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ASSETS “PROPERTY” IN BANKRUPTCY
IMPORTANT: THIS FIRM MAKES NO REPRESENTATIONS AS TO THE ACCURACY OR CURRENT STATUS OF ANY LAW, CASE, ARTICLE OR PUBLICATION CITED HEREIN OR LINKED TO.
WARNING – SOME OF THESE REFERENCES ARE PRE-BAPCPA.
SECTION 521 OF THE BANKRUPTCY CODE – DEBTOR’S DUTIES
(a) The debtor shall—
(1) file—
(A) a list of creditors; and
(B) unless the court orders otherwise—
(i) a schedule of assets and liabilities;
(ii) a schedule of current income and current expenditures;
(iii) a statement of the debtor’s financial affairs and, if section 342(b)applies, a certificate—
(I) of an attorney whose name is indicated on the petition as the attorney for the debtor, or a bankruptcy petition preparer signing the petition under section 110(b)(1), indicating that such attorney or the bankruptcy petition preparer delivered to the debtor the notice required by section 342(b); or
(II) if no attorney is so indicated, and no bankruptcy petition preparer signed the petition, of the debtor that such notice was received and read by the debtor;
(iv) copies of all payment advices or other evidence of payment received within 60 days before the date of the filing of the petition, by the debtor from any employer of the debtor;
(v) a statement of the amount of monthly net income, itemized to show how the amount is calculated; and
(vi) a statement disclosing any reasonably anticipated increase in income or expenditures over the 12-month period following the date of the filing of the petition;
The bankruptcy process is a series of many steps. One important step is the requirement that the debtor must list all property they have a interest in, no matter where it is located. 11 U.S.C. 541 (a) The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held:
When dealing with property the debtor owns, or has or could have a right to, everything must be listed in the bankruptcy on Schedules A/B (the debtor swears under oath all the information is correct). If the debtor has an exemption right, that must be listed on Schedule C. When the bankruptcy is filed the trustee (and creditors) have a deadline to file objections to the items exempt is 30 days after the conclusion of the creditor’s meeting (522(f)). If there is no objection by the deadline, then the trustee and creditors waive their right to object to those items listed as exempt.
When the court closes the file, then everything listed on A/B is abandoned to the debtor (no one can make a claim on it, unless it is used as security for a debt). 11 U.S.C. Section 554(c) Unless the court orders otherwise, any property scheduled under section 521(a)(1) of this title not otherwise administered at the time of the closing of a case is abandoned to the debtor and administered for purposes of section 350 of this title.
But, if there is any property that was not listed on Schedule A/B, even though the case is closed, the property is still not abandoned. If undisclosed property is discovered, even years later, the trustee can reopen the case to administrate (liquidate) the property.
MORAL TO THE STORY – BANKRUPTCY IS NOT SOMETHING TO DO WITHOUT UNDERSTAND ALL THE CONSEQUENCES.
A young, inexperienced paralegal said “bankruptcy is not rocket science”. She apologized for her naivety after we spend hours talking about some of the very basic bankruptcy issues.
Case law: Stevens v. Whitmore, 9th Cir. BAP No. CC-19-1325-TaFL Bk. No. 6:17-bk-15301-MH (7/2/20) A lawsuit was listed in the SOFA and even discussed at the 341 hearing, but the BAP decided that was not sufficient because it was not listed on Schedules A/B. Therefore, it was not abandoned and when the disputed claim ripened into a sum of money, it belonged to the estate, not the debtors.
WHAT IS JUDICIAL ESTOPPEL?
Judicial estoppel is a legal defense used for early dismissal of cases against bankrupt plaintiffs. In a bankruptcy, judicial estoppel applies if a debtor plaintiff omits any claim that the plaintiff knew of at the time of filing for bankruptcy or learned of while the bankruptcy case was pending. If a defendant succeeds in establishing judicial estoppel, the plaintiff is barred from pursuing a case regardless of the claim’s merits.
Failure to update schedules post-petition:
Smith v. Haynes & Haynes P.C., 940 F.3d 635 (11th Cir. 2019) The plaintiff/Debtor, Jenny Smith, sued her former employer, Haynes & Haynes, a law firm, alleging claims for unpaid overtime and retaliation under the Fair Labor Standards Act. Smith began working for Haynes & Haynes after filing for bankruptcy. On her bankruptcy filings she stated she had no claims that might prompt a lawsuit. While this disclosure was true when she filed for bankruptcy, she failed to amend her bankruptcy filing when she realized she had a claim against Haynes & Haynes.
The district court granted summary judgment for the employer on Smith’s overtime claim, relying on the judicial estoppel defense. On appeal, the Eleventh Circuit reversed summary judgment on judicial estoppel grounds, holding the district court did not have the benefit of Slater v. U.S. Steel Corp., 871 F. 3d 1174 (11th Cir. 2017) (Slater II), at the time of its ruling.
The Eleventh Circuit said it was “far from clear” that Smith acted in bad faith because she denied motive to deceive the court and may not have known she had to update her bankruptcy filing when she learned of her claims. It also stated that the district court erred applying judicial estoppel based on the inconsistencies between Smith’s initial and amended complaint, stating that her inconsistent statements about when she learned of her claims against the employer did not show intent to deceive.
Failure to list malpractice claim in a chapter 7:
Alward v. Johnston, 2017-0080 (N.H. Dec. 21, 2018)
The debtor neglected to list her medical malpractice case in her chapter 7 schedule of assets (supposedly on advice of counsel). A few months after filing her chapter 7 case she filed a civil case for malpractice. The defendants moved to dismiss, arguing that the plaintiff should be judicially estopped from pursuing her medical malpractice claim because she failed to disclose it on her schedule of assets.
Judicial estoppel is applied where a party has assumed a new position contrary to a previous position with regard to a claim.
The court said:
“While the circumstances under which judicial estoppel may be invoked vary with each situation, the following three factors typically inform the decision whether to apply the doctrine: (1) whether the party’s later position is clearly inconsistent with its earlier position; (2) whether the party has succeeded in persuading a court to accept that party’s earlier position; and (3) whether 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.”
“Several courts, including the First Circuit, have held “that a failure to identify a claim as an asset in a bankruptcy proceeding is a prior inconsistent position that may serve as the basis for application of judicial estoppel, barring the debtor from pursuing the claim in a later proceeding.
” … the bankruptcy trustee “never took an inconsistent position . . . with regard to this claim.” The first judicial estoppel factor is not met with respect to the trustee because the trustee did not assert inconsistent positions.
“The defendants argue that judicial estoppel is necessary to protect the integrity of the bankruptcy system because it incentivizes debtors to fully disclose their assets. We agree with the Ninth Circuit that this justification “do[es] not withstand scrutiny.” Ah Quin v. County of Kauai Dept. of Transp., 733 F.3d 267, 275 (9th Cir. 2013)
“Furthermore, it would be inequitable to apply judicial estoppel to a trustee pursuing a claim on behalf of innocent creditors, and doing so would undermine, rather than protect, the integrity of the judicial process.
“For all of these reasons, we hold that the trustee is not judicially estopped from pursuing the medical malpractice claim against the defendants. In light of this holding, we need not address the parties’ remaining arguments, which concern the application of judicial estoppel to the plaintiff.”
