Thursday, December 12, 2013

Forget to List a Lawsuit in Your Bankruptcy?

By Michael Fuller, Portland Trial Attorney

If you're involved in a lawsuit that you previously failed to list in your bankruptcy, the defendant may ask your judge to dismiss your case based on judicial estoppel.

As soon as you realize your bankruptcy documents may require a correction, immediately reach out to your attorney in writing for advice.

In 2013, the Ninth Circuit Court of Appeals issued two opinions that explain how to properly raise the "mistake" exception to the judicial estoppel doctrine.

Judges in Washington, Oregon, California, Idaho, Nevada, Arizona, and Montana are generally required to follow Ninth Circuit Court of Appeals opinions. For more about stare decisis, click here.

What is Judicial Estoppel?


Judicial estoppel is a rule your judge can use to prohibit you from changing your position in separate legal cases.

For more about the equitable doctrine of judicial estoppel, read the 2001 US Supreme Court case New Hampshire v. Maine.

Essentially, the defendant will argue that it's unfair for you to pursue a lawsuit that you previously failed to disclose in your bankruptcy schedules.

The "Mistake" Exception


In July, the Ninth Circuit opinion Quin v County of Kauai held that judicial estoppel did not necessarily require dismissal of claims that were mistakenly omitted from a bankruptcy schedule.

Read more about the Quin case here.

Yesterday, the Ninth Circuit's opinion in Dzakula v. McHugh clarified the steps you must take to successfully argue the "mistake" exception.

Step One: Fix the Mistake


The moment you realize you omitted something from your bankruptcy documents, call your attorney.

Your attorney can advise you whether you should immediately re-open your case to amend your schedules.

Bankruptcy documents are filed under oath, under penalty of perjury, so you may want to error on the side of over-disclosure.

Step Two: Explain the Mistake


The consumer in Quin filed a sworn affidavit admitting her mistake. This evidence allowed her to successfully argue the "mistake" exception.

The consumer in Dzakula failed to memorialize her mistake in writing and was prohibited from raising the "mistake" exception for this reason.

Step Three: Ask Your Judge to Reconsider


If your trial court judge has already dismissed your lawsuit based on judicial estoppel, you must complete steps one and two, then promptly ask for reconsideration of the dismissal order.

The consumer in Dzakula failed to seek reconsideration and was later prohibited from doing so for the first time on appeal.

Commentary


Kudos to the Ninth Circuit for recognizing the importance of the "mistake" exception to the judicial estoppel doctrine, especially in this unique consumer context.

Bankruptcy practitioners should always repeatedly advise clients of the importance of disclosing all potential claims.

That being said...

In my experience as a former bankruptcy practitioner, the probability that an average consumer would intentionally fail to disclose a potential lawsuit seems highly unlikely.

In practical terms, average folks just don't think of potential claims as "assets" like the household goods, vehicles, and other personal property listed on Schedule B.

And even sophisticated consumers are often confused when asked about "claims they can assert against others" at meetings of creditors.

If a consumer intentionally conceals information or property in a bankruptcy case, courts should impose appropriate civil and criminal sanctions.

However, the defense bar's increasingly popular use of the judicial estoppel doctrine in the "unscheduled claim" context is often a perversion, and can produce unfair results, as demonstrated in Quin.