United States: Mass Tort Plaintiffs Who Failed To Disclose Their Claims In Bankruptcy Court: Standing And Estoppel

Last Updated: August 29 2019
Article by Stephen J. McConnell

We have blogged several times about mass tort plaintiffs who failed to list their tort claims in prior bankruptcy proceedings, thereby stiffing their creditors. See here, for example. Do they get away with it? Usually not. Courts have routinely sent those tort plaintiffs packing, and two different theories call for that result: (1) lack of standing, and (2) judicial estoppel. See, e.g., In re Taxotere (Docetaxel) Prod. Liab. Litig., 2018 WL 5016219, at *6-7 (E.D. La. Oct. 16, 2018) (granting summary judgment and holding that plaintiff is estopped from pursuing her claims against defendant because "the Chapter 7 Trustee is the real party in interest in this litigation").

Recently, we ran into a tort plaintiff who tried to escape this outcome by arguing that: (1) as a Chapter 13 bankruptcy debtor, she had standing, and (2) judicial estoppel should not apply because her failure to disclose the tort claim in bankruptcy was an innocent mistake – – all the more understandable because the tort claim did not arise until after she filed for bankruptcy and after her reorganization plan was confirmed.

It occurs to us that these issues might not be so rare, so we thought we'd share some quick and dirty learning with you.

Standing

Lack of standing is clear in Chapter 7 cases. See 11 U.S.C. § 541(a)(1) (upon commencement of a bankruptcy proceeding, "all legal or equitable interests of the debtor in property" become property of the bankruptcy estate); see also Newman v. Enriquez, 869 N.E.2d 735, 741 (Ohio Ct. App. 2007) ("Upon the commencement of a bankruptcy case, all of a debtor's property becomes property of the estate ... includ[ing] any unliquidated legal claims.") (internal citations omitted).

Chapter 13 is a bit messier. But wait a minute, you ask, what is the difference between Chapter 7 and Chapter 13? Chapter 7 is a liquidation bankruptcy as opposed to Chapter 13, which is a rehabilitation bankruptcy. (In the corporate context, the juxtaposition is liquidation vs. a Chapter 11 reorganization.) In a Chapter 7 bankruptcy, all nonexempt property becomes the property of the trustee, who must liquidate that property to satisfy secured creditors. So as of the time of filing a Chapter 7 bankruptcy petition, a debtor's interest in any pending civil action immediately becomes the property of the debtor's bankruptcy estate. See, e.g., Northland Ins. Co. v. The Illuminating Co., 2004 WL 612889, at *2-4 (Ohio Ct. App. March 29, 2004) (dismissing claims on grounds that plaintiff lacked standing because civil claims are the property of the bankruptcy estate). But in a Chapter 13 bankruptcy, the debtor maintains ownership in the property that is not included in the repayment plan, although the debtor is required to repay secured creditors in full and unsecured creditors in an amount equal to the value of nonexempt assets pursuant to a rehabilitation plan. See 11 U.S.C. § 1306(b) ("Except as provided in a confirmed plan or order confirming a plan, the debtor shall remain in possession of all property of the estate.").

What did we mean when we said that standing is messier under Chapter 13? There are some cases suggesting that Chapter 13 debtors lack standing outright. See, e.g., Richardson v. United Parcel Service, 195 B.R. 737, 739 (E.D. Mo. 1996) ("only the trustee is authorized to pursue a cause of action"); In re Bryer, 216 B.R. 755 (E.D. Pa. 1998). But there are also cases suggesting that a debtor has standing to pursue claims. Olick v. Parker & Parsley Petroleum Co., 145 F§ .3d 513, 515-16 (2d Cir. 1998); Ponton v. AFSCME, 395 F. App’x 867, 871 (3d Cir. 2010).

The standing of a Chapter 13 debtor seemingly rests upon the distinction between the debtor pursuing the claims for the benefit of the estate or for his or her own benefit. Thus, even Chapter 13 cases talk about standing to bring action on behalf of the estate. See, e.g., Autos, Inc. v. Gowin, 244 F. App'x 885, 889 (10th Cir. 2007) (unpublished) (the "case for standing [was] particularly compelling" because the debtor was "pursuing a claim ostensibly for the benefit of estate with the knowledge and consent of the trustee"); see also Ponton, 395 F. App'x at 871, n.1 (citing Smith v. Rockett, 522 F.3d 1080, 1081 (10th Cir. 2008) (Chapter 13 debtors held to have standing "to bring claims in their own name on behalf of the bankruptcy estate")). Notably though, the dissent by Judge O'Brien in Rockett pointed out that there is no language in the bankruptcy code granting Chapter 13 debtors capacity to sue in their own name, even on behalf of the estate, and declared the decision "unwarranted and unwise." It is a very good dissent. But it is a dissent. In any event, are the mass tort plaintiffs trying to sue on behalf of the estate? No, they are not. The beneficiaries of the tort claims are the plaintiffs – and their lawyers.

Under Chapter 13 there is also the issue of timing. If the tort claim is never disclosed, then when does it become property of the bankruptcy estate? What if the tort claim ripens after the initial bankruptcy petition? Plan confirmation is certainly a measuring point in a Chapter 13 case where full disclosure has been made, and it is not unusual for plans to be modified or amended. So, what about a claim that arises after a plan is confirmed, but then amended? That claim must be disclosed so that the bankruptcy trustee may determine how it should be allocated, and whether the claim reverts back to the debtor. Undisclosed assets remain property of the bankruptcy estate – it's that simple. In re Waldron, 536 F.3d 1239, 1242 (11th Cir. 2008); see also Rainey v. United Parcel Serv., Inc., 466 F. App'x 542, 544 (7th Cir. 2012) ("A Chapter 13 estate encompasses all property, including legal claims, acquired after the petition is filed and before the case is closed."); Barbosa v. Solomon, 235 F.3d 31, 36–37 (1st Cir. 2000) ("[P]roperty of the estate at the time of confirmation vests in the debtors free of any claims from the creditors. The estate does not cease to exist however, and it continues to be funded by the Debtors' regular income and post petition assets as specified in section 1306(a)."); In re Gonzales, 587 B.R. 363, 370 (Bankr. D.N.M. 2018). Those assets can be pre- or post-petition.

Judicial Estoppel

Even if your jurisdiction deems a Chapter 13 debtor to have standing to pursue claims on behalf of the bankruptcy estate, judicial estoppel may operate to bar those claims. For instance, though the court in Autos, Inc. held that the debtor had standing to pursue undisclosed claims, it also held that failure to disclose compelled dismissal of the case. 244 F. App'x at 889 (judicial estoppel applies against a Chapter 13 debtor who failed to list a lawsuit as an asset in prior bankruptcy case).

Let's go back to basics for a moment. For estoppel to apply, the plaintiff must have (i) taken inconsistent positions in two different courts, and (ii) the former position must have been accepted by the first court. See, e.g., Browning v. Levy, 283 F.3d 761 (6th Cir. 2002). Plaintiffs who did not disclose their tort lawsuits, and who have had their plans confirmed or bankruptcies discharged, clearly meet this standard. The only way for a plaintiff in this instance to avoid dismissal is to allege "inadvertence." A legal term of art in the judicial estoppel context, inadvertence is shown only when either (i) the debtor lacks knowledge of the factual basis of the undisclosed claims, or (ii) where the debtor has no motive for concealment. Id. at 776. Motive for concealment will always be clear in the bankruptcy context (the financial motive to avoid paying your creditors part of any potential award). Thus, the question really becomes: when does the plaintiff "lack knowledge of the factual basis of the undisclosed claims"? The factors that help answer that question will vary by jurisdiction, but it is certainly the case that once a tort lawsuit has been filed, no plaintiff can claim inadvertence under a theory of lack of knowledge.

But what about the tort plaintiff's argument that this was all too complicated and that she did not mean to stiff her creditors – even if that is the happy, unintentional result? The burden to prove "inadvertence" is on the plaintiff. In re Taxotere, 2018 WL 5016219, at *4 ("[T]o establish a defense of inadvertence, a party has to prove (1) that he or she did not know about the inconsistency or (2) that he or she lacked a motive for concealment."). Just saying "I did not mean it" does not get you off the hook. Mind you, there are some cases where plaintiffs were able to come forth with good reasons for their omission. See Hanley v. Trizetto Corp., 2014 WL 4212719 (D. Colo. 2014) (the debtor was misled by her lawyer who advised her that her legal claim should not be disclosed in bankruptcy; plus, she sought to reopen her bankruptcy and list the claim before the discrepancy was raised by the defendant; plus, she agreed to pay the estate a lump sum plus a percentage of any recovery). Byrd v. Wyeth, Inc., 907 F. Supp. 2d 803 (S.D. Mississippi 2012). But if the debtor-tort claimants do not have that something like that extraordinary concatenation of hardships/equities, they are in the soup, which means that your client might get out of the soup for that particular case.

Exemptions

In our case, the plaintiff argued that the nondisclosure of her tort lawsuit was all much ado about nothing, because the bankruptcy laws of her home state shielded her personal injury claims from the grasping hands of her creditors. It is true, to be sure, that such state law exemptions are applied – but take a careful look at the scope of such exemptions. Personal injury damages are not the same thing as punitive damages. We told the plaintiff lawyers we'd drop our standing/estoppel arguments if they'd drop their claim for punitive damages. Guess what their response was? They actually never did respond. We'd call that nonresponse rather telling.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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