Consequences of the Failure to Disclose Assets

One of the requisites of a bankruptcy filing is that the Debtor make a full and complete disclosure of not only all debts that a person has, but also that he disclose all of his assets. Because the Debtor signs all bankruptcy schedules under the penalty of perjury, a failure to disclose all assets may carry severe consequences for the Debtor. For example, the Debtor may be denied a discharge of his debts and following bankruptcy, the Debtor is again subject to all preexisting claims and creditors. Additionally if the nondisclosure is deemed a knowing and willful failure to disclose, the Debtor is subject to criminal charges and penalties and the bankruptcy case may be “reopened” to administer the omitted assets.

The nondisclosure may be inadvertent in that the Debtor merely did not remember the asset or, it might be the Debtor thought that the asset was so inconsequential that it was not “worth mentioning.” Nonetheless the omission of the asset carries serious consequences for the Debtor and may give rise to a malpractice claim against the attorney who prepared the Debtor’s schedules for bankruptcy or possibly Rule 11 sanctions by the Court and/or an ethical complaint if the omission was the fault of counsel. The ultimate liability for the omission, however, falls on the client who faces the wrath of the Court and his Bankruptcy Trustee.

On the other hand, a failure to disclose an asset may be a defense attorney’s treasure. For example, in the situation where a Debtor files a bankruptcy petition, receives a discharge, and then brings a personal injury action, a civil suit for damages for breach of contract, or other action, a wise defense counsel may assert the defense of judicial estoppel. Judicial estoppel is a legal doctrine which holds that a party cannot assert opposing positions for the same matter. For example if a Debtor fails to schedule a personal injury or tort action in a bankruptcy petition, then later, after receiving a discharge of debts and an abandonment of his assets by his Trustee, attempts to bring the action against the tortfeasor once he is out of bankruptcy so that he retains the asset free and clear of any claim by his Bankruptcy Trustee, he faces a rude awakening.

Carefully prepared discovery may request whether the Debtor (Plaintiff) has ever filed bankruptcy and, if so, when. The inquiry should then proceed to when the filed claim accrued, or the claim arose. E.g. a claim for fraud (four year statute of limitations) arises when the fraud occurs, but the claim itself may not accrue, for Statute purposes, until the fraud is discovered, or a probate claim as a result of a death where the Debtor is to benefit. The bankruptcy code requires the disclosure of all assets known or expected at the time of filing as well as certain assets acquired within 180 days after filing and, additionally, within the 3-5 year period of filing a Chapter 13 bankruptcy.

Recently, in cases of a medical implant (such as pelvic mesh), the implant itself may be uneventful and the patient may go on for years with normal exams. The claim itself may be said to accrue when the damages or erosion from the implant begin to occur or when the damage is discovered. Suits involving surgical mesh usually allege the tortious act arises from the original surgical implant, although the Plaintiff may not have a case until there is damage from the implant. In any case it is important as to know when the bankruptcy was filed because that is determinative as to what is necessary to disclose to the Bankruptcy Court. For the defense of judicial estoppel to apply it must be a knowing assertion of contrary or opposing positions by the party. If the Debtor knew of the implant before the bankruptcy but was experiencing no problems with the implant until after the bankruptcy was closed, then judicial estoppel and the failure to disclose probably would not apply. The time between the implantation of the mesh and the actual damage arising therefrom and/or the Debtor’s knowledge of that damage are gray areas where the defense of judicial estoppel may be asserted if the matter was not disclosed to the Bankruptcy Court. If the judicial estoppel defense applies, then the Plaintiff Debtor’s claim would be barred and defense counsel may then be forced to deal with the Bankruptcy Trustee as far as settling the claim on more favorable terms for the defense since the Trustee might be less willing to fund or proceed with litigation.