Has your client filed for bankruptcy protection in the past? If so, he or she may be barred from pursuing an unrelated — but pre-existing — claim.
Whether the claim relates to a contract dispute, an allegation of an unlawful employment practice such as discrimination or harassment, an insurance claim or a personal injury, a prior bankruptcy filing could bar your client from being able to pursue it. Or, if you represent a defendant in a lawsuit, the plaintiff’s prior bankruptcy may give you a basis for dismissal or summary judgment. All litigators should be aware of the impact a prior bankruptcy could have on a case and ensure that they ask the right questions to provide their clients with the best advice.
The financial distress that might lead an individual to file for bankruptcy protection is often a result of the same underlying facts that form the basis for a later lawsuit. Think of an individual who has been injured in a car accident. If he has no medical insurance or personal injury protection coverage, he may be unable to pay his medical bills as incurred and may ultimately seek bankruptcy protection to get out from under the mounting bills. If he fails to disclose the potential personal injury claim in his bankruptcy case, he can be barred from seeking recovery for his injuries.
Although a debtor in bankruptcy is required to complete detailed schedules disclosing all assets and liabilities, many fail to appreciate the breadth or impact of this obligation. Bankruptcy law requires that a debtor include any personal injury, employment or contractual dispute claim as an asset (or liability), if the underlying acts giving rise to the claim have accrued, even if no lawsuit has been filed or claim asserted.
By way of background for non-bankruptcy practitioners, the commencement of a bankruptcy case creates an “estate.”1 With very few exceptions, the property of the estate includes “all legal or equitable interests of the debtor in property as of the commencement of the case.”2 Courts have consistently held that causes of action accrue at the time the individual has the right to file a claim, whether or not litigation has been commenced, and that accrued causes of action are property of the estate.3
Bankruptcy counsel should carefully explain this obligation and advise clients to schedule all potential claims. Failure to do so is certainly a disservice to the client and may even constitute malpractice.
The individual who fails to disclose the existence of a claim in bankruptcy loses his status as the real party in interest. Instead, the claim belongs to the bankruptcy estate and the trustee in bankruptcy is vested with standing to pursue it.4 Many courts have dismissed non-bankruptcy-related lawsuits based on lack of standing to bring a pre-petition claim because the plaintiff failed to list the claim in his bankruptcy schedules.5 Other courts have reached the same result, based on the doctrine of judicial estoppel, which precludes a party from taking inconsistent positions in litigation.6
“The purposes of the doctrine are to preserve respect for judicial proceedings without the necessity of resort to the perjury statutes; to bar as evidence statements by a party which would be contrary to sworn testimony the party has given in prior judicial proceedings; and to avoid inconsistency, duplicity, and the waste of time.”7
The integrity of the bankruptcy system depends on full and honest disclosure by debtors of all of their assets. The courts will not permit a debtor to obtain relief from the bankruptcy court by representing that no claim exists and then subsequently to assert those claims for his own benefit in a separate proceeding.8
Most debtors tend to list all liabilities because they desire to have their debts discharged. Unfortunately, debtors are not as diligent about listing all assets. The law does not permit them to deny the existence of claim assets in the bankruptcy and then later seek to gain the benefit from those same assets after denying creditors the right to do so.
Information regarding a plaintiff’s prior bankruptcy is equally relevant to defense counsel as it may provide a basis for dismissal or summary judgment on grounds of lack of standing or judicial estoppel. Defense counsel should determine if the plaintiff sought bankruptcy protection after the cause of action accrued.
This can be done through formal discovery or simply by checking the bankruptcy court dockets where the plaintiff resides. All bankruptcy courts maintain electronic dockets. If counsel discovers that a plaintiff filed for bankruptcy, the petition and schedules should be reviewed carefully to determine if the cause of action was disclosed.
If you discover a prior bankruptcy, consult competent bankruptcy counsel to determine its impact. There may be instances where the claim is deemed to have reverted back to the debtor or where the trustee has the right to intervene and continue the case on behalf of the bankruptcy estate.
By exercising due diligence in this important area, counsel on both sides of litigation can save their clients a significant amount of time and money. Before you proceed with (or defend) litigation, check into prior bankruptcy filings. You’ll be glad you did!
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1 11 U.S.C. § 541(a).
2 11 U.S.C. § 541(a)(1).
3 11 U.S.C. § 323; In re Eisen, 31 F.3d 1447, 1451 n.2 (9th Cir. 1994).
4 See 11 U.S.C. § 323; Stoll v. Quintanar (In re Stoll), 252 B.R. 492, 495 (B.A.P. 9th Cir. 2000); Linklater v. Johnson, 53 Wn. App. 567, 570, 768 P.2d 1020 (1989) (holding that a debtor lacked standing to bring a pre-petition claim where he failed to list it in his bankruptcy schedules).
5 11 U.S.C. §§ 521(1), 541(a)(1); Cusano v. Klein, 264 F.3d 936, 945–46 (9th Cir. 2001).
6 Hamilton v. State Farm Fire & Casualty Co., 270 F.3d 778, 782 (9th Cir. 2001).
7 Johnson v. Si-Cor, Inc., 107 Wn. App. 902, 906, 28 P.3d 832 (2001) (quoting Seattle-First Nat’l Bank v. Marshall, 31 Wn. App. 339, 343, 641 P.2d 1194 (1982)).
8 Hamilton, 270 F.3d at 785 (quoting In re Coastal Plains, 179 F.3d 197, 208 (5th Cir. 1999)).
