When a bankruptcy filer does not list a pending lawsuit for damages as an asset in his bankruptcy schedules, he lacks standing to litigate the lawsuit, and he is estopped from pursuing it. The lawsuit is considered property of the bankruptcy estate.
A federal case in Arkansas that dealt with this issue is Horton v. CitiMortgage and Chong, et al., litigated in the U.S. District Court, Eastern District of Arkansas, Western Division, back in April. The court found that Horton could not have his debts discharged in bankruptcy and then subsequently benefit from an asset that was not identified in the bankruptcy estate.
Horton and his wife, borrowers of a CitiMortgage loan, filed a lawsuit in Pulaski County Circuit Court seeking damages against the defendants for an alleged improper statutory foreclosure. The Hortons' complaint alleged that the foreclosure sale did not meet the requirements of the Arkansas Statutory Foreclosure Act as set out in Arkansas Code.
The foreclosed property – the Hortons' home – was sold to Raymond Chong at a March 2005 foreclosure sale. The Hortons remained in the property after the sale and entered into a lease agreement with Chong.
Soon thereafter, the Hortons breached the lease agreement by failing to make the required monthly rental payments. However, they would not leave the property after they were given notice to vacate. Chong counterclaimed for unlawful detainer and also sought payment for past due rent.
A deposition of Horton revealed that he had filed a Chapter 7 bankruptcy action that was pending when the Pulaski County lawsuit was filed, and he did not list the Pulaski County lawsuit as an asset in his bankruptcy schedules.
Subsequently, Horton received his bankruptcy discharge, even though the cause of action was never listed as an asset of his bankruptcy estate.
Upon learning about Horton's discharge from bankruptcy without him ever listing the cause of action against the defendants as an asset, the defendants removed the Pulaski County lawsuit to the U.S. District Court. Judge Susan Webber Wright found that the court had jurisdiction of this matter pursuant to U.S. Code section 554(d), under which the asserted cause of action remained property of the bankruptcy estate because the asset was not abandoned or administered by the estate (giving the court exclusive jurisdiction of all the property of the bankruptcy estate).
The court further found that the Hortons lacked standing for bringing their claims against the defendants because the estate was fully administered and closed. Therefore, the Hortons' claims remained property of the bankruptcy estate.
The Hortons lacked standing to prosecute the claims and lost all right to enforce any unscheduled legal claims in their own names.
Additionally, the court found that the Hortons were judicially estopped from bringing their claims against the defendants. The reasoning for this is that the Hortons' position in the lawsuit was inconsistent with their earlier position in bankruptcy court. The Hortons' assertion of their inconsistent position from that in the bankruptcy court would impose an unfair detriment on the defendants if not estopped.
The Hortons conceded that they had no possessory interest in the property, and the court found that Chong's claim of unlawful detainer against the Hortons derived from the very foreclosure proceeding that the Hortons had no standing to challenge and were estopped from contesting.
Accordingly, the court found that Chong prevailed on his unlawful detainer claim and established his right to possession of the property, but the court remanded Chong's counterclaim to Pulaski County Circuit Court because any damages resulting from the unlawful detainer claim and the procedures for regaining possession of the property involve matters of state law.
The court granted the defendants' motions to dismiss the Hortons' complaint and amended complaint with prejudice.
Judicial estoppel and the requirement that the bankruptcy filer have standing to sue in a civil lawsuit ensure fairness to creditors and prevent the bankruptcy filer, who benefits from having his debts discharged, from pursuing a lawsuit that should have been listed as an asset in the bankruptcy estate.
The bankruptcy filer must choose to either file for bankruptcy and list the civil lawsuit as an asset or not file for bankruptcy and pursue the civil lawsuit. He cannot have it both ways.
Scott Lauck is a litigation attorney with Wilson & Associates PLLC, which provides legal services in Arkansas and Tennessee. He can be reached at (501) 219-9388.