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Found Treasure: How a Claimant’s Bankruptcy Filing May Uncover New Defenses

Found Treasure: How a Claimant’s Bankruptcy Filing May Uncover New Defenses

One of the many questions one should always ask any claimant is whether he or she has ever filed for bankruptcy. The reason is twofold. First, depending on the timing and nature of the bankruptcy filing, the claimant may have forfeited standing to pursue (or further pursue) a claim that is part of a bankruptcy estate of which only the trustee can control. Secondly, a debtor may be precluded, through judicial estoppel, from further pursuing a claim if the debtor failed to properly list or disclose said cause of action as an asset in bankruptcy proceedings.  Below is a more detailed discussion of each defense.

Potential Loss of Standing

Under the Bankruptcy Code, substantially all of a debtor’s assets, including causes of action belonging to the debtor, vest in the bankruptcy estate upon the filing of a bankruptcy petition. [i] Thus, “[o]nce an asset becomes part of the bankruptcy estate, all rights held by the debtor in the asset are extinguished, unless the asset is abandoned” by the trustee to the debtor pursuant to §554. As a result, a trustee, as the representative of the bankruptcy estate, is the real party in interest, and is the only party with standing to prosecute causes of action belonging to the estate.[ii]  For this reason, Louisiana jurisprudence has regularly dismissed causes of action for lack of subject-matter jurisdiction when it is established that a plaintiff debtor no longer has standing for a claim that is part of a bankruptcy estate.[iii] This result, however, is limited. Only in Chapter 7 (liquidation) or Chapter 11 (reorganization) bankruptcy cases are debtors required to surrender to the trustee all property of the estate.[iv]  In a Chapter 13 case, however, the trustee does not take custody or control of estate property except for the payments made to the trustee under the Chapter 13 plan. Consequently, a Chapter 13 debtor remains in sole possession and control of property of the estate, and retains standing to pursue causes of action that are considered part of the estate.[v]

Judicial Estoppel

Judicial estoppel is an equitable doctrine that can be invoked to prevent a party from asserting a position in a legal proceeding that is inconsistent with a position taken in a previous proceeding.[vi] The aim of the doctrine is to protect the integrity of the judicial process.[vii] In the context of a bankruptcy matter, where legal causes of action may become a bankruptcy asset used to pay creditors, the integrity of the judicial system depends on full and honest disclosure by debtors of all legal claims.[viii]  For this reason, jurisprudence has held that judicial estoppel must be applied in such a way as to deter dishonest debtors whose failure to fully and honestly disclose all their assets undermines the integrity of the bankruptcy system.[ix]  To satisfy this duty of disclosure, a “debtor need not know all the facts or even the legal basis for the cause of action; rather, if the debtor has enough information … prior to confirmation to suggest that it may be a possible cause of action, then it is a ‘known’ cause of action such that it must be disclosed”, even if the claim is contingent, dependent, conditional, or un-liquidated.[x]  Furthermore, in the context of a Chapter 13 case where the bankruptcy estate includes any property “that the debtor acquires after the commencement of the bankruptcy case and before the case is closed….,”[xi] a debtor has a continuing duty to disclose post-petition causes of action.[xii] This means a Chapter 13 debtor has a duty to amend his schedule of assets to include any tort claim that should have been listed initially, or was acquired after the bankruptcy petition was filed.[xiii]

To apply judicial estoppel, the following criteria is required: (1) the party against whom judicial estoppel is sought has asserted a legal position which is plainly inconsistent with a prior position; (2) a court accepted the prior position; and (3) the party’s act was not inadvertent.[xiv] Courts have held, however, that the doctrine is not governed by inflexible prerequisites or an exhaustive formula for determining its applicability. Rather, numerous considerations may inform the doctrine’s application in specific factual contexts.[xv] For instance, some courts have refused to apply judicial estoppel in the following circumstances:[xvi]

  • When a creditor had notice of claim thus did not detrimentally rely on omission;
  • A trustee had notice of claim;
  • The bankruptcy is not final or reopened to subsequently include a claim;
  • A debtor received no benefit from earlier proceeding;
  • A debtor lacked knowledge of claim;
  • A debtor was distinct from party in subsequent suit;
  • The interest of debtor’s creditors protected;
  • An inconsistent position not taken;
  • The disclosure was not complete but adequate;
  • Bad faith, or intent to deceive, not shown.

Absent any of the above outliers, however, the Fifth Circuit has noted that “[j]udicial estoppel is particularly appropriate where … a party fails to disclose an asset to a bankruptcy court, but then pursues a claim in a separate tribunal based on that undisclosed asset.”[xvii]  

The Take Away

Because of the potential effect on a claim, through loss of standing and/or judicial estoppel, it is always prudent for adjusters and defense counsel to look into whether a claimant has ever filed for bankruptcy, and, if so, the nature and timing of the bankruptcy filing, and if the subject claim was properly listed as a bankruptcy asset. Based on what is found, the claim may be subject to dismissal for reasons completely separate from the claim’s merits.

  • [i] Kane v. Nat’l Union Fire Ins. Co., et al., 535 F.3d 380, 385 (5th Cir. 2008) (per curium) (citing 11 U.S.C. § 541(a)(1)); State Farm Life Ins. Co. v. Swift (In re Swift), 129 F.3d 792, 795 (5th Cir. 1997); 5 Collier on Bankruptcy § 541.08.

    [ii] 11 U.S.C. § 323, 541(a)(1); Wieburg v. GTE Sw. Inc., 272 F.3d 302, 308 (5th Cir. 2001).

    [iii] Dance v. Louisiana State Univ. Med. Ctr. at Shreveport, La. App. 2 Cir. 12/10/99, 749 So. 2d 870, writ denied, La. 3/31/00, 759 So. 2d 76; citing Morris v. Succession of Williams, supra; Shahla v. City of Port Allen, 601 So.2d 746 (La.App. 1st Cir.1992); Ott v. Richard, 556 So.2d 147 (La.App. 5 th Cir.1990); Jones v. Chrysler Credit Corp., supra.

    [iv] Norton Bankruptcy Law and Practice 2d.

    [v] In re Bowker, 245 B.R. 192, 195 (Bankr. D.N.J. 2000); Olick v. Parker & Parsley Petroleum Co., 145 F.3d 513 (2nd Cir.1998); In re Griner, 240 B.R. 432 (Bankr.S.D.Ala.1999); Donato v. Metropolitan Life Insurance Co., 230 B.R. 418 (Bankr.N.D.Cal.1999); In re Wirmel, 134 B.R. 258 (Bankr.S.D.Ohio1991).

    [vi] Reed v. City of Arlington, 650 F.3d 571, 573–74 (5th Cir.2011) (en banc).

    [vii] New Hampshire v. Maine, 532 U.S. 742, 749–50, 121 S.Ct. 1808, 149 L.Ed.2d 968 (2001).

    [viii] In re Coastal Plains, 179 F.3d 197 (5th Cir. 1999).

    [ix] Reed, supra.

    [x] In re Coastal Plains, 179 F.3d 197, 208 (5th Cir. 1999).

    [xi] 11 U.S.C. § 1306(a)(1)

    [xii] Flugence v. Axis Surplus Ins. Co. (In re Flugence), 738 F.3d 126, 129 (5th Cir.2013).

    [xiii] Nat’l Bldg. Maint. Specialists, Inc. v. Hayes, 288 Ga. App. 25, 26, 653 S.E.2d 772, 774 (2007).

    [xiv] Reed, 650 F.3d at 574 (citations omitted).

    [xv] New Hampshire, 532 U.S. at 751, 121 S.Ct. 1808.

    [xvi] See 85 A.L.R. 5th 353 and cases cited

    [xvii] Jethroe v. Omnova Solutions, Inc., 412 F.3d 598, 600 (5th Cir. 2005), cited by Love v. Tyson Foods, Inc., 677 F.3d 258, 261–62 (5th Cir. 2012).

Allen & Gooch is providing this legal update for informational purposes only. This article should not be construed as legal advice or a legal opinion as to any specific facts or circumstances. You should consult your own attorney concerning your particular situation and any specific legal questions you may have.