Defense Digest

The Defense of a Plaintiff's Prior Bankruptcy Proceeding as a Bar to Plaintiff's Subsequent Tort Action

The case of Feist v. Consolidated Freightways Corp., 100 F. Supp. 2d 273, 274 (E.D. Pa. 1999), aff'd without opinion 216 F.3d 1075, (3d Cir. Pa. 2000), cert. dnd. 532 U.S. 920, 121 S. Ct. 1357 (2001), illustrates how bankruptcy law can intersect with the litigation aspects of a seemingly unrelated claim and lead to the dismissal of a plaintiff's cause of action without ever reaching the merits of the claim.

In Feist, a case affirmed by the Third Circuit Court of Appeals without opinion, the District Court for the Eastern District of Pennsylvania decided both a motion to dismiss by the defendant and a motion to substitute the real party in interest, the Chapter 7 Bankruptcy Trustee, filed by the plaintiff and supported by the Trustee. The case involved a pre-bankruptcy claim by the plaintiff.  The plaintiff never disclosed the claim in his bankruptcy.  At the § 341 meeting of creditors, the plaintiff affirmatively stated that he had no claims.  The plaintiff was discharged, and the bankruptcy was closed.  The plaintiff subsequently filed a personal injury suit arising from events which occurred prior to the bankruptcy.

The defendant contested the plaintiff's ability to bring the claim, asserting that the claim arose pre-bankruptcy.  As such, the trustee was the proper party to prosecute the claim.  The court agreed. After finding that the plaintiff was not the real party in interest to prosecute the lawsuit, the court then also found that the trustee could not be substituted as a party and dismissed the case.

The Feist decision relied on principles of bankruptcy and civil procedure.  When an individual files for bankruptcy, certain rights are given up in exchange for the protection afforded by the system.  With minor exemptions, all existing assets, including any cause of action that accrued prior to the filing of bankruptcy, become part of the bankruptcy estate. 11 U.S.C. § 541(a)(1).  Bankruptcy also requires the debtor to lay it all out on the table.  A debtor has an affirmative duty to list and disclose all assets, including any causes of action arising prior to a bankruptcy filing.  11 U.S.C. §§ 521(1), (3), (4); Bankruptcy Rule of Procedure 1007,1008.

11 U.S.C. § 341 also requires a meeting of creditors.  This typically involves a trustee's examination of the debtor's assets, including any potential claims, with a recorded or written record of the meeting being kept.

The estate may abandon to the debtor rights to certain assets.  This is either done formally by motion, or by closing the case without administering the assets.  However, an asset that is not listed in the schedules cannot be abandoned and never leaves the estate.  11 U.S.C. § 554.

The bankruptcy concept that assets, including potential claims, belong to the estate, coupled with Federal Rules of Civil Procedure 17, can lead to the result that a plaintiff is not the proper party to prosecute the action.  Pursuant to Federal Rule of Civil Procedure 17(a), only a real party in interest may prosecute a claim.  "After a claim becomes part of the bankruptcy estate, only the bankruptcy trustee, as representative of the estate, has the authority to prosecute or settle the cause of action." Feist, 100 F. Supp. 2d at 274.  When a plaintiff files a claim or lawsuit for an action that arose prior to the filing of the bankruptcy, he or she is not the real party in interest and must be dismissed from the suit.

Typically, pursuant to Federal Rule of Civil Procedure 17(a), this may lead to substitution of the proper party in interest, the bankruptcy trustee.  However, in certain situations, courts have precluded substitution under Rule 17(a).  To allow substitution pursuant to Rule 17(a), the plaintiff must prove that the filing in his or her own name was the result of an honest mistake.  Thus, as in Feist, if a plaintiff cannot show that bringing the action, which properly belongs to the estate, in his or her own name was the result of an innocent mistake, the plaintiff may be dismissed, substitution may be denied, and the case may be dismissed altogether.

While this article does not address the issue, it is important to note that Feist, and other decisions, also rely on the principle of judicial estoppel to preclude the debtor and trustee from pursuing pre-bankruptcy claims never disclosed in the bankruptcy proceeding. 

Feist illustrates the importance of exploring whether a claimant has a history of filing bankruptcy.  As a purely legal matter, a pre-bankruptcy claim does not belong to the injured claimant, unless it was abandoned by the trustee.  As a factual matter, the failure to disclose such a claim in the bankruptcy proceeding may ultimately lead to dismissal of the case altogether.

*Andrew is an associate with in the firm's Philadelphia, PA office.  He can be reached at (215) 575-2582 or ahenry@mdwcg.com.