Vendor Able to Seek Payment of Contract Debt Despite Pending Bankruptcy Claim

After a tradeshow exhibit vendor was stiffed on the payment of a contract by a middleman, it sued the tool manufacturer to recover its debt. At the same time, it filed a claim in the bankruptcy proceeding of the middleman. The district court ruled that the plaintiff could not pursue a claim against the manufacturer because it had a claim pending in the middleman’s bankruptcy proceeding. The 7th Circuit panel reversed, finding that there was no concept of judicial estoppel where a pending claim in a bankruptcy proceeding barred seeking the collection of a debt from a third party.

TRUMPF, Inc., the U.S. subsidiary of an international business, makes specialty tools such as precision laser cutters. TRUMPF sells many of its products at trade shows. It hired Lynch Exhibits to handle its appearance at the 2017 FABTECH show in Chicago. Lynch then subcontracted with CSI Worldwide to provide some of the necessary services.

CSI contended that it told TRUMPF that it was unsure of Lynch’s reliability. CSI stated that it would do the work only if TRUMPF paid it directly or guaranteed Lynch’s payment. According to CSI, TRUMPF assented. The two entities did not sign any undertaking to that effect. CSI did the work and then billed Lynch. Lynch did not pay. CSI filed an involuntary bankruptcy petition against Lynch, who then filed a voluntary bankruptcy petition. CSI claimed approximately $530,000 as a creditor, and also filed suit against TRUMPF under diversity jurisdiction, seeking $530,000 on theories including unjust enrichment and promissory estoppel.

The district court dismissed the suit on the pleadings. The district court found that, by making a claim in Lynch’s bankruptcy, CSI necessarily represented that Lynch was the sole debtor for its claim. The district could found that judicial estoppel, therefore, barred CSI’s suit against TRUMPF. CSI then appealed.

The appellate panel began by citing New Hampshire v. Maine, stating that the Supreme Court had explained that judicial estoppel generally prevents a party from prevailing in one phase of a case on an argument and then relying on a contradictory argument to prevail in another phase. The panel stated that the Court’s description showed that judicial estoppel did not block CSI’s suit against TRUMPF. The panel noted that CSI had not prevailed by collecting the debt from Lynch’s estate in bankruptcy. The panel reasoned that because CSI had not prevailed in the bankruptcy court, judicial estoppel could not block its claim against TRUMPF.

The panel then stated that CSI’s claim against TRUMPF was also not “contrary” to its claim against Lynch. The panel stated that CSI had not asserted that Lynch was solely responsible for payment. The panel noted that CSI had not tried to recover twice on one debt. The panel stated that seeking to recover one debt from multiple persons is common and proper. The panel pointed to the examples of joint tortfeasors, insured defendants, debts guaranteed by third party investors, and general contractors required by subcontractors to issue bonds as a guarantee of payment as examples that would be blocked by the doctrine of judicial estoppel if the district court’s view was correct.

Finally, the panel stated that the Bankruptcy Code itself provided the answer in the instant case. The panel noted that filing a claim in bankruptcy does not foreclose claims against non-bankrupt obligors, and even discharge of a debt in bankruptcy does not do that. Citing In re Shondel, the panel stated that many decisions recognize that a claim in bankruptcy does not block recovery from third parties such as guarantors or jointly responsible persons. The panel, therefore, reversed the decision of the district court and remanded the case for further proceedings.

You can view the Court’s opinion here.

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