The Intersect of Bankruptcy and Personal Injury
A pending personal injury action is considered an asset for purposes of a Chapter 7 bankruptcy proceeding. Failure to disclose such action in a bankruptcy proceeding can result in dismissal of the personal injury claim. It is crucial to ask about any bankruptcy proceedings at personal injury depositions.
November 21, 2018 at 02:30 PM
7 minute read
A pending personal injury action is considered an asset for purposes of a Chapter 7 bankruptcy proceeding. Failure to disclose such action in a bankruptcy proceeding can result in dismissal of the personal injury claim. It is crucial to ask about any bankruptcy proceedings at personal injury depositions.
A plaintiff will lose their legal capacity to subsequently sue on a civil claim by failing to disclose a known civil claim in a bankruptcy proceeding. Courts have upheld this loss of legal capacity even in instances where the bankruptcy proceeding is ultimately dismissed. Under the doctrine of judicial estoppel, parties are precluded from pursuing claims that were not disclosed in a bankruptcy proceeding. Courts want to avoid giving a plaintiff an unjust reward by allowing a plaintiff to collect on an undisclosed claim.
|Bankruptcy Assets
Bankruptcy court requires a petitioner to disclose all assets and property, including “unliquidated claims of every nature, with their estimated value.” See Bankruptcy Act §7(a)(8). Under the Bankruptcy Code, causes of action that existed at the time of the commencement of the bankruptcy petition are defined as the property of a debtor. See Weitz v. Lewin, 251 A.D.2d 402 (2d Dept. 1998).
Once a bankruptcy petition is filed, all of the debtor's property, including a cause of action, vests in the bankruptcy estate. See Lightening Caption Holdings v. Erie Painting & Maint., 149 A.D.3d 1229 (3d Dept. 2017). “[A] debtor's failure to list a legal claim as an asset in its bankruptcy proceeding precludes the debtor from pursuing such claim on its own behalf inasmuch as the claim remains the property of the bankruptcy estate … .” See id. A plaintiff who does not properly list claims regarding assets on her bankruptcy petition, “lacks standing to maintain a an action regarding those assets.” See Chantal Jean-Paul v. 67-30 Dartmouth St. Owners, No. 12550/14 (N.Y. Sup. Ct. filed Dec. 14, 2017); Weitz, 251 A.D.2d 402.
|Lack of Capacity to Sue
To maintain a cause of action in any case, one must have the capacity to sue. See Silver v. Pataki, 96 N.Y.S.2d 532 (2001). In Weitz, the plaintiff failed to disclose a pending civil claim that began before the start of a bankruptcy action. The court held that because the plaintiff failed to disclose the known civil claim, the plaintiff lacked capacity to sue subsequently on that civil claim. The Appellate Court affirmed that the plaintiff lacked standing to sue on the civil case as the plaintiff had not listed the pending civil claim as an asset in his bankruptcy petition. See Weitz v. Lewin, 251 A.D.2d 402 (2d Dept. 1998).
Similarly, in Chantal Jean-Paul, plaintiff failed to disclose a personal injury claim that was initiated prior to the filing of a bankruptcy proceeding. The court dismissed the case, holding that the plaintiff lacked standing and the legal capacity to sue on the personal injury matter. See Chantal Jean-Paul v. 67-30 Dartmouth St. Owners, No. 12550/14 (N.Y. Sup. Ct. filed Dec. 14, 2017).
A finding of bad faith is not required for a plaintiff to lose her capacity to sue on an undisclosed civil claim. See Dynamics Corp. of America v. Marine Mainland Bank-New York, 69 N.Y.2d 191 (1987).
|Questions at Deposition
At deposition, it is imperative to ask questions about past and pending bankruptcy actions. In Jean-Paul, plaintiff's dismissed bankruptcy action was discovered at the deposition stage. See Chantal Jean-Paul v. 67-30 Dartmouth St. Owners, No. 12550/14 (N.Y. Sup. Ct. filed Dec. 14, 2017). In preparation for a second deposition, it surfaced that plaintiff had failed to list the pending personal injury civil claim in her Chapter 7 bankruptcy voluntary petition. Id. Plaintiff's failure to disclose the pending personal injury action in her bankruptcy petition ultimately led to the dismissal of the personal injury action at the summary judgment stage. Id.
|Bankruptcy: Dismissal vs. Discharge
Whether a bankruptcy proceeding results in dismissal or discharge has no effect on a plaintiffs' subsequent legal rights in undisclosed assets. See Nationwide Assocs. v. Epstein, 24 A.D.3d 738 (2d Dept. 2005). In Nationwide, the plaintiff failed to disclose malpractice causes of action against the defendant in a prior bankruptcy proceeding. This deprived the plaintiff of the legal capacity to sue on those withheld malpractice causes of action. The fact that the bankruptcy proceeding was ultimately dismissed instead of discharged did nothing to alter the effect of the plaintiff's inability to assert a cause of action on the undisclosed malpractice claims. Id.
In Patrick, a party failed to disclose a cause of action, that the party knew or should have known existed, as an asset. See Patrick & DAA v. Abraham, 97 A.D.3d 646 (2d Dept. 2012). The Appellate Court held that the party was deprived of the “legal capacity to sue subsequently” on the undisclosed cause of action. Id. The fact that the plaintiff's bankruptcy petition was later dismissed, and not discharged, did not change the result. Id.
|Safe Harbor
If courts allowed plaintiffs to continue adjudicating civil claims not disclosed in dismissed bankruptcy proceedings, courts would create a “safe harbor” for plaintiffs to shield assets. In Kunica, the court wanted to avoid providing a debtor with a safe harbor when a bankruptcy action was dismissed instead of discharged. See Kucina v. St. Jean Fin., 233 B.R. 36 (S.D.N.Y. 1999). The court held that a dismissal of a bankruptcy case “should not provide a debtor with a safe harbor against lack of standing to pursue causes of action that were not properly disclosed.” Id.
|Judicial Estoppel
Justification for the courts' decisions to bar plaintiffs from continuing causes of action that have not been disclosed in bankruptcy proceedings can be found in the doctrine of judicial estoppel. Judicial estoppel works “to protect the integrity of the judicial process by prohibiting parties from deliberately changing positions according to the exigencies of the moment.” See Whitehurst v. 230 Fifth, 998 F. Supp.2d 233 (S.D.N.Y. 2014). Judicial estoppel prevents a plaintiff from pursing a claim that has not been disclosed in a bankruptcy proceeding. See Solovay v. Alure Home Improvements, 2011 N.Y. Misc. LEXIS 3336 (Sup. Ct., Nassau Co. 2011).
The doctrine of judicial estoppel can be evoked when “(1) the party against whom it is asserted must have advanced an inconsistent position an a prior proceeding, and (2) the inconsistent position must have been adopted by the court in some manner.” See Mintz v. Transworld Sys. 2016 U.S. Dist. LEXIS 65103 (E.D.N.Y. 2016). In Mintz, the court held that a plaintiff had advanced an 'inconsistent position' in bankruptcy court when the plaintiff failed to disclose a pending lawsuit as an asset in a bankruptcy petition.
In Whitehurst, the plaintiff failed to disclose her civil rights action as an asset in her bankruptcy proceeding. In granting the defendants' motion for summary judgment on judicial estoppel grounds, the court ruled that petitioner was under an affirmative duty to disclose all assets to the bankruptcy court. The court stressed the need for bankruptcy creditors to have the right to know all of a debtor's assets. See Whitehurst v. 230 Fifth, 998 F. Supp. 2d 233 (S.D.N.Y. 2014).
|Conclusion
A plaintiff's legal capacity to subsequently sue on a personal injury claim can be lost if the plaintiff fails to disclose the pending personal injury claim as an asset in a bankruptcy proceeding. Dismissal, as opposed to discharge, of a bankruptcy claim will not reinstate a plaintiff's legal right to sue on previously undisclosed assets. Questions about past and pending bankruptcy actions should be included personal injury depositions. Information on undisclosed bankruptcy assets, gathered at deposition, could give rise to grounds for dismissal of personal injury actions.
Kevin G. Faley and Andrea M. Alonso are partners in the firm of Morris Duffy Alonso & Faley. Kelsey Dougherty Howard, a paralegal, assisted in the preparation of this article.
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