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Bankruptcy Attorneys in Indianapolis Since 1980

Property & Asset Protection

Additional Bankruptcy Cases to Consider Regarding Estate Property

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Property of the Estate - An 8-Part Series#7 of 8 in Series — Previous Article #6: Cause of Action Assets Must Be Disclosed Whether Property of Estate or Debtor
Here are four additional bankruptcy cases to consider regarding property of the estate:

Case #1:

In the Matter of Peebles (Case. No 09-60792, Bankr. Court, SD Georgia, Sept. 26 2013)

Inheritance is not property of the estate. More than 180 days after filing the Chapter 13 bankruptcy, the debtor became entitled to receive inheritance of more than $45,000.00. The trustee filed a section 1329 motion to modify the plan to increase the dividend to unsecured creditors. The debtor argued that the inheritance is not disposable income as the Code defines current monthly income as income received in the six full months prior to filing the case. The Court disagreed with the debtor’s position, but ruled that the inheritance was not property of the estate. It then ruled that there is no difference between property that has been exempted and is therefore no longer property of the estate and property such as this inheritance which never became property of the estate. Therefore, similar to exempt property, the trustee may not modify the plan to acquire that property.
Bankruptcy Opinion: In the Matter of Peebles (Case. No 09-60792, Bankr. Court, SD Georgia, Sept. 26 2013)[7]

Case #2:

In re Waldron, 536 F.3d 1239, 1245 (11th Cir. 2008).

The Waldron court found that an amended disclosure pursuant to Rule 1009 was the appropriate vehicle for a debtor to make post-confirmation disclosures. In so holding, the Waldron court observed:

“The disclosure of post-confirmation assets gives the trustee and creditors a meaningful right to request, under section 1329, a modification of the debtor’s plan to pay his creditors. A confirmed plan may be modified at the request of the debtor, the trustee, or the holder of an allowed unsecured claim to ‘(1) increase or reduce the amount of the payments on claims of a particular class provided for by the plan; [or to] extend or reduce the time for such payments.’ 11 U.S.C. § 1329(a). Payments under a plan are based on the debtor’s disposable income when the plan is confirmed. Id. § 1325(b)(1)(B). When a debtor discloses assets acquired after confirmation, creditors may move the bankruptcy court to modify the plan to increase payments made by the debtor to satisfy a larger percentage of the creditors’ claims. Id. § 1329(a)(1). If post-confirmation assets were not subject to disclosure, modifications for increased payments would be rare because few debtors would voluntarily disclose new assets… [emphasis added].”

The Peebles Court disagreed with the Waldron Court stating,

“Thus, the whole point of the exercise in Waldron was to determine if the asset in question could be included in disposable income. Though not explicitly stated, the clear corollary of the Waldron holding is that non-estate property need not be disclosed because it will never comprise disposable income that might support an upward modification of plan payments. Accordingly, the Court holds that the non-estate property at issue in this case, namely an inheritance received more than 180 days post-petition, is not included in disposable income.” See In the Matter of Peebles (Case. No 09-60792, Bankr. Court, SD Georgia, Sept. 26 2013).

These two cases demonstrate the circular argument for an estate transformation approach, that is: if an asset is not necessary for the fulfillment of the confirmed plan then it is not property of the estate and Rule 1009 would not require an amendment. However, had the trustee or creditors known about the asset then the trustee could have modified the plan under section 1329 to increase the dividend to unsecured creditors and the new asset would be necessary for the fulfillment of the modified plan. Then the debtor would be required to disclose the asset that the trustee had included in the modification.
Bankruptcy Opinion: IN RE WALDRON, 536 F.3d 1239 (11th Cir. 2008)[4]

Case #3:

In re Foreman (378 BR 717 – Bankr. Court, SD Georgia, 2007).

In this case the debtor attempted to amend her schedules to include a post-confirmation wrongful death claim. The Court held that:

“[b]ecause Debtor’s interest in this cause of action arose post-confirmation, the potential asset is not property of the bankruptcy estate as defined by 11 U.S.C. § 541. See Witko v. Menotte (In re Witko), 374 F.3d 1040 (11th Cir.2004) (concluding that “[p]re-petition causes of action are part of the bankruptcy estate and post petition causes of action are not”); see also Telfair, 216 F.3d 1333 (adopting the estate transformation approach to post petition acquired property, and holding that after confirmation only the property necessary for, the execution of the plan remains as property of the bankruptcy estate). Furthermore, because the cause of action is not property of the bankruptcy estate, Debtor is under no ongoing duty to disclose and amend the schedules of her confirmed bankruptcy case.”

The Court denied the debtor’s motion to amend the schedules.
Bankruptcy Opinion: In re Foreman (378 BR 717 – Bankr. Court, SD Georgia, 2007)[4]

Case #4:

Matthews v. Potter, 316 Fed. App’x 518, 522 (7th Cir. 2009)

A Chapter 7 debtor filed a cause of action that originally was not listed in her Bankruptcy Schedules, but she advised the trustee about the claim at the meeting of creditors. The Court of Appeals found the debtor’s oral disclosure of the cause of action to the trustee sufficient to comply with the Code, and enough to prevent the application of judicial estoppel.

“Matthews, in whose favor we must draw all reasonable inferences, states in her affidavit that she informed the trustee about her pending administrative complaints at the meeting of creditors for her Chapter 7 bankruptcy. . . . The Bankruptcy Code contemplates the possibility that a debtor may later discover and inform the trustee of additional assets not already listed on the schedules, given the trustee’s obligations to investigate the debtor’s financial affairs, and to examine the debtor at the meeting of creditors. . . . That is precisely what happened here, at least as far as the record shows, and the inference we draw is that following Matthews’s oral disclosure the trustee determined that her discrimination claims were not sufficiently valuable to warrant pursuing them on behalf of the creditors.”

Bankruptcy Opinion: Matthews v. Potter, 316 Fed. App’x 518, 522 (7th Cir. 2009)[4]

Next Article in Series: Debtor Obligated to Disclose Assets Acquired During Life of Bankruptcy Plan

Sources: [1] Cornell University Law School Legal Information Institute; [2] Justia; [3] OpenJurist; [4] CaseText; [5] CourtListener; [6] Leagle; [7] Chapter11Cases

Disclosure required by 11 U.S.C. § 528(a)(3): We, the law office of Tom Scott & Associates, P.C., are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.

Cause of Action Assets Must Be Disclosed Whether Property of Estate or Debtor

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Debtor in Bankruptcy Must Disclose All Assets and Liabilities or Risk Severe Penalties#6 of 8 in Series — Previous Article #5: Chapter 7 and Chapter 13 Bankruptcy Codes Conflict
Under the estate transformation approach, it would appear that any after acquired asset would not become property of the estate unless that property would be necessary to complete the terms of the plan. As an example, if a Chapter 13 plan was filed to repay priority tax claims and the debtor was later wrongfully terminated any chosen action necessary to complete the terms of the plan would become property of the estate to the extent necessary to repay those priority claims.
In addition, the trustee would have the option of attempting to modify the plan under section 1329[1] to increase the dividend to unsecured creditors if the trustee felt there was additional disposable income available. However, if the asset is not necessary to the fulfillment of the plan (and it is not property of the estate) does it need to be disclosed? Clearly if the asset is a cause of action, it must be disclosed regardless of whether the asset is property of the estate, otherwise the debtor may be barred from pursuing that action through judicial estoppel.

A case we are currently litigating is a good example of this:
On the date of filing, the debtor owned a house, which was fully encumbered by a mortgage and had no equity value at all. The debtor surrendered the house, basically saying, “I don’t want it any more.”
The estate trustee, of his own agreement, abandoned the property and returned it, fully encumbered, to the debtor. The property was no longer part of the estate.
A couple of years later, the home was sold at a tax sale because the debtor wasn’t paying the taxes on it. At a tax sale, investors bid on properties. You, as an investor, if the home is worth $100,000, have to bid at least the amount of the owed taxes, or higher if bidding against another investor.
For example, for this $100,000 home with a $100,000 mortgage and $10,000 in back taxes owed, the investor bid $40,000. Either the mortgage company or the debtor have one year to pay the $10,000 in back taxes, plus 10% interest (of the investor’s initial purchase price.)
For investors, it is a great deal to bid at a tax sale because one of two things is going to happen. In this case, if no one redeems the property, the investor buys a $100,000 piece of property for $40,000, which is a very good deal. If the property is redeemed, the investor gets his money back, plus a 10% return on the investment ($4,000), which is not quite as profitable, but is still a very good short-term ROI.
The results were: the investor bid $40,000; the debtor didn’t want the property and was out of the picture; and the mortgage company, for whatever reason, never paid the $10,000 tax bill (and the 10%). The mortgage company never started foreclosure proceedings, so the investor received the property, for $40,000, free and clear of any liens whatsoever, and owned it 100% outright. The county treasurer retained $10,000 to cover the taxes due, which left an additional $30,000, called an overage, which went to the current property owner – the investor. The overage did not go to pay any liens, because those were wiped out when nobody redeemed the property, so the county treasurer sent the $30,000 back to the homeowner.
When the estate trustee was informed about the overage refund, his reaction was, “Uh, uh, that’s property of the estate.” The trustee’s position was that this was property of the estate at the time of filing and that the debtor apparently misstated the facts by claiming there was no equity in the house. But, in fact, there was equity in it because, as stated earlier, property of the estate includes any unforeseen, speculative contingent, and it is the debtor’s responsibility to have listed it. We disagree with the trustee’s position and have submitted a brief in an effort to settle through an even split of the $40,000.

Debtor Must Schedule All Legal or Equitable Interests as Assets

In the case, Cowling v. Rolls Royce Allison (S.D. IN Case No. 1:11-cv-01719-JMS-TAB, Oct. 5, 2012)[6], the court held “[a]t the outset, the Court must determine whether the claims Mr. Cowling asserts in this lawsuit should be included in his Chapter 13 bankruptcy estate. The clear answer is ‘yes’. Under the Bankruptcy Code, a debtor must schedule as assets ‘all legal or equitable interests of the debtor in property as of the commencement of the case.’ 11 U.S.C. § 541(a)(1).

Cause of Action Assets Acquired During Bankruptcy Considered Property of Estate

Additionally, causes of action which the debtor acquires while the bankruptcy is pending are also considered property of the bankruptcy estate. 11 U.S.C. § 1306(a)(1)[1] (‘Property of the [Chapter 13 bankruptcy] estate includes…all property of the kind specified in such section that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted…’).” The District Court simply dismissed the case without prejudice due to the debtor’s lack of standing to bring the cause of action and thus did not need to even rule on the issue of judicial estoppel. The District Court also held that the debtor has an ongoing duty to schedule newly acquired assets while the case is open. Sections 1307[1] and 1330[1] allow for revocation of confirmation and dismissal in limited circumstances where the confirmation order itself was procured through fraud.

Next Article in Series: Additional Bankruptcy Cases to Consider Regarding Estate Property

Sources: [1] Cornell University Law School Legal Information Institute; [2] Justia; [3] OpenJurist; [4] CaseText; [5] CourtListener; [6] Leagle

Disclosure required by 11 U.S.C. § 528(a)(3): We, the law office of Tom Scott & Associates, P.C., are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.

Chapter 7 and Chapter 13 Bankruptcy Codes Conflict

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Debtor in Bankruptcy Must Disclose All Assets and Liabilities or Risk Severe Penalties#5 of 8 in Series — Previous Article #4: Judicial Estoppel Normally Used to Prevent Conflicting Litigation
In the vast majority of consumer cases, assets are easily identifiable and can be listed and valued on schedules A and B with limited investigation. However, one asset that may be both difficult to identify and value is the debtor’s interest in any causes of action that he or she may have against a creditor or other third party. In fact the debtor may not even realize that there is a potential claim, such as a creditor’s violation of the Fair Debt Collection Practices Act, or an action against a former employer for wrongful termination. The attorney’s failure to properly list an asset may bar the debtor from pursuing an action at a later time. Yet bad legal advice does not relieve the debtor of the consequences of the incorrect filing. In the case Cannon-Stokes v. Potter, 453 F.3d 446 (7th Cir. 2006)[2] Judge Easterbrook wrote “[a] lawyer is the client’s agent, and the client is bound by the consequences of advice that the client chooses to follow. Cannon-Stokes might as well say that she is free to ignore any contract that a lawyer advised her to sign with her fingers crossed behind her back. The lawyer’s role as agent is why the Supreme Court held in United States v. Boyle, 469 U.S. 241, 105 S.Ct. 687, 83 L.Ed.2d 622 (1985), that a taxpayer could not avoid paying interest and penalties occasioned by his lawyer’s mishandling of the return. Just so here: a debtor in bankruptcy is bound by her own representations, no matter why they were made, at least until the debtor moves to amend the disclosures and pay the creditors their due (a step that, to repeat, Cannon-Stokes has not taken). The remedy for bad legal advice lies in malpractice litigation against the offending lawyer.”

Let’s sum this up: Upon filing a bankruptcy under sec. 541, everything in the world you own, or are entitled to receive, belongs to, and is under the control of, the bankruptcy court until the court abandons that property and gives it back to you. The job of a good attorney is to know what you are allowed to keep, and advise you on that.
However, that does not absolve the debtor from any responsibilities, as they could be penalized for following bad advise from their attorney and subject to fines, revocation of the bankruptcy, and/or criminal charges.

Judicial Estoppel Normally Used to Prevent Conflicting Litigation

Judicial estoppel “is an equitable concept providing that a party who prevails on one ground in a lawsuit may not in another lawsuit repudiate that ground.” United States v. Christian, 342 F.3d 744, 747 (7th Cir. 2003)[3]. This doctrine’s purpose is “‘to protect the integrity of the judicial process’ by preventing litigants from ‘deliberately changing positions according to the exigencies of the moment.’” Matthews v. Potter, 316 Fed. App’x 518, 522 (7th Cir. 2009)[4] (quoting New Hampshire v. Maine, 532 U.S. 742, 749-50 (2001)). Judicial estoppel may apply when: (1) the later position is clearly inconsistent with the earlier position; (2) the facts at issue are the same in both cases; (3) the party to be estopped convinced the first court to adopt its position; and (4) the party seeking to assert an inconsistent position would derive an unfair advantage or impose an unfair detriment on the opposing party if not estopped. Christian, 342 F.3d at 747. “Judicial estoppel is strong medicine, however, and it should not be used where it would work an injustice. . . . The rule looks toward cold manipulation and not an unthinking or confused blunder.” In re In re FV Steel & Wire Co., 349 B.R. 181, 185 (Bankr. E.D. Wis. 2006)[5].
Judicial Estoppel Applied in Bankruptcy When Debtor Belatedly Pursues Undisclosed Claim
The doctrine of judicial estoppel is normally invoked to prevent a party from asserting positions in successive judicial proceedings that are so “clearly inconsistent” that accepting the latter position would create the perception that at least one of the courts was deceived. Matthews, 316 Fed. App’x at 522. The doctrine frequently is invoked in connection with bankruptcy proceedings when a debtor has failed to disclose a claim, but then pursues the claim after the bankruptcy concludes. However, “[e]stoppel is an equitable concept, and its application is therefore within the court’s sound discretion…. It should not be used where it would work an injustice, such as where the former position was the product of inadvertence or mistake . . . or where there is only an appearance of inconsistency between the two positions but both may be reconciled.” In re Cassidy, 892 F.2d 637, 642 (7th Cir. 1990).[4].
Judicial Estoppel Motivates Full and Truthful Disclosures From Debtor Bankruptcy Filings
For example, in the Cannon-Stokes decision cited earlier in these materials, Traci Cannon-Stokes filed a Chapter 7 bankruptcy in which she attempted to discharge over $98,000.00 in debt while at the same time she was pursuing a $300,000.00 claim against her former employer, the United States Postal Service. The Seventh Circuit applied the doctrine of judicial estoppel and held that the debtor’s failure to list the potential asset in her bankruptcy would preclude her from pursuing the claim against the USPS. The Court held, “’By making [litigants] choose one position irrevocably, the doctrine of judicial estoppel raises the cost of lying.’ Chaveriat v. Williams Pipe Line Co., 11 F.3d 1420, 1428 (7th Cir.1993).[5]. A doctrine that induces debtors to be truthful in their bankruptcy filings will assist creditors in the long run (though it will do them no good in the particular case)—and it will assist most debtors too, for the few debtors who scam their creditors drive up interest rates and injure the more numerous honest borrowers. Judicial estoppel is designed to “prevent the perversion of the judicial process,” In re Cassidy, 892 F.2d 637, 641 (7th Cir.1990), a fair description of the result if we were to let Cannon-Stokes conceal, for her personal benefit, an asset that by her reckoning is three times the value of the debts she had discharged. It is impossible to believe that such a sizeable claim—one central to her daily activities at work—could have been overlooked when Cannon-Stokes was filling in the bankruptcy schedules. And if Cannon-Stokes were really making an honest attempt to pay her debts, then as soon as she realized that it had been omitted, she would have filed amended schedules and moved to reopen the bankruptcy, so that the creditors could benefit from any recovery. Cannon-Stokes never did that; she wants every penny of the judgment for herself.” Cannon-Stokes, 453 F.3d at 448.

Chapter 7 and Chapter 13 Bankruptcy Codes Conflict

Such a decision appears fairly straight-forward in the context of a Chapter 7 petition, but conflicting Code provisions in Chapter 13 cloud the waters in a Chapter 13 proceeding. Bankruptcy Code section 1306 [Property of the estate][1] states, “Property of the estate includes, in addition to the property specified in section 541 of this title — (1) all property of the kind specified in such section that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first; and (2) earnings from services performed by the debtor after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first. 

In the 7th Circuit, Judge Posner stated, “It’s true that the bankruptcy code say that all earnings of the debtor are property of the estate under 1306. But it also says confirmation of the plan vests all property of the estate to the debtor, unless the plan provides otherwise, which we think scotches any inference that Congress intended to render all Ch 13 debtors legally incompetent to manage any of their own property. We read the two sections, 1306 and 1327, to mean simply that while filing the petition for bankruptcy places all the property of the debtor in the control of the bankruptcy court, the plan upon confirmation returns so much property to the debtor’s control as is not necessary for the fulfillment of the plan.”
We interpret this to mean that if the court already has a confirmed plan in place, it is assumed that the debtor can manage these funds, and that assets not necessary for the fulfillment of the plan should be returned to the debtor.

Four Judicial Lines of Reasoning Regarding Bankruptcy Estate

Thus it appears clear that any after acquired property in Chapter 13 constitutes property of the estate. However, Bankruptcy Code section 1327(b) [Effect of confirmation] states, “Except 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.” Thus once a case is confirmed all property of the estate vests in the debtor; so does the bankruptcy estate cease to exist? There are four main lines of reasoning from circuits across the country.
  1. Estate termination approach: All property of the estate vests in the debtor upon confirmation and that the estate terminates at that point. Under this approach, there is no property of the estate after confirmation, only property of the debtor. This approach takes a literally reading of Section 1327(b) in vesting all property regardless of when it was acquired in the debtor. It has been criticized because it fails to give effect to the language of section 1306(a), which specifically provides that all property acquired between commencement of the case and closing, conversion or dismissal is property of the estate. See Cal. Franchise Tax Bd. v. Jones (In re Jones), 420 B.R. 506, 514-515 (9th Cir. B.A.P. 2009). However, even under this approach, a debtor may have to amend schedules to add an after acquired asset even if it is not property of the estate. As discussed earlier undisclosed assets remain property of the estate and may not revest to the debtor.
  2. Estate Preservation Approach: All property of the estate at confirmation remains property of the estate until discharge, dismissal or conversion. This approach is criticized because it fails to address the language of section 1327(b), which specifically provides for the vesting of property of the estate in the debtor upon confirmation of the plan. See Security Bank of Marshaltown v. Neuman, 1 F.3d 687, 690-691 (8th Cir. 1993) which held that confirmation is not relevant to determining whether property is property of the estate. Instead the only relevant events are commencement of the case and dismissal, closing or conversion of the case. This approach has been criticized as it would render section 1327(b) meaningless when it clearly states that property of the estate vests in the debtor upon confirmation of the plan.
  3. Estate reconciliation approach: Estate property existing at confirmation vests in the debtor but subsequently acquired property becomes property of the estate. See In re Eldridge, 09-03589-8-SWH, 2013 WL 64756 (Bankr. E.D.N.C. Jan. 4, 2013): Residence vested in the debtor at confirmation and was not property of the estate; homeowners association did not need stay relief to pursue post-petition assessment under state law. The debtor was not required to pay association’s attorney fees for unnecessary stay relief motion. See also Crouser v. BAC Home Loans Servicing, L.P. (In re Crouser), 476 B.R. 340 (Bankr. S.D. Ga. Aug. 20, 2012): Vesting at confirmation did not prevent property acquired post-confirmation from coming into the estate. Damages for willful stay violation were property of the estate that must be turned over to trustee for distribution.
  4. Estate transformation approach: Chapter 13 plan confirmation returns all property of the bankruptcy estate to the Debtor that is not necessary for the fulfillment of the confirmed plan. This approach has been criticized because it also ignores the language of section 1306(a) which, by its terms, makes no distinction between “property necessary to complete the plan,” and any other property. See In re Waltower, No. 08-12864, 2012 WL 4758043 (Bankr. S.D. GA. Sept. 7 2012): Surrender of property to mortgagee through a confirmed plan and revesting property in debtors under §1327(b) removed property from the estate and automatic stay terminated; neighbor is entitled to §362(j) order confirming that the automatic stay does not protect debtors from a state court nuisance action when mortgagee did not foreclose or maintain property after surrender.
The estate transformation approach, which is what the 7th Circuit uses to make determinations, says the estate does continue to exist, but only to the extent of assets that are necessary for the completion of the plan.

Seventh Circuit Court Adopts Estate Transformation Approach

The Seventh Circuit adopted the “estate transformation approach” when it ruled on the case, Black v. United States Postal Serv. (In re Heath), 115 F.3d 521, 524 (7th Cir. 1997)[3]. Chief Judge Posner wrote the opinion and held “It is true that the Bankruptcy Code says that all the earnings of a Chapter 13 debtor are property of the estate. 11 U.S.C. § 1306(a)(2). But it also says that ‘confirmation of a plan vests all of the property of the estate in the debtor’ unless the plan provides otherwise, § 1327(b) (emphasis added), which we think scotches any inference that Congress intended to render all Chapter 13 debtors legally incompetent to manage any of their property. We read the two sections, 1306(a)(2) and 1327(b), to mean simply that while the filing of the petition for bankruptcy places all the property of the debtor in the control of the bankruptcy court, the plan upon confirmation returns so much of that property to the debtor’s control as is not necessary to the fulfillment of the plan.” 

For example, let’s say the court states that the debtor has to pay back $5,000 to creditors because they have too much in assets, and the debtor puts together a plan that pays for a needed car, as well as pays $5,000 to their unsecured creditors, the estate exists to the extent that is necessary to collect that money to pay those debts back.
On the other hand, creditors cannot attempt to sue the debtor for a post-petition debt in an effort to garnish their wages or collect the debt. In this case, the bankruptcy attorney would be responsible to write to contact the creditor and state, “You cannot do that because the wages that they are earning are property of the estate because they are necessary for the fulfillment of the plan. After the bankruptcy is over, you can whatever the hell you want to do, but while the bankruptcy is going on, this is property of the estate and you can’t touch it.”

Next Article in Series: Cause of Action Assets Must Be Disclosed Whether Property of Estate or Debtor

Sources: [1] Cornell University Law School Legal Information Institute; [2] Justia; [3] OpenJurist; [4] CaseText; [5] CourtListener

Disclosure required by 11 U.S.C. § 528(a)(3): We, the law office of Tom Scott & Associates, P.C., are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.

Judicial Estoppel Normally Used to Prevent Conflicting Litigation

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Debtor in Bankruptcy Must Disclose All Assets and Liabilities or Risk Severe Penalties#4 of 8 in Series — Previous Article #3: Debtor Responsible for Accuracy of Bankruptcy Filing Regardless of Legal Advice
Judicial estoppel “is an equitable concept providing that a party who prevails on one ground in a lawsuit may not in another lawsuit repudiate that ground.” United States v. Christian, 342 F.3d 744, 747 (7th Cir. 2003)[4]. This doctrine’s purpose is “‘to protect the integrity of the judicial process’ by preventing litigants from ‘deliberately changing positions according to the exigencies of the moment.’” Matthews v. Potter, 316 Fed. App’x 518, 522 (7th Cir. 2009) (quoting New Hampshire v. Maine, 532 U.S. 742, 749-50 (2001)). Judicial estoppel may apply when: (1) the later position is clearly inconsistent with the earlier position; (2) the facts at issue are the same in both cases; (3) the party to be estopped convinced the first court to adopt its position; and (4) the party seeking to assert an inconsistent position would derive an unfair advantage or impose an unfair detriment on the opposing party if not estopped. Christian, 342 F.3d at 747. “Judicial estoppel is strong medicine, however, and it should not be used where it would work an injustice. . . . The rule looks toward cold manipulation and not an unthinking or confused blunder.” In re FV Steel & Wire Co., 349 B.R. 181, 185 (Bankr. E.D. Wis. 2006)[5].

Judicial Estoppel Applied in Bankruptcy When Debtor Belatedly Pursues Undisclosed Claim

The doctrine of judicial estoppel is normally invoked to prevent a party from asserting positions in successive judicial proceedings that are so “clearly inconsistent” that accepting the latter position would create the perception that at least one of the courts was deceived. Matthews, 316 Fed. App’x at 522. The doctrine frequently is invoked in connection with bankruptcy proceedings when a debtor has failed to disclose a claim, but then pursues the claim after the bankruptcy concludes. However, “[e]stoppel is an equitable concept, and its application is therefore within the court’s sound discretion…. It should not be used where it would work an injustice, such as where the former position was the product of inadvertence or mistake . . . or where there is only an appearance of inconsistency between the two positions but both may be reconciled.” In re Cassidy, 892 F.2d 637, 642 (7th Cir. 1990).[4]

Judicial Estoppel Motivates Full and Truthful Disclosures From Debtor Bankruptcy Filings

For example, in the Cannon-Stokes[2] decision cited earlier in these materials, Traci Cannon-Stokes filed a Chapter 7 bankruptcy in which she attempted to discharge over $98,000.00 in debt while at the same time she was pursuing a $300,000.00 claim against her former employer, the United States Postal Service. The Seventh Circuit applied the doctrine of judicial estoppel and held that the debtor’s failure to list the potential asset in her bankruptcy would preclude her from pursuing the claim against the USPS. The Court held, “’By making [litigants] choose one position irrevocably, the doctrine of judicial estoppel raises the cost of lying.’ Chaveriat v. Williams Pipe Line Co., 11 F.3d 1420, 1428 (7th Cir.1993).[5] A doctrine that induces debtors to be truthful in their bankruptcy filings will assist creditors in the long run (though it will do them no good in the particular case)—and it will assist most debtors too, for the few debtors who scam their creditors drive up interest rates and injure the more numerous honest borrowers. Judicial estoppel is designed to “prevent the perversion of the judicial process,” In re Cassidy, 892 F.2d 637, 641 (7th Cir.1990), a fair description of the result if we were to let Cannon-Stokes conceal, for her personal benefit, an asset that by her reckoning is three times the value of the debts she had discharged. It is impossible to believe that such a sizeable claim—one central to her daily activities at work—could have been overlooked when Cannon-Stokes was filling in the bankruptcy schedules. And if Cannon-Stokes were really making an honest attempt to pay her debts, then as soon as she realized that it had been omitted, she would have filed amended schedules and moved to reopen the bankruptcy, so that the creditors could benefit from any recovery. Cannon-Stokes never did that; she wants every penny of the judgment for herself.” Cannon-Stokes, 453 F.3d at 448.

Next Article in Series: Chapter 7 and Chapter 13 Bankruptcy Codes Conflict

Sources: [1] Cornell University Law School Legal Information Institute; [2] Justia; [3] OpenJurist; [4] CaseText; [5] CourtListener

Disclosure required by 11 U.S.C. § 528(a)(3): We, the law office of Tom Scott & Associates, P.C., are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.

Debtor Responsible for Accuracy of Bankruptcy Filing Regardless of Legal Advice

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Debtor in Bankruptcy Must Disclose All Assets and Liabilities or Risk Severe Penalties#3 of 8 in Series — Previous Article #2: Debtor in Bankruptcy Must Disclose All Assets and Liabilities or Risk Severe Penalties
In the vast majority of consumer cases, assets are easily identifiable and can be listed and valued on schedules A and B with limited investigation. However, one asset that may be both difficult to identify and value is the debtor’s interest in any causes of action that he or she may have against a creditor or other third party.
In fact the debtor may not even realize that there is a potential claim, such as a creditor’s violation of the Fair Debt Collection Practices Act, or an action against a former employer for wrongful termination. The attorney’s failure to properly list an asset may bar the debtor from pursuing an action at a later time.
Yet bad legal advice does not relieve the debtor of the consequences of the incorrect filing. In the case Cannon-Stokes v. Potter, 453 F.3d 446 (7th Cir. 2006), Judge Easterbrook wrote:

“[a] lawyer is the client’s agent, and the client is bound by the consequences of advice that the client chooses to follow. Cannon-Stokes might as well say that she is free to ignore any contract that a lawyer advised her to sign with her fingers crossed behind her back. The lawyer’s role as agent is why the Supreme Court held in United States v. Boyle, 469 U.S. 241, 105 S.Ct. 687, 83 L.Ed.2d 622 (1985), that a taxpayer could not avoid paying interest and penalties occasioned by his lawyer’s mishandling of the return. Just so here: a debtor in bankruptcy is bound by her own representations, no matter why they were made, at least until the debtor moves to amend the disclosures and pay the creditors their due (a step that, to repeat, Cannon-Stokes has not taken). The remedy for bad legal advice lies in malpractice litigation against the offending lawyer.”

Let’s sum this up: Upon filing a bankruptcy under sec. 541, everything in the world you own, or are entitled to receive, belongs to, and is under the control of, the bankruptcy court until the court abandons that property and gives it back to you. The job of a good attorney is to know what you are allowed to keep, and advise you on that.
However, that does not absolve the debtor from any responsibilities, as they could be penalized for following bad advise from their attorney and subject to fines, revocation of the bankruptcy, and/or criminal charges.

Next Article in Series: Judicial Estoppel Normally Used to Prevent Conflicting Litigation

* Source: Cornell University Law School Legal Information Institute ** Source: Justia *** Source: OpenJurist

Disclosure required by 11 U.S.C. § 528(a)(3): We, the law office of Tom Scott & Associates, P.C., are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.

Debtor in Bankruptcy Must Disclose All Assets and Liabilities or Risk Severe Penalties

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Property of the Estate in Bankruptcy#2 of 8 in Series — Previous Article #1: What Constitutes Property of the Estate in Chapter 13 Bankruptcy and What are the Consequences of Failing to Amend the Schedules?

Debtor Has Duty to Disclose All Assets and Liabilities at Start of Bankruptcy Case

Regardless of whether an asset is property of the estate or not, the debtor has a duty to disclose it. The Bankruptcy Code requires that a debtor disclose all of his or her assets at the commencement of the case. See Section 521* which states “[t]he debtor shall file … (B) unless the court orders otherwise, (i) a schedule of assets and liabilities. One Court has stated “Given the wide scope of § 541*, the debtor’s obligation to disclose all his [or her] interests at the commencement of a case is equally broad. Because full disclosure by debtors is essential to the proper functioning of the bankruptcy system, the Bankruptcy Code severely penalizes debtors who fail to disclose assets: While properly scheduled estate property that has not been administered by the trustee normally returns to the debtor when the bankruptcy court closes the case, undisclosed assets automatically remain property of the estate after the case is closed.” Chartschlaa v. Nationwide Mut. Ins.Co., 538 F.3d 116, 122 (2d Cir. 2008)** .

The bottom line is that every conceivable interest and future interest of the debtor, such as an anticipated tax refund, must be listed, including:  

  • Non-possessory property, meaning not currently in your possession
  • Contingent, speculative, derivative investments
  • Any claim you may have against anyone else, for whatever reason, whether you think it’s collectible or not, whether you think it has value or not

Exempt Property and Assets Must Also Be Disclosed

One court has even found that exempt property loses its exempt status and remains property of the estate if the debtor has failed to disclose that exempt asset. In addition, simply amending the schedules after the fact may not be sufficient to cure an error. In the Yonikus case [974 F.2d 901 (7th Cir.1992)]***, the Debtor filed amended schedules B and C listing exempt property and claiming an exemption six years after filing his bankruptcy petition. The bankruptcy court denied the exemption, and the district court affirmed that ruling. The debtor’s position was that any nondisclosure of a potential workers’ compensation claim was not fraudulent, because he believed that he was not required to report totally exempt property. In citing, Payne v. Wood 775 F.2d 202,, 205 (7th Cir. 1985)**, cert. denied, 475 U.S. 1085, 106 S.Ct. 1466, 89 L.Ed.2d 722 (1986) the Court held, “[A]lthough amendments before discharge are liberally allowed it is most unlikely that the [debtors] would be permitted to amend. The [debtors’] omissions from the initial list suggest that they meant to hide assets if they could get away with it…. The operation of the bankruptcy system depends on honest reporting. If debtors could omit assets at will, with the only penalty that they had to file an amended claim once caught, cheating would be altogether too attractive. The omission of assets may be a good reason to deny or revoke a discharge.” 

In other words, it is not up to the debtors, or their attorney’s, to determine if an asset has value, it is the job of the trustee. Even if the debtor believes an asset has no value, such as back rent owed by a tenant that skipped out that the debtor thinks is not collectible, it must be listed; the trustee will then determine its value.

Failure to Disclose Assets Can Lead to Bankruptcy Revocation and Criminal Charges

In a Chapter 7* setting, a failure to list assets may lead to a revocation of discharge pursuant to Section 727(d)* which states:
(d) On request of the trustee, a creditor, or the United States trustee, and after notice and a hearing, the court shall revoke a discharge granted under subsection (a) of this section if—
(1) such discharge was obtained through the fraud of the debtor, and the requesting party did not know of such fraud until after the granting of such discharge;
(2) the debtor acquired property that is property of the estate, or became entitled to acquire property that would be property of the estate, and knowingly and fraudulently failed to report the acquisition of or entitlement to such property, or to deliver or surrender such property to the trustee;
In addition to a revocation, concealment of property can also result in criminal sanctions under 18 U.S.C. § 152*. United States v. Cherek, 734 F.2d 1248 (7th Cir.1984), cert. denied, 471 U.S. 1014, 105 S.Ct. 2016, 85 L.Ed.2d 299 (1985). “Even if the asset is not ultimately determined to be property of the estate under the technical rules of the Federal Bankruptcy Code, Section 152 properly imposes sanctions on those who preempt a court’s determination by failing to report the asset.” Id. at 1254. Accord, United States v. Grant, 971 F.2d 799 (1st Cir.1992); United States v. Beard, 913 F.2d 193 (5th Cir. 1990); United States v. Jackson, 836 F.2d 324 (7th Cir.1987). Most importantly, your client may be precluded under the doctrine of judicial estoppel from bringing a cause of action that was not listed, valued and potentially exempted in the schedules. 

This point is pretty self-explanatory; If the court determines that the debtor has acted fraudulently by trying to hide any assets, the bankruptcy can be denied and criminal charges can be filed.

Next Article in Series: Debtor Responsible for Accuracy of Bankruptcy Filing Regardless of Legal Advice

* Source: Cornell University Law School Legal Information Institute ** Source: Justia *** Source: OpenJurist

Disclosure required by 11 U.S.C. § 528(a)(3): We, the law office of Tom Scott & Associates, P.C., are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.

Stripping Off Wholly Unsecured Mortgages: Chapter 13 and Why to File – Overview of Bankruptcy, Part 7

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Series: #12 0f 13
Our last post took a brief look at how to protect a co-debtor in a Chapter 13 bankruptcy. This article will discuss stripping off wholly unsecured mortgages.

Stripping: A Tool to Modify Unsecured Mortgages

One of the most valuable options to a debtor in a Chapter 13 case is the opportunity to modify a wholly undersecured second or other junior mortgage pursuant to 11 USC § 1322 – Contents of plan*(b)(2) which allows a Chapter 13 plan to modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, or holders of unsecured claims, or leave unaffected the rights of holders of any class of claims (emphasis added).
In conjunction with 11 USC § 506 – Determination of secured status*(a), a second or other junior mortgage can be avoided in its entirety, be given a value of zero and treated as an unsecured claim. See In Re Goda, Case No. 99-80983 (January 10, 2000), In Re Twyman, Case No. 00-4437-FJO-13 (July 31, 2000), In Re Gyger, Case No. 00-14683-AJM-13 (May 2, 2001) In Re Bailey, Case No. 02-01074-AJM-13.
In order to avoid a second or other junior mortgage, it cannot be supported by any equity whatsoever. The decision rendered by the Court in Kelly vs. Countrywide Home Loans, Inc., Case No. 01-14607, Adv. Pro. 01-572 (June 17, 2002), however, reaffirms earlier decisions that completely unsecured mortgages may not be stripped in chapter 7 cases.
In order to attempt to strip the wholly unsecured junior mortgage, the debtor must know the exact date of filing payoff balance on the first mortgage (including any arrears) as well as at least one walk through appraisal from an expert willing to travel to testify as an expert if there lien strip draws an objection. The lien strip language must be included the plan filed with the court (located in Paragraph 11 of the model plan used in the Indianapolis Division) and the attorney needs to file either a separate motion to strip the second mortgage (if you believe the issue deals with valuation only) or an adversary proceeding (if you believe the issue is to determine the validity, priority or extent of a lien).
An adversary proceeding is likely the best course to choose; however, attorneys in the Indianapolis Division have a general belief that they are not arguing the validity of the debt (conceding that it is a valid debt), but are instead only arguing about the fair market value of the real estate which can be determine without an adversary proceeding.
In order to protect the debtor from potential problems with future transfers of the real estate, the attorney should be vigilant in obtaining proper service, should always make sure that an order avoiding a second mortgage contains the full and exact legal description, and that the order is properly recorded. The debt is not officially discharged until the Chapter 13 plan has been discharged.
Accordingly, large notes should be made on the file that the case cannot be converted to Chapter 7; otherwise the second mortgage is no longer avoided.
Next: Discharging Property Settlements in Divorce or Separation

* Source: Cornell University Law School Legal Information Institute