Part I:  The Setup:  Treatment of Prepetition Causes of Action in Bankruptcy Proceedings

In commercial lending, as in law, no single practice area exists independently of another. Bankruptcy law often intersects with contract law and even personal injury law when debtors find themselves as the plaintiff or defendant in a prepetition civil action. It is important for parties and counsel involved in both the bankruptcy and the prepetition action to understand the interplay between both proceedings, and, when appropriate, to coordinate and cooperate to achieve an equitable result for all interested parties.

As we have discussed in previous posts, there are two fundamental objectives that underpin bankruptcy law: (1) to provide an “honest but unfortunate debtor” with a fresh start, and (2) to equitably compensate creditors. In the next three posts, we will examine how these objectives are applied in light of a debtor’s involvement in a prepetition cause of action, with a special eye towards an unfortunately dishonest debtor, who attempts to conceal its claim to proceeds arising therefrom.

The importance of this subject stretches well beyond bankruptcy law, as courts have gone so far as to grant summary judgment against a plaintiff in multi-million dollar lawsuits based solely on their failure to disclose their interest in the cause of action arising prior to their filing of bankruptcy.