Bankruptcy Schedules: Reliable Information Provided Under Oath, Right? Maybe Not…

A debtor’s bankruptcy schedules of assets and liabilities (Schedules) and statement of financial affairs (SOFA) are filed early in a chapter 11 case and are supposed to contain an accurate and complete listing of all assets and liabilities, signed by a responsible party under oath. The Schedules and SOFA are often the first things to review when a case is filed, as they provide important information regarding the value of assets and whether identified claims are disputed. A recent trend has developed, however, whereby debtors file “global notes” with their Schedules and SOFA, in which they make various disclaimers about the reliability of the information and attempt to avoid having any disclosed information used for any purpose.[1] Perhaps the most concerning thing about these global notes is that they have rarely been challenged, despite the fact that their effect is to arguably render the Schedules and SOFA unreliable.

Section 521(a)(1) of the Bankruptcy Code requires all debtors to file Schedules and a SOFA, “which apprise all parties to the case of the debtor’s financial situation, including all of the debtor’s assets and liabilities.”[2] “The purpose of the schedules is to provide interested parties sufficient information to decide whether they want to engage in further inquiry.”[3] The import of the information in the Schedules cannot be overstated: “The fact that the debtor does not have complete knowledge of his or her own affairs will not excuse the omission of creditors from the schedules.”[4] All assets, including possible causes of action, must be included in the Schedules.[5] The content of the Schedules are admissions rather than hearsay, and may be used in any civil or criminal proceeding in state or federal court, not just the bankruptcy case.[6] For example, the failure to include a cause of action in the Schedules may constitute judicial estoppel, preventing the debtor from pursuing that cause of action later.[7] “Debtors have an ultimate responsibility for the accuracy of their schedules which cannot be avoided ‘by playing ostrich,’ for example, by failing to read or review documents.”[8]

Despite these obligations, it seems increasingly common for debtors to file global notes with their Schedules and SOFA. Global Notes contain statements to the effect that nothing in the Schedules or SOFA will be binding on the debtor for any purpose and that such statements are not admissions, or that failing to identify a claim as disputed, unliquidated or contingent will not preclude the debtor from challenging a claim. In some instances, global notes contain broad disclaimers, such as stating that there can be no assurance that the Schedules are complete.

Although global notes sometimes contain helpful information, like providing explanations for the valuation used,[9] several courts have issued scathing decisions criticizing the use of global notes. For example, in In re Robert’s Plumbing and Heating LLC,[10] the court was considering disclosure statements submitted on behalf of related debtors and took the opportunity to comment (not for the first time in the case) on the debtors’ use of general notes filed with the Schedules and SOFA. The court observed that those notes contained a “cavalcade of disclaimers and renouncements of the accuracy” of the Schedules and SOFA, which “appears to be purposefully obtuse and calculated in part to absolve the Debtor from any responsibility for the facts set forth, and affirmed under oath, in her Schedules.”[11] Referring to the notes as a “funhouse mirror” coloring all of the information in the case[12] and “intended to gut those all-important documents of any substance at all,” the court found the deficiencies in the disclosure statement to be that much more glaring.[13]

In In re JK Harris & Company LLC,[14] the chapter 7 trustee objected to the disclaimers contained in the global notes and moved to compel the filing of amended Schedules and SOFA. The court granted the motion and emphasized that “accuracy, honesty and full disclosure are critical to the functioning of bankruptcy and inherent in the bargain for a debtor’s discharge….”[15] The court also noted that Bankruptcy Rule 1008 and the official forms require the person signing to declare under penalty of perjury that the answers are true and correct, and while there is no case law addressing whether a debtor can add a disclaimer to schedules, the effect of disclaimers on tax returns with similar requirements is to render them invalid.[16] Additionally, “a court should not have to parse a lengthy disclaimer to determine whether it has the effect of reducing or qualifying the signer’s assurances regarding the veracity of the schedules.…”[17] The court concluded by saying that the “Court also believes, in general, that the inclusion of a disclaimer without compelling justification is contrary to the very purpose of requiring detailed and verified schedules and statements of financial affairs and the policy of complete and accurate disclosure underlying the Bankruptcy Code and Federal Rules of Bankruptcy Procedure.”[18]

Given the requirements of the Bankruptcy Code and Rules regarding the accuracy and completeness of Schedules and the SOFA, it is not surprising that the courts squarely addressing disclaimers find them to be wholly improper. What is surprising is that the issue has not been raised in more cases because, if accepted at face value, such disclaimers may render the Schedules and SOFA “meaningless.”[19]