Keep to the Schedule: How a Failure to List Affirmative Claims in a Debtor’s Schedules Can Preclude Recovery in Future Actions

Contributed by Adam Lavine
The preparation and filing of a debtor’s schedules of assets and liabilities is a routine but important aspect of nearly every bankruptcy case.  A debtor’s schedules provide critical information to creditors and other parties in interest, the Office of the United States Trustee, and the bankruptcy court. 
As the recent case of George v. Fresenius Medical Care N.A., reminds us, there is another important reason to ensure the accuracy and completeness of a debtor’s schedules.  Under the doctrine of judicial estoppel, if a debtor fails to disclose an affirmative claim as one of its assets, the debtor may be prevented from pursuing such claim at a later date.
In Fresenius Medical, the debtor filed a chapter 13 petition along with a schedule of assets.  Approximately two years after the debtor’s plan was confirmed, the debtor’s case was dismissed as a result of the debtor’s failure to make payments in accordance with the confirmed plan.  Thereafter, the debtor commenced an employment discrimination action under Title VII of the Civil Rights Act of 1964 and the Americans with Disabilities Act.  The defendant moved for summary judgement, arguing that the debtor was judicially estopped from pursuing the discrimination claims due to the debtor’s failure to include such claims on the schedule of assets filed in the earlier chapter 13 case.
Although Fresenius Medical involved a chapter 13 case, the judicial estoppel doctrine applies to cases brought under other chapters of the Bankruptcy Code, including chapter 11.  Regardless of the chapter involved, in the Fifth Circuit, courts look to the following three criteria when determining whether judicial estoppel is appropriate to bar a claim that a debtor failed to schedule in its bankruptcy case:

  1. the debtor-plaintiff must assert a legal position which is plainly inconsistent with a prior position;
  2. a court must have accepted the prior position; and
  3. the debtor-plaintiff must not have acted inadvertently.

In Fresenius, the court held that the first prong was satisfied because the plaintiff’s failure to schedule its employment discrimination claims was plainly inconsistent with the plaintiff’s commencement of a lawsuit based on those claims at a later date.
The court found, however, that the second prong was not satisfied because the bankruptcy court never “accepted” the debtor’s prior position given the post-confirmation dismissal of the case.  Specifically, the court held that because the dismissal of a bankruptcy case returns the parties to the position they were in prior to the commencement of the case, the bankruptcy court could not have “accepted” the debtor’s position.  In reaching this holding, the court implied that a bankruptcy court “accepts” a debtor’s position regarding its schedules at the time of discharge, which occurs after confirmation in chapter 13.
Interestingly, this holding directly conflicts with a decision of the District Court for the Southern District of New York.  See In re Residential Capital, LLC, 519 B.R. 606, 612 (S.D.N.Y. 2014).  In ResCap, Judge Koeltl held that “[e]ven if a debtor’s bankruptcy petition is dismissed before discharge, a bankruptcy court still ‘accepts’ the veracity of the plaintiff’s asset schedules when it confirms a chapter 13 plan.”  In support of this holding, the court noted that a majority of courts have held that confirmation of a chapter 11 or 13 plan qualifies as acceptance for judicial estoppel purposes.  It also noted that any contrary rule would promote gamesmanship by debtors, which is contrary to a primary rationale for the judicial estoppel doctrine; namely, to protect the integrity of the judicial system.  To illustrate this point, the court stated,

A chapter 13 petitioner could bring a suit, omit that suit from the asset schedule, and adopt a wait-and-see strategy. If the unlisted lawsuit has promise, the debtor could then voluntarily dismiss the chapter 13 petition, even after confirmation. That approach would undermine the integrity of the judicial process.

Regardless of the jurisdiction or the chapter involved, debtors should ensure that their schedules list all affirmative claims, including those that may be contingent or unliquidated.  Only through complete and accurate reporting will a debtor be able to avoid allegations of gamesmanship and prevent future challenges to its causes of action on judicial estoppel grounds.
Adam Lavine is an Associate at Weil Gotshal & Manges, LLP in New York.