payment from Knight of at least $27 million
(to the Companies) and $34 million (to the Bank).
Knight’s Personal Bankruptcy. On February 23, 2010,
Knight filed his own voluntary petition for chapter 7
bankruptcy. Knight listed in his schedule of assets and
liabilities the Companies’ D&O claims, disclosing their
potential value as “unknown.” Knight originally filed
his bankruptcy petition in New Hampshire, but it was
transferred to the Northern District of Illinois and to
the judge presiding over the Companies’ petition. In
granting transfer, the bankruptcy court noted the
existence of the D&O claims. See In re Knight-Celotex,
LLC, 427 B.R. 697, 701 (Bankr. N.D. Ill. 2010). Chatz was
appointed to serve as the chapter 7 trustee of Knight’s
estate.
Retention Application in Knight’s Bankruptcy. On May 19,
2010, trustee Chatz asked the bankruptcy court to allow
him to retain Freeborn & Peters as his counsel in Knight’s
individual bankruptcy, as well. In the retention applica-
tion, Chatz said that Freeborn & Peters “does not have
No. 11-3588 5
any connection with [Knight], his creditors, or other
parties-in-interest or their respective attorneys . . . and is
a ‘disinterested person’ ” as that term is defined in
the bankruptcy code.1 In support of the application,
Chatz submitted the “Declaration of Richard S. Lauter
in Accordance with Section 327 of the Bankruptcy Code
and Rule 2014 of the Federal Rules of Bankruptcy Pro-
cedure.” In the declaration, attorney Lauter explicitly
stated that Freeborn & Peters served as bankruptcy
counsel to Chatz in the Companies’ bankruptcy. Lauter
also asserted that “to the best of my knowledge, I have
determined that F&P does not currently represent any
entity, or hold interests adverse to any entity, in
matters related to [Knight’s] chapter 7 case.”
At a hearing on the retention application on May 25,
2010, the court asked if anyone objected to Chatz’s reten-
tion of Freeborn & Peters as counsel in the Knight bank-
ruptcy. Knight’s counsel replied:
There’s no objection, Your Honor. I just . . . was curi-
ous. I didn’t see in here where counsel indicated
he represented Mr. Chatz as to his capacity as corpo-
1
The bankruptcy code defines “disinterested person” as a
person that: “(A) is not a creditor, an equity security holder, or
an insider; (B) is not and was not, within 2 years before the
date of the filing of the petition, a director, officer, or employee
of the debtor; and (C) does not have an interest materially
adverse to the interest of the estate or of any class of creditors
of equity security holders, by reason of any direct or indirect
relationship to, connection with, or interest in, the debtor, or
for any other reason.” 11 U.S.C. § 101(14).
6 No. 11-3588
rate trustee. But since we all know that’s the case,
I mean, I don’t think that’s a problem that it was
omitted.
...
As long as they’re still disinterested, we’re fine, Your
Honor. 2
In response, Lauter volunteered to submit a supple-
mental declaration, which he did the next day. Lauter
reaffirmed that Freeborn & Peters served as counsel
to Chatz in the Companies’ bankruptcy and also
reaffirmed that:
Based on the foregoing and the declaration
previously submitted in support of the [Retention]
Application, upon reasonable inquiry and to the best
of my knowledge, I have determined that F&P does
not currently represent any entity or hold any
interests, adverse to the estate, and is a “disinterested
person” pursuant to 11 U.S.C. § 101(14).
Without further objection, the bankruptcy court entered
an order authorizing Chatz to retain Freeborn & Peters
as counsel in the Knight bankruptcy, finding that the
firm was a “disinterested person” as defined in the bank-
ruptcy code. Knight’s trap was set.
Assignment of Knight Companies’ Claims to Bank. More
than five months later, on November 3, 2010, the Bank
2
Knight’s counsel was mistaken; as noted, the Lauter Declara-
tion did disclose the fact that Freeborn & Peters represented
Chatz as Trustee of the Companies.
No. 11-3588 7
and Chatz jointly asked the court to allow Chatz to
assign the Companies’ D&O claims to the Bank. These
were the same claims that Chatz and the Bank had
asserted against Knight in the December 2009 letters
that had preceded Knight’s personal bankruptcy. In a
separate filing, the Bank asserted that it would seek
recovery only against Knight’s liability insurance policy
and not against Knight himself.
Knight objected. He contended that Chatz should
be judicially estopped from asserting that the Companies
had any claims against him that could be assigned to
the Bank. He based his contention on the following logic,
trying to spring the trap he set when he did not object
to the trustee’s retention of Freeborn & Peters: First,
Freeborn & Peters had asserted in its retention applica-
tion that it was a “disinterested person” in Knight’s
individual bankruptcy proceeding even though the
firm also represented Chatz in his role as trustee for the
Companies. Second, the bankruptcy court had approved
the retention application, signaling that the court be-
lieved or assumed that Chatz, as the Companies’ trustee,
held no interests adverse to Knight. According to
Knight’s theory, this position, assumed by the court,
directly conflicted with the premise of the later-filed
assignment motion, specifically that the Companies had
viable claims against Knight that their trustee could
pursue or assign to the Bank. Third, since the bankruptcy
court had approved the firm’s retention application
and thus implicitly had concluded that the trustee and
Freeborn & Peters had no interests adverse to Knight, they
8 No. 11-3588
should be judicially estopped from taking any further
action to pursue or assign those claims against Knight.
The bankruptcy court overruled Knight’s objection,
finding that the assignment was a proper exercise
of the trustee’s business judgment.3 The court re-
jected Knight’s judicial estoppel theory, reasoning that
application of the doctrine is discretionary, and that in
this instance, Freeborn & Peters’s statements should
not prevent the Companies’ creditors from pursuing
otherwise legitimate claims against the Knight estate. If
the law firm acted improperly, the bankruptcy court
reasoned, other remedies were available that would not
impose such a hardship on the estate’s creditors.
On appeal, the district court affirmed. See Knight v.
Bank of America, N.A., 2011 WL 5008528, at *2-4 (N.D. Ill.
Oct. 18, 2011). Even if the bankruptcy court had not
explicitly addressed all the judicial estoppel factors
identified in New Hampshire v. Maine, 532 U.S. 742 (2001),
nothing required the court to do so. The hearing
transcript satisfied the district court that the bankruptcy
3
Once the automatic stay was lifted, the Bank sued Knight and
several co-defendants based in part on the D&O claims. On
June 20, 2012, the district court dismissed with prejudice the
Bank’s second amended complaint in that action. Bank of
America, N.A. v. Knight, 2012 WL 2368458 (N.D. Ill. June 20,
2012). The Bank has appealed the dismissal, which is pending
as No. 12-2698. The ultimate outcome of those proceedings
might render this case academic, but we think the better course
is to resolve the separate appeals as they have arisen rather
than to postpone a decision in this one.
No. 11-3588 9
court had considered the equities in weighing whether
to apply the doctrine of judicial estoppel. Knight appeals
that decision of the district court. We have jurisdiction
under 28 U.S.C. § 158(d)(1).
II. Knight’s Standing to Object
Before proceeding to the merits, we must address a
threshold issue: Knight’s standing. The trustee and the
Bank point out that the Bank would seek recovery on the
D&O claims only from Knight’s insurer and not from
Knight personally. They argue, therefore, that the D&O
claims were not actually adverse to Knight’s estate.
Accordingly, they contend that Knight may lack standing
to object to the assignment of the claims. In response,
Knight points out that the insurance policy would not
necessarily cover all of his potential liability on the
D&O claims for two reasons. The policy is a “wasting”
policy with a limit of $5 million on combined defense
and indemnification costs, and the policy excludes cover-
age for intentional fraudulent acts, which have been
alleged as part of the D&O claims.
Bankruptcy standing is narrower than constitutional
standing and requires that a person “have a pecuniary
interest in the outcome of the bankruptcy proceedings.”
Cult Awareness Network, Inc. v. Martino, 151 F.3d 605, 607
(7th Cir. 1998). The prospect that the D&O claims might
not be entirely discharged, at least to the extent they are
based on fraud, is sufficient to give Knight standing here.
See, e.g., 11 U.S.C. §§ 523(a)(2), (4), (19) (exceptions to
10 No. 11-3588
discharge in bankruptcy). He faced the prospect of per-
sonal liability on some of the claims.
We also reject the basic premise on which the
standing argument is based, specifically, that the D&O
claims were not “adverse” to Knight because they could be
ultimately covered by liability insurance. The cases on
which the trustee and the Bank rely for this point are
inapposite. We stated in IBM v. Fernstrom Storage and Van
Co., that permitting a creditor to seek recovery from a
debtor’s insurers “will neither deplete the debtor’s
assets or otherwise interfere with the administration of
the bankruptcy proceeding, nor hinder the debtor’s fresh
start at the close of the proceeding.” 938 F.2d 731, 734
(7th Cir. 1991) (creditors who did not file proofs of claim
in a debtor’s bankruptcy case were free to pursue
claims against debtor’s insurers). And, in In re Shondel,
950 F.2d 1301, 1304, 1307 (7th Cir. 1991), we held that a
plaintiff could proceed with a wrongful death action
against a debtor after discharge, in spite of the debtor’s
interest in a “fresh start,” because any recovery would
come from the debtor’s automobile liability insurance.
See also Hendrix v. Page, 986 F.2d 195, 197 (7th Cir. 1993)
(collecting cases and noting that courts are nearly unani-
mous in holding that a post-discharge injunction does
not extend to suits in which relief is sought only against
debtor’s insurer; such suits do not create a “personal
liability of the debtor”) (internal citations omitted).
But here, there was a strong possibility that at least some
of the D&O claims would not be discharged in Knight’s
personal bankruptcy. Accordingly, these precedents
do not support the contention that the D&O claims
No. 11-3588 11
were not adverse to Knight. Nor do they excuse the
failure to identify the D&O claims, asserted by trustee
Chatz, represented by Freeborn & Peters, as claims
adverse to Knight at every appropriate turn.
For these reasons, the fact that the Bank intended to
seek payment under Knight’s liability insurance should
not have been considered by the bankruptcy court or
the district court in assessing the effect of the omission
of the D&O claims from the trustee’s disclosures in
the retention motion. However, both courts considered
the impact of Knight’s liability insurance only in the
alternative. See Knight, 2011 WL 5008528, at *5; Supp.
Appx. 5 (bankruptcy court describing insurance cov-
erage as a “minor twist” that might or might not make
a difference). Accordingly, any error in doing so was
harmless. With standing secure, and without con-
sidering Knight’s insurance coverage, we turn to the
merits of his appeal and the issue of judicial estoppel.
III. Judicial Estoppel
Judicial estoppel is a matter of equitable judgment
and discretion, and we review the bankruptcy court’s
decision for an abuse of that discretion. See Wiese v.
Community Bank of Central Wisconsin, 552 F.3d 584, 588
(7th Cir. 2009); Commonwealth Ins. Co. v. Titan Tire Corp., 398
F.3d 879, 887 (7th Cir. 2004). “[A] court abuses its dis-
cretion when its decision is premised on an incorrect
legal principle or a clearly erroneous factual finding, or
when the record contains no evidence on which the
court rationally could have relied.” Corporate Assets, Inc. v.
12 No. 11-3588
Paloian, 368 F.3d 761, 767 (7th Cir. 2004). We find that the
bankruptcy court properly exercised its discretion in
rejecting Knight’s theory and in refusing to invoke
the doctrine of judicial estoppel to preclude assignment
of the D&O claims against Knight to the Bank.
In New Hampshire v. Maine, 532 U.S. 742 (2001),
the Supreme Court observed that the standard for
invoking judicial estoppel is “not reducible to any
general formulation of principle,” but recognized three
factors that “typically inform the decision whether to
apply the doctrine in a particular case.” Id. at 750
(internal quotation omitted). Those factors are first, that
“a party’s later position must be clearly inconsistent
with its earlier position;” second, that “the party has
succeeded in persuading a court to accept that party’s
earlier position, so that judicial acceptance of an incon-
sistent position in a later proceeding would create the
perception that either the first or second court was mis-
led;” and third, that “the party seeking to assert an incon-
sistent position would derive an unfair advantage or
impose an unfair detriment on the opposing party if not
estopped.” Id. at 750-51 (internal quotations omitted).
We reject Knight’s argument that the bankruptcy court’s
failure to march through the New Hampshire v. Maine
factors one by one was error in itself. These factors are
not a rigid test that must be applied every time the
issue of judicial estoppel is raised, but rather are
general guideposts that must be considered in the
context of all the relevant equities in any given case. See
Bisek v. Soo Line R.R. Co., 440 F.3d 410, 413 (7th Cir. 2006)
No. 11-3588 13
(refusing to invoke judicial estoppel, without explicitly
relying on New Hampshire v. Maine factors, where doc-
trine would render an inequitable result by “land[ing]
another blow” on bankrupt’s creditors, who were
victims of his bankruptcy fraud).
Returning to the New Hampshire v. Maine factors,
Knight attempts to show that the trustee took “clearly
inconsistent” positions in the retention application and
the assignment motion. Specifically, he argues that
Chatz’s application to retain Freeborn & Peters violated
11 U.S.C. § 327(a) and Federal Rule of Bankruptcy Pro-
cedure 2014(a). Section 327(a) permits the trustee to
retain attorneys “that do not hold or represent an
interest adverse to the estate, and that are disinterested
persons.” See, e.g., Kravit, Gass & Weber, S.C. v. Michel
(In re Crivello), 134 F.3d 831, 835-36 (7th Cir. 1998)
(defining the phrase “hold or represent an interest
adverse to the estate”) (collecting cases). Rule 2014(a)
facilitates enforcement of section 327(a) by requiring that
professionals seeking to represent the trustee in a bank-
ruptcy proceeding submit a verification that fully and
broadly discloses “the person’s connections with the
debtor, creditors, [or] any other party in interest,” among
others. See Fed. R. Bankr. P. 2014(a); In re Gluth Brothers
Construction, Inc., 459 B.R. 351, 364 (Bankr. N.D. Ill. 2011)
(describing “connections” that must be disclosed pursu-
ant to Rule 2014(a) as “considerably broader” than the
disclosures required for section 327(a)). For purposes
of Knight’s appeal, though, his arguments on the merits
of those rules and the precedents applying them are
beside the point.
14 No. 11-3588
If any violations of either section 327(a) or Rule 2014(a)
occurred, they occurred with the Freeborn & Peters
retention application. The order granting that applica-
tion was entered in May 2010. Pursuant to Bankruptcy
Rule 8002(a), Knight had fourteen days to file any
appeal from that order, and that deadline has long since
passed. See Fed. R. Bankr. P. 8002(a). Knight insists that
he has not appealed the bankruptcy court’s grant of the
Freeborn & Peters retention application, only its grant
of the assignment order. But, having appealed only the
assignment order, any issues relating to the disclosures
made or not made during the retention application
process are only tangential. The question before us is
whether the bankruptcy court abused its discretion in
refusing to find the trustee judicially estopped from
pursuing the D&O claims, not, as Knight contends,
whether the disclosure rules were actually violated.
Knight argues that by asserting in the retention ap-
plication that Freeborn & Peters was a “disinterested
person,” Chatz effectively disavowed the existence of
the D&O claims against Knight, and that it was then
“clearly inconsistent” to seek later to assign those aban-
doned D&O claims to the Bank. He claims that these
“clearly inconsistent” positions support his desired
remedy: the imposition of judicial estoppel to bar any
pursuit of the D&O claims. It is true that Freeborn & Peters
and Chatz failed to disclose explicitly the continued
existence of the D&O claims in the representation ap-
plication — a regrettable lapse, for the omission has
resulted in this unnecessary litigation. But, it is also
true that Chatz never explicitly disavowed the D&O
No. 11-3588 15
claims or expressed any intent to abandon them at any
time before, during, or after the retention application.
The court, Knight, and all other interested parties
participating in the proceedings at the time of the
retention application were aware of Chatz’s dual
roles, of Freeborn & Peters’s representation of Chatz in
each of those roles, and of the continued existence of
the D&O claims. The court had taken note of the claims
in its opinion transferring Knight’s personal bankruptcy
case to the Northern District of Illinois, see In re Knight-
Celotex, 427 B.R. at 701, and Knight had listed the
D&O claims on his bankruptcy schedules. Trustee Chatz
had taken none of the steps needed to abandon the
claims by the Companies’ estate.
Knight asserts on appeal that his counsel “expressly
sought confirmation at the Retention application hearing
that [Freeborn & Peters] was, in fact, disinterested, in
order to confirm that Chatz had decided not to pursue
the D&O claims against Knight.” This assertion is belied
by the transcript. What Knight’s counsel was seeking in
his exchange with the court was less than clear, and
whatever he sought, he hardly sought it “expressly.” See
Appx. 97 (“There’s no objection . . . . I was curious, I didn’t
see in here where counsel indicated he represented
Mr. Chatz as to his capacity as corporate trustee. But
since we all know that’s the case . . . I don’t think that’s
a problem that it was omitted.”). He plainly was aware
of Freeborn & Peters’s role as Chatz’s counsel in the
Companies’ bankruptcy, and he raised no objection to
the firm’s dual representation. No response to Knight’s
16 No. 11-3588
counsel’s non-objection was required. We will not
construe the trustee’s silence regarding the D&O claims
at this moment of the retention application hearing as
an abandonment of those claims.
It defies belief to think that the trustee would have
abandoned a possible multimillion dollar recovery
on behalf of the Companies’ creditors without a word,
without complying with the statutory procedures for
abandoning property, and probably in violation of his
duties as trustee.4 If Knight really thought that re-
taining Freeborn & Peters in the individual bank-
ruptcy was inconsistent with pursuit of the D&O claims,
he had ample opportunity to raise the issue explicitly at
the time of the retention application. He chose instead
to set a trap to be sprung when the trustee attempted
to pursue or assign the D&O claims. Under these cir-
cumstances, the bankruptcy court did not abuse its dis-
cretion by finding that the trustee and Freeborn &
Peters had not done anything “clearly inconsistent” with
the trustee’s later motion to assign the D&O claims to
the Bank. We therefore agree with the district court that
the omission of express reference to the D&O claims in
the retention application motion was, on this record,
at most a harmless violation of the disclosure obliga-
tions of section 327(a) and Rule 2014(a). It certainly
4
If an asset is “burdensome” or of “inconsequential value,” the
trustee may abandon property after notice and a hearing
under 11 U.S.C. § 554(a). No notice was given or hearing
held, and at that stage the D&O claims could not have been
deemed “burdensome” or of “inconsequential value.”
No. 11-3588 17
was not a foundation for judicial estoppel to bar pursuit
of the claims.
We also find no support in the record for the remaining
two New Hampshire v. Maine considerations. The record
does not support the conclusion that the trustee or Free-
born & Peters succeeded in “persuading” the bankruptcy
court to accept the conclusion that the Companies’ estate
was abandoning its D&O claims against Knight. The
bankruptcy court never suggested it viewed the D&O
claims as abandoned or that it had been misled. See
New Hampshire v. Maine, 532 U.S. at 750. The issue
simply did not come up.
Similarly, nothing in the record suggests that Chatz, as
trustee of the Companies, stood to derive an unfair ad-
vantage or impose an unfair detriment on Knight if not
estopped. See id. at 751. Knight contends that the assign-
ment order forced him to defend himself in the
D&O litigation and put his eligibility for a discharge
in question, and that the existence of the D&O claims
“has cast a considerable pall” over his post-bankruptcy
“fresh start.” We agree with the district court that
Knight could not have reasonably believed that Chatz
intended to abandon so casually the D&O claims and
the millions of dollars that they could bring into the
Companies’ estate. The prospect that Knight would
have to defend himself against potentially valid claims
does not amount to either an “unfair advantage” to the
trustee or the Companies’ estate, or an “unfair detri-
ment” to Knight.
Even if we assume for the sake of argument that the
Freeborn & Peters retention application violated the
18 No. 11-3588
disclosure requirements of 11 U.S.C. § 327(a) and that
the firm should have been precluded from its sim-
ultaneous representation of Chatz in his dual trustee
roles, it was entirely appropriate for the bankruptcy
court to consider the fact that the bankruptcy code pro-
vides a statutory remedy. Section 328(c) permits the
bankruptcy court to deny professional compensation
to a person who has been retained under section 327
if it is determined that that person is not actually disin-
terested or “represents or holds an interest adverse to
the interest of the estate with respect to the matter on
which such professional person is employed.” Knight
complains that this sanction would not provide him with
an effective remedy for the trustee’s and Freeborn &
Peters’s lack of disclosure. But Knight has not shown
that he should be entitled to any remedy at all. Even if
we put aside the fact that he and his counsel were fully
aware of the relevant facts, Knight has not shown how
he suffered any injury by pursuit of the D&O claims or
the hiring of Freeborn & Peters or the trustee. The bank-
ruptcy court properly rejected Knight’s judicial estoppel
theory.
Conclusion
Like the bankruptcy court and the district court
before us, we find that the larger equities at stake in
this matter supported the bankruptcy court’s refusal to
invoke the doctrine of judicial estoppel. On this record,
the omission of the D&O claims from the Freeborn &
Peters retention application papers was a regrettable
No. 11-3588 19
mistake that led to this unnecessary litigation. That omis-
sion, however, did not warrant Knight’s attempt to fore-
close pursuit of the D&O claims altogether. All inter-
ested parties were aware of the pertinent facts, specifically
of Chatz’s dual roles as trustee in the Companies’ bank-
ruptcy and trustee in Knight’s personal bankruptcy, of
Freeborn & Peters’s representation of Chatz in both
of those roles, and of the existence of the D&O claims. The
omission of an explicit reference to the D&O claims
in the retention application was therefore harmless. Ac-
cordingly, there was no equitable basis for the bank-
ruptcy court to invoke the doctrine of judicial estoppel
and to find that Chatz abandoned the D&O claims,
which would permit Knight to escape upwards of
$34 million in potential liability. Refusing to do so was
a sound exercise of the bankruptcy court’s discretion.
A FFIRMED.
9-5-12