Fraud Allegations Dismissed Due To Bankruptcy Non-Disclosure

By: Jeffrey M. Haber

What happens when a business owner believes he’s been misled about the value of his company, only to have his claims dismissed not on their merits, but because of a procedural misstep years earlier? A recent decision from the Appellate Division, Second Department – Rubin v. Hodes, 2026 N.Y. Slip Op. 03328 (2d Dept. May 27, 2026) – addresses this question.

In Rubin, plaintiff, once the majority shareholder of a healthcare company, brought the action alleging fraud, unpaid loans, and financial loss tied to the restructuring and sale of corporate interests. He claimed that he was deceived about the true value of his shares and that outstanding promissory notes remained unpaid. Yet despite the substance of these allegations, the courts never reached the merits. Instead, the litigation turned on a threshold issue: whether plaintiff had the legal capacity to sue at all.

The answer hinged on an earlier Chapter 11 bankruptcy filing, in which plaintiff failed to disclose key assets, including stock holdings and loan documents that later formed the basis of his claims. Under well-established bankruptcy principles, such omissions proved to be fatal. Once a debtor files for bankruptcy, all assets, including potential legal claims, become part of the bankruptcy estate. If those claims are not disclosed, the debtor may be barred from pursuing them later.

Affirming the Supreme Court’s dismissal, the Second Department reinforced a strict but essential rule: the integrity of the bankruptcy system depends on complete transparency. Even inadvertent omissions can strip a litigant of the ability to seek relief in court. As discussed below, Rubin highlights the intersection of bankruptcy law, corporate transactions, and fraud claims, as well as the consequences of incomplete disclosure.

Rubin v. Hodes

In 1993, plaintiff became the majority shareholder of defendant, UHP-Delaware, Inc. (“UHP”), with 85% of the stock shares. In 1996, plaintiff loaned UHP $250,000 with interest, and in 2001, he loaned defendant Patriot Health, Inc. (“Patriot”) $100,000 with interest. Both loans were evidenced by promissory notes. As of 2004, only a portion of each loan had been repaid.

Defendant Cost Containment Group, Inc. (“Cost Containment”) was later created and became the parent company of UHP and Patriot. Plaintiff, however, was under the belief that Cost Containment became UHP’s successor and that there was a change in name only. Thereafter,  defendant Cost Containment Group, Inc., Employee Stock Ownership Plan (the “ESOP”) was formed to purchase shares of Cost Containment stock. The ESOP paid approximately $32 million for approximately 80% of the shares of Cost Containment stock. In 2017, plaintiff and his wife were paid approximately $6 million for their equity interest in Cost Containment.

In June 2013, plaintiff filed a voluntary petition for Chapter 11 bankruptcy in federal court. He also filed a Schedule B listing his personal property but omitting his UHP stock shares and the promissory notes (the “subject assets”). The bankruptcy proceeding was closed in 2017.

In 2018, plaintiff commenced the action seeking, inter alia, to recover damages for fraud, repayment of the loans, and punitive damages. Plaintiff alleged that due to certain misrepresentations about UHP and the value of his shares, he relinquished his shares for substantially less than their value. He also alleged that he had not been paid the amounts due under the outstanding promissory notes.

Thereafter, Cost Containment, UHP, Patriot, and the individual defendants (collectively, the “Cost Containment defendants”) moved, inter alia, pursuant to CPLR 3211(a)(3) to dismiss the amended complaint on the ground that plaintiff lacked the legal capacity to sue. The ESOP and defendant Wilmington Trust Retirement and Institutional Services Company separately moved, among other things, for the same relief on the same ground. In an order entered December 11, 2020, the Supreme Court, inter alia, granted those branches of the separate motions. Plaintiff appealed.

The Second Department affirmed.

The Court held that plaintiff lacked the capacity to sue due to his failure to disclose the promissory notes in his bankruptcy action. “The failure of a party to disclose a cause of action as an asset in a prior bankruptcy proceeding, which the party knew or should have known existed at the time of that proceeding, deprives him or her of the legal capacity to sue subsequently on that cause of action,” explained the Court.[1] Indeed, said the Court, “[t]he integrity of the bankruptcy system depends on full and honest disclosure by debtors of all of their assets.”[2] 

The Court found that “plaintiff did not disclose in his schedule of assets in the bankruptcy proceeding the subject assets or the claims he now asserts against the defendants” – facts that were undisputed.[3] Whether plaintiff’s “failure to list the promissory notes in his schedule of assets in the bankruptcy proceeding,” was “inadvertent[ ] or mistaken[ ],” it did not excuse his failure to include them in the bankruptcy proceeding, concluded the Court.[4] Accordingly, plaintiff was “preclude[d] … from pursuing those claims.”[5] 

The Court also found that “defendants’ submissions in support of their separate motions established that the plaintiff knew or should have known of the existence of the subject claims prior to the filing of the bankruptcy petition, that the causes of action against the defendants remained property of the bankruptcy estate, and that the plaintiff therefore lacked capacity to sue on those claims.”[6]

Takeaway

Rubin underscores three interrelated legal principles that ultimately defeated plaintiff’s fraud claims.

At the outset, Rubin reinforces the requirement of full disclosure in bankruptcy proceedings. Individuals who file for bankruptcy must disclose all assets, including not only tangible property but also potential legal claims, whether contingent or not yet fully developed. In Rubin, plaintiff failed to list his stock interests and the promissory notes, assets that later became the foundation of his fraud and repayment claims. The Court made clear that this obligation is neither optional nor flexible; it is central to preserving the integrity of the bankruptcy system. Even where an omission is characterized as inadvertent or mistaken, the consequence is severe: a debtor in bankruptcy who fails to disclose such assets is precluded from later asserting claims based on them.

Closely tied to that principle is the rule that undisclosed claims remain property of the bankruptcy estate, not the individual debtor. Once a bankruptcy petition is filed, any causes of action that exist, or that the debtor reasonably should have known about, vest in the bankruptcy estate by operation of law. Because plaintiff’s claims arose from events predating his bankruptcy filing, they belonged to the bankruptcy estate, and only the bankruptcy trustee had standing to pursue them. As a result, plaintiff lacked the legal capacity to bring the action himself, regardless of the viability of the underlying allegations of fraud.

Rubin also illustrates how procedural barriers can foreclose substantive claims. The Court never reached the merits of plaintiff’s allegations that he was misled about the value of his shares or that he was owed repayment under promissory notes. Instead, the action was resolved on a threshold issue – the capacity to sue. This outcome, therefore, serves as a reminder that even meritorious fraud claims can be dismissed before they are heard on the merits if procedural requirements are not followed.

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Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes only and is not intended to be, and should not be, taken as legal advice.

Unless otherwise stated, Freiberger Haber LLP’s articles are based on recently decided published opinions or litigation releases and not on matters handled by the firm.

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[1] Slip Op. at *1, quoting Golden Jubilee Realty, LLC v. Castro, 196 A.D.3d 680, 682 (2d Dept. 2021) (alteration and internal quotation marks omitted), and citing Potruch & Daab, LLC v. Abraham, 97 A.D.3d 646, 647 (2d Dept. 2012).

[2]  Id., quoting Flanders v. E.W. Howell Co., LLC, 193 A.D.3d 822, 823 (2d Dep. 2021) (alteration and internal quotation marks omitted), and citing Turner v. Owens Funeral Home, Inc., 189 A.D.3d 914, 916 (2d Dept. 2020).

[3] Id., citing Jean-Paul v. 67-30 Dartmouth St. Owners Corp., 174 A.D.3d 870, 871; Potruch & Daab, 97 A.D.3d at 647.

[4] Id., citing Dynamics Corp. of Am. v. Marine Midland Bank-N.Y., 69 N.Y.2d 191, 197 (1987); Hutchinson v. Chana Weller, DDS, PLLC, 93 A.D.3d 509, 510 (1st Dept. 2012).

[5] Id.

[6] Id., citing Keegan v. Moriarty-Morris,  153 A.D.3d 683, 684 (2d Dept. 2017); Potruch & Daab, 97 A.D.3d at 647-648.