Under the law of several federal circuits, employment-discrimination and other plaintiffs who omit their claims as estate assets in Chapter 7 bankruptcy are held to forfeit them under the legal theory of “judicial estoppel” – a rule that prevents litigants from taking inconsistent positions in successive proceedings. The Ninth Circuit, in a 2-1 decision, stakes an entirely new position, contrary to this consensus: provided that the claimant omitted the claim by mistake or inadvertence, and re-opens the bankruptcy proceeding to correct the omission, there will be no estoppel. A dissenting judge vigorously objects to this plaintiff-friendly rule.
Quin v. County of Kauai Dep’t of transportation, No. 10-16000 (9th Cir. July 24, 2013): On November 10, 2008, the plaintiff filed a gender-discrimination lawsuit, and five months later filed for bankruptcy protection under Chapter 7. The bankruptcy lawyer did not list the first lawsuit as part of the estate on a form that prompted the debtor to “List all suits and administrative proceedings to which the debtor is or was a party within one year immediately preceding the filing of this bankruptcy case.”
Only after the bankruptcy court ordered discharge of the estate, and closed the case, was the omission noticed by her bankruptcy counsel. Her lawyers then took a step to mend the breach:
“On January 13, 2010, Plaintiff moved to reopen her bankruptcy case and to set aside the discharge. The motion, accompanied by declarations from her bankruptcy lawyer’s staff and from Plaintiff, explained that Plaintiff had never disclosed the pending lawsuit to her bankruptcy lawyer or his staff and that Plaintiff’s failure to list the lawsuit as an asset stemmed from Plaintiff’s misunderstanding of what she was required to do. The bankruptcy court reopened the case the same day. Plaintiff amended her bankruptcy schedules to list this pending claim as an asset.”
The employer in the discrimination case nonetheless successfully moved for summary judgment in the case, on the ground that the plaintiff/debtor forfeited the discrimination claim by not listing the claim originally in bankruptcy.
The Ninth Circuit reverses. The panel majority opinion (by Judge Graber) initially pays heed to the law established in other circuits on judicial estoppel:
“In the bankruptcy context, the federal courts have developed a basic default rule: If a plaintiff-debtor omits a pending (or soon-to-be-filed) lawsuit from the bankruptcy schedules and obtains a discharge (or plan confirmation), judicial estoppel bars the action.”
Yet the panel majority in this opinion upends the default rule, holding that it has long been based on a misapprehension of the standards of judicial estoppel explored in New Hampshire v. Maine, 532 U.S. 742, 750 (2001).
The panel begins by noting the circuit’s acceptance of the framework of judicial estoppel as applied to bankruptcy petitions:
“That basic rule comports fully with the Supreme Court’s decision in New Hampshire: (1) the positions are clearly inconsistent (‘a claim does not exist’ vs. ‘a claim does exist’); (2) the plaintiff-debtor succeeded in getting the first court (the bankruptcy court) to accept the first position; and (3) the plaintiff-debtor obtained an unfair advantage (discharge or plan confirmation without allowing the creditors to learn of the pending lawsuit). The general rule also comports fully with the policy reasons underlying the doctrine of judicial estoppel: to prevent litigants from playing ‘fast and loose’ with the courts and to protect the integrity of the judicial system.”
While judicial estoppel makes sense where there is evidence that the plaintiff/debtor deliberately sought to hide the claim, the panel majority holds that such an intention cannot simply be inferred under circumstances where he or she has taken steps to correct the omission.
Judicial estoppel recognizes a safety valve of omission due to “mistake or inadvertence.” Most circuits (at least the Fifth, Sixth, Tenth and Eleventh) hold that the defense of “mistake or inadvertence” is narrow. Those courts “have asked only whether the debtor knew about the claim when he or she filed the bankruptcy schedules and whether the debtor had a motive to conceal the claim.”
The panel majority rejects this presumption of deceit where the plaintiff/debtor has already taken steps to correct the error:
“[W]here, as here, the plaintiff-debtor reopens bankruptcy proceedings, corrects her initial error, and allows the bankruptcy court to re-process the bankruptcy with the full and correct information, a presumption of deceit no longer comports with New Hampshire.” [Emphasis in original.]
The panel majority observes that the avowed justifications for enforcing judicial estoppel – protecting the integrity of the courts and preventing plaintiffs from taking advantage of inconsistent positions – do not apply where the plaintiff/debtor voluntarily takes steps to correct the bankruptcy petition:
“[O]nce a plaintiff-debtor has amended his or her bankruptcy schedules and the bankruptcy court has processed or re-processed the bankruptcy with full information, two of the three primary New Hampshire factors are no longer met. Although the plaintiff-debtor initially took inconsistent positions, the bankruptcy court ultimately did not accept the initial position.”
The panel majority notes the perverse results that arise from a rigid application of judicial estoppel:
“If Defendant here did, in fact, discriminate against Plaintiff, it will not have to pay the consequences of its actions, for the entirely unrelated reason that Plaintiff happened to file for bankruptcy and, possibly due to inadvertence, happened to omit the claim from her initial schedules. Further, because the application of judicial estoppel does not look to the nature of the underlying claim, the alleged bad actor could be someone who clearly does not warrant a windfall (e.g., someone who physically assaulted the plaintiff and badly injured him or her). It seems hard to justify a policy that takes money from innocent third-party creditors and gives it, for example, to a violent criminal.” [Foot note omitted.]
So the panel majority allows the plaintiff/debtor to explain the inconsistency, and does not assume a bad-faith motivation:
“Courts must determine whether the omission occurred by accident or was made without intent to conceal. The relevant inquiry is not limited to the plaintiff’s knowledge of the pending claim and the universal motive to conceal a potential asset-though those are certainly factors. The relevant inquiry is, more broadly, the plaintiff’s subjective intent when filling out and signing the bankruptcy schedules.”
The panel majority nevertheless distinguishes an innocent omission from one where the record indicates an intent to hide the claim, as in Hamilton v. State Farm Fire & Cas. Co., 270 F.3d 778 (9th Cir. 2001), in which the trustee reopened the bankruptcy case not because of inadvertence but on grounds of “bad faith, lack of truthfulness under oath, and failure to cooperate.”
The panel majority acknowledges the departure from the law of other circuits: “We recognize that, by adopting the ordinary understanding of ‘mistake’ and ‘inadvertence’ in this context, we differ from the test articulated by most of our sister circuits-whether the plaintiff knew of the claims and had a motive to conceal them.”
Dissenting, Judge Bybee regards the majority opinion as inconsistent with Ninth Circuit law (citing Hamilton) and a betrayal of long-understood ground rules that place a burden of full disclosure on debtors: “[A]lthough there are reasons to believe that the majority’s broader understanding of the ‘inadvertence or mistake’ factor might produce more equitable results in some cases, . . . the situation is not as one-sided as the majority suggests. The majority emphasizes the plight of creditors who lose recourse to claims that are dismissed on the basis of judicial estoppel, but the majority fails to sufficiently consider the other creditors and the debtors who will benefit from the better up-front disclosure motivated by a strict estoppel rule.”