Omitted Tort Claim in Bankruptcy Leaves Debtor with Coal in Her Stocking

Sometime in July, 2010, the debtor, Shawnna Pitts, was injured while leaving a CVS store in Ferndale, Michigan. As Shwanna was exiting the store, an automatic door closed on her and she was injured. Shawnna later filed suit against CVS and in 2013 she was able to reach a settlement with CVS. At the time, Shawnna had not filed suit against the manufacturer of the door, Stanley Access Technologies, LLC (“Stanley”) so Shawnna still had a potential claim against Stanley. Instead of filing suit against Stanley, Shawnna instead filed for bankruptcy protection under Chapter 7. As part of filing for bankruptcy, the debtor must list all of his or her assets, to include any potential lawsuits. In her petition, Shawnna did not mention her settlement with CVS (Shawnna signed the settlement agreement days after filing bankruptcy) or the potential claim against Stanley. At no time, after filing her petition, did Shawnna amend the petition to disclose either lawsuit.

Three days after receiving her bankruptcy discharge, Shawnna filed suit against Stanley. It is not clear how Stanley found out about Shawnna’s omission, but find out it did and in response the company filed a motion asking the court, among other things, to dismiss the case against Stanley because Shawnna was “judicially estopped” from arguing she had a viable claim. Judicial estoppel is a device used by the court to force parties to “play fair” which in this case means not taking inconsistent positions in different court proceedings. The court found that Shawnna did not inadvertently omit the personal injury claim and as such Shawnna should have to stand by her position taken on her bankruptcy petition – that she had no potential tort claims. No claim means no viable lawsuit and so the court dismissed her claim. Now Shawnna is barred from recovering anything from Stanley.

While the debtor’s stocking may have been a bit empty this year – except for the coal that is – her creditors may find a bit extra in theirs. Where a debtor omits assets, the Chapter 7 trustee may be able to step into the debtor’s shoes and sue Stanley on behalf of the bankruptcy estate. Judicial estoppel only affects the party who is taking inconsistent positions so other parties are not similarly barred. When Shawnna filed bankruptcy, all of her assets became “property” of a bankruptcy estate which is administered by a trustee. The trustee’s job is to marshal all of the debtor’s assets that are not exempt and sell non-exempt assets for the benefit of creditors, such as the tort claim against Stanley. So in the end, Shawnna’s creditors may be able to benefit from her mistake.

Unfortunately, the omission of personal injury claims is sadly too common. I know of several cases in Maine and I have read about many more nationwide. I imagine these debtors think that no one will be the wiser if such a claim is left off the petition. Defense attorneys know to check the bankruptcy court website as part of preparing their case and often this is how the omissions come to light. What makes this case more tragic is that in many states the debtor can exempt all or a portion of a personal injury claim – so she might have been able to keep all or some of any proceeds from the lawsuit. Worst of all, Shawnna could face possible criminal bankruptcy fraud charges, all because she tried to get one over on her creditors.

This case highlights the maxim often used in bankruptcy: bankruptcy is for the honest but unfortunate debtor who is seeking a fresh start. Honesty, in bankruptcy as in life, is the best policy as Shawnna found out to her dismay.

You can read the full opinion here at Google Scholar: http://scholar.google.com/scholar_case?case=12015280686927367958&q=bankruptcy&hl=en&scisbd=2&as_sdt=10000003

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