Litigation Update: Back to the Basics: One Item Defense Counsel Must Check After the Filing of a New Lawsuit

By Rebekah L. Hudgins

Upon the assignment of any new lawsuit, defense counsel will most certainly be thinking of the multitude of tasks to be completed with regard to the plaintiff's claims: the filing of an answer, the investigation of underlying facts, and the serving of initial discovery, just to name a few. Often, however, defense counsel may overlook one item that could quite possibly end the plaintiff's suit altogether—the plaintiff's failure to disclose a cause of action in a bankruptcy proceeding. Many times, a plaintiff/debtor fails to list his causes of action as an asset on the bankruptcy schedules, which the plaintiff/debtor signs under penalty of perjury.  In an instance where the plaintiff/debtor did not disclose his causes of action on the bankruptcy schedules, a defendant may assert the doctrine of judicial estoppel, which, if successful, can bar the plaintiff's claims.[1]

"Judicial estoppel is a common law doctrine that prevents a party from assuming inconsistent positions in litigation."[2] The doctrine's purpose "is 'to protect the integrity of the judicial process' [ ] by 'prevent[ing] [a party] 'from playing fast and loose with courts'" in order to promote the party's own self-interest.[3]  Judicial estoppel is comprised of three elements: "(1) the party against whom it is sought has asserted a legal position, which is plainly inconsistent with a prior position; (2) a court accepted the prior position; and (3) the party did not act inadvertently."[4]  In a bankruptcy proceeding, the debtor's full and complete disclosure of assets is integral to an effective bankruptcy process. The debtor's failure to disclose the existence of a cause of action is synonymous to a representation that no such asset exists.

On multiple occasions, the Fifth Circuit has considered the issue and has held that a debtor who denies owning a cause of action against a third party in a bankruptcy proceeding may be judicially estopped from recovering on the cause of action altogether.[5]  Application of the doctrine and its detrimental effects to plaintiffs can be seen in the Fifth Circuit's opinion, Allen v. C & H Distributors, L.L.C.[6]

In Allen, a husband and wife filed for Chapter 13 bankruptcy in July 2009.  The bankruptcy court confirmed the Chapter 13 Plan in September of the same year.  Ultimately, the Plan was amended on three separate occasions.  In October 2010, the husband and wife filed an unrelated personal injury lawsuit against multiple defendants alleging that, while at work, the wife sustained serious and permanent injuries when a stool she was sitting on broke apart.  The incident occurred after the initial confirmation of the Plan, but prior to all three of the amendments.

In September 2014, the defendants in the personal injury lawsuit moved for leave to file a late supplemental motion for summary judgment, asserting that only very recently had the defendants learned of the husband's and wife's bankruptcy proceeding, even despite having requested such information during written discovery. The district court granted the defendants' motion for leave and the defendants subsequently moved for summary judgment, arguing that the husband's and wife's personal injury claim was barred by judicial estoppel as the two had never disclosed the claim to the bankruptcy court. The district court granted the supplemental motion for summary judgment; the husband and wife appealed.

With certain modifications not directly relevant to the below-mentioned analysis, the Fifth Circuit affirmed the district court's granting of summary judgment in favor of the defendants. In analyzing the first element—whether the husband and wife asserted a legal position plainly inconsistent with a prior position—the Fifth Circuit noted that it has recognized that a Chapter 13 debtor has a continuing obligation to disclose post-petition causes of action. The court pointed out that the husband and wife never disclosed the existence of their personal injury lawsuit to the bankruptcy court, even though the two amended their Plan on three separate occasions. Such blatant inconsistency, the court reasoned, easily satisfied the first prong of the judicial estoppel inquiry.

As for the second element—a court having accepted the husband's and wife's prior position—the Fifth Circuit clarified that such acceptance does not require a formal judgment; rather, it requires that the first court have adopted the position urged by a party, either as a preliminary matter or as part of a final disposition. The Fifth Circuit reasoned that the husband's and wife's failure to disclose their personal injury claim led the bankruptcy court to accept that there was no such claim.  This, the court reasoned, was clearly an inconsistent position.

Finally, looking to the third element—whether the husband and wife did not act inadvertently—the Fifth Circuit stated that the husband and wife could establish inadvertence in one of two ways: (1) by establishing that they did not know of the inconsistent position; or (2) by establishing that they had no motive to conceal their inconsistent position from the bankruptcy court. The Fifth Circuit was quick to conclude that the husband and wife had failed to satisfy either. The husband and wife argued that, when they filed the original bankruptcy petition, they were unaware of the personal injury cause of action, as the incident underlying the claim did not occur until later that year. The Fifth Circuit noted that the husband and wife amended their Plan on multiple occasions, never once disclosing their post-petition cause of action.  By not disclosing their personal injury cause of action to the bankruptcy court, the Fifth Circuit concluded that the husband's and wife's motivation for concealment was self-evident given the potential financial benefit resulting from the nondisclosure.  Having established all three elements of the judicial estoppel doctrine, the Fifth Circuit affirmed the district court's judgment, barring the husband's and wife's claim.

Given the harsh results of the application of the judicial estoppel doctrine, defense counsel should be sure to check whether a plaintiff has filed for bankruptcy at the commencement of the plaintiff's lawsuit. The plaintiff's failure to disclose causes of action on his bankruptcy schedules can indeed be favorable to defendants. Such revelation can save defendants time, effort, and additional expenses in litigation.

[1] Though not detailed in this litigation update, litigators should be mindful that a court will often allow an innocent trustee to pursue the cause of action for the benefit of creditors. See U.S. v. GSD&M idea City LLC, No. 3:11-cv-11554, 2014 WL 11320447 *7 (N.D. Tex. June 10, 2014); see also In re Flugence, 738 F.3d 126, 132 (5th Cir. 2013); Reed v. City of Arlington, 650 F.3d 571, 573 (5th Cir. 2011); Kane v. Nat'l Union Fire Ins. Co., 535 F.3d 380, 387 (5th Cir. 2008) (per curium).

[2] Superior Crewboats, Inc. v. Primary P &I Underwriters, 374 F.3d 330, 334 (5th Cir. 2004).

[3] In re Costal Plains, 179 F.3d 197, 205 (5th Cir.1999).

[4] Love v. Tyson Foods, Inc., 677 F.3d 258, 261 (5th Cir. 2012) (quoting Reed, 650 F.3d at 574).

[5] See Allen v. C & H Distributors L.L.C, 813 F.3d 566, 576 (5th Cir. 2015); In re Flugence, 738 F.3d at 128; Love, 677 F.3d at 263; Reed, 650 F.3d at 573; Kane, 535 F.3d at 388; In re Costal Plains, 179 F.3d at 197.

[6] 813 F.3d at 576.