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7thCir position on judicial estoppel enables employee to pursue employment suit despite failure to disclose potential claim in bankruptcy

June 14th, 2012  |  Ron Miller

Judicial estoppel “generally prevents a party from prevailing in one phase of a case on an argument and then relying on a contradictory argument to prevail on another phase.” As a consequence, it has been long held that “pursuing a cause of action that was not disclosed as an asset in a bankruptcy filing creates an inconsistency sufficient to support judicial estoppel. Faced with an employee who has failed to disclose the existence of an employment claim, courts can either dismiss the action outright, permit the employee to amend the bankruptcy filing to include the claim and permit the employee to pursue the action, or allow the bankruptcy trustee to pursue the claim on behalf of the bankruptcy estate.

In Lewis v Weyerhaeuser Co, the Sixth Circuit observed that the disclosure obligations of consumer debtors are at the very core of the bankruptcy process and meeting those obligations is part of the price debtors pay for receiving the bankruptcy discharge. Moreover, the duty to disclose is a continuing one and a debtor is required to disclose all potential causes of action.

Judicial estoppel no bar. In Osterhout v Wal-Mart Stores East, LP, the giant retailer was denied its motion to dismiss an employee’s age, gender and disability discrimination and FMLA interference and retaliation claims based on the doctrine of judicial estoppel despite her failure to disclose those claims in bankruptcy proceedings. Following the employee’s amendment of her bankruptcy filings to notify the bankruptcy court of her pending lawsuit, Wal-Mart conceded that the Seventh Circuit’s ruling in Rainey v United Parcel Serv, precluded judicial estoppel.

In Osterhout, the employee asserted that the discriminatory actions began as early as November 2008. In July 2010, the EEOC issued her a right to sue letter and the employee followed up by initiating a lawsuit in September 2010 alleging that the giant retailer failed to accommodate her disability as required by the ADA and terminated her employment because of it.

Throughout this same timeframe, the employee was involved in a bankruptcy proceeding, having filed a petition in August 2008. Her bankruptcy filings included a statement of financial affairs indicating that she had no pending suits or administrative proceedings, as well as a personal property form indicating that she had no “other contingent or liquidated claims.” The bankruptcy court approved the employee’s repayment plan before she filed her discrimination claims against Wal-Mart. Thereafter, the retailer moved to dismiss her complaint on the bases that the doctrine of judicial estoppel precluded her from prosecuting her claims because they were not disclosed to the bankruptcy trustee.

The day after Wal-Mart filed its motion the employee’s counsel contacted her bankruptcy counsel and informed her of the lawsuit and the motion to dismiss. The bankruptcy counsel filed an amended statement of financial affairs. Thereafter, the bankruptcy trustee indicated that the employee could pursue her cause of action as a debtor in possession. Under such circumstances, Wal-Mart conceded that the doctrine was foreclosed based upon the Seventh Circuit’s decision in Rainey. Consequently, Wal-Mart’s motion to dismiss was denied.

Rainey, an unpublished opinion from the Seventh Circuit, involved an employee suit for race discrimination under Title VII. The claim accrued while the employee was in bankruptcy. Since the employee had not disclosed the claim on his schedule of assets, a district court reasoned that the claims remained part of the bankruptcy estate and could no longer be administered because the bankruptcy case was closed. However, on appeal, the employee pointed out to the appeals court that the bankruptcy had been reopened and he had amended his schedules and the discrimination claim disclosed. The Seventh Circuit agreed with the employee that he should be allowed to pursue those claims on behalf of the bankruptcy estate.

According to the Seventh Circuit, as long as the bankruptcy estate was ongoing a debtor can inform the trustee of previously undisclosed legal claims, unless the trustee elects to abandon that property, the debtor may litigate the claims on behalf of the estate and for the benefit of the creditors. Preventing the employee from bringing his claim would undermine the interests of his creditors and defeat the district court’s intent that he be able to pursue the discrimination claims if he reopened his bankruptcy case.