Accuracy on Bankruptcy Schedules: A Challenge in Representing Family Businesses

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Accurate information? (photo by Marilyn Swanson)

By: Donald L. Swanson

“I’m very proud of the fact that, in four decades of practicing law, I’ve had only one client go to federal prison for lying on these bankruptcy schedules.”

—Yours truly, emphasizing to clients the importance of accuracy and full disclosure in preparing bankruptcy schedules.

One of the great challenges in representing family businesses is assuring accuracy in preparing and filing schedules. This challenge is daunting for lots of reasons: schedules are often prepared under time pressures and with limited resources, the extent and depth of information required is significant, supporting records and memories are often unclear, and remedies for less-than-accurate information can be severe.

What follows are some of my hard-knocks experiences on this subject that others might find useful.

Prison Time for False Statements

As to the client who went to federal prison, it happened back in the early 1990s. Long-story-short is that I questioned the accuracy of information but went ahead anyway.

It happened like this:

I’d spent considerable time going back and forth with the debtor and another professional about concerns I had with the information provided;

After a while, I received an emphatic assurance from a professional on accuracy of the information (i.e., “Don, the schedules are correct!”);

Whereupon, I made the biggest mistake of my professional career: I said, “Ok,” allowed them to sign the schedules, and then filed those schedules.

It didn’t take creditors long, after sworn testimony at the first meeting, to produce documents from outside sources proving falsehoods in the schedules and the sworn testimony. Things went downhill quickly—out of my hands and on to a criminal defense attorney.

Fortunately, no one accused me of wrongdoing. But in later times, my position might have been different.  Here’s why.

A Scare

About a decade after the events described above, attorneys from the Department of Justice started showing up at CLE seminars on bankruptcy law, with this message for bankruptcy attorneys:

  • The DOJ is looking at attorneys—not just debtors and creditors—for criminal prosecution when schedules and other bankruptcy filings are inaccurate.

It seemed, from the descriptions and examples given, that criminal exposure might arise from almost anything, including honest mistakes.

I remember thinking at the time (with my previously-imprisoned client firmly in mind) something like:

“You’ve got to be kidding! It’s hard enough representing debtors—and now you’re throwing up criminal prosecution of attorneys as a remedy for mistakes? Seriously?!”

A Subsequent Mistake

Then, I made a mistake on another client’s schedules—this would have been in the mid-2000s. I misunderstood information provided by the client and put inaccurate information on the client’s bankruptcy schedules. The client signed-off without catching the error.

Then . . . a creditor latched onto the error and started making allegations of fraud and intent to deceive.

When I realized what had happened and how the error could look bad—very bad, actually—I became horrified. Then, I recalled those seminar presentations from the DOJ and what had happened to my imprisoned-client.

I figured the best approach would be to come clean. So I called the U.S. Trustee’s representative for the case: I explained the error, acknowledged that it looked really bad, emphasized that it was an honest mistake, and said we were in the process of amending the schedules.

As it turned out, the U.S. Trustee’s representative proved to be understanding, expressed appreciation for the heads-up, and did not pursue the matter further.

Disputing creditors weren’t so understanding and used the error against us whenever possible.

So . . . while the error did not result in serious consequences for my client or me, it proved to be a pain and an impediment throughout the case.

Conclusion

The signing of schedules and other bankruptcy documents requires care, by both the signing party and the attorney, to assure accuracy.

But mistakes happen. So, a strategy to avoid adverse consequences is to make a solid effort at due diligence and accuracy—then, mistakes will be just that and can be explained in good faith.

Actual intent to deceive is a different thing entirely.

** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.

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