By: Donald L Swanson
Question: What happens when a Chapter 7 debtor:
- fails to disclose the existence of claims against third parties;
- receives a Chapter 7 discharge and a closing of the Chapter 7 case;
- then, pursues the undisclosed claims by filing a lawsuit against the third parties; and
- the defendants in that lawsuit move to dismiss debtor’s claim for non-disclosure in the Chapter 7 bankruptcy?
That actually happened—and a U.S. District Court refused to dismiss the debtor’s lawsuit on summary judgment:
- the opinion is LeGree v. City of Waterbury, Case No. 3:22-CV-00659, Doc. 49, in the U.S. District Court for the District of Connecticut (decided August 28, 2024).
Facts
Here’s how the District Court’s opinion describes the facts.
–Two Plaintiffs/One Debtor
Back in May of 2020 (days after the death of George Floyd in Minneapolis), a racial justice protest occurs in Waterbury, Connecticut.
Plaintiff # 1 attends that protest, listens to speakers, kneels, marches, and, along with dozens of others, makes her way to the Waterbury police station.
Plaintiff # 2 (the subsequent bankruptcy debtor) is a passenger in a car that morning. His car is blocked by protestors in front of the Police Department. The driver parks the car across the street from the Police Department. Plaintiff # 2 gets out and walks toward the police station, following and observing the protest as it arrives at the station.
–Police Arrive in Force
The lawsuit defendants, police officers, assert that “a number of the demonstrators were in the street and obstructing traffic.” By contrast:
- the two Plaintiffs argue that the number of people in the street was “manageable,” based on two aerial photographs.
In response to the demonstration, the Police Department calls in its Field Force Unit, Emergency Response Team, and Street Crime Units. These units assemble at either end of street.
–What Happens Next
Defendants testify that the protestors continue blocking traffic and refuse to disperse, despite an officer issuing at least three warnings to disperse on a loud speaker. By contrast:
- Plaintiff # 1 says she doesn’t hear any announcement to disperse, the crowd is already dispersing, and no one is in the street; and
- Plaintiff # 2 says he hears a Police Officer on a horse yell, “Everybody get out of the street! Anyone in the street will be arrested,” but “there was no one in the street.”
–Arrests
The Police Captain orders the arrest of those who remain in the street:
- Plaintiff # 1 says that an unknown police officer, a black woman, grabs her, knocks her down, pins her, and arrests her; and
- Plaintiff # 2 says that, as he walks from his vehicle toward the Police Department, an officer gives a loud command, “all hell” breaks loose, and he is arrested.
Both plaintiffs testify that they were not in the street at the time of their arrest:
- Plaintiff # 1 says she is never in the street—that she is on the sidewalk at all times; and
- Plaintiff # 2 says he never steps off the sidewalk—he is pulled off the sidewalk into the street by an arresting officer.
Seventeen people are taken into custody, placed under arrest, and taken into the Police Department for processing and booking.
Plaintiff # 1: After the Arrest
When arrested, Plaintiff # 1 gives police a fictitious name but gives her correct birthday.
Before being booked, Plaintiff # 1 complains of difficulty breathing and is taken to the Hospital, where she discloses her correct name. Plaintiff # 1 is taken into custody and is charged with disorderly conduct and interfering with an officer.
The charges against Plaintiff # 1 are dismissed as the result of a mass dismissal of all individuals arrested that day in the City of Waterbury, resulting in no criminal conviction. However:
- because Plaintiff # 1 is on probation at the time of arrest, she is charged with violating her probation and is remanded to the Department of Correction; and
- as a result, Plaintiff # 1 spends 162 days incarcerated, despite never being required to appear in Court for the charges related to her May 31, 2020 arrest.
Plaintiff # 2: The Bankruptcy Non-Disclosures
Plaintiff # 2 is arrested and charged with disorderly conduct and interfering with an officer, but his charges are also dismissed as a result of the mass dismissal of charges.
In July of 2020 (around the time his criminal case is dismissed), Plaintiff # 2 meets with an attorney about suing the Waterbury Police Department for false arrest. The attorney does not take the case—but advises Plaintiff # 1 about a 3-years statute of limitations.
Nearly two years later, Plaintiff # 2 files his Chapter 7 bankruptcy:
- initially, he files pro se, but later files an amended petition with the help of an attorney; and
- in his bankruptcy paperwork, Plaintiff # 2 is asked whether he has any claims against third parties, and he answers “no”—twice.
Plaintiff # 2 contends that, when he gives those answers: (i) he does not know what the question means, (ii) he does not ask his attorney what the question means, and (iii) his attorney does not ask whether he has any potential claims against third parties.
Plaintiff # 2 receives a Chapter 7 discharge, and his Chapter 7 bankruptcy concludes in September 2022.
The Post-Bankruptcy Lawsuit
On May 13, 2022, Plaintiff # 1 files her Complaint against the City of Waterbury and its police officers.
On November 3, 2022, Plaintiff # 2 is added to the lawsuit as a plaintiff — that’s less than two months after his bankruptcy concludes.
The Dismissal Request
So, defendants move on summary judgment to dismiss Plaintiff # 2’s claims as barred by the doctrine of judicial estoppel—i.e., because he failed to disclose the claims in his bankruptcy.
The District Court denies the defendants’ motion.
Here are the legal standards that the District Court identifies in its dismissal-denial opinion:
- judicial estoppel is an equitable doctrine invoked at the discretion of the court and is “designed to prevent a party who plays fast and loose with the courts from gaining unfair advantage” by deliberately taking inconsistent positions;
- in bankruptcy, courts often apply judicial estoppel “to prevent a party who failed to disclose a claim” from “asserting that claim after emerging from bankruptcy”;
- the party asserting judicial estoppel must show “two prerequisite elements”: (i) that a party took an inconsistent position in a prior proceeding, and (ii) that the position was adopted in the bankruptcy, such as by issuing a favorable ruling;
- however, judicial estoppel is not a “mechanical rule,” even when the two prerequisites are met: courts must inquire whether, (i) the factual circumstances “tip the balance of equities in favor” of estoppel, and (ii) the party asserting the inconsistent positions would derive an unfair advantage;
- in bankruptcy, judicial estoppel is derived from any “unfair advantage” gained over creditors, who had a right to consider the undisclosed claims; and
- courts will only impose judicial estoppel when the “impact on judicial integrity is certain.”
Here is how the District Court applies the legal standards to the Plaintiff # 2 facts:
- Plaintiff # 2 represented to the Bankruptcy Court that he had no viable claims against third parties, which is inconsistent with the present lawsuit—and the Bankruptcy Court adopted his position by discharging his debts;
- so, the District Court must determine (based on the summary judgment record) whether the balance of equities tips in favor of estoppel—and it concludes that the equities do not because:
- Plaintiff # 2 did not gain an “unfair advantage” over his creditors—it is unclear whether disclosure would have altered his bankruptcy outcome; and
- the record is insufficient to establish that Plaintiff # 2 was playing “fast and loose” with the bankruptcy or intended to deceive the Bankruptcy Court—i.e., “it is possible” that Plaintiff # 2 did not fully understand his potential claim during his bankruptcy;
- also, before filing bankruptcy, Plaintiff # 2 consulted with an attorney about suing the Police Department and received advice—but he has testified (and a jury could reasonably believe) that the omissions were honest mistakes:
- because a genuine issue of fact remains about his intent and the credibility of his testimony, the court cannot reach an a judicial estoppel result; and
- the court is also unpersuaded that Plaintiff # 2 gained an unfair advantage through his false answers in the bankruptcy—there is no evidence of more than a “de minimis effect,” the court is required to resolve all ambiguities and inferences in the non-moving party’s favor, and the “unfair advantage” argument is too “theoretical and speculative” at this stage.
Conclusion
That’s fascinating!
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