No Recovery for Foreclosure Sale of Non-Disclosed Property

Posted by NCBRC - September 20, 2018

The chapter 13 debtor was judicially estopped from challenging the foreclosure sale of his property as a violation of the automatic stay because he failed to disclose his ownership interest in the property. Fornesa v. Fifth Third Mortgage Co., No. 17-20324 (5th Cir. July 27, 2018).

Chapter 13 debtor, Ricardo Fornesa’s, son, Mark, had a mortgage on his home held by Fifth Third Mortgage Company. Without informing Fifth Third, Mark and Ricardo entered into an equity sharing agreement under which Ricardo made mortgage payments on Mark’s property for three years. In the meantime, Ricardo filed for chapter 13 bankruptcy listing the equity agreement but not the address of the property or the mortgagee. He surrendered his own home, and moved in with his son. They defaulted on the mortgage and, again without informing Fifth Third, Mark quitclaimed the property to his father, but Ricardo did not amend his bankruptcy schedules to reflect ownership. After Fifth Third sold the property in a foreclosure sale, the Fornesas filed a pro se suit in state court alleging wrongful foreclosure. Ricardo also filed an adversary complaint in his ongoing chapter 13 bankruptcy alleging that the sale of the home was in violation of the automatic stay. The actions were consolidated and removed to district court. That court granted summary judgment in favor of Fifth Third.

The only issue pursued on appeal was Ricardo Fornesa’s claim that the foreclosure sale was in violation of the automatic stay.

The Fifth Circuit found that the elements of judicial estoppel were met by the Fornesas’ failure to inform the bankruptcy court of the existence of the asset in Ricardo’s bankruptcy schedules. The bankruptcy court’s reliance on the non-disclosure could be inferred by its treatment of the case as if the asset did not exist. Ricardo could not rely on inadvertence because, while he may not have been aware of the legal ramifications of non-disclosure, he knew of the underlying facts concerning his ownership of the asset. Finally, the court found that motive to conceal is “self-evident” where a debtor fails to disclose an asset because of the presumed financial benefit to him based on the non-disclosure.

The circuit court concluded that the district court did not abuse its discretion by applying the doctrine of judicial estoppel to deny relief to Mr. Fornesa.

Fornesa 5th Cir July 2018


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