Judicial Estoppel in the Fifth Circuit, Part 2 The Three-Prong Test

The Fifth Circuit has established a three-prong test for determining whether a debtor should be judicially estopped from pursuing a cause of action that he failed to disclose to the bankruptcy court.  See In re Flugence, 738 F.3d 126 (5th Cir. 2013); Love v. Tyson Foods, Inc., 677 F.3d 258, 261 (5th Cir. 2012); Reed v. City of Arlington, 650 F.3d 571(5th Cir. 2011)(en banc); Kane v. Nat’l Union Fire Ins. Co., 535 F.3d 380 (5th Cir. 2008); In re Superior Crewboats, Inc., 374 F.3d 330 (5th Cir. 2004); In re Coastal Plains, Inc., 179 F.3d 197 (5th Cir. 1999).

Prong One.    The debtor asserted clearly inconsistent positions. If a debtor/plaintiff files bankruptcy and fails to schedule a civil lawsuit or cause of action as an asset, he has represented to the bankruptcy court that no such cause of action exists.  If he later asserts the claim by filing a lawsuit, the position asserted in the civil action is clearly inconsistent with the position taken in the bankruptcy proceeding. “[I]ntentional self-contradiction is being used as a means of obtaining unfair advantage in a forum provided for suitors seeking justice.” Superior Crewboats, 374 F.3d  at 334-35 (citations and quotations omitted).

Prong Two.   The bankruptcy court must have accepted the previous position.   The bankruptcy court must have accepted the debtor’s position that he had no pending lawsuits, claims or causes of action.  How does the bankruptcy court “accept” the debtor’s position?  No formal order or final judgment is required. In practice, almost ANY action the bankruptcy court takes could be “acceptance” of the debtor’s position.  If the cause of action had been scheduled, the case would necessarily have been administered differently in some respect.  The following actions taken by the bankruptcy court have been ruled to be “acceptance” of a debtor’s position:

A.     Granting the debtor a discharge in a Chapter 7 caseSee, e.g., Superior Crewboats, 374 F.3d at 335 (The bankruptcy court granted a “no asset” discharge thereby accepting the debtors’ position that they had no personal injury cause of action.); Kane, 535 F. 3d at 384 (The bankruptcy court accepted the debtor’s position by entering a “no asset” discharge and closing the case.); Reed, 650 F.3d at 575-76 (The bankruptcy court accepted the debtor’s position that he did own any judgments and issued a “no asset” discharge.); Kirk v. Pope, 973 So. 2d 981, 991 (Miss. 2007)(The bankruptcy court relied on the debtor’s schedules in granting a discharge.).

B.     Entering an order modifying a Chapter 13 PlanSee, e.g., Flugence, 738 F.3d at 130 (The bankruptcy court entered an order modifying a Chapter 13 plan accepting the debtor’s position that she had no personal injury causes of action.  If the cause of action had been disclosed, the bankruptcy court would likely have altered the plan to include a provision relating to the cause of action.).

C.     Entering an order confirming a Chapter 13 PlanSee, e.g., Tyson Foods, 677 F.3d at 261 (The bankruptcy court accepted the debtor’s position that he did not have an EEOC claim by confirming the debtor’s Chapter 13 plan that did not contain a provision related to the claim.).

D.    Entering an order terminating the automatic stay.  See, e.g., Coastal Plains, 179 F. 2d at 207 (The bankruptcy court entered an order terminating the automatic stay as to “intangibles” partially in reliance on the debtor’s omission of a cause of action.   If the debtor had included the cause of action in the schedules as an intangible asset, the valuation of the “intangibles” could have affected the court’s consideration of the motion to terminate the automatic stay.).

Prong Three.   The non-disclosure must not have been inadvertent.  A debtor is most likely to contest the  “not inadvertent” prong of the judicial estoppel test.   “[T]he debtor’s failure to satisfy its statutory disclosure duty is ‘inadvertent’ only when, in general, the debtor either lacks knowledge of the undisclosed claims or has no motive for their concealment.” Coastal Plains, 179 F.3d at 210. Love v. Tyson Foods well describes the “not inadvertent” prong and the shifting burdens of persuasion.    The party (defendant) urging judicial estoppel must demonstrate that the debtor (plaintiff) had a motive to conceal the cause of action from the bankruptcy court.  The defendant’s burden is not difficult because the motive to conceal is almost always present.  “Motivation in this context is self-evident because of the potential financial benefit resulting from the non-disclosure.” Tyson Foods, 677 F.3d at 262 (quoting Thompson v. Sanderson Farms, Inc., No: 3:04CV837-WHB-JCS, 2006 U.S. Dist. LEXIS 48409, at 12-13 (S.D. Miss. May 21, 2006)).   See also, Superior Crewboats, 374 F.3d at 336 (The Court found a motive to conceal where the debtors stood to “reap a windfall” from an undisclosed claim.).  After the defendant establishes motivation, the burden shifts to the plaintiff to demonstrate that he lacked knowledge of the undisclosed claims. Id.   The “lack of knowledge” of the duty to disclose or the reliance on an attorney is not enough.  In order to establish inadvertence, the plaintiff must demonstrate that he was “unaware of the facts” that gave rise to the cause of action. Flugence, 738 F.3d at 131; Coastal Plains, 179 F.3d at 212.

My two cents: If a debtor fails to disclose a cause of action that arose before a Chapter 7 or Chapter 13 bankruptcy case was filed, judicial estoppel should be fairly easy to obtain by summary judgment by relying on the bankruptcy schedules and other matters of record.  The three-prong test is almost self-effectuating. The harder cases involve causes of action that arise post-petition in Chapter 13 cases. There is a continuing duty to disclose causes of action that arise during the three to five years that the debtor is making plan payments. However, factual issues are more likely to preclude summary judgment on the issue of judicial estoppel in the post-petition failure to amend cases.  Complicating issues may include (1) the length of time that passed before the cause of action was disclosed, (2) whether the disclosure was made by the debtor or the defendant asserting judicial estoppel, and (3) the actions taken in the Chapter 13 case prior to the disclosure.   For example, if the debtor voluntarily amends the schedules to include the cause of action within a reasonable time after the cause of action arises, then the debtor has likely met his disclosure duty.    On the other hand, if the cause of action is brought to the attention of the bankruptcy court by the defendant a “long time” after the cause of action accrued, then the court, applying the three-prong test, will probably find that the debtor should be estopped.  See Anderson v. Entergy Operations, Inc., 2012 WL 5400059 (U.S.D.C. S.D. Miss. 2012)(The Chapter 13 debtor failed to amend his schedules to add a wage and hour claim against Entergy.  The defendant brought the claim to the attention of the court eleven months after the debtor’s Chapter 13 plan was confirmed.  The Court applied the three-prong test and judicially estopped the debtor from pursuing the claim.). In between those extreme scenarios, there are inumerable factual variations that could preclude summary judgment.

Just another reminder that estoppel only affects the debtor and does not apply to the trustee. See Judicial Estoppel Part 1.