One of the first things we advise all of our clients about filing bankruptcy is the requirement that a debtor disclose all required information. Whether filing a Chapter 7 Bankruptcy, Chapter 11 Bankruptcy or Chapter 13 Bankruptcy, the Bankruptcy Petition is a statement made subject to the federal penalties for perjury. However, even more importantly, the Bankruptcy Code is replete with requirements that disclosure equals protection. A recent case from the Eleventh Circuit highlights the potential peril of failing to disclose a disputed claim when filing for bankruptcy protection.
Slater sued U.S. Steel for discrimination and retaliation for her complaints of discrimination under provisions of Title VII, 42 U.S.C. § 2000e et seq, and 42 U.S.C. § 1981 1. The federal district court denied portions of U.S. Steel’s Motion to dismiss on summary judgment.
About a month after the ruling, Slater filed a Chapter 7 bankruptcy petition. In the Petition, Slater failed to disclose the pending claim against U.S. Steel. She had two (2) opportunities to do so. In Schedule B-Personal Property, a debtor is required to disclose “contingent and unliquidated claims.” In the Statement of Financial Affairs, a debtor must identify any “suits and administrative proceedings to which the debtor is or was a party within one year immediately preceding the filing of this bankruptcy case”. In both cases, she again answered “none.”
The bankruptcy trustee, unaware of Slater’s claim against U.S. Steel, issued a Report of No Distribution finding there was no property available for distribution from the estate over and above that exempted by law.
The next day, U.S. Steel, seeing opportunity, sought to dismiss Slater’s federal claims based on Slater’s failure to disclose the claim in her bankruptcy petition. Slater amended her Petition to reflect the claim and subsequently converted to a Chapter 13 case. Slater failed to make all required payments and her Chapter 13 case was ultimately dismissed without Slater receiving a discharge.
Slater’s claims against U.S. Steel were also dismissed. The Court was not moved by Slater’s argument that her failure to disclose was “inadvertent” nor her immediate amendments which disclosed them. The Court found that Slater “intended to make a mockery of the judicial system” and dismissed her claims.
Applicable Bankruptcy Law
When a debtor files a Chapter 7 petition, his assets, subject to certain exemptions, are immediately transferred to a bankruptcy estate. 11 U.S.C. § 541(a)(1). 11 U.S.C. § 727 provides that a Chapter 7 debtor may denied a discharge for failing to list an asset in the bankruptcy petition.
The logical reason for these provisions of the Code is simple and straightforward. Creditors who have claims against the debtor have a right to know whether the debtor has any assets against which a claim by them can be made. “Chapter 7 allows a debtor to make a clean break from his financial past, but at a steep price: prompt liquidation of the debtor’s assets.” Harris v. Viegelahn, 135 S. Ct. 1829, 1835 (2015).
Doctrine of Judicial Estoppel
The provisions of the Bankruptcy Code become relevant in bankruptcy cases under the the doctrine of judicial estoppel. “The equitable doctrine of judicial estoppel is intended to protect courts against parties who seek to manipulate the judicial process by changing their legal positions to suit the exigencies of the moment.” Slater v. United States Steel Corp. at 1176-1177. Where a party makes a legal argument in a proceeding, a Court may bar – or estop – that party from taking an inconsistent advantage by pursuing an incompatible theory.
U.S. Steel argued that Slater was estopped from, on one hand, failing to disclose her claim in the bankruptcy petition, and continuing to pursue it after it was not disclosed. The District Court’s language belied its belief that Slater’s omission was a purposeful effort to “defraud creditors” and that her subsequent amendment was “waiting until after being caught… is too little, too late.”