Unscheduled Claims and Property in Bankruptcy

Tollefsen Law practices in Oregon and Washington which is part of the 9th Circuit Federal Court. The United States Constitution gives the federal government exclusive jurisdiction over bankruptcy issues. State law governs substantive issues like ownership of property and legitimacy of claims.

Unscheduled Claims

In most bankruptcies, creditors who have been omitted can file an claim and correct the error. The problem arises in Chapter 13 filings when debtors omit claims, often to qualify within the jurisdictional dollar limit for unsecured claims (§109(e)).

Unless the creditor can prove intentional fraud, the strategy used to obtain a non-dischargeable judgment is to attempt to increase claims above the§109(e) jurisdictional limit, forcing the debtor out of bankruptcy or into Chapter 7 or 11 where all objections to discharge can be used.

The problem with this strategy in the 9th Circuit is that the creditor is limited to the claims listed when the debtor filed the Chapter 13 schedules, unless the creditor can prove bad faith. This has led to the practice by some debtors to intentionally omit some debts knowing they can just claim they made a innocent mistake if caught. The controlling case is In re Scovis (249 F.3d 975 (2001).

In re Scovis was decided primarily on two considerations: 1) the language of 11 U.S.C. 109(e) ("on the date of the filing of the petition" ) and, 2) the policy to not allow procedures for determining initial jurisdiction to dominate the proceedings themselves nor to delay them unduly. In re Scovis stated the law as follows: We now simply and explicitly state the rule for determining Chapter 13 eligibility under § 109(e) to be that eligibility should normally be determined by the debtor's originally filed schedules, checking only to see if the schedules were made in good faith. "Normally" implies that there are exceptions to this rule. Tollefsen Law filed an appeal in another case and asked the 9th Circuit to carve out an exception for certain cases. TL pointed out that what the dissent in Scovis had argued (at 987) has occurred. The court "sacrificed accuracy without any efficiency gains" and "inadvertently omitted" creditors were not protected.

The 9th Circuit refused to give any relief to omitted Chapter 13 creditors and the practice of "forgetting" inconvenient creditors of Chapter 13 schedules continues.

Unscheduled Property if Bankruptcy Case Dismissed

When the bankruptcy petition is filed, all of the property of the debtor become assets of the estate as provided by §541(a)(1). Property acquired after filing but before plan confirmation or discharge of the debtor also becomes property of the estate under §1306(a)(1). If the case is dismissed, the property reverts to the debtors (11 U.S.C. § 349(b)(3)). In re Nash, 765 F.2d 1410 C.A.9 (9th CA, 1985).

Unscheduled Property in Chapter 13 Bankruptcy Cases

Upon filing the Chapter 13 petition, all of the property of the debtor becomes assets of the estate as provided by §541(a)(1). After acquired property also becomes part of the estate under §1306(a)(1). Upon confirmation of the plan, all the property of the estate reverts to the debtor (§1327(b)) except as otherwise provided by the plan. See unpublished opinion, In re Bigelow, 185 F.3d 865 (C.A. 9th Cir,1999). If the case is dismissed, the property reverts to the debtors (11 U.S.C. § 349(b)(3)). In re Nash, 765 F.2d 1410 C.A.9 (9th CA, 1985). It apparently does not matter if the property was scheduled by the debtor under §521(1): Both scheduled and unscheduled property revert to the debtor.

Unscheduled Property in Chapter 7 Bankruptcy Cases

Upon filing the Chapter 7 petition, all of the property of the debtor becomes assets of the estate as provided by §541(a)(1). After acquired property also becomes part of the estate under §1306(a)(1).

If the case is dismissed, the property reverts to the debtors (11 U.S.C. § 349(b)(3)). In re Nash, 765 F.2d 1410 C.A.9 (9th CA, 1985). It apparently does not matter if the property was scheduled by the debtor under §521(1): Both scheduled and unscheduled property revert to the debtor if the case is dismissed.

If the debtor is discharged the provisions of §554 apply: §554. Abandonment of property of the estate

(a) After notice and a hearing, the trustee may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate.

(b) On request of a party in interest and after notice and a hearing, the court may order the trustee to abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate.

(c) Unless the court orders otherwise, any property scheduled under section 521(1) of this title not otherwise administered at the time of the closing of a case is abandoned to the debtor and administered for purposes of section 350 of this title.

(d) Unless the court orders otherwise, property of the estate that is not abandoned under this section and that is not administered in the case remains property of the estate.

It is clear under the statutory provision the trustee must give notice to interested creditors and schedule a hearing. Unless that is done, the unscheduled property remains property of the estate indefinitely. See Sierra Switchboard Co. v. Westinghouse Elec. Corp., 789 F.2d 705, (C.A. 9th Cir 1986). The knowledge of the property by the trustee does not change the rule. Hamilton v. State Farm Fire & Casualty Co., 270 F3d 778, 784 (9th Cir 2001).

Judicial Estoppel

Judicial estoppel is an equitable doctrine that precludes a party from gaining an advantage by asserting one position in a court proceeding and later seeking an advantage by taking a clearly inconsistent position. The rule is designed to protect the court and can be invoked by judicial notice. See reasoning of Johnson v. Si-Cor, Inc.,107 Wash.App. 902, 28 P.3d 832 (Div. 3, 2001) and “Honing A Blunt Instrument: Refining The Use Of Judicial Estoppel In Bankruptcy Nondisclosure Cases,” 59 Vanderbilt LR 205 (2006). Numerous federal circuits hold that prepetition claims must be disclosed in the bankruptcy reorganization plan or otherwise mentioned in the debtor's schedules or disclosure statements. In Hamilton v. State Farm Fire & Casualty Co., 270 F.3d 778 (9th Cir.2001) the Ninth Circuit Court of Appeals held that "notifying the trustee by mail or otherwise is insufficient to escape judicial estoppel."

Judicial Estoppel from a bankruptcy case to Superior Court has been applied in several Washington appellate cases. To prove judicial estoppel, there must be proof that the first court accepted the debtor's assertion. If the debtor obtained a discharge on the basis of omissions in the debtor's bankruptcy schedules, the court has accepted the assertion. Therefore the debtor is barred from claiming ownership of the asset in the second proceeding. Cunningham v. Reliable Concrete Pumping, Inc., 126 Wash.App. 222, 108 P.3d 147 (2005).