STANDING TO LITIGATE AFTER BANKRUPTCY

            A client’s bankruptcy can have a significant impact on state litigation. One common situation is what happens when a client with a personal injury case fails to disclose said case in her bankruptcy petition. One issue might be judicial estoppel, but another potential problem is that the failure to schedule a personal injury claim may divest your client of standing to pursue the case.

            The failure to schedule a cause of action in a bankruptcy petition divests a Plaintiff of standing to bring the claim. Dailey v. Smith, 292 Ill.App.3d 22, 24 (Ill. App. Ct. 1997). Filing a bankruptcy petition creates an estate compromising all “legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. 541(a)(1). The bankruptcy estate is extensive and “has been found to encompass every conceivable interest of the debtor, future, non-possessory, contingent, speculative, and derivative.” Dailey, 292 Ill.App.3d at 24 (internal citations omitted). “The preceding principles apply regardless of whether the bankruptcy petitioner has scheduled the property or assets.” Id. Lawsuits are included in this definition of the bankruptcy estate, and, “even if such claims are scheduled, a debtor is divested of standing to pursue them upon filing his petition.” Id. Instead, the bankruptcy trustee is the representative of the bankruptcy estate who has the capacity to sue or be sued. 11 U.S.C. 323(a) and (b) (see also Dailey, 292 Ill.App.3d at 26 “Once a bankruptcy petition is filed, all claims belong to the estate, and the bankruptcy trustee alone has standing to pursue them.”). Most importantly, if an asset is not scheduled in a bankruptcy petition, it remains property of the bankruptcy estate after the close of the bankruptcy. 11 U.S.C. 554 (See also Aspling v. Ferrall, 232 Ill.App.3d 758, 767 (Ill. App. Ct. 1992), which held that even property not scheduled in a bankruptcy petition remains property of the bankruptcy estate at the close of the bankruptcy case).

            The principle is explained clearly in Dailey v. Smith. 292 Ill.App.3d 22 (Ill. App. Ct. 1997). In Dailey, the Plaintiff and Defendants had an oral partnership to sell decorative wall coverings. Dailey, 292 Ill.App.3d at 24. Plaintiff alleged Defendants withheld profits which ultimately led him to seek bankruptcy protection. Id. Plaintiff filed for bankruptcy in September 1986 but did not schedule his claim against Defendants as an asset. Id. The bankruptcy case concluded in June 1988. Id. Plaintiff pursued the cause of action for partnership profits and in February 1994 won a jury verdict for $288,000. Id. However, after trial Defendants were awarded a judgment notwithstanding the verdict based on Plaintiff’s lack of standing to bring the cause of action and judicial estoppel. Id. As for the standing issue, the appellate court held that Plaintiff “clearly did not have standing” to pursue the cause of action. Id. The cause of action belonged to the bankruptcy trustee and said trustee “alone [had] standing to pursue” the claim. Id at 26.

            This blog post is intended to offer readers a general discussion of state court standing issues related to bankruptcy. Hopefully, this blog provides some issue spotting for state court litigators dealing with the complexities of the bankruptcy code.