Why You Should Be Honest with Bankruptcy Court

The District of Columbia Court of Appeals recently affirmed dismissal of a $10 million medical malpractice lawsuit, based on the plaintiffs’ failure to disclose the case as a potential asset in their bankruptcy case. While the decision is not binding judicial precedent beyond D.C. local courts, it serves as a dramatic reminder of the risks of failing to disclose even potential assets in a bankruptcy case.

Summary of the Case

The case of Dennis v. Jackson, No. CAM-872-16, September 16. 2021, is a factually and legally complex case, as evidenced by the detailed 36-page opinion of the three-judge panel of the D.C. Court of Appeals. The case involves an appeal by the plaintiffs in a $10 million medical malpractice lawsuit decision from dismissal of the action by the D.C. Superior Court. The D.C. Court of Appeals (not to be confused with the United States Court of Appeals for the District of Columbia Circuit) is the District’s highest court and comparable to a state supreme court.

Factual Background

In 2012, Melinda Dennis had abdominal surgery. Due to multiple problems resulting from the surgery, Ms. Dennis had additional operations. The record in the case indicates that she decided to file a lawsuit against the original physician as early as 2013.

In November 2014, Ms. Dennis and her spouse filed a petition in bankruptcy, due to her inability to return to work after the initial surgery and the couple’s resulting inability to pay their existing debts. On the bankruptcy schedule requiring disclosure of actual and contingent assets and liabilities, petitioners did not disclose the potential malpractice claim.

In March 2015, the bankruptcy court discharged $86,163.06 of the petitioners’ debts. In 2016, almost a year later, Ms. Dennis and her husband filed a medical malpractice action against the original doctor and the hospital where the surgeries were performed in D.C. Superior Court, seeking $10 million compensation on various legal grounds.

In December 2018, the D.C. Superior Court judge granted the defendants’ motion to dismiss the malpractice case. The court determined that under the doctrine of judicial estoppel, the plaintiffs’ failure to divulge the potential lawsuit in the bankruptcy case prevented them from proceeding with the civil action. The plaintiffs appealed that decision to the D.C. Court of Appeals. In a lengthy decision, the appellate court affirmed the lower court’s dismissal of the action.

Legal Issues

The doctrine of judicial estoppel is well-established, although rather infrequently encountered in litigation. Citing the United States Supreme Court, the D.C. Court of Appeals described the doctrine as recognizing that “where a party successfully assumes a certain position in a legal proceeding, that party may not subsequently assume a contrary position in a different proceeding, simply because that party’s interests have changed, particularly where the change in position results in an unfair advantage to that party or where the change works an unfair detriment upon another party.”

The opinion includes a comprehensive analysis of the application of the doctrine to the facts of the case, before concluding that appellants’ failure to disclose the potential malpractice lawsuit in the bankruptcy case prevented them from pursuing the civil action. In the process, the Court discussed Section 522 of the U.S. Bankruptcy Code (11 U.S.C. § 522) relating to exemption of assets from a bankruptcy estate.

The Court determined that the civil action potentially included both exempt and non-exempt claims, and that the potential action should have been disclosed to the bankruptcy trustee. The judges then concluded that “[B]ecause of the nondisclosure of the entire potential civil action, the creditors in appellants’ bankruptcy proceeding were cheated out of a possible resource for satisfying at least some of their claims.”

Finally, the Court held that the abuse of discretion standard applies to review of lower court decisions on issues of judicial estoppel. In conclusion, the Court of Appeals determined that the trial court’s findings and conclusions on judicial estoppel were supported by the evidence and applicable law. Finding no error of law or abuse of discretion, the Court of Appeals affirmed the trial court’s ruling.

Why Honesty Matters in a Bankruptcy Case

The D.C. Court of Appeals case is just one example of many scenarios where failure to disclose or affirmative efforts to mislead regarding assets can result in catastrophic repercussions for a debtor who files for bankruptcy. The U.S. Bankruptcy Code safeguards the integrity of bankruptcy proceedings through numerous provisions designed to prevent fraud and even unintentional nondisclosure. In some circumstances, fraudulent conduct is also illegal and can result in criminal penalties.

In many cases, fraud or nondisclosure of assets results in adversary proceedings in the bankruptcy court. An adversary proceeding is separate bankruptcy litigation that occurs within the bankruptcy case, rather than as part of the case itself. The results of an adversary proceeding can have significant financial impact on the debtor and the underlying bankruptcy case.

The risks of dishonesty include the possibility that debts will not be discharged, the debtor will have to turn property over to the trustee, and even revocation of a previously granted discharge. The seriousness of these potential risks cannot be overstated. If you file for bankruptcy, it is essential to be completely honest in disclosing assets to the bankruptcy court.

Talk With an Experienced Minnesota Bankruptcy Litigation Attorney

At the Dave Burns Law Office, I represent clients in contested matters and adversary proceedings in the United States Bankruptcy Courts in Minneapolis and St. Paul. If you encounter bankruptcy litigation as a bankruptcy petitioner or creditor, I welcome you to contact me at (612) 677-8351 or by sending an email to me at dave@daveburnslaw.com.

I am available to meet with clients in both Minneapolis and St. Paul. Inquiries from clients and referring attorneys throughout the State of Minnesota are welcomed.