Borrowers lose rights to lawsuit and any settlement by failing to list their lawsuit against lender/servicer in their bankruptcy asset schedule. The Ninth Circuit has made new law finding that the borrowers listing of their lawsuit in their statement of financial affairs and mentioning it to the bankruptcy trustee was not enough. A borrower’s lawsuit, as with any other potential asset, must be clearly identified in the list of assets for the borrower to be able to preserve standing to pursue a claim if the bankruptcy trustee decides to abandon it.
Prior to this decision, there was no Circuit Level authority and a split at the bankruptcy court and district court levels. This strict interpretation will help early motions to dismiss for lack of standing, or, as we did in this case, allow defendants to come back after the bankruptcy is closed and strike a settlement with the bankruptcy trustee. This can be a useful tool, especially when dealing with unreasonable demands from a borrower litigant.
When a borrower files a chapter 7 bankruptcy petition all of the borrower’s assets – including claims against third parties like a lender/servicer – become the property of estate over which the bankruptcy trustee has control. The borrowers lack standing to prosecute the claims themselves. Generally, claims will automatically be passed back to borrowers upon the closing of a bankruptcy, if properly disclosed. Prior to this decision, several courts had taken more expansive approaches, allowing borrowers to assert standing if their claims were merely disclosed at some point in their bankruptcy filings. However, the Ninth Circuit ruled that the disclosure must be within a specific schedule, and disclosure elsewhere in a debtors’ filings was not sufficient.
Houser LLP was involved with the bankruptcy trustee to assist on key briefing at the Bankruptcy Court, Bankruptcy Appellate Panel, and the Ninth Circuit. Please let us know if you have any questions.