Judicial estoppel, the concept that a party is estopped from taking inconsistent positions in different judicial proceedings, is being applied with increasing regularity when the debtor's schedules omit reference to a pending or a potential cause of action. The failure to list the asset often results in dismissal of the cause of action in the non-bankruptcy forum, either for the debtor's lack of standing or under the principles of judicial estoppel.¹

Briefly stated, the doctrine of judicial estoppel, as recently discussed by the Supreme Court in the case of New Hampshire v. Maine,² applies when (1) a party takes "clearly inconsistent" positions in judicial proceedings; (2) the party persuaded the court in the first proceeding to accept or "adopt" the party's position such that the subsequent inconsistent position, if adopted, would appear to result in one of the courts being misled; and (3) the party taking inconsistent positions would derive an unfair advantage.³ The Supreme Court acknowledged that other factors may be considered in the application of the doctrine to the facts of a particular case.

In the bankruptcy context, judicial estoppel is generally considered in cases in which the debtor has failed to disclose the existence of the cause of action as an asset of the estate. This has been applied in chapter 11 proceedings when the debtor fails to include treatment of it in the plan or the disclosure statement and then brings such action after confirmation of the plan. The first case at the appellate court level to consider the issue was Oneida Motor Freight Inc. v. United Jersey Bank.⁴ The Third Circuit applied the doctrine of judicial estoppel, reasoning that the creditors voting on the plan are prejudiced by the debtor's non-disclosure and that the integrity of the bankruptcy process is impugned by the debtor's actions, even if the debtor acted without malice. Other courts considering the issue in chapter 11 have applied the doctrine of res judicata to bar the debtor's subsequent action, reasoning that the issues sought to be subsequently litigated should have been litigated in the confirmation hearing and are therefore barred.⁵

In proceedings under chapters 7 and 13, the problem arises when the debtor fails to reveal the asset in the debtor's schedules. The Eleventh Circuit recently held in Burnes v. Pemco Aeroplex Inc.⁶ that the debtor's action for employment discrimination was judicially estopped due to the debtor's failure to disclose the potential claim in the debtor's prior chapter 7 proceeding. The debtor reopened the bankruptcy proceeding and amended the schedules to include the claim. The Eleventh Circuit, in dismissing the claim for monetary damages,⁷ held that detrimental reliance by the defendant was not an element since it is the integrity of the judicial process that is being protected, and that the debtor's attempt to reopen the case was evidence of bad faith since it was only done upon being discovered by the adversary. The court makes no mention of any attempt by the trustee to intervene or the prejudice to creditors that would result if the employment discrimination case were not pursued.

In a similar case, but reaching different results, the Fifth Circuit in Wieburg v. GTE Southwest Inc.⁸ reversed the dismissal of the debtors' employment discrimination case, which was brought after the debtors' discharge and which was revealed to the trustee after the defendant in the employment discrimination case had filed a motion to dismiss. The trustee and the debtor entered into an agreement, approved by the bankruptcy court, to allow the debtor to pursue the action for the estate. The district court dismissed the case, ruling that the debtor had no standing to proceed with the case, but failed to give the trustee an opportunity to intervene or be substituted as the real party in interest. The Fifth Circuit reversed, holding that the district court must consider the prejudice to the creditors resulting from dismissal and whether there had been ample opportunity for the trustee to be substituted, considering that the statute of limitations had expired.

Although a minority holds to the contrary,⁹ the vast majority of courts have held that judicial estoppel requires a finding of intentional manipulation coupled with a benefit bestowed on the debtor.¹⁰ Several courts have held that if the debtor subsequently amends the schedules to include the cause of action, judicial estoppel should not apply since the first court, where the conflicting position was taken by the debtor, sanctioned the change of position.¹¹ However, a New York appellate court held that since the debtor had no capacity to sue in the first instance, the trustee had no right to substitute since "substitution is not available to cure the deficiency, as a party with no capacity to sue cannot be replaced with one who has capacity in these circumstances."¹² If the debtor's confirmed chapter 13 plan provides for 100 percent payment to creditors, then judicial estoppel would not apply.¹³

In an interesting case that has received criticism for its brevity of facts and misapplication of the concept of judicial estoppel in chapter 13,¹⁴ the Georgia Supreme Court has held in Wolfork v. Tackett¹⁵ that judicial estoppel would apply to bar a tort claim that arose after the plan was confirmed, since assets acquired by the debtor post-petition were assets of the estate. The debtor failed to amend her schedules to include the claim and subsequently received a discharge. The bankruptcy proceedings were not part of the record such that it is unknown whether the debtor's chapter 13 was a 100 percent plan or not.

Conclusion

The doctrine of judicial estoppel is applicable in proceedings under chapters 7 and 13. Unless the debtor promptly amends the schedules (and reopens the case if necessary) to include the omitted cause of action, even if it arose post-petition in a chapter 13, the non-bankruptcy forum is likely to dismiss the case as being barred by judicial estoppel. The better rule, and consistent with Rule 1009 of the Federal Rules of Bankruptcy Procedure, is that the debtor should be liberally allowed to amend the schedules. Further, the best interest of creditors should be a paramount consideration before dismissing the cause of action under the doctrine of judicial estoppel. The trustee should be substituted as the real-party-in-interest to protect the assets of the estate.

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Footnotes

¹ For a more exhaustive treatment of the subject of this article, see Brown, "Debtor's Counsel Beware: Use of the Doctrine of Judicial Estoppel in Non-bankruptcy Forums" 75 Am. Bankr. L. J. 197 (Spring, 2001). This article will attempt to supplement Judge Brown's excellent article. Return to article

² 532 U.S. 742, 121 S.Ct. 1808, 149 L. Ed. 2d 968 (2001). Return to article

³ 532 U.S. at 750-51, 121 S.Ct. at 1815. Return to article

⁴ 848 F 2d 414 (3rd Cir. 1988), cert. denied, 488 U.S. 967, 109 S.Ct. 495, 102 L.Ed. 2d 532 (1988). Return to article

⁵ Eubanks v. FDIC, 977 F.2d 166 (5th Cir. 1992); D & K Properties Crystal Wake v. Mutual Life Insurance Co. of New York, 112 F.3d 257 (7th Cir. 1997); Sure-Snap Corp. v. State Street Bank & Trust Co., 948 F.2d 869; and Sanders Confectionary Products v. Heller Financial, 973 F.2d 474 (6th Cir. 1992). Return to article

⁶ 2002 U.S. App. LEXIS 9529, 88 Fair Empl. Prac. Cas. (BNA) 1281 (11th Cir. May 20, 2002). Return to article

⁷ The court allowed the debtor to continue with injunctive relief to the extent that he sought to change the defendant's employment practices. Return to article

⁸ 272 F.3d 302 (5th Cir. 2001). Return to article

⁹ See Stuart v. Hardie, 978 S.W.2d 203 (Tex. App. 1998). Return to article

¹⁰ See Jinright v. Paulk, 758 So.2d 553 (Ala. 2000) (knowledge and failure to include the claim in the bankruptcy schedules, without more, is not sufficient to invoke judicial estoppel); Bruner, 2002 U.S.App LEXIS 9529 (2000) (an inference of intentional manipulation can be inferred from the record); Riggan v. Askew, 1997 Tenn. App. LEXIS 727 (Tenn. Ct. App. 1997); In re Daniel, 205 B.R. 346, 348 (Bankr. N.D. Ga. 1997). Return to article

¹¹ See Richardson v. United Parcel Service, 195 B.R. 737 (E.D. Mo. 1996) (estoppel not applied where chapter 13 plan is not confirmed and trustee could easily have intervened); Shewmaker v. Etter, 644 N.E.2d 922 (Ind. Ct. App. 1994); Jowers v. Arthur, 537 S.E.2d 2000) (Ga Ct. App. 2000) (the bankruptcy court's decision to permit the reopening and amendment precludes a finding of an inconsistent position); In re Griner, 240 B.R. 432, 439 (Bankr. S.D. Ala. 1999) ("the better result is to allow the claim to be prosecuted and collected, order the funds paid toward claims filed in the case, and punish the debtor another way."). Return to article

¹² Reynolds v. Blue Cross of Northeastern New York Inc., 210 A.D. 2d 619, 620 N.Y. 2d 164 (N.Y. App. Div. 1994); see, also, Hansen v. Madani, 263 A.D. 2d 881, 693 N.Y. S.2d 332 (N.Y. App. Div. 1999). Return to article

¹³ Donato v. Metropolitan Life Ins. Co., 230 B.R. 418 (Bankr. N.D. Cal. 1999). Return to article

¹⁴ Brown, 75 Am. Bankr. L.J. at 206-207. Return to article

¹⁵ Wolfork v. Tackett, 540 S.E.2d 611 (Ga. 2001), affirming 526 S.E.2d 436 (Ga. Ct. App. 1999). Return to article