You may lose the right to ever go to trial or settle that personal injury (“PI”) suit.
In bankruptcy, you are required to list every asset you have, including equitable interests and possible and/or pending lawsuits against third parties. If you fail to do so, bad things can happen in your bankruptcy case.
However, with a PI suit, it can be even worse:
1. The bankruptcy trustee can move to revoke your bankruptcy discharge for fraud, meaning that your bankruptcy case is thrown out and you can NEVER file a chapter 7 on those same debts again.
2. The bankruptcy trustee may decide to pursue the PI suit on your behalf. This sounds great, but if he settles, he may then argue that you didn’t exempt (protect) the settlement, and the money will go to your creditors instead of you!
3. The defendant in your PI suit can move to dismiss the suit against them.
Even if you have a very strong case, failure to list the suit in your bankruptcy may give the people you’re suing a nice “out” from the lawsuit. In other words, they “win” even if you have a wonderfully strong case.
I was reading an 2011 article called “Woe Unto the Bankrupt Plaintiff Who Doesn’t Schedule the Lawsuit,” by a collection attorney named David J. Cook. He obviously does his homework. He summarizes a number of cases on the issue that should make you really, really want to disclose the PI suit. I am including that case summary section from his article below:
The seminal case is Oneida Motor Freight, Inc v. United Jersey Bank (3rd Cir. 1988) 848 F.2d 414. In Oneida, the debtor filed a chapter 11 and did not schedule a potential lender liability claim against the bank, nor raise any issue of set-off against the bank’s claim (Id. at 417) and settled, providing for payment to the bank (Id. at 415). The bankruptcy filings failed to disclose the lender liability claim against the bank. Post-confirmation the debtor filed a lender liability against the bank, which the court dismissed on the grounds of estoppel (Id. at 416, fn. 2, and 420).
Oneida kicks off a series of cases holding that failure to schedule or disclose the claim (against the tortfeasor) in the bankruptcy constituted judicial estoppel barring any relief. See Billmeyer v. Plaza Bank of Commerce (Cal.App. 6th 1995) 42 Cal.App. 4th 1086, 1092 (fn. 2) (dismissal of lender liability claim for the failure to disclose); Matter of Baudoin (5th Cir. 1993) 981 F.2d 736 (lender liability claim); Hay v. First Interstate Bank of Kalispell, N.A., (9th Cir. 1992) 978 F.2d 555, 557 (lender liability action barred but left open rights of creditors); Ryan Operations G.P. v. Santiam-Midwest Lumber Co. (3rd Cir. 1996) 81 F.3d 355 (estoppel applied in favor of non creditor defendant if the claim was not scheduled); International Engine Parts, Inc. v. Feddersen & Co. (1998) 64 Cal.App. 4th 345 (judicial estoppel in favor of a party who was not a creditor nor a party to the bankruptcy proceeding).
Other cases abound: Maggio v. Schatz (Cal. App 2d Dist. 2004) 2004 Cal. App. Unpub. LEXIS 9366 (unscheduled), Hamilton v. Greenwich Investors, XXVI, LLC, (2011) 195 Cal. App. 4th 1602 (unscheduled); Hamilton v. State Farm Fire & Cas. Co. (9th Cir. 2001) 270 F.3d 778, 784-786 (unscheduled); Burnes v. Pemco Aeroplex, Inc. (11th Cir. 2002) 291 F.3d 1282, 1287-1288 (unscheduled). See also M & M Foods, Inc. v. Pacific Amer. Fish Co. (2011) 196 Cal. App. 4th 554, 561-565 (denied confirmation of arbitration award because debtor failed to fully disclose asset in schedules).
Not every personal injury plaintiff crumples and some survive the debacle of the unscheduled PI lawsuit. See e.g., Cloud, supra. (possibly holding barred summary disposition at pleading stage: “[N]on-disclosure, and nothing more, is all that could be established in this case by a review limited to the plaintiff’s complaint plus her bankruptcy filings.” (Cloud at 1019-1020, questioning whether non-disclosure was part of a scheme to defraud or innocent error); also Gottlieb v. Kest (Cal. App. 2d 2006) 141 Cal App. 4th 110 (bankruptcy proceeding did not adjudicate the claim one way or another).
Dismissal is not preordained but the trustee captures an asset, possibly free of trial counsel absent a valid pre-petition lien. An unscheduled asset belongs to the trustee who may pursue the action for the benefit of the estate. Locapo vs. Colsia (D.N.H. 2009) 609 F. Supp.2d 156, GE HFS Holdings, Inc. v. International Ins. Group (D. Ma, May 29, 2008) LTC 2008 U.S. Dist LEXIS 4406, Graupner v. Town of Brookfield (D. Ma. 2006) 450 F. Supp.2d 119, Vidal v. Doral Bank Corp., (D.P.R. 2005) 363 F. Supp.2d 12. While the claim is preserved, the plaintiff’s standing is forfeited. In any event, the PI lawsuit belongs to the trustee who might oust trial counsel who embraces Fracasee v. Brent (1972) 6 Cal. 3d 784 (measure of attorney’s fees due discharged attorney in tort case).
Worse, the plaintiff’s omission is act of dishonesty gives the defense counsel a WMD: “Did you lie on the bankruptcy schedules?” or “Did you lie in this case?” or “Are you cheating your own doctor who saved your life?” The failure to list the PI lawsuit might bar the debtor’s discharge under Bankr. C. § 727(a)(4)(A) et seq. See In Re Harris (Bankr. D. N.H. 2006) 2006 B.N.H. 26; Saunders Real Estate Corp. v. Pearlman (In re Pearlman) (Bankr. D.R.I. 2009) 413 B.R. 27. The failure to list the PI lawsuit may deny viable exemptions. See In re Orlando (Bankr. D. Mass. 2007) 359 B.R. 395; In re Salvucci (Bankr. D. Mass, 2006) 339 B.R. 279. The nightmare culminates in a criminal prosecution under 18 U.S.C. §§ 152 (1),(2) and (3)[false oath].