Establishing the judicial estoppel defense against a bankrupt plaintiff will be harder in the Eleventh Circuit following Smith v. Haynes & Haynes P.C., 940 F.3d 635 (11th Cir. 2019).
Judicial estoppel is a legal defense used for early dismissal of cases against bankrupt plaintiffs. In a bankruptcy, judicial estoppel applies if a debtor plaintiff omits any claim that the plaintiff knew of at the time of filing for bankruptcy or learned of while the bankruptcy case was pending. If a defendant succeeds in establishing judicial estoppel, the plaintiff is barred from pursuing a case regardless of the claim’s merits.
The plaintiff, Jenny Smith, sued her former employer, Haynes & Haynes, a law firm, alleging claims for unpaid overtime and retaliation under the Fair Labor Standards Act. Smith began working for Haynes & Haynes after filing for bankruptcy. On her bankruptcy filings she stated she had no claims that might prompt a lawsuit. While this disclosure was true when she filed for bankruptcy, she failed to amend her bankruptcy filing when she realized she had a claim against Haynes & Haynes.
The district court granted summary judgment for the employer on Smith’s overtime claim, relying on the judicial estoppel defense. On appeal, the Eleventh Circuit reversed summary judgment on judicial estoppel grounds, holding the district court did not have the benefit of Slater v. U.S. Steel Corp., 871 F. 3d 1174 (11th Cir. 2017) (Slater II), at the time of its ruling.
Before Slater II, the bar to prove judicial estoppel was “exceeding low.” A defendant simply relied on the plaintiff’s bankruptcy filing to show the plaintiff had a potential claim and failed to disclose it, and courts would infer that a plaintiff always had motive to deceive the bankruptcy court, thus, establishing judicial estoppel.
The Eleventh Circuit stated that this presumption of deceit produced perverse results and defendants, such as employers, were the only party that benefited because judicial estoppel barred the omitted lawsuit without showing the plaintiff intended to deceive. Courts must apply Slater II’s “all the facts and circumstances” standard to determine the plaintiff’s intent when she omitted her claims in her bankruptcy petition.
The Eleventh Circuit said it was “far from clear” that Smith acted in bad faith because she denied motive to deceive the court and may not have known she had to update her bankruptcy filing when she learned of her claims. It also stated that the district court erred applying judicial estoppel based on the inconsistencies between Smith’s initial and amended complaint, stating that her inconsistent statements about when she learned of her claims against the employer did not show intent to deceive.
In this case Plaintiff filed a Chapter 13 bankruptcy petition, which allows a portion of a debtor’s future earnings to be collected by a trustee and paid to creditors. The Court recognized that a Chapter 13 debtor, does not receive a discharge of her debts; rather, the debtor is allowed to extend or reduce the balance of her debts through a plan of rehabilitation. By contrast, in a Chapter 7 proceeding, the trustee is the party conferred with standing to enforce or abandon the rights of the debtor followed by issuance of a discharge. If Plaintiff’s petition was filed under Chapter 7, undisclosed contingent claims could still result in the successful assertion of a lack of standing defense. Accordingly, the discovery of a claimant’s bankruptcy proceeding remains an important area of inquiry in employment litigation.