The Whole Truth – Defending Against Claims That a Debtor Failed to Disclose in Bankruptcy Court

The Bankruptcy Code provides debtors with a fresh start or an opportunity to reorganize their debts. In doing so, the Code requires all debtors to provide, under oath, a full disclosure of their assets and liabilities. This requirement promotes fairness to the debtor and its creditors by ensuring a complete and candid disclosure of assets to the trustee and the creditor body. But what happens when a debtor lists its liabilities to shed bad debts, but that same debtor fails to disclose certain valuable assets to the bankruptcy court? The consequences are that the debtor may lose standing or otherwise forfeit its ability to pursue that claim or asset after the bankruptcy proceedings terminate. Creditors should be cognizant that certain powerful defenses can be asserted against a former debtor who failed to disclose its claims in bankruptcy court.

Claims May Be Precluded for a Lack of Standing

It is well settled by the Bankruptcy Code and the case law interpreting: “Failure to list an interest on a bankruptcy schedule leaves that interest in the bankruptcy estate.” Parker v. Wendy’s Int’l, Inc., 365 F.3d 1268, 1272 (11th Cir. 2004).

In Parker, the Eleventh Circuit Court of Appeals succinctly discussed this principle:

Generally speaking, a pre-petition cause of action is the property of the Chapter 7 bankruptcy estate, and only the trustee in bankruptcy has standing to pursue it. Barger v. City of Cartersville, 348 F.3d 1289, 1292 (11th Cir. 2003). Section 541 of the Bankruptcy Code provides that virtually all of a debtor’s assets, both tangible and intangible, vest in the bankruptcy estate upon the filing of a bankruptcy petition. 11 U.S.C. § 541(a)(1) (providing that the bankruptcy estate includes “all legal or equitable interest of the debtor in property as of the commencement of the case”). Such property includes causes of action belonging to the debtor at the commencement of the bankruptcy case. Barger, 348 F.3d at 1292. Thus, a trustee, as the representative of the bankruptcy estate, is the proper party in interest, and is the only party with standing to prosecute causes of action belonging to the estate. 11 U.S.C. § 323; Barger, 348 F.3d at 1292.

Once an asset becomes part of the bankruptcy estate, all rights held by the debtor in the asset are extinguished unless the asset is abandoned back to the debtor pursuant to § 554 of the Bankruptcy Code. See 11 U.S.C. § 554(a)-(c). At the close of the bankruptcy case, property of the estate that is not abandoned under § 554 and that is not administered in the bankruptcy proceedings remains the property of the estate. 11 U.S.C. § 554(d). Failure to list an interest on a bankruptcy schedule leaves that interest in the bankruptcy estate. Mobility Systems & Equip. Co. v. United States, 51 Fed.Cl. 233, 236 (Fed.Cl.2001) (citing cases); see Vreugdenhill v. Navistar Int’l Transp. Corp., 950 F.2d 524, 525–26 (8th Cir. 1991).

Id. at 1272.

Accordingly, failure to list an interest on a bankruptcy schedule leaves that interest in the bankruptcy estate. Jones v. Clayton Cnty, 184 Fed.App’x 840 (11th Cir. 2006) (affirming summary judgment that debtor lacked standing to pursue a cause of action because he failed to disclose the claim as an asset in his bankruptcy petition).

A debtor’s failure to list its interest in an asset or legal claim on the bankruptcy petition means any interest the debtor may have had in that asset remains with the bankruptcy estate.  Therefore, that debtor lacks standing to pursue post-bankruptcy actions on those claims, as a matter of law. See Parker v. Wendy’s Intern., Inc., 365 F.3d 1268, 1272 (11th Cir. 2004) (“Thus, a trustee, as the representative of the bankruptcy estate, is the property party in interest and is the only party with standing to prosecute causes of action belonging to the estate.”).

Claims May Be Precluded by the Judicial Estoppel Doctrine

When a debtor fails to disclose a claim or assets in its bankruptcy proceedings, judicial estoppel may be a remedy that would bar that claim. Judicial estoppel can be applied when a party takes a prior inconsistent position in bankruptcy (i.e. failing to disclose the asset), while subsequently pursuing that claim after the bankruptcy proceedings are over.

Under Florida law, a party must generally establish four (4) elements to invoke the doctrine of judicial estoppel:

A claim or position (1) successfully maintained in a former action or judicial proceeding bars a party from making a (2) completely inconsistent claim or taking a clearly conflicting position in a subsequent action or judicial proceeding, (3) to the prejudice of the adverse party, (4) where the parties are the same in both actions, subject to the “special fairness and policy considerations” exception to the mutuality of parties requirement.

Grau v. Provident Life & Acc. Ins. Co., 899 So. 2d 396, 400 (Fla. 4th DCA 2005) (citing New Hampshire v. Maine, 532 U.S. 742, 750 (2001); Blumberg v. USAA Cas. Ins. Co., 790 So. 2d 1061, 1067 (Fla. 2001)).

Regarding whether a claim was successfully maintained in a former action, the prior court must “adopt the claim or position, either as a preliminary matter or as part of a final disposition.” Grau, 899 So. 2d at 401. According to Grau, prejudice to the adverse party occurs when “the party seeking to assert an inconsistent position would derive an unfair advantage or impose an unfair detriment on the opposing party if not estopped.” Maine, 532 U.S. at 751. Finally, the mutuality of parties requirement can be set aside in the presence of “special fairness and policy considerations.”

Those considerations are present when a plaintiff has “used intentional self-contradiction to obtain an unfair advantage in litigation” or where “a plaintiff litigated to a jury verdict on one legal theory, only to abandon that theory for a contradictory one when the verdict was not as favorable as the plaintiff desired.” Grau, 899 So. 2d at 401 (citing Town of Oakland v. Mercer, 851 So.2d 266 (Fla. 5th DCA 2003); Blumberg, 790 So. 2d at 1067).

Conclusion

When facing a claim from a (formerly bankrupt) debtor, creditors should be cognizant of the consequences a debtor may face for failing to fully and accurately disclose its assets and liabilities to the bankruptcy courts. Judicial estoppel and lack of standing are both consequences of a debtor’s failure to meet the disclosure requirements. If it is determined that a debtor did not tell “the whole truth” in its bankruptcy schedules, creditors and defendants should leverage these powerful defensive remedies in seeking dismissal of the claims that were not previously disclosed. Need help with your claim? Contact the attorneys at Jimerson Birr for help.