Discovering a failure by a plaintiff/debtor to disclose an existing personal injury claim in a federal bankruptcy petition can give rise to a motion for
Discovering a failure by a plaintiff/debtor to disclose an existing personal injury claim in a federal bankruptcy petition can give rise to a motion for summary judgment by a defendant based upon judicial estoppel. There is a consistent line of Georgia cases applying judicial estoppel to preclude the prosecution of a tort claim by a plaintiff/debtor who failed to list the claim as an assets in its federal bankruptcy petitions. Byrd v. J.R.C. Towne Lake, 225 Ga. App. 506, 507, 484 S.E.2d 309 (1997); Cochran v. Emory University, 251 Ga. App. 737, 738, 555 S.E.2d 96 (2001). Faced with a motion for summary judgment based on failure to disclose the claim in the bankruptcy petition, a plaintiff/debtor may attempt to amend an existing bankruptcy asset schedule or, if the bankruptcy court discharged the bankruptcy, petition the court to re-open the bankruptcy. If the plaintiff/debtor is successful in re-opening or amending the bankruptcy, then the motion for summary judgment might be ruled by the trial court as moot. Johnson v. Trust Company Bank, 478 S.E.2d 629, 223 Ga. App. 650 (1996).
This creates an interesting dynamic, in which the plaintiff/debtor can defeat a motion for summary judgment based on judicial estoppel only by turning the personal injury claim over to the bankruptcy trustee as part of the debtor’s assets, called the bankruptcy estate. Once part of the bankruptcy estate, the personal injury claim is likely less valuable to the plaintiff/debtor since, as with other assets, a recovery may be distributed among creditors. This scenario may tempt a plaintiff/debtor to seek a settlement outside the bankruptcy at a lower than expected level with the defendant, but at a higher amount than the plaintiff/debtor may see if the personal injury claim is included in the bankruptcy estate. This may likewise prove tempting to a defendant as well, since a bankruptcy trustee may attempt to “squeeze every last cent” out of a personal injury claim to benefit the estate and the creditors. However, settling with a plaintiff/debtor could prove dangerous, as under 11 U.S.C. § 542 (a) a debtor has no authority to “settle or release debts after the commencement of bankruptcy proceedings” and a release by the plaintiff/debtor indemnifying a defendant in a personal injury action upon settlement may not be valid.
JUDICIAL ESTOPPEL AND BANKRUPTCY.
The function and justification of judicial estoppel is to protect the integrity of the judicial system by preventing the use of “intentional self-contradiction as a means of obtaining unfair advantage…” Byrd v. J.R.C. Towne Lake, 225 Ga. App. 506, 507, 484 S.E.2d 309 (1997) (citations omitted); Southmark Corp. v. Trotter Smith & Jacobs, 212 Ga. App. 454, 455, 442 S.E.2d 265 (1994). Section 521 (a)(1) of the Bankruptcy Code requires a debtor filing bankruptcy to file a list of creditors and a schedule of assets and liabilities. 11 USC § 521. When a plaintiff/debtor fails to list a pre-existing cause of action in his bankruptcy petition, he effectively denies that any such asset exists and thus “deprives the bankruptcy court of the full information it needs to evaluate and rule upon a bankruptcy petition, and deprives creditors of resources that may satisfy unpaid obligations.” Chicon v. Carter, 258 Ga. App. 164, 165, 573 S.E.2d 413 (2002).
However, a motion for summary judgment based upon judicial estoppel may be avoided if the plaintiff/debtor, who upon learning of the motion, files a petition to amend or re-open his bankruptcy petition. The Georgia Court of Appeals in Johnson v. Trust Company Bank, 478 S.E.2d 629, 223 Ga. App. 650 (1996), reversed a grant of summary judgment when the plaintiff/debtor successfully amended his bankruptcy petition stating “he clearly has gained no unfair advantage in bankruptcy court. Any recovery he obtains from defendant will inure to the benefit of plaintiff's bankruptcy estate, and in turn, to the creditors who asserted claims to the estate's assets.” Id at 652.
As discussed above, having to reopen or amend the bankruptcy prevents optimal settlement posture for the plaintiff/debtor, as recovery becomes the property of the bankruptcy estate and could be subject to distribution among creditors. Faced with that potential, the plaintiff/debtor may approach the tort defendant in an effort to settle the case at their so called “bottom dollar.” However, defendants should take care in such cases , as the plaintiff/debtor has no authority to settle the claim.
UNDER THE BANKRUPTCY CODE A CAUSE OF ACTION THAT BELONGS TO THE BANKRUPTCY ESTATE CAN ONLY BE BROUGHT BY THE BANKRUPTCY TRUSTEE.
11 USC § 541 of the Bankruptcy Code provides that virtually all of a debtor's assets, both tangible and intangible, vest in the bankruptcy estate upon the filing of a bankruptcy petition. (See 11 U.S.C. § 541(a)(1) providing that the bankruptcy estate includes "all legal or equitable interest of the debtor in property as of the commencement of the case”). Such property includes causes of action belonging to the debtor at the commencement of the bankruptcy case. Barger v. City of Cartersville, 348 F.3d 1289, 1292 (11th Cir. 2003) cited in Parker v. Wendy's Int'l, Inc., 365 F.3d 1268, 1272 (11th Cir. 2004). In determining if a cause of action is included in property of the estate, it is included only if, at the commencement of the bankruptcy case, the debtor could have brought a cause of action under applicable state law. In re Swift, 198 B.R. 927 (W.D. Texas 1996).
CAUSES OF ACTIONS NOT LISTED IN A BANKRUPTCY SCHEDULE REMAIN PROPERTY OF THE ESTATE EVEN AFTER DISCHARGE.
Causes of action that belong to the bankruptcy estate cannot be prosecuted by the plaintiff/debtor and can only be prosecuted by a trustee of the bankruptcy estate. Miller v. Shallford Community Hosp. Inc., 767 F.2d 1556 (11th Cir. 1985); Lawrence v. Jackson Mack Sales, Inc., 873 F. Supp 771 (S.D. Miss. 1992). In Jones v. Harrell, the Court of Appeals for the 11th Circuit held that a plaintiff/debtor had no authority to settle and release a personal injury claim post bankruptcy petition. Jones v. Harrell, 858 F.2d 667 (11th Cir. 1988). Further, a cause of action is a property right which passes to the trustee in bankruptcy “even if such cause of action is not included in the schedules filed with the bankruptcy court.” Carlock v. Pillsbury Co., 719 F. Supp. 791 (D. Minn. 1989). Any asset not properly scheduled in the bankruptcy petition remains property of the estate under 11 USC § 554 (d), and it remains property of the estate even after discharge. In re Drexel Burnham Lambert Group Inc. 160 B.R. 508 (S.D. N.Y. 1993).
THERE MAY BE RISK FOR A PARTY THAT PAYS A SETTLEMENT DIRECTLY TO A DEBTOR WITH KNOWLEDGE OF THE BANKRUPTCY.
11 USC § 542 (a) provides some protection to a party that owes a debt to a debtor in bankruptcy. It states:
Except as provided in section 362(a)(7) of this title, an entity that has neither actual notice nor actual knowledge of the commencement of the case concerning the debtor may transfer property of the estate, or pay a debt owing to the debtor, in good faith and other than in the manner specified in subsection (d) of this section, to an entity other than the trustee, with the same effect as to the entity making such transfer or payment as if the case under this title concerning the debtor had not been commenced.
However, the 11th Circuit Court of Appeals held that section 542 (c) granted no authority for the plaintiff/debtor to settle and release debts after the commencement of bankruptcy proceedings. Jones v. Harrell, 858 F.2d 667, 670 (11th Cir. 1988). The Court of Appeals state that section 542 (c) “does grant protection to certain entities that either transfer property of the bankrupt estate or pay debts owing to the bankrupt; it says nothing about actions taken by the bankrupt.” Id at 670. The court went on to hold that a release executed by the plaintiff/debtor indemnifying the defendant in the personal injury action upon settlement was invalid. The court did credit the defendant in the personal injury action the $15,000 she paid to the plaintiff/debtor in the settlement because the defendant had no knowledge of the bankruptcy: “When a person has no knowledge of bankruptcy proceedings, it is inequitable to require him or her to forfeit payments made toward a debt owing to the bankrupt merely because those payments were made to the bankrupt rather than to the trustee.” Id. at 670. In the Jones case, the defendant did not have to pay again the amount she paid to the plaintiff/debtor to the trustee in bankruptcy and the trustee had to recoup the $15,000 from the plaintiff/debtor directly. However, if the bankruptcy trustee had been able to show that the defendant had knowledge of the bankruptcy and despite that knowledge settled with the plaintiff/debtor, the result may have been quite different.
Settling directly with a plaintiff/debtor directly could prove quite costly if a trustee or creditor learn of the settlement. A defendant who has knowledge that a plaintiff/debtor failed to include an asset on his bankruptcy petition could not take advantage of the protections offered by 11 USC § 542 (a), because the defendant has actual knowledge of the bankruptcy. Further, Jones v. Harrell indicates that any amount paid to the plaintiff/debtor to settle the personal injury claim by a defendant with knowledge of the bankruptcy may not be credited to the defendant if the trustee subsequently initiates an action on the claim as part of the bankruptcy estate. In such a situation, a defendant may find itself paying twice for the same claim.