Unscheduled Rights of Action

The Governing Principles

The ground rules governing the debtor's post-bankruptcy assertion of property rights are themselves simple. First, under 11 U.S.C. ' 541(a)(1) “all legal or equitable interests of the debtor in property as of the commencement of the case” are property of the bankruptcy estate. Second, the debtor must make full disclosure, in the schedules or otherwise, of all assets. 11 U.S.C. ”5 21(a)(1), 727(a)(d); 18 U.S.C. ' 152(1),(2),(3). Third, while property of the estate that is scheduled and not administered is abandoned to the debtor at the time of closing of a case, unscheduled property is not abandoned and remains property of the estate. 11 U.S.C. ' 554(c), (d). Together, these rules determine how a debtor's post-bankruptcy assertion of unscheduled rights is judged.

Rights of Action As Property of the Estate

When a debtor attempts to assert a right of action that was not scheduled in the bankruptcy, the first question is whether it is the debtor's claim to assert at all. It is clear that, at least in the Chapter 7 context, only the trustee can assert claims that the bankruptcy estate has against other parties. See, e.g., Cable v. Ivy Tech State College, 200 F.3d 467 (7th Cir. 1999); In re Enyedi, 371 B.R. 327 (Bankr. N.D. Ill. 2007). Of course, a debtor can legitimately assert rights that were abandoned by the trustee. A trustee may choose not to pursue an estate claim against a third party and either abandon it under ' 554(a) or allow it to be automatically abandoned upon the closing of the case under ' 554(c). Unscheduled assets, however, are not automatically abandoned upon the closing of the case and remain property of the estate, even long after the closing of the case and discharge of the trustee. 11 U.S.C. ' 554(d). Courts have recognized that abandonment presupposes knowledge and that there can be no abandonment by operation of law if an asset was not scheduled or otherwise disclosed. See, e.g., Guaranty Residential Lending, Inc. v. Homestead Mortgage Co., 463 F.Supp.2d 651 (E.D. Mich. 2007).

Regardless of the context, it is widely accepted that a debtor cannot assert a right of action that was not disclosed in the bankruptcy. This was established over 100 years ago by the Supreme Court in First National Bank of Jacksboro v. Lasater, 196 U.S. 115 (1905), and has not been seriously questioned since. Debtors asserting unscheduled rights of action have sometimes attempted to rely on inadvertence, mistake, or lack of intent to justify their failure to disclose the rights in their schedules. This contention has generally been rejected, however, unless the debtor had no knowledge of the claim or no motive to conceal it, and even that is a difficult standard to meet. See, e.g., Eastman v. Union Pacific Railroad, 493 F.3d 1151 (10th Cir. 2007) (debtor judicially estopped from asserting claim); In re Coastal Plains, Inc., 179 F.3d 197 (5th Cir. 1999) (same). The Tenth Circuit Court of Appeals recently reaffirmed this in the unpublished opinion of Clementson v. Countrywide Financial Corp., 2012 WL 375508 (10th Cir. 2012), stating, “a debtor's ignorance or mistake, even if insufficiently egregious to warrant application of judicial estoppel, does not excuse a debtor from listing all potential causes of action in a bankruptcy petition.”

While sometimes addressed as a matter of judicial estoppel, barring inconsistent positions in successive litigation (as in Eastman and Coastal Plains), the debtor's inability to later assert an unscheduled right of action has most often been addressed as a matter of standing. An action must be brought in the name of the real party in interest, and if a plaintiff does not own the claim he has no standing to assert it. Case law has consistently confirmed the broad scope of property of the estate. In summing up the law, the Second Circuit Court of Appeals remarked that “[i]t would be hard to imagine language that would be more encompassing” and that “[e]very conceivable interest of the debtor, future, non-possessory, contingent, speculative, and derivative, is within the reach of ' 541.” Chartschlaa v. Nationwide Mutual Insurance Co., 538 F.3d 116, 122 (2d Cir. 2008) (internal quotes omitted).

It is not always as easy as invoking the general rule, however. Many situations arise, particularly with rights of action that accrued or ripened in a legal sense after the bankruptcy filing, in which it is difficult to determine whether the right existed at the time of the bankruptcy filing. Dissecting the elements of a claim may be a challenge, but rights of action that find their origins in the pre-bankruptcy period and later coalesce into justiciable claims are part of the bankruptcy estate. This was established by the Supreme Court under the former definition of estate property in ' 70(a)(5) of the Bankruptcy Act (“property, including rights of action, which prior to the filing of the petition [the debtor] could by any means have transferred”). Segal v. Rochelle, 382 U.S. 375 (1966). Noting the breadth of the definition and that “an interest is not outside its reach because it is novel or contingent or because enjoyment must be postponed,” the Court held a tax refund claim based on losses in the year of the bankruptcy filing to be property of the estate, even though no refund could be claimed until the end of that year. In so holding, the Court introduced an important concept ' that a property right is property of the estate if “it is sufficiently rooted in the pre-bankruptcy past and so little entangled with the bankrupts' ability to make an unencumbered fresh start that it should be regarded as 'property' under” the Act's definition. Id. at 380.

The “sufficiently rooted” analysis has been carried forward under the Bankruptcy Code. See In re Dittmar, 618 F.3d 1199 (10th Cir. 2010); (employee stock option rights part of estate even though contingent on post-petition events); Fix v. First State Bank, 559 F.3d 803 (8th Cir. 2009) (causes of action arising from mortgage dispute held property of the estate even though they did not accrue until after the debtor's discharge); Chartschlaa, 538 F.3d at 122 (claims arising from agency relationship held property of the estate even though entity involved was not formed and contract was not signed until after bankruptcy).

The lesson to take from these cases is that the ripening or accrual of an actionable claim is not determinative of whether it is part of the bankruptcy estate. Rights of action that have a significant connection or can trace their origins to pre-bankruptcy events are in most cases going to be property of the estate, regardless of whether they are contingent or conditioned in some way on post-bankruptcy events. Those rights, if not scheduled, will remain property of the estate and be assertable only by the trustee, long after the bankruptcy
case has been closed.

Roadblocks to Asserting the Defense

When a debtor asserts an unscheduled right of action, it would seem that the debtor has nothing to assert and the action should be dismissed. Unfortunately for the defendant, things are not always that easy. The bankruptcy court has exclusive jurisdiction over property of the estate, including to determine what constitutes property of the estate. See In re Washington Mutual, Inc., 461 B.R. 200, 217 (Bankr. D. Del. 2011). But such actions are normally brought in a different court, lacking such jurisdiction. How then is the defendant to raise and resolve the issue? One way is to reopen the bankruptcy case and obtain a determination that the debtor's claim belongs not to the debtor but to the estate. See 11 U.S.C. ' 350(b). However, the defendant, which is essentially a stranger to the bankruptcy case, may lack standing to move to reopen the case, because it is not a “party in interest.” Fed. R. Bankr. P. 5010; Nintendo Co. v. Patten (In re Alpex Computer Corp.), 71 F. 3d 353, 356 (10th Cir. 1995) (“party in interest” for purposes of section 350(b) and Rule 5010 “confined to debtors, creditors, or trustees, each with a particular and direct stake in reopening cognizable under the Bankruptcy Code”); Riazuddin v. Schindler Elevator Corp. (In re Riazuddin), 363 B.R. 177 (B.A.P. 10th Cir. 2007) (defendant without standing to oppose debtor's motion to reopen case to list the unscheduled claim).

The defendant may also choose to simply assert the debtor's lack of standing as a defense. Since the debtor does in fact lack standing to bring these actions, that would seem to be the simple solution. Surprisingly, apparently influenced by the perceived unfairness of letting the defendant off the hook so easily, some courts have refused to let the defendant take advantage of the standing defense. See Morlan v. Universal Guar. Life ins. Co., 298 F. 3d 609 (7th Cir. 2002) (Code provisions on abandonment “not intended for the benefit of alleged violators of the debtor's legal rights”); Dietz v. Univ. of Denver, 2011 WL 723118 (D. Colo. 2011) (abandonment “is intended for the benefit of creditors of the debtor”).

At least one court has gone so far as to declare that the automatic stay precludes a defendant from moving to dismiss a debtor's action asserting an unscheduled claim and that a state court's dismissal of the action was void as a result of the stay. Enyedi, 371 B.R. at 334-336. On its face, this reasoning would impose a harsh result that may go beyond a reasonable application of the Code ' prohibiting a defendant from opposing a debtor's unscheduled claim based on standing or, as in that case, judicial estoppel. But that result may be softened by the fact that the court's decision was made in the context of the trustee's effort to revive the claim after reopening of the bankruptcy case. Nevertheless, these variations of interpretation illustrate the potential complexity of the issues and the need for caution on the part of those parties defending against a debtor's unscheduled claims.

Risks and Responses

Each player in the drama faces significant risks arising from a debtor's assertion of unscheduled rights of action and should be prepared to take the appropriate action to head off those risks.

The Trustee

Trustees normally rely on the debtor's schedules and on the closing of the case to put it to rest. Nevertheless, trustees should be receptive to communications from defendants or others raising the possibility that the estate might have lost out on an asset. Reopening the case and taking over the claim may allow the trustee to realize value from an otherwise unknown asset.

Creditors

Like the trustee, creditors rely on the schedules and write off their accounts when the case is closed. Creditors often have more history with a debtor and more insight into what claims the debtor might have and want to keep out of sight than the trustee does. Creditors with any reason to suspect that there might be an undisclosed asset should consider pursuing the discovery available at the 341 meeting or under Rule 2004. They might also informally encourage the trustee to do further investigation. If they learn of a debtor's assertion of claims that might have arisen prepetition they should bring it to the trustee's attention and, if necessary, move for reopening of the bankruptcy case.

Defendants

Defendants to claims asserted by a debtor face an especially high risk. If they litigate and lose on the merits, they might end up paying claims that the debtor never had. If they settle, they might find they have settled with the wrong party. Defendants with knowledge of a bankruptcy in the plaintiff's past should confirm that the claims arose after the bankruptcy filing and, if not or if it is not clear, examine the bankruptcy case file to assure that the claims were scheduled and abandoned. They should be prepared not only to raise the debtor's standing as a defense but to locate and notify the trustee. While involving the trustee might not make the claims go away, it may be easier to reach a rational settlement with a trustee than with an emotionally invested debtor, and at the very least double exposure can be avoided.

Parties Acquiring Rights from a Debtor Post-Bankruptcy

Because a debtor can only transfer good title to rights that he owns, anyone receiving any property rights from a debtor should be sure that they either arose post-petition or were duly scheduled and abandoned in the debtor's bankruptcy. An abundance of caution would dictate that the transferee determine whether the debtor has ever filed bankruptcy, so that these questions can be definitively answered, but at a minimum they should be addressed if it is known that the debtor's history includes bankruptcy.

The Debtor

Debtors must use great caution in proceeding with claims that have any trace of origin in the pre-bankruptcy period. Those claims that are “sufficiently rooted” in the pre-bankruptcy past simply do not belong to a debtor and must be fully disclosed, even if the debtor does not become fully aware of them until after the bankruptcy case is closed. The debtor should assume that a vigilant defendant will know of the debtor's bankruptcy and failure to schedule the claim. That will in all likelihood result either in the dismissal of the debtor's action or disclosure of the claim to the debtor's former trustee or creditors. Once a debtor's failure to schedule an asset is discovered, the debtor may risk denial or revocation of discharge and, in extreme cases, criminal exposure for bankruptcy fraud.

Conclusion

Ultimately, the integrity of the bankruptcy system rests in the first instance with the debtor. By resorting to bankruptcy for the protection and fresh start that it offers, the debtor cannot expect a free ride. The cost of receiving the benefits of bankruptcy is the duty to fully disclose all assets, in whatever form they might be, and surrender them for the benefit of creditors. Even if intangible property such as a right of action does not manifest itself until after the bankruptcy case is filed, or even until after it is closed, the debtor must recognize the duty, both legal and ethical, to disclose property “sufficiently rooted” in the pre-bankruptcy period, so that the trustee can at least have the opportunity to administer it for the benefit of creditors.

Defendants should always be alert to the consequences of unscheduled rights of action if there is a bankruptcy in the plaintiff's past. Trustees, creditors, and purchasers should be similarly aware and take appropriate preventive or remedial action. Above all, debtors should be especially cognizant of both their unique obligations under the Bankruptcy Code and the consequences of not fulfilling them.

Jack L. Smith, a member of this newsletter's Board of Editors, is a partner at Holland & Hart LLP in Denver. He may be reached at [email protected].

A cornerstone of the bankruptcy system is the principle that property of the estate must be preserved and administered for the benefit of creditors, and that the debtor's fresh start entitles him to whatever he acquires later. This is in turn linked to another cornerstone ' the debtor's duty of full disclosure. As fundamental as these principles are, it is often long after the bankruptcy process is ostensibly completed that they are put to the test.

Despite the clarity of these concepts, debtors occasionally attempt to assert property rights that existed, at least in some form, at the time of their bankruptcy filing. When those rights were not fully disclosed in the debtor's schedules, there is a problem. This occurs most often in the context of Chapter 7 cases, when a debtor pursues a claim against another party after the bankruptcy case has been closed. It then triggers a series of questions about whose right of action is being asserted, who is entitled to assert it, and how the opposing party should respond.

When a debtor seeks to assert a property right that should have been part of the bankruptcy estate, the effects are felt in all quarters. The trustee and the bankruptcy estate may be deprived of property to which they are entitled, without ever even knowing. Creditors may lose an opportunity for payment. Parties defending against rights of action asserted by the debtor may face double jeopardy in defending or paying claims twice ' first brought by the debtor and later potentially brought by a trustee. Parties relying on rights acquired from a debtor after a bankruptcy, of which they might not even be aware, may find that those rights never existed. And finally, the debtor may face serious consequences, including criminal exposure, for failing to disclose and misappropriating
property of the estate.

The Governing Principles

The ground rules governing the debtor's post-bankruptcy assertion of property rights are themselves simple. First, under 11 U.S.C. ' 541(a)(1) “all legal or equitable interests of the debtor in property as of the commencement of the case” are property of the bankruptcy estate. Second, the debtor must make full disclosure, in the schedules or otherwise, of all assets. 11 U.S.C. ”5 21(a)(1), 727(a)(d); 18 U.S.C. ' 152(1),(2),(3). Third, while property of the estate that is scheduled and not administered is abandoned to the debtor at the time of closing of a case, unscheduled property is not abandoned and remains property of the estate. 11 U.S.C. ' 554(c), (d). Together, these rules determine how a debtor's post-bankruptcy assertion of unscheduled rights is judged.

Rights of Action As Property of the Estate

When a debtor attempts to assert a right of action that was not scheduled in the bankruptcy, the first question is whether it is the debtor's claim to assert at all. It is clear that, at least in the Chapter 7 context, only the trustee can assert claims that the bankruptcy estate has against other parties. See, e.g., Cable v. Ivy Tech State College , 200 F.3d 467 (7th Cir. 1999); In re Enyedi, 371 B.R. 327 (Bankr. N.D. Ill. 2007). Of course, a debtor can legitimately assert rights that were abandoned by the trustee. A trustee may choose not to pursue an estate claim against a third party and either abandon it under ' 554(a) or allow it to be automatically abandoned upon the closing of the case under ' 554(c). Unscheduled assets, however, are not automatically abandoned upon the closing of the case and remain property of the estate, even long after the closing of the case and discharge of the trustee. 11 U.S.C. ' 554(d). Courts have recognized that abandonment presupposes knowledge and that there can be no abandonment by operation of law if an asset was not scheduled or otherwise disclosed. See, e.g., Guaranty Residential Lending, Inc. v. Homestead Mortgage Co. , 463 F.Supp.2d 651 (E.D. Mich. 2007).

Regardless of the context, it is widely accepted that a debtor cannot assert a right of action that was not disclosed in the bankruptcy. This was established over 100 years ago by the Supreme Court in First National Bank of Jacksboro v. Lasater , 196 U.S. 115 (1905), and has not been seriously questioned since. Debtors asserting unscheduled rights of action have sometimes attempted to rely on inadvertence, mistake, or lack of intent to justify their failure to disclose the rights in their schedules. This contention has generally been rejected, however, unless the debtor had no knowledge of the claim or no motive to conceal it, and even that is a difficult standard to meet. See, e.g., Eastman v. Union Pacific Railroad , 493 F.3d 1151 (10th Cir. 2007) (debtor judicially estopped from asserting claim); In re Coastal Plains, Inc., 179 F.3d 197 (5th Cir. 1999) (same). The Tenth Circuit Court of Appeals recently reaffirmed this in the unpublished opinion of Clementson v. Countrywide Financial Corp., 2012 WL 375508 (10th Cir. 2012), stating, “a debtor's ignorance or mistake, even if insufficiently egregious to warrant application of judicial estoppel, does not excuse a debtor from listing all potential causes of action in a bankruptcy petition.”

While sometimes addressed as a matter of judicial estoppel, barring inconsistent positions in successive litigation (as in Eastman and Coastal Plains), the debtor's inability to later assert an unscheduled right of action has most often been addressed as a matter of standing. An action must be brought in the name of the real party in interest, and if a plaintiff does not own the claim he has no standing to assert it. Case law has consistently confirmed the broad scope of property of the estate. In summing up the law, the Second Circuit Court of Appeals remarked that “[i]t would be hard to imagine language that would be more encompassing” and that “[e]very conceivable interest of the debtor, future, non-possessory, contingent, speculative, and derivative, is within the reach of ' 541.” Chartschlaa v. Nationwide Mutual Insurance Co. , 538 F.3d 116, 122 (2d Cir. 2008) (internal quotes omitted).

It is not always as easy as invoking the general rule, however. Many situations arise, particularly with rights of action that accrued or ripened in a legal sense after the bankruptcy filing, in which it is difficult to determine whether the right existed at the time of the bankruptcy filing. Dissecting the elements of a claim may be a challenge, but rights of action that find their origins in the pre-bankruptcy period and later coalesce into justiciable claims are part of the bankruptcy estate. This was established by the Supreme Court under the former definition of estate property in ' 70(a)(5) of the Bankruptcy Act (“property, including rights of action, which prior to the filing of the petition [the debtor] could by any means have transferred”). Segal v. Rochelle , 382 U.S. 375 (1966). Noting the breadth of the definition and that “an interest is not outside its reach because it is novel or contingent or because enjoyment must be postponed,” the Court held a tax refund claim based on losses in the year of the bankruptcy filing to be property of the estate, even though no refund could be claimed until the end of that year. In so holding, the Court introduced an important concept ' that a property right is property of the estate if “it is sufficiently rooted in the pre-bankruptcy past and so little entangled with the bankrupts' ability to make an unencumbered fresh start that it should be regarded as 'property' under” the Act's definition. Id. at 380.

The “sufficiently rooted” analysis has been carried forward under the Bankruptcy Code. See In re Dittmar, 618 F.3d 1199 (10th Cir. 2010); (employee stock option rights part of estate even though contingent on post-petition events); Fix v. First State Bank , 559 F.3d 803 (8th Cir. 2009) (causes of action arising from mortgage dispute held property of the estate even though they did not accrue until after the debtor's discharge); Chartschlaa, 538 F.3d at 122 (claims arising from agency relationship held property of the estate even though entity involved was not formed and contract was not signed until after bankruptcy).

The lesson to take from these cases is that the ripening or accrual of an actionable claim is not determinative of whether it is part of the bankruptcy estate. Rights of action that have a significant connection or can trace their origins to pre-bankruptcy events are in most cases going to be property of the estate, regardless of whether they are contingent or conditioned in some way on post-bankruptcy events. Those rights, if not scheduled, will remain property of the estate and be assertable only by the trustee, long after the bankruptcy
case has been closed.

Roadblocks to Asserting the Defense

When a debtor asserts an unscheduled right of action, it would seem that the debtor has nothing to assert and the action should be dismissed. Unfortunately for the defendant, things are not always that easy. The bankruptcy court has exclusive jurisdiction over property of the estate, including to determine what constitutes property of the estate. See In re Washington Mutual, Inc., 461 B.R. 200, 217 (Bankr. D. Del. 2011). But such actions are normally brought in a different court, lacking such jurisdiction. How then is the defendant to raise and resolve the issue? One way is to reopen the bankruptcy case and obtain a determination that the debtor's claim belongs not to the debtor but to the estate. See 11 U.S.C. ' 350(b). However, the defendant, which is essentially a stranger to the bankruptcy case, may lack standing to move to reopen the case, because it is not a “party in interest.” Fed. R. Bankr. P. 5010; Nintendo Co. v. Patten (In re Alpex Computer Corp.), 71 F. 3d 353, 356 (10th Cir. 1995) (“party in interest” for purposes of section 350(b) and Rule 5010 “confined to debtors, creditors, or trustees, each with a particular and direct stake in reopening cognizable under the Bankruptcy Code”); Riazuddin v. Schindler Elevator Corp. (In re Riazuddin), 363 B.R. 177 (B.A.P. 10th Cir. 2007) (defendant without standing to oppose debtor's motion to reopen case to list the unscheduled claim).

The defendant may also choose to simply assert the debtor's lack of standing as a defense. Since the debtor does in fact lack standing to bring these actions, that would seem to be the simple solution. Surprisingly, apparently influenced by the perceived unfairness of letting the defendant off the hook so easily, some courts have refused to let the defendant take advantage of the standing defense. See Morlan v. Universal Guar. Life ins. Co. , 298 F. 3d 609 (7th Cir. 2002) (Code provisions on abandonment “not intended for the benefit of alleged violators of the debtor's legal rights”); Dietz v. Univ. of Denver, 2011 WL 723118 (D. Colo. 2011) (abandonment “is intended for the benefit of creditors of the debtor”).

At least one court has gone so far as to declare that the automatic stay precludes a defendant from moving to dismiss a debtor's action asserting an unscheduled claim and that a state court's dismissal of the action was void as a result of the stay. Enyedi, 371 B.R. at 334-336. On its face, this reasoning would impose a harsh result that may go beyond a reasonable application of the Code ' prohibiting a defendant from opposing a debtor's unscheduled claim based on standing or, as in that case, judicial estoppel. But that result may be softened by the fact that the court's decision was made in the context of the trustee's effort to revive the claim after reopening of the bankruptcy case. Nevertheless, these variations of interpretation illustrate the potential complexity of the issues and the need for caution on the part of those parties defending against a debtor's unscheduled claims.

Risks and Responses

Each player in the drama faces significant risks arising from a debtor's assertion of unscheduled rights of action and should be prepared to take the appropriate action to head off those risks.

The Trustee

Trustees normally rely on the debtor's schedules and on the closing of the case to put it to rest. Nevertheless, trustees should be receptive to communications from defendants or others raising the possibility that the estate might have lost out on an asset. Reopening the case and taking over the claim may allow the trustee to realize value from an otherwise unknown asset.

Creditors

Like the trustee, creditors rely on the schedules and write off their accounts when the case is closed. Creditors often have more history with a debtor and more insight into what claims the debtor might have and want to keep out of sight than the trustee does. Creditors with any reason to suspect that there might be an undisclosed asset should consider pursuing the discovery available at the 341 meeting or under Rule 2004. They might also informally encourage the trustee to do further investigation. If they learn of a debtor's assertion of claims that might have arisen prepetition they should bring it to the trustee's attention and, if necessary, move for reopening of the bankruptcy case.

Defendants

Defendants to claims asserted by a debtor face an especially high risk. If they litigate and lose on the merits, they might end up paying claims that the debtor never had. If they settle, they might find they have settled with the wrong party. Defendants with knowledge of a bankruptcy in the plaintiff's past should confirm that the claims arose after the bankruptcy filing and, if not or if it is not clear, examine the bankruptcy case file to assure that the claims were scheduled and abandoned. They should be prepared not only to raise the debtor's standing as a defense but to locate and notify the trustee. While involving the trustee might not make the claims go away, it may be easier to reach a rational settlement with a trustee than with an emotionally invested debtor, and at the very least double exposure can be avoided.

Parties Acquiring Rights from a Debtor Post-Bankruptcy

Because a debtor can only transfer good title to rights that he owns, anyone receiving any property rights from a debtor should be sure that they either arose post-petition or were duly scheduled and abandoned in the debtor's bankruptcy. An abundance of caution would dictate that the transferee determine whether the debtor has ever filed bankruptcy, so that these questions can be definitively answered, but at a minimum they should be addressed if it is known that the debtor's history includes bankruptcy.

The Debtor

Debtors must use great caution in proceeding with claims that have any trace of origin in the pre-bankruptcy period. Those claims that are “sufficiently rooted” in the pre-bankruptcy past simply do not belong to a debtor and must be fully disclosed, even if the debtor does not become fully aware of them until after the bankruptcy case is closed. The debtor should assume that a vigilant defendant will know of the debtor's bankruptcy and failure to schedule the claim. That will in all likelihood result either in the dismissal of the debtor's action or disclosure of the claim to the debtor's former trustee or creditors. Once a debtor's failure to schedule an asset is discovered, the debtor may risk denial or revocation of discharge and, in extreme cases, criminal exposure for bankruptcy fraud.

Conclusion

Ultimately, the integrity of the bankruptcy system rests in the first instance with the debtor. By resorting to bankruptcy for the protection and fresh start that it offers, the debtor cannot expect a free ride. The cost of receiving the benefits of bankruptcy is the duty to fully disclose all assets, in whatever form they might be, and surrender them for the benefit of creditors. Even if intangible property such as a right of action does not manifest itself until after the bankruptcy case is filed, or even until after it is closed, the debtor must recognize the duty, both legal and ethical, to disclose property “sufficiently rooted” in the pre-bankruptcy period, so that the trustee can at least have the opportunity to administer it for the benefit of creditors.

Defendants should always be alert to the consequences of unscheduled rights of action if there is a bankruptcy in the plaintiff's past. Trustees, creditors, and purchasers should be similarly aware and take appropriate preventive or remedial action. Above all, debtors should be especially cognizant of both their unique obligations under the Bankruptcy Code and the consequences of not fulfilling them.

Jack L. Smith, a member of this newsletter's Board of Editors, is a partner at Holland & Hart LLP in Denver. He may be reached at [email protected].