According to the glossary maintained by the Administrative Offices of the United States Courts, the term “bankruptcy estate” is defined as:
“All legal or equitable interest of the debtor at the time of the bankruptcy filing. The estate includes all property which the debtor has an interest, even if it is owned or held by another person.”
In most chapter 7 cases, the bright line between the bankruptcy estate, which includes money in the bank, and wages earned prior to the bankruptcy filing, as well as lawsuits for or against the debtor, in existence at the time of the filing of the bankruptcy petition, as well as personal property and real property that the debtor owns, as opposed to for example, wages earned after the bankruptcy is filed, which wages are not part of the bankruptcy estate.
An equitable interest, such as an interest in a will, that vests after the bankruptcy is filed, may still be considered part of the bankruptcy estate, because the equitable interest existed before the bankruptcy was filed.
The debtor is required to list all assets and all debts, which would be part of his or her bankruptcy estate, in the bankruptcy petition, at the beginning of the bankruptcy proceeding.
But what about something that was neither expected nor known at the time of filing? Following the logic of the above definition, if a debtor were the victim in a traffic accident after he or she filed his or her bankruptcy petition, and he or she in fact became the plaintiff in that auto accident case, would that lawsuit be part of the bankruptcy estate, or not? Indisputably, the accident had not occurred, and the lawsuit did not exist, at the time of filing of the bankruptcy petition. The accident lawsuit would not be part of the estate, period.
Not so fast, said the US Fifth Circuit Court of Appeal. That Court held that all of the debtor’s assets and liabilities had to be disclosed, even a personal injury lawsuit that came into existence after the bankruptcy petition was filed. The defendant in the auto accident case, being rather cagey, argued that the injury lawsuit should be barred, because the debtor, who was still in bankruptcy, had not disclosed the lawsuit in his multiple amendments to the bankruptcy petition. The Court of Appeals applied the doctrine of “judicial estoppel,” in other words, the debtor was prevented from pursuing this asset, because he had failed to disclose it to the bankruptcy court.
Again, what is the definition of the bankruptcy estate? The lawsuit did not exist at the time of filing. The matter would eventually work its way to the US Supreme court.
The Supreme Court will issue its decision in the summer of 2026. However, the judges apparently are considering the question of judicial estoppel, and whether it is fair to bar plaintiff, who had no control over when the auto accident occurred, from seeking to recover relief for his personal injuries. The Fifth Circuit’s rule, which is followed in some, but not all circuits, seeks to hold a debtor responsible for non-disclosure of the asset (the lawsuit).
Some commentators seem to mock the plaintiffs debtor’s bankruptcy attorney, for not including the lawsuit in subsequent amendments to the bankruptcy papers. And certainly, given the fact that papers were amended, the careful attorney would have certainly mentioned the lawsuit, and parenthetically said that this arose after the bankruptcy was filed, and let the US trustee and bankruptcy judge sort out whether it was really part of the bankruptcy estate or not.
Additionally, as in all contested litigation, there is no guarantee that the Plaintiff will receive a dime. Pending litigation is often given a value of $0 in bankruptcy proceedings, because no one knows how it will end up.
The mechanical, punitive approach of the Fifth Circuit seemed unconvincing to the US Supreme Court. According to commentators, the justices seemed skeptical of the idea that the debtor should bear the full brunt of his attorney’s apparent failure to include the subsequent lawsuit in the amendments.
In fairness to the attorney, however, the lawsuit was not part of the bankruptcy estate, under the strict definition of the term.
In bankruptcy, as in many things, issues of law are sometimes seen through a lens of fairness (“equity”). If someone received a $10 million inheritance a week after filing bankruptcy, the bankruptcy trustee would have a hard time ignoring that and considering whether that money should be part of the bankruptcy estate. But there may be valid arguments for the debtor, depending on the circumstances (including a motion to dismiss the bankruptcy).
But here, the Supreme Court seems to be leaning towards not holding the debtor/accident victim accountable for his lawyer’s arguable error, and not preventing him from recovering on his lawsuit.
It will also be interesting to see if the High Court even mentions “abandonment” of the claim (asset) by the Trustee, or whether the Trustee would be the real party in interest. My guess is that the issue won’t even come up.
The Supreme Courts decision should be an interesting read.
Keathley v. Buddy Ayers Construction, Incorporated.; Docket 25-6
Thanks to the Oyez Project, at Chicago Kent School of Law
FOR EDUCATIONAL PURPOSES ONLY; THIS POST DOES NOT CONSTITUTE LEGAL ADVICE, NOR DOES IT CREATE AN ATTORNEY-CLIENT RELATIONSHIP. PLEASE CONSULT AN ATTORNEY
