In re Knight-Celotex, LLC

In re Knight-Celotex, LLC, et al., Case No. 11-01815, ---F.3d ---- (7th Cir. Sept. 5, 2012)(slip opinion) (Hamilton, J)
AFFIRMING the District Court, the Seventh Circuit held that the Bankruptcy Court did not abuse its discretion by finding that a trustee was not judicially estopped from assigning claims against the principal of corporate debtors due to the trustees failure to state an intent to pursue or abandon those claims in an application to employ counsel; instead, the omission was found to be a harmless violation of the disclosure requirements of Section 327(a) and Rule 2014(a) because the claims had been prominent in prior court records and it “defie[d] belief to think that the trustee would abandon a possible multimillion dollar recovery on behalf of the Companies’ creditors without a word.” The Circuit Court also rejected the premise that claims are not “adverse” to a party simply because they may ultimately be covered by liability insurance, at least not when the claims may potentially be carved out from insurance coverage.
Procedural context:
Appeal from the District Court for the Northern District of Illinois, which had affirmed the Bankruptcy Court.
Two jointly administered corporate debtor estates owned D&O claims against the sole principal of both corporations. When the principal filed individually in a distant jurisdiction, his case was transferred to the bankruptcy judge overseeing the two corporate bankruptcy cases to avoid inconsistent rulings on those claims. Eventually, the same trustee was appointed to administer all three cases. The trustee’s subsequent application to employ counsel failed to disclose the D&O claims as an adverse interest. During the hearing on the application to employ, the principal’s counsel specifically raised the issue of the D&O claims and was quoted on the record as saying, “since we all know that’s the case, I mean, I don’t think that’s a problem that it was omitted.” More than five months later, the trustee and the largest secured creditor jointly moved for court authorization to assign the D&O claims to the secured creditor; the principal promptly objected that the trustee was judicially estopped from assigning the claim due to the failure to mention the claim in the application to employ.
Cudahy, Kanne, and Hamilton, Seventh Circuit Judges.

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