Judicial Estoppel: Can’t Have Your Cake & Eat It Too

Did the Debtor forget to list a lawsuit on his Schedule B or Statement of Financial Affairs?

Judicial estoppel is used to prevent a party from asserting inconsistent positions in different judicial proceedings (i.e.  you say one thing in bankruptcy court but then another in state court).   This rule was set in Supreme Court case of New Hampshire v. Main (2000). 

In bankruptcy, this doctrine is used to prevent a plaintiff-debtor from recovering property (money, real estate, etc) from a pending or future lawsuit when they fail to list that lawsuit (pending or not) on their Schedule B and Statement of Financial Affairs.  Causes of action are potential assets of the debtor, and as such, are property of the estate.

Here is what the courts are worried about:  plaintiff-debtor sues someone in state court and they have a good chance of winning, then plaintiff-debtor fails to list that lawsuit on his schedules, and gets a discharge and creditors get nothing.   Then this plaintiff-debtor wins $1 million dollars in the state court suit, and gets a windfall because he doesn’t have to share the $1 million with his creditors.

How does this work:  If the plaintiff-debtor failed to list the cause of action on his schedules, the defendant in the state court matter can argue “judicial estoppel” to prevent the plaintiff-debtor from proceeding because they are now taking an inconsistent position (in bankruptcy court plaintiff state on schedules that he did not have a suit, and now plaintiff in state court is saying he does have a case).    You can’t have your cake and eat it too.

Judicial Estoppel Factors From Hampshire

  • Factor 1: Party must have asserted a position that is clearly inconsistent with an earlier position.   In bankruptcy, this factor is satisfied because plaintiff-debtor failed to list a pending or possible cause of action in his bankruptcy case, and now later is trying to pursue the claim.  The positions are inconsistent.
  • Factor 2: Party must have been successful in convincing a court to accept his earlier position.   In bankruptcy, this factor is also satisfied because the plaintiff-debtor convinced a bankruptcy court to accept its earlier position, which was that he did not have a pending or potential case.
  • Factor 3:  Party pursuing the case now will obtain an “unfair advantage” if they are not estopped.   In bankruptcy, this is also satisfied because if the plaintiff-debtor got a discharge without allowing his creditors to recoup something from the lawsuit winnings, the plaintiff-debtor stands to gain a windfall from the winnings.

The Ninth Circuit has a flexible standard when applying judicial estoppel, where they say courts must consider the subjective intent of the plaintiff-debtor such that if he failed to list the lawsuit due to inadvertence or mistake, then the Court should likely not apply judicial estoppel.   Ah Quin (9th Circuit, 2013).

So, if a plaintiff-debtor has not yet filed a claim, you’d list it on Schedule B as a asset.  If the lawsuit is pending, you’d list it on both Schedule B and the Statement of Financial Affairs.

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