Using Bankruptcy Filings To (Es)stop A Plaintiff in His Tracks
As a transportation defense lawyer, one of the last things you want to read about is “bankruptcy.” Your eyes might have already glossed over at the very mention of the word. We urge you to plug through and tune in. Your plaintiff’s disclosures in his bankruptcy proceedings, made under oath and penalty of perjury, may be a valuable tool in your personal injury suit. If your plaintiff takes certain positions before the Bankruptcy Court, judicial estoppel bars him from taking a contradictory position in your case before your court. It may bar him from even pursuing the case against your client at all.
Bankruptcy Filings: The Basics
When an individual files for bankruptcy, he seeks relief from outstanding liabilities owed to various creditors (e.g. mortgage lenders, student loan lenders, credit card companies). He trades in all of his non-exempt assets and, in return, his liabilities are discharged and he achieves a “fresh start.”
Before that happens, the Bankruptcy Code requires the debtor to disclose the “current value” of his assets and liabilities. A potential personal injury claim (including an actual lawsuit) is required to be disclosed because it is an asset—a potential right to payment. This disclosure must be made even if the facts of the claim are disputed and the value of the claim is not yet known. In some jurisdictions, a debtor has a continuing duty to disclose a claim even if injury occurs after the commencement of bankruptcy. The debtor also completes a Statement of Financial Affairs in which he must list specific details regarding any lawsuits to which he is or was a party in the year before his bankruptcy filing (e.g., case caption, venue, case status). He must also appear at a Meeting of Creditors and certify under oath that the list of assets which he provided to the Bankruptcy Court is complete and accurate, and that he has no additional disclosures to make.
The purpose of these disclosures is to notify creditors of the debtor’s insolvency, to protect the creditors’ interests, and to enable the Bankruptcy Court to fairly discharge/reorganize the debtor’s debts. These filings provide a fruitful area to forage for facts to help in your personal injury lawsuit.
Using Bankruptcy Filings in Your Personal Injury Case
By filing for bankruptcy, your plaintiff takes certain positions with respect to your actual (or potential) lawsuit. For example, he takes a position on your case’s “current value.” More fundamentally, he takes a position regarding the very existence of your case. If he fails to disclose it, the majority view is that he has taken a position that your lawsuit does not even exist.
He is then bound by those positions. Under the “equitable doctrine” of judicial estoppel, which protects the integrity of the entire judiciary, he cannot shift gear and take different positions in your personal injury case. If your plaintiff, say, takes the position in his bankruptcy filing that his personal injury suit does not exist (or is worth “$0.00”), judicial estoppel probably bars him from taking the inconsistent position that he has a viable tort suit, and that it is worth $1,000,000.
Twists that we have Encountered
Undervaluing a Suit
One plaintiff filed her personal injury suit in April 2008. She pled that the value of her suit exceeded $50,000.00. In the eight months after filing suit, she amassed nearly $60,000 in credit card debt and, in June 2009, filed for bankruptcy. In her Asset Schedule she listed an unspecified “personal injury claim” and conveniently assigned it a value of $16,150 — not a penny more than the state’s personal injury exemption. In her Statement of Financial Affairs, she checked the box for “None” when asked if she was a party to a lawsuit. Accepting these disclosures, the Bankruptcy Court confirmed her discharge plan, and the bulk of her debts vanished, with the rest being paid under a minimal repayment plan. We moved for summary judgment, arguing that judicial estoppel barred her from recovering anything more than the $16,150 disclosed during the bankruptcy proceedings. That question is now before the state’s highest court.
Interestingly, after the high court accepted interlocutory appeal, the plaintiff went back and amended her bankruptcy disclosures. The majority view is that a plaintiff’s attempt to unring the bell not only fails to spare her, but in fact is an admission that the prior disclosures were improper and deceptive. If the rule were otherwise, debtors could game the system and amend dishonest bankruptcy filings only if their initial lack of candor is exposed.
Disclosing Two Cases as One
Another plaintiff had separately pending worker’s compensation and tort proceedings when he filed for bankruptcy. In his Asset Schedule, however, he melded the two proceedings together to make it look like he only had a worker’s compensation claim, and disclosed them as a single asset: “Workers Comp claim. Jim Jones v. Acme Trucking Co. (October 2007).” The disclosure identifies the defendant in his tort suit (Acme Trucking Co.), but stops short of including Janice Jones (his co-plaintiff wife), and conveniently omits the trial court venue and docket number. By doing so, he concealed his assets (a worker’s compensation claim is a fully exempt asset in most states, whereas a personal injury suit is typically only partially exempt to a set dollar amount). The Bankruptcy Court accepted his disclosures and approved his discharge plan, and he wiped away 50% of his consumer debt without his creditors ever knowing about his pending tort suit, a suit he subsequently valued at $5,000,000 in a verified pleading. We moved for summary judgment in the tort suit based on his failure to properly disclose it. We achieved a favorable settlement in a case that was hard to defend on liability before the motion was resolved. Exposure of the plaintiff’s attempted ruse undoubtedly played a significant part.
Research the elements of judicial estoppel in your jurisdiction: Some jurisdictions include a scienter element — i.e., an inconsistent disclosure must be made with a specific intent to deceive. That intent can be gleaned from the record — bankruptcy filers have an ever present, inherent motive to conceal assets: the less assets they show, the less they pay to discharge their debts. Other jurisdictions consider the possibility of inadvertence/mistake. Although your personal injury suit might be in state court, federal cases (especially those in the same state) are persuasive authority.
Plead judicial estoppel as an affirmative defense: Or, at least plead general estoppel. If you do not, consider amending. Even if you had no good faith basis to plead a judicial estoppel defense at the time you filed your Answer, failure to amend could derail your dispositive motion.
Gain the element of surprise: You need not ask your plaintiff about bankruptcy filings in written discovery. There are online databases that will tell you if and when he filed for bankruptcy. Conduct a docket search in the Federal Bankruptcy Court where he resides. You can pay a nominal fee to view and obtain all pertinent filings from ECF/PACER. Also, obtain the minutes from your plaintiff’s Rule 341 Meeting of Creditors (in which the debtor answers questions about his filing under oath). The audio transcript of this hearing can be obtained with a written request to the Office of the United States Trustee. The disclosures and representations that your plaintiff makes will tell you if you have a potential judicial estoppel argument. And you can depose your plaintiff without having telegraphed your interest in his bankruptcy filings.
Use the bankruptcy filings in other aspects of your case: Bankruptcy filings offer a treasure trove of admissions made under oath. Even if the judicial estoppel argument does not exist, you can use these admissions to your advantage. For example, in the second scenario above, we moved for outright dismissal based on the failure to properly disclose the personal injury suit. But we also discovered that the 2008 wages disclosed in our plaintiff’s bankruptcy filings were much lower than the 2008 wages claimed in his tort suit. So we were also prepared to argue that he could not board a wage amount in his tort suit that was higher than the amount disclosed in the bankruptcy proceedings. The lower 2008 figures would certainly have made for an interesting deposition/cross- examination of his economist.
Seek outside expertise: Because bankruptcy law is a discrete body of law with unique issues, consider consulting with a bankruptcy practitioner, or a firm with experience reading bankruptcy filings and identifying relevant points to use in the personal injury context.
Consider timing: Remember, to make a successful judicial estoppel argument, the plaintiff must succeed in asserting his previous position in the Bankruptcy Court (i.e. achieve a discharge). So you need to wait until that occurs before moving. Strategically, consider moving at a time that will maximize case leverage (e.g., just prior to mediation).