At the urging of one of the judges on the original panel, the Eleventh Circuit sat en banc and reversed two of its prior decisions by holding that a court must consider all the facts and circumstances before invoking the doctrine of judicial estoppel. To prevent a defendant from reaping an “unjustified windfall,” the intentional failure to list a claim belonging to a bankrupt no longer results in the automatic application of judicial estoppel.
Even after the Sept. 18 opinion by Circuit Judge Jill Pryor, the Eleventh Circuit still has not gone as far as the Fifth Circuit when the New Orleans-based court sat en banc and functionally held in Reed v. City of Arlington, 650 F.3d 571 (5th Cir. 2011), that a defendant in a lawsuit cannot assert judicial estoppel to inflict harm on a bankruptcy trustee and innocent creditors based on a debtor’s shortcomings.
The Facts
A woman initiated an employment discrimination suit two years before filing a chapter 7 petition. The employer learned about the bankruptcy and filed a motion to dismiss based on judicial estoppel, because the debtor had not scheduled the lawsuit among her assets. The debtor modified her schedules to list the claim, and the chapter 7 trustee retained the debtor’s litigation counsel as special counsel to pursue the suit on behalf of the estate.
The debtor then converted her case to chapter 13 and confirmed a plan, but the chapter 13 case was dismissed when the debtor failed to make plan payments.
Invoking judicial estoppel, the district court dismissed the discrimination suit. Recognizing that it was bound by Eleventh Circuit precedent, the appeals court’s three-judge panel upheld dismissal in February 2016 in an unsigned, 32-page per curiam opinion.
One of the three judges on the panel, Circuit Judge Gerald B. Tjoflat, wrote a special concurrence that reads like a dissent. He urged the appeals court to rehear the case en banc and overrule two Eleventh Circuit precedents that he believed were “wrongly decided.” Anyone confronted with an issue involving judicial estoppel should study Judge Tjoflat’s 78-page concurrence from last year, because it reads like a treatise discussing everything there is to know on the subject.
The appeals court granted rehearing en banc, heard argument in February and reversed its own precedents in Judge Pryor’s 33-page opinion.
‘Mockery’ No Longer Automatic
Judge Pryor began by reaffirming the circuit’s general rule that judicial estoppel applies when a litigant takes inconsistent positions and intends “to make a mockery of the judicial system.” Her opinion focused on the mockery element because the debtor unquestionably took inconsistent positions by originally omitting the suit from her schedules.
Under the circuit’s Barger and Burnes decisions from 2003 and 2002, respectively, Judge Pryor said that the mockery element was conclusively established by a debtor’s nondisclosure, “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.”
Judge Pryor devoted her opinion to explaining why the court was reversing Barger and Burnes and holding that the court instead “should consider all the facts and circumstances,” including the “plaintiff’s level of sophistication, his explanation for the omission, whether he subsequently corrected the disclosure, and any action taken by the bankruptcy court concerning the nondisclosure.” She said that “voluntariness alone does not necessarily establish a calculated attempt to undermine the judicial process.”
In refusing to impose judicial estoppel reflexively, Judge Pryor seemed largely motivated to avoid giving “an unjustified windfall” to “an otherwise liable civil defendant,” in the process harming “innocent creditors.” She recognized that pro se debtors may not understand how the requirement for disclosing contingent and unliquidated claims also means claims that the debtor holds, not just claims against the debtor.
Judge Pryor explained why courts should not automatically apply judicial estoppel even in chapter 13 cases. Because the debtor must satisfy the best interests test to confirm a plan, creditors in chapter 13 would be harmed just like in chapter 7 if a claim by the debtor is treated as worthless.
Is a Cert Petition Next?
Judge Pryor said there is a split of circuits even after abandoning Burnes and Barger. Like her court now holds, the Sixth, Seventh and Ninth Circuits previously ruled that the “mockery” element requires showing more than an intention not to disclose.
The Fifth and Tenth Circuits, she said, take the opposite view by endorsing “the inference that a plaintiff who omitted a claim necessarily intended to manipulate the judicial system.”
Judge Pryor may have overstated the circuit split.
The en banc opinion in Reed, written for the Fifth Circuit by Circuit Judge Carolyn King, laid down a “general rule that, absent unusual circumstances, an innocent trustee can pursue for the benefit of creditors a judgment or cause of action that the debtor fails to disclose.” She also said that judicial estoppel must be applied “flexibly” to achieve “substantial justice,” a principle that Judge Tjoflat advocated in his concurrence in the Eleventh Circuit’s original decision last year.
In substance, the applicability of judicial estoppel is now virtually irrelevant in the Fifth Circuit when a trustee is prosecuting a previously undisclosed claim for the benefit of creditors. The Fifth Circuit also endorsed the idea of precluding a culpable debtor from benefitting from successful prosecution by directing any recovery exclusively toward creditors.
Therefore, the Fifth Circuit’s pre-Reed automatic invocation of judicial estoppel may no longer be good law in that circuit. Even if it is, the principle has little relevance after Reed, which permits recoveries on undisclosed claims to benefit innocent creditors.
Consequently, the Tenth Circuit may be the only circuit functionally at odds with four other circuits. As such, there may not be a fully developed, entrenched split warranting a grant of certiorari. For lack of a final order, a certiorari petition also would be premature at this juncture because the circuit remanded for more than ministerial duties.
The Amicus in the Eleventh
Supporting the debtor, J. Erik Heath of San Francisco submitted an amicus brief in the Eleventh Circuit on behalf of the National Association of Consumer Bankruptcy Attorneys. In addition to explaining how Eleventh Circuit precedent had gone beyond the purpose of judicial estoppel, he recommended adopting the approach in Reed by granting a trustee standing to pursue a claim not available to a debtor in view of judicial estoppel.
Unfortunately, Judge Pryor did not cite Reed or consider how that case might inform the relief available on remand. Although the Eleventh Circuit “may not have explicitly gone the route of Reed,” Heath told ABI in an email that he believes it’s “part of the result.” He also praised the appeals court for overruling Barger and thereby allowing “trustees to escape judicial estoppel.”
Remand to the Panel
When a circuit court reverses, it ordinarily remands to the trial court. But not here.
Judge Pryor remanded the case to the original three-judge panel “to consider whether the district court abused its discretion in applying judicial estoppel and to resolve any other remaining issues.” [Emphasis added.]
The mandate to consider other issues should allow the three judges to opine on a result like Reed, where creditors can benefit but the debtor cannot.
To read ABI’s discussion of the panel decision from February 2016, click here.