A debtor’s duty to disclose his assets and liabilities is an affirmative, continuing duty that cannot be overemphasized. 11 U.S.C. §521(a)(1); In re Coastal Plains, Inc., 179 F. 3d 197 (5th Cir. 1999); Reed v. City of Arlington, 650 F.3d 571 (5th Cir. 2011); Kane v. National Union Fire Ins. Co., 535 F. 3d 380 (5th Cir. 2008); In re Superior Crewboats, Inc., 374 F.3d 330 (5th Cir. 2004); In re Beaubouef, 966 F.2d 174 (5th Cir. 1992).
A debtor must disclose all contingent and unliquidated “plaintiff” claims as assets, including, for example, class action drug claims, personal injury and wrongful death claims, EEOC claims and oil spill claims. A debtor does not have to know or understand the legal basis for a claim to trigger the duty to disclose – he does not even have to know all of the facts that might give rise to a claim. If a debtor has enough information to know that he “may” have a claim, he has a duty to disclose the potential cause of action. Coastal Plains, at 207-08 (citations omitted).
Notwithstanding the unwavering disclosure imperative, affirmed, reaffirmed and restated dozens of ways by many courts over many years, debtors still routinely fail to disclose potential causes of action in their bankruptcy schedules.
I believe debtors’ attorneys should press their clients about the existence of potential claims and explain that such claims are assets that must be disclosed. Debtors must understand that undisclosed lawsuits always surface. Most plaintiffs’ lawyers check PACER for bankruptcy filings to make sure they are dealing with the “real party in interest” before disbursing settlement funds. Defense attorneys also check PACER for bankruptcy filings for possible judicial estoppel defenses.
Lawyers can give their debtor clients 5 good reasons to disclose potential and existing causes of action:
1. The debtor will avoid prison. http://www.justice.gov/ust/r05/docs/general/press/2009/pr20091106.pdf.
2. The willful failure to disclose assets is fraud and could result in the denial or revocation of the debtor’s discharge. In re Sholdra, 249 F.3d 380 (5th Cir. 2001); In re Beaubouef, 966 F.2d 174 (5th Cir 1992); In re Chalik, 748 F.2d 616 (11th Cir. 1984).
3. Under the doctrine of judicial estoppel it is unlikely that the debtor will ever prevail in the pursuit of the cause of action. Judicial estoppel operates sort of like an admission. Failure to disclose a cause of action is treated as if the debtor admitted that it did not exist. Reed v. City of Arlington, 650 F.3d 571 (5th Cir. 2011); Kane v. National Union Fire Ins. Co., 535 F. 3d 380 (5th Cir. 2008); In re Superior Crewboats, Inc., 374 F.3d 330 (5th Cir. 2004); In re Coastal Plains, Inc., 179 F. 3d 197 (5th Cir. 1999). (More on judicial estoppel in future posts)
4. The debtor could receive a surplus distribution after creditors’ claims are satisfied. Although the debtor may have scheduled numerous unsecured creditors, only creditors who file Proofs of Claim are entitled to a distribution from the bankruptcy estate.
5. If the debtor owes taxes or has non-dischargeable debts, he will benefit from distributions made by the bankruptcy trustee.