The Second Circuit aligned itself with other circuits on the standard of review in cases involving judicial estoppel, but only opened the door a crack for bankrupts attempting to avoid invocation of the doctrine.
A couple confirmed their five-year chapter 13 plan in 2010, promising to pay all creditors in full with interest. Only a few weeks before their final payment in 2015, the husband was diagnosed with mesothelioma. The couple alerted their bankruptcy counsel, but he evidently did not amend the schedules or otherwise notify the court or the trustee of a potential new asset in the form of a lawsuit.
The couple sued the husband’s former employer in July 2016 along with dozens of other defendants. A week later, the couple got their chapter 13 discharge, even though they had made their last plan payment in 2015.
After removing the suit to federal court, the defendants filed a motion to dismiss on the grounds of judicial estoppel. Conceding that the doctrine was a “harsh rule,” the district court dismissed. The husband died while the appeal was pending in the Second Circuit.
In his seemingly apologetic March 30 opinion for the Court of Appeals, Circuit Judge Guido Calabresi reversed, saying the appeals court would grant the widow “what relief we can” by vacating the judgment below.
The first question for Judge Calabresi was the standard of appellate review. He cited nine circuits as holding that an application of judicial estoppel is reviewed for abuse of discretion. The Sixth Circuit, he said, reviews do novo but recently brought its own precedent into question.
There is “some uncertainty” in the Second Circuit, Judge Calabresi said, because the appeals court stated in dicta in 2005 that review of a decision on judicial estoppel is a question of law subject to the de novo standard.
Saying “it is time we put this uncertainty to rest,” Judge Calabresi held that “a district court’s invocation of judicial estoppel is reviewed only for abuse of discretion.” The outcomes, he said, will vary based on specific factual contexts, making the trial court better positioned to decide on invoking judicial estoppel. He did not cite U.S. Bank NA v. The Village at Lakeridge LLC, 200 L. Ed. 2d 218, 86 U.S.L.W. 4121 (Sup. Ct. March 5, 2018), where the Supreme Court prescribed the standard of appellate review for mixed questions of law and fact.
Although it seemed “evident to us that the balance of the equities tips overwhelmingly in the [debtors’] favor,” Judge Calabresi posed the question, “What went wrong?”
Answering his own question, Judge Calabresi said that the district court started on the correct footing by reciting how the defendant must show that (1) the debtors took an inconsistent position in a prior proceeding, and (2) the position taken in the prior litigation must have been adopted “in some manner” by the first court.
Although the two factors were present, Judge Calabresi said that judicial estoppel “is not a mechanical rule.” The two factors, he said, “may be necessary conditions . . . , but they are not sufficient ones.” [Emphasis in original.] The court “must inquire into whether the particular factual circumstances of a case ‘tip the balance of the equities in favor’ of doing so,” citing the Supreme Court in New Hampshire v. Maine, 532 U.S. 742, 751 (2001).
Prior Second Circuit authority requires showing that one party achieved an “unfair advantage” by the inconsistent position. The debtor’s employer admitted that it “was in no particular way prejudiced” by the debtors’ failure to disclose. Still, he said, prejudice suffered by the defendant is not required when bankrupts achieve an “unfair advantage” over their creditors.
The case at bar was the “unusual case” where “nondisclosure had at most a ‘de minimis effect’ on a prior bankruptcy proceeding” and would not have affected the outcome of the bankruptcy because the debtors were already paying their creditors in full.
The defendant argued that judicial estoppel protects the sanctity of the judicial process. “But this case is surely not of that sort,” Judge Calabresi said, because nothing in the record suggests that the debtor withheld the diagnosis “from the bankruptcy court in an effort to game the bankruptcy system.”
“Indeed, it is hard to see what benefit they could even have hoped to obtain by nondisclosure.”
Although Judge Calabresi’s decision is facially favorable for debtors, the opinion in the long run may turn against debtors, because few in the future will have cases equally sympathetic in an equitable sense. Indeed, the opinion might be cited as authority that judicial estoppel should apply if the plan pays less than 100%.
On the other hand, debtors will benefit if they persuade the trial court not to apply judicial estoppel, because appellate review will invoke the abuse of discretion test.