Like many civil litigation firms, when our office is retained to defend a civil action, one of our first tasks is to perform a basic investigation into the background of the plaintiff. With increasing frequency, these investigations are revealing that the plaintiff has, at some point, filed for bankruptcy. Although this typically has no impact on the case at hand, in some instances it uncovers a powerful defense for our clients – judicial estoppel.
What Is Judicial Estoppel?
Judicial estoppel is a doctrine aimed at protecting the integrity of the judicial process by preventing litigants from maintaining a position that is inconsistent with those previously asserted. To prohibit a party from deliberately changing positions according to the exigencies of the moment, courts will apply judicial estoppel where a party's self-contradiction is being used as a means of obtaining an unfair advantage in a forum provided for those seeking justice. In short, judicial estoppel is designed to prevent unscrupulous litigants from benefiting through manipulation of the courts.
In the bankruptcy context, judicial estoppel applies to bar a litigant from pursuing a cause of action that had not been disclosed in the litigant's prior bankruptcy schedules or disclosures. The debtor, having obtained relief from its creditors on a representation that no claims existed, cannot subsequently resurrect and realize on that concealed claim after the bankruptcy ends.
Judicial Estoppel and Bankruptcy
At its core, the purpose of bankruptcy is to provide a debtor with a "fresh start" through a discharge of its debt, for which the debtor need only sacrifice its non-exempt assets, if any. To effectuate this goal and to ensure the integrity of the process, a debtor has an express, affirmative duty to disclose both all of its debts and all of its assets. Amongst the various categories of assets that a debtor must disclose to the Bankruptcy Court are all contingent or unliquidated claims of any nature, which includes any potential cause of action the debtor might have.
What Claims Must Be Disclosed?
The duty to disclose a cause of action is not limited to claims that are pending or brought during the bankruptcy case, or even to claims that the debtor intends to pursue. In fact, case law clearly establishes that a debtor need not even know all the facts or the legal basis for the cause of action; rather, if the debtor has enough information to suggest that it may have a possible cause of action, then that is a "known" cause of action that must be disclosed. Furthermore, the debtor's duty of disclosure does not end with the initial bankruptcy petition paperwork, but continues through the duration of the bankruptcy case. Therefore, if the debtor learns of information that would give rise to a potential claim but does not disclose that claim while the bankruptcy case is pending, the debtor just may be barred from pursuing it in a later action.
The purpose behind applying judicial estoppel to bar undisclosed causes of action is clear: where a debtor declares to the Bankruptcy Court that it has no "contingent or unliquidated claims" and thereby obtains the benefits provided by the Bankruptcy Code, including a discharge or restructuring of its debt, the debtor must not then be allowed to reap a windfall by subsequently pursuing the very claims it denied during the pendency of the bankruptcy case, without concern that any recovery would go to its creditors.
Courts have employed a variety of colorful clichés to explain the doctrine of judicial estoppel, characterizing it as a rule against playing fast and loose with the courts, blowing hot and cold as the occasion demands, or having one's cake and eating it too. However it is described, judicial estoppel can be an extremely powerful defense against a devious plaintiff.