Do I need to disclose my disability insurance claim if I filed for bankruptcy?
Yes. If you file for bankruptcy it is imperative that you disclose your disability insurance claim regardless of the stage that your claim is in – application, denial, appeal, pending litigation, etc.
The Bankruptcy Code and Rules impose an express and affirmative duty on individuals filing for bankruptcy to disclose all assets – to include contingent and unliquidated claims. Under the Code the duty to disclose during a bankruptcy proceeding is a continuing duty requiring the debtor to disclose all potential causes of action. This requirement does not mean that the debtor know all the facts of the action or even the legal basis of a cause of action; it only requires that if someone has a possible cause of action then that cause of action is determined to be “known” by the debtor and subject to disclosure. Failure to disclose a disability insurance claim during a bankruptcy proceeding can in turn prevent a claimant from pursuing legal action against an insurance company for failure to pay a claim for disability benefits.
In a recent case out of a Texas a Federal District Court was presented with such a situation. In the case of Casandra Kidd v. Prudential Insurance Company of America, Kidd filed a lawsuit under ERISA against Prudential for failure to pay her disability insurance benefits following a February 26, 2014 denial of her claim. From a procedural standpoint Kidd filed her administrative appeals as required under ERISA and her long term disability policy. On March 11, 2016, following the filing of her appeals, Prudential advised Kidd it was upholding the denial of her claim for benefits and notified her that she had exhausted all administrative remedies under ERISA. A lawsuit was then filed against Prudential in August of 2016. However, in February 2015, Kidd filed a bankruptcy petition and at no time did she disclose her disability insurance claim with Prudential in the bankruptcy proceeding. Kidd subsequently received a no asset discharge and her bankruptcy case was terminated in June 2015.
Following the filing of the ERISA disability insurance lawsuit in August of 2016, Prudential’s attorneys filed a Motion to Dismiss Kidd’s Complaint asserting the legal doctrine of Judicial Estoppel, which is “a common law doctrine by which a party who has assumed one position in the pleadings may be estopped from assuming an inconsistent position.” Courts have further elaborated on this doctrine noting its purpose is “to protect the integrity of the judicial process” by “preventing parties from playing fast and loose with the courts to suit the exigencies of self-interest.”
The Fifth Circuit, the federal judicial circuit which Texas is in, has three requirements for judicial estoppel:
(1) the position of the party against whom judicial estoppel is sought is plainly inconsistent with its prior legal position;
(2) a court accepted the prior position; and
(3) the party did not act inadvertently.
Kidd conceded the first requirement – that her legal position in her bankruptcy case that she had no assets related to the Prudential policy was inconsistent with her current position that she has a right to disability benefits (assets) under the Prudential policy; and the second requirement that the bankruptcy court accepted her assertion that she had no assets related to the Prudential policy. The Court was then left to determine whether Kidd acted inadvertently.
Kidd argued in response to the Motion to Dismiss that she did not know she had a valid claim against Prudential for her disability benefits and that her attorneys failed to communicate with her during the administrative appeal process. As such she asserted that she thought she did not have a valid claim against Prudential. The Court notes in its opinion that Kidd alleged that it wasn’t until September 2015 when she spoke to her present attorney (who did not represent her during the appeal process) that she had a valid claim against Prudential for her disability insurance benefits. The Court dismissed that argument noting that due to the fact Kidd had hired an attorney to file her administrative appeals with Prudential she is not justified in asserting a lack of knowledge of a claim. The Court goes on to further note that a week before Kidd filed for bankruptcy her attorney at the time copied her on a letter appealing the claim denial. In light of the preceding the Court determined that Kidd failed to show that she lacked knowledge of the “undisclosed claim.”
The Court also found that Kidd failed to show a lack of motive to conceal the Prudential claim from the bankruptcy court referencing that the Fifth Circuit had previously held that a party in circumstances similar Kidd would have a financial incentive to not disclose information in the form of a potential windfall (receipt of disability insurance benefits). The Judge stated, “Plaintiff has the potential to collect her insurance claim after having received the benefit of failing to disclose it to her creditors in her bankruptcy proceeding, a windfall that the judicial estoppel doctrine is designed to prevent.”
Based on the above the Court granted Prudential’s Motion to Dismiss Plaintiff’s Complaint.
Many people faced with a denial of disability benefits and no source of income find themselves in extreme financial hardship that can often lead to the filing on bankruptcy. This case serves as a very important warning that if you file for bankruptcy you must list your disability insurance claim as an asset regardless of whether you are receiving it or not. Failure to do so could nullify any legal remedy you have against your disability insurance carrier in the event of a claim denial. If you are represented by counsel for your disability claim or bankruptcy claim it is imperative you discuss this issue with your attorney.