I’ve written in the past
about the concept of “judicial estoppel” and how – if you fail to mention that you have pending litigation or a claim against someone on your bankruptcy schedules, you could be barred from litigating the claim in the future.
In plain English, this is how it works… John Doe goes to Mal-Wart to do some shopping, and while he’s there, he slips and falls on a sidewalk that hasn’t been cleared of ice. John Doe has a potential personal injury claim against Mal-Wart (whether he can win and how much he could potentially win – both of these are irrelevant). After the accident, he files for bankruptcy and does not list his potential claim against Mal-Wart. After his bankruptcy case is discharged, he then brings a lawsuit against Mal-Wart. Mal-Wart brings a motion to have the lawsuit dismissed on the grounds that on a previous legal document that was signed under the penalty of perjury, John Doe asserted – by his omission – that he had no legal claim against Mal-Wart.
That’s judicial estoppel in a nutshell, and many courts would grant Mal-Wart’s motion and dismiss the case on those grounds. But sometimes a court will allow the lawsuit to proceed. The law is not uniform on this subject (yet), but there are two questions to consider. (1) Whether the lawsuit will be permitted to continue and (2) if the lawsuit continues and the debtor-plaintiff prevails, who gets the money?
The answer to both questions may depend on two factors. (1) What court is the lawsuit being brought in, and what existing case law on these questions is that particular court bound by? (2) Has the debtor-plaintiff taken steps to demonstrate that the omission was inadvertent?
Sometimes, despite being grilled by their bankruptcy attorney, debtors simply forget about a potential claim that they have or – more frequently – they don’t realize that they even have a cause of action. If they later file a motion to reopen the case and disclose the asset, that goes a long way to demonstrating that the debtor did not intend to deceive or hinder creditors – especially if the claim would have been exempt all along.
If a lawsuit is permitted despite judicial estoppel, it is generally accepted that the Trustee will always have a right to pursue those funds. Whether the debtor has any right to the funds will again depend on the court and a demonstration of intent.
Moral of the story? Unchanged. Make sure that you list any potential claims (such as personal injury cases, breach of contract cases, class action suits, etc.) immediately when you file for bankruptcy.