When filing for bankruptcy, accurately identifying assets in the schedules is a critical step. Intentionally omitting an asset often results in significant legal consequences. We typically see those consequences imposed by the bankruptcy court. They can include everything from the loss of a discharge to charges of bankruptcy fraud. If assets that should have been disclosed are discovered after the case is closed, a bankruptcy case can be reopened, and the discharge can be revoked.
In some cases, however, the consequences come in state court. A recent decision from the Michigan Court of Appeals, albeit unpublished, illustrates the point. In Willis Cass, LLC v. Renis II, LLC , the plaintiff was the successor-in-interest to the lessor of a parking lot in Detroit. The terms of the lease were unusual, as the court acknowledged, and there were allegations of default, lease termination, and general bickering between the parties over a period of several years. When the original lessor filed for bankruptcy protection, it only listed a parking lot lease with the principal of the lessee, but not the lessee itself. At the first meeting of creditors, the value of the lease was minimized, with the lessor claiming it only received a limited number of gift cards from lessee’s restaurants. The lessor/debtor never amended its schedules before the plan of reorganization was confirmed and its disclosure statement was approved by the bankruptcy court.
Within months, the reorganized debtor was again claiming the lease was terminated, and less than a year after confirmation, its attorney was demanding over $21,000 in damages for failing to make improvements to the parking lot, in addition to “other accruing debt obligations.” That claim against the lessee was an asset which should have been disclosed in the debtor’s schedules. The facts are complicated, and the lessor had terminated the lease at least five times, three of them after confirmation of the plan. Years later, the lessee exercised its option to purchase the property under the lease, which resulted in litigation (actually two cases) that gave rise to the appeal.
After the lessor’s successor sued to quiet title in state court, the lessee claimed that the lessor (or its successor) was judicially estopped from making the claim against it. First, it had assumed a contrary position (that it had no claim) in a previous legal proceeding (the bankruptcy). In addition, the contrary position had been adopted via confirmation of its plan of reorganization. Finally, the failure to schedule was not due to mistake or inadvertence. The court of appeals agreed and affirmed the trial court, stating:
In sum, because (the debtor) did not identify any possible claims that it may have had against defendant in the bankruptcy proceedings, because the bankruptcy court adopted (its) reorganization plan without knowledge of those potential claims, and because (its) omission of those potential claims was not the product of a mistake or inadvertence, the trial court correctly held that plaintiff’s claim to quiet title was barred by judicial estoppel, even if the trial court did not specifically address that claim on its own.
(See unpublished decision of the Michigan Court of Appeals in Case No. 361612 and Case No. 362366, August 17, 2023.)
The only reference to the bankruptcy code, without citation, was a quote attributed to the precedent for the court of appeals’ decision. Spohn v Van Dyke Pub Sch, 296 Mich App 470, 479; 822 NW2d 239 (2012).
This case is merely a reminder of how important it is to accurately identify assets (not to mention liabilities and pre-petition transfers) on bankruptcy schedules. Creditors, whether financial institutions, businesses, or individuals, should carefully review the petition, schedules, and statement of financial affairs of their debtors and engage counsel when discrepancies are discovered. This includes those who owe them money and with whom they have other agreements, such as a lease or executory contract. It can result in action against a debtor in bankruptcy court as well as a defense to post-bankruptcy litigation.
At Dalton & Tomich, we assist financial institutions and small businesses in precisely this type of situation. Call us today to discuss any bankruptcy or commercial collection issue.