Bankruptcy And The Need To Disclose Potential Causes Of Action: Current Court Decisions

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Bankruptcy And The Need To Disclose Potential Causes Of Action: Current Court Decisions

If you're filing or considering filing bankruptcy, one thing you need to know about is the need to disclose potential causes of action. Specifically, the Fifth Circuit recently held that, on judicial estoppel, inadvertence may be unavailing.

Huh?

Okay, we know that is a lot of legal words. Let us break it down for you:

  • If you're filing bankruptcy, you need to disclose potential causes of action. This means that you need to tell the bankruptcy court about any legal claims you might have against other people. For example, in the case we linked above, the debtor (the person filing bankruptcy) failed to tell the bankruptcy court that she might be able to sue for personal injuries from a car accident. The bankruptcy court wants to know about any possible sources of money that the debtor might have, so that it can be distributed fairly to creditors (people owed money).
  • The Fifth Circuit is a federal Court of Appeals. Courts of Appeals are geographic, meaning they hear federal cases appealed from local federal courts within particular states. The only court higher than the Fifth Circuit is the Supreme Court, which may choose to hear cases appealed from the Fifth Circuit. The Fifth Circuit hears cases from Texas, Louisiana, and Mississippi. Therefore, the decision in this case is now federal law for those states, unless the Supreme Court issues a different opinion, which would overrule the Fifth Circuit.
  • Judicial estoppel means that a fact or case has been decided in court, and cannot be considered again. Therefore, the issue cannot be brought in front of a court.
  • In this case, because the debtor did not tell the bankruptcy court about her personal injury claim, she could not bring her personal injury lawsuit.

This case has an interesting set of competing interests: that of the debtor, who wants to be able to declare bankruptcy but also file her personal injury claim; the creditors, who want to recover as much as possible from the debtor; and the potential defendants in a personal injury claim, who do not want the potential high cost of a judgment against them.

What this case established is a three-part test that is applied if a personal injury defendant claims that the claim is judicially estopped because it was not declared to the bankruptcy court.

  1. The debtor has asserted inconsistent positions. In other words, she has claimed no causes of action before the bankruptcy court, but has asserted a cause of action in a personal injury lawsuit.
  2. The first position asserted is accepted. This means the bankruptcy court has accepted that the debtor has no causes of action.
  3. The debtor's failure to disclose the cause of action was not inadvertent. To show that the failure to disclose was inadvertent, the debtor must demonstrate she had no motive to conceal the cause of action, or that she did not know about it.

If all of the above are true - that is to say the debtor asserted inconsistent positions, those positions were accepted by the court, and the failure to disclose was not inadvertent - the debtor may not bring her personal injury cause of action.

For this reason, it is very important to inform the bankruptcy court about any causes of action you may have. We can make sure your bankruptcy filings are complete and thorough - contact us if you're considering bankruptcy and we can help you with your filings.

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