Judicial Estoppel is an equitable legal doctrine that prevents parties from taking intentionally inconsistent positions in different forums or courts. In the context of a bankruptcy case, judicial estoppel can prevent a debtor from bringing a claim against a party if the debtor failed to list that claim on Schedule B of the bankruptcy schedules. Any claim a debtor has against another person or company is an asset of the bankruptcy estate that must be disclosed, regardless of which Chapter is filed. The problem occurs when a debtor either forgets or purposefully fails to list an potential or currently litigated claim on Schedule B. Courts have long held that failure to list the claim on Schedule B judicially estops a debtor from either maintaining or later bringing that a claim against the other party.
The courts reason that bankruptcy schedules are signed under penalty of perjury, and filing the petition and schedules without listing the claim is tantamount to taking the position under legal pleadings that such claim does not exist.
Slater v. U.S. Steel – 11th Circuit Holds Debtor Can’t Rectify Mistake After “Getting Caught”
If a debtor forgets to list a claim, the schedules can possibly be amended to correct the error, but the 11th Circuit’s recent decision in Slater v. U.S. Steel, Case No. 12-15548 (11th Cir. 2015) makes it clear that the timing of the amendment must come before the debtor “gets caught” by another party failing to list the claim.
Debtor filed an employment discrimination suit against U.S. Steel, and twenty-one months later filed a Chapter 7 bankruptcy case. The Debtor failed to list her employment discrimination claim against U.S. Steel in either her Statement of Financial Affairs or Schedule B, and the trustee concluded the 341 meeting and filed a report of no distribution in the case – which means that the case was a “no asset case” in which no assets were available for distribution to debtor’s creditors. When U.S. Steel learned of the Debtor’s Chapter 7 and the fact that she failed to list her claim, it filed a motion asking the district court to either dismiss the case or, in the alternative, grant it summary judgment against the debtor for taking inconsistent positions. The district court concluded that the doctrine of judicial estoppel, as set out in Burnes v. Pemco Aeroplex, Inc., and Robinson v. Tyson Foods, Inc., 291 F.3d 1292 (11th Cir. 2002) controlled its decision. Like Slater, Burnes involved a debtor whose employment discrimination case was dismissed against the defendant-employer under the doctrine of judicial estoppel because the debtor failed to disclose the law suit on Schedule B or the Statement of Financial Affairs.
After receiving U.S. Steel’s motion to dismiss, Slater promptly amended her schedules and statement of financial affairs to list her claims against U.S. Steel. You can probably guess how this turns out. While debtors often amend schedules for minor (or major) disclosure oversights, the court drew a hard line and found that a debtor cannot amend her way out of being judicially estopped from bringing a claim against a defendant AFTER she gets caught failing to list that claim on her schedules.
Citing Burnes, the Slater Court laid out the two factors used to determine whether a debtor should be judicially estopped from bringing a claim:
[i]n the Eleventh Circuit, courts consider two factors in the application of judicial estoppel to a particular case. First, it must be shown that the allegedly inconsistent positions were made under oath in a prior proceeding. Second, such inconsistencies must be shown to have been calculated to make a mockery of the judicial system. 291 F.3d at 1285.
In Robinson v. Tyson Foods, Inc., 595 F.3d 1269 (11th Cir. 2010), the Eleventh circuit found that “[w]hen considering a party’s intent [under the second prong of our test] . . . the debtor’s failure to satisfy its statutory disclosure duty is ‘inadvertent’ only when, in general, the debtor either lacks knowledge of the undisclosed claims or has no motive for their concealment.” 595 F.3d at 1275 (quotation marks omitted). The court found that
The court found that Slater obviously took inconsistent positions under oath when she failed to list her claims on her bankruptcy schedules. The next question the court needed to answer was whether this failure was calculated to make a mockery of the judicial system. This factor sounds like it requires some kind of calculated malfeasance from the strong language, but it really doesn’t. Quoting the lower district court, the Eleventh Circuit held:
. . . that ‘the relevant inquiry is intent at the time of non-disclosure’– the motive to conceal is measured prior to the time the adversary discovers and reveals the concealment. It further explained that . . . ‘the motive to conceal stems from the possibility of defrauding the courts and not from any actual fraudulent result.’
Under this reasoning, the 11th Circuit held that “waiting until after being caught” to rectify a debtor’s bankruptcy schedules is “too little, too late.” Slater, p. 10.
Expounding upon this holding, the 11th Circuit provided that “allowing [Slater] to do so without penalty would encourage rather than discourage debtors like her to conceal their assets unless or until they are caught.” To avoid this consequence, the 11th Circuit affirmed the District Court’s ruling that to avoid a mockery of the judicial system, Slater’s claims must be dismissed.
So What’s the Lesson?
So the lesson for debtors and debtor’s attorneys is to ensure that ANY potential or ongoing claims are appropriately listed on both Schedule B and the Statement of Financial Affairs. If a debtor inadvertently fails to list a claim, the 11th Circuit’s holding implies that if you rectify the mistake PRIOR to anyone finding out, you’ll be in a good position to maintain or bring the claim in the future. Normally I would say that as long as you amend before the 341 meeting, the facts will be in your favor, but if a defendant like U.S. Steel quickly discovers the error and promptly files a motion asking for your claims to be dismissed in the other court, it may be “too little, too late.”