By Ryan C. Wood
People file bankruptcy to stop all collection activity against them, including lawsuits filed by creditors in an attempt to recover funds from the borrowers. That is the power of the automatic stay. What about if the person filing for bankruptcy has filed a lawsuit (or intends to file a lawsuit soon) against another person or entity? What happens to this lawsuit? Can the bankruptcy filer continue with this lawsuit? The short answer is yes, but you need to notify the bankruptcy court that you are currently in a lawsuit or you have the right to sue someone in a lawsuit. You must list the pending lawsuit in your bankruptcy schedules (Schedule B to list the potential asset in your bankruptcy case and Statement of Financial Affairs to indicate that you are currently involved in a lawsuit).
What happens if you do not list the pending lawsuit in your bankruptcy petition? First you should inform your bankruptcy lawyer about the lawsuit. If the lawsuit was not listed in your bankruptcy petition and you have received a discharge of your debts, the general rule is that you are stopped from continuing on with the lawsuit. This is the principle of “judicial estoppel.” You are stopped from continuing with the lawsuit because your bankruptcy petition indicated you do not have any claims against anyone and you do not have the right to sue anyone at the time your bankruptcy petition was filed. If you did have any rights you would have listed them as a potential asset in your case. You cannot say that you do not have any claims in your case and proceed to discharge all your debts and then try to go after someone in court to receive money.
In the Supreme Court case New Hanpshire v. Maine, 532 U.S. 742 (2001), judicial estoppel bars the continuing lawsuit if: (1) the positions are clearly inconsistent; (2) the bankruptcy filer and plaintiff in the lawsuit succeeded in getting the first court to accept the first position; and (3) the bankruptcy-filer and plaintiff in the lawsuit obtained an unfair advantage. The Supreme Court indicated that “it may be appropriate to resist application of judicial estoppel when a party’s position was based on inadvertence or mistake.” New Hampshire v. Main, 532 U.S. 742, 753. The 9th Circuit Appellate Court applied that rule in their case Quin v. County of Kauai Department of Transportation, No. 10-16000 (9th Cir, July 24, 2013). In Quin, the bankruptcy filer did not originally list her discrimination lawsuit in her bankruptcy petition. She received her discharge and was continuing with the discrimination lawsuit when her lawyer for the discrimination suit realized she filed for bankruptcy. Her lawyer then reopened her bankruptcy case to list the lawsuit in her schedules. She indicated she did not list the lawsuit as an asset because she misunderstood what she was required to do. The Quin court indicated that there was factual support for a conclusion of either mistake and inadvertence and remanded to lower courts to determine whether the omission of the lawsuit was mistaken or inadvertent.
If you are involved in a lawsuit against another party you need to be sure to notify your bankruptcy attorney so they can help you list the lawsuit in your schedules. Failure to do so may result in your lawsuit being stopped in its tracks and the person or company you are suing would be able to walk away.