The forthcoming bankruptcy legislation poses considerable challenges for bankruptcy practitioners. There is little in the way of legislative history, and many commentators have noted the amended Code's lack of clarity and precision in a number of amendments. There is little dispute that the new Code will impose a number of additional burdens on consumer lawyers. One notable amendment is the requirement that consumer debtor lawyers verify the accuracy of their client's schedules and petition.² Given this requirement, consumer lawyers will need to ensure that their clients accurately disclose all potential assets, including causes of action.

Recent case law indicates that consumer debtors have had some difficulty in disclosing employment discrimination claims in their cases, either failing to understand that a potential recovery is an asset of the estate or attempting to shield any potential recovery from creditors. Regardless of the reason, it is possible that the failure to identify these causes of action will result in adverse consequences to counsel and their clients.

Disclosure Required

The debtor is required to list or disclose all potential assets to the bankruptcy court. 11 U.S.C. §§521(1) and 541(a)(7). This obligation is a continuing one that does not end with the first filing of the debtor's financial statements. Burnes v. Pemco Aeroplex Inc., 291 F.3d 1282, 1286 (11th Cir. 2002) (citation omitted). In fact, full and honest disclosure is "crucial to the effective functioning of the federal bankruptcy system." Id. (citation omitted). Moreover, the importance of full and honest disclosure is essential to a creditor's evaluation of the creditor's participation in a bankruptcy case and whether or not to contest a discharge in a no asset case.³ Id.

In addition, a plaintiff seeking damages for employment discrimination in many instances must go through an administrative process before obtaining jurisdiction to sue. As such, a potential cause of action may exist when a debtor files for bankruptcy while a debtor's employment discrimination claim is pending administrative review. A claim of employment discrimination can include compensation in the form of emotional damages, back pay and future compensation in the form of a pay or grade increase. There may also be other forms of non-monetary relief that could include an employee's reinstatement or transfer to another position. As a result, should a plaintiff/debtor prevail in an employment discrimination lawsuit, the debtor could obtain both a monetary award and the potential of increased earnings. Therefore, a successful employment discrimination case can positively impact a consumer case.

Given these antecedents, courts will closely examine a debtor's failure to schedule an employment discrimination claim. Intent can be one of the factors that a court will review in determining how to resolve a debtor's failure to schedule an employment discrimination claim. In addition, courts will have to balance the debtor's failure to disclose a claim and potentially dismissing a bankruptcy case against any detriment to creditors.

Judicial Estoppel

Judicial estoppel is an equitable doctrine invoked at a court's discretion. Burnes at 1285, citing New Hampshire v. Maine, 532 U.S. 742, 750 (2001). Judicial estoppel is "a common law doctrine by which a party who has assumed one position in his pleadings may be estopped from assuming an inconsistent position." In re Coastal Plains Inc., 179 F.3d 197, 205 (5th Cir. 1999), cert. denied, 528 U.S. 1117 (2000), quoting Brandon v. Interfirst Corp., 858 F.2d 266, 268 (5th Cir. 1988). The Fifth Circuit has explained (in addition to several other circuit courts) that the purpose of the doctrine is to protect the integrity of the judicial system by preventing a party from taking a contrary position in a subsequent proceeding where that party's interests have changed. Id. (citation omitted). Moreover, because judicial estoppel is intended to protect the integrity of the judicial system, rather than the litigants, detrimental reliance by a party is not a component of the court's analysis. Id.

The policy considerations behind judicial estoppel include preventing internal inconsistency, keeping litigants from playing fast and loose with the courts and prohibiting parties from changing their positions if circumstances change. Id. (citation omitted). Judicial estoppel can be applied where "intentional self-contradiction is being used as a means of obtaining unfair advantage in a forum provided for suitors seeking justice." Scarano v. Central R. Co., 203 F.2d 510, 513 (3d Cir. 1953).

The Supreme Court has noted that the circumstances under which the doctrine may be invoked are generally not reducible to any general formula. New Hampshire, 532 U.S. at 750-51. Nonetheless, courts typically consider whether (1) the party's current position is clearly inconsistent with an earlier position, (2) the party persuaded a court to accept an earlier position so that judicial acceptance of the inconsistent position in a later matter creates a perception that the court was misled, and (3) the party advancing the inconsistent position would derive an unfair advantage on the opposing party. Id. The Eleventh Circuit has observed that the list is by no means exhaustive, but rather a function of the facts and circumstances of a particular case. Burnes, 291 F.3d at 1285-86.

One important factor in this inquiry is intent. Some debtors ascribe their failure to list a potential recovery as inadvertent. See Jethroe v. Omnova Solutions Inc., 412 F.3d 598, 2005 WL 1385197, *2 (5th Cir. 2005). Therefore, a debtor may assert that because the failure to list a lawsuit was inadvertent, judicial estoppel should not apply. Id. The Fifth Circuit has found that for a claim of inadvertence to be substantiated, the debtor must not show that she was unaware of her duty to disclose the cause of action, but that at the time she filed bankruptcy she was unaware of the facts giving rise to the claim of discrimination. Id. (citation omitted). Moreover, it would appear that the Fifth Circuit would also require that there be no motive for concealment; and that the debtor is not using the concealment of the claim to the detriment of paying creditors. Id.

Additionally, the Third Circuit provides two other considerations in evaluating a debtor's intent regarding concealment of a potential claim. One factor is based on lack of knowledge, and the other is based on a failure to disclose despite knowledge of undisclosed facts. Id. For example, in Oneida Motor Freight Inc. v. United Jersey Bank, 848 F.2d 414 (3d Cir.), cert. denied, 488 U.S. 967 (1988), the Third Circuit used judicial estoppel to bar a chapter 11 debtor from prosecuting a claim it had against a bank. The bank had a claim of setoff against the debtor. The debtor's excuse for nondisclosure of the competing claims was not lack of knowledge, but rather that the bankruptcy case was never in a procedural posture for the claims to be properly asserted. Id. at 418. In Oneida, the debtor not only failed to disclose its potential claim against a bank as a potential asset, but the Oneida debtor also scheduled its claim to the bank without noting the possibility of a setoff being asserted. Id. The Third Circuit found the debtor's position untenable, and that both claims should have been disclosed even if the setoff was ripe for consideration. Conversely, in Ryan Operations G.P. v. Santiam-Midwest Lumber Co., 81 F.3d 355 (3d 1996), the court did not infer any effort by the debtor to obtain an advantage because there was no evidence that the nondisclosure of a potential claim played any role in confirmation of the plan or that the disclosure of the potential claim would have led to a different result. See Coastal Plains, 179 F.3d at 211; see, also, Burnes, 291 F.3d at 1285-86 ("motivation" of debtor apparent where debtor filed chapter 13 case, continued to pursue employment discrimination claims, and then did not disclose claim in chapter 7 case when case converted).

Application of Judicial Estoppel in Consumer Cases

In Jethroe v. Omnova Solutions Inc., 412 F.3d 598, 2005 WL 1385197 (5th Cir. June 13, 2005), the debtor filed chapter 13 bankruptcy while pursuing a Title VII employment discrimination case. The debtor did not disclose the case as a contingent or unliquidated claim nor did she indicate that she had a pending suit or administrative proceeding. Jethroe at *1. Roughly two years into her case, the debtor filed her employment discrimination case in federal district court. Thereafter, the debtor's chapter 13 case was dismissed because of a failure to comply with an agreed order. The district court found that the debtor's Title VII claim was judicially estopped because of her failure to disclose the lawsuit and claim in her chapter 13 case. Id.

The Fifth Circuit affirmed the district court's decision to bar the debtor's discrimination claim using the doctrine of judicial estoppel, finding that (1) judicial estoppel is appropriate where the debtor fails to disclose an asset and then pursues a claim based on that undisclosed asset, and (2) the debtor fails to amend her schedules by adding the undisclosed asset. Id. at *1-2. Further, the Fifth Circuit completely discounted the debtor's argument that the failure to disclose was inadvertent and the result of her attorney's advice. The court correctly noted that this argument was suspect given that the debtor knew of the claim before and during her chapter 13 case, and that by concealing the asset the debtor would not have to make more than a nominal distribution to unsecured creditors. Id.

A court's usage of judicial estoppel in chapter 13 cases to prohibit the debtor's inconsistent positions in and out of bankruptcy is more streamlined because the debtor is the party who retains the cause of action as property of the estate. See 11 U.S.C. §1306. The chapter 13 trustee would not be the party responsible for pursuing the employment discrimination claim. Conversely, in a chapter 7 case where the debtor has concealed a potential employment discrimination claim, it would be the chapter 7 trustee who would be vested with the responsibility of adjudicating the claim. See 11 U.S.C. §706.

"Generally speaking, a pre-petition cause of action is the property of the chapter 7 bankruptcy estate, and only the trustee in bankruptcy has standing to pursue it." Parker v. Wendy's Int'l. Inc., 365 F.3d 1268, 1272 (11th Cir. 2004). Section 541 provides that all of the debtor's property, both tangible and intangible, vests in the bankruptcy estate. Id. As such, the chapter 7 trustee, as representative of the chapter 7 estate, is the proper party in interest and is the only party who has standing to prosecute causes of action belonging to the estate. Id. (citations omitted). Moreover, should the trustee not abandon the cause of action back to the debtor, the cause of action remains property of the estate. Id.; Estel v. Bigelow Mgmt. Inc., 323 B.R. 918, 924 (E.D. Tex. 2005).⁴

Based on this analysis, judicial estoppel in chapter 7 cases is more problematic. To begin with, the acts that form the basis for judicial estoppel—the inconsistent positions—are not taken by the trustee but the debtor. Id. As a result, the court cannot ascribe the bad conduct to the trustee and estop the chapter 7 trustee from pursuing the claim. Also, the chapter 7 trustee becomes the party with the authority to pursue and settle an employment discrimination case. Therefore, the defendant to a discrimination lawsuit may be at advantage to settle a discrimination claim with the trustee because the trustee does not have the emotional ties to a discrimination case that a plaintiff would.

Conclusion

The nondisclosure of employment discrimination claims in bankruptcy cases has been the source of discussion among several circuit courts. The majority of courts have concluded that judicial estoppel is an appropriate remedy in bankruptcy cases to protect the integrity of the court system. It appears that judicial estoppel is more favored in chapter 13 and individual chapter 11 cases where the debtor who takes inconsistent positions in two different cases is also the party responsible for prosecuting the employment discrimination claim. Judicial estoppel would not appear to be as valid a remedy in chapter 7 cases where the chapter 7 trustee has the standing and responsibility to resolve the employment discrimination claim.

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Footnotes

¹ The views expressed in this article are Mr. Gargotta's and do not necessarily reflect the views of the Department of Justice or any federal agency. Return to article

² See §102(a)(4)(D) of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("the signature of an attorney on the petition shall constitute a certification that the attorney has no knowledge after an inquiry that the information in the schedules filed with the petition is incorrect"). Return to article

³ Given the application and means testing, the value of available asset for liquidation in a case will be affected by a potential recovery for a discrimination claim. Return to article

⁴ Although the chapter 7 trustee has standing to pursue an employment discrimination claim, the debtor could reopen a chapter 7 case after discharge, schedule the cause of action and allow a chapter 7 trustee to pursue the claim. In re Upshur, 317 B.R. 446, 452 (N.D. Ga. 2004). Return to article