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Connecticut: Appellate Court Holds that Failure to Schedule an Asset on Bankruptcy Schedules Strips Debtor of Standing to Prosecute

Posted By USFN, Tuesday, February 13, 2018
Updated: Monday, February 12, 2018

February 13, 2018

by Linda J. St. Pierre
McCalla Raymer Leibert Pierce LLC – USFN Member (Connecticut, Florida, Georgia, Illinois)

A decision was rendered in Beck and Beck, LLC v. Costello, AC 39034 (Conn. App. Ct. 2017), which held that the debtor in a Chapter 7 case lacked standing to bring amended counterclaims and cross claims against the plaintiff because of a failure to properly list the counterclaims and cross claims on his bankruptcy petition.

This decision stems from an action brought in the state superior court against the debtor seeking unpaid legal fees. During the pendency of that case, the debtor filed an answer, a special defense, and a four-count counterclaim alleging breach of contract, breach of the implied covenant of good faith and fair dealing, professional malpractice, and violation of the Connecticut Unfair Trade Practices Act. The plaintiff in that action then filed a motion to strike (due to legal insufficiency), which was granted. The debtor proceeded to file amended counterclaims and cross claims that were essentially identical to the original ones. These were also stricken at the request of the plaintiff, on the same grounds. The debtor appealed that decision.

Bankruptcy Court
During the pendency of the state court appeal, the debtor filed a voluntary Chapter 7 petition. He checked “none” on Schedule B where the form asked for a description of “[o]ther contingent and unliquidated claims of every nature, including counterclaims of the debtor.” The bankruptcy trustee issued a report of no distribution, determining that there was no property available for distribution, and the bankruptcy case was subsequently closed.

State Superior Court
Prior to oral argument on the appeal, the plaintiff filed a motion to dismiss the debtor’s counterclaims on the basis that the claims had not been abandoned by the Chapter 7 trustee and, therefore, remained property of the estate — the real party in interest as to the claims. The appellate court remanded that issue back to the superior court for a decision on standing. The trial court, upon the filing of a motion to dismiss by the plaintiff on the same standing arguments, granted the motion to dismiss, determining that the debtor did not have standing because the bankruptcy trustee had not abandoned the counterclaims and cross claims. This appeal followed.

State Appellate Review
During his appeal, the debtor contended that the bankruptcy trustee abandoned the counterclaims and cross claims when she filed her report of no distribution. The plaintiff countered that the trustee never abandoned those claims because the bankruptcy trustee was not made aware of the counterclaims and cross claims that the defendant had pending against the plaintiff.

The appellate court held in favor of the plaintiff, stating “that upon the filing of a bankruptcy petition, all prepetition causes of action become the property of the bankruptcy estate [citation omitted]; and that in order to revest in the debtor through abandonment, the assets must be properly scheduled. … Because the defendant failed to include the counterclaims and cross claims on his schedule B—personal property form, we conclude that the bankruptcy estate owns the defendant’s amended counterclaims and cross claims. … Accordingly, the [trial] court correctly determined that the defendant lacks the requisite standing to bring the amended counterclaims and cross claims against the plaintiff and counterclaim defendant. The judgment is affirmed.”

This decision provides a powerful argument to creditors who face post-bankruptcy dilatory and costly litigation.

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