Judicial Estoppel in the Fifth Circuit, Part 2 The Three-Prong Test

The Fifth Circuit has established a three-prong test for determining whether a debtor should be judicially estopped from pursuing a cause of action that he failed to disclose to the bankruptcy court.  See In re Flugence, 738 F.3d 126 (5th Cir. 2013); Love v. Tyson Foods, Inc., 677 F.3d 258, 261 (5th Cir. 2012); Reed v. City of Arlington, 650 F.3d 571(5th Cir. 2011)(en banc); Kane v. Nat’l 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).

Prong One.    The debtor asserted clearly inconsistent positions. If a debtor/plaintiff files bankruptcy and fails to schedule a civil lawsuit or cause of action as an asset, he has represented to the bankruptcy court that no such cause of action exists.  If he later asserts the claim by filing a lawsuit, the position asserted in the civil action is clearly inconsistent with the position taken in the bankruptcy proceeding. “[I]ntentional self-contradiction is being used as a means of obtaining unfair advantage in a forum provided for suitors seeking justice.” Superior Crewboats, 374 F.3d  at 334-35 (citations and quotations omitted).

Prong Two.   The bankruptcy court must have accepted the previous position.   The bankruptcy court must have accepted the debtor’s position that he had no pending lawsuits, claims or causes of action.  How does the bankruptcy court “accept” the debtor’s position?  No formal order or final judgment is required. In practice, almost ANY action the bankruptcy court takes could be “acceptance” of the debtor’s position.  If the cause of action had been scheduled, the case would necessarily have been administered differently in some respect.  The following actions taken by the bankruptcy court have been ruled to be “acceptance” of a debtor’s position:

A.     Granting the debtor a discharge in a Chapter 7 caseSee, e.g., Superior Crewboats, 374 F.3d at 335 (The bankruptcy court granted a “no asset” discharge thereby accepting the debtors’ position that they had no personal injury cause of action.); Kane, 535 F. 3d at 384 (The bankruptcy court accepted the debtor’s position by entering a “no asset” discharge and closing the case.); Reed, 650 F.3d at 575-76 (The bankruptcy court accepted the debtor’s position that he did own any judgments and issued a “no asset” discharge.); Kirk v. Pope, 973 So. 2d 981, 991 (Miss. 2007)(The bankruptcy court relied on the debtor’s schedules in granting a discharge.).

B.     Entering an order modifying a Chapter 13 PlanSee, e.g., Flugence, 738 F.3d at 130 (The bankruptcy court entered an order modifying a Chapter 13 plan accepting the debtor’s position that she had no personal injury causes of action.  If the cause of action had been disclosed, the bankruptcy court would likely have altered the plan to include a provision relating to the cause of action.).

C.     Entering an order confirming a Chapter 13 PlanSee, e.g., Tyson Foods, 677 F.3d at 261 (The bankruptcy court accepted the debtor’s position that he did not have an EEOC claim by confirming the debtor’s Chapter 13 plan that did not contain a provision related to the claim.).

D.    Entering an order terminating the automatic stay.  See, e.g., Coastal Plains, 179 F. 2d at 207 (The bankruptcy court entered an order terminating the automatic stay as to “intangibles” partially in reliance on the debtor’s omission of a cause of action.   If the debtor had included the cause of action in the schedules as an intangible asset, the valuation of the “intangibles” could have affected the court’s consideration of the motion to terminate the automatic stay.).

Prong Three.   The non-disclosure must not have been inadvertent.  A debtor is most likely to contest the  “not inadvertent” prong of the judicial estoppel test.   “[T]he debtor’s failure to satisfy its statutory disclosure duty is ‘inadvertent’ only when, in general, the debtor either lacks knowledge of the undisclosed claims or has no motive for their concealment.” Coastal Plains, 179 F.3d at 210. Love v. Tyson Foods well describes the “not inadvertent” prong and the shifting burdens of persuasion.    The party (defendant) urging judicial estoppel must demonstrate that the debtor (plaintiff) had a motive to conceal the cause of action from the bankruptcy court.  The defendant’s burden is not difficult because the motive to conceal is almost always present.  “Motivation in this context is self-evident because of the potential financial benefit resulting from the non-disclosure.” Tyson Foods, 677 F.3d at 262 (quoting Thompson v. Sanderson Farms, Inc., No: 3:04CV837-WHB-JCS, 2006 U.S. Dist. LEXIS 48409, at 12-13 (S.D. Miss. May 21, 2006)).   See also, Superior Crewboats, 374 F.3d at 336 (The Court found a motive to conceal where the debtors stood to “reap a windfall” from an undisclosed claim.).  After the defendant establishes motivation, the burden shifts to the plaintiff to demonstrate that he lacked knowledge of the undisclosed claims. Id.   The “lack of knowledge” of the duty to disclose or the reliance on an attorney is not enough.  In order to establish inadvertence, the plaintiff must demonstrate that he was “unaware of the facts” that gave rise to the cause of action. Flugence, 738 F.3d at 131; Coastal Plains, 179 F.3d at 212.

My two cents: If a debtor fails to disclose a cause of action that arose before a Chapter 7 or Chapter 13 bankruptcy case was filed, judicial estoppel should be fairly easy to obtain by summary judgment by relying on the bankruptcy schedules and other matters of record.  The three-prong test is almost self-effectuating. The harder cases involve causes of action that arise post-petition in Chapter 13 cases. There is a continuing duty to disclose causes of action that arise during the three to five years that the debtor is making plan payments. However, factual issues are more likely to preclude summary judgment on the issue of judicial estoppel in the post-petition failure to amend cases.  Complicating issues may include (1) the length of time that passed before the cause of action was disclosed, (2) whether the disclosure was made by the debtor or the defendant asserting judicial estoppel, and (3) the actions taken in the Chapter 13 case prior to the disclosure.   For example, if the debtor voluntarily amends the schedules to include the cause of action within a reasonable time after the cause of action arises, then the debtor has likely met his disclosure duty.    On the other hand, if the cause of action is brought to the attention of the bankruptcy court by the defendant a “long time” after the cause of action accrued, then the court, applying the three-prong test, will probably find that the debtor should be estopped.  See Anderson v. Entergy Operations, Inc., 2012 WL 5400059 (U.S.D.C. S.D. Miss. 2012)(The Chapter 13 debtor failed to amend his schedules to add a wage and hour claim against Entergy.  The defendant brought the claim to the attention of the court eleven months after the debtor’s Chapter 13 plan was confirmed.  The Court applied the three-prong test and judicially estopped the debtor from pursuing the claim.). In between those extreme scenarios, there are inumerable factual variations that could preclude summary judgment.

Just another reminder that estoppel only affects the debtor and does not apply to the trustee. See Judicial Estoppel Part 1.

Plaintiff as Debtor – Bankruptcy Basics for Trial Lawyers

21970042_s If your practice centers on non-bankruptcy civil litigation, you may be uncertain how to proceed when the plaintiff files bankruptcy.  You know about the “automatic stay,” but does it apply when the plaintiff files bankruptcy? How does the trustee fit into the picture?  The plaintiff’s bankruptcy could change the entire dynamic of the pending litigation.   If the stakes are high, consider consulting a bankruptcy lawyer.  If you decide to handle the bankruptcy related matters yourself, you should become familiar with “judicial estoppel,” “standing” and “real party in interest.” You should also be prepared for the involvement of the bankruptcy trustee and the Bankruptcy Court. A good starting place would be the cases cited in my previous post and the Mississippi Supreme Court case, Kirk v. Pope, 973 So.2d 981 (Miss. 2007).  Kirk v. Pope confirms that federal common law applies in Mississippi state courts when considering judicial estoppel due to bankruptcy omissions. The case also addresses “standing” and “real party in interest” related issues.  Whether you represent the defendant or the plaintiff in pending litigation, it is important to consider the following when the plaintiff files bankruptcy (hereafter, the plaintiff may be referred to as the Debtor):

1.  Did the Debtor have a duty to include the cause of action or pending lawsuit in his bankruptcy schedules?

The answer depends on whether the Debtor filed a Chapter 7 or a Chapter 13 bankruptcy.  [The analysis below is very abbreviated and sometimes issues arise.  However, as a general rule, if there is any doubt about whether a cause of action should be disclosed, the Debtor should choose disclosure.  If he asks the question “should I disclose?,” the default answer should be “yes.”]

In cases originally filed under Chapter 7 – If the cause of action arose before the bankruptcy petition was filed, then it is should be disclosed and included as an asset in the bankruptcy schedules.  11 U.S.C. §521; In re Coastal Plains, Inc., 179 F.3d 197, 207-08 (5th Cir. 1999).

In Chapter 13 cases – If the cause of action arose before the bankruptcy petition was filed, or while the Chapter 13 case was pending, the cause of action is property of the bankruptcy estate and should be included as an asset in the bankruptcy schedules. 11 U.S.C. §1306, §521. The law on post-confirmation duty to disclose has recently been settled by In re Flugence, 738 F.3d 126 (5th Cir. 2013). There are opinions issued as recently as 2012 that would likely be decided differently today. See, e.g. Byrd v. Wyeth, Inc., 907 F. Supp. 2d 803 (S.D. Miss. 2012).  Section 1327 of the Bankruptcy Code provides, “[e]xcept as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor.” (emphasis added). The uniform order confirming Chapter 13 plans provides that property does not vest in the debtor until discharge, dismissal, or conversion.  Therefore, property of the estate includes property that the debtor acquires post confirmation, including causes of action that arise post-confirmation.  The Chapter 13 debtor has a duty to amend the schedules and disclose causes of action that arise before the case is dismissed, converted or until the debtor receives his discharge.

In Chapter 7 cases converted from Chapter 13 – It depends.  Generally, if the cause of action arose after the Chapter 13 case was filed, but before it was converted to Chapter 7, it would NOT be property of the Chapter 7 bankruptcy estate. 11 U.S.C. §348(f)(1). There is an exception that could apply that involves the debtor’s bad faith. 11 U.S.C. §348(f)(2).

The date that a cause of action arises is determined under applicable state or federal law and depends on the nature of the claim.  The date a lawsuit is filed is not the applicable date for purposes of determining whether a cause of action is property of the bankruptcy estate.

2.  Did the Debtor disclose the cause of action to the Bankruptcy Court?

If the cause of action became property of the bankruptcy estate, it should be included as an asset in the bankruptcy schedules. If you have access to PACER, you can search the bankruptcy court records by federal court judicial district using the Debtor’s name.   You can simultaneously search every district in the United States with the Debtor’s Social Security number.  The schedules are usually one of the first docket entries. It is possible that the Debtor told the trustee about the pending lawsuit at the 341 Meeting of Creditors.  I specifically ask debtors if they are “suing anyone” and whether they believe they are “entitled to sue someone for any reason.”   Sometimes debtors disclose the existence of causes of action at the 341 Meeting of Creditors even though they did not include a claim on their written schedules.  You may obtain an official copy of the recorded meeting of creditors from the U.S. Trustee.  I maintain unofficial recordings of my 341 Meetings and will provide a copy to attorneys upon request.

If the Debtor had a duty to disclose a cause of action or pending lawsuit and failed to schedule the claim or to inform the trustee, your next actions will depend on whether you represent the Debtor (plaintiff) or the defendant.

If You Represent the Defendant

If you represent the defendant, you will want to assert “judicial estoppel” and you will have to decide how to raise the issue procedurally. I have seen Motions to Dismiss and Motions for Summary Judgment filed with the trial court.  I have also seen a Complaint for Declaratory Judgment in bankruptcy court seeking a determination that the Debtor is judicially estopped.  I do not know if there is a right or wrong way to raise the issue – it likely depends on the circumstances and the court in which the case is pending.   Remember that judicial estoppel does not apply to the bankruptcy trustee.  Reed v. City of Arlington, 650 F.3d 571(5th Cir. 2011)(en banc); Kirk v. Pope, 973 So.2d 981 (Miss. 2007).   Therefore, if the trustee decides to proceed, it is unlikely that the trial court will dismiss the case.  However, it is very possible that the court will judicially estop the plaintiff, which will prohibit him from receiving any benefit from the claim or suit. In re Flugence, 738 F.3d 126 (5th Cir. 2013).  Thereafter, with the bankruptcy trustee involved, settlement opportunities may arise.  At a very minimum, the Debtor, as a witness, has lost credibility.

In addition to raising judicial estoppel, defendants usually include a request for dismissal based upon lack of plaintiff “standing” or based upon the “real party in interest” requirement of F.R.C.P. or M.R.C.P 17(a).  Unless the case trustee decides not to pursue the case as plaintiff, these assertions should not result in a dismissal of the lawsuit.  However, it should prompt a response by the plaintiff to cause the trustee to be substituted as plaintiff in the case.

If You Represent the Plaintiff/Debtor

It is not uncommon for a plaintiff to file bankruptcy without the knowledge of the attorney pursing a civil case on his behalf.  If you discover that your client has filed bankruptcy, you should immediately contact the case trustee.  If the cause of action is property of the Debtor’s bankruptcy estate, the bankruptcy trustee is the sole representative of the estate and the only party with authority to continue with the action or consider a settlement.  11 U.S.C. §323.   The case trustee will decide whether to continue as plaintiff in the civil action.  The trustee’s inquiry is whether the potential recovery would make a “meaningful distribution” to the Debtor’s creditors.

If the trustee agrees to pursue the case, you must be hired as “Special Counsel” and the Bankruptcy Court must approve your fee arrangement.  Special Counsel may be hired “on any reasonable terms and conditions of employment, including on a retainer, on an hourly basis, on a fixed or percentage fee basis, or on a contingent fee basis.” 11 U.S.C. §§ 328, 330.  If multiple firms are involved, or there is a fee sharing arrangement among two or more firms, the arrangement must be disclosed and the Court may require each firm to be separately employed.  Disclosure and transparency are paramount in Bankruptcy Court.   There are no secret deals or under the table transactions. The Bankruptcy Court must approve any settlement and award of attorney’s fees. As a general rule, the Mississippi Bankruptcy Courts and the Office of the U.S. Trustee limit the total compensation (combined fees and expenses) awarded to Special Counsel to 50% of the gross judgment or settlement amount. However, in a case in which Special Counsel has actually incurred extraordinary expenses, an exception may be made. The trustee will file the requisite Applications with the Bankruptcy Court.

When you represent the trustee, you must provide quarterly updates about the status of the case.  A one-paragraph e-mail message should be sufficient in most cases.   Failure to keep the trustee advised of the case status may result in a conference with the bankruptcy judge.  Repeated failures could jeopardize your fees.

Finally, please remember that when you agree to represent the trustee as Special Counsel, you have a new client with the attendant duty of loyalty.  Although you may feel sympathy for the Debtor, it is inappropriate to advocate that the Debtor be included in a settlement or to otherwise receive a benefit from a settlement.

3.  Does the automatic stay apply?

The automatic stay does not apply to civil actions in which the Debtor is the plaintiff. The stay only applies to proceedings against the Debtor. 11 U.S.C. §362(a).  Unless there was a counterclaim filed against the Debtor, the automatic stay should not affect the pending case.

*****After I was almost finished with this post, I realized that it was based on the premise that civil attorneys were “surprised” by a plaintiff’s bankruptcy filing.   It certainly happens that a plaintiff will file bankruptcy while a civil case is pending. However, for those attorneys who regularly represent plaintiffs in civil litigation, I cannot stress enough the importance of checking PACER for bankruptcies before you file a civil lawsuit.  You cannot simply rely on the potential client’s representations regarding past bankruptcies.   Some examples of what they may say if a bankruptcy is discovered include…

  • Oh! That was only related to my divorce.
  • That was about my failed business, not me personally.
  • That case was discharged a long time ago.
  • I didn’t file bankruptcy on the car that was involved in the accident.
  • That was just to stop a foreclosure; it didn’t have anything to do with the accident.
  • I forgot.
  • My attorney got that bankruptcy dismissed.
  • That was under my maiden name.

With so much information available online, there is simply no excuse for failing to discover a prior bankruptcy.  Your client may not have standing as plaintiff and your fee may be in jeopardy. *****

Judicial Estoppel in the Fifth Circuit, Part 1 – The Basics

8602181_sIn a previous post I stressed the importance of a debtor’s full disclosure of pending personal injury and other causes of action to the bankruptcy court and promised this post on the doctrine of “judicial estoppel.” Judicial estoppel cases are necessarily fact driven and sometimes require interpretation of ambiguous provisions of the Bankruptcy Code.  There are l-o-n-g articles available that go into great detail on every potential estoppel nuance.   I have decided that such an analysis is beyond the scope this blog – please consider this to be a primer.   I am working on “Judicial Estoppel, Part 2” which will deal with the practical application of judicial estoppel in Mississippi state courts and how to work with the bankruptcy trustee.

In recent years, the Fifth Circuit Court of Appeals has issued several opinions on judicial estoppel involving undisclosed claims by bankruptcy debtors and has created a fairly consistent body of law.  See In re Coastal Plains, Inc., 179 F.3d 197 (5th Cir. 1999); In re Superior Crewboats, Inc., 374 F.3d 330 (5th Cir. 2004); Kane v. Nat’l Union Fire Ins. Co., 535 F.3d 380 (5th Cir. 2008); Reed v. City of Arlington, 650 F.3d 571(5th Cir. 2011)(en banc); Love v. Tyson Foods, Inc., 677 F.3d 258, 261 (5th Cir. 2012).   These cases establish that “judicial estoppel” is a federal common law doctrine courts use to prevent a party from asserting a position in a legal proceeding that is inconsistent with a position taken in a previous proceeding.  For example, the official bankruptcy schedules of assets require debtors to disclose all property, tangible and intangible, including causes of action and claims of every sort.  If a debtor fails to schedule a personal injury claim, he has represented to the bankruptcy court that no such claim exists. Accordingly, judicial estoppel is invoked where “intentional self-contradiction is being used as a means of obtaining unfair advantage in a forum provided for suitors seeking justice.” Superior Crewboats, 374 F.3d at 334-35 (citations and quotations omitted).

The Fifth Circuit has established a three-part test for determining whether a debtor should be judicially estopped from pursing an undisclosed cause of action:

(1) The debtor is judicially estopped only if his position is clearly inconsistent with the previous one (the allegations in the complaint are clearly inconsistent with the representations in the bankruptcy schedules);

(2) The court must have accepted the previous position (the bankruptcy court discharged the debtor’s debts or took some other action relying on the bankruptcy schedules); and

(3) The non-disclosure must not have been inadvertent. “[T]he debtor’s failure to satisfy its statutory disclosure duty is ‘inadvertent’ only when, in general, the debtor either lacks knowledge of the undisclosed claims or has no motive for their concealment.” Superior Crewboats, 374 F.3d at 335 (quoting Coastal Plains, 179 F.3d at 210).

After Coastal Plains and Superior Crewboats were decided, there was a question whether judicial estoppel should apply to the bankruptcy trustee serving in the case. As a general rule, under Section 541 of the Bankruptcy Code a bankruptcy trustee succeeds to the debtor’s interest in property, but has no greater rights in property than the debtor. However, in Kane, 535 F.3d at 387, the Fifth Circuit ruled that a bankruptcy trustee should be able to pursue a claim on behalf of the creditors that the debtor himself would be judicially estopped from pursuing:

[The debtor’s] nondisclosure in bankruptcy harmed his creditors by hiding assets from them. Using this same nondisclosure to wipe out [the debtor’s claim against the defendant] would complete the job by denying creditors even the right to seek some share of the recovery. Yet the creditors have not contradicted themselves in court. They were not aware of what [the debtor] has been doing behind their backs. Creditors gypped by [the debtor’s] maneuver are hurt a second time by the district judge’s decision. Judicial estoppel is an equitable doctrine, and using it to land another blow on the victims of bankruptcy fraud is not an equitable application.

Id. at 387-388 (quoting Biesek v. Soo Line R.R. Co., 440 F.3d 410, 413 (7th Cir.2006)).  Similarly, Reed held that where a debtor is individually estopped from pursuing an undisclosed claim, the trustee can pursue the claim for the benefit of creditors and any remaining funds after distribution would be refunded to the defendants and not to the debtor.  Reed, 650 F.3d at 573.

A debtor’s failure to disclose pre-petition causes of action and pending litigation could be devastating to the lawyer who has spent time and incurred expenses pursuing the debtor’s personal injury case.  If the Trustee can pursue the claim, but the debtor cannot receive any benefit, how do the parties deal with the possibility that the trustee may collect more funds than are necessary to pay the debtor’s creditors in full?  Ordinarily, the debtor would receive the surplus.  The Fifth Circuit addressed this contingency in its most recent case on judicial estoppel, In re Flugence, 738 F.3d 126 (5th Cir. 2013).

In Flugence, the debtor failed to disclose a personal injury claim in her Chapter 13 case. She completed her plan payments and the case was closed. The personal injury defendants learned of the bankruptcy and petitioned the bankruptcy court to reopen the case.   The debtor amended Schedule B to add the personal injury suit as an asset and the Chapter 13 trustee hired the debtor’s personal injury lawyer to pursue the claim on behalf of the trustee and the bankruptcy estate. The defendants filed an adversary proceeding seeking a declaratory judgment that the debtor was “judicially estopped” from pursing the personal injury claim due to her failure to disclose her personal injury claim in her bankruptcy proceedings.  The bankruptcy court found that all of the elements of judicial estoppel were met and that the debtor was precluded from recovering any damages in the state court litigation. However, the court ruled that estoppel did not apply to the Chapter 13 trustee.  The defendants then argued that since the debtor was estopped, the trustee was limited to recovering an amount sufficient to pay off creditors. The bankruptcy court rejected the argument and ruled that the trustee could pursue the personal injury case without regard to the claims filed in the bankruptcy case.  This meant that the personal injury attorney could recover his full contingency fee under the original contract without limitation or reference to the claims filed in the case.

Neither side was satisfied and both sides appealed. The District Court overturned the bankruptcy court on the issue of judicial estoppel of the debtor and affirmed in all other respects.

 The Fifth Circuit disagreed with the district court and reinstated the judgment of the bankruptcy court.  The Court ruled that, “[w]here a debtor is judicially estopped from pursuing a claim he failed to disclose to the bankruptcy court, the trustee, consistent with Reed, may pursue the claim without any limitation not otherwise imposed by law.” Id. at 132.  The Court believed that to limit the recovery to creditors’ claims could negatively affect creditors because an attorney may not be willing to pursue the personal injury case if there were a limitation on the potential recovery.

If one clear message arises from the Fifth Circuit cases on judicial estoppel, it is that no one, especially the creditors in a case, should be negatively affected by a debtor’s failure to disclose a cause of action (no one other than the debtor).

One last point.  This post focused on the omission of personal injury or other causes of action and the effect on creditors and the trustee.  However, judicial estoppel could be applied in other contexts – consider bankruptcy schedules versus domestic relation disclosures in chancery court and similar proceedings.

5 Reasons Debtors Should Disclose Contingent Claims

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.

DISCLAIMER