“Bankruptcy?” you ask. “Why are employment lawyers talking about bankruptcy?” Well, in fact, there are times when bankruptcy can provide a defense to employment discrimination claims. It involves a principle known as “judicial estoppel,” which precludes a party from taking a position in a case which is contrary to a position they have taken in earlier legal proceedings.
Although there is no uniform definition of judicial estoppel under federal law, the U.S. Supreme Court outlined three factors that courts may consider in determining whether to apply the doctrine: (1) whether the party took “clearly inconsistent” positions, (2) whether the court accepted the party’s earlier position, and (3) whether the party would obtain an unfair advantage if not estopped. Failure to disclose a pending claim (discrimination or otherwise) in bankruptcy can establish that the party took a “clearly inconsistent” position. As a penalty, the court can invoke judicial estoppel to dismiss the later case entirely.
Federal courts agree that judicial estoppel should not apply when the failure to reveal the claim was a result of inadvertence or mistake. Courts disagree, however, as to what constitutes ‘‘inadvertence’’ and as to what, if any, showing of bad faith is required. Last week, the Ninth Circuit weighed in and provided its view on the appropriate analysis.
The plaintiff in Ah Quin v. County of Kauai Department of Transportation, filed for bankruptcy after suing her employer for sex discrimination. As part of her bankruptcy filing, Ah Quin was required to disclose all of her assets, including the lawsuit, because in the event she prevailed, she could have recovered damages to help satisfy her debts. Shortly after the bankruptcy court issued an order discharging her debts, the lawyer representing her in the discrimination claim learned of the bankruptcy proceeding. Ah Quin then moved to set aside the discharge and amend her filing to include the discrimination lawsuit as an asset. In support, Ah Quin explained that the failure to list the lawsuit was the result of a misunderstanding. Ah Quin’s employer moved for summary judgment against her discrimination claim asserting judicial estoppel. The district court granted summary judgment because Ah Quin did not disclose the suit in her bankruptcy proceeding.
On appeal, the Ninth Circuit reversed (2-1) holding that the district court applied the wrong legal standard in determining whether her omission was “mistaken” or “inadvertent.” As Judge Susan Graber observed, “Courts have not asked whether the debtor’s omission was inadvertent or mistaken; instead, they have asked only whether the debtor knew about the claim when he or she filed the bankruptcy schedules and whether the debtor had a motive to conceal the claim.”
The Ninth Circuit, however, rejected this approach:
Courts must determine whether the omission occurred by accident or was made without intent to conceal. The relevant inquiry is not limited to the plaintiff’s knowledge of the pending claim and the universal motive to conceal a potential asset – though those are certainly factors. The relevant inquiry is, more broadly, the plaintiff’s subjective intent when filling out and signing the bankruptcy schedules.
The court acknowledged that a “presumption of deliberate manipulation” generally makes sense, but went on to explain that the employee overcame the presumption by reopening her bankruptcy proceedings and properly listing her claim as an asset. Further, the court also pointed out that she did identify her attorney as a creditor, and that if she was “truly seeking to hide the lawsuit from the bankruptcy court, she would not have listed that lawyer.” Crediting Ah Quin’s version of the events, and specifically her stated belief that she did not have to disclose the discrimination suit, the court reversed the lower court’s decision granting summary judgment, allowing the discrimination case to proceed to trial.
Judge Jay Bybee dissented, concluding that Ah Quin’s omission was not a simple mistake. “To the contrary, on this record, it is hard to see anything but a debtor who was caught in a lie and now seeks to avoid the consequences.”
The Ninth Circuit, over the years, has fairly consistently agreed with Judge Bybee’s approach. Laisure-Radke v. Barr Laboratories, Inc. (9th Cir. 2009) (“That [plaintiff] later moved to reopen her bankruptcy proceedings does not excuse her earlier failure to disclose; judicial estoppel ensures that debtors make a ‘full and honest disclosure’ of their assets in the original bankruptcy proceeding.”); Hamilton v. State Farm Fire & Cas. Co., (9th Cir. 2001) (“Judicial estoppel will be imposed when the debtor has knowledge of enough facts to know that a potential cause of action exists during the pendency of the bankruptcy, but fails to amend his schedules or disclosure statements to identify the cause of action as a contingent asset.”).
At least for now, however, employers in the Ninth Circuit shoulder a heavier burden if they wish to assert judicial estoppel when a plaintiff fails to disclose a pending claim in bankruptcy due to mistake or inadvertence.