Tuesday, June 1, 2010

Beating FDCPA Claims That Were Not Disclosed In Bankruptcy

Bankruptcy filings and FDCPA lawsuits are both rising steadily. If you have been sued in an FDCPA action by a consumer who recently filed for bankruptcy, you should pull the bankruptcy filings and carefully review the debtor’s petition. You may find that the consumer failed to properly disclose the claims they now seek to pursue against you. If so, the case is subject to a motion to dismiss. Consumers lack standing to assert claims based upon pre-petition conduct if the claims were not properly disclosed in the bankruptcy petition. See, e.g., Yack v. Washington Mutual Inc., 389 B.R. 91 (N.D. Cal. 2008) (granting motion to dismiss FDCPA class action where debtor failed to disclose claims in bankruptcy schedules).

The filing of a bankruptcy petition creates an “‘estate’” that consists of “‘all legal or equitable interests of the debtor in property as of the commencement of the [bankruptcy] case,’” including any causes of action the debtor may have. See Cusano v. Klein, 264 F.3d 936, 945 (9th Cir. 2001) (quoting 11 U.S.C. § 541(a)). Once a cause of action becomes part of the bankruptcy estate, “[o]nly the trustee . . . has the authority to prosecute and/or settle such causes of action.” Cain v. Hyatt, 101 B.R. 440, 442 (Bankr. E.D. Pa. 1989).

A debtor has an affirmative duty to schedule all property the debtor owns, including all legal claims. See 11 U.S.C. § 521(1). “Causes of action are separate assets which must be formally listed.” Cusano, 264 F.3d at 947. The importance of complete disclosure of a debtor’s assets cannot be overstated: “These matters are at the heart of the bankruptcy system . . . . The proper ‘operation of the bankruptcy system depends on honest reporting.’” In re Mohring, 142 B.R. 389, 394 (Bankr. E.D. Cal. 1992) (citation omitted); see also In re Colvin, 288 B.R. 477, 480 (Bankr. E.D. Mich. 2003) (“the disclosure obligations of consumer debtors are at the very core of the bankruptcy process and meeting these obligations is part of the price debtors pay for receiving the bankruptcy discharge”).

Courts have recognized that, “[f]ull and comprehensive disclosure is critical to the integrity of the bankruptcy process.” In re Rolland, 317 B.R. 402, 413 (Bankr. C.D. Cal. 2004). This “duty of candor . . . accrues from the time the facts that give rise to the potential claim are known.” Rose v. Beverly Health & Rehab. Servs., Inc., 356 B.R. 18, 25 (E.D. Cal. 2006) (emphasis added).

Debtors have a “paramount duty” to not only list all of their assets, but also to do so “carefully, completely and accurately,” using the appropriate schedules. See In re Mohring, 142 B.R. at 394 (emphasis added); see also Cusano, 264 F.3d at 945 (bankruptcy code places “affirmative duty” on debtor to schedule “assets and liabilities”). As the In re Mohring court explained:

“The basic rule is that schedules must be accurate and complete. And they must be corrected if they are incomplete. Thus, amendments are liberally permitted and can be demanded by the court. . . . Numerous cases hold that the debtor has a duty to prepare schedules carefully, completely, and accurately. . . . There are, however, no bright-line rules for how much itemization and specificity is required. What is required is reasonable particularization under the circumstances. The Official Forms themselves have generally been regarded as subject to a rule of substantial compliance.”

In re Mohring, 142 B.R. at 394-95 (citations omitted); see also In re Searles, 317 B.R. 368, 378 (9th Cir. B.A.P. 2004) (“Every debtor has a continuing duty to assure the accuracy and completeness of schedules. Postpetition discovery of rights that actually existed at the time of filing must be addressed in the schedules. This implies a duty to amend.”).

At the conclusion of the bankruptcy proceedings, if a claim was properly scheduled by the debtor, and was not otherwise administered by the trustee, the claim is “abandoned to the debtor.” 11 U.S.C. § 554(c). But if a debtor has failed “to properly schedule an asset, including a cause of action, that asset continues to belong to the bankruptcy estate” and the claim does not revert to the debtor. Cusano, 264 F.3d at 945-46.

A trustee cannot “abandon” a claim if the claim was never disclosed by the debtor. For this reason, in Stein v. United Artists Corp., 691 F.2d 885 (9th Cir. 1982), the Ninth Circuit held that “abandonment results only when the trustee knows of the existence of the property. . . . When the bankrupt fails to list an asset, he cannot claim abandonment because the trustee had no opportunity to pursue the claim.” Id. at 891 (affirming dismissal of debtor’s unscheduled antitrust claim). Similarly, in Cusano, the Ninth Circuit held that a debtor lacked standing to assert a claim for royalties that had not been scheduled by the debtor:

“Thus, if there was any outstanding balance due Cusano on the open book account when he filed for bankruptcy, he was under a duty to schedule it as a receivable or as a cause of action for unpaid royalties. His failure to do so vests the claim in the bankruptcy estate, where it remains.”

Cusano, 264 F.3d at 948.

The debtor lacks standing to pursue claims that were not properly disclosed. See Cusano, 264 F.3d at 945-48 (where a debtor fails to “properly schedule an asset, including a cause of action, that asset continues to belong to the bankruptcy estate” and does not revert to the debtor); see also Stein, 692 F.2d at 891 (debtor lacked standing to pursue antitrust claims that were not listed in bankruptcy).

Debtors may seek to reopen the bankruptcy proceedings to reacquire claims they failed to list, but the judicial estoppel doctrine should bar them. Judicial estoppel is “is an equitable doctrine that precludes a party from gaining an advantage by asserting one position, and then later taking to their benefit a clearly inconsistent position.” See Yack, 389 B.R. at 96 (citation omitted). In “the bankruptcy context, a party is judicially estopped from asserting a cause of action not raised in a reorganization plan or otherwise mentioned in the debtor’s schedules or disclosure statements.” Hamilton v. State Farm Fire & Cas. Co., 270 F.3d 778, 783 (9th Cir. 2001); see also Hay v. First Interstate Bank, 978 F.2d 555, 557 (9th Cir. 1992) (failure to list a cause of action in bankruptcy schedule judicially estops prosecution of that claim). This is true “even if the discharge is later vacated.” Hamilton, 270 F.3d at 784.

Where a debtor failed to disclose their alleged claims, they are judicially estopped from seeking to re-acquire and assert them later. To hold otherwise would reward debtors for hiding assets from her creditors and the trustee, and would amount to a fraud on the bankruptcy court. See Latman v. Burdette, 366 F.3d 774, 785 (9th Cir. 2004) (surcharge remedy prevented “a fraud on the bankruptcy court” where plaintiffs knowingly failed to disclose assets that should have been listed on bankruptcy schedule).

For these reasons, collectors sued in FDCPA action should carefully review the bankruptcy filings of the debtor to determine if these defenses are available.


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  3. Mr. Narita, what about a claim for an FDCPA violation that occured prepetition. It was listed on the BK schedules. It was abandoned by the trustee. BK is discharged (Chpt 7). Debtor now sues the creditor. Can creditor claim right of offset this late in the game? Or is the creditor's debt extinguished by the discharge such that there is nothing to offset against? Do you have any insight on this nuance?