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Estoppel and Bankruptcy: Lawsuits Are Assets

Consider the following scenario, which happens sometimes in New York bankruptcy: A debtor is injured by someone (it could be a serious auto accident, slip and fall, or other misconduct) but without asserting a claim in court against that party, the debtor files bankruptcy. The debtor names all of the creditors in his or her petition, but not the person who injured them. The debtor receives a discharge, and then goes on to file a lawsuit over the injury. The defendant moves to dismiss that lawsuit with prejudice—and succeeds. Why? It’s a legal doctrine called “estoppel,” specifically judicial estoppel. (There are others.)

Judicial estoppel prevents parties in one legal proceeding from successfully asserting claims that are self-servingly contradictory in another. In other words, debtors can’t discharge their debts but then claim they are owed money by a prior, unnamed creditor. The elements of judicial estoppel are usually listed as:

(1)  The party’s (here the debtor’s) position in the current proceeding must be clearly inconsistent with the one it asserted in a previous one.

(2)  The court in the prior proceeding must have accepted the contradictory position, creating the appearance that the previous or current court was misled.

(3)  The party may not gain an unfair advantage if it is not estopped.

The U.S. Court of Appeals for the Second Circuit, which includes New York, sometimes does not require a showing of an unfair advantage to a party seeking judicial estoppel, but it is “typically” necessary. (The case on point was decided in 2014 and can be found here (pdf)).

Ironically, there are inconsistent lists of the elements for showing judicial estoppel, but they largely boil down to the same criteria: Don’t take advantage of courts.

In most situations, it’s defendants in civil lawsuits who allege judicial estoppel against plaintiffs. If they are successful, the cases against them can be completely dismissed, which can be quite a victory. Frequent defendants, like insurance companies, rely on judicial estoppel all the time, even when they are clearly liable for the debtor-plaintiff’s injuries. Sometimes debtors even file bankruptcy after the lawsuit has been filed and is in the discovery phase. Defendants simply wait for the bankruptcy case to close and then file their judicial estoppel motions.

Of course, debtor-plaintiffs can assert some defenses against judicial estoppel. They can prove that the prior proceeding was not binding, that they did not successfully assert the inconsistent claim in the first place, that it didn’t ultimately matter for the outcome of the case, or that they made a good faith mistake. Filed lawsuits omitted from bankruptcy petitions are not going to fit those criteria.

Judicial estoppel is a compelling reason for debtors who have legal claims at the same time as they encounter financial difficulties to avoid filing bankruptcy alone or with an inexperienced lawyer.

For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced bankruptcy law changes Bruce Weiner for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA

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