First and foremost here at the Drug and Device Law Blog, we like good, strong defense decisions. If those decisions contain lessons (or reminders) for our everyday practice – so much the better. That’s why we’ve blogged about cases that let us remind you to check publicly available information about plaintiffs, make sure the plaintiff was alive when she filed suit, and search bankruptcy filings to see if plaintiff disclosed her lawsuit. We blogged about a bankruptcy discharge case a few months ago out of state court in Massachusetts. So, when we stumbled across a recent federal court decision on the issue, we thought we’d pass it along and take a look to see what else was going on in federal court on this issue.
The case that prompted this post is a holdout from the Vioxx MDL – In re Vioxx Products Liability Litigation, 2012 WL 4097200 (E.D. La. Sep. 17, 2012). Plaintiff Sandra Elliott filed her Vioxx lawsuit in 2006 and later filed for bankruptcy in 2009, but did not disclose to the trustee her claims against Merck. Id. at *1. While the bankruptcy was still pending, Merck moved for summary judgment on the grounds of judicial estoppel. Id. The fact that the bankruptcy was still pending is one of the things that caught our eye about this case. We’re sure you won’t be surprised to learn that plaintiff’s primary argument in opposition to the motion to dismiss was – I’ll just go back and amend my bankruptcy petition and then no harm, no foul. The court didn’t see it that way.
There are three requirements for judicial estoppel to apply: “(1) [T]he party is judicially estopped only if its position is clearly inconsistent with the previous one; (2) the court must have accepted the previous position; and (3) the non-disclosure must not have been inadvertent.” Id. at *2 (citation omitted). It is the second two factors which are most often at issue in the bankruptcy non-disclosure context.
Let’s start with number 3. We can imagine that almost every plaintiff when faced with this type of motion to dismiss argues inadvertence. The definition of an inadvertent non-disclosure can vary from court to court. In the Fifth Circuit “[a] nondisclosure is considered inadvertent only when, in general, the debtor either lacks knowledge of the undisclosed claims or has no motive for their concealment.” Id. (emphasis added and citation omitted). Knowledge and/or motive give “rise to an inference of intent sufficient to satisfy the [bad faith] requirements of judicial estoppel.” In re Coastal Plains, Inc., 179 F.3d 197, 210 (5th Cir.1999). The Third, Eighth, Tenth, and Eleventh Circuits have also adopted this reasoning. See, e.g., Eastman v. Union Pac. R.R. Co., 493 F.3d 1151, 1157 (10th Cir.2007); Stallings v. Hussmann Corp., 447 F.3d 1041, 1048 (8th Cir.2006); Barger v. City of Cartersville, Ga., 348 F.3d 1289, 1294 (11th Cir.2003); Ryan Operations G.P. v. Santiam–Midwest Lumber Co., 81 F.3d 355, 363 (3d Cir.1996).
As the Vioxx court explained, at least applying Fifth Circuit law: “the motivation sub-element is almost always met if a debtor fails to disclose a claim or possible claim to the bankruptcy court ... because of potential financial benefit resulting from the nondisclosure.” In re Vioxx, 2012 WL 4097200 at *3. We can’t conceive a situation in which a plaintiff lacks a motive to conceal her claims – the financial motive is strong and always present. So at least in the 3rd, 5th, 8th, 10th and 11th Circuits, if your plaintiff failed to disclose her lawsuit in her bankruptcy proceedings – it wasn’t inadvertent.
What about element #2 – the court must have accepted the previous position. When a bankruptcy has been discharged, certainly the court has accepted the plaintiff’s statement of her assets and made a ruling based on that. But, what about in a situation like Ms. Elliott’s where the bankruptcy proceedings are still open and in response to a summary judgment motion based on judicial estoppel, she seeks leave to amend her bankruptcy petition? In the Fifth Circuit it doesn’t matter. The Vioxx court explained the recent decision in Love v. Tyson Foods, Inc., 677 F.3d 258 (5th Cir.2012):
The Fifth Circuit held that the district court did not abuse its discretion when it granted summary judgment, because the plaintiff had not adequately addressed his failure to disclose his claims in his original bankruptcy petition—that is, at the time [plaintiff] failed to meet his disclosure obligations, which is the relevant time frame for the judicial estoppel analysis. The Love Court found it significant that [plaintiff] did state that he would pay his creditors before collecting any money from his claims against [defendant], but he made this assertion only after [defendant] brought his nondisclosure to light. On the other hand, [plaintiff’s] disclosure obligations arose long beforehand, and he had not adequately explained why he did not meet those obligations at that time. The court also noted that if a debtor who is caught concealing his claims by an opponent could then disclose his claims in order to fix the problem, there would virtually no incentive for a debtor to disclose his claims until forced to do so by an opponent.
In re Vioxx, 2012 WL 4097200 at *4. “[A] plaintiff may not be permitted to pursue a claim that was omitted from a bankruptcy petition, even if that plaintiff reopens her bankruptcy proceedings and amends her petition.” Id. at *3. Tough love.
This hard line by the Fifth Circuit prompted us to poke around and see what some of the other circuits were doing. Our research is by no means exhaustive and should only be used as a jumping off point – but we did find a few other decisions worthy of mention.
First, the Fifth Circuit is not alone it is embracing of judicial estoppel for undisclosed claims in bankruptcy: White v. Wyndham Vacation Ownership, Inc., 617 F.3d 472, 480 (6th Cir.2010) (affirming grant of summary judgment dismissing plaintiff's undisclosed sexual harassment claim); Krystal Cadillac-Oldsmobile GMC Truck, Inc. v. Gen. Motors Corp., 337 F.3d 314, 325 (3d Cir. 2003) ("Applying a lesser sanction [than judicial estoppel] . . . would reward [plaintiff] for what appears to be duplicitous conduct in the course of its bankruptcy proceeding. [Plaintiff] would still reap the benefit of any recovery . . . . In addition, the integrity of both the bankruptcy process and the judicial process would suffer."), cert. denied, 541 U.S. 1043 (2004); Payless Wholesale Distribs., Inc. v. Alberto Culver, Inc., 989 F.2d 570, 571-72 (1st Cir.) ("In order to preserve the requisite reliability of disclosure statements and to provide assurances to creditors regarding the finality of plans which they have voted to approve . . . [plaintiff's] failure to announce [its] claim against a creditor precludes it from litigating the cause of action at this time."), cert. denied, 510 U.S. 931 (1993).
The Ninth Circuit, however, doesn’t join in. Instead, that court has held that rather than invoking judicial estoppel, allowing a plaintiff to remedy his “inconsistent assertions by allowing him to reopen his bankruptcy case, thereby giv[es] the bankruptcy trustee an opportunity to administer the unscheduled claims.” Dunmore v. United States, 358 F.3d 1107, 1113 (9th Cir. 2004). So, in the Ninth Circuit, the failure to disclose may be remedied by reopening the bankruptcy case and properly disclosing the claims. This then leads to decisions such as Cannata v. Wyndham Worldwide Corp., 798 F.Supp.2d 1165 (D. Nev. 2011) in which the court denied judicial estoppel in favor of an “alternative equitable solution” that allowed plaintiff to pursue her claims but limited any potential award to “the amount necessary for the repayment of her creditors as determined by the chapter 7 estate trustee. [Plaintiff] will receive nothing.” Id. at 1176. The court reasoned: “This solution also serves to discourage others not disclosing assets during bankruptcy proceedings.” Id. It certainly discourages that plaintiff from aggressively pursuing her claims.
We also found an interesting twist in the Eleventh Circuit. The Eleventh Circuit would appear to be a judicial estoppel friendly jurisdicition. See Robinson v. Tyson Foods, 595 F.3d 1269, 1276 (11th Cir. 2010) (summary judgment granted on judicial estoppel grounds in employment discrimination action; plaintiff had "motive to conceal her claims in order to keep any settlement proceeds" which made "a mockery of the judicial system"). Likewise, in an earlier decision, Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282, 1288 (11th Cir.2002), the court granted defendant’s motion for summary judgment on the ground of judicial estoppel and held that allowing an amendment or re-opening of the bankruptcy proceedings would “diminish the necessary incentive to provide the bankruptcy court with a truthful disclosure of the debtor's assets.” Id. at 1288. Two years later, the court called that decision into question in Parker v. Wendy's Int'l, Inc., 365 F.3d 1268, 1272 (11th Cir. 2004): “it is questionable as to whether judicial estoppel was correctly applied in Burnes. The more appropriate defense in the Burnes case was, instead, that the debtor lacked standing.” The difference between the cases – in Parker the bankruptcy trustee intervened and sought to pursue the action on behalf of the estate. Finding the trustee wasn’t burdened by the debtor/plaintiff’s non-disclosure, summary judgment was denied. Something to watch out for.
Finally, we refer you to the case of Byrd v. Wyeth, 2012 U.S. Dist. LEXIS 18590 (S.D. Miss. Feb. 15, 2012) because we happened upon it. It contains a discussion of the difference between a Chapter 7 and a Chapter 13 bankruptcy and why the judicial estoppel analysis may differ. We’ll leave that for another day.