Insured, Shortly After Filing For Bankruptcy, Sues Insurer For Damages to Property Caused By Hurricane

The insured in Hadden v. State Farm Fire & Cas. Co., 37 So. 3d 918 (Fla. 5th DCA 2010), filed a lawsuit on September 18, 2006, for breach of contract against State Farm for property damage sustained from Hurricane Charley in August 2004. Unknown to his lawyer, the insured had already filed a petition to declare bankruptcy in Federal Court on September 12, 2006. He filed the bankruptcy petition pro se, meaning on his own behalf without the assistance of counsel. State Farm raised an affirmative defense of judicial estoppel to the breach of contract case. The Court in Hadden described judicial estoppel as an “equitable doctrine that is used to prevent litigants from taking totally inconsistent positions in separate judicial proceedings.”

The trial court granted summary judgment in favor of State Farm on its judicial estoppel defense. State Farm asserted that the insured failed to properly disclose his insurance claim in the bankruptcy action, and could not pursue the state court action for damages. In the bankruptcy court forms submitted, Mr. Hadden was required to list all pending lawsuits. Since the State Farm lawsuit had not yet been filed at the time of his pro se bankruptcy petition, he did not include it among the pending lawsuits listed. However, Mr. Hadden did make the following disclosure in identifying his personal property in Schedule B of the bankruptcy petition:

-Hurricane insurance claim on 30 N. Terry Ave., Orlando, FL.

This was the address of the damaged property that was involved in the lawsuit against State Farm. Mr. Hadden’s list of losses in his statement of financial affairs similarly included an item described as:

-House Destroyed By Hurricane, Court Case Filed, Orange County, Florida, Pending.

Mr. Hadden appealed the trial court’s order of summary judgment against him and claimed that it was in error. The Fifth District Court of Appeals ruled that Mr. Hadden’s disclosures in the bankruptcy petition were sufficient to preclude the application of judicial estoppel in the case against State Farm. The identifying information listed by Mr. Hadden on the bankruptcy forms created a factual issue regarding whether he maintained an inconsistent position in the bankruptcy proceeding that his State Farm action did not exist. The appellate court reversed the summary judgment and stated that it was improperly entered on judicial estoppel grounds.

The Fifth District Court of Appeals went on to write in dicta (meaning giving a statement of belief that is not part of the direct ruling of the case) that Mr. Hadden may not have standing to pursue the lawsuit against State Farm due to the bankruptcy petition. The Court stated that once Mr. Hadden filed his bankruptcy petition, the State Farm lawsuit became property of the bankruptcy estate, subject to the bankruptcy trustee’s control. There are critical issues necessary for a Court to resolve such a standing issue, such as: whether there has been a discharge in bankruptcy, whether the case has been closed, or whether there has been an abandonment of the State Farm lawsuit by the bankruptcy trustee. However, State Farm failed to raise the standing argument before the trial or appellate courts.

The appellate court remanded the case with directions for the trial court to order that the bankruptcy court be notified of the lawsuit against State Farm related to Mr. Hadden’s property. Again in dicta, the appellate court stated that if there is an existing bankruptcy trustee, he or she can abandon the State Farm lawsuit or request to be substituted as the proper party plaintiff. If the trustee abandons the lawsuit, it will be removed from the bankruptcy estate, and Mr. Hadden will be free to proceed with the action against State Farm.

This case has factual issues of concern that policyholders and their advocates may come across more frequently given the current economic crisis. The portion of the case related to standing, while not binding authority, is likely to be beneficial to those finding themselves amidst a financial crisis such as the Hadden case. Bankruptcy is not necessarily the end of the road for an insurance claim. An insurance claim should be properly disclosed in the bankruptcy case so that a trustee may be able to decide the proper course of action.