Undisclosed Claims and Pending Litigation

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.

Undisclosed Claims & Judicial Estoppel

If you needed another reason to disclose assets to your bankruptcy attorney, here’s one.

Patricia Plaintiff is involved in an auto accident.  She is thinking about suing the other driver for damages.  She is also planning to file for bankruptcy.  Worried that the money she would be entitled to from the accident would be seized by the bankruptcy trustee, she delays filing her lawsuit in the hopes that her bankruptcy attorney (and everyone else involved in the administration of her bankruptcy case) does not learn about the asset.

Patricia Plaintiff made a huge mistake by keeping her potential claim a secret.
  1. She wrongly assumed that the trustee would have a claim to the money.  Federal exemptions currently protect more than $20,000 for a personal injury claim, plus any wildcard exemption that the debtor has remaining.  Wisconsin exemptions can protect the first $50,000 of a personal injury claim.
  2. Because she omitted her contingent asset, she will most likely not be allowed to claim her exemptions later, if and when the asset is discovered.  The exemption she would otherwise have been entitled to can be denied for failure to disclose the asset initially.
  3. Because she did not list the asset on her bankruptcy schedules. she could be barred from filing the lawsuit later due to judicial estoppel, which precludes a party from taking a position in a legal proceeding (the personal injury lawsuit) that is inconsistent with a position the party took in a prior legal proceeding (the bankruptcy case).  In other words, by omitting her personal injury claim, she basically testified to the bankruptcy court that she has no personal injury claim.  She cannot then, later, go into civil court and assert that she has a personal injury claim.

Contingent assets are assets that a person has a future interest in, but does not presently have possession over.  A contingent asset might be of unknown nature or value.  Examples of contingent assets include personal injury claims, breach of contract claims, tax refunds, and inheritances.
Nevertheless, the existence of a contingent asset is still a valid legal interest, even if the value of such an asset is yet to be determined.  The uncertainty of a contingent asset does not excuse a debtor from listing the potential on his bankruptcy schedules.  Care should be taken to disclose as much information about the potential claim as possible, so the trustee can make a determination on the asset.  Sometimes, it is necessary to keep a bankruptcy case open for a long period of time so that the nature and value of the asset can be determined (this does not delay the issuance of a discharge).  Other times, the trustee can predict that the asset will not be worth pursuing, and close the case despite not knowing for certain the ultimate value of the asset.