To assess debtor’s intent in omitting civil claims in bankruptcy, consider everything
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Wednesday, September 20, 2017

To assess debtor’s intent in omitting civil claims in bankruptcy, consider everything

By Kathleen Kapusta, J.D.

Overruling prior precedent approving the inference that a plaintiff intended to make a mockery of the judicial system solely because she failed to disclose her civil claim in bankruptcy, the en banc Eleventh Circuit, in agreement with the Sixth, Seventh, and Ninth Circuits, held that district courts should consider all the facts and circumstances of the case to determine whether the debtor had the requisite intent. Having identified the proper standard for determining when judicial estoppel may be applied, the en banc court remanded to the panel to consider whether the district court abused its discretion in applying judicial estoppel to the employment discrimination claims of a U.S. Steel Corporation employee who failed to disclose those claims as assets in her bankruptcy. Judge Carnes filed a separate concurring opinion (Slater v. U.S. Steel Corp., September 18, 2017, Pryor, J.).

Twenty-one months after suing U.S. Steel for race and sex discrimination, the employee, a high school graduate, filed a Chapter 7 bankruptcy petition (in which she was represented by a different attorney). In filling out her statement of financial affairs under the penalty of perjury, she answered “none” when asked if she had any “contingent and unliquidated claims” and if she was or had been a “party” to any “suits and administrative proceedings” in the prior year. Upon learning that she had not disclosed her discrimination suit in the bankruptcy proceedings, U.S. Steel moved for summary judgment, arguing that her claims should be barred by judicial estoppel.

Amended. The next day, the employee amended her bankruptcy petition to disclose the suit. The bankruptcy trustee then filed with the bankruptcy court a request to employ the lawyers who were representing the employee in her employment action to continue to pursue the claims against U.S. Steel on behalf of the estate. The bankruptcy court granted the motion and the bankruptcy case proceeded. Upon the employee’s petition, the case was converted from a Chapter 7 to a Chapter 13 proceeding, and the employee filed a proposed Chapter 13 plan. When she failed to pay the trustee, however, under the terms of the confirmed plan, the bankruptcy court dismissed her case and her debts were never discharged.

Panel decision. The district court then granted U.S. Steel’s motion for summary judgment, applying the doctrine of judicial estoppel to bar her claims and rejecting her assertion that she inadvertently omitted her civil claims in the bankruptcy proceeding. She appealed and an Eleventh Circuit panel affirmed. In a concurring opinion, Judge Tjoflat urged the court to review en banc precedent permitting the inference that a plaintiff who omitted a civil claim as an asset in bankruptcy filings necessarily intended to make a mockery of the judicial system. The court agreed to rehear the case en banc and vacated the panel opinion.

Two-part test. Observing that it employs a two-part test to guide district courts in applying judicial estoppel—whether (1) the party took an inconsistent position under oath in a separate proceeding, and (2) these inconsistent positions were “calculated to make a mockery of the judicial system”—the en banc court explained that under this test, district court considers both the plaintiff’s actions and his motive. Focusing on the second part, the court noted that in Burnes v. Pemco Aeroplex, Inc., and Barger v. City of Cartersville, it endorsed an inference that a plaintiff who failed to disclose a lawsuit in a Chapter 7 bankruptcy intended to manipulate the judicial system because the omission was not inadvertent. It subsequently extended the reasoning of those decisions to cases involving Chapter 13 debtors as well.

Conflict. While the court noted that in two panel decisions after Burnes and Barger it applied judicial estoppel more narrowly, it found those decisions could not be reconciled with its prior precedent. In Parker v. Wendy’s Int’l, Inc., the appeals court reversed the district court’s application of judicial estoppel to bar an employment discrimination claim that a debtor failed to disclose as an asset in his Chapter 7 bankruptcy petition, reasoning that judicial estoppel should not be applied in that case because when the debtor filed Chapter 7 bankruptcy, the trustee, as representative of the bankruptcy estate, became “the proper party in interest, and … the only party with standing to prosecute causes of action belonging to the estate.”

In that case, the court held that because the trustee was the real party in interest in the civil lawsuit, had never taken an inconsistent position under oath, and had not abandoned the discrimination claim, the district court abused its discretion in applying judicial estoppel. Parker, however, could not be reconciled with Barger, which upheld the application of judicial estoppel to bar civil claims that the Chapter 7 debtor failed to disclose, even though the court acknowledged that the trustee was the real party in interest there too.

And in Ajaka v. Brooksamerica Mortgage Corp., the appeals court, relying in part on the fact that the plaintiff had subsequently amended his bankruptcy schedules, found the district court abused its discretion in applying judicial estoppel when there was a question of material fact about whether the plaintiff intended to conceal his civil claim from his creditors. Ajaka, said the en banc court, could not be squared with Burnes and Barger, which looked solely to whether the debtor omitted a claim to determine the debtor’s intent.

Totality of the facts and circumstances. Given the flaws in the reasoning of Burnes and Barger and the inconsistencies in its precedent, the court turned to how district courts should evaluate a debtor’s intent, holding that to determine whether a plaintiff’s inconsistent statements were calculated to make a mockery of the judicial system, a court should look to all the facts and circumstances of the particular case. When the plaintiff’s inconsistent statement comes in the form of an omission in bankruptcy disclosures, the court may consider such factors as the plaintiff’s level of sophistication, whether and under what circumstances the plaintiff corrected the disclosures, whether the plaintiff told his bankruptcy attorney about the civil claims before filing the bankruptcy disclosures, whether the trustee or creditors were aware of the civil lawsuit or claims before the plaintiff amended the disclosures, whether the plaintiff identified other lawsuits to which he was party, and any findings or actions by the bankruptcy court after the omission was discovered.

In rejecting the inference it accepted in Burnes and Barger in favor of a rule that a district court should look to all the circumstances of the case, the court pointed out that such an inquiry ensures that judicial estoppel is applied only when a party acted with a sufficiently culpable mental state. It allows a district court to consider any proceedings that occurred in the bankruptcy court after the omission was discovered, and limiting judicial estoppel to those cases in which the facts and circumstances warrant it is more consistent with the equitable principles that undergird the doctrine.

While U.S. Steel argued that no change to its precedent was required because even when a district court finds that the plaintiff intended to manipulate the judicial system, the court remains “entirely free to find in particular circumstances that a debtor’s omission was inadvertent,” the court noted that no plaintiff who omitted civil claims from bankruptcy disclosures will be able to show that he acted inadvertently because the plaintiff will always have knowledge of his pending civil claim and a potential motive to conceal it due to the very nature of bankruptcy.

As to its argument that overruling Burnes and Barger would create a circuit split, the court pointed out that a circuit split already exists, and its newly adopted approach is consistent with the decisions of at least three other circuits, which have recognized that whether a plaintiff intended to make a mockery of the judicial system requires consideration of more than just whether the plaintiff failed to disclose a claim. Accordingly, the court remanded the appeal to the panel to consider whether the district court abused its discretion in applying judicial estoppel.

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