The United States Court of Appeals for the Tenth Circuit recently shut down litigation filed by plaintiffs who had represented to a Bankruptcy Court that their claims were worth far less than they were attempting to recover in a lawsuit filed in federal district court. Queen v. TA Operating, LLC, --- F.3d ----, 2013 WL 4419322, (10th Cir. Aug. 20, 2013). As a result of this decision, a defendant sued by a plaintiff who has filed for bankruptcy should take the time to determine whether the plaintiff’s bankruptcy filings included an estimate of the lawsuit that was lower than the amount of damages sought in the lawsuit. If such filings exist, there may be a basis to move for dismissal of the lawsuit based on the doctrine of judicial estoppel.

Background

A married couple (“Plaintiffs”) filed suit in federal district court against a company that operated a parking lot (“Defendant”), seeking damages relating to the husband’s alleged slip-and-fall injury. After filing the lawsuit, Plaintiffs filed for Chapter 7 bankruptcy protection. Initially, Plaintiffs failed to disclose their litigation claims in their bankruptcy proceedings. They eventually amended their bankruptcy filings to disclose the claims, but did not do so until after Defendant notified their bankruptcy trustee that Plaintiffs had omitted the claims from their disclosures. Plaintiffs’ amended filings provided an estimated value of the claims that was far below the amount of damages they sought to recover in the litigation and stated that the claims were exempt from distribution to their creditors. Subsequently, the trustee determined that Plaintiffs had no assets available to distribute to creditors, and the Bankruptcy Court granted Plaintiffs a no-asset discharge.

Defendant filed a motion for summary judgment in the litigation, arguing that the Court should apply the doctrine of judicial estoppel to dismiss Plaintiffs’ lawsuit due to their failure to disclose their claims in the bankruptcy case. The District Court granted Defendant’s motion, and Plaintiffs appealed to the Tenth Circuit. The Tenth Circuit affirmed, holding that the District Court did not abuse its discretion in applying judicial estoppel to bar Plaintiffs’ claims.

Tenth Circuit’s Analysis

The Tenth Circuit began its analysis by discussing the purpose of judicial estoppel, which “is to protect the integrity of the judicial process by prohibiting parties from deliberately changing positions according to the exigencies of the moment.” Queen, 2013 WL 4419322, at *4 (internal quotation marks and citation omitted). The Court then listed the three non-exhaustive factors that courts typically consider in deciding whether to apply the doctrine:

  1. whether the second position taken by the party was clearly inconsistent with the first position;
  2. whether the party persuaded a court to accept the first position, so that acceptance of a subsequent inconsistent position would create the perception that either court was misled; and
  3. whether the party “would gain an unfair advantage in the litigation if not estopped.” Id.

Applying the first factor, the Court found that Plaintiffs had taken a position in their bankruptcy proceedings that was inconsistent with the position taken in their lawsuit. They did this by initially failing to disclose the claims in the bankruptcy case and subsequently representing in amended bankruptcy filings that the value of the lawsuit was much lower than they had claimed in the litigation and by asserting that the lawsuit was entirely exempt.

With respect to the second factor, the Court found that the Bankruptcy Court had adopted Plaintiffs’ position regarding the value of the lawsuit and the claimed exemption by granting a no-asset discharge.

The Court found that the third factor also weighed in favor of applying judicial estoppel because Plaintiffs would gain an unfair advantage if allowed to continue pursuing the litigation without the risk that their creditors would receive any of the recovered damages. In making this finding, the Court again noted that Plaintiffs received a no-asset discharge based on their amended bankruptcy filings, “which provided a greatly decreased estimate of the value of the lawsuit and claimed the entire lawsuit as exempt under provisions that do not extend to the full value” of the lawsuit. Id. at *9. The Court pointed out that the Bankruptcy Court may not have granted a no-asset discharge had Plaintiffs provided an accurate estimate of the value of the claims.

Finally, the Court refused to accept Plaintiffs’ argument that judicial estoppel should not be applied because their position in the Bankruptcy Court was based on inadvertence or mistake. The Court reasoned that the Plaintiffs had knowledge of the claims as well as a motive to conceal them in their bankruptcy proceedings.

Takeaway

In light of this decision, a defendant sued by a plaintiff who has filed for bankruptcy should determine whether the plaintiff failed to disclose the existence of the lawsuit or represented to the Bankruptcy Court that the value of the lawsuit was lower than that claimed in the litigation. If that is the case, the defendant may have a strong argument that judicial estoppel should apply to bar the plaintiffs’ litigation claims.