Sixth Circuit All But Eliminates Defense to Judicial Estoppel

Posted by NCBRC - October 26, 2022

Stating that it “is always in a Chapter 13 petitioner’s interest to minimize income and assets,” and speculating that “had the bankruptcy court and Stanley’s creditors known about [his civil] claim, the outcome of Stanley’s bankruptcy petition could have been less favorable to Stanley,” the Sixth Circuit all but eliminated a bankruptcy debtor’s defense against judicial estoppel based on lack of motive to conceal the claim. Stanley v. FCA US, LLC, No. 21-4238 (6th Cir. Oct 18, 2022).

When the plaintiff filed his bankruptcy petition he had a pending grievance against his former employer, FCA US, for violation of the Family and Medical Leave Act. He failed to disclose the claim despite the explicit requirement to list employment disputes in his bankruptcy schedules. His confirmed plan committed to 100% payment of his debts.

A little over a year after his plan was confirmed, the plaintiff filed a civil lawsuit against his former employer. He disclosed the lawsuit to the bankruptcy court, listing its value as “unknown,” only after FCA’s attorney brought up the prospect of dismissal of his lawsuit on judicial estoppel grounds. The district court found the disclosure came too late and granted summary judgment in favor of FCA. The plaintiff appealed to the Sixth Circuit.

Even though judicial estoppel is a discretionary equitable principle, the court noted that the standard for review in the Sixth Circuit is de novo. Judicial estoppel in this context has three elements: 1) the plaintiff took a contrary position in the bankruptcy court, 2) the bankruptcy court relied on that position, and 3) the contradiction was not based on inadvertence or mistake. Here, the only issue was the third element which requires showing that “(1) the plaintiff had knowledge of the facts underlying the undisclosed claims; (2) the plaintiff had motive to conceal the undisclosed claims; and (3) the omission was made in bad faith.”

With respect to motive, the court began with the presumption that a bankruptcy debtor always has an “interest [in] minimiz[ing] income and assets.” The court explored the “novel” question of whether that interest adheres when the debtor has confirmed a 100% plan.

Here, the court found, the plaintiff, like many chapter 13 debtors, benefited from his bankruptcy plan by being able to reorganize his debts, extend repayment deadlines, and save his home from foreclosure. But because the plaintiff failed to disclose his civil lawsuit, the court found that his creditors in bankruptcy acted on incomplete information when they opted not to object to confirmation of his plan.

In the face of the plaintiff’s argument that he had nothing to gain from the nondisclosure, the court said merely, “disclosure could have resulted in bankruptcy terms less favorable to Stanley,” without stating what those terms might be and without any indication that any party would have sought less favorable terms.

The court rejected the plaintiff’s argument in favor of overruling the presumption that a bankruptcy debtor always has an interest in minimizing assets. It reasoned that the presumption had been established in Lewis v. Weyerhaeuser Co., 141 F. App’x 420, 426 (6th Cir. 2005), and that one circuit panel could not overrule another.

Having determined that the plaintiff had a motive to conceal the civil lawsuit, the court went on to determine whether he sustained his burden of showing that the concealment was not in bad faith. The court found that because he did not reveal the civil lawsuit until after the issue of judicial estoppel was raised in the district court, his disclosure did not establish a lack of bad faith. Furthermore, the court found evidence of bad faith in the plaintiff listing the claim as being of unknown value, even though he’d demanded $602,894 in damages.

The court concluded that the cost of allowing FMLA violators to “get off” without consequences was outweighed by the benefits inherent in inducing bankruptcy debtors to be truthful in their filings.

The only circumstance this opinion seems to leave open for finding that a plaintiff’s failure to disclose was not based on a motive to conceal, is in the case of Browning v. Levy, 283 F.3d 761, 775 (6th Cir. 2002). In that chapter 11 case, the creditors rather than the debtor stood to gain from the civil lawsuit. Here, the plaintiff argued that, like Browning, he did not stand to get a windfall from the lawsuit because his bankruptcy plan was 100% so his creditors would not have benefitted from the suit. The court rejected that argument with the vague and universally applicable statement that the “disclosure could have resulted in bankruptcy terms less favorable to Stanley.”

Stanley 6th Cir. Oct 2022


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