Failure to List Claim in Bankruptcy Schedule Does Not Require Dismissal of Claim Under Judicial Estoppel Doctrine

The Houston Lawyer

12/01/2008

The Fifth Circuit recently elaborated on the scope of the judicial estoppel doctrine when a debtor fails to list an affirmative claim for damages in its bankruptcy schedule. In Kane v. National Union Fire Ins. Co., 535 F.3d 380 (5th Cir. 2008), Chapter 7 debtors, Stuart and Lisa Kane, brought a pre-petition personal injury action for injuries arising from an auto accident, but failed to list the lawsuit in their bankruptcy schedules. After the bankruptcy court granted the Kanes a no-argument discharge, the personal injury defendants moved for summary judgment on the Kanes’ claims, arguing that the Kanes should be judicially estopped from pursuing their lawsuit on account of their failure to list it as an asset in the bankruptcy proceedings.

The Kanes successfully moved the bankruptcy court to reopen the bankruptcy proceedings to allow the bankruptcy trustee to administer the lawsuit and other undisclosed debts on behalf of the estate. The trustee also moved to substitute himself for the Kanes as real parties in interest in the lawsuit. Nevertheless, the district court granted summary judgment for the defendants and denied the trustee’s motion to substitute as moot.

The Fifth Circuit reversed and remanded, finding that the Kanes’ personal injury claim became an asset of their bankruptcy estate when they filed their Chapter 7 petition and that the trustee never abandoned its interest in the lawsuit.

The Fifth Circuit distinguished its holding from its earlier decision in Superior Crewboats, Inc. v. Primary P & I Underwriters (In re Superior Crewboats, Inc.), 374 F.3d 330 (5th Cir. 2004), upon which the district court relied. In that case, debtors had brought a personal injury action after filing bankruptcy but failed to amend their bankruptcy schedules to reflect the claims. They ultimately told the trustee about the claim but represented to him that it was proscribed by the statute of limitations. The trustee formally abandoned the claim and the interest on the claim reverted to the debtors. The Fifth Circuit ultimately concluded that the debtors were judicially estopped from renewing their action against the personal injury defendants following their bankruptcy discharge, despite the trustee’s effort to substitute for the debtors.

The key distinction between the two cases was that the trustee in Superior Crewboats had abandoned the claim and was thus no longer the real party in interest. Further, if they were allowed to pursue the claim outside of bankruptcy, the Superior Crewboats debtors stood to collect a windfall from their failure to schedule the asset at the expense of their creditors. In contrast, the Kanes’ lawsuit remained an asset of the bankruptcy estate, and any recovery would have accrued to the benefit of the estate’s creditors, with the Kanes standing to benefit only if there was a surplus after all debts and fees have been paid. Consequently, the Fifth Circuit found that Superior Crewboats, Inc. did not require the application of judicial estoppel doctrine in this case.



Mark Trachtenberg is a partner at Haynes and Boone LLP and a member of The Houston Lawyer editorial board. This article was published in The Houston Lawyer, November/December 2008, and is reprinted with permission. 

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