Employing state law, the Oregon Supreme Court reached the same conclusion as most federal courts: The trial court should allow the substitution of a bankruptcy trustee as the real party in interest when a debtor attempts to prosecute a lawsuit that was not scheduled among the debtor’s assets.
The October 12 opinion for the Oregon high court by Justice Stephen J. Bushong added a caveat also reminiscent of federal law: The trial court might exercise discretion to bar substitution of the trustee if the defendant would be “unfairly prejudiced.” In the Oregon case, the defendant did not claim there would be unfair prejudice were the trustee substituted as plaintiff.
The facts followed a familiar pattern that occurs when defendants raise judicial estoppel defenses.
Before bankruptcy, the debtor consulted an employment lawyer about a potential employment discrimination claim.
Two months later, the debtor filed a chapter 7 petition, represented by a bankruptcy lawyer. The employment claim was not listed in the debtor’s schedules. Just after the bankruptcy filing, the employment lawyer sent a demand letter to the employer.
Evidently, the employment lawyer didn’t know about the bankruptcy, and the bankruptcy lawyer didn’t know about the employment claim.
The debtor received her general discharge. One month after discharge and four months after the bankruptcy filing, the employment lawyer sued the employer in state court. Six months later, the bankruptcy court reopened the chapter 7 case to allow the chapter 7 trustee to administer the claim in state court, and the debtor amended her schedules to include the employment claim.
The employer moved for summary judgment in state court, contending that the debtor was not the real party in interest. The trial court granted the motion and subsequently denied a separate motion to substitute the trustee as the real party in interest.
The state intermediate appellate court affirmed, reasoning that the trial court did not abuse its discretion in dismissing the suit because the court was not convinced that the debtor had made an “honest mistake.”
Supported by an amicus brief filed by Oregon’s chapter 7 trustees, the trustee appealed and won reversal of the lower courts.
Justice Bushong reviewed the order on appeal for abuse of discretion and initially abjured an invitation to analyze the case by analogy to federal law and rules. Instead, he conducted review under Oregon’s procedural rules adopted by the state legislature.
Justice Bushong extrapolated from the state rule governing amendments to complaints and from a separate rule for substitution of real parties in interest. He held as follows:
In sum, the legislative history of [the state rule on amending complaints], the Supreme Court cases interpreting the analogous federal rule (FRCP 17(a)) before [the state rule] was adopted, and the Advisory Committee notes on amendments to the analogous federal rules adopted before the Oregon Rules of Civil Procedure were promulgated in 1978, all support the proposition that a request to substitute the real party in interest requires an amendment to the pleadings, and that such a request should be governed by the lenient standards governing leave to amend the pleadings to avoid dismissal or forfeiture of just claims. [Emphasis added.]
“It is settled in Oregon,” Justice Bushong said, that “leave [to amend] shall be freely granted when justice so requires,” unless “allowing the amendment would cause unfair prejudice to the nonmoving party.” In the case on appeal, the employer had not claimed prejudice.
In similar circumstances, Justice Bushong said that federal courts make their decisions based on judicial estoppel. Although federal courts have taken “somewhat different approaches,” he synthesized federal cases to mean that
any need to penalize plaintiff for conduct that the trial court believed was . . . in bad faith could . . . be accomplished by preventing her from benefitting from her conduct, rather than by denying substitution of the trustee as the real party in interest. Although denying substitution in this context might penalize plaintiff if resolution of her claims yielded a surplus that went to her, denial primarily penalizes plaintiff’s creditors by denying them any opportunity for recovery.
Justice Bushong reversed and remanded. He held that the trial court “abused its discretion in denying substitution and dismissing this case” because “the trial court did not apply the correct standard.”
Employing state law, the Oregon Supreme Court reached the same conclusion as most federal courts: The trial court should allow the substitution of a bankruptcy trustee as the real party in interest when a debtor attempts to prosecute a lawsuit that was not scheduled among the debtor’s assets.
The October 12 opinion for the Oregon high court by Justice Stephen J. Bushong added a caveat also reminiscent of federal law: The trial court might exercise discretion to bar substitution of the trustee if the defendant would be “unfairly prejudiced.” In the Oregon case, the defendant did not claim there would be unfair prejudice were the trustee substituted as plaintiff.