Judicial Estoppel

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). [Read more…] about Sixth Circuit All But Eliminates Defense to Judicial Estoppel

The district court did not abuse its discretion in dismissing the plaintiff’s case under the False Claims Act where he had failed to disclose the cause of action in his pending chapter 13 case. Bias v. Tangipahoa Parish School Board, No. 17-30982 (5th Cir. March 22, 2019) (withdrawing prior opinion) (unpublished, per curiam opinion).

After his chapter 13 case was confirmed in bankruptcy court, debtor, Ronald Bias, learned that his retirement from the Marine Corps had mistakenly been permitted two years earlier than it should have been. The Marine Corps offered him the option of continuing his teaching position in the Junior Reserve Officer’s Training Corp (JROTC), Tangipahoa Parish School District, as a way of fulfilling his pre-retirement obligations. While teaching, Mr. Bias learned of a fellow marine and teacher at the school whom he believed was submitting false reimbursement requests to the Marine Corps. After he reported his suspicions, Mr. Bias was offered the opportunity to retire or be transferred to a new school district.

Believing this action by the school board to be in retaliation for his whistle-blowing, Mr. Bias filed an action in district court under the False Claims Act, 42 U.S.C. section 1983, and state law, against the school board, the school principal and the marine who sought the reimbursements. The court dismissed all the claims that were not separately settled, and Mr. Bias appealed. The Fifth Circuit reversed and remanded the dismissal of Mr. Bias’s FCA retaliation claim against the Board. On remand, the Board argued that Mr. Bias’s claim should be dismissed on judicial estoppel grounds because Mr. Bias failed to disclose the action to the bankruptcy court where his chapter 13 case was pending. The district court agreed and granted the Board’s motion to dismiss.

On appeal, the Fifth Circuit found that the district court did not abuse its discretion in applying judicial estoppel to Mr. Bias’s case.

Applying the three elements necessary for application of judicial estoppel, the circuit court found first that Mr. Bias had an ongoing duty to report post-petition causes of action to the bankruptcy court and that, by failing to do so, he impliedly misrepresented to the court that no such litigation existed. Mr. Bias, and NACBA/NCBRC as amici, argued that Mr. Bias had no duty to disclose the litigation, as section 541(a), and Rule 1007(h) delineate the debtor’s duty of disclosure and neither the Code nor the Rule impose that duty. Mr. Bias and amici distinguished Flugence v. Axis Surplus Insurance Co. (In re Flugence), 738 F.3d 126 (5th Cir. 2013), which involved a chapter 13 plan specifying that property would not re-vest in the debtor until discharge. In contrast, Mr. Bias’s plan provided that upon confirmation, property would re-vest in him. Mr. Bias and amici argued, therefore, that because a post-petition cause of action would not enter the bankruptcy estate, he had no obligation to disclose it.

Citing its own precedents, the court found that Fifth Circuit law has established that a debtor’s duty to disclose is not dependent upon the whether the asset acquired post-confirmation entered the bankruptcy estate or was otherwise subject to disclosure requirements as set forth in the Code. Rather, under judicially-created law, debtors in the Fifth Circuit have an obligation of disclosure beyond what is required by Congress. The court summarily rejected the argument that its disclosure obligation is unduly burdensome.

The court next found that the bankruptcy court’s reliance on Mr. Bias’s misrepresentation was evidenced by its grant of discharge. It rejected Mr. Bias’s argument that the bankruptcy court could not have relied on a representation of which it was not aware, as not having been raised below.

Finally, the court found the third element of intentionality and motive to conceal, was satisfied. In so holding, the court held that, under its precedents, Mr. Bias’s lack of awareness of the law requiring disclosure is irrelevant. Inadvertence can be shown only by a lack of awareness of the facts giving rise to the duty to disclose, i.e. the existence of the cause of action. With respect to motive, the court applied an objective analysis under which the mere fact that Mr. Bias would have had to disclose any settlement or award arising out of the litigation to the bankruptcy court thereby possibly exposing himself to increased plan payments or shorter plan period, was sufficient to infer motive to delay the FCA litigation and keep the bankruptcy court in the dark.

In the face of amici’s argument that the “Fifth Circuit has begun using the doctrine [of judicial estoppel] as a per se rule as a perfunctory bludgeon with which to punish dishonest and honest debtors alike,” the court fell back on its position as a reviewing court. It held that the district court based its holding on a correct statement of the facts and reasonable interpretation of circuit law and, therefore, did not abuse its discretion.

Mr. Bias has filed a petition for rehearing en banc.

Bias 5th Cir March 2019 new opinion

Whether a debtor intends to make a mockery of the judicial system when she fails to disclose a civil lawsuit in her bankruptcy schedules requires consideration of a totality of facts and circumstances. Slater v. U.S. Steel Corp., No. 12- 15548 (11th Cir. Sept. 18, 2017).

When she filed her chapter 7 bankruptcy petition, Sandra Slater failed to disclose her civil lawsuit for retaliation and discrimination in her employment that was pending in district court. In fact, in her Schedule B and in the Statement of Financial Affairs she affirmatively stated that she had no contingent claims or pending lawsuits. After her bankruptcy was fully administrated, U.S. Steel moved for summary judgment in the district court seeking a finding that her pending claims for employment discrimination should be barred by the doctrine of judicial estoppel due to her failure to disclose them in her bankruptcy. The next day, explaining that she had misunderstood the questions in the bankruptcy filings, Ms. Slater amended her bankruptcy documents to list the lawsuit. The bankruptcy court granted the trustee’s motion for an order to employ Ms. Slater’s current district court lawyers (who were different from her bankruptcy lawyer) so they could continue to pursue the employment lawsuit. Ms. Slater then converted from chapter 7 to chapter 13 but failed to make all required contributions to the plan and her case was ultimately dismissed.

Based on Eleventh Circuit precedents, Barger v. City of Cartersville, 348 F.3d 1289 (11th Cir. 2003) and Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282 (11th Cir. 2002), the district court in Ms. Slater’s civil case held that the claims were barred by judicial estoppel by virtue of her failure to disclose and the presumption that she was motivated by the desire to conceal the asset from bankruptcy creditors. The court granted summary judgment to U.S. Steel. The Eleventh Circuit affirmed, but in her concurring opinion, Judge Tjoflat urged the court to reconsider its precedents en banc.

In en banc review, the Eleventh Circuit reconsidered its rule that “the mere fact of the plaintiff’s nondisclosure is sufficient [to establish intent to mislead], even if the plaintiff corrected his bankruptcy disclosures after the omission was called to his attention and the bankruptcy court allowed the correction without penalty.”

The court began its analysis with a look at of the difference between chapter 7 and chapter 13, finding that, in chapter 7, the debtor’s property becomes part of the bankruptcy estate to be administered by the trustee and, therefore, only the trustee has standing to pursue a pending lawsuit. In chapter 13, on the other hand, once a plan is confirmed the property of the estate reverts to the debtor and she has standing to maintain the civil suit.

With this difference in mind, the court turned to principles of judicial estoppel. Under that doctrine, a court will bar a suit when the person against whom the doctrine is to be applied “(1) took a position under oath in the bankruptcy proceeding that was inconsistent with the plaintiff’s pursuit of the civil lawsuit and (2) intended to make a mockery of the judicial system.” It is the second prong of this test that the court focused on in its decision, noting that Barger and Burnes essentially create a presumption of satisfaction of the second prong by virtue of satisfaction of the first.

The court found the presumption erroneously ignored the possibility that a debtor’s failure to disclose could be based on inadvertence or mistake and was inconsistent with other precedents out of the Eleventh Circuit. For instance, Parker v. Wendy’s Int’l, Inc., 365 F.3d 1268, 1272 (11th Cir. 2004), held that judicial estoppel could not be applied to bar a chapter 7 debtor’s civil lawsuit because that debtor, having lost standing to pursue the civil case upon filing for bankruptcy, could not have taken inconsistent positions as to her assets. In Ajaka v. Brooksamerica Mortgage Corp., 453 F.3d 1339 (11th Cir. 2006), the court looked to judicial estoppel in the context of chapter 13. There, the debtor disclosed the civil action to his bankruptcy attorney, but the attorney failed to list it in the bankruptcy schedules. The creditors, however, were aware of the lawsuit and the debtor amended his schedules later to include it. The Eleventh Circuit found the district court’s application of judicial estopped to have been in error and remanded with instructions for the court to address whether the debtor had the requisite intent to conceal.

The Slater panel found that proper analysis of the second prong of the judicial estoppel test requires examination of a totality of the facts and circumstances including, but not limited to, such factors as the debtor’s level of sophistication, whether and under what circumstances she corrected the nondisclosure, whether the debtor’s attorney and/or the creditors were aware of the lawsuit, whether the debtor revealed any other lawsuits to which she was a party, and what action the bankruptcy court deemed appropriate to address the late disclosure. The court overruled Barger and Burnes to the extent they allowed a court to infer a debtor’s intent to mislead without considering these and other relevant circumstances.

The court reasoned that its current ruling was more in line with the principles behind the doctrine of judicial estoppel. It ensures that the debtor had the requisite culpable mental state, it allows the actions of the bankruptcy court to be taken into consideration thereby addressing whether the omission in fact undermined the integrity of the judicial system, and it better supports the equitable underpinnings of the doctrine.  Because the bankruptcy Code and Rules permit a debtor to amend her schedules at any time, and allows the court to reopen a case to administer an asset, the bankruptcy system has its own tools for dealing with non-disclosures to avoid apparent manipulation. The court also noted that “[i]f a court applies judicial estoppel to bar the plaintiff’s claim absent such intent, it awards the civil defendant an unjustified windfall.” Furthermore, as a practical matter, application of judicial estoppel could deprive the debtor’s creditors of the benefits of a victory in the civil lawsuit.

The court noted that in so holding, it joined three other circuits that have applied a totality-of-the-circumstances analysis to the question of judicial estoppel. See Spanie v. Cmty. Contacts, Inc., 756 F.3d 542, 548 (7th Cir. 2014); Ah Quin v. Cty. of Kauai Dep’t. of Transp., 733 F.3d 267, 276 (9th Cir. 2013); Eubanks v. CBSK Fin. Grp., Inc., 385 F.3d 894, 899 (6th Cir. 2004). It disagreed with two circuits applying a similar presumption as that overruled in Barger and Burnes. See, e.g., Eastman v. Union Pac. R.R. Co., 493 F.3d 1151, 1157-60 (10th Cir. 2007); Ine Superior Crewboats, Inc., 374 F.3d 330, 335-36 (5th Cir. 2004).

The court remanded to the panel to determine whether the district court abused its discretion in applying judicial estoppel to Ms. Slater’s civil lawsuit.

Chief Judge Ed Carnes filed a concurring opinion noting that the decision allows a court to consider the credibility of the debtor even if her testimony with respect to intent is uncontradicted.

Much of the reasoning applied by the en banc panel was argued by NACBA in its amicus brief.

Slater 11th Cir. opinion Sept 2017