Judicial Estoppel Defense in Bankruptcy Claims Likely to Get More Difficult

A recent decision from the Court of Appeals for the Eleventh Circuit has impaired a valuable defense for early dismissal or settlement with bankrupt plaintiffs. This decision will affect strategy for mortgage originators, servicers, and other financial services companies that face a high volume of claims from bankrupt consumers.

On September 18, 2017, the Eleventh Circuit issued its en banc decision in Slater v. U.S. Steel Corp. overruling prior circuit precedent on the judicial estoppel defense. Judicial estoppel is an equitable defense that bars a plaintiff’s claim when she takes differing positions in subsequent court cases with an intent to make a mockery of the judicial system. Courts in the Eleventh Circuit have applied the defense when a plaintiff pursues a lawsuit in one court and files for bankruptcy without disclosing the claim as an asset that may be used to pay her creditors. Courts apply the judicial estoppel defense in these circumstances to prevent plaintiffs from obtaining a windfall by concealing an asset from the bankruptcy court while simultaneously asserting the same claim in a different court. Companies facing consumer litigation have successfully employed this defense by reviewing sworn bankruptcy schedules to see if plaintiffs failed to disclose claims asserted in pending lawsuits. As discussed here, following the Eleventh Circuit’s Slater decision, defendants will be less likely to prevail on this defense in the early stages of litigation.

In Slater, the Eleventh Circuit reaffirmed that courts may apply judicial estoppel when a two-part test is met: The plaintiff (1) took a position under oath in the bankruptcy proceeding that was inconsistent with the plaintiff’s pursuit of the lawsuit and (2) intended to make a mockery of the judicial system. The contested legal issue in Slater was what evidence is necessary to find that a plaintiff who did not disclose a lawsuit in bankruptcy intended to make a mockery of the judicial system? Prior Eleventh Circuit decisions endorsed a rule that the mere fact of the plaintiff’s nondisclosure is sufficient to show such intent, even if the plaintiff corrected her bankruptcy disclosures after the omission was called to her attention and the bankruptcy court allowed a correction (see Barger v. City of Cartersville, 348 F.3d 1289 (11th Cir. 2003); Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282 (11th Cir. 2002)). In Slater, the court granted en banc review to reconsider this precedent and overruled the Barger and Burnes decisions. Courts in the Eleventh Circuit may no longer infer a plaintiff’s intent to misuse the judicial system without considering the individual plaintiff and the circumstances surrounding the nondisclosure of a cause of action in the plaintiff’s bankruptcy schedules. Among other things, courts may consider factors such as the plaintiff’s level of sophistication, her explanation for the omission, whether she subsequently corrected the disclosures, and any bankruptcy court motions or orders concerning the nondisclosure.

According to the en banc panel, overruling prior precedent on judicial estoppel brings the Eleventh Circuit in line with the law in the Sixth, Seventh, and Ninth Circuits. On the other hand, the Fifth and Tenth Circuits have recognized that knowingly omitting a cause of action from bankruptcy schedules is enough to support the “intent to make a mockery of the judicial system” prong of the judicial estoppel defense.

Thus, in the Eleventh Circuit, obtaining summary judgment or dismissal based on judicial estoppel with respect to bankruptcy disclosures is likely going to be more difficult. Merely relying on plaintiffs’ sworn bankruptcy schedules is no longer sufficient to prove the intent element of the judicial estoppel defense.  Courts are now required to undertake a more rigorous inquiry of the plaintiff’s intent. Plaintiffs will be able to present self-serving factual arguments regarding the circumstances surrounding nondisclosure of a cause of action in bankruptcy.

Fortunately for defendants, Chief Judge Carnes wrote a concurrence clarifying that the judicial estoppel defense is not eradicated. Notwithstanding the Eleventh Circuit’s new requirement to consider the “surrounding circumstances”, courts are “not required to accept the testimony of the plaintiff that her misstatements . . . were not made with intent to mislead, even if that testimony is uncontradicted.” If a bankrupt plaintiff denies any intent to mislead the court or creditors by not disclosing a cause of action, the court has the “authority and responsibility to find the facts and not blindly accept [such] testimony.”