United States: 11th Circuit Applies Totality-Of-The-Circumstance Analysis To Judicial Estoppel

Last Updated: October 12 2017
Article by David Long, Jr., Andrew B. Buxbaum and Timothy St. George

On September 18, in an en banc review, the Court of Appeals for the Eleventh Circuit overruled, in part, seminal cases Barger v. City of Cartersville, 348 F.3d 1289 (11th Cir. 2003) and Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282 (11th Cir. 2002), adopting a totality-of-the-circumstances analysis when facing questions of judicial estoppel.  In Barger and Burnes, the Court endorsed an inference that a plaintiff's claims are barred by judicial estoppel, without the defendant having to prove the plaintiff's intent to mislead the court, when the plaintiff fails to disclose a lawsuit in a chapter 7 bankruptcy.

In Slater v. U.S. Steel Corp., Case No. 12-15548, plaintiff Sandra Slater filed suit against her employer, U.S. Steel, with allegations of discrimination and retaliation (the "discrimination suit").  During the pendency of her discrimination suit, Slater filed for chapter 7 bankruptcy but failed to list the discrimination suit as an asset in her bankruptcy schedule.  Slater's bankruptcy trustee eventually issued a Report of No Distribution, and Slater's bankruptcy estate was fully administered.

After Slater's bankruptcy, U.S. Steel sought summary judgment in the discrimination suit, arguing that Slater was judicially estopped from asserting her claims because she failed to list her suit as an asset in her bankruptcy.  The District Court granted U.S. Steel's motion, even though the bankruptcy court reopened Slater's bankruptcy case, converted it to a chapter 13, and allowed Slater to continue her suit, without penalty.

The district court, relying on Burnes and Barger, rejected Slater's arguments that her omission of her civil claims was inadvertent and not intended to "thwart judicial process."  The district court reasoned that Slater had motive to conceal her claims to prevent creditors from receiving a payout if a money judgment was entered in her favor.  The district court also reasoned that nondisclosure is "inadvertent only when . . . the debtor either lacks knowledge of the undisclosed claims or has no motive for their concealment."

The Eleventh Circuit, in an en banc review, overruled its prior precedent outlined in Barger and Burnes.  The Court stated that Barger and Burnes "endorsed an inference that a plaintiff who failed to disclose a lawsuit in a chapter 7 bankruptcy intended to manipulate that judicial system because the omission was not inadvertent."  In those cases, the Court determined that nondisclosure of a known civil suit or cause of action during bankruptcy precluded the party from filing that civil suit at a later date whether or not the party corrected his bankruptcy disclosures without penalty.

The Circuit Court first discussed the main differences between chapter 7 and chapter 13 bankruptcy proceedings.  Particularly, in chapter 7 the debtor's estate is controlled by the trustee, and the creditors are paid with pre-petition assets.  In a chapter 13 bankruptcy, the debtor controls their estate, and their creditors are paid with post-petition earnings.  In chapter 13, the debtor retains standing to continue to pursue the civil claim.  This distinction is important and may limit the applicability of the Court's ruling to chapter 13 cases.

The Circuit Court then discussed the principle of judicial estoppel.  The Court reaffirmed that a district court may apply judicial estoppel when two elements are satisfied: (1) the plaintiff took a position under oath in the bankruptcy proceeding that was inconsistent with the plaintiff's pursuit of the civil lawsuit, and (2) the plaintiff intended to make a mockery of the judicial system.  The Circuit Court, however, focused on the second element, finding, for example, that a party could fail to list a civil suit because the party misunderstood the instructions on the schedule without any intent to mock the judicial system.

The Circuit Court found that a broader inquiry is required for judicial estoppel, allowing courts to consider the party's actions to determine whether the debtor intended to mislead the court and creditors.  The Court reasoned that the bankruptcy courts do not view omissions on a bankruptcy schedule as sufficient intent to mislead the Court, finding there is "no good reason why. . . a district court should not consider the bankruptcy court's treatment of the nondisclosure."  The Court noted that the Bankruptcy Code allows debtors to amend their schedules at any time and contains rules for dealing with intentional non-disclosures, preventing manipulation of the court.  The Circuit Court further suggested that courts look at plaintiffs' "level of sophistication," any explanation for the omission, whether the bankruptcy disclosures were corrected, and whether the bankruptcy court took issue with the plaintiff's nondisclosure, before determining that the party had ill intentions and granting a motion for judicial estoppel.

The Circuit Court noted that its present ruling was consistent with the principals of judicial estoppel by allowing courts to ensure the debtor had the requisite culpability when the debtor failed to list an asset in bankruptcy without awarding a defendant "an unjust windfall."

The Court remanded the case to the panel to determine whether the district court abused its discretion in applying judicial estoppel to Slater's civil lawsuit.

The Troutman Sanders' Consumer Financial Services Law Monitor blog offers timely updates regarding the financial services industry to inform you of recent changes in the law, upcoming regulatory deadlines and significant judicial opinions that may impact your business. To view the blog, click here

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