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    The Lawletter Blog

    BANKRUPTCY: Effect of Prior Bankruptcies on Civil Litigation

    Posted by Lee P. Dunham on Fri, Sep 28, 2018 @ 10:09 AM

    The Lawletter Vol 43 No 4

    Lee Dunham, Senior Attorney, National Legal Research Group

                Bankruptcy Code § 521(1) places an affirmative duty upon a debtor to disclose all assets to the bankruptcy court. A known cause of action that has accrued is an asset that must be scheduled under Bankruptcy Code § 521(1). See Eubanks v. CBSK Fin. Group, Inc., 385 F.3d 894, 897 (6th Cir. 2004); Cusano v. Klein, 264 F.3d 936, 945 (9th Cir. 2001). An unliquidated cause of action need not actually be filed prior to the commencement of the bankruptcy in order to qualify as an asset that must be scheduled. See Barletta v. Tedeschi, 121 B.R. 669, 671-72 (N.D.N.Y. 1990). However, debtors frequently neglect to list unliquidated causes of action as assets, whether because they have filed a bankruptcy without the assistance of a competent bankruptcy attorney or because, through simple oversight or lack of understanding, they failed to inform their bankruptcy counsel of their existing claims.

                This oversight can cause significant problems when the debtor attempts to pursue the claim after the bankruptcy is closed. The claim becomes an asset of the bankruptcy estate, whether or not it is properly scheduled, and it remains the property of the bankruptcy estate unless "abandoned" by the trustee. See Bankruptcy Code § 554. "The party seeking to demonstrate abandonment . . . bears the burden of persuading the court that the trustee intended to abandon the asset." Barletta, 121 B.R. at 672. Where the trustee was never informed of the asset in the first place, demonstrating abandonment is generally not possible.

                Some courts have held that a debtor's pursuit of an undisclosed cause of action creates an inconsistency sufficient to warrant application of judicial estoppel—if the debtor successfully asserted in bankruptcy court that no claim existed, the debtor will not be permitted to later take a contrary position in a different court. See Eubanks, 385 F.3d at 898; In re Freedom Ford, Inc., 140 B.R. 585 (M.D. Fla. 1992). Additionally, as the claims remain property of the bankruptcy estate, only the trustee, and not the debtor, has standing to pursue the claim. See Auday v. Wet Seal Retail, Inc., 698 F.3d 902, 904 (6th Cir. 2012).

                An attorney representing a client in a civil claim who discovers that the client failed to disclose the claim in a prior bankruptcy should act quickly to move to reopen the bankruptcy to amend the debtor's schedules to list the claim as an asset and seek abandonment of the claim by the trustee.  Unfortunately, it is possible that the client will have lost the right to assert exemptions that would have been available if the asset had been properly listed in the first place, and that would have enabled the debtor to take the asset back from the estate. If the suit is a valuable asset, the trustee has an obligation to seek to liquidate the claim in order to pay the debtor's creditors. However, even without exemptions, it is not uncommon for trustees to agree to abandon a civil claim—frequently, the anticipated costs of litigation are high and the possibility of recovery is uncertain, making the expected value of the suit too low for the trustee to be concerned with it.

                If the attorney does not discover that the claim was omitted from the bankruptcy until the later suit has already been filed, it is still worth reopening the bankruptcy to schedule the claim as quickly as possible. Although some courts have held that a failure to do so before filing the suit is incurably fatal to the plaintiff's standing, Kearney v. Campbell, 2016-Ohio-1332, appeal not allowed, 2016-Ohio-5585, 146 Ohio St. 3d 1491, 57 N.E.3d 1171, other courts have held that standing issues may be cured by the trustee's subsequent abandonment of the claim, or by joining the trustee as a plaintiff in the action, Krieger v. Cleveland Indians Baseball Co., 2008-Ohio-2183, 176 Ohio App. 3d 410, 892 N.E.2d 461, rev'd on other grounds sub nom. Oliver v. Cleveland Indians Baseball Co. P'ship, 2009-Ohio-5030, 123 Ohio St. 3d 278, 915 N.E.2d 1205. Similarly, a prompt motion to amend the bankruptcy can help to demonstrate that the prior failure to schedule the asset was mere "mistake or inadvertence" which does not warrant the application of judicial estoppel. See Browning v. Levy, 283 F.3d 761, 775 (6th Cir.2002).

    Topics: bankruptcy proceeding, unliquidated causes of action, undisclosed asset, asset

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