Bankruptcy Schedules Will Not Be Treated as Judicial Admissions in Court

By: Charles Akinboyewa Jr.

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Chlad,[1] the United States Bankruptcy Court for the Northern District of Illinois, ruled that it would not treat bankruptcy schedules as judicial admissions when assessing a debtor’s eligibility for a discharge, or the dischargeability of a particular debt.[2] The court further held that a debtor’s initial schedules could, however, be used as evidentiary admissions in a bankruptcy case.[3] Plaintiffs, Mitchell Chapman and Semy Investments, Ltd. (collectively, “Chapman”) invested money in a property restoration and rental business owned by Defendants Monik Chlad and Eric Vehovc,).[4] Subsequently, the Defendants filed voluntary petitions for relief under chapter 7 of the Bankruptcy Code.  The Defendants listed the debts owed to Chapman in their bankruptcy schedules, but did not indicate that the debts to Chapman were disputed.[5] Thereafter, Chapman filed a complaint with the bankruptcy court seeking a judicial determination that (1) the debt was nondischargable because the debt was based on the Defendants’ fraud and misrepresentations, and (2) the Defendants were not entitled to a discharge because they made false oaths in the bankruptcy case.[6] Following a separate trial for the second count, the Defendants filed amended schedules that disputed the debts owed to Chapman.[7] Chapman then filed a motion to strike and a motion to dismiss the Defendants’ amendments, arguing that by listing their debts in the initial schedules, the Defendants had admitted to them. Thus, Defendants should have been precluded from disputing the validity of the debt to Chapman.[8] The court denied Chapman’s motions, citing, among other things, the nature of bankruptcy cases, and the negative consequences that binding debtors to their initial schedules would have on the bankruptcy process.[9]

Addressing Chapman’s motion to strike, the court applied a narrow standard and concluded it would grant that motion only if the defenses were insufficient on the face of the pleadings.[10] Chapman argued that Defendants’ initial schedules should have been deemed judicial admissions, thus barring Defendants from raising any subsequent defense.[11] The court rejected Chapman’s argument primarily because the initial schedules were filed before the adversarial proceeding, not during it.[12]  In addition, the court noted that treating a debtor’s schedules as binding in all subsequent proceedings would conflict with the bankruptcy court’s goals of reducing an estates liability where necessary and maximizing its value.[13]

The court further noted that because judicial admissions are binding while, conversely bankruptcy schedules may be withdrawn or amended without the permission of the court, that difference precluded a ruling that would effectively make them the same.[14] An initial schedule may only be used for evidentiary purposes; however, schedules are not binding admissions.[15]

The Chlad decision illustrates how bankruptcy courts have a primary interest in increasing the value of each bankruptcy estate in question. Specifically, the court promoted this interest by refusing to bind the debtors to their initial schedules, which maximizes the estate’s value to its creditor constituencies in that the debtors could dispute, and later strike certain debts, while using their resources to pay undisputed debts. In an adversary proceeding stemming from a chapter 7 filing, a bankruptcy court will be reluctant to bind debtors to their initial schedules because the estate might become drained by unnecessarily forcing it to pay off superfluous debts. Throughout the duration of a bankruptcy, a debtor may withdraw or amend its schedules as many times as they see fit, without the permission of the court. This affords a debtor ample time to assess each debt, and enhances its ultimate ability to repay what is owed.