Eleventh Circuit Revamps Standard for Applying Judicial Estoppel

In Slater v. U.S. Steel Corp,[1] the Eleventh Circuit recently revisited its past rulings on judicial estoppel and revamped the standard to be applied when a debtor is pursuing a lawsuit that was not disclosed in bankruptcy. Although the appellate court reaffirmed the previously adopted test, the court’s opinion in Slater provides further guidance for trial courts in considering judicial estoppel. More specifically, the court rejected its own prior precedent allowing the application of judicial estoppel based solely on a finding that the debtor knowingly failed to disclose a lawsuit.[2]

Judicial estoppel is an equitable doctrine. It is intended to protect the integrity of the judicial system against parties who would manipulate the judicial process by changing their positions from one proceeding to another. In relation to bankruptcy proceedings, judicial estoppel often has been applied in district court cases when a plaintiff has asserted a claim that was not listed as an asset while the plaintiff was a debtor in a bankruptcy case. Prior to Slater, the Eleventh Circuit most recently held that judicial estoppel could be applied to bar undisclosed claims only if the defendant showed that the debtor actually intended to make a mockery of the judicial proceedings.[3] In Slater, the court reaffirmed this holding while clarifying the standard for determining whether a party intended to make a mockery of the judicial system.

In its Barger and Burnes opinions, the Eleventh Circuit ruled that a defendant could meet its burden of showing that judicial estoppel should be applied by simply proving that the plaintiff failed to disclose a known claim. In Slater, however, the Eleventh Circuit expanded the scope of the required analysis by concluding that a district court should consider all of the facts and circumstances of the debtor’s nondisclosure before concluding that judicial estoppel bars a plaintiff’s claim. More specifically, “[t]he court should look to factors such as the plaintiff’s level of sophistication, his explanation for the omission, whether he subsequently corrected the disclosures, and any action taken by the bankruptcy court concerning the nondisclosure.” Of these factors, the last may be the most interesting to court observers and most important for future litigants.

Although the first three factors focus on the debtor’s actions as providing evidence of the debtor’s intentions, the last factor focuses instead on the action taken by the bankruptcy court, if any, after the lawsuit came to light. In explaining the reason for including this factor, the court noted that the bankruptcy rules afford the opportunity to amend bankruptcy schedules, possibly even after a bankruptcy case has been closed. The court expressed its view that the principles giving rise to the opportunity to amend may be inconsistent with drawing an inference that a debtor who fails to disclose a lawsuit intended to manipulate the bankruptcy proceeding. In light of these observations, the court reasoned, “We see no good reason why, when determining whether a debtor intended to manipulate the judicial system, a district court should not consider the bankruptcy court’s treatment of the nondisclosure.” With respect to the ways in which a bankruptcy court might decide to treat a nondisclosure, the court noted as examples that the bankruptcy court might revoke the debtor’s discharge or deny a claim of exemption as to the proceeds of the lawsuit or might even hold the debtor in contempt or refer the matter to the U.S. Attorney’s Office for prosecution.

The Slater court’s newfound focus on the bankruptcy court’s reaction to a debtor’s nondisclosure appears to result from tension created by allowing judicial estoppel to function as a means of protecting the integrity of the judicial system without regard to whether the bankruptcy court took any action to protect the judicial system. In this regard, the court described its revamped approach to judicial estoppel as “reduc[ing] the likelihood that an otherwise liable civil defendant will receive an unjustified windfall or that innocent creditors will be harmed.” But the extent to which the court’s revamped standard will relieve this tension remains to be seen because judicial estoppel may still be applied when a debtor fails to disclose a lawsuit, so long as the “totality of the circumstances” warrants the application of judicial estoppel.