In a recent bankruptcy case here in Texas, a debtor failed to disclose a pending lawsuit judgment and other assets to the bankruptcy court. The debtor's deception cost the creditors and the city money pushing the court to pursue judicial estoppel action against him.Kim Lubke, formerly an Arlington, Texas, firefighter, obtained a large verdict against the City of Arlington pursuant to the Family Medical Leave Act (FMLA). Lubke v. City of Arlington, 455 F.3d 489 (5th Cir.2006).
During the City's appeal to this court, Lubke and his wife filed a Chapter 7 bankruptcy case but omitted the pending $1 million-plus judgment from his sworn statements and bankruptcy filings. He obtained a discharge of $300,000 in debt, while the creditors were led to believe his was a "no asset" case. Once the debtor's bankruptcy deception was discovered, the court moved to pursue judicial estoppel against the debtor. After a lengthy and costly court battle, the bankruptcy court ruled that the debtor should be prevented from receiving the FMLA settlement and stopped from pursuing any litigation regarding the issue.
While the bankruptcy court conceded that the debtor was harmed by the former employer and that the FMLA judgment was justified, it was not fair for him to receive it since he hid it from the bankruptcy court and creditors. The debtor's deception subsequently cost the bankruptcy court and the creditors money because if they had known about the FMLA settlement they would have at least received some type of payment.
Finally, Lubke, although deprived of a discharge and the proceeds of the FMLA judgment, has effectively been rid of his creditors. By entangling the creditors in his web, he has hindered and delayed their efforts to seek reimbursement of his debts. He has also benefitted from his continued possession and enjoyment of other unscheduled assets-a retail business, farm income, livestock and a mineral lease that Reed evidently chose not to pursue for the creditors' benefit while the FMLA judgment loomed large.
This bankruptcy case is warning to other debtors who might feel tempted to exclude assets from their filing. Doing so can cost you money, your bankruptcy discharge and place your future financial well-being in harm's way.