Debtors Who Fail To Disclose A Potential Claim During The Bankruptcy Process Are Precluded From Pursuing Such Claims Later
December 16, 2022
Lesson. A BK debtor’s civil claims for damages remain exclusively with the BK trustee.
Case cite. Capalla v. Best, 198 N.E.3d 26 (Ind. Ct. App. 2022).
Legal issue. Whether a state court lawsuit for damages should be dismissed because the underlying claims were not disclosed by the plaintiffs in prior bankruptcy action.
Vital facts. Best Vineyards filed a lawsuit against the Capallas in an Indiana state court in July 2019. That action alleged breach of contract, theft, and deception. The Capallas filed for bankruptcy in October 2019, and the trial court stayed Best Vineyards' case. In 2021, following months of bankruptcy-related proceedings, the Capallas initiated their own Indiana state court lawsuit against Best Vineyards for abuse of process, malicious prosecution, defamation per se, fraud, deception, and intentional infliction of emotional distress. Notably, “the Capallas failed to timely disclose their interest in [these] civil claims in their bankruptcy proceedings.”
Procedural history. Best Vineyards filed a Trial Rule 12(C) motion for judgment on the pleadings that the trial court granted. The Capallas appealed to the Indiana Court of Appeals.
Key rules. Indiana law is settled that “a debtor who fails to disclose a potential cause of action in a bankruptcy proceeding is precluded from pursuing such undisclosed claims in subsequent litigation.”
The Court noted that when a debtor files bankruptcy, unliquidated lawsuits become part of the bankruptcy estate:
When a debtor files a petition in bankruptcy, the debtor is divested of all of his or her assets, including any potential causes of action, and the assets are transferred to the bankruptcy estate. As stated in 11 U.S.C. § 541(a), the bankruptcy estate consists of "all legal or equitable interests of the debtor in property as of the commencement of the case." Once a cause of action becomes property of the bankruptcy estate, the debtor may not pursue the claim until it is abandoned from the estate. A property interest can be abandoned from the bankruptcy estate only if it has been listed in the debtor's schedule, has been disclosed to all the creditors, and is ordered abandoned by the bankruptcy court.
Further, the absence of standing “effectively prevents a plaintiff from pursuing an action and restrains the court from exercising its general jurisdiction over any issue in the case.”
Holding. The Court of Appeals affirmed the trial court's dismissal and concluded that the Capallas' claims were barred because the Capallas lacked standing to bring them.
Policy/rationale. Since the Capallas failed to list in their bankruptcy schedule their causes of action against Best Vineyards, they lacked standing to pursue the claims later in state court. This is because the suit must be brought by the bankruptcy trustee. In other words, the Capallas’ claims belonged to their bankruptcy estate and could only be brought by the trustee in that case. The Capallas also failed to disclose their interests in the civil suit, so the trustee “cannot be said to have abandoned them.”
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