Be Careful What You Say (or Don’t Say) –Judicial Estoppel and the Wealth of Information in Bankruptcy

By: Matthew D. Quinn

During the standard client intake process, it is common for a plaintiff’s attorney to inquire whether the potential client has ever been a party to any prior judicial proceeding. Frequently a potential plaintiff will disclose prior workers’ compensation claims or other such proceedings.

The relevance of these prior proceedings is typically obvious. For instance, a recent workers’ compensation claim regarding a bulged disc might be relevant to a subsequent civil action regarding an injured back.

Some potential plaintiffs will disclose prior bankruptcies, and it would be easy for the general practitioner, lacking extensive bankruptcy experience, to overlook the significance of such bankruptcies. This is especially true in the context of personal injury civil actions. After all, a potential client’s previous financial struggles should have nothing to do with his/her current back injury—right?

Wrong. Indeed, prior bankruptcy cases contain a wealth of information which could be relevant to seemingly unrelated subsequent litigation, even seemingly unrelated personal injury cases. Accordingly, it is good practice to review your potential client’s prior recent bankruptcy filings. Otherwise, you might be unpleasantly surprised when the case is dismissed by the imposition of the doctrine of judicial estoppel.

But we’re getting ahead of ourselves. First, it would be helpful to discuss one type of disclosure that debtors in bankruptcy must make.

The Bankruptcy Court, the bankruptcy trustee, and the debtor’s creditors are entitled to a full disclosure of the debtor’s assets. The debtor’s obligation to disclose all of his/her assets is part of the Bankruptcy Code (11 U.S.C § 521(1)) and exists so that all interested parties have a full and clear picture of not only the debts, but also the assets, of the debtor. Indeed, the “full disclosure by debtors is essential to the proper functioning of the bankruptcy system.” Chartschlaa v. Nationwide Mut. Ins. Co., 538 F.3d 116, 122 (2d Cir. 2008).

There’s nothing too surprising about this disclosure obligation. After all, most any lawyer would expect that interested parties—especially creditors—would be entitled to understand what assets are available to repay the debtor’s debts.

However, the general practitioner would probably be surprised by the full scope of this disclosure obligation. The Bankruptcy Code requires that the debtor disclose “all legal or equitable interests of the debtor in property.” 11 U.S.C. § 541(a)(1). The asset disclosure is made on the Official Bankruptcy Form 6, Schedule B – Personal Property, which can be viewed here. Obviously the debtor must disclose assets like “Cash on hand,” “Checking, savings or other financial accounts,” “Furs and jewelry,” etc.

But more nuanced disclosures are also required. For instance, the debtor must disclose “Accounts receivable” and “Other liquidated debts owed to debtor.” But for purposes of the present blog post, the most significant, and perhaps most unexpected, mandatory disclosure is the following: “Other contingent and unliquidated claims of every nature.”

Note the very broad nature of this disclosure requirement, which encompasses “claims of every nature,” even if the claim is “contingent and unliquidated.” The case law is clear that this mandatory disclosure is broad enough to capture most any type of claim, including prospective personal injury claims, that may theoretically exist at the time of the disclosure.

Why does any of this matter? Because of the doctrine of judicial estoppel. “[J]udicial estoppel forbids a party from asserting a legal position inconsistent with one taken earlier in the same or related litigation. The doctrine prevents the use of intentional self-contradiction . . . as a means of obtaining unfair advantage in a forum provided for suitors seeking justice.” Price v. Price, 169 N.C. App. 187, 191, 609 S.E.2d 450, 452 (2005).

Hence, the failure to disclose to the Bankruptcy Court a claim, such as a personal injury claim, may very well bar the assertion of that claim in a subsequent civil action. There are several examples in the state and federal case law within North Carolina.

For instance, the N.C. Court of Appeals has held that a failure to disclose potential claims in a bankruptcy proceeding judicially estops the debtor from subsequently asserting those undisclosed claims.  In Bioletti v. Bioletti, the plaintiff-debtor filed a petition for bankruptcy.  204 N.C. App. 270, 270, 693 S.E.2d 691, 692 (2010). Nearly three years later, the plaintiff-debtor filed a civil action alleging that the defendant “unlawfully converted to her own use monies which he was entitled to receive from insurance policies and retirement accounts.”  Id.  The Court of Appeals held that the plaintiff-debtor was required to disclose these claims in the prior bankruptcy.  Id. at 277, 693 S.E.2d at 696-97 (“Plaintiff . . . failed to disclose the remainder of the claim that he asserted against Defendant despite the requirement that he report [to the Bankruptcy Court] . . . ‘other contingent and unliquidated claims of every nature.’”).

Therefore, the Court of Appeals in Bioletti held that “[i]t would be inequitable to allow Plaintiff to assert the right to recoup” damages in the civil action which the plaintiff-debtor did not disclose “in his filings in the Bankruptcy Court,” and “the trial court did not abuse its discretion in dismissing Plaintiff’s claims on the basis of judicial estoppel.”  Id. at 279, 693 S.E.2d at 297.

Similar decisions have been rendered in the federal courts located within North Carolina. E.g., In re Family Dollar FLSA Litigation, No. 06-CV-306, 2009 WL 1750908, at *3 (W.D.N.C. June 19, 2009) (“Courts in the Fourth Circuit have explicitly held that a plaintiff’s failure to list a claim on his or her bankruptcy schedule of assets, either initially or through an amendment, judicially estops the plaintiff from pursuing such undisclosed claims in a lawsuit.”).

The general practitioner’s law practice will only rarely intersect with bankruptcy. Hence it would be easy for the general practitioner to miss the significance and broad scope of the bankruptcy debtor’s asset disclosure requirements. Don’t make that mistake. If your potential client filed bankruptcy in the recent past, access and review the file on Pacer. You might save yourself, and your potential client, a lot of unnecessary heartache.