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In The Fourth Circuit Lawsuit Not Precluded By Debtor’s Failure to Disclose Claim

August 30, 2019

U.S. Circuit Court Judge Pamela Harris wrote for a unanimous panel in Martineau v. Wier et al., and found that the district court erred by presuming the debtor’s failure to list a potential tort claim in her Chapter 7 case was done in bad faith. Martineau explored potential tort claims against a man who stabbed her, who was later charged with assault and battery but found mentally incompetent to stand trial. Martineau also looked into bringing claims against the Wiers, who owned the apartment building  where the man lived and where Martineau was attacked. Based on the Wiers argument that they were only the man’s landlord, Martineau settled her claims for a fraction of the damages and signed a settlement agreement. Martineau later learned Diane Wier was the sister of the man who attacked her and that both Wiers knew of the man’s mental issues.

 

Prior to filing for Chapter 7 relief in June 2015 and receiving a no asset discharge, Martineau had not taken any legal action against the Wiers. Approximately one year later, Martineau asserted tort-based claims against the Wiers and sought to rescind their settlement agreement because it was fraudulently induced. The District Court found for the defendants based on a lack of standing, reasoning that her tort claims belonged to the bankruptcy estate. Thus, Martineau was judicially estopped from bringing her claims against the Wiers.

 

The Circuit Court panel identified two major errors: (1) the standing issue and (2) the presumption. In terms of the standing issue, the Circuit Court found that the District Court, “conflated Article III standing with the distinct issue of whether Martineau or her bankruptcy trustee was the ‘real party in interest’ legally entitled to pursue these claims.” The panel explained that the District Court mischaracterized the standing question as constitutional standing rather than procedural. Citing the Federal Rules of Civil Procedure, the explained the real party in interest requirement of Rule 17. According to the panel’s analysis of Rule 17, the bankruptcy trustee had the legal authority to bring the tort claims against the Wiers. However, the bankruptcy trustee re-opened bankruptcy proceedings and abandoned the estate’s interest in the tort claim, which made Martineau the real party in interest. “Indeed, once the trustee abandoned the claims against the defendants, bankruptcy law treats Martineau as ‘having owned [the claims] continuously’,” said Judge Harris. Accordingly, the District Court’s ruling on the issue of standing was reversed.

 

The more egregious error to the panel was the presumption that Martineau acted in bad faith by failing to disclose the lawsuit in her bankruptcy case. Martineau had previously asserted that the lack of disclosure was not deliberate and that she reasonably believed that the settlement agreement between her and the Weirs barred her claims. On appeal, she argued the District Court rejected this argument and instead presumed her bad faith. The panel agreed with Martineau saying, “presuming bad faith from failure to disclose a legal claim is particularly unwarranted in a case like this one, in which there was no 'pending lawsuit' to disclose when the debtor filed for bankruptcy.” Further, Judge Harris emphasized that the District Court’s, “reliance on a presumption of bad faith runs the risk of producing a decidedly non-equitable result.”

 

In this case, the panel illustrated that judicial estoppel is a tool to prevent unfairness, but looking objectively at the facts of this case, unfairness would be the outcome in letting the District Court’s ruling stand. The defendants, the Weirs, who may have committed fraud against Martineau benefitted from the District Court ruling. To allow potentially bad actors to benefit from the equitable powers of the court would be contradictory to the purpose of those equities: to promote justice and fairness.

 

Martineau v. Wier et al., No. 18-2294, 2019 WL 3772151 (4th Cir. Aug. 12, 2019).

 

Curran Antonelli represents a broad range of businesses and corporate entities, private equity funds, as well as governmental agencies and other interested parties in all phases of the bankruptcy process and in bankruptcy related transactions and litigation.  As advocates and trusted business advisors, our well-established foundation of knowledge and understanding of our clients’ business interests, enables our attorneys to deliver unparalleled individualized attention to our clients of all sizes with their litigation and corporate transactional needs.

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