Judicial Estoppel in Chapters 7 and 13

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.

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