Benjamin Hardy is an associate professor of the College of Commerce and Business Administration at Jacksonville State University in Jacksonville, Ala. He is a former corporate labor attorney. The author thanks Tabitha Croscut, a third-year student at Syracuse University College of Law, for her assistance in the editing of this article.
Reprinted by permission. Originally appearing in The Labor Lawyer, Volume 18, No. 2, Fall 2002 © 2002 American Bar Association. All rights reserved.
"We are all patchwork, and so shapeless and diverse in composition that each bit, each moment, plays its own game."
- Michel de Montaigne
The above-referenced quotation from Michel de Montaigne recognizes that it is human nature to be inconsistent in our actions and to take positions that serve us at the moment.1 While this may be a matter of human nature and frequently is done without any adverse consequences, one area in which it can have disastrous results is in the pursuit of legal claims. This is especially true in the case of plaintiffs in civil actions who have failed to list their legal causes of action as assets in bankruptcy.
It is not uncommon for potential plaintiffs in civil actions to find themselves in desperate financial circumstances. Indeed, in many instances their financial plight may be the direct result of tortious or wrongful conduct, which gives rise to their legal claims. This is often the case with regard to plaintiffs who believe they have been wrongfully discharged from their employment. Oftentimes, terminated employees who believe that they may have a claim for wrongful discharge resulting from race, age, sex, national origin, religion, handicap or some other unlawful reason are unable to find new employment or employment at a level of compensation comparable to their prior job.2 As a consequence, these individuals and their families become f inancially stressed and must resort to a bankruptcy filing.
Potential plaintiffs and their attorneys must be aware that if the plaintiff seeks financial relief in bankruptcy, then he or she must list as an asset any potential legal claim, for example, the debtor plaintiff's employment claim for a Title VII discriminatory discharge.3 Failure to include a plaintiff's cause of action as an asset of the debtor can result in a loss of the claim and subsequent dismissal of the debtor plaintiff's case. Needless to say, an attorney who allows his or her client to proceed with a legal claim after failing to include it in the bankruptcy estate may also face a malpractice claim. In addition, the defense lawyer who fails to use discovery to determine whether a plaintiff has filed a bankruptcy claim and whether the pending litigation is included as an asset will miss a golden opportunity to obtain an early dismissal in the case. The defendant's motion to dismiss may be based on an assertion of the doctrine of judicial estoppel or possibly on a lack of standing.
Judicial estoppel is a common law doctrine that has been adopted in various forms by some courts and rejected by others.4 The doctrine and its requirements are sometimes considered vague and uncertain.5 This is not surprising in light of the fact that it is an equitable doctrine, and, as in the case of other equitable doctrines, its use and form may be dictated to some extent by the facts to which it is applied and by the policy underlying the doctrine.
Wright, Miller, and Cooper address judicial estoppel as a form of the doctrine of preclusion that prevents parties to litigation from adopting inconsistent positions or making inconsistent claims in successive suits.6 These inconsistent positions may be taken by a party under oath or as a result of a party's out-of-court conduct.7 The policy concerns are patently to prevent a party from benefiting by the taking of inconsistent positions either to the detriment of the other party or in an effort to deal unfairly with a court and take unfair advantage of the legal process.8
The courts have recognized that the objective of judicial estoppel is "to protect the integrity of the judicial process" and to "prevent parties from playing fast and loose with the courts to suit the exigencies of self interest."9 Given this purpose, courts have found that reliance by an opposing party is unnecessary for the doctrine to come into play.10 It is generally recognized that the taking of an inconsistent position by a party must be intentional and that the party must have as an improper motive the quest for an unfair advantage.11
While cases using judicial estoppel can sometimes appear confusing and unclear regarding the doctrine's makeup, there do appear to be several recognized requirements for its use in the federal courts. First, a party must take a position that is "clearly inconsistent" with a previously taken position.12 Second, the court faced with the previous position must have been persuaded by the party to accept that position.13 Third, some courts require that the position taken be one of fact, not of law.14 Fourth, courts have required that the acts of the party to be estopped be intentional and not inadvertent.15 And, fifth, the party taking the inconsistent position must stand to benefit from such action.16
In a recent case, New Hampshire v. Maine, the U.S. Supreme Court had occasion to review the doctrine and apply it in a case involving the boundary between New Hampshire and Maine.17 New Hampshire claimed that its boundary with Maine ran along the shore of Maine and included all of the Piscataqua River and all of Portsmouth Harbor.18 In earlier litigation between the two states over rights relating to lobster fishing, a consent decree was entered that used the words "Middle of the River," which was held to mean "the middle of the main channel of navigation of the Piscataqua River."19 In the court's opinion, which was joined by all the justices except Justice Souter (who did not participate in the case), Justice Ginsburg held that judicial estoppel applied to the case and that New Hampshire's claim of a boundary along the Maine shore was barred.20
Justice Ginsburg explained that judicial estoppel is an equitable doctrine that is exercised at the discretion of the court and that it is designed to prevent a party from manipulating the judicial process through the utilization of inconsistent positions.21 She pointed out that courts which have commented on the doctrine note that it cannot be reduced to any general formula.22 However, she explained that a number of factors are normally considered in deciding on the application of the doctrine to a particular case. The first fact is whether the subsequent position taken by a party was "clearly inconsistent" with the position taken earlier.23 The second factor is whether the court was persuaded to accept the earlier position taken by the party.24 On this issue, she explained that a court's acceptance of the subsequent inconsistent position should create "the perception that either the first or the second court was misled."25 Clearly, the court is focusing on the necessity for an intentional act with the purpose of manipulating and abusing the judicial process. Indeed, later in the opinion, Justice Ginsburg opined that the doctrine could be inapplicable when the first inconsistent position was the result of inadvertence or mistake.26 The third factor is whether the party asserting the inconsistency stood to gain an unfair advantage before a court or to cause unfair detriment to the other party.27 The opinion further explained that the requirements for judicial estoppel were not to be viewed as inflexible requirements and that, with different factual circumstances, additional considerations may be taken into account.28
Obviously, the thrust of the decision in New Hampshire v. Maine is to recognize the equitable doctrine of judicial estoppel as it has developed in the federal courts and the general requirements for its use along with the necessary flexibility in its application that is required for the use of equitable doctrines.29 Courts sometimes take an abbreviated or shorthand approach to the doctrine, which is referred to as a two-pronged analysis; they focus first on whether inconsistent positions were in fact taken and second on whether a party stands to benefit from the inconsistency and concomitant manipulation of the judicial process.30
The doctrine has particular applicability in the case of potential tort and employment claim litigants who are forced into bankruptcy filings and who fail to include their claims as an asset. A debtor in a bankruptcy filing is required to disclose all assets, and this duty is a continuing one that also encompasses potential causes of action.31 In the case of a Chapter 13 bankruptcy, courts have recognized that legal causes of action are assets that must be disclosed; this is the case with regard to claims existing at the beginning of the bankruptcy or arising after the bankruptcy has been initiated and until closure of the action or dismissal or conversion of a Chapter 13 bankruptcy to a Chapter 7 bankruptcy.32 In a Chapter 11 bankruptcy, a debtor also has a duty to disclose legal claims that arise after the bankruptcy commences.33 In Chapter 7 cases, the trustee succeeds to all those causes of action that exist at the time of the filing of a bankruptcy petition.34
Honesty in the filing of a schedule of assets by a debtor is obviously one of the cornerstones of the bankruptcy system. One of the best judicial discussions of the applicability of judicial estoppel to cases in which a bankrupt fails to disclose a legal claim explains the rationale as follows:
The rationale for these decisions is that the integrity of the bankruptcy system depends on full and honest disclosure by debtors of all of their assets. The courts will not permit a debtor to obtain relief from the bankruptcy court by representing that no claims exist and then subsequently to assert those claims for his own benefit in a separate proceeding. The interests of both the creditors, who plan their actions in the bankruptcy proceeding on the basis of information supplied in the disclosure statements, and the bankruptcy court, which must decide whether to approve the plan of reorganization on the same basis, are impaired when the disclosure provided by the debtor is incomplete.35
In light of the necessity for an honest statement of assets (including causes of action), judicial estoppel has been used to bar the claims of debtors who failed to list their claims.36 Legal claims growing out of an individual's employment are assets and must be listed as such.37 When this has not occurred, defendants have urged the application of judicial estoppel.38 Thus, it must be emphasized that the bankrupt and his or her attorney in a discharge or some other type of employment case must not overlook the necessity of filing a claim as an asset of the debtor. This is particularly true given the employee's unique knowledge of his or her termination or of other employment-affecting conduct by the employer.
Cases addressing judicial estoppel indicate that a possible barrier to the doctrine's use is the attribution of the prior inconsistency to inadvertence or mistake. The fact finder on this issue is the court, and the cases appear to take a rather broad approach to the issue of knowledge. It has been said that a debtor does not have to know all the facts or even the basis in law of the action but just enough information to indicate the possibility of a legal action.39 Furthermore, "[a]ny claim with potential must be disclosed, even if it is 'contingent, dependent, or conditional."40 While it is impossible to enumerate all the factors that a court might consider in finding knowledge and intent, there are several important ones that should be noted: the debtor plaintiff's age, sophistication and education; inconsistent actions such as in the case of a discrimination claimant contacting or filing a charge with the Equal Employment Opportunity Commission;41 employment and employment claim history; discussio ns and contacts with attorneys and others; multiple misrepresentations in the bankruptcy filing that indicate knowledge of a claim and a desire to conceal it;42 and other relevant facts of an objective nature that the debtor plaintiff had to know. While courts consider a debtor plaintiff's motive on the issue of the manipulation of the judicial process and potential benefit, the motive would certainly also be taken into account on the issue of the amount of knowledge to be attributed to the debtor.
As a general rule, a broad approach may be taken toward a debtor's knowledge, but courts have been willing to reject the use of judicial estoppel, even when there is clearly knowledge and a failure to list an employment termination claim, if arrangements with bankruptcy courts deny debtors any "windfall" and a "plan" provides that all creditors will receive 100 percent of their claims.43 Moreover, a bankrupt may file a declaration with a federal district court explaining the facts that gave rise to the omission from the schedule and that the inconsistent position was the result of inadvertence or mistake.44 The signing of blank forms for a paralegal and the failure of a paralegal to inquire about causes of action would be factors in the debtor's favor.45 Obviously, the decision to use judicial estoppel to bar a claim is within the discretion of a court, and, although a court might take a charitable view of omissions, the prudent course of action is to list all such claims and avoid the inquiry.
Lack of standing
Another weapon in the defense arsenal that may be used when the plaintiff has failed to list a cause of action as an asset in bankruptcy is the argument that the plaintiff lacks standing to bring the case. This argument is based on the idea that a debtor must file a schedule that includes as sets; encompassed in assets are causes of action that have accrued at the commencement of the bankruptcy.46 These causes of action are viewed as a part of a bankrupt's estate and are to be used for the benefit of creditors.47 The trustee in bankruptcy is charged with administering the bankruptcy estate; therefore, only the trustee can pursue the claims of the debtor, and the debtor plaintiff lacks standing with regard to such claims.48 Debtors may pursue claims that have been "abandoned" by the trustee. However, notice and a hearing is obviously required along with knowledge of the claim by the trustee.49 Since none of this has occurred with regard to an unscheduled cause of action, there has been no abandonment of the claim.
The lack-of-standing argument has been successfully made by defendants in civil actions, and courts have granted motions for summary judgment on this basis.50 A review of the cases in this area reveals that a defendant's chances of success may well depend on the nature of a plaintiff debtor's bankruptcy - that is, Chapter 7, Chapter 11 or Chapter 13. In the case of Chapter 13 bankruptcies, there appears to be a split of opinion among the bankruptcy courts.51 There are, however, federal appellate court decisions that make a persuasive case for allowing a bankruptcy debtor to proceed with her claim. This is based on the idea that, unlike a Chapter 7 liquidation, a Chapter 13 reorganization plan posits that creditors will be repaid from earnings rather than liquidated assets.52 Furthermore, the "debtor retains possession of and may use all the property of his estate, including his pre-petition causes of action."53 Although the Bankruptcy Code does not address the issue of whether a Chapter 13 debtor can bring a suit on the basis of a pre-bankruptcy petition claim, the legislative history of 11 U.S.C. ß 1303 (the applicable U.S. Code section) indicates that Congress's intent was to give debtors the right to maintain suits in their right if they so desire.54
A contrary result has been reached in the case of Chapter 7 bankruptcies. Here, the trustee is charged with liquidating the bankruptcy estate and is solely charged with the duty of representing the estate in legal actions that are part of the estate.55 Courts have also concluded that the trustee in Chapter 11 bankruptcies is the one with standing to maintain actions on behalf of the bankruptcy estate.56
A review of cases reveals that while a lack of standing has been found on the part of debtor-plaintiffs in Chapter 13 bankruptcy cases,57 the better view is that a debtor and a trustee have concurrent rights and that the debtor can maintain a legal action in his own right.58 In the case of a Chapter 7 liquidation, it appears that only a trustee can maintain an action on behalf of the bankruptcy estate; thus, a motion to dismiss for a lack of standing may succeed in these cases.59
It is clear that both the plaintiff's employment claim attorney and his or her bankruptcy attorney must be cognizant of the necessity of including causes of action in the plaintiff-debtor's schedule of assets. Clearly, a failure to include such a claim can result in a successful motion to dismiss on either the basis of judicial estoppel or a lack of standing. While judicial estoppel will probably provide the primary basis for a dismissal, it is possible for a lack-of-standing dismissal to occur in a Chapter-7 bankruptcy case or in a Chapter-13 bankruptcy situation in some jurisdictions. The law in this area demands vigilance on the part of plaintiffs' attorneys, for it provides a very effective vehicle for dismissals to defense attorneys.
1. "Of the inconsistency of our actions"; THE ESSAYS (LES ESSAIS) bk II, ch. 1, Simon Millanges, Bordeux, (1st ed. 1580).[back]
2. See generally JACK B. HOOD ET AL., WORKERS' COMPENSATION AND EMPLOYEE PROTECTION LAWS IN A NUTSHELL (3d ed. 1999)[back]
3. See 11 U.S.C. ß 521(1) (2000); United States v. Whiting Pools, Inc., 462 U.S. 198, 205 n.9, citing 1978 U.S.C.C.A.N. 5868, 6323 (1983); In re Coastal Plains, Inc., 179 F.3d 197, 208 (5th Cir. 1999).[back]
4. See United States v. 162 Mania Mega Gambling Devices, 231 F.3d 713, 726 (10th Cir. 2000) (rejecting the doctrine of judicial estoppel).[back]
5. See New Hampshire v. Maine, 532 U.S. 742, 742-43 (2001).[back]
6. See 18B CHARLES ALAN WRIGHT ET AL., FEDERAL PRACTICE AND PROCEDURE ß 4477, at 551-52 (2D ED. 2002).[back]
7. Id. at 558-59, 785. See Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282, 1286 (11th Cir. 2002).[back]
8. Supra FEDERAL PRACTICE AND PROCEDURE, at 558-65.[back]
9. See Coastal, 179 F.3d at 205-06, quoting Brandon v. Interfirst Corp., 858 F.2d 266, 268 (5th Cir. 1988); United States v. McCaskey, 9 F.3d 368, 378 (5th Cir. 1993); see also Franco v. Selective Ins., 184 F.3d 4, 9 (1st Cir. 1999); Burnes, 291 F.3d at 1284-85.[back]
10. Coastal, 179 F.3d at 205, citing In re Cassidy, 892 F.2d 637, 641 n.2 (7th Cir.), cert. denied, 498 U.S. 812 (1990); see also Wright v. Bankamerica Corp., 219 F.3d 79, 90 (2d Cir. 2000) (explaining that the key requirements are an inconsistent position in a prior case and some kind of acceptance of it by the prior court).[back]
11. See Chandler v. Samford Univ., 35 F.Supp. 2d 861, 865 (N.D. Ala. 1999); see also Burnes, 291 F.3d at 1285.[back]
12. See Wright, 219 F.3d at 90; Coastal, 179 F.3d at 206.[back]
13. See Blanchy v. Butcher, 221 F.3d 896, 908 (6th Cir. 2000); Wright, 219 F.3d at 90; Franco, 184 F.3d at 9; see also Alabama v. Shalala, 124 F.Supp. 2d 1250, 1266 (M.D. Ala. 2000)(judicial estoppel also applies when prior inconsistent statements are made in administrative hearing).[back]
14. See Pittston Co. v. United States, 199 F.3d 694, 701 n.4 (4th Cir. 1999).[back]
15. See Klein v. Stahl GMBH & Co. Maschinefabrick, 185 F.3d 98, 111 (3d Cir. 1999)(bad faith required); Int'l Union of Mine Workers v. Marrowbond Dev., 232 F.3d 383, 391 (4th Cir. 2000).[back]
16. See Chandler, 35 F.Supp. 2d at 863.[back]
17. See 532 U.S. 742, 742-43 (2001).[back]
18. Id. at 742.[back]
19. Id. at 747.[back]
20. Id. at 756.[back]
21. Id. at 749-50.[back]
22. Id. at 750.[back]
23. See Id., citing inter alia United States v. Hook, 195 F.3d 299, 306 (7th Cir. 1999); Coastal, 179 F.3d at 206; Hossaini v. W. Mo. Med. Ctr., 140 F.3d 1140, 1143 (8th Cir. 1998); Maharaj v. Bankamerica Corp., 128 F.3d 94, 98 (2d Cir. 1997).[back]
25. Id., citing Edwards v. Aetna Life Ins., 690 F.2d 595, 599 (6th Cir. 1982).[back]
26. Id. at 753 (citation omitted); see also Lampi, LLC v. Am. Power Products, 65 F.Supp. 2d 757, 776 (N.D. Ill. 1999), aff'd in part, vacated in part and remanded, 228 F.3d1365 (Fed. Cir. 2000) (recognizing that the doctrine does not apply if position due to mistake or inadvertence); see also Burnes, 291 F.3d at 1287.[back]
27. See New Hampshire, 532 U.S. at 751, citing inter alia Davis v. Wakelee, 156 U.S. 680, 689 (1895); Philadelphia, W. & B.R. Co. v. Howard, 54 U.S. 307, 335-37 (1851); Scarano v. Central R. Co. of N.J., 203 F.2d 510, 513 (1953).[back]
30. See Chandler, 35 F.Supp. 2d at 863-64.[back]
31. See 11 U.S.C. ß 5211); Burnes, 291 F.3d at 1286; Coastal, 179 F.3d at 208, citing inter alia Youngblood Group v. Lufkin Fed. Sav. & Loan Ass'n, 932 F.Supp. 859, 867 (E.D. Tex. 1996).[back]
32. See 11 U.S.C. ß 521(1); id. ß 1306(a)(1) (stating causes of action that the debtor acquires following commencement of the bankruptcy case or until closure of the case or dismissal or conversion to a Chapter 7, 11, or 12 case are property of the estate.); see also Chandler, 35 F.Supp. 2d at 864-65; Valley Fed. Sav. Bank v. Anderson, 612 N.E.2d 1099, 1102-03 (Ind. App. 4 Dist. 1993); Burnes, 291 F.3d at 1287.[back]
33. See Chandler, 35 F.Supp. 2d at 864 n.3.[back]
34. See Miller v. Shallowford Cmty. Hosp., 767 F.2d 1556, 1559 (11th Cir. 1985).[back]
35. Rosenshein v. Kleban, 918 F.Supp. 98, 104 (S.D.N.Y. 1996)(quoted with approval in Coastal, 179 F.3d at 208).[back]
36. See Coastal, 179 F.3d at 208-09 n.7; Chandler, 35 F.Supp. 2d at 863.[back]
37. See Chandler, 35 F.Supp. 2d at 862-63.[back]
38. See Burns, 291 F.3d at 1289 (judicial estoppel was utilized to bar an employment discrimination claim for money damages, but not the claim for injunctive relief to prevent discriminatory practices because injunctive relief did not involve anything of value for the estate and creditors); Chandler, 35 F.Supp. 2d at 864-65 (judicial estoppel was used to bar the plaintiff's claim of racial discrimination because of her employer's failure to hire her for a permanent rather than a temporary position.); Donato v. Metro. Life Ins., 230 B.R. 418, 420 (N.D. Cal. 1999)(the defendant argued that judicial estoppel and lack of standing should have barred the debtor-plaintiff's alleged claims of violations of the Americans with Disabilities Act, the Family and Medical Leave Act, the Age Discrimination in Employment Act, Title VII, 42 U.S.C. ß 1981, employment harassment and retaliation, employment discrimination, breach of the covenant of good faith and fair dealing, and breach of an implied employment contract).[back]
39. See Coastal, 179 F.3d at 208, quoting Youngblood Group v. Lufkin Fed. Sav. & Loan Assoc., 932 F.Supp. at 867).[back]
40. Id., quoting Westland Oil Dev. Corp. v. MCorp Mgmt. Solutions, 157 B.R. 100, 103 (S.D. Tex. 1993).[back]
41. See Chandler, 35 F.Supp. 2d at 862 (the court applied judicial estoppel to bar the plaintiff's employment claims; the court observed that the plaintiff was an African-American woman under 40 with an associate degree in business administration, a bachelor's degree and two years of legal education and that she had filed an EEOC charge); see also Burnes, 291 F.3d at 1284 (judicial estoppel was held to bar an employment discrimination claim for money damages, where the plaintiff-debtor had filed an equal employment opportunity charge and an employment discrimination suit).[back]
42. See Donato, 230 B.R. at 422 (the court refused to apply judicial estoppel where the defendant made a good argument that the plaintiff-debtor had made multiple misrepresentations to the bankruptcy court relating to her employment claim and the failure to disclose it and that the misrepresentations were too numerous and too pointed to constitute coincidence. These misrepresentations included the use of different names in the filing of the cases, despite her termination by her employer, and a representation of employment after her termination.)[back]
43. See id.[back]
44. Id. at 421-22.[back]
46. See 11 U.S.C. ß 521(1).[back]
47. See 2 DANIEL R. COWANS, BANKRUPTCY LAW AND PRACTICE ßß 9.1 - 9.2(h) (7th ed. 1998).[back]
48. See In re Alvarez, 224 F.3d 1273, 1279-80 (11th Cir 2000), cert. denied, Alvarez v. Johnson, 531 U.S. 1146 (2001) (chapter seven case in which debtor's malpractice claim belonged to bankruptcy estate); Jones v. Harrell, 858 F.2d 667, 669 (11th Cir. 1988) (personal injury tort claim belonged to bankruptcy estate); In re Dawnwood Properties/78, 209 F.3d 114, 116 (2d Cir. 2000) (Chapter 11 case in which debtor-plaintiff had no standing to maintain tort and contract action against third party).[back]
49. See Steyr-Daimler-Puch of Am. Corp. v. Pappas, 852 F.2d 132, 136 (4th Cir. 1988); 11 U.S.C. ß 554(a) (stating that notice and a hearing must precede abandonment).[back]
50. See Correll v. Equifax Check Serv., Inc., 234 B.R. 8, 11-12 (D. Conn. 1997) (summary judgment for lack of standing granted against Chapter 7 debtor-plaintiff who filed case alleging a violation of the Fair Debtor Collection Practices Act).[back]
51. See Donato, 230 B.R. at 425.[back]
52. Id. citing Olick v. Parker & Parsley Petroleum Co., 145 F.3d 513, 516 (2d Cir. 1998).[back]
53. Maritime Elec. Co. v. United Jersey Bank, 959 F.2d 1194, 1209 n.2 (3d Cir. 1991) (quoted with approval in Donato, 230 B.R. at 425).[back]
54. Id.; see also Donato, 230 B.R. at 425.[back]
55. See Donato, 230 B.R. at 425; Alvarez, 224 F.3d at 1277 n.9.[back]
56. See Dawnwood Properties/78, 209 F.3d at 115.[back]
57. See In re Gardner, 218 B.R. 338, 342 (Bankr. E.D. Pa. 1998).[back]
58. See Adair v. Sherman, 230 F.3d 890, 893 n.1 (7th Cir. 2000); Murray v. Bd. of Educ. of City of New York, 248 B.R. 484, 486 (S.D.N.Y. 2000). (The debtor in a Chapter 13 bankruptcy had standing to maintain an employment discrimination case alleging violations of Title VII and the Civil Rights Act of 1866. The court noted, however, that there would have been no standing if it had been a chapter eleven or seven bankruptcy.)[back]
59. See Correll, 234 B.R. at 11.[back]