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Inadvertence May Be Unavailing, Says the Fifth Circuit on Judicial Estoppel

The Fifth Circuit became the second United States Court of Appeals to establish a three prong test for determining whether a bankrupt debtor should be judicially estopped from pursuing a cause of action that she failed to disclose to the bankruptcy court.  Flugence v. Axis Surplus Ins. Co. (In re Flugence), 738 F.3d 126 (5th Cir. 2013).

Cheryl Flugence filed for Ch. 13 bankruptcy protection in 2004 and confirmed a plan. In March, 2007, she was injured in a car accident and hired an attorney to pursue a personal injury claim.  In July 2007 she amended and confirmed her Ch. 13 plan.  In March 2008 she sued several defendants for personal injuries sustained from the car accident.  In November 2008 she received a bankruptcy court order discharging her debts. During this period, she never disclosed to the bankruptcy court that she had been in a car accident and might prosecute a personal injury claim.

Once the personal injury defendants discovered the non-disclosure, they reopened the bankruptcy case and sought to have Ms. Flugence judicially estopped from pursuing the undisclosed claim.

The case made its way to the Fifth Circuit which confirmed that Ms. Flugence was judicially estopped from pursuing her personal injury claim.  In so doing, the Fifth Circuit established the following three prong test for judicial estoppel:

1st Prong: The plaintiff/debtor asserts inconsistent positions.  When a debtor files for bankruptcy protection, and fails to list a claim or cause of action as an asset (or even a potential claims or potential cause of action), the debtor has made a representation to the bankruptcy court that no such claim or cause of action exists.  If, prior to or during the period of the bankruptcy (including the plan period), the debtor asserts a claim in a personal injury lawsuit, the debtor has made an “intentional self-contradiction that is being used as a means of obtaining an unfair advantage in a forum provided for suitors seeking justice.”  In re Superior Crewboats, Inc. 374 F.3d 330 (5th Cir. 2004).  In other words, the plaintiff/debtor has taken a position in her lawsuit (i.e., ‘a claim exists’) that is inconsistent with the position taken in her bankruptcy case (i.e., ‘no such claim exists’).

2nd Prong: A Court accepts the prior position. The first position asserted must be accepted by a court.  Here, the bankruptcy court accepted Ms. Flugence’s “non-disclosure,” where her bankruptcy schedules reflected that she had no pending lawsuits, claims or causes of action.  Arguably, just about any action taken by a bankruptcy court constitutes an “acceptance” of the debtor’s position (i.e., granting a discharge, confirming a plan, ordering relief from the automatic stay, etc…).

3rd Prong: The non-disclosure must not have been inadvertent.  To establish inadvertence, a plaintiff/debtor must prove that she did not know of the inconsistent position or that she had no motive to conceal it from the bankruptcy court.  In order to prove that she did not know of the inconsistent position, the debtor must show that she was unaware of the facts giving rise to the inconsistent positions – a difficult argument for a debtor to make when she signs her bankruptcy petition declaring that she has reviewed the information and that it is accurate and complete, and then files a lawsuit as a named plaintiff.  Similarly, the motive to conceal is almost always present because the debtor invariably stands to gain a financial benefit by not disclosing and, according to the Fifth Circuit, ignorance of the continuing duty to disclose is irrelevant in the judicial estoppel analysis. Flugence, 738 F.3d at 130-131.

Paul S. Murphy