Where Ignorance Truly Is Bliss: Failure to Disclose Potential Lawsuit in Bankruptcy Not a Bar to Future Suit
By In the past year, I’ve blogged a few times about the consequences of failure to disclose assets and claims in a bankruptcy. See Be Prepared to Fully Disclose in Bankruptcy or Suffer the Consequences, November 17, 2010; Disclosure in Bankruptcy: When Too Little and Too Late Bar a Lawsuit, April 5, 2010.
The general upshot of these posts is that failure to disclose the existence of a lawsuit or known claim during a bankruptcy can act as a bar to pursuing that claim post-bankruptcy. However, a recent case from the Middle District of Tennessee indicates that in some circumstances a failure to disclose a potential claim does not necessarily act as a bar to a future lawsuit.
In Sovik v. Ducks Unlimited, Inc., 2011 WL 1397970 (M.D. Tenn. Apr. 13, 2001), the Court ruled that a debtor’s failure to disclose a potential claim against his former employer under FLSA did not bar him from bringing the claim later. The key in allowing the debtor to bring the undisclosed claim was there was no evidence that the debtor acted intentionally or in bad faith. While the debtor was aware of the facts serving the basis for the claim during the pendency of the bankruptcy, he was not aware of the law that supported the claim. In short, the court concluded that the debtor had not knowingly failed to disclose — he knew something had happened to him, but he didn’t know that those facts could form the basis for a legal claim. Without this knowledge, the debtor couldn’t (and didn’t) realize that he had a legal claim that could be an asset of the estate. In short, the rule remains that a debtor fails to disclose claims at its peril, but at least in this case, ignorance was bliss for the debtor.
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