Being a bankruptcy litigator is often what it must be like to be a member of the Geek Squad. Emergency calls from non-bankruptcy attorneys whose case has been short circuited by the infiltration of the “B” word somehow into the litigation are frequent. They don’t want to understand why or how such a virus infected the case. Whatever it costs – they want it gone – now!
Through the General Practice and Small Firm Section’s new Blog, we will introduce a series of articles on important bankruptcy issues non-bankruptcy lawyers should understand. If you would like to review more of our articles, please visit the Publications section of our website at http://www.iurillolaw.com/
#1 Disclosure of a Plaintiff’s Claim in Bankruptcy
Like anti-virus software, preventative maintenance is the first step in avoiding a bankruptcy-related “virus” in your case. Finances should be discussed with the potential client at the initial consult to avoid future bankruptcy pitfalls. The lawyer should ask whether the potential client has filed bankruptcy or is contemplating filing bankruptcy. If the potential client is in bankruptcy, or needs to file bankruptcy midstream, the case may still have value to the client and to you. The first step is to contact the bankruptcy attorney to notify him/her that you are pursuing the claim if the bankruptcy has not been filed, or ask if the claim was disclosed if the bankruptcy case has already been filed. If the claim was disclosed, you will want to know whether the client claimed all or a portion of it as exempt. If the claim was not disclosed, you will need to discuss (actually insist!) amending the schedules immediately.
After gathering the background information on the bankruptcy, the next critical step is to contact the trustee to start the process of retention as Special Counsel for the bankruptcy estate or, in the alternative, abandonment of the claim by the trustee which returns the rights in the claim to the plaintiff/debtor and negates the need for your employment to be approved by the Bankruptcy Court. Court appointment is a pre-condition to your receiving payment for fees and costs. Although being cooperative with the trustee is in the best interest of you and your client, and standard practice, you should keep in mind attorney-client privilege when communicating with the trustee. At this stage, no attorney-client relationship exists with the trustee and the trustee may ultimately abandon the claim. Therefore, your assessment of the claim, strategies, work product, etc. may be discoverable information.
Thus, the threshold issue is whether the trustee is interested in pursuing the claim. Whether the claim is abandoned depends on several factors such as the likelihood of success, the value of the claim, the amount of allowed exemptions, the amount of creditors’ claims, etc. Generally speaking, if there will be almost nothing to pay to creditors out of any settlement in a case after payment of attorneys’ fees, the plaintiff/debtor’s exemptions and other administrative costs, the trustee will likely abandon the claim.
If the trustee decides not to abandon the claim, you must file your application for retention as Special Counsel pursuant to 11 U.S.C. § 327. The application must include an affidavit or certification stating that you do not hold or represent any interest adverse to the trustee or the estate. Also, you must disclose past or present dealings with the debtor, any family member, business associate or creditor of the debtor.
Upon receipt of the order approving your application, you may move forward with pursuing the claim. When the claim has resolved and funds are available for distribution, the bankruptcy court must approve your fees and costs. The debtor is then paid the exempt portion of the claim, administrative costs, including trustee’s fees, are paid and finally the remaining funds are distributed to creditors.
One giant pitfall involves nondisclosure or misleading disclosure of your client’s claim in bankruptcy. The seminal case discussing this issue is Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282 (11th Cir. 2002). In Burnes, the plaintiff/debtor, Billups, was an employee of Pemco who filed for bankruptcy protection in the Northern District of Alabama. Although at the time he filed Billups was not participating in a lawsuit, within six months, Billups filed a charge of discrimination with the EEOC against Pemco. Problematically (and intentionally), Billups never amended his bankruptcy schedules to include his lawsuit against Pemco. Upon the discovery of Billups’ nondisclosure, Pemco moved for summary judgment the claim.
Pemco asserted that the doctrine of judicial estoppel barred Billups from seeking monetary damages against Pemco because Billups intentionally failed to disclose the lawsuit to the bankruptcy court; moreover, he stood to gain from his lack of candor. Conversely, Billups argued that judicial estoppel was inappropriate under the circumstances, and at the very least, he should be permitted to re-open his bankruptcy case to include the previously undisclosed lawsuit. In holding for Pemco, the court unambiguously established that debtors, like Billups, who intentionally fail to disclose potential claims, lose them.
In sum, ideally you will learn about a client’s bankruptcy before it is filed and work with the bankruptcy attorney and trustee from the beginning. Even if the case has been filed and the claim not disclosed, amendments may still be made to correct the nondisclosure error if the case is still pending. However, the discovery of the nondisclosed claim after the bankruptcy case has been closed creates a series of hurdles which may reach an undesirable and costly result. When in doubt, walk down the hall to a bankruptcy colleague or give us a call to discuss how big (or small) of a problem the “B” word is in your case.