By: Daniel Stone
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Why it is important to list potential claims/lawsuits in a bankruptcy
Two years ago I received a phone call from an injury attorney representing a former Chapter 13 client of mine. The client had completed her Chapter 13 bankruptcy within the last 12 months. The attorney said that the client had a pending injury lawsuit and the defendant had filed a motion for summary judgment stating the case should be dismissed due to the client’s failure to list the potential claim in her bankruptcy. The legal theory behind this is called judicial estoppel. The legal theory is that a person should be estopped from seeking a position in one Court that is contrary to a position the person took in a prior case. Here is an example. A client is involved in a car accident and is hurt. The client decides against filing a lawsuit at the time and fails to list the potential claim in her name because she does not think she will pursue the claim. The bankruptcy is discharged and a year later the client decides that she wants to pursue the accident claim due to lingering back issues. In this scenario, the client could be in danger of losing her claim in Court if the Defendant learns about the prior bankruptcy. In fact, many insurance companies are having their defense attorneys ask plaintiffs in their discovery paperwork if they have ever filed for bankruptcy. If they say “yes”, the Defendant scrolls through Schedule B of the plaintiff’s bankruptcy to see if they listed a potential claim.
So what does this mean for debtors interested in filing for bankruptcy and for bankruptcy attorneys? We need to make sure we list every potential lawsuit or claim on the bankruptcy petition no matter how small or unlikely the debtor will pursue the claim. I have my clients initial a checklist that states they have no potential claims or lawsuits against anyone. I also ask them if they currently have any litigation or attorneys representing them on an injury or workers compensation case. In addition, match information your client gives you on Schedule I with Schedule B. For instance, if your client tells you that they have just begun to receive workers compensation but the case is still pending, red flags should go up for you to ask additional questions. Do you have an attorney? Have you filed a claim? Do you have a potential case for additional funds. If there is even a remote chance of a future claim, list it and explain to the Trustee later that it is remote but you are listing it in an abundance of caution.
Finally, are there any defenses to the fact scenario listed above where the debtor failed to list the potential claim? In my case the debtor had a 100% Chapter 13 plan and won the summary judgment motion. The injury attorney with my help was able to explain to the Court that no creditors were harmed by her failure to list the claim because she paid every creditor back 100% of their claim. In addition, you may be in some circumstances able to reopen the case to list the potential claim or lawsuit and claim any available state exemptions. Please note that Trustee may object to this and step in the shoes of the Debtor in seeking the injury reward.