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January 22, 2015 Articles

The Significance of Bankruptcy in Mass Torts Litigation

By M. Joseph Winebrenner

Defendants in mass tort litigation often face hundreds or even thousands of related lawsuits that, taken as a whole, can represent significant potential liability. Although a global defense strategy in this context—common to all cases—is crucial, it is also important to pursue, and win, individual case-specific victories whenever possible. By whittling away at the bad cases, mass tort defendants can reduce the overall caseload, manage potential liability, and change the public perception of the litigation for the better.

In pursuing case-specific victories, one often overlooked area of inquiry is a plaintiff’s prior or pending bankruptcy. In many jurisdictions, bankruptcy—a procedure through which an insolvent individual or organization can discharge debts owed to creditors—can have case-dispositive implications for lawsuits that were either pending or ripe at the time the bankruptcy petition was filed. As discussed in more detail below, bankruptcy can either deprive a plaintiff of standing to pursue his or her claims or preclude the plaintiff from pursuing claims not disclosed in the bankruptcy petition under the doctrine of judicial estoppel.

For young lawyers—often deeply engaged in discovery and motion practice—it is important to understand the potential consequences of bankruptcy and to keep them top of mind throughout the litigation. By asking the right questions in discovery and identifying case-dispositive opportunities when and if they arise, young lawyers can demonstrate superior analytical ability, reliability, and value—characteristics essential for both career development and client retention.

A Brief Primer on Bankruptcy
A debtor can commence a bankruptcy proceeding by filing a petition with the bankruptcy court. Upon the filing of the petition, a bankruptcy estate is formed, comprising “all legal or equitable interests of the debtor in property as of the commencement of the case,” as well as other specified property and assets of the debtor. 11 U.S.C. § 541(a). There are many types of bankruptcy in the United States. For individuals, the most common arise under Chapter 7 and Chapter 13 of the Bankruptcy Code. In a Chapter 7 bankruptcy, all nonexempt assets of the debtor are transferred to and liquidated by the trustee of the bankruptcy estate; the proceeds from the liquidation are used to pay down the outstanding debt owed to creditors; and the debtor’s remaining eligible debts after liquidation are discharged. Under a Chapter 13 bankruptcy, the debtor’s assets are not liquidated. Rather, pursuant to a mandatory court-approved payment plan, commonly referred to as a Chapter 13 plan, the debtor pays down all or part of the outstanding debt owed to creditors, typically over a three- to five-year period. If the debtor satisfies his or her payment obligations under the plan, the court typically discharges any remaining eligible debt at the plan’s conclusion.

Bankruptcy and Standing
The doctrine of standing ensures that a litigant is entitled to have the court decide the merits of his or her claims. Standing is a requirement for all lawsuits, and if a plaintiff lacks standing with regard to particular claims, those claims are subject to dismissal.

In the context of bankruptcy, a debtor may lack standing to pursue legal claims that, as of the time the bankruptcy petition was filed, were either pending or perfected, even if not yet filed. Because all legal and equitable interests of a debtor are transferred to the bankruptcy estate upon commencement, courts have recognized that the filing of a petition transfers such claims (disclosed in the petition or not) to the bankruptcy trustee and deprives the debtor of standing to pursue them on his or her own accord. See, e.g., United States ex rel. Spicer v. Westbrook, 751 F.3d 354, 361–62 (5th Cir. 2014); United States ex rel. Gebert v. Transp. Admin. Servs., 260 F.3d 909, 913–15 (8th Cir. 2001).

Yet, not every claim held by a debtor is affected by the filing of a bankruptcy petition. With regard to the issue of standing, variables that may affect the post-bankruptcy viability of a claim filed by a debtor include the following:

  • The type of bankruptcy sought. For example, a number of jurisdictions have distinguished between Chapter 7 and Chapter 13 bankruptcy, recognizing that in Chapter 7 liquidation proceedings, only the bankruptcy trustee has standing to pursue a legal claim, whereas in Chapter 13 proceedings, the debtor may pursue claims in his or her own name, on behalf of the bankruptcy estate, once a payment plan is approved by the court. See, e.g., Crosby v. Monroe Cnty., 394 F.3d 1328, 1331 n.2 (11th Cir. 2004) (“[B]ecause Crosby filed under Chapter 13 of the Bankruptcy Code, he retains standing to pursue legal claims on behalf of the estate.”); Cable v. Ivy Tech State Coll., 200 F.3d 467, 472–74 (7th Cir. 1999).
  • Why the bankruptcy trustee was not substituted as a plaintiff. Federal Rule of Civil Procedure 17(a) requires that all actions must be “prosecuted in the name of the real party in interest.” However, when the wrong party is named as plaintiff (e.g., the debtor remains the named plaintiff after his or her interest in the claim has been transferred to the trustee) due to an unintentional mistake, Rule 17(a) does not permit the court to dismiss the action outright “until . . . a reasonable time has been allowed for the real party in interest [in this example, the trustee] to ratify, join, or be substituted into the action.” See Wieburg v. GTE Sw., Inc., 272 F.3d 302, 308 (5th Cir. 2001).
  • Whether the bankruptcy trustee is motivated to pursue the action. In cases in which legal standing is transferred to the bankruptcy trustee, the trustee has discretion whether or not to pursue the claim, and if the claim ultimately is pursued, the trustee controls the legal strategy. Although theoretically the debtor and the trustee should have a common interest to achieve the best possible result, the trustee may decide that the value of the lawsuit is outweighed by the anticipated legal expenses or may choose to quickly settle the litigation for the benefit of the creditors.

Bankruptcy and Judicial Estoppel
Judicial estoppel is a common-law doctrine that precludes a party from taking one position in a legal proceeding when the same party took a contrary position in an earlier proceeding and benefited from it. In the bankruptcy context, courts have widely recognized that judicial estoppel can preclude a plaintiff from pursuing causes of action not disclosed as assets in a bankruptcy petition. See Stallings v. Hussmann Corp., 447 F.3d 1041, 1047 (8th Cir. 2006).

When a debtor files a bankruptcy petition and other required bankruptcy schedules, he or she must fully disclose all assets, including contingent assets, such as causes of actions that are pending or known at the time. If a cause of action exists but is not disclosed in the bankruptcy petition, the trustee and the bankruptcy judge will act and make decisions without full consideration of all assets, and this may result in the debtor receiving a windfall (i.e., the cause of action may not be liquidated with proceeds going to creditors) or the creditors getting short-changed or both. For this reason, “[a] debtor’s failure to list a claim in the ‘mandatory bankruptcy filings is tantamount to a representation that no such claim existed.’” Stallings, 447 F.3d at 1047.

Generally, there are three elements that must be satisfied for judicial estoppel to apply:

  • A party’s later position must be clearly inconsistent with its earlier position. In the bankruptcy context, this requirement is satisfied when a debtor fails to list a legal claim in the bankruptcy petition.
  • The bankruptcy court must have adopted the debtor’s position.
  • The debtor’s nondisclosure of the claim must have resulted in the debtor gaining an unfair advantage.

Because judicial estoppel is a discretionary doctrine, district courts may, but are not required to, dismiss a plaintiff’s claims in cases in which these elements are satisfied. There are additional factors that may influence a district court’s discretion:

  • The reason for the nondisclosure. Some courts have declined to apply judicial estoppel where the plaintiff’s nondisclosure was the result of inadvertence or mistake. See Stallings, 447 F.3d at 1049. Other courts, however, have been less sympathetic. See, e.g., Eastman v. Union Pac. R.R., 493 F.3d 1151, 1157 (10th Cir. 2007); Burnes v. Pemco Aeroplex, 291 F.3d 1282, 1287 (11th Cir. 2002) (“[S]everal circuits, in considering the particular issue of judicial estoppel and the omission of assets in a bankruptcy case, have concluded that deliberate or intentional manipulation can be inferred from the record.”).
  • Whether the plaintiff debtor amended the petition after learning of the nondisclosure. Some courts have declined to apply judicial estoppel when the plaintiff cures the nondisclosure by amending the bankruptcy petition to reveal the subject claims, after learning of the defendant’s position on judicial estoppel. See, e.g., Vandiver v. Little Rock Sch. Dist., No. 03-834, 2007 U.S. Dist. LEXIS 63157, at *24 (E.D. Ark. Aug. 27, 2007). Other courts have rejected such attempts to cure, reasoning that to permit amendment only after a plaintiff debtor’s omission has been challenged by an adversary would provide a perverse incentive for debtors to conceal pending lawsuits and disclose them only when confronted. See, e.g., Burnes, 291 F.3d at 1288.
  • Whether the bankruptcy trustee has been substituted as a named plaintiff. If the bankruptcy trustee has already been substituted as the named plaintiff in the pending litigation, some courts have declined to apply judicial estoppel to bar the claims of the trustee because it was not the trustee who engaged in the contradictory litigation tactics. See Eastman, 493 F.3d at 1155 n.3; Cannon-Stokes v. Potter, 453 F.3d 446, 448 (7th Cir. 2006) (“Judicial estoppel is an equitable doctrine, and it is not equitable to employ it to injure creditors who are themselves victims of the debtor’s deceit.”).

Best Practices in Bankruptcy Discovery
Because of the potential dispositive impact of bankruptcy on a plaintiff’s lawsuit, it is important for mass tort practitioners—experienced and young lawyers alike—to identify bankruptcy as a case-specific discovery target in every mass tort litigation. Interrogatories, depositions, and plaintiff fact sheets, where applicable, should uniformly seek information regarding whether plaintiffs have filed for bankruptcy and, if so, where and when each bankruptcy took place. With this information, defense attorneys should then obtain bankruptcy files through PACER or, if necessary, by contacting the applicable bankruptcy court directly. Once the materials are in hand for a particular plaintiff, defense attorneys can (a) determine whether the plaintiff was required to disclose the pending lawsuit, given the timing of the bankruptcy proceedings; (b) determine whether the plaintiff disclosed the lawsuit as an asset; (c) conclude whether there is a viable judicial estoppel defense; and (d) conclude whether there is a viable defense for lack of standing. In some cases, there may be viable defenses to pursue, and a motion to dismiss or an early motion for summary judgment could result in a dismissal and avoid the time and expense of case-specific depositions, experts, and motion practice that would otherwise ensue. For young lawyers in particular, this can provide a rare opportunity to showcase your analytical prowess and to demonstrate your value to the firm and the client alike.

Keywords: mass torts litigation, bankruptcy, judicial estoppel, standing, disclosure

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