Bankruptcy and Personal Injury: When Two Worlds Collide

Ruben Ernesto Vasquez

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Chapter 13 Bankruptcy Attorney

Contributor Level 9

Posted 11 months ago. 3 helpful votes

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Bankruptcy and Personal Injury: When Two Worlds Collide

Presented:

2013 Texas Advanced Paralegal Seminar (TAPS)

October 2-4, 2013

Omni Hotel (Colonnade) Boulevard, San Antonio, Texas

Author Contact Information:

Ruben E. Vasquez, Esq.

Attorney and Counselor at Law

The Vasquez Law Firm

5411 IH-10 West, Ste. 100

San Antonio, Texas 78201.

info@TheVasquezLawFirm.com

(210) 229-2067 office

(210) 733-0439 fax

www.TheVasquezLawFirm.com

** For 24-hour automated information:

call (210) C13-PLAN™

(213-7526) or

visit www.C13PLAN.com

Settlement and Motion to Compromise

Once a trial or settlement liquidates the claim, and before papers are signed between counsel, a motion to compromise must be filed with the bankruptcy petition. [17] This is necessary as the bankruptcy estate is the real party in interest and potentially owns the cause(s) of action. As such, the bankruptcy court has discretion as to whether to approve the compromise of the cause(s) of action. It is my experience that bankruptcy courts will not upset the proposed settlement(s) between personal injury counsel so long as they are reasonable in value and in counsel’s attorney fees.

Failure to Disclose Asset(s)

A debtor(s) who willfully omits a cause of action is subject to criminal prosecution, [18] dismissal, [19] sanctions, [20] conversion to chapter 7 [21] and/or may have the denial or revocation of their discharge. [22] Therefore, it should not come as a surprise to anyone that failure to disclose a known asset is always a bad idea that can bring about serious consequences to the debtor(s), debtor(s) attorney(s) and/or personal injury attorney(s).

Doctrine of Judicial Estoppel

As previously stated, unfortunately debtor(s) omit the disclosure and inclusion of their cause(s) of action in their bankruptcy petitions. This omission can later be used against the debtor(s) as a defense to their claim for money damages in a civil personal injury cause(s) of action.

The legal doctrine of judicial estoppel is a common law doctrine that generally states, “a party is precluded from asserting a position in a judicial proceeding that is inconsistent with a position previously and successfully asserted by it in a prior proceeding." [28] This is the legal basis that prudent civil personal injury defense counsel generally assert in an attempt to preclude a bankruptcy debtor(s) from pursuing money damages from their client(s) for failure to disclose and include said asset(s) in the debtor(s) bankruptcy pleadings. It emerged to prevent litigants from “playing fast and loose with the courts to suit the exigencies of self interest." [29]

Currently the doctrine of judicial estoppel is anything but well settled, especially in the bankruptcy context. The U.S. Supreme Court attempted to shed some light on the doctrine in 2001. In New Hampshire v. Maine, a non-bankruptcy case, the Supremes established “several factors that typically inform the decision whether to apply the doctrine in a particular case." [30] They are:

  1. A party has taken a position in a legal proceeding that is “clearly inconsistent" with a position that party has taken previously in either the same or a separate legal proceeding;

  2. That party “has succeeded in persuading a court to accept that party’s earlier position, so that judicial acceptance of an inconsistent position in a later proceeding would create the perception that either the first or the second court was misled;" and

  3. That party “would derive an unfair advantage or impose an unfair detriment on the opposing party if not estopped." [31]

The Supremes added further guidance to the list of factors saying “the circumstances under which judicial estoppel may appropriately be invoked are probably not reducible to any general formulation of principle." [32] They stressed “In enumerating these factors, we do not establish inflexible prerequisites or an exhaustive formula for determining the applicability of judicial estoppel. Additional considerations may inform the doctrine’s application in specific factual contexts." [33]

The Fifth Circuit promulgated three elements for judicial estoppel to apply: (1) the position is clearly inconsistent with a prior position; (2) the court accepted the prior position; and (3) the non-disclosure was not inadvertent. [34] To show inadvertence, the party must lack knowledge of the claim or have no motive for concealment. [35]

Reed v. City of Arlington

In 2011, the Fifth Circuit, in an en banc opinion reversing a three-judge panel of the court, ruled in Reed v. City of Arlington [36] that judicial estoppel DID NOT bar an innocent chapter 7 bankruptcy trustee from pursuing and collecting on a consumer debtor’s judgment against his former employer, the City of Arlington, Texas, under the Family and Medical Leave Act (“FMLA"). The debtor “concealed the judgment during the bankruptcy" from both the court and his bankruptcy attorney by failing to list on his bankruptcy schedules either the judgment against the city or his associated legal fees. [37] Therefore, the debtor was estopped from pursuing the claim himself, [38] a result in line with case law of numerous jurisdictions at the time. [39] However, for the first time the Fifth Circuit held that as “a general rule, absent unusual circumstances, an innocent trustee CAN pursue for the benefit of creditors a judgment or cause of action that the debtor fails to disclose in bankruptcy." [40]

The debtor in Reed received a no-asset discharge, and his bankruptcy case had been closed. [41] When the debtor’s nondisclosure came to light, however, the trustee reopened the case pursuant to 11 U.S.C. § 350(b), successfully obtained a revocation of the debtor’s discharge pursuant to 11 U.S.C. § 727(a)(4)(A), and got substituted as the real party in interest in the FMLA litigation against the City of Arlington, Texas. [42] The City of Arlington, Texas argued, to no avail, that the debtor’s wrongdoing barred the trustee from collecting the judgment on judicial estoppel grounds.

This will strike many as the correct interpretation and result for a fair and just outcome. Innocent creditors should not have to be punished and pay for the debtor’s transgressions. The court held that in the bankruptcy context judicial estoppel must be applied “against the backdrop of the bankruptcy system and the ends it seeks to achieve." [43] Under the bankruptcy code, the debtor is a distinct entity from the debtor’s estate, and the chapter 7 trustee’s duty is to maximize the value of the latter to thereby maximize creditor return. [44] Courts must therefore apply judicial estoppel “in such a way as to deter dishonest debtors, whose failure to fully and honestly disclose all their assets undermines the integrity of the bankruptcy system, while protecting the rights of creditors to an equitable distribution of the assets of the debtor’s estate." [45]

In reaching this result in Reed, the Fifth Circuit joins other circuits, including the Tenth and Eleventh Circuits, the D.C. Circuit, as well as district courts in numerous other circuits, that have either held or noted in dicta that a debtor’s misconduct should not judicially estop an innocent trustee from pursuing claims for the benefit of creditors. [46]

Love v. Tyson Foods, Incorporated

In 2012, the Fifth Circuit in Love v. Tyson Foods, Incorporated, [47] affirmed the dismissal of a cause of action on the basis of judicial estoppel and held that the district court DID NOT abuse its discretion in dismissing, a chapter 13 debtor’s civil rights action against his former employer, Tyson Foods, that he failed to disclose in his bankruptcy pleadings. The court reasoned that this case was readily distinguishable from Reed because unlike in Reed, here the debtor would be the only one to benefit from the nondisclosure. Apparently, the majority of the Fifth Circuit interpreted the debtor’s confirmed plan to mean that any potential recovery “would go the debtor to the exclusion of his creditors." [48]

However, note the powerful but respectful dissent by Judge Catharine Haynes. Judge Haynes explained that Love should not have been estopped because the discrimination claims were property of the bankruptcy estate, and therefore, Love was obligated to pursue these claims on his creditor’s behalf. [49] She further explained that the claim became property of the estate at the time the petition was filed and was, therefore, property of the estate under § 541 of the Bankruptcy Code. [50] Specifically, Judge Haynes explained that judicial estoppel is an equitable doctrine, and it should not be used if its application would “land another blow on the victims [i.e., creditors] of bankruptcy fraud." [51]

It is not entirely apparent that Love would have received any of the benefits arising from his discrimination claim. If the award from Love’s claim paid off creditors in full and allowed for a distribution to him, the Reed v. City of Arlington decision would prevent a distribution to Love. The decision in Reed explained that judicial estoppel will not be imposed against an innocent trustee, absent unusual circumstances. Furthermore, the Reed court explained that in situations where the judgment obtained by the trustee will satisfy all creditor claims, any “surplus" remaining after distribution should not be enjoyed by the debtor who wrongfully concealed the existence of the claim but rather can be refunded to the defendant-litigant. [52] It remains to be seen how future courts will reconcile these two cases. For complete paper please visit our website at www.TheVasquezLawFirm.com or contact the author. thank you.

Ruben E. Vasquez, Esq.

The Vasquez Law Firm

5411 IH-10 West, Ste. 100

San Antonio, Texas 78201

www.TheVasquezLawFirm.com

ofc: (210)229-2067

fax: (210)733-0439

** For 24-hour automated information

call (210) C13-PLAN™

(213-7526) or

Visit www.C13PLAN.com

Additional Resources

www.nacba.org www.abiworld.org

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