The intersection between bankruptcy law and state tort law trips many lawyers and their clients. Just about one year ago, we posted about a District of Columbia case ("Your broken leg is now the trustee's broken leg, feel better?") where a fellow lost his right to sue in the Superior Court for personal injury precisely because he forgot to list the claim in his D.C. federal bankruptcy petition. And now a Maryland appellate court has confirmed the same result for a Maryland litigant who fails to disclose a potential state court claim in a Maryland federal bankruptcy petition.
The Maryland case is called Schlotzhauer v. Morton, decided July 30, 2015, if you're inclined to read the published opinion. But here it is, in a nutshell:
The Maryland case is called Schlotzhauer v. Morton, decided July 30, 2015, if you're inclined to read the published opinion. But here it is, in a nutshell:
- Ms. Schlotzhauer filed for bankruptcy and did not disclose that she had a claim for personal injury.
- She waited until the bankruptcy was over to file a lawsuit in a Maryland Circuit Court.
- The Circuit Court granted the defendant's motion and kicked Ms. Schlotzhauer out of court because her claim belonged to the bankruptcy trustee, and not to her.
Ms. Schlotzhauer had to fight to get her claims back, and that included reopening her old bankruptcy to regain control over her personal injury claim. She then had to return to the Maryland courts to overturn the summary judgment. With this decision, the Maryland Court of Special Appeals has released her to pursue her claim in the Circuit Court.
But her lawyers sure could have saved themselves a whole bunch of aggravation. If you have tort claims against others (personal injuries or intentional actions such as assaults, libel, slander or even fraud) when you file for bankruptcy, here is the game plan:
- Disclose the potential claims in your bankruptcy petitions. The moment you file a petition for federal bankruptcy protection, all of what you own becomes "property of the estate," and within the control of the trustee.You can't demand protection from your creditors without upholding your obligations to make full disclosure.
- Negotiate with the trustee. Most trustees are not interested in pursuing tort claims, and will consent to release the claim back to you and your lawyer. This is called "abandonment" of the claim by the trustee. If you skip this step, the claim remains under the trustee's control even after the bankruptcy case is dismissed.
- Don't miss your statute of limitations! Whether the claim is held by the trustee or you, that limitations period just keeps ticking along. Act promptly.
And if you have simply forgotten or through some mistake a claim was never listed in your past bankruptcy, now what? Like Ms. Schlotzhauer, you will have to return to the bankruptcy court to reclaim your rights to make the state court claim. Ms. Schlotzhauer waited almost three years. The passage of time did not resolve the issue--her state tort claim remained property of the bankruptcy estate under the control of the trustee.
Your bankruptcy case is a matter of public record, and your petition and schedules remain available for review to anyone searching the national federal database long after the case is closed. And when you file a lawsuit in state court the lawyers for the other side are going to search those records to determine if your broken leg is really your broken leg, or if it is still the trustee's broken leg.
