List it or Lose It: the Application of Judicial Estoppel When a Debtor Fails to List a Claim

• Citation: Vol. 37 No. 2
• Publication year: 2021

List It or Lose It: The Application of Judicial Estoppel When a Debtor Fails to List a Claim

Johnathan H. Christoforatos

LIST IT OR LOSE IT: THE APPLICATION OF JUDICIAL ESTOPPEL WHEN A DEBTOR FAILS TO LIST A CLAIM

Abstract

This Comment addresses the application of judicial estoppel to dismiss a debtor's civil or administrative claim when the debtor fails to list his claim on the required schedule. Part I of this Comment analyzes the general concept of equity and the principles underlying judicial estoppel. Part II analyzes equity and judicial estoppel through the lens of the bankruptcy system. Part III presents my proposed test to determine when it is appropriate for courts to invoke judicial estoppel to dismiss a debtor's undisclosed claim when the trustee has decided to abandon it after it has been discovered. This test considers four factors: (1) the legal sophistication of the debtor; (2) the events prompting disclosure; (3) whether there was any showing of inadvertence or attempts to disclose the claim; and (4) the reasons underlying the decision for the trustee to abandon the claim once discovered. The Comment concludes that a strict approach, as advocated by the proposed test, is the best way to protect the integrity and promote the efficient functioning of the bankruptcy system.

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Introduction.............................................................................................369

I. Equity Through Judicial Estoppel.............................................371

A. Theory of Equity ....................................................................... 372
B. The Equitable Remedy of Judicial Estoppel ............................. 373
C. Concepts of Equity and Judicial Estoppel in the Bankruptcy Context...................................................................................... 375

II. Application of Judicial Estoppel for Failure to List a Claim................................................................................................376

A. Real Party in Interest................................................................ 377
B. Use of Judicial Estoppel for Failure to List a Claim................ 378

1. Strict Circuits ..................................................................... 378
2. Relaxed Circuits ................................................................. 380

C. Form Modernization ................................................................. 381
D. Alternative Remedies Through the Bankruptcy Court .............. 382

1. Deny or Revoke Discharge................................................. 382
2. Loss of Undisclosed Asset .................................................. 383
3. Criminal Prosecution ......................................................... 383

III. Proposed Test: Airing Closer to a Presumption of Bad Faith.................................................................................................384

A. How Sophisticated Is the Debtor? Is She Represented?........... 384
B. Who Discovered the Claim? What Prompted Disclosure? ....... 385

1. Debtor Realized and Reported to Bankruptcy Court or to Attorney .............................................................................. 385
2. Defendant in the Civil Action ............................................. 386
3. The Bankruptcy Trustee ...................................................... 386
4. Was Disclosure Prompted by a Threat of Judicial Estoppel? ............................................................................ 387

C. Was There Any Showing of an Intent to Disclose the Claim? .. 388

1. Oral Disclosure .................................................................. 388
2. Misplaced on Schedules ..................................................... 388
3. Has the Debtor Listed Other Claims of a Similar Type? .... 389

D. What Are the Reasons the Trustee Abandoned the Claim After It Had Been Discovered? .......................................................... 389

1. Amount of the Pending Claim in Relation to Debt ............. 389
2. Claim Has Matured and Become Unattractive to the Trustee and Estate .............................................................. 390

E. Recap of the Proposed Considerations ..................................... 391
F. How the Proposal Fits with The Two Goals of Bankruptcy ..... 392

1. Maximizing Distribution to the Creditors .......................... 392
2. Providing a Fresh Start to the Debtor ................................ 392

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G. Proposed Adjustments That Can Curb Non-Disclosure ........... 393

1. Increased Access to Legal Resources................................. 393
2. Further Clarify the Language on Official Form 106 A/B and the Individual Filing Instructions ................................ 393
3. Section 341 Meeting of the Creditors ................................. 394
4. Civil Attorneys Search for Bankruptcy Filings................... 394

Conclusion: The Future of Judicial Estoppel.....................................395

Introduction

The United States bankruptcy system has two primary goals: to provide a good faith debtor a fresh start—a life free from the financial burdens of his pre-bankruptcy past—and to maximize the value of the bankruptcy estate distributed to the creditors.¹ it is important for any system to have clearly established goals and principles because they determine how the system functions and act as benchmarks measuring the system's success. The United States bankruptcy system seeks to strike a balance between a creditor's rights to payment and society's interest in allowing people to take personal and entrepreneurial risks.² These co-equal values guide the policies and practices of the United States bankruptcy system.³

A fundamental component of bankruptcy is the debtor's duty to fully disclose her assets. Without such disclosure, the estate would need to go through great expense to investigate and determine the financial situation of the debtor.⁴ The modern Bankruptcy Code's requirement for debtors to provide an explanation of their assets can be traced back to the Act of Henry the VII in 1541.⁵ Similarly, the Bankruptcy Act of 1800—and every bankruptcy act that followed it—also included provisions and penalties for debtors hiding or attempting to hide assets.⁶ The need for debtors to accurately disclose their assets

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should be readily apparent; distributing assets to creditors without a full understanding of the value of the estate would lead to unjust results and a degradation of the bankruptcy system.⁷ such an outcome would directly defeat the purpose of bankruptcy, which is intended not just to discharge debt but also to provide the most appropriate distribution of the estate's assets to creditors.

In the modern bankruptcy system, debtors are required to file bankruptcy schedules that detail, among other things, their assets, liabilities, current income, and expenditures.⁸ When a debtor initially fails to list or amend his bankruptcy schedule to reflect his interest in property, he is hiding assets from the estate and, therefore, the creditors.⁹ These omissions—whether intentional or inadvertent—threaten the integrity of the federal bankruptcy system.¹⁰ Although every omission on filers' forms threatens the integrity of the bankruptcy system, it is not necessarily the case that all omissions should be treated equally. Assets come in different shapes and sizes. To name just a few, debtors can own houses, boats, stocks, interests in inheritance, or interest in a business.¹¹ Also included in the debtor's property—but possibly not as readily known by filers—are lawsuits and administrative claims for which the debtor is a plaintiff,¹² suits where the debtor is the defendant but has made counterclaims,¹³ and potential claims where the injurious conduct had occurred prior to the petition date and where the debtor had taken some steps to show an intention to pursue a cause of

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action.¹⁴ This Comment explores the consequences that result from a debtor omitting assets on his Official Form 106 A/B or Statement of Financial Affairs ("SOFA").¹⁵

Circuits are split as to whether a debtor's failure to disclose a legal claim should be presumed to have been done in bad faith and subsequently dismissed on the basis of judicial estoppel.¹⁶ This Comment will show why courts should adopt a more stringent analysis, leaning closer to a presumption of bad faith, when deciding whether to invoke judicial estoppel for a debtor's failure to list a claim. Particularly, this Comment will lay out the four primary factors that courts should consider when determining whether the invocation of judicial estoppel is appropriate. Courts should consider: (1) the legal sophistication of the debtor; (2) the events prompting disclosure; (3) any showing of inadvertence or attempts to disclose her claim; and (4) the reasons underlying the decision for the trustee to abandon the claim once discovered. This four-factor test will clarify when to invoke judicial estoppel in the bankruptcy context. This checklist can be used by judges when determining whether to invoke judicial estoppel, by defense attorneys when deciding whether to raise the affirmative defense of judicial estoppel, and by debtors' attorneys when developing the best defense against a motion for summary judgment based on judicial estoppel.

I. Equity Through Judicial Estoppel

Bankruptcy courts are often viewed as courts of equity, although to varying degrees.¹⁷ How we view equity and its role in the judicial system affects which

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equitable remedies will be considered appropriate in any given situation.¹⁸ It is important to balance our views of equity with the goals and practicalities of the bankruptcy system. To that end, this Comment first analyzes the numerous goals and policies underlying the concept of equity and the use of the equitable remedy of judicial estoppel.

A. Theory of Equity

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