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Plaintiff's bankruptcy filing may create defenses in civil litigation

A search should be conducted early in every case to determine if the plaintiff has filed for bankrtupcy. There are a number of good reasons to do so.

DRI published a recent article on its website concerning the defense of judicial estoppel arising from the plaintiff's failure to disclose his or her claim as an asset in the bankruptcy proceedings.  There is quite a bit of case law on judicial estoppel arising from bankruptcy. 

Another way in which bankruptcy proceedings can negatively impact a plaintiff's suit was recently illustrated by the case of Kocher v. Campbell, a decision of the Virginia Supreme Court that came out last June.  In Kocher, the Court considered the issue whether the plaintiff in an action to recover damages for personal injuries had standing to maintain his action after filing a petition for bankruptcy, causing his claim to become an asset of his bankruptcy estate.  The Court held that the plaintiff lacked standing, and dismissed the case.

The plaintiff was involved in a motor vehicle accident, and before filing a lawsuit the plaintiff filed a voluntary Chapter 7 petition in bankruptcy.  His petition failed to disclose his personal injury claim as an asset in Schedule B, and failed to list it on Schedule C as an exempt property.  About three months later, plaintiff received a standard discharge in bankruptcy.

The plaintiff then filed his civil action based on the motor vehicle accident.  This was nonsuited then refiled and served.  The defense filed a motion for summary judgment on the grounds that the plaintiff lacked standing to bring the action.  During the hearing on the motion, the plaintiff nonsuited the action again.

The plaintiff then persuaded the bankruptcy trustee to file a motion in bankruptcy court to reopen his bankruptcy case, which was granted.  Then the plaintiff obtained leave to file amended schedules, listing the personal injury action and claiming it as exempt property.  The bankruptcy court ruled that the plaintiff had properly exempted the cause of action.

Next, the plaintiff filed his civil suit for the third time. The defense again moved for summary judgment, asserting the lack of standing and the statute of limitations.  The trial court denied the motion, but certified the issue for an interlocutory appeal pursuant to a Virginia statute, and the Virginia Supreme Court awarded the defendant an appeal.

The Virginia Supreme Court reversed, holding that the action was a nullity at the time of its filing and the statute of limitations had run before it was refiled the third time, and dismissed the case.

The Court reasoned first that as a result of the plaintiff's filing a petition for bankruptcy, his inchoate personal injury claim passed to his bankruptcy estate.  Thereafter, the cause of action was one that could only be asserted by the trustee in bankruptcy, unless and until it was restored to the plaintiff by the bankruptcy court.  Here, the cause of action remained a part of the bankruptcy estate until the bankruptcy court ordered it exempted over five years after the motor vehicle accident.  All three complaints were filed during the period when the plaintiff lacked standing to assert the cause of action because it remained in the bankruptcy estate, enforceable only by the trustee. 

The Court rejected the plaintiff's argument that the final order closing the reopened bankruptcy case had the effect of abandoning all property remaining in the estate, and that abandonment causes the abandoned property to revert back to the debtor retroactively, as if the bankruptcy had never occurred.  The Court reasoned that the exemption that preceded the final order had already removed the plaintiff's cause of action from the bankruptcy estate.  Second, under Virginia law concerning standing, an action filed by a party who lacks standing is a legal nullity.  Standing acquired after the statute of limitations has run cannot be retroactively applied to cure the lack of standing that existed when the action was filed.

How a similar scenario would play out in other States would depend on the State law where the action is pending.  The most important step, however, is to run the search, and find out whether there has been a bankruptcy filing.