Your Litigation Checklist: Defenses Based on a Class Representative's Nondisclosure in Bankruptcy
Most litigators have a standard deposition outline that incorporates a few introductory questions. Usually, those questions include an inquiry into the deponent’s experiences with the legal system: Have you ever been involved in a lawsuit before? Filed for workers compensation? Ever filed for bankruptcy? While seemingly perfunctory, the answer to this last question may provide valuable fodder for the class action defendant. That is, with a little extra due diligence, the putative class defendant may be able to identify additional, game-changing defenses based on a debtor’s failure to disclose to the Bankruptcy Court claims or litigation against the potential class defendant. See Danielle Kingsbury, et al. v. U.S. GreenFiber, LLC, et al.
A plaintiff’s failure to disclose a claim or cause of action on a bankruptcy petition gives rise to two potential defenses for the class action defendant, one based on lack of standing, and another based on judicial estoppel.
First, the class defendant can argue that the class representative no longer has standing to pursue his claims on behalf of the class, irrespective of whether the cause of action has been disclosed. This is because all lawsuits in which the debtor is a plaintiff become property of the bankruptcy estate at the time the debtor files his bankruptcy petition. 11 U.S.C. § 541(a)(1).
Accordingly, the trustee alone has the right to sue on behalf of the estate, unless and until the cause of action is abandoned. While a debtor may regain standing to pursue a claim abandoned by the trustee, the estate cannot abandon a cause of action that the debtor never scheduled. Anderson v. Acme Markets, Inc., 287 B.R. 624, 629 (E.D. Penn. 2002) (citing 11 U.S.C. § 554(c)). To the contrary, an unscheduled cause of action remains the property of the bankruptcy estate, even after the bankruptcy is discharged. 11 U.S.C. § 554(d). Consequently, the debtor loses all rights to pursue those claims in his own name. Yack v. Wash. Mut., Inc., 389 B.R. 91, 95-97 (N.D. Cal. 2008).
For example, in Yack, Plaintiffs brought claims on behalf of themselves and others similarly situated alleging that the defendants had withdrawn and transferred funds from their checking account, despite knowing that such funds were exempt from attachment under both state and federal law. Subsequent to the events giving rise to plaintiffs’ claims, the putative class representatives filed a petition for Chapter 7 bankruptcy, but failed to disclose their potential claims. As a result, the Northern District of California found that plaintiffs lacked standing to pursue their claims, irrespective of whether they were for monetary, injunctive, and declaratory relief. Id. See also, Kuahulu v. Employers Ins. Of Wausau, 557 F.2d 1332 (9th Cir. 1977)(holding that where class representative’s claim became moot before any class was certified, the entire appeal must be dismissed as moot). This mootness defense is largely consistent with the decisions cited in our previous blog posts where courts have dismissed individual and class claim as moot when the defendant has offered a complete offer of judgment. See Genesis Healthcare Corp. v. Symczyk, 133 S.Ct. 1523 (2013).
Second, a debtor may be judicially estopped from pursuing a claim that she failed to disclose to the bankruptcy trustee. Judicial estoppel precludes a party from gaining an advantage by taking inconsistent positions. The purpose of judicial estoppel is to protect the integrity of the judicial process, and courts typically invoke estoppel principles when a litigant tries to “play fast and loose with the courts.” New Hampshire v. Maine, 532 U.S. 742, 749-50 (2001); Hamilton, 270 F.3d 778, 782 (9th Cir. 2001). In the bankruptcy context, a party is judicially estopped from asserting a cause of action not raised in a reorganization plan or otherwise mentioned in debtor’s schedules or disclosure statement. Hamilton v. State Farm Fire & Cas. Co., 270 F.3d 778, at 783 (holding that the plaintiff was “precluded from pursuing claims about which he had knowledge, but did not disclose, during his bankruptcy proceedings, and that a discharge of debt by a bankruptcy court, under these circumstances, is sufficient acceptance to provide a basis for judicial estoppel.”); Hay v. First Interstate Bank of Kalispell, N.A., 978 F.2d 555, 557 (9th Cir. 1992).
Because judicial estoppel is an equitable remedy, some courts have been reluctant to apply it where, for example, a debtor “inadvertently” failed to schedule his or her class claims. Some courts may also allow the debtor to reopen a closed bankruptcy estate in order to disclose the omitted class claims.
In sum, class defendants should review a plaintiff’s bankruptcy disclosures with an eye toward potential litigation-ending defenses, including a mootness defense that the plaintiff has been stripped of standing, or that he is judicially estopped from continuing to pursue his claims.
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Stephen E. Embry is a member of the Firm's class action, privacy and mass tort groups. He frequently defends participants in consumer class actions and mass tort litigation. Stephen is a national litigator and advisor who is experienced in developing solutions to complex litigation and corporate problems.