In two recent cases the 8th Circuit Court of Appeals has sustained summary judgments against debtors who failed to report claims against third parties that arose after the bankruptcy case was filed.
In the case of Jones v. Bob Evans Farms Inc., the debtor failed to disclose an employment discrimination claim that occurred 3 years after the bankruptcy case was filed. The bankruptcy case was filed in 2009 and in 2012 the debtor quit his job and filed a discrimination case with the Missouri Equal Opportunity Commission. The employer filed a motion for Summary Judgment claiming that the debtor was judicially estopped from pursuing his claim because he failed to report the claim in his bankruptcy schedules.
The 8th Circuit court agreed with the employer and declared that a debtor who intentionally hides a post-petition claim by failing to amend the bankruptcy schedules lacks standing to assert such claims in future legal proceedings and is thereby judicially estopped from litigating such claims.
A month later the 8th Circuit issued another opinion on this same topic in the case of Van Horn v. Martin where a debtor filed Chapter 13 bankruptcy in 2007 but failed to amend schedules to report an employment discrimination claim that occurred in 2011. After the debtor completed the chapter 13 case the employer was awarded a Summary Judgment because the debtor failed to report the new claim, and the 8th Circuit court sustained the summary judgment.
Judicial estoppel is an equitable doctrine which “prevents a party from asserting a claim in a legal proceeding that is inconsistent with a claim taken by that party in a previous proceeding.” New Hampshire v. Maine, 532 U.S. 742, 749 (2001).
The 8th Circuit applied a three-prong test to determine when judicial estoppel applies.
- A party’s later position must be clearly inconsistent with its prior position. By not amending bankruptcy schedules to report a new claim the 8th Circuit declares that no such claim must exist, and that is a position deemed to be clearly inconsistent with the later litigation.
- Whether the party succeeded in persuading the first court to accept its position. Receiving a discharge in a chapter 13 case where new new claims are not disclosed is considered to cause the first court to accept the position that no claim truly exists.
- Whether the party seeking to assert an inconsistent position would derive an unfair advantage if not estopped. Failure to disclose new claims arising during a chapter 13 gives the debtor an unfair advantage in that creditors may have benefited from increased payments derived from settlement of those claims.
The concept of Judicial Estoppel is widely understood by attorneys to require the disclosure of claims that exist prior to the filing of bankruptcy in both chapter 7 and chapter 13 proceedings, but many were surprised that the doctrine was extended to new claims arising after the bankruptcy was filed.
Attorneys for the debtors pointed out that the “bankruptcy estate” is not compromised of post-petition claims. They claimed that there is no legal duty under the Bankruptcy Code to disclose post-petition claims. However, the 8th Circuit responded that judicial estoppel may apply “regardless of whether he had independent legal duty to amend schedules.”
As a practical matter, these rulings will have a profound impact on debtors and their attorneys. First, many debtors are simply not aware of the requirement to report new claims to their bankruptcy attorneys. Debtors are inundated with information at the beginning of a case and it is unreasonable to expect them to remember such fine legal details during a five year case. Also, once a chapter 13 payment plan is approved the case really just fades into the background of their life. Payments are made the the court monthly, often through a payroll deduction, but there really is no ongoing contact with the court or their attorneys in many cases.
The 8th Circuit takes a drastic and dark view of debtors who fail to amend schedules to report new claims, but this omission is more common and innocent than the court understands. I frequently learn of new claims that arise from clients who have no idea that such claims should be reported. Usually we learn of these claims when a debtor defaults on plan payments and responds that they were off work due to a car accident or job injury.
Very commonly I discover debtors who are in the middle of new lawsuits for worker compensation claims or auto accidents, and their personal injury attorney has no clue of the need to report the claim to the bankruptcy court. Contrary to the 8th Circuit’s concern over dishonest debtors who hide claims with the intent of misleading the bankruptcy court of their ability to pay debts, most debtors and their injury attorneys are completely clueless of the need to amend bankruptcy schedules to report new claims. These rulings will cause a lot of unexpected grief when debtors realize they have lost their right to recover just compensation for injuries.
Bankruptcy attorneys will need to communicate with Chapter 13 debtors on an ongoing basis to ensure that new claims are reported. I can envision scores of malpractice lawsuits being filed against attorneys who fail to report new claims. This is going to be a mess.
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