03 Jun The Perils of Guessing: The Ford Case
I have my own version of Murphy’s Law that I like to (immodestly) call Wendell’s Rule of Law:
If you guess what the law says and your guess is in your favor, you’re wrong.
The 10th Circuit Court of Appeals indirectly taught this rule to a Utah couple last month and we can all learn a lesson from the case. The result was that they lost a $50,000 personal injury settlement to the bankruptcy trustee that they probably could have kept normally. Expensive lesson.
The debtors filed a Chapter 7 bankruptcy but failed to list the wife’s pending personal injury lawsuit in two different places, either as an asset or as a case to which she was a party at the time of filing. After a settlement was reached, her injury lawyers told her she ought to have listed the case in her bankruptcy. But the record showed that she did not in fact do so for several more months. The bankruptcy court apparently believed she did not actually file the corrected paperwork — tell the trustee and court about the case officially — until she found out she could not get the settlement money any other way.
The debtor — who was a paralegal — testified that she did not originally list the personal injury lawsuit in the paperwork because she believed they only needed to list lawsuits against themselves, not cases they had against others. She also testified that she did not believe they had to list the claim itself as an asset because she understood these were exempt and therefore not of any value to the trustee.
Both of her reasons for failing to list these things were guesses. They worked in her favor, allowing her to avoid questions about the lawsuit being pursued by other lawyers. And they were completely wrong. A few moments of thought and examination of the paperwork would probably have corrected her reasoning — the forms ask if you are a “party” to any lawsuit, not simply whether you are a “defendant” in any, and they no doubt listed other property which was exempt so clearly her bankruptcy lawyers thought exempt property needed to be listed — but it is all too easy to act without thinking. The easier, unexamined road beckoned.
The trustee objected to the exemption of the personal injury claim. He did so not because the law didn’t protect those claims (apparently it did in Utah) but because of her bad faith in failing to list it. The bankruptcy court backed the trustee, denied the exemption, and gave the settlement to the trustee to pay creditors. Ultimately the court of appeals decided this was within the judge’s discretion.
The 10th Circuit adopted reasoning from a Utah case that a debtor could recover an unscheduled asset from the clutches of a trustee by showing they had inadvertently — innocently — omitted it from the case. But they would need to show they had no knowledge of the asset (i.e. “I couldn’t list it if I didn’t know I had it”) or they had no motive in concealing it. At first glance, the debtor would not seem to have any reason to conceal an exempt asset — you get to keep it after all.
While the court was at pains to say that this case could have gone either way at trial and it only affirmed the result because the trial judge had not clearly abused his discretion, it pointed out reasons why concealing the lawsuit were prejudicial. Most importantly, the trustee — had he known of the case prior to settlement — could have intervened and potentially obtained some part of the settlement (e.g. property damages which were not exempt) for the estate instead of having it structured purely as exempt personal injury. So creditors lost out on that opportunity.
[Note: There is also a line of cases which hold that the debtor has no control of an injury case — and possibly no case at all — if it was not listed properly in a bankruptcy case, under the doctrine of judicial estoppel. This is a subject for another time.]
Ultimately the case mostly stands for the proposition that trial judges have great discretion in deciding whether someone acts in good or bad faith. They see the witnesses and can make the best judgment of their demeanor and truthfulness. But it also stands for the proposition that you can lose important and very clear rights — even large settlements to repay you for personal injuries — if you don’t tell the bankruptcy court everything. The lesson is, of course, disclose, disclose, disclose.
But it also stands for the proposition that guessing about what the law says — in this case, that you don’t really have to list exempt property — and acting on those guesses if you like what you came up with can sadly come back to bite you.
Case: Gillman v. Ford (In re Ford), #06-4029 (10th Cir. May 17, 2007).
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