Parties other than those who file for bankruptcy and discharge their obligations to creditors generally view a bankruptcy filing as a bad thing. The filing of a bankruptcy case prevents creditors from foreclosing on collateral or suing to recover money owed to them and generally results in creditors being paid much less than they are owed. A February 16, 2017 decision of the Virginia Supreme Court, however, demonstrates that a bankruptcy filing can be a good thing for someone facing a lawsuit who has not filed for bankruptcy.
In Ricketts v. Strange, Ms. Ricketts had been injured in a collision with a vehicle driven by Mr. Strange on February 3, 2012. On January 16, 2014, about two weeks before the statute of limitations would have expired, Ricketts sued Strange in a Virginia Circuit Court for damages resulting from the injuries that she sustained in the collision.
Between the date of the collision and when she filed suit, Ricketts had filed a Chapter 7 bankruptcy case. Under the United States Bankruptcy Code, the filing of a bankruptcy case creates an “estate” consisting of all interests of the debtor in both tangible and intangible property on the date the case is filed. In a Chapter 7 case, the trustee is responsible for reducing the property of the estate to money and paying creditors. If the property is a claim against someone, the trustee has the exclusive right to prosecute and settle it. Debtors who are individuals can “exempt” property so that it is carved out of the estate and not subject to administration by the trustee. What assets can be exempted is governed by the Bankruptcy Code if the state in which the debtor lives has not “opted out” of the federal exemption scheme and by state exemption laws if the state has opted out.
Strange moved to dismiss Ricketts’ suit against him on the grounds that she did not have standing to sue him. Since the collision occurred before Ricketts filed her bankruptcy case, Ricketts’ claim against him was property of her bankruptcy estate that could be prosecuted only by the trustee unless she had exempted it. Strange asserted that she had not. Ricketts argued that since she had listed as assets in her bankruptcy schedules and claimed as exempt “proceeds related to claims or causes of action that may be asserted by the debtor,” she had exempted the claim against Strange and thus had standing to sue. The Circuit Court concluded that language in the schedules was too vague to exempt the claim from Ricketts’ estate and dismissed the case.
By the time the case was dismissed, of course, the statute of limitations had expired so the trustee could not sue Strange. Ricketts asked the Circuit Court to allow her to change the name of the plaintiff in the case she had filed against Strange from her name to the trustee’s name to correct what she characterized as a “misnomer” or, alternatively, to substitute the trustee for her as the plaintiff. The Circuit Court denied both requests.
On appeal, the Virginia Supreme Court agreed with the Circuit Court that Ricketts had not exempted her claim against Strange from her bankruptcy estate. The Supreme Court said that the proper standard is that “a debtor’s description of his assets and exemptions must contain sufficient detail to enable the trustee to determine whether further investigation into a claimed exemption is warranted.” The Court described Ricketts’ listing of “claims or causes of action” as “overly general at best and boilerplate at worst” and agreed with the Circuit Court that Ricketts had not exempted her claim against Strange.
Moving on to Ricketts’ attempts to salvage her claims against Strange by recasting her suit as one brought by the trustee, the Court noted that the rule permitting correction of a “misnomer” contemplates correction of a “mistake in the name, not the identification, of a party.” Court said:
The “right person” was [the trustee], but he was not incorrectly named. Rather, the “wrong person,” Ricketts, was named. This is not a misnomer.
Ricketts’ attempt to substitute the trustee as the plaintiff fared no better. Citing the Virginia Rule regarding substitution of parties, the Supreme Court said:
The Rule’s language contemplates a plaintiff who was once capable of prosecuting a claim, but subsequently “becomes incapable.” It is therefore inapplicable to Ricketts, who has been incapable of prosecuting her claim since it was filed.
Ricketts serves as an important reminder that checking for a bankruptcy filing by an opposing party is not only a step that someone contemplating suing someone else should take, but a step that anyone who is sued should take as well. Like Strange, a party who undertakes the appropriate investigation may be able to avoid liability altogether.