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First Circuit Rules Debtor May Not Continue Lawsuit He Failed to Disclose in Chapter 7 Filings - Guay v. Burack

April 26, 2012

Very recently, Vincent Howard and our Corona consumer bankruptcy attorneys wrote here about a debtor who was barred by the Eleventh U.S. Circuit Court of Appeals from pursuing a legal claim he failed to disclose during bankruptcy. Interestingly, that case was followed very shortly by a similar ruling from the First Circuit, in Guay v. Burack et al.. As with the Eleventh Circuit case, Love v. Tyson Foods, plaintiff Kevin Guay brought his case while his bankruptcy was already pending, but failed to amend his filings to disclose the case as a potential asset. This caused the defendants, a group of New Hampshire government officials who allegedly searched Guay illegally, to move for summary judgment on the grounds that Guay was judicially estopped from pursuing a claim he didn't acknowledge before. The First Circuit affirmed.

Guay and his wife, Lorraine Guay, filed for Chapter 11 bankruptcy in late 2008 and converted to Chapter 7 in 2009. The events giving rise to Guay's legal claims had not yet arisen when they filed, but in early 2009, the state of New Hampshire began investigating him for alleged illegal disposal of various toxic substances. The search was legal as to two properties, but included a search of their home, which was not named in the warrants, and officers kept the Guays and their tenants from accessing other properties not named. The searches also caused "extensive damage" to the subject properties and local media coverage. The Guays filed separate pro se lawsuits, which were later consolidated, just three days after Chapter 7 conversion. They failed to amend their filings to disclose these lawsuits, despite discussing them and other pending litigation at a later creditors' meeting, and despite a court order requiring filings that would have included the claims. They were granted a discharge in October of 2009.

In December of that year, the magistrate in their consolidated civil rights lawsuit noted that the bankruptcy case wasn't closed and ordered related briefing; the defendants raised the judicial estoppel issue, and the Guays filed an amended bankruptcy report that included this lawsuit. The Chapter 7 trustee then filed a notice of abandonment, saying she believed the claims were burdensome and of insignificant value. No creditors objected. Several of the claims were subsequently dismissed on other grounds, and after more discovery, the district court granted summary judgment on the remaining claims, saying they were judicially estopped by the earlier nondisclosure. Guay appealed.

The First Circuit started by noting that judicial estoppel applies when a party has succeeded asserting one position and now wishes to assume an inconsistent position. Disallowing this prevents litigants from unfairly manipulating the system. It's well established that failing to identify a claim in bankruptcy is grounds for judicial estoppel, the First said. Guay argued that his positions were not inconsistent, but the appeals court disagreed, noting that he maintained there was no further claim even when the state had moved for contempt for nondisclosure. It also dismissed Guay's argument that the bankruptcy court had never accepted his "position" of not disclosing the claim. Discharge of the bankruptcy case happened before the issue came to a head, the First said, but long after the obligation to disclose accrued. Finally, Guay argued that it would be inequitable to stop the claims because the trustee was aware of them before discharge and he amended to include them after discharge. However, the First rejected this, noting that Guay didn't bring them up himself and that oral disclosure is insufficient in any case.

Vincent Howard and our Tustin personal bankruptcy lawyers are particularly interested in this case coming so closely on the heels of Love. The cases have some important similarities, including claims that the plaintiff/bankruptcy filer gained no unfair advantage from failure to disclose. Because both circuit courts rejected that argument, we'd like to take the opportunity to remind bankruptcy filers that there's no substitute for full disclosure. Many bankruptcy filers, in our experience as San Diego County individual bankruptcy attorneys, don't even realize that a potential legal claim can be considered a financial asset. That's why, at Howard Law, P.C., we make sure to discuss the issue very thoroughly with bankruptcy clients before they file their petitions.

If you're deep in debt and considering a Chapter 7 or Chapter 11 bankruptcy, you should call Vincent Howard and the team at Howard Law to discuss how we can help. For a case evaluation, send us an email or call us toll-free at 1-800-872-5925.

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