Todd Hennings Conducts Seminar “Before You Pay….”

Todd Hennings Conducts Seminar “Before You Pay….”

Todd Hennings conducted a legal education seminar entitled “Before You Pay…” for the Georgia Defense Lawyers Association on March 20, 2013. The seminar addressed the ability of trustee’s and individuals to file lawsuits in bankruptcy cases. When a bankruptcy case is filed, there are significant issues concerning who can and should bring lawsuits involving the debtor. “Before You Pay…” cautioned attorneys to make sure they were dealing with the correct parties before they negotiate a settlement of claims.

Presented by: Todd E. Hennings

Macey, Wilensky & Hennings, LLC

I. Introduction

You represent an insurance company that provides the insurance for Mr. Jones. Mr. Jones recently drank a little too much at a St. Patrick’s Day party, got behind the wheel of a car, and collided head on with Mr. Smith’s car; Mr. Smith was killed. Mr. Smith left behind a lovely stay-at-home wife and two kids and was the sole paycheck for the family. Mrs. Smith sues Mr. Jones and your client for wrongful death, future earnings, and emotional distress; however, Mrs. Smith finds herself financially strapped for cash and files for Chapter 7 bankruptcy protection. At the time of her filing, you were in the middle of negotiating a settlement with her attorney, but had not finalized anything. What should you do?

Same basic facts, but while you are defending the claims, you learn that after the accident, the plaintiff filed a bankruptcy case. The plaintiff got her discharge and the bankruptcy case was closed. Knowing this, what should you do? Who do you deal with regarding the claim? Since the bankruptcy case is no longer pending, does it make a difference at all to what you are doing?
These sets of facts are common in bankruptcy cases, but the answer to these questions is not always easy to find. In our examples, we have presumed that the plaintiff/debtor is an individual, but the principals involved apply to any kind of claims that the plaintiff/debtor may have regardless of the Chapter of the Bankruptcy Code involved, and regardless of whether the plaintiff/debtor is an individual or artificial entity (corporation, partnership, etc.). Finding the answer involves delving into what are, at their heart, Constitutional questions. There are two main issues: Standing – now that the plaintiff has filed a bankruptcy case, who can properly bring the action; and Estoppel – what happens when the plaintiff does not list his/her/its claim in the bankruptcy case. Not knowing how to address the impact of a bankruptcy case on your case can result in increased liability for your client and possibly yourself.

II. Standing – Making Sure You are Working with the Right Person

One of the biggest issues confronting litigants when one side files for bankruptcy during the litigation (or before) is who do you deal with now, and how can you turn this development to your client’s advantage? Who is this trustee person? What is a DIP?

A. Brief Bankruptcy Overview

An individual or business can file for bankruptcy protection under 11 U.S.C. § 101 et. seq. The three main chapters are 7, 11, and 13. An individual or business can file a 7 or 11, while only an individual can file for protection under chapter 13. Regardless of whether it is an individual or a business, when they file, an estate is formed containing all of the debtor’s assets (and liabilities). 11 U.S.C. § 541. What belongs to the estate is essentially all of the debtor’s non-exempt property. What continues to belong to the debtor is provided for under state law in the statutory list of exempt property. The debtor and the estate are therefore not one and the same, and understanding this is the first step in understanding who is the proper party to pursue a lawsuit against your client.

The rules concerning property of the estate are straightforward in the language of the statute, but can be complex in application. In order to prevent us from making this into a treatise, we will try to generalize without going into all of the exceptions and possible permutations of the rules. Suffice it to say, once you have identified an issue in your litigation pertaining to a bankruptcy case, stop where you are and take stock of the situation. The ultimate resolution to your situation will, however, involve the issues we are discussing.

Generally any causes of action known or that should be known at the time of filing become part of the estate. Section 541(a) defines what constitutes property of the estate – including “all legal or equitable interest of the debtor in property.” 11 U.S.C. § 541(a)(1). Moreover, under 11 U.S.C. § 362(a)(3) “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate” is stayed. Since the debtor and the estate are separate, if the cause of action is considered property of the estate, then the debtor may be stayed from exercising control over the cause of action. It depends upon who is authorized to manage the estate’s assets under the relevant Chapter of the Bankruptcy Code. Typically, there are two scenarios. Where the debtor remains in possession of the assets and administers the assets in a fiduciary capacity for the benefit of the estate and its creditors (Chapter 11), and where a trustee is appointed as a fiduciary for the benefit of the estate and its creditors (Chapters 7, 13 and for cause in a Chapter 11 case). If the debtor/plaintiff in your litigation is not the proper party to pursue claims on behalf of the bankruptcy estate, then the debtor/plaintiff will not have standing to resolve the issues with you, cannot bind the estate and its creditors to the resolution you reach (by trial or settlement), and may in fact leave your client open to multiple sources of liability for the same or similar claims.

B. Standing – Who can bring what claims?

I have heard it said by judges addressing the issue of standing that it can involve deciding how many angels can dance on the head of a pin. As difficult as it can be in some cases, in order to keep your client from facing multiple potential liabilities it is an exercise you have to go through whenever a bankruptcy case is involved.

i. The Debtor’s Standing

Returning to our hypothetical with Mr. Jones and Mrs. Smith, the first question you need to find out is – who has standing to continue to prosecute this case? Is the cause of action one that belongs to the estate, or since Mr. Jones is an individual, are the claims exempt under relevant state law?
O.C.G.A. § 44-13-100 provides for various exemptions a debtor can take to keep certain property out of the hands of creditors, or in the case of bankruptcy, out of the estate. O.C.G.A. § 44-13-100(11)(B), (C), (D), and (E) allows for a debtor to exempt compensation for wrongful death to the extent necessary for support; loss of future earnings to the extent necessary for support; and up to $10,000 in personal injury payments. Additionally, life insurance payments are exempt to the extent necessary for the debtor’s support and the debtor can further exempt up to $250 in monthly income benefits and all other proceeds of accident and sickness policies, including group or blanket policies and disability benefits provided under life insurance policies. O.C.G.A. § 44-13-100(8) and (9). Remember, the debtor is required to list the claim on the debtor’s Schedule of Assets and list it as exempt property. The trustee may investigate the claim and challenge the debtor’s claim of exemption. Until the exemption claim is decided the issue as to whether the claim belongs to the debtor or the trustee is up in the air.

In the case of Mrs. Smith, her claim may be exempt from becoming property of the estate under the Georgia exemption statutes and therefore, Mrs. Smith would be the proper party to continue proceeding in the action against Mr. Jones. However, the statue in this case is not absolute, but rather restricts the exemption “to the extent necessary for support.” So, the estate may indeed have an interest in the claims. The best course of action is to reach out to the trustee in the bankruptcy case, as the representative of the estate. The debtor and the trustee may have very different opinions on the issue of liability and resolving the issues with the debtor may be only half the battle. If the debtor is not the proper party to bring the claims on behalf of the estate, the debtor cannot bind the trustee or the estate to any resolution of the claims.  As mentioned, exemptions only come into play in the case of individuals. If the debtor is not an individual, any causes of action will be property of the bankruptcy estate. If the debtor in a chapter 7 case is an artificial entity, the trustee will always have standing to pursue claims of the estate. In a chapter 11 case, the debtor acts as a debtor-in- possession and has almost the same powers as a bankruptcy trustee. In re Diabetes America, Inc., 485 B.R. 340 *5 (Bankr. S.D.Tx. 2012). This includes causes of actions arising pre-confirmation. Id. This means that unless there is a trustee appointed, the debtor-in-possession will have the authority to pursue and resolve causes of action. The debtor-in-possession will pursue these claims for the purpose of adding the recoveries to its distribution to creditors under a plan of reorganization. However, once a Chapter 11 plan is confirmed, the estate is dissolved. Unless the debtor specifically reserves the ability to continue litigation under a plan, the debtor in possession will lose standing to pursue claims even if the debtor in possession had proper standing from the start. “After confirmation, the debtor is no longer the debtor-in-possession and does not have the authority to pursue claims previously owned by the estate – unless those claims were properly retained pursuant § 1123(b)(3)(B).” Id. (referencing In re United Operating, LLC, 540 F.3d 331 (5th Cir. 2008)) (emphasis added). Unless the debtor makes an effective reservation in its chapter 11 plan, then the debtor has no standing to pursue a claim that the estate owned before it was dissolved. In re United Operating, LLC, 540 F.3d at 335. Therefore, knowing what chapter the debtor is in is also important for knowing who has standing to address causes of action – in chapter 7, unless property is exempt it is the trustee and in chapter 11 it is the debtor-in-possession. It is also important to know the status of a case because that will affect the party’s standing – post-confirmation or closing of the case, the trustee and the debtor lose their standing. However, as will be discussed below, the trustee can move to re-open a case to administer an undisclosed claim.

ii. A Creditor versus the Trustee

Apart from the issue of whether the debtor or a trustee is the proper party to bring a lawsuit, creditors may also contest with the debtor or the trustee as the proper plaintiff to bring lawsuits against your defendants. Creditors may decide, often correctly, that from an economic standpoint they are better off bringing a lawsuit themselves than just waiting in line with other creditors for a distribution from a bankruptcy estate. Creditors may also be motivated more by a desire to extract a pound of flesh from those they see as responsible for the debt – officers, directors or affiliated companies. A bankruptcy case may impact even what would otherwise be third party claims not directly involving the debtor. In the business context, a common issue arises when a creditor of a debtor sues a non-debtor third party in order to collect the creditor’s claims that would otherwise be against the bankruptcy debtor. Since the trustee in bankruptcy has standing to pursue claims on behalf of the estate and in certain circumstances it creditors, depending on the basis of the suit, the creditor may actually lose its standing to the trustee or debtor in possession.
For example, let us imagine a hypothetical business – Ace Co. – which builds widgets. Ace Co. went to creditors A, B, and C and obtained parts for the widgets. Creditors A, B, and C kept a running account with Ace Co. and therefore, all were owed money for the parts. Ace Co. then transferred all the parts to an affiliated entity Base Co for no consideration. Ace Co. fails to pay its creditors. Creditors A and B learn of the asset transfers and sue Ace Co. and Base Co. in an attempt to recover the transferred property under a theory of fraudulent conveyance. Ace Co. files for bankruptcy.  In this instance, Ace Co.’s bankruptcy filing would seem to not effect creditors A’s and B’s lawsuits against Base Co. because neither creditors A or B, nor Base Co. are in bankruptcy. However, the lawsuits are attempting to recover property of the debtor Ace Co. or associated damages for the value of the property.

The trustee in bankruptcy has sole standing to pursue lawsuits based on the transfer of assets of the bankruptcy estate and to attempt to recover the assets on behalf of the estate and its creditors. In this case, once the bankruptcy is filed the creditors pursuing Base Co. cannot proceed. See generally Kerr v. Commer. Credit Group, Inc. (In re Siskey Hauling Co.), 456 F.R. 597, 608-09 (Bankr. N.D. Ga. 2011); In re C.D. Jones & Co., Inc., 482 B.R. 449, 457 (Bankr. N.D.Fla. 2012) (citing In re Moore, 608 F.3d 253, 261 (5th Cir. 2010)); In re Zwirn, 362 B.R. 536, 539 (Bankr. S.D. Fla. 2007). The causes of action belong to the trustee, and the trustee may move to stay any pending lawsuits, remove them to the Bankruptcy Court, or simply demand that the creditors cease the litigation or face a damages claim for violation of the automatic stay of 11 U.S.C. § 362.

The trustee may settle or resolve the litigation as an asset of the estate regardless of whether the claims were first brought by a creditor, and the creditors must look to the estate and not the third party defendants for payment of their claims.  However, to establish the limits of the trustee’s standing to pursue creditor claims, let’s assume that in obtaining the parts from creditor A, Ace Co.’s President personally provided a false financial statement to creditor A to reassure creditor A about Ace Co.’s business success. Ace Co.’s President also happens to be on the Board of Directors for Base Co. So, now creditor A is not only seeking to undue a fraudulent asset transfer, but prior to the bankruptcy filing sued Ace Co., Ace Co.’s President, and Base Co. for actual fraud. What happens now?

In this example, the creditor is not only suing to recover assets, which claims we know belong to a trustee, but is also suing based on damages due to actual fraud committed by the President and Base Co.  Courts have distinguished this from the above fraudulent transfer example and held that creditors may pursue these claims without having the trustee preempt the creditors’ standing.  A creditor can have standing to sue if the creditor can show that its facts supporting its causes of action are direct and particularized, meaning that no other creditor can show the same injury based on the same facts.

In The 1031 Tax Group, the court considered the various lawsuits filed by creditors in state court, each in turn and stated that “[t]o determine standing, the Court must look to the underlying wrongs as pleaded in the complaint and whether the plaintiff alleges a particularized injury.  Johns-Manville, 517 F.3d at 63; Granite Partners, 194 B.R. at 325 (“To determine standing, the court must look to the nature of the wrongs alleged in the complaint without regard to the plaintiff’s designation, and the nature of the injury for which relief is sought.”). The Court therefore only looks to the allegations as they are stated in the complaint, not as they are characterized in the plaintiffs’ motion before this Court. [citations omitted]. The Court does not pass on the legal sufficiency of the claims. [citations omitted].  McHale v. Alvarez (In re The 1031 Tax Group, LLC), 397 B.R. 670, 679 (Bankr. S.D.N.Y. 2008) (emphasis added).

In analyzing the specific complaints filed by the creditors, the court noted that it must look to see if the injuries are first, direct or indirect. Id. at 682. In situations where the defendants engaged in fraudulent misrepresentations directed specifically at the plaintiffs, then the creditors were able to show a direct injury and standing to sue. Id. at 680-83. Where claims by plaintiffs were derivative in nature – indirect – these claims belonged to the trustee. Id. at 680-681.  In simpler terms – if the creditor can show that the defendant’s actions were specifically directed to that creditor, then the creditor, not the trustee would have standing to sue. If, however, the creditor was injured in a way that was no different than another creditor of the debtor, then the trustee has standing to bring the action.

It is important to not think of the issue of who may bring a lawsuit as a zero sum game. This is the most common mistake in approaching the issue.  If the trustee cannot bring a lawsuit, this does not mean that creditors can by default.  Standing is an independent inquiry that either stands or falls on its own merits for each plaintiff.  If the trustee has standing but is barred from bringing a suit, by statute of limitations or some other equitable bar to recovery, the lawsuit will not fall into the hands of a creditor by default.  If the trustee had the standing to bring a lawsuit, but is barred, no party can bring the lawsuit.

A good example of this principal in action is the impact of the equitable defense of in pari delicto (“unclean hands”). See e.g. Moratzka v. Morris (In re Senior Cottages of America, LLC), 482 F.3d 997 (8th Cir. 2007).  In the Moratzka case, a trustee brought a malpractice claim against a law firm for damages based on a claim for malpractice, later including claims for aiding and abetting a breach of director and officer fiduciary duty and negligence. The bankruptcy court stated that the trustee could not bring the aiding/abetting and negligence claims, based on the doctrine of in pari delicto, reasoning that the trustee stood in the shoes of the debtor and the debtor could not bring the lawsuit itself.  Id. at 1000. On appeal, the district court affirmed, reasoning that the trustee’s action belonged to the creditors, rather than the trustee.

On subsequent appeal, the Eighth Circuit engaged in an extensive analysis of the constitutional basis for standing and whether the doctrine of in pari delicto factors into questions of standing.  The Court found that the equitable defense of in pari delicto has absolutely nothing to do with constitutional questions of standing.  Id. at 1003-04 (citing Official Comm. Of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340, 346 (3rd Cir. 2001) (“Whether a party has standing to bring claims and whether a party’s claims are barred by an equitable defense are two separate questions, to be addressed on their own terms.”); Official Comm. of Unsecured Creditors v. Edwards, 437 F.3d 1145 (11th Cir. 2006) (holding that trustee had standing, but federal claim was barred by in pari delicto and state claim for aiding and abetting breach of fiduciary duty was not cognizable under Georgia law); Baena v. KPMG, LLP, 453 F.3d 1, 6-10 (1st Cir. 2006) (trustee’s case barred by in pari delicto, but that doctrine “has nothing to do with Article III requirements.”); [further citations omitted]).  Accordingly, where the trustee was the proper party to bring the lawsuit due to the trustee’s official role as representative of the estate and its creditors, but could not, the lawsuit could not be brought by anybody.

The Court reasoned that standing is one aspect of the constitutional requirement that courts may only decide cases or controversies. [citation omitted]. “To have standing, a plaintiff must allege an injury that is fairly traceable to the defendant’s conduct, and the requested relief must be likely to redress the alleged injury.” [citation omitted]. The existence of a defense to a cause of action does not deprive the plaintiff of standing . . . . The in pari delicto doctrine is a defense. [citations omitted]. Even if an in pari delicto defense appears on the face of the complaint, it does not deprive the trustee of constitutional standing to assert the claim, though the defense may be fatal to the claim.  Id. at 1004. Therefore, even if the trustee may not be able to seek redress of the debtor’s pre-petition claims due to various defenses, a creditor may still not have standing to sue independently.

So, what does this mean to an attorney defending a case where a bankruptcy case is filed?  A shrewd practitioner may argue on the one hand that an existing lawsuit cannot proceed because the trustee has become the proper party plaintiff to bring the claims, depriving both the debtor and the estate’s creditors of the ability to pursue the claims separately.  On the other hand, due to the trustee’s dual role of representative of the debtor and the creditors of the estate, a defendant may have additional equitable defenses available against claims brought by the trustee that would not bar creditors proceeding individually.  If claims can be successfully steered into the hands of a trustee, these additional equitable defenses may effectively bar litigation that otherwise would be viable.  Both the trustee and the estate’s creditors may be effectively prevented from pursuing claims.

On this basis, a defendant may seek to dismiss not only claims brought on behalf of a debtor estate, but also any claims that individual creditors may seek to bring that would otherwise be available to them as derivative claims under state law. Although rules of standing are often relegated to law school exams, and arguments may become somewhat esoteric for routine litigation, you should always consider this as a threshold issue whenever a bankruptcy case is concerned, no matter how tangentially it may seem initially. From a legal standpoint, if you settle and make payment to a plaintiff and it turns out that due to an intervening bankruptcy the initial plaintiff lost standing to sue, you will have made payment to the wrong person and may have to pay again.  Bankruptcy changes everything, and if you understand the underlying rules of standing you can manipulate litigation to the advantage of your client.

No panel is complete without a war story, and I will offer this one as an example about how knowledge regarding the rules of standing and how they are impacted by a bankruptcy filing can be used both offensively and defensively. I represented a creditor of a bankruptcy debtor. This creditor had done business with and subsequently purchased a struggling debtor’s assets, continuing to operate what had been the debtor’s business for some time before it, too, failed. When the business closed its doors, assets were stolen and vandalized and the creditors of the original debtor filed numerous lawsuits against my client alleging everything from successor liability to fraudulent conveyances based on the original asset purchase. My client faced half-a-dozen lawsuits in jurisdictions around the country as well as competing claims to a multi-million dollar insurance policy covering the assets.  After a time, the original debtor business was put into a bankruptcy case. The bankruptcy trustee added his claims against my client to the half dozen existing lawsuits.

The trustee had defects to his claims surrounding a statute of limitations, but knowing that the trustee had standing to pursue these claims, I also knew that he had the ability to deny standing to the other plaintiffs with lawsuits already pending. Rather than moving to dismiss the trustee’s lawsuit, I used it offensively as a vehicle to attack the claims of the other plaintiffs. I convinced the trustee to assert sole and exclusive standing concerning the transfers and transactions. I sought a “channeling order” from the Bankruptcy Court permanently enjoining the other plaintiffs from pursuing their claims and directing them to file claims with the bankruptcy estate. The Bankruptcy Court did issue such an order finding that the trustee had sole and exclusive standing to pursue claims by the estate and its creditors. Having obtained an order denying all other parties the ability to proceed individually and permanently enjoining the lawsuits, I proceeded to settle with the trustee based on a fraction of the total liability asserted in the multiple lawsuits – in part by using the trustee’s statute of limitations problems to drive down the settlement value.

The client paid less than ten percent of the total demands, recovered several million dollars in insurance proceeds and was able to dispose of litigation pending across the country – all by appealing to the bankruptcy trustee’s standing to bring claims on behalf of the estate and its creditors.

III. Estoppel – What Happens if the Cause of Action or the Asset is not Disclosed in the Petition?

Before entering into negotiations with a party, another factor to consider aside from standing is the possibility that the equitable defense of judicial estoppel may apply. As you can see from the above, the other party does not even have to have been a debtor in bankruptcy for the case to have an effect, but estoppel is a defense best suited to a former or current bankruptcy debtor.

Judicial estoppel is based on the notion that a party may not make a statement of fact in a matter and then change its version of the facts later to better suit its current circumstances. Judicial estoppel is based on a representation to a court, either through testimony or pleadings. If a party tries to later change its representation, the party may be estopped from alleging the new version of facts. In the context of a bankruptcy case, the debtor’s statement of financial affairs and schedules of assets filed in connection with the case are considered to be representations made under oath. Indeed, in an evidentiary sense, they are deemed to be admissions of the debtor.

If the debtor makes false statements in connection with the statement of financial affairs or the schedules of assets, not only is it considered to be perjury, it is also a bankruptcy crime pursuant to 18 U.S.C. § 152 and will provide the basis for application of judicial estoppel in a later matter to the extent that the later position is inconsistent with the contents of the documents filed in the bankruptcy case. Where judicial estoppel arises most often is when the debtor fails to list claims or causes of action in the statement of financial affairs or schedules of assets and later attempts to bring a lawsuit after the bankruptcy case has been closed.

Full and honest disclosure in bankruptcy proceedings is important – “it is ‘crucial’ to the [bankruptcy] system’s ‘effective function.’” Robinson v. Tyson Foods, Inc., 595 F.3d 1269, 1274 (11th Cir. 2010) (citing Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282, 1285 (11th Cir. 2002)). “The duty to disclose is a continuing one that does not end once the forms are submitted to the bankruptcy court; rather the debtor must amend [their] financial statements if circumstances change.” Id. (quoting Burnes, 291 F.3d at 1286).  There is no distinction in chapter 7, 13, or 11 bankruptcies, as “the need for complete and honest disclosure exists in all types of bankruptcies.” Id. (quoting De Leon v. Comcar Industries, Inc., 321 F.3d 1289, 1291 (11th Cir. 2003)). Therefore, if the court finds that non-disclosure of a claim was advertent, the debtor may be barred from bringing the claim and, in individual bankruptcies, may have their discharge revoked.

Despite the fact that the debtor may be barred from bringing the claim, it is important to speak with the bankruptcy trustee.  Simply because a debtor is barred from bringing an action does not prevent the trustee from pursuing it for the benefit of the estate. In re McDowell, 2013 Bankr. LEXIS 610, *11 (Bankr. S.D.Tx. Feb. 14, 2013) (citing Reed v. City of Arlington, 650 F.3d 571, 574 (5th Cir. 2011); Love v. Tyson, 677 F.3d 258 (5th Cir. 2012) (other internal citations omitted)). Thus, simply because the debtor may be stopped from pursuing a non-disclosed claim, the trustee may still pursue it. This is true even if the case is closed – the trustee can always petition the court to re-open the case to pursue the claim and the trustee will not be bound by any settlement or release the debtor may enter into with your client. There is therefore little advantage to be had dealing with a debtor once you determine a claim may fail by judicial estoppel. Dismissal of the action is the most you should consider if the bankruptcy case has already closed. If the bankruptcy case is still pending, you may have an affirmative duty to inform the trustee of the claims. To conceal an asset in connection with a bankruptcy case is a crime pursuant to 18 U.S.C. § 152, and you should be very wary of any agreement that enables a debtor to conceal an asset regardless of how it is structured.  If the debtor’s case is still pending, notify the trustee immediately and do not attempt to keep the non-disclosure for later use. Judicial estoppel is an equitable remedy and aside from the criminal implications you should not expect the court look favorably on your client, or your firm, if it is disclosed that your client knew of the pending bankruptcy case and said nothing.

As mentioned above, a Chapter 11 plan should disclose how the debtor proposes to dispose of all of its assets. This includes lawsuits or other claims, since the Chapter 11 plan and disclosure statement process should be considered to be a representation akin to those made on the statement of financial affairs and the schedules of assets. Therefore, in a less common context, estoppel may apply to the situation of dealing with a Chapter 11 case post-confirmation in which the plan and disclosure statement did not properly reserve the claim for post-confirmation recovery. In re Diabetes America, Inc., 485 B.R. at *38 – *40.  Judicial estoppel will also apply if the plan and disclosure statement affirmatively mislead a potential defendant as to the possibility that the claim has been reserved for post- confirmation prosecuting. Id. Accordingly, if you learn that the plaintiff either is in or has been in a Chapter 11 case, it is important to look for a confirmed Chapter 11 plan and disclosure statement to see if the claim has been preserved. If it has not or the plan and disclosure statement appear misleading, you may have a viable judicial estoppel defense to the action going forward.

IV. Why Talk with the Trustee and How to Talk with the Trustee

There are some advantages to dealing with a trustee. Besides the example of strategic use of a settlement given above, you may also find that the trustee is much more willing to settle on reasonable terms than the debtor is. The trustee is motivated by reaching a reasonable settlement with the minimum of expense. The trustee does not litigate on commission, although the trustee is paid through any recovery. The trustee does not seek a pound of flesh or litigate to make a point, whatever that point may be. The usual non-economic factors that drive litigation are by and large absent when a trustee enters the picture.

The trustee may be the ideal litigant, as the trustee must disclose all of the estate’s assets in periodic filings, and there is no question as to how deep the trustee’s pockets are.
Aside from the practical considerations, talking to the trustee is one of the safest ways to determine what possible defenses are available to you and to avoid double liability. A trustee may elect to “abandon” a cause of action if it is of nominal value, but at least then you have a binding statement by the trustee that will prevent the trustee from later pursuing your client. As I mentioned above, if multiple parties involved with the bankruptcy have claims against your client, negotiating with the trustee may help create a global resolution where otherwise jurisdictional or venue issues prevent consolidation. Specifically, “channeling orders,” may direct creditors to seek relief from the debtor’s estate and grant releases of liability to your client, by the estate and otherwise non-parties to the trustee’s action. Properly pursued, such orders are extremely useful. Therefore, it can be very beneficial to talk with the trustee – you may be able to settle a claim with the trustee on a very reasonable basis and also obtain releases from other liabilities not otherwise available in litigation with a single party.

As I said previously, to go over every permutation of standing and estoppel would require a treatise. These materials are intended to provide you with an explanation of the most common bankruptcy related issues that may impact litigation and some of the ways that familiarity with the concepts can be used to your client’s advantage. As is always the case with an area of law with which you may be unfamiliar, it is advisable to seek bankruptcy counsel before reaching conclusions and when mapping out a strategy in such cases.

I hope this has been of some assistance. Please feel free to contact me at the below address and phone number if you feel that these or any other bankruptcy related issues may impact your case.

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