The more I think about the disastrous consequences of two recent 8th Circuit Court of Appeals decisions regarding Judicial Estoppel the more alarmed I become.
This is a time bomb waiting to go off. The 8th Circuit has ruled that debtors who fail to amend bankruptcy schedules to report claims against third parties that occur after the bankruptcy case was filed will not be able to recover damages in their future litigation.
Following the entry of a bankruptcy discharge, litigation related to unreported post-petition claims shall be subject to Summary Judgment dismissal under the legal theory of Judicial Estoppel.
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 has ruled that a debtor’s failure to report new claims arising after the bankruptcy case was filed is basically a statement that no such claim exists, and if a debtor is saying that no such claim exists in one legal proceeding (i.e., the bankruptcy case) then it is inconsistent to say one exists in a future case.
The court’s reasoning is deeply flawed. There is no provision in the Bankruptcy Code requiring debtors to report new claims that occur after a bankruptcy is filed. And not reporting such a claim is clearly not the same thing as making an affirmative statement that no such claim exists. Silence is not a statement. Nevertheless, the 8th Circuit has taken a punitive approach and the failure to report new causes of action will be fatal to recovering a settlement in future legal proceedings.
This is a significant ruling. There will be tragic consequences. Uninformed debtors will be denied rightful recoveries and their attorneys are going to be sued.
Imagine the case of a Chapter 13 debtor who is seriously injured in an auto accident 6 months before the end of a 5-year bankruptcy plan. Assume the bankruptcy attorney never learned of the accident and the debtor never knew of the requirement to report such claims. Imagine a year or two after the bankruptcy is completed and the debtor’s injury attorney receives a Summary Judgment motion since the bankruptcy schedules were never amended. This is the type of disaster that now awaits plaintiff attorneys who fail to verify if their client was in a bankruptcy case.
Can you smell the legal malpractice case? Who gets sued? The Plaintiff attorney? Absolutely. The bankruptcy attorney? Very likely if they had any knowledge or should have known of the claim.
HOW CAN PLAINTIFF’S ATTORNEYS PEVENT THIS DISASTER?
There is a simple procedure plaintiff’s attorneys can utilize to avoid this nightmare: Check the PACER computer system to verify if their client has filed bankruptcy, and check the system again before the lawsuit is filed. Update your quality checklist to verify whether a bankruptcy is filed.
My experience is that plaintiff’s attorneys are generally annoyed when a bankruptcy attorney contacts them about the need to report their case to the bankruptcy court. They are fearful that they may somehow lose control of their case or that the bankruptcy court will interfere with the process. The opposite is true. Reporting the claim will preserve the right to proceed with the case and will protect them summary judgment motions.
WHAT BANKRUPTCY ATTORNEYS NEED TO DO TO PREVENT UNREPORTED CLAIMS.
My office is instituting the following procedures to protect our clients from losing recovery for new injuries suffering during the bankruptcy case:
- We have updated our information disclosure forms to warn clients of the vital need to report new claims against third parties throughout the term of their bankruptcy case.
- We are contacting all existing clients to warn of this danger.
- We are sending out regular correspondence to clients to remind them to report new claims.
- We will conduct an exit interview when cases are about to close to discover unreported claims.
Although there are some debtors who intentionally fail to report new claims because they fear they would have to pay the settlement over to the bankruptcy court, that is not the typical case. The 8th Circuit’s decision to punish dishonest debtors will unfortunately be imposed on innocent debtors and plaintiff attorneys who are simply unaware of the duty to amend bankruptcy schedules.
Chapter 13 cases fade into the background of life once the payment plan is approved. It’s just another payment in our list of monthly bills. Contact between debtors and their bankruptcy attorney commonly disappears once the payment plan is approved. Life resumes, and when bad things happen–like car accidents or work injuries–clients contact other attorneys to represent them in those matters. The need to report these new claims to a bankruptcy attorney they have not spoken to in 4 years is not obvious. This is what the 8th Circuit is not understanding. The failure to report new claims is generally not intentional. Why do I have to call my bankruptcy attorney when I get in a car accident? There is no obvious connection between the two events.
The rules have changed. Beware.
Image courtesy of Flickr and Andrew Kuznetsov