Judicial Estoppel/Standing: A Power Tool for Your Risk Management Toolbox

One of the most important litigation tactics to consider whenever a claim arises is to perform a search with the United States Bankruptcy Court.  

This is important because when a plaintiff files for bankruptcy after a slip and fall or some other alleged incident, and makes no mention of the case during the deposition, he or she may lack standing and could be judicially estopped from proceeding in the action, resulting in a dismissal.  

For example, the Michigan Court of Appeals recently held that a sexual harassment claim was barred by judicial estoppel because the plaintiff failed to disclose the potential claim in her prior bankruptcy case.

The plaintiff was employed as a secretary in a school district and her claim was predicated upon comments made by a teacher employed by the district. The plaintiff and her husband filed a joint Chapter 13 bankruptcy petition on Nov. 27, 2008 and a proposed plan on Dec. 9. This plan did not mention the potential sexual harassment lawsuit.

The plaintiff’s final day of employment with the school district was Jan. 6, 2009, which was the same day that the plaintiff’s husband contacted an attorney to discuss a potential sexual harassment claim against the district. The plaintiff and her husband did not disclose at the creditors’ meeting on Jan. 23 that they were considering a lawsuit.

Ultimately, the bankruptcy plan was confirmed on Feb., 23. In May, the plaintiff’s attorney proposed a settlement of the sexual harassment claim against the district. On Aug. 26, the bankruptcy trustee moved to dismiss the bankruptcy plan due to lack of payment. The plaintiff filed a response to the trustee’s motion on Sept. 15 but withdrew the response on Sept. 28, which was the same day she filed the sexual harassment suit in Macomb County Circuit Court.

The defendants moved for summary disposition in the sexual harassment suit under MCR2.11(C)(10), arguing that the plaintiff was judicially estopped because she had not included the potential lawsuit as an asset in her bankruptcy case. The trial court granted summary disposition to the defendants and denied the plaintiff’s motion for reconsideration. The plaintiff appealed.

The Michigan Court of Appeals upheld the trial court, agreeing that the plaintiff was judicially estopped because of the failure to include the potential lawsuit as an asset in the bankruptcy. The court noted that to support a finding of judicial estoppel, a reviewing court must find that the plaintiff assumed a position that was contrary to the one that she asserted under oath in the bankruptcy proceedings, that the bankruptcy court adopted the contrary position either as a preliminary matter or as part of a final disposition, and that the plaintiff's omission did not result from mistake or inadvertence.

With regard to the first requirement, that the plaintiff assumed a contrary position in circuit court to that asserted under oath in the bankruptcy court, the appellate court held that this requirement was demonstrated by the failure of the plaintiff to include the potential lawsuit in her bankruptcy schedules or to amend the schedules to include it. The appellate court then held that the second requirement for judicial estoppel, that the bankruptcy court adopted the contrary position, was satisfied when the bankruptcy court confirmed the plan which did not mention the potential lawsuit.

Finally, the appellate court held that the third requirement, that the plaintiff’s omission did not result from mistake or inadvertence, was satisfied because the plaintiff had knowledge of the factual basis of the undisclosed claim, the plaintiff had a motive for concealment of the claim, and the evidence did not indicate a lack of bad faith on the part of the plaintiff in omitting the claim in that the plaintiff had knowledge of the factual basis of the claim  but never advised the bankruptcy court of  the existence of the claim.

Accordingly, judicial estoppel, if used correctly, can be one of the most powerful tools in your risk management tool box. And, depending on timing, defense counsel might be able to obtain a dismissal in your favor.

In addition, it is always helpful to have a bankruptcy attorney run a quick search in every case to see if the plaintiffs have filed (or are still in) bankruptcy. Another best practice is to  inquire of the plaintiff during discovery whether he or she has any past or pending bankruptcy filings, which could help lead to dismissal of the case at hand.

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