Failing to List a Lawsuit in Your Bankruptcy Case
Whenever you file bankruptcy, your attorney will advise you to make certain you have listed all of your debts and all of your assets. Not only are there severe penalties for failing to list an asset, but you may suffer significant negative consequences to your rights as well. For example, as several litigation plaintiffs have discovered, failing to list a lawsuit might just forfeit the entire matter to the defendant.
Under the Bankruptcy Code, all legal or equitable interests of the debtor in property, whether scheduled or unscheduled, becomes property of a “bankruptcy estate” created by the operation of law upon the filing of a bankruptcy case. This includes the right to file a lawsuit against another party, whatever the grounds, as well as the proceeds of such a lawsuit. Such property then remains in the Chapter 7 bankruptcy estate until abandoned by the Trustee, until the court orders abandonment, or – in the case of any property which was properly scheduled in your bankruptcy petition – upon the closing of the case. Once abandoned, the rights in the property return to you, exactly as they were before. However, all other property remains a part of the estate, which means that if you have failed to list such property, you will ordinarily not regain your right to it.
This is particularly problematic when it comes to lawsuits, because of the judicial concept of standing. Standing effectively requires a personal stake in the resolution of any legal controversy – it’s not enough just to want to see an outcome, there must be some actual harm done to you which the court can redress. Unfortunately, once you pass this right to another party, you no longer have standing to sue – only the other party does. If you file the case, or even if your case has already been filed and is now pending, the defendant may move to summarily dismiss it for lack of standing.
As previously mentioned, this applies to Chapter 7 cases. In a recent case filed in the Eastern District of Virginia,Royal v. R&L Carriers Shared Services, Inc., a Defendant to a lawsuit attempted to argue lack of standing in a Chapter 13 case, using the exact same reasoning as above. However, the bankruptcy code specifically provides that, in a Chapter 13 case, the debtor shall remain in possession of all property of the estate unless a confirmed plan specifically states otherwise. Further, once a plan is confirmed, unless the plan provides otherwise, all property of the estate, not merely scheduled property, re-vests in the debtor. The Court, relying on the plain language of these statutes, held that even a debtor who fails to properly schedule a lawsuit will retain their rights in a Chapter 13.
However, even in a Chapter 13, there is still another risk to failing to accurately schedule a lawsuit – the concept of estoppel. Under this concept, once you have asserted a fact as true, and the court has accepted it, you are prevented from asserting a position which is inconsistent with that prior assertion in a future case. Unfortunately, asserting a fact in bankruptcy – namely, that you have no assets in the form of potential redress of a wrong that you suffered – is considered asserting a fact in a court proceeding, and may be used to estop a contradictory claim in any future case that you file. In addition, even if such a lawsuit is listed, if you do not value it appropriately, then you risk being held to that value if your listed value is accepted by the court. In other words, if you list a suit and value it at $5,000.00, a later attempt to sue for $75,000.00 may be estopped even though the suit was properly listed. However, the Eastern District of Virginia also held in Royal that a bankruptcy court only “accepts” the claim once final relief is granted in the case. Therefore, until you receive your discharge, you will have the opportunity to make amends and correct this failure. In addition, under numerous Fourth Circuit holdings, estoppel will not be applied when a prior position was based on inadvertence or mistake. However, if you have gained a benefit from this failure, you will be faced with a difficult task of proving your failure was inadvertent. The District Court of Virginia has in the past held that a failure to amend schedules timely shows intent to mislead, and any possibility of there being non-exempt funds shows a motive for doing so.
It is therefore of utmost importance to ensure that all potential lawsuits or causes of action that you may have are listed in your bankruptcy schedules, and are valued appropriately if the value of the suit is known. While doing so may attract the trustee’s attention, failure to do so is not only potentially criminal, but may cost you your case.