05 Aug Failure to Disclose Litigation in Bankruptcy Schedules
Henry FloresSenior Counsel
Litigating against or on behalf of an individual plaintiff? You should determine whether the plaintiff filed bankruptcy before or during the litigation.
When an individual plaintiff sues another person or a business, the defendant(s) and the plaintiff’s counsel should investigate whether the plaintiff has filed a recent bankruptcy case and try to learn about any bankruptcy case the plaintiff initiates during the litigation. Why? Depending on the type of bankruptcy case (chapter 7 liquidation vs. chapter 13 payment plan) and when the facts giving rise to the lawsuit arose, the lawsuit might belong to the bankruptcy trustee, not the plaintiff.
When an individual or business entity files a bankruptcy case, the Bankruptcy Code and Bankruptcy Rules require the debtor to file a detailed schedule of assets and liabilities (these schedules are signed under penalty of perjury). Among other assets, debtors are required to disclose whether they have claims against third parties. Occasionally, debtors will fail to disclose pending or potential lawsuits in their schedules, and that can give rise to headaches for debtor-plaintiffs and their lawyers. Fifth Circuit cases provide real-world examples of how this can unfold.
Reed v. City of Arlington.[i] In Reed, a firefighter won a $1 million-plus judgment against the City of Arlington under the Family Medical Leave Act (FMLA). During the city’s appeal of the judgment, the firefighter and his wife filed a chapter 7 bankruptcy case and did not list the lawsuit or the judgment in their schedules. The chapter 7 case was deemed a “no asset” case and the debtors were discharged. The plaintiff’s lawyer in the FMLA case later learned of the bankruptcy filing and immediately notified the chapter 7 trustee, who moved to reopen the chapter 7 case, revoke the debtors’ discharge and to substitute herself as the plaintiff in the FMLA case. The trustee also immediately accepted the city’s offer of judgment under the Federal Rules of Civil Procedure. The city, however, argued that the debtors’ failure to schedule the lawsuit resulted in judicial estoppel barring the debtor firefighter and the trustee from suing the city. The District Court and the Fifth Circuit disagreed, holding that while the failure to disclose the claim barred the debtor firefighter from pursing the claim, the trustee (acting on behalf of the bankruptcy estate and its creditors) was free to sue the city.
In re Parker.[ii] In Parker, an individual filed a chapter 13 bankruptcy case in 2009, proposing a 5-year plan to pay creditors. In 2010, the individual was involved in an accident at a Wal-Mart store, and he filed a personal injury lawsuit against Wal-Mart in 2011. Although the individual’s chapter 13 case and payment plan were ongoing, he did not amend his bankruptcy schedules to disclose the lawsuit. In 2014, the individual completed his 5-year bankruptcy payment plan and received a discharge while the lawsuit against Wal-Mart remained pending. Wal-Mart later learned of the bankruptcy filing, moved to reopen the bankruptcy case, and sought dismissal of the lawsuit based on judicial estoppel arising from the plaintiff’s failure to list the lawsuit as an estate asset. As in Reed, the Fifth Circuit concluded that the individual debtor was appropriately estopped from suing Wal-Mart, but the bankruptcy trustee could pursue the lawsuit on behalf of creditors.
The takeaway for defendants? If your opponent has failed to disclose the existence of a lawsuit that should have been part of the bankruptcy estate, the real party in interest is the bankruptcy trustee, not the individual plaintiff. Defendants should make sure that they are litigating against, negotiating with, and paying the correct party, which should be the trustee after a plaintiff has filed bankruptcy. Further, in litigating or negotiating with the bankruptcy trustee, a defendant might find a counterparty that is more willing to consider factual or legal problems in the plaintiff’s case, probability of success on the merits, the likely duration of the litigation and other matters that would factor into whether and how aggressively to pursue a lawsuit.
The takeaway for plaintiff’s counsel? If your plaintiff client has failed to disclose the existence of a lawsuit that should have been part of a bankruptcy estate, your case and your fee might be at risk. Learn about your client’s bankruptcy history at the beginning of the representation and (if possible) stay on top of any bankruptcy filing that occurs during the litigation.
Again, these disputes are highly fact dependent. Counsel should understand all of the facts relating to the underlying lawsuit and relating to the timing and specific type of bankruptcy case that the plaintiff filed. A quick PACER search at the beginning of a new case could provide critical information for either party to the dispute.
[ii] In re Parker, 789 Fed. Appx. 462 (5th Cir. 2020)