Page 34 - January 2020 BarJournal

COLUMNETHICS PERSPECTIVE

ETHICAL IMPLICATIONS

FOR BANKRUPTCY

RELATED JUDICIAL ESTOPPEL

Chad Eggspuehler

n civil litigation, defendants often invoke a ary line after it had adopted a different line as part 871 F.3d 1174, 1185 (11th Cir. 2017) (en banc).
defense based on non-disclosure in the plain- of a consent decree in previous litigation. The The Fourth, Sixth, and Ninth Circuits have simi-
tiff’s prior bankruptcy. Simply put, this estop- Court prescribed a non-exhaustive list of factors larly eschewed such bad-faith presumptions from
pel defense asserts that: (1) the plaintiff con- to consider: (1) “clearly inconsistent” positions in the mere non-disclosure of claims in bankruptcy
Icealed or withheld information about the civil multiple proceedings; (2) success with previous proceedings. See, e.g., Martineau v. Wier, 934 F.3d
claim from the bankruptcy court despite a legal inconsistent position, creating the perception that 385, 394 (4th Cir. 2019); Ah Quin v. Cty. of Kau-
duty to disclose; and (2) that the plaintiff withheld the court had been misled; and (3) unfair advan- ai Dep’t of Transp., 733 F.3d 267 (9th Cir. 2013);
this information in order to receive a benefit (dis- tage. Id. at 750–51. As an equitable doctrine, ju- White v. Wyndham Vacation Ownership, Inc., 617
charge of debt), while keeping the value of the legal dicial estoppel serves “to protect the integrity of F.3d 472, 478 (6th Cir. 2010).
claim separate and apart from assets that would be the judicial process by ‘prohibiting parties from Other courts remain open to inferring “a mo-
distributed to creditors—a windfall. deliberately changing positions according to the tive to conceal assets” from the circumstances of
According to one appellate court, 83% of the 237 exigencies of the moment.’” Id. at 749–50. bankruptcy proceedings—i.e., every asset with-
instances of judicial estoppel analysis documented Federal district and appellate courts have ex- held is one less asset distributed to creditors.
in that circuit between 2002 and 2016 “arose in the tended these principles to the bankruptcy context. See, e.g., Anderson v. Seven Falls Company, 696
bankruptcy context.” Smith v. Haynes & Haynes The non-disclosure of known legal claims in the F. App’x 341 (10th Cir. 2017) (adhering to circuit
P.C., 940 F.3d 635, 643 n.3 (11th Cir. 2019). Yet, the bankruptcy proceeding, and the subsequent filing precedent and rejecting subjective-intent stan-
ethical implications and responsibilities associated of those claims in a different proceeding, consti- dard); cf. United States ex rel. Bias v. Tangipahoa
with this equitable defense rarely come up. tutes “clearly inconsistent” positions. If the debtor Parish School Bd., 766 F. App’x 38, 43 n.3 (5th Cir.
Courts have increasingly expressed skepti- succeeds in extinguishing debts while maintain- 2019) (rejecting characterization of circuit law as
cism about this form of estoppel, worried that ing that potentially valuable asset, that demon- permitting inference of bad faith, citing circuit’s
dismissal punishes plaintiffs for innocent mis- strates both success with the previous position previous holistic review of record in determin-
takes and fails to secure additional assets for (i.e., that the debtor had no such claims) and un- ing whether bankruptcy non-disclosure justifies
the bankruptcy estate—all the while granting fair advantage (the windfall to the debtor, at the estoppel).
a windfall to a party (the civil defendant) who expense of the creditors). In light of these developments, one can reason-
often has no interest in the bankruptcy estate. Yet, fissures have emerged in applying this test ably expect continued disagreement on the scope
Accordingly, some courts are adopting stricter to bankruptcy-related omissions, particularly over of judicial estoppel in the bankruptcy context un-
proof requirements for judicial estoppel in whether or not courts may infer bad faith from til the Supreme Court clarifies the standard.
terms of the debtor/plaintiff’s bad faith. the mere non-disclosure of legal claims (assets)
While this reassessment takes place, the bar in bankruptcy proceedings despite a legal duty of Ethical Issues
would be wise to reexamine the ethical respon- disclosure. In recent years, some appellate courts While these developments place increased focus
sibilities for defense counsel considering how to have rejected such a presumption, opting instead on debtor/plaintiffs’ litigation conduct, they may
proceed against a plaintiff who has failed to dis- to predicate estoppel on findings of bad faith and/ also impact the standards for defense conduct.
close the legal claim to the bankruptcy estate. This or a subjective intent to conceal the asset from the First, the defense attorney must determine when
article aims to start that conversation. bankruptcy estate. the claim accrued—before the filing of the bank-
For instance, the en banc Eleventh Circuit re- ruptcy proceeding or post-petition? Claims that
Doctrinal Developments: Raising the Bar for cently abandoned its precedents permitting an in- accrued before the bankruptcy proceeding ordi-
Bankruptcy-Related Judicial Estoppel ference of intentional non-disclosure, concluding narily belong to the bankruptcy estate, and the
The Supreme Court addressed judicial estoppel that the intent requirement—whether the plain- plaintiff’s knowledge of circumstances giving
in New Hampshire v. Maine, 532 U.S. 742 (2001). tiff “intended to make a mockery of the judicial rise to such claims prior to filing for bankruptcy
There, the Court applied estoppel to prevent New system”—“requires review of the totality of the would count towards any bad-faith requirement
Hampshire from pursuing a different state bound- facts and circumstances.” Slater v. U.S. Steel Corp., imposed by the courts.

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