Michigan Bankruptcy Blog

Only trustee, not debtor, can bring lawsuit on pre-petition cause of action

Auday v. Wet Seal Retail, Inc., Case No. 12-5057 (6th Cir., Oct. 25, 2012) (recommended for full-text publication). 

As most bankruptcy practitioners know, a debtor’s pre-petition cause of action – whether for personal injury, breach of contract, or other claim – is property of the bankruptcy estate.  Now, the Sixth Circuit has clarified that only the trustee can file suit in connection with a Chapter 7 debtor’s pre-petition cause of action, unless the action is abandoned.

In Auday, the debtor was fired from her job four days before she filed her Chapter 7 bankruptcy case.  The debtor, who was 47 years old, worked for a clothing store that catered to young women, and the debtor claimed that her termination was unlawfully based on her age.  The debtor did not list her potential age discrimination claim in her bankruptcy schedules, although she subsequently disclosed it to her Chapter 7 trustee.

The Chapter 7 trustee had the debtor’s attorney appointed as “special counsel” for the estate to file a lawsuit on behalf of the debtor, but the trustee ultimately decided not to file the suit.  Though the trustee did not abandon the cause of action or close the case, the debtor proceeded to file suit against her former employer while her bankruptcy case was open.  The federal district court handling the employment suit entered judgment on the pleadings in favor of the employer, finding that the debtor was judicially estopped from bringing the action because she did not list it in her bankruptcy schedules.

On appeal, the Sixth Circuit found that the dispositive issue was not whether the debtor was judicially estopped from pursuing the action, but rather whether she was capable of pursuing the action.  The Sixth Circuit explained that upon the bankruptcy filing, the age discrimination claim became property of the bankruptcy estate, and thus the estate became the owner of that claim.  Consequently, only the Chapter 7 trustee can bring the action; the debtor has no standing to pursue it alone.

Simply put, “without the Trustee, [the debtor] may not pursue her lawsuit.”  The Sixth Circuit noted that this was consistent with the principle of judicial estoppel and that judicial estoppel did not bar the trustee from pursuing the action.  The Sixth Circuit therefore held that the district court should either dismiss the action without prejudice or allow the trustee to be substituted into the action as the real party in interest.

This case is consistent with case law from other jurisdictions and makes the following points clear for Sixth Circuit practitioners: (1) causes of action or claims must be listed in the debtor’s bankruptcy schedules, even if no lawsuit has been filed yet, and (2) absent abandonment, the trustee is the only one with standing to pursue a debtor’s pre-petition cause of action.

Categories: 6th Circuit Court of Appeals, Chapter 7