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Tale as Old as Time: The Importance of Accurate Schedules in Bankruptcy

On Behalf of | Jul 2, 2020 | Bankruptcy, Business, Debt, Firm News

By: Laura Day DelCotto

Clients who are considering whether to file for bankruptcy usually leave our office with their “homework.” We know that they grumble under their breath about the magnitude of work involved in locating the most accurate information that is available. A recent case serves as an important reminder of the Why.

The Eight Circuit BAP went through a lengthy primer involving a five year litigation saga over a simple concept: all debtors swear to the accuracy of their schedules under penalty of perjury. All debtors are obligated by law to file the most accurate information known to them. They must also amend if they discover any inaccuracies. This sounds simple enough, but things are not always as they appear. Your bankruptcy attorney must be closely involved. They will assist with all questions you have about filling in the information asked for, or it can come back to bite you.

Case Law – In re Richards

In the 2015 chapter 11 bankruptcy case of In re Richards , a small LLC owned by husband and wife filed. The LLC listed various machinery and equipment used by the company in the bankruptcy and in the monthly operating reports in the case. The tax returns listed the machinery and equipment. Balance sheets for the individuals did not list the equipment. So far, all the documents are matching up. ALWAYS think about any other documents in existence that would evidence ownership and values.

The problem arose later, after the plan was confirmed. The secured lender demanded that the LLC equipment be sold as required. Seemingly forgetting their prior statements, the individuals attempted to claim that various items of equipment were owned individually, not by the LLC.  No dice. The lower courts as well as the appellate court rightfully held that the individual members and the LLC were “equitably estopped” from arguing that the equipment at issue was individually owned. The 8th Circuit BAP went through each element necessary to prove estoppel.

Honesty and Accuracy

An important part of the analysis involved the legal concept that parties are entitled to rely on representations made in a debtor’s schedules and statements of financial affairs, citing a number of cases standing for this general rule. See, e.g., Mertz v. Rott, 955 F. 2d 596 (8th Cir. 1992) (petition must be accurate and reliable, without the necessity of digging out and conducting independent examinations to get to the facts). The integrity of the process demands this level of accuracy. “In fact, ‘the bankruptcy system as a whole, and each particular case which forms a component part of it, cannot function with the honest and forthcoming efforts of its debtors.’” In re McLaren, 236 B.R. 882 ( Banrk. D. N.D. 1999). Remember this simple rule and beware if you attempt otherwise.

About DelCotto Law Group

DelCotto Law Group is Kentucky’s asset protection law firm known for its commitment to the lifetime success of its clients. With offices located in Lexington, Louisville and Danville, DLG serves Kentuckians with complicated financial matters, especially in the areas of bankruptcy and complex litigation. For more information please call (859) 231-5800, email [email protected] or reach us on our contact page.