No. 89-526 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1990 

ELWOOD W. CLEASBY d/b/a WESTERN 

HERITAGE and MARGE M. CLEASBY, 

Plaintiffs and Appellants, 

SECURITY FEDERAL SAVINGS BANK, a/k/a 

SECURITY FEDERAL SAVINGS AND LOAN 

ASSOCIATION, a Banking Corporation, 

and JAMES E. HIGGENBOTHAM, 

Defendants and Respondents. 

APPEAL FROM: District Court of the Thirteenth Judicial District, 

In and for the County of Yellowstone 

The Honorable Todd G. Baugh, Judge presiding. 

COUNSEL OF RECORD: 

For Appellants: 

Don Vernay, Attorney at Law, Kalispell, Montana 

C3 

- 2 For Respondents: 

Jon T. Drye, Attorney at Law, Billings, Montana 

Submitted on briefs: 4/12/90 

. - -3 

7 - Decided: June 28, 1990 

F&ed: a_; 

i ) -- -. 

Clerk 
Justice John C. Sheehy delivered the Opinion of the Court. 

Plaintiffs (Cleasbys) appeal from an order of the Thirteenth 

Judicial District, Yellowstone County, granting defendants1 motion 

for partial summary judgment. We affirm the District Court's 

order. 

The Cleasbys raise two issues on appeal: 

(1) Whether the Cleasbysl failure to adequately disclose the 

existence of claims against Security Federal in the bankruptcy 

proceeding estops them from now pursuing those claims. 

(2) Whether the Cleasbysl claims are barred by the doctrine 

of res judicata. 

On June 3, 1988, the Cleasbys filed a complaint against 

Security Federal and James Higgenbotham alleging breach of 

contract, tortious interference with their business affairs, and 

a breach of the implied covenant of good faith and fair dealing. 

A review of the complaint shows that most of these allegations were 

grounded on events occurring in the spring and summer of 1986, 

prior to the Cleasbys filing for bankruptcy under Chapter 11 of the 

Bankruptcy Code. 

According to the record, the Cleasbys filed their petition for 

a Chapter 11 reorganization on October 29, 1986. Attached to the 

bankruptcy petition was a list of personal property officially 

designated as llSchedule B-2." Part (q) of Schedule B-2 requests 

the debtor to list "contingent and unliquidated claims of every 

nature including counterclaims of the debtor." In response, the 

Cleasbys listed the following: 

Potential claim for bad faith or tortious interference 

against Security Federal Savings and Loan Association 

The Cleasbys stated the value of their potential claim as 

llundetermined." Subsequent to the filing of the petition and the 

Schedule B-2, the Cleasbys prepared three disclosure statements and 

three bankruptcy plans. Each disclosure statement contained a list 
of the debtors1 assets, but the Cleasbys failed to mention the 

potential claim against Security Federal. The bankruptcy plan also 

specifically listed potential sources of revenue which could be 

used to pay creditors. Again, the Cleasbysl potential claim 

against Security Federal was not included in any of the three 

plans. Also the Cleasbys never disclosed, in the disclosure 

statements or the schedule of assets, their potential claims 

against co-defendant James Higgenbotham. 

On October 12, 1987, Security Federal stipulated to the third 

bankruptcy plan filed by the Cleasbys. That stipulation provided 

that Security Federal's claims against the Cleasbys were I1settled 

and satisfied." On October 26, 1987, the bankruptcy entered an 

order confirming the Cleasbyls Chapter 11 plan. 

As previously stated plaintiffs filed on June 3, 1988, their 

complaint against the defendants. Security Federal filed a motion 

for summary judgment arguing that the confirmation of the Chapter 

11 bankruptcy plan now bars the Cleasbysl claims, which are based 

on events that took place prior to the Cleasbysl bankruptcy, under 

the doctrines of equitable estoppel, judicial estoppel and res 

judicata. The District Court agreed and found the Cleasbys barred 

by equitable estoppel and res judicata from bringing their claims 

in District Court. The Cleasbys now appeal the District Court 

order. 

The effect of a debtor's failure to disclose potential 

lawsuits in a bankruptcy proceeding has been the subject of limited 

judicial review. The courts addressing this issue, however, found 
that failure of a debtor to disclose a potential lawsuit in the 

bankruptcy proceeding prevents the debtor in possession from later 

maintaining that lawsuit. In Re Hoffman (N.D. Iowa 1989), 99 B.R. 

929; Oneida Motor Freight, Inc. v. United Jersey Bank (3d Cir. 

1988), 848 F.2d 414, cert.denied 109 S.Ct. 495, 102 L.Ed. 532 

(1988) ; In Re Galerie Des Monnaies of Geneva, Ltd. (S.D. N.Y. 

1986), 62 B.R. 224. The various legal theories employed by these 

courts to reach this conclusion include equitable estoppel, 

judicial estoppel, and res judicata. 

In each of the above cited decisions, the debtors failed to 

provide any notice of claims or potential lawsuits in their 

bankruptcy plans. In the present case, the Cleasbys listed the 

potential claim against Security Federal in their B-2 schedule of 

assets. However, in three subsequent disclosure statements the 

Cleasbys did not provide any information regarding their 

counterclaim against Security Federal. The District Court held 

that the mere listing of a potential lawsuit in the schedule of 

assets was not adequate disclosure as required by the bankruptcy 

code. Thus, the District Court barred the Cleasbysl claims under 

the doctrine of equitable estoppel and res judicata. 

I. 

Whether the Cleasbysl failure to adequately disclose the existence 

of claims against Security Federal in the bankruptcy proceeding 

estops them from now pursuing those claims. 

The doctrine of equitable estoppel is applied to promote 

justice, honesty, fair dealing and to prevent injustice. Keneco 
v. Cantrell (1977), 174 Mont. 130, 135, 568 P.2d 1225, 1228. We 

have long held that equitable estoppel is founded in equity and 

good conscience. Its objective is to prevent a party from taking 

an unconscionable advantage of his own wrong while asserting his 

strict legal right. In the Matter of Shaw (1980), 189 Mont. 310, 

316, 615 P.2d 910, 914; Leno v. General-Shea-Morrison (1955), 128 

Mont. 570, 576, 280 P.2d 1086, 1090. The Court in Oneida, above, 

strictly applied these equitable principles to a debtor who failed 

to disclose the existence of a potential lawsuit in a prior 

bankruptcy proceeding. Oneida, 848 F.2d at 418. See also, In Re 

Hoffman (N.D. Iowa 1989), 99 B.R. 929. 

In Oneida, a former Chapter 11 debtor brought suit against a 

bank for breach of contract, misrepresentation, and breach of the 

bank's duty of good faith. The plaintiff failed to disclose the 

lawsuit in the Chapter 11 proceeding. Because of this failure to 

disclose, the Court held that the subsequent lawsuit was barred by 

the doctrine of equitable estoppel: 

We can assume that revealing the potential action may 

also have impacted upon the bank's decision to enter into 

the stipulation establishing the extent and validity of 

its lien against Oneida [the debtor] and to vote for 

confirmation. The practical effect of a successful 

prosecution of Oneida's claim would be to require the 

bank to make restitution of the amount realized on its 

bankruptcy claim, since Oneida's present action calls 

into question the bank's right to collect its secured 

debt. This would also constitute a successful collateral 

attack on the Bankruptcy Court's order confirming the 

reorganization plan. In such circumstances, employment 

of equitable estoppel is required to preserve the 

integrity of the earlier proceeding, particularly where, 

as here, the creditors have reasonably acted in reliance 

upon the assumed finality and integrity of those 

adjudications. (Citations omitted.) 
Oneida, 848 F.2d at 418. 

Recently, in Mellem v. Kalispell Laundry (1989), 237 Mont. 

439, 442, 774 P.2d 390, 392, we listed the following six elements 

of equitable estoppel: 

1. There must be conduct--acts, language, or silence-- 

amounting to a representation or a concealment of material facts. 

2. These facts must be known to the party estopped at the 

time of his said conduct, or at least the circumstances must be 

such that knowledge of them is necessarily imputed to him. 

3. The truth concerning these facts must be unknown to the 

other party claiming the benefit of the estoppel, at the time when 

it was acted upon by him. 

4. The conduct must be done with the intention, or at least 

with the expectation, that it will be acted upon by the other 

party, or under such circumstances that it is both natural and 

probable that it will be so acted upon. . . . 

5. The conduct must be relied upon by the other party, and, 

thus relying, he must be led to act upon it. 

6. He must in fact act upon it in such a manner as to change 

his position for the worse. . . . 

Security Federal contends the facts of Oneida and Hoffman and 

the instant case are similar, and thus, this Court should apply 

the doctrine of equitable estoppel as set forth in Mellem. The 

Cleasbys attempt to distinguish the cases relied on by Security 

Federal by arguing that Oneida and Hoffman contained no disclosure 

whatsoever of the potential claims to the creditors during the 

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bankruptcy proceeding, whereas, the Cleasbys disclosed their 

potential claims against Security Federal in their petition for 

bankruptcy. The Cleasbys contend that listing claims with their 

schedule of assets provided Security Federal with sufficient notice 

to allow it to raise any questions or objections regarding the 

claim. 

The question presented, then, is whether this initial 

disclosure was sufficient to escape a finding of llconcealmentll as

required by the first element of equitable estoppel. Therefore, 

we must review the Bankruptcy Code's requirements of disclosure to 

determine whether the Cleasbys concealed their potential claim 

against Security Federal. 

As the Court in Onieda properly notes, section 521 of the 

Bankruptcy Code list the debtor's duties in a bankruptcy case. The 

Code requires the debtor to "file a . . . schedule of assets and 

liabilities . . . and a statement of the debtor's financial affairs 

. . . " 11 U.S.C. 5 521(1); Oneida, 848 F.2d at 417. 

The Cleasbys complied with 5 521 and listed a ''potential claim 

for bad faith or tortious interference against Security Federal 

Savings & Loan ~ssociation~~ in their schedule of assets. The 

Cleasbys contend that by listing the claim as an asset, they are 

excused from any further disclosure. The duty to list pending 

litigation as an asset is, however, only the first of the specific 

statutes mandating disclosure. 

The second such statute is 11 U. S. C. 5 1125 (b) , which mandates 

the filing of a disclosure statement containing "adequate 
information." Section 1125(a) defines adequate information as 

follows: 

5 1125. Postpetition disclosure and solicitation 

(a) In this section - 

(1) "adequate information" means information of a kind, 

and in sufficient detail, as far as is reasonably 

practicable in light of the nature and history of the 

debtor . . . that would enable a hypothetical reasonable 

investor typical of holders of claims or interests of the 

relevant class to make an informed judgment about the 

plan. 

The importance of full disclosure is intensified by the 

reliance placed upon the disclosure statement by the creditors and 

the court. Oneida, 848 F.2d at 417. The duty to provide "adequate 

inf~rmation~~ in the disclosure statement has been interpreted as 

requiring an explanation of pending or contemplated litigation. 

In Re Malek (Bkrtcy. Mich. 1983), 35 B.R. 443, 444; In Re Route 202 

Corp. (Bkrtcy. Penn. 1984), 37 B.R. 367, 375-6. The Court in Malek 

required the debtor to set forth the following information, 

regarding potential litigation, the disclosure statement: 

B. A HISTORY OF THE DEBTOR PRIOR TO FILING. 

The Chapter 11 Debtor should describe, in detail, his 

activities before filing, including the reasons for filing the 

Chapter 11.. . . Litigation issues are to be described in an 

objective professional tone, free of any mischaracterization 

of the issues to be resolved in such litigation. Where 

possible, the Debtor should provide an evaluation of the 

probable success of any litigation and its effects on the 

Debtor's business or his plans for reorganization under 

Chapter 11. 

I. LITIGATION 
All pending or contemplated litigation of whatever nature 

must be described fully, completely and in detail. . . 

In Re Malek, 35 B.R. at 444. 

The disclosure statement filed by the Cleasbys contained no 

reference to the contemplated suit against Security Federal. 

Clearly, the listing of potential litigation against Security 

Federal, especially a potential counterclaim, would have affected 

Security Federal's decision to approve or disapprove of the 

Cleasbysl bankruptcy plan. Considering the importance of the 

disclosure statement in the bankruptcy proceedings, we are not 

swayed by the Cleasbysl contention that merely listing the 

potential lawsuit in the schedule of assets was sufficient notice 

to preserve their lawsuit, and that they were not required to list 

the claim on their disclosure statement. The debtor must provide 

"adequate informationv1 in order for creditor to make an informed 

decision on the bankruptcy plan. In this case, the Cleasbys were 

remiss in their duty to provide "adequate informationI1 in their 

bankruptcy plan. 

The Cleasbys attempt to excuse their failure to include the 

claim against Security Federal in the disclosure statement by 

arguing that the creditors had a duty to look beyond the disclosure 

statement, and reexamine the schedule of assets, thus discovering 

the reference to a llpotential claiml1 against Security Federal. The 

Cleasbysl contention is in direct contradiction of the Bankruptcy 

Code s mandate to provide "adequate informationt1 to the creditors. 

11 U.S.C. 5 1125(a), requires the debtor to provide "adequate 

informationn in its plan. The Code does not require a creditor to 

9 
sift through the bankruptcy plan to find an inadequately potential 

described lawsuit. 

The Cleasbys also argue that Security Federal had an 

affirmative duty to seek out additional information regarding their 

potential claim against Security Federal. Again, this argument 

contradicts the rule that the debtor in possession owes a fiduciary 

duty to the creditors, particularly with respect to assets of the 

bankruptcy estate. Natco Industries v. Federal Ins. Co. (S.D. N.Y. 

1987), 69 B.R. 418, 419. The assets of the estate include any 

cause of action which has accrued to a debtor as of the filing of 

the bankruptcy petition. 11 U.S.C. 541(a). The Cleasbys, as 

debtors in possession, had a fiduciary duty to safeguard the assets 

of the estate which include causes of action, and had a statutory 

obligation to identify fully the claims against Security Federal. 

Under the Bankruptcy Code, reorganization is dependent upon the 

debtor's full disclosure of all relevant information. The 

Bankruptcy Code and the courts have placed the obligation to ensure 

full disclosure on the debtor in possession, not the creditors. 

Our conclusion that the Cleasbys failed adequately to disclose 

the existence of a potential lawsuit in their disclosure statement 

establishes that the first element of equitable estoppelconcealment-has been met in this case. The second element of 

equitable estoppel, that the facts must be known to the party 

estopped, is more easily met. The fact that the Cleasbys listed 

the potential lawsuit in the schedule of assets reveals that 

requisite knowledge was present. The third element, that the truth 
concerning these facts must be unknown to the party claiming 

estoppel, is established through the absence of disclosure in the 

bankruptcy proceeding. As previously noted, the disclosure 

statement is the method to provide creditors such as Security 

Federal with pertinent knowledge. That disclosure was not made, 

and there is no allegation that any other means was provided by the 

Cleasbys. 

The fourth element of equitable estoppel requires that the 

conduct must be done with the intention, or at least the 

expectation, that it will be acted upon by the other party. We 

find this element is satisfied by the very purpose of the 

disclosure statement, which is to provide creditors with the 

necessary information to approve or disapprove the bankruptcy plan. 

The fifth element is that the conduct must be relied upon by the 

other party. This requirement, also, is met. Security Federal 

relied upon the Cleasbys' bankruptcy plan when Security Federal 

agreed to settle all claims against the Cleasbys. Lastly, it must 

be shown that the party seeking estoppel changed its position to 

its detriment. In this case, Security Federal agreed to a 

restructuring of its debt which provided more beneficial terms to 

the Cleasbys. By rewriting the debt, Security Federal changed its 

position to its detriment. 

Each of the elements of equitable estoppel is present in this 

case. Therefore, we affirm the District Court's conclusion that 

the Cleasbys are now estopped from bringing those claims in 

District Court. 
Whether the Cleasbys' claim is barred by the doctrine of res 

j udicata. 

We need not address the issues of res judicata, since we have 

already found that the Cleasbys are barred from bringing their 

District Court claims through equitable estoppel. 

Accordingly, we affirm the District Court's order that the 

Cleasbys are equitably estopped from pursuing their claims in 

District Court. 

Justice 4 

Justice Diane G. Barz did not participate.