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October 19, 2011

Insured Barred From Recovery Based Upon Judicial Estoppel Following Bankruptcy Proceeding

The Appellate Division, Third Department, recently decided a case in which it held that the insured was estopped from asserting a claim against the property insurer for damage to business personal property in excess of the valuation placed on the property by the insured in a bankruptcy filing several months before the property was destroyed by fire. Kittner, Individually, and as Assignee of Stewart Quimby, et al. vs. Eastern Mutual Insurance Company, 80 A.D.3d 843 (3d Dep't. 2011).

Design Science Toys, Ltd., ("DST"), was a corporation controlled by Cary Kittner and Stewart Quimby, her husband. In 2003, Kittner and Quimby formed QK Properties, LLC, ("QK") which purchased a building and rented it to DST. In October, 2005, QK sold the building, but DST continued to store its inventory and equipment in the building.

In December, 2005, DST filed a Chapter 7 bankruptcy petition, and valued the equipment and inventory at $5,052.93. When the bankruptcy was concluded, the Trustee abandoned the equipment and inventory. DST then transferred its post-bankruptcy assets to QK.

In March, 2006, the equipment was destroyed by a fire. DST and QK made a claim under an insurance policy issued by Eastern Mutual Insurance Company (Eastern). In a sworn proof of loss, signed by Kittner and Quimby, DST and QK valued the equipment at $212,427. Thereafter, Eastern denied the claim in full.

Plaintiffs commenced suit in January, 2008. Eastern moved for summary judgment dismissing the complaint on the grounds, among others, that Kittner lacked standing to recover under the policy, that the policy was null and void because the sworn proof of loss contained material misrepresentations, and that the plaintiffs were judicially estopped from claiming that the property was valued higher than the amount claimed in the bankruptcy petition.

Supreme Court denied the motion, as well as the Defendant's subsequent motion for leave to renew and/or reargue. Defendant appealed.

The Appellate Division agreed with Eastern that Kittner lacked standing and that she did not have an insurable interest in the property. The Court noted that the policy only covered the business property of DST and QK, the named insureds.

Although DST had assigned all of its interests in any claims to Kittner, since DST had previously transferred all of its post-bankruptcy assets to QK, there was nothing for DST to transfer to Kittner. As a result, she had no insurable interest in the policy proceeds. The parties did not contest the lower court's determination that Kittner did not have standing to raise claims with respect to any property owned by QK.

The Appellate Division also found that DST was judicially estopped from claiming "that the same equipment and inventory had a value some forty times that as previously asserted***" in the bankruptcy proceeding. The Court noted that, in filing its petition in bankruptcy, DST valued its equipment and inventory at $5,052.93, and eight months later, after the fire, DST and QK valued the same items at $212,427.

Finally, the Court addressed the Defendant's motion to dismiss the Plaintiffs' claim on the grounds that the policy was void as a result of material misrepresentations in the sworn proof of loss. The Court held:

As the proponent for summary judgment, defendant bore the burden of demonstrating plaintiffs' material misrepresentation (see Precision Auto Accessories Inc. v Utica First Ins. Co., 52 A.D.3d 1198, 1200 [2008] lv. denied 11 N.Y.3d 709 [2008]). Here, while defendant relies on DST's bankruptcy filing, listing the value of the property to total $5,052.93, which is in sharp contrast to the $212,427 figure set forth in the proof of loss, defendant tendered no proof of plaintiffs' intent to defraud – 'a necessary element to the defense' (Deitsch Textiles v. New York Prop. Ins. Underwriting Assn., 62 N.Y.2d at 1001). Accordingly, Supreme Court properly denied Defendant's motion seeking summary judgment based on plaintiffs' alleged material misrepresentations.

This is an example of the application of the doctrine of judicial estoppel in connection with the valuation of an insurance claim following a bankruptcy proceeding. Nevertheless, the Court refused to dismiss the claim in its entirety based upon material misrepresentation in light of the gross disparity between the amount claimed in the bankruptcy filing and in the proof of loss to the insurer. 

If you require further information regarding the information presented in this Legal Alert and its impact on your organization, please contact any of the members of the Practice Area.


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