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Debtor’s Failure to Disclose Comes Back to Haunt Him

By Guest Blogger: Paul B. Porvaznik, Esq.

When you file for bankruptcy, you sign sworn schedules that itemize your assets.  If you fail to fully disclose or update your asset summary, you risk a creditor objecting to your discharge on the basis of fraud.  Another peril of nondisclosure concerns claims that arise after the bankruptcy filing; like future lawsuits.   So, what happens if a claim develops after you file your bankruptcy petition but before you are granted a discharge and you don’t inform the bankruptcy court of this claim?  That’s the question examined in Schoup v. Gore, 2014 IL App (4th) 130911 (4 Dist. 2014), a case that will doubtless serve as a cautionary tale for future bankruptcy petitioners.

 In Schoup the debtor filed in 2010 and obtained a discharge in 2012.  Several months into the case the debtor was injured on private property, giving rise to a premises liability claim.  The debtor didn’t tell the bankruptcy court or trustee of the premises suit until after his bankruptcy case was discharged. Indeed, after obtaining his discharge the debtor filed that claim. The property owners moved for summary judgment on the basis of judicial estoppel, arguing that the plaintiff’s failure to disclose the suit as an asset in his bankruptcy barred the post-discharge action entirely.  The trial court agreed and the plaintiff/debtor appealed.

Ruling: Summary judgment affirmed. Why? Because the judicial estoppel doctrine barred the plaintiff’s premises liability suit.  Judicial estoppel prevents a litigant from taking a position in one case and then, in a later case, taking the opposite position (i.e., you can’t claim that you’re an independent contractor in one case and then in a second case, claim that you’re an employee).  Judicial estoppel’s purpose is to protect the integrity of the court system and to prevent a party from making a mockery of court proceedings by conveniently taking whatever position happens to serve that party at a given moment.  (¶ 9).  The five elements of judicial estoppel: (1) two positions are taken by the same party; (2) the positions must be taken in judicial proceedings; (3) the positions must be taken under oath; (4) the party must have successfully maintained the first position and received a benefit from it; and (5) the two positions must be “totally inconsistent.” (¶ 10).  Illinois courts have consistently held that a debtor who fails to disclose an asset – including an unliquidated lawsuit – can’t later realize a benefit from the concealed asset after discharge.  (¶ 14).

The Court agreed with the trial court that all five elements were met.  First, the plaintiff took two positions: he impliedly represented to the bankruptcy court that he had no pending lawsuits and then filed a personal injury suit in state court after discharge.  The two positions were taken in judicial proceedings (Federal bankruptcy court and Illinois state court) and under oath (the plaintiff signed sworn disclosures in the bankruptcy court and filed a sworn complaint in state court).  The plaintiff also obtained a benefit from concealing the premises liability case as he received a discharge without any creditor knowing about the state court claim.  Finally, plaintiff’s positions were “totally inconsistent”: he omitted his personal injury case from his bankruptcy schedules and then filed a state court personal injury suit after he got his discharge. (¶¶ 17-18).

In conclusion, a party that had absolutely nothing to do with the plaintiff’s prior bankruptcy was able to get a case dismissed because the plaintiff didn’t update his asset schedules to account for an inchoate lawsuit.  The case is a great reminder to always check on-line bankruptcy records to see if a plaintiff suing your client has any prior bankruptcies.  More than once I’ve found that a plaintiff recently received a discharge before filing suit and never disclosed the lawsuit as an asset in the bankruptcy case.  In those situations, the plaintiff, not wanting to deal with a judicial estoppel motion (like the one filed by the defendants in this case), is usually motivated to settle for a reduced amount and in one case, even non-suited the case.  Viewed from the debtor’s lens, I counsel clients to fully disclose all assets – even lawsuits that haven’t materialized on the bankruptcy filing date.  Otherwise, they run the risk of having a creditor challenge the discharge or even having a future lawsuit dismissed; like the plaintiff in this case.

My other observation concerns the “sworn statement” judicial estoppel element.  What if the state court complaint wasn’t verified under oath?  Would that still meet the sworn statement criterion?  It’s unclear from the text of the opinion.  If the complaint wasn’t verified, I think I’d argue that the plaintiff didn’t take two sworn contradictory positions.

About the Author: Paul B. Porvaznik, Esq. is a business litigation attorney practicing in Chicago at the firm of Molzahn, Rocco, Reed & Rouse, LLC, a full-service litigation firm.  He has practiced for 17 years primarily in the areas of general civil litigation, mechanics liens, landlord-tenant law, collections, post-judgment enforcement and general business disputes.

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