By: Heidi T. Sharp
Heidi T. Sharp practices in the areas of Civil Rights, Real Estate, Small Business Formation and Representation, with focus and specialization on Employment and Labor. She is a partner at the law firm of Burgess & Sharp, PLLC located in Clinton Township, Michigan.
The doctrine of judicial estoppel can be a deadly sword against a debtor who has an employment discrimination claim but does not list it on their petition in bankruptcy, and a complete shield to the employer, who avoids liability for potentially discriminatory conduct. Inronically, the debtor’s bankruptcy is often necessitated by the financial condition they are placed in by a defendant’s discriminatory conduct.
History of Judicial Estoppel
Judicial estoppel was recently invoked and upheld by the Supreme Court in New Hampshire v Maine[1] as “an equitable doctrine invoked by a court at its discretion.”[2] Justice Ginsburg explained, “‘[W]here a party assumes a certain position in a legal proceeding, and succeeds in maintaining that position, he may not thereafter, simply because his interests have changed, assume a contrary position, especially if it be to the prejudice of the party who has acquiesced in the position formerly taken by him.’ Davis v Wakelee, 156 US 680, 689 (1895).'” 532 US at 749. The purpose of the doctrine is “to protect the integrity of the judicial process by prohibiting parties from deliberately changing positions according to the exigencies of the moment.”[3] In the “unusual circumstances” presented by the New Hampshire case, the Court used the doctrine against the State of New Hampshire, which had clearly and unequivocally argued a different interpretation of the phrase “middle of the [Piscataqua] river” in a separate 1977 consent judgment concerning border rights with Maine.
In New Hampshire, the Supreme Court noted that it had not previously had occasion to “discuss the doctrine elaborately”. 532 US at 749. Reviewing the existing case law, the Court held that the three factors that “typically inform the decision whether to apply the doctrine (of judicial estoppel) in a particular case” are: (1) “a party’s later position must be ‘clearly inconsistent’ with its earlier position”; (2) “whether the party has succeeded in persuading a court to accept that party’s earlier position, so that judicial acceptance of an inconsistent position in a later proceeding would create ‘the perception that either the first or the second court was misled’”; and (3) “whether the party seeking to assert an inconsistent position would derive an unfair advantage or impose an unfair detriment on the opposing party if not estopped.”[4]
The Sixth Circuit first applied the Supreme Court’s test in the bankruptcy context in Browning v Levy.[5] The court posited the test as follows: “The doctrine of judicial estoppel bars a party from (1) asserting a position that is contrary to one that the party has asserted under oath in a prior proceeding, where (2) the prior court adopted the contrary position “either as a preliminary matter or as part of a final disposition.” The court explained later that the doctrine is “utilized in order to preserve the integrity of the courts by preventing a party from abusing the judicial process through cynical gamesmanship.””[6] In Browning, the court declined to apply the doctrine, reasoning that omission of a claim on the bankruptcy petition was, in that case, consistent with inadvertence.[7]
The Sixth Circuit next examined the doctrine in 2004 in Eubanks v CBSK Financial Group, Inc,[8] which cited Browning to the effect that mere inadvertent omission of a claim in the original petition does not trigger application of the doctrine, stating it “should be applied with caution to “avoid impinging on the truth-seeking function of the court, because the doctrine precludes a contradictory position without examining the truth of either statement.”[9]
Most recently, in 2010, the Sixth Circuit again discussed the doctrine of judicial estoppel in White v Wyndham Vacation Ownership, Inc,[10] which is often relied upon by defendants in bringing motions to dismiss based on judicial estoppel. In White, long before she declared bankruptcy, the plaintiff had made an EEOC claim and had a right to sue letter, which she received about a month before her bankruptcy petition. The court found that she was clearly a party to an administrative proceeding that she should have disclosed under Section 4 of her Statement of Financial Affairs and question 21 of Schedule B.[11] However, the plaintiff did not disclose her claim at all. The court could not find any possible excuse for her not having done so, reasoning that she clearly knew of the harassment claim and had a motive for concealment.[12] The court then stated that summary judgment would be granted unless plaintiff could provide sufficient facts to show “an absence of bad faith” (in particular, through her attempts to correct her initial omission) and that her omission resulted from inadvertence or mistake and was not intentional. Citing the previous Sixth Circuit cases, the court noted, two circumstances in which a debtor’s failure to disclose might be deemed inadvertent are: (1) “where the debtor lacks knowledge of the factual basis of the undisclosed claims,” and (2) where “the debtor has no motive for concealment”.[13]
The holding of White and the established tests were followed in the unpublished case Finney v The Free Enterprise System, Inc,[14] where the Court declined to apply judicial estoppel to several plaintiffs in a collective action. In Finney, Theodore Jackson worked for Free Enterprise from October 20, 2003 to October 17, 2005. Jackson joined the action in question by filing an opt-in form with the court on June 12, 2009. With the assistance of counsel, Jackson filed for Chapter 13 bankruptcy on September 30, 2009, but did not disclose the claim on his schedule which accompanied the petition, and his plan was confirmed on December 10, 2009. On August 19, 2010, approximately three weeks after the defendants filed the motion for summary judgment to dismiss the plaintiff’s claim on judicial estoppel, the plaintiff amended his bankruptcy petition to reflect his claim in the action. Jackson stated in an affidavit to the court that he did not know until receiving notice of the defendants’ motion that he was required to list his claim in his bankruptcy schedule. Jackson has stated that he “did not intentionally omit reference to the lawsuit or try to hide it,” but “simply did not know it was supposed to have been listed” and his bankruptcy attorney did not tell him otherwise.[15]
The Court in Finney found that the record did not reflect bad faith on Jackson’s part when the facts were reviewed because he did not know that the needed to include the action on his bankruptcy filings and acted quickly to amend his bankruptcy filings once the problem was brought to his attention:
On the other hand, Jackson’s swift amendment of his bankruptcy petition after the defendants’ motion was filed tips the scales strongly in his favor. The defendants, citing White, argue that Jackson’s amendments were “too little, too late.” The defendants note that the Sixth Circuit in White did “not consider favorably the fact that White updated her initial filings after the motion to dismiss was filed,” because to do so would “encourage gamesmanship.” White, 617 F3d at 481. White, however, is distinguishable from this case for two reasons. First, the Sixth Circuit’s finding of bad faith in White was bolstered by other factors—such as White’s decision to file her lawsuit only after her bankruptcy plan was confirmed—that led to a conclusion that White’s omission was not due to inadvertence or mistake. See id. at 480–483. Second, even when the plaintiff in White amended her bankruptcy filings after the defendants filed their motion to dismiss, the amendment still did not reflect the estimated amount of her claim or whether White was the plaintiff or defendant in the lawsuit, which further indicated White’s apparent desire to conceal the claim from the bankruptcy court. Id. at 481. The defendants do not argue, nor does the court find, evidence of such behavior here.
Because judicial estoppel, as previously noted, should be “applied with caution,” Eubanks, 385 F3d at 897, the court will decline to apply the doctrine here. The defendants’ motion for summary judgment with respect to Jackson’s claims will be denied.[16]
How to avoid the Judicial Estoppel Trap
The best way to avoid judicial estoppel is by conducting a very thorough first interview with any potential client. On your list of required questions should always be “have you filed bankruptcy in the last seven years?” If so, even if the bankruptcy has been closed for some time the plaintiff should petition the bankruptcy court to re-open their action and add the proposed defendant(s) as possible assets from potential litigation under the inquiry regarding “contingent and liquidated claims of every nature”. By re-opening the bankruptcy before beginning any litigation, the plaintiff will be able to demonstrate that they did not conceal any potential assets from their debtors and any failure to list the claim at the time of the bankruptcy was because it had (a) not yet become ripe or was (b) inadvertent. The key to whether or not a prior bankruptcy needs to be re-opened depends on how long the person was employed with the defendant and when their prior bankruptcy occurred. For example, if someone had been employed with the defendant for five years before bringing a claim, their bankruptcy was three years ago, and they claim ongoing discrimination up to the point of their termination, the bankruptcy must be amended to add the claim against the defendant because the cause of action accrued during the time of the bankruptcy. On the other hand, if someone filed bankruptcy five years prior and did not begin employment with the defendant until two years after the close of the bankruptcy then there is no need to re-open the bankruptcy. When a person was employed with the defendant throughout their bankruptcy but their claim is a discrete action at the time of termination, re-opening a bankruptcy may not be necessary but advisable based on the current state of the courts.
For those clients who are still employed, and elect to file bankruptcy after termination or during a period of lay-off, they should be counseled to list even a potential claim if they have sought legal advice or filed with the EEOC or other agency regarding the situation with their employer.
If you do face a judicial estoppel motion, the best way to oppose it is to demonstrate to the court that your client inadvertently failed to list the potential asset and had no intention of concealing it. Your client’s educational background, whether they used an attorney to file the bankruptcy, what information they provided to the bankruptcy attorney and the proximity in time between the bankruptcy filing and the adverse action alleged in your case will all be important in taking such a stance.
Like many of the other judge-made doctrines judicial estoppel is here to stay.[17] Along with the other many hurdles to a jury, plaintiffs’ attorneys should continue to be wary of a bankruptcy filing by their clients or a bankruptcy trustee taking over their case.
End Notes
[1]. New Hampshire v Maine, 532 US 742; 121 S Ct 1808; 149 L Ed 2d 968 (2001).
[2]. Id.
[3]. Id. at 749-750.
[4]. Id. at 750-751.
[5]. 283 F3d 761, 775 (6th Cir 2002).
[6]. Id. at 776.
[7]. Id.
[8]. 385 F3d at 897.
[9]. Id.
[10]. 617 F3d 472 (6th Cir 2010).
[11]. Id. at 474.
[12]. Id. at 478-479.
[13]. Id. at 479.
[14]. 2011 WL 1157696 (WD Ky March 29, 2011 No. 3:08-cv-383-S).
[15]. Id at *2.
[16]. Id.
[17]. Concerns about a client’s bankruptcy history and failure to disclose a claim are not limited to employment cases or Federal jurisdiction. See, e.g., Miller v Chapman Contracting, 477 Mich 102; 730 NW2d 462 (2007) (affirming the trial court’s decision that amending the complaint in an action for auto negligence to substitute plaintiff’s bankruptcy trustee as plaintiff after the expiration of the period of limitations would be futile); Szyszlo v Akowitz, 296 Mich 40; 818 NW2d 424 (2012), lv den (reversing the trial court’s conclusion that plaintiff was not a proper party in interest to a medical malpractice claim, which his bankruptcy petition schedule of assets listed as exempt under 11 USC 522[11][D], and affirming the trial court’s conclusion that plaintiff was not judicially estopped by listing the his “current market value” of his interest in the claim at $15,000 from seeking damages in excess of the circuit court’s $25,000 jurisdictional minimum), and Spohn v Van Dyke Public Schools, 296 Mich App 470; 822 NW2d 239 (2012) (holding that judicial estoppel applied because, by failing to disclose her potential Elliott-Larsen Civil Rights Act sexual harassment claim in her bankruptcy, plaintiff assumed a position that was contrary to the one in the lawsuit; the bankruptcy court adopted the contrary position by confirming plaintiff’s Chapter 13 plan, and plaintiff’s omission did not result from mistake or inadvertence).
Michigan Justice 