Judicial Estoppel: An Introduction

The number of consumer bankruptcy filings in the United States rose significantly in 2009. There were 1.07 million bankruptcy filings nationwide in the first nine months of 2009 according to the American Bankruptcy Institute, and Utah’s consumer bankruptcy filing rate is 13th in the nation. Due to the recession that has plagued our economy since early 2008, the bankruptcy filing rate is anticipated to remain steady or rise slightly in 2010.

Bankruptcy filings have the potential to impact personal injury, employment, and commercial litigation cases through judicial estoppel. Judicial estoppel is a little-understood, but very powerful, equitable doctrine that prohibits a party from gaining an advantage by asserting one claim or position in one case, and then later seeking an advantage by taking an inconsistent position either in that same case or another case.

Courts have been known to exact what are seemingly harsh penalties against persons who file bankruptcy and fail to identify property that should be included as part of the bankruptcy estate. These penalties can include dismissal of the action that was not identified as part of the bankruptcy proceeding, if the court deems that the omission was sufficiently egregious.

Consequently, judicial estoppel remains a relevant doctrine for both plaintiff and defense civil litigators.

The Statement of Financial Affairs:

The bankruptcy code imposes a duty upon a debtor to disclose all assets, including contingent and unliquidated claims. 11 U.S.C.S. § 521(1). That duty encompasses disclosure of all legal claims and causes of action, including pending claims or potential claims, which a debtor might have. The statement of financial affairs specifically requires a debtor to disclose his involvement in pending lawsuits.

In addition to disclosing information about pending lawsuits, the statement of financial affairs requests detailed information about a petitioner’s income, and the sources from which it is derived, as well as information about the petitioner’s monthly expenses. It also requests information about the value of the petitioner’s real property and personal property, including vehicles. It also requires the debtor to list his debts, and classify the debts as secured or unsecured, and priority or non-priority claims.

A recent case in which a court applied judicial estoppel and dismissed a debtor’s personal injury claim outright was Eastman v. Union Pacific Railroad Company, 493 F.3d 1151 (10th Cir. 2007). The United States Court of Appeals for the Tenth Circuit, which encompasses Utah, found that a plaintiff took inconsistent positions in the bankruptcy and federal district courts. Based on the evidence, the court determined that he knew of the pending lawsuit and did not disclose it to the bankruptcy court. The court found it unlikely that such a sizable claim could have been overlooked, and noted that the employee had a motive to sweep his personal injury action under the rug, so he could obtain a discharge free and clear of his creditors and that he received the benefit of a discharge without disclosing his pending action provided him with an unfair advantage over his creditors. Thus, the district court's discretionary application of judicial estoppel was appropriate. The appellate court also determined that the bankruptcy was reopened and his creditors were made whole was inconsequential.

When defending a personal injury, medical malpractice, or employment case, the prudent litigator or insurer should conduct a search of the plaintiff’s bankruptcy and litigation history.

Asset and Debt Schedules: A Treasure Trove of Information

Even if it is deemed that a bankruptcy filing is unavailing in terms of dismissal of a case, the petition and its schedules should be examined closely to ensure that the information they contain is consistent with other representations made by the plaintiff in the context of the civil case; for example, in terms of statements about income, property valuations, debts, and the like. In many cases, the old adage, “You don’t really know what you’re looking for, but you know when you find it” rings true.

For example, in 2005, I handled a case in which a plaintiff sued my client, claiming that his $15,000 Harley-Davidson motorcycle had been totaled in a motor vehicle accident. When I determined that the plaintiff had filed for bankruptcy about three months prior to the accident, I learned that he placed the motorcycle’s value at only $4,500 for the purposes of his bankruptcy proceeding. At mediation, this fact was brought to the plaintiff’s attention and was a factor in arriving at a settlement far less than what plaintiff originally demanded.

Furthermore, the petitioner’s schedule of debts can be extremely useful in learning about pre-accident injuries and pre-existing conditions. Many bankruptcy filers owe medical providers significant amount of medical bills, and in order for those debts to be discharged, they must be clearly identified in the petitioner’s debt schedules. Reviewing bankruptcy debt schedules often locates additional doctors, hospitals, chiropractors, and physical therapists that were never mentioned in the plaintiff’s disclosures or written discovery documents. Often the treatment was for the same injury or condition that was the basis for the lawsuit, and the information can be very helpful to the defense of the case.

Written by Tanya N. Lewis