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 SAVINGSAND LOAN ASSOCIATION, a Banking Corporation, and JAMES E. HIGGENBOTHAM, Defendants and Respondents.

APPEAL FROM: District Court of theThirteenth 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

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### -2 For Respondents: Jon T. Drye,Attorney at Law, Billings, Montana

Submitted on briefs: 4/12/90

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### - Decided: June 28, 1990 F&ed: a_;

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ClerkJustice John C. Sheehy delivered the Opinion of the Court.

Plaintiffs (Cleasbys) appeal from an order of the Thirteenth Judicial District, YellowstoneCounty, granting defendants1motion for partial summary judgment. We affirm the District Court's order. The Cleasbys raise two issues on appeal:

(1) Whether the Cleasbyslfailureto adequately disclose the existence of claims against Security Federal in the bankruptcy proceeding estops them from now pursuing those claims. (2) Whether the Cleasbyslclaims 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 reviewof the complaint shows thatmost of these allegations were grounded on events occurring in the spring and summer of 1986, prior to theCleasbys filing forbankruptcy under Chapter 11of the Bankruptcy Code. According to therecord,theCleasbys filed theirpetition for a Chapter 11 reorganizationon 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 ScheduleB-2, the Cleasbysprepared three disclosure statementsand threebankruptcyplans. Eachdisclosure statementcontained a listof the debtors1 assets, but the Cleasbys failed to mention the potential claimagainstSecurity Federal. Thebankruptcyplan 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-defendantJames Higgenbotham. On October 12, 1987, Security Federal stipulated to the third bankruptcy plan filed by the Cleasbys. That stipulationprovided that Security Federal's claims against the Cleasbyswere I1settled and satisfied." On October 26, 1987, the bankruptcy entered an order confirming the CleasbylsChapter 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 Cleasbyslclaims, which are based

on events that took place prior to the Cleasbyslbankruptcy,under the doctrines of equitable estoppel, judicial estoppel and res judicata. The District Court agreed and found the Cleasbysbarred 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 proceedinghasbeen the subjectof limited judicial review. The courts addressing this issue, however, foundthat failure of a debtor to disclose a potential lawsuit in the bankruptcy proceeding prevents the debtor inpossession from later maintaining that lawsuit. InReHoffman (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. Thevarious 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 Cleasbyslclaims under the doctrine of equitable estoppel and res judicata. I. Whether the Cleasbyslfailureto adequatelydisclose 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. Kenecov. 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 debtorwho failed to disclose the existence of a potential lawsuit in a prior bankruptcy proceeding. Oneida, 848 F.2d at 418. See also, InRe 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 11proceeding. Because of this failure to disclose, the Court held that the subsequent lawsuitwas barred by the doctrine of equitable estoppel:

We can assume that revealing the potential action may also have impactedupon thebank's decisiontoenter 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. Thiswould alsoconstitute a successfulcollateral attack on the Bankruptcy Court's order confirming the reorganizationplan. In such circumstances, employment of equitable estoppel is required to preserve the integrity of the earlier proceeding, particularlywhere, ashere, 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 thebenefit of the estoppel, at the timewhen itwas 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. Hemust in fact act upon it in such amanner as to change his position for theworse. 

# . . . Security Federal contends the factsof 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 Federalby arguing that Oneida and Hoffman contained no disclosure whatsoever of the potential claims to the creditors during the 6bankruptcy proceeding, whereas, the Cleasbys disclosed their potential claims against Security Federal in their petition for bankruptcy. The Cleasbys contend that listing claims with their scheduleofassetsprovided Security Federalwith sufficientnotice 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,

wemust review the Bankruptcy Code's requirementsof 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 listthedebtor's duties in a bankruptcy case. The Code requires the debtor to "file a 

# . . . schedule of assets and liabilities

# ... and a statement of thedebtor's financialaffairs



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

### 5 521and listed a ''potentialclaim 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 litigationas an asset is,however, only the first of the specific statutesmandating disclosure. The second such statute is 11U.S.C. 

### 5 1125(b)

## ,whichmandates the filing of a disclosure statement containing "adequateinformation." 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

# . . . thatwould enable a hypothetical reasonable investor typicalofholdersof claimsor interestsofthe relevant class to make an informed judgment about the plan. The importance of full disclosure is intensified by the relianceplaced upon thedisclosure statementby the creditorsand the court. Oneida, 848F.2d at 417. Theduty toprovide "adequate inf~rmation~~ in the disclosure statement has been interpreted as requiring an explanation of pending or contemplated litigation. InReMalek (Bkrtcy. Mich. 1983), 35 B.R. 443, 444; In ReRoute 202 Corp. (Bkrtcy.Penn. 1984), 37B.R. 367, 375-6. TheCourt in Malek required the debtor to set forth the following information, regardingpotential 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,includingthereasons for filingthe Chapter 11.. 

# . . Litigation issues are tobe 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. LITIGATIONAll pending orcontemplated litigationofwhatever 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 assetswas sufficient notice topreserve 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 arguingthat the creditorshad aduty to look beyond thedisclosure statement, and reexamine the schedule of assets, thus discovering thereference to a llpotential claiml1againstSecurity Federal. The Cleasbyslcontention is in direct contradiction of the Bankruptcy Code smandate toprovide "adequate informationt1 to the creditors. 11 U.S.C. 5 1125(a), requires the debtor to provide "adequate informationn in itsplan. The Code does not require a creditor to 9sift through thebankruptcy plan to find an inadequately potential described lawsuit. The Cleasbys also argue that Security Federal had an affirmative dutyto seekoutadditional informationregarding their potential claim against Security Federal. Again, this argument contradictstherule that thedebtor in possession owesa fiduciary duty to the creditors,particularly with respect to assets of the bankruptcy estate. Natco Industriesv. 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 inpossession,had a fiduciary duty to safeguard theassets 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 Codeand the courtshave placed theobligationto ensure full disclosure on the debtor in possession, not the creditors. Our conclusionthat theCleasbys failedadequately todisclose 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 knowledgewaspresent. Thethird element, thatthe truthconcerning 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 othermeans wasprovided 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 informationtoapproveordisapprovethebankruptcyplan. 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, itmust 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 thedebt, Security Federal changed its position to its detriment. Each of the elements of equitable estoppel ispresent 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 judicata. We need not address the issuesof res judicata, sincewe 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 

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Justice Diane G. Barz did not participate.