The Last Estop: Why Judicial Estoppel Should Be a Court's Last Resort for Undisclosed Lawsuits from Bankruptcy

• Publication year: 2017

The Last Estop: Why Judicial Estoppel Should Be a Court's Last Resort for Undisclosed Lawsuits from Bankruptcy

Caryn Wang

THE LAST ESTOP: WHY JUDICIAL ESTOPPEL SHOULD BE A COURT'S LAST RESORT FOR UNDISCLOSED LAWSUITS FROM BANKRUPTCY^†

Abstract

This Comment analyzes federal and state courts' application of judicial estoppel to a lawsuit that a consumer debtor failed to disclose in a prior bankruptcy case. Federal courts are split on most aspects of the judicial estoppel doctrine when applied to an undisclosed lawsuit from bankruptcy. Not all state courts recognize the doctrine of judicial estoppel, and those that do recognize it may apply the federal judicial estoppel doctrine or their own doctrine. Confusion throughout the federal circuits and state courts regarding judicial estoppel has harmed debtors, creditors, and the federal bankruptcy court system.

This Comment argues that non-bankruptcy courts should not apply the judicial estoppel doctrine to undisclosed lawsuits from bankruptcy. Application of judicial estoppel in this context is both inequitable and contrary to provisions of the Bankruptcy Code. The continued effect of the automatic stay on property of the bankruptcy estate makes all non-bankruptcy court judgments dismissing undisclosed lawsuits void. Defendants who seek to assert judicial estoppel against an undisclosed lawsuit must first petition the bankruptcy court to reopen the debtor's bankruptcy case to request relief from the automatic stay. The bankruptcy court may then appoint a trustee who can either abandon the claim or pursue the claim for the benefit of the creditors. This approach is both equitable and conforms to the Bankruptcy Code. This Comment concludes that judicial estoppel should not and may not be applied to undisclosed lawsuits from bankruptcy until the bankruptcy court grants relief from the automatic stay.

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Introduction...........................................................................................1211

I. Background of Relevant Bankruptcy Provisions...............1215

A. Property of the Estate and the Debtor's Duty to Disclose ..... 1216
B. The Automatic Stay................................................................. 1219
C. Jurisdiction of Bankruptcy Courts.......................................... 1221

II. The Development of the Judicial Estoppel Doctrine...........1222

A. The Judicial Estoppel Doctrine and Its Goals........................ 1223
B. Federal Courts' Application of Judicial Estoppel.................. 1225

1. The Appropriate Standard of Review ............................... 1225
2. Applying the Maine Factors in the Undisclosed Lawsuit Context ............................................................................. 1226
3. Choice of Law when Sitting in Diversity .......................... 1230

C. State Courts' Application of Judicial Estoppel ...................... 1232

1. Judicial Estoppel and Choice of Law ............................... 1232
2. Jurisdictional Issue in the Undisclosed Lawsuit Context . 1233

III. Alternatives to Judicial Estoppel..........................................1234

A. The Debtor Is Not the Real Party in Interest .......................... 1235
B. Reopening the Debtor's Bankruptcy Case.............................. 1238

IV. An Equitable Framework Based on the Bankruptcy Code 1240

A. Application of Judicial Estoppel Thwarts the Goals of Judicial Estoppel and the Bankruptcy System ........................ 1240
B. An Equitable, Statutory Framework....................................... 1243

1. The Automatic Stay Continues to Act Against Undisclosed Lawsuits ....................................................... 1244
2. The Bankruptcy Court's Exclusive Jurisdiction over Undisclosed Lawsuits ............................................... 1246
3. Equitable Treatment of Undisclosed Lawsuits ................. 1248

Conclusion...............................................................................................1250

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Introduction

The notion that plaintiffs are entitled to their day in court is a fundamental characteristic of the United States judicial system.¹ However, plaintiffs are routinely denied their day in court when they have previously filed for bankruptcy but failed to disclose a potential lawsuit.² In bankruptcy, a potential lawsuit is an asset that the debtor must disclose to the bankruptcy court.³ When a debtor fails to disclose a potential lawsuit on her bankruptcy schedules and later pursues that lawsuit in a non-bankruptcy court, the non-bankruptcy court may determine that the debtor has taken inconsistent positions in an attempt to manipulate the judicial system.⁴ Courts approach this issue in different ways, but the majority of courts apply the doctrine of judicial estoppel.⁵

Judicial estoppel is an equitable doctrine that is meant to protect the integrity of the court system.⁶ Judicial estoppel allows a court to dismiss⁷ a plaintiff's claim if the plaintiff has taken inconsistent positions in different court proceedings to manipulate the judicial system and gain an advantage.⁸ Federal courts and many state courts have applied judicial estoppel when a debtor-turned-plaintiff fails to disclose a lawsuit in bankruptcy.⁹

The following examples will better illustrate the role of judicial estoppel in the undisclosed lawsuit context. consider the stories of Jane and John. Jane's situation represents the case of the debtor who is unaware of her claim and whose nondisclosure was due to an innocent mistake. John's situation represents the

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case of the debtor attempting to take advantage of the courts and get an unfair benefit from the judicial process.

Jane is a single mother who works at a restaurant in California. For years, Jane has always felt uncomfortable with the way her manager interacts with her, but she continues to work there because the job pays well. Unfortunately, Jane's manager fires her because she constantly refuses his romantic advances. Jane is unable to find comparable work and has to settle for a job that pays much less. After a few months of struggling to pay her bills, Jane decides to file a petition for relief under Chapter 7 of the Bankruptcy Code. She files without an attorney, receives a discharge, and comes out of bankruptcy with a fresh start. Six months after receiving her discharge, Jane realizes that she may have a wrongful termination claim against the restaurant that fired her. Jane hires a lawyer and files a complaint against the restaurant in federal court.

John runs a successful business in Vermont. Despite his success, John lives such a lavish lifestyle that he is unable to pay all of his debts. John decides to file a petition for relief under Chapter 7 and hires an attorney. John's attorney asks him if he has any potential or pending lawsuits. John knows he has a claim against a business associate, but decides not to tell his attorney. John is granted a discharge in his bankruptcy case. Six months later, John files a lawsuit against his business associate in Vermont state court.

In an ideal system, judicial estoppel would prevent debtors like John from taking advantage of the judicial system and would forgive Jane for her innocent mistake. However, the development of judicial estoppel has been far from ideal. Debtors similar to Jane are estopped in some jurisdictions,¹⁰ and debtors like John may bring their claims without fear of being estopped in other jurisdictions.¹¹

The stories of Jane and John represent two possible outcomes when a debtor fails to disclose a lawsuit in bankruptcy. Despite the varying circumstances underlying Jane's and John's stories, the same basic elements are present: something bad happened, resulting in their potentially bringing a lawsuit; they

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later ended up in financial distress and sought relief from the bankruptcy court; they received relief from the bankruptcy court; they pursued the lawsuit; and then the defendant raised the affirmative defense of judicial estoppel. Jane and John's stories diverge on one important issue: forum choice. Jane had a federal claim that she brought in federal court. John had a state law claim that he brought in state court. There are other forum possibilities that may arise in this context.

The undisclosed lawsuit journey always begins in a bankruptcy court, but may end up in state or federal court under state or federal law. A plaintiff may file a federal claim in state court¹² or federal court.¹³ If the plaintiff chooses to file in state court, the defendant may remove the lawsuit to federal court.¹⁴ A plaintiff may file a state law claim in state court or in federal court if she can meet the requirements for diversity jurisdiction.¹⁵ If the plaintiff's claim meets the requirements for diversity jurisdiction, and the plaintiff files in state court, the defendant may still remove the case to federal court.¹⁶

In the undisclosed lawsuit context, forum choice has become a deciding factor when judicial estoppel arises because federal and state courts do not apply judicial estoppel uniformly.¹⁷ Federal circuits are also split on choice of law issues for judicial estoppel when sitting in diversity jurisdiction.¹⁸ Moreover, undisclosed lawsuits from bankruptcy create jurisdictional issues that are different for state courts and non-bankruptcy federal courts.¹⁹ The inherent variability of judicial estoppel as a discretionary, common-law doctrine, combined with the various forum and choice of law possibilities, has created extreme confusion and inconsistency throughout the court systems.²⁰ This inconsistency has led to inequitable results from the perspective of debtors, creditors, and the bankruptcy court system—resulting in a need for a more

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uniform and equitable approach that judicial estoppel is not equipped to solve on its own.²¹

Judicial estoppel's inequitable results in this context have led the Eleventh Circuit to reconsider its...