Written by Chris Flynn, Esq.
Edited by Bill Pfund, Esq.
An earlier article addressed two reasons why asking if a plaintiff has filed for bankruptcy during discovery is an overlooked but important question. Those reasons are to raise the issue of the admissibility of the debtor-plaintiff’s medical bills as well as to challenge the standing of that debtor-plaintiff in the non-bankruptcy matter. The question of standing however is exclusive to Chapter 7 debtor-plaintiffs (see Wilson v. Dollar General Corp., 717 F3 337, 343-44 (4th Cir. 2013)). Therefore, aside from challenging the admissibility of the debtor-plaintiff’s medical bills, is there any challenge that can be raised when a plaintiff in a non-bankruptcy matter has filed a Chapter 13 bankruptcy case? The answer is, yes.
Judicial estoppel is a legal defense used for early dismissal of cases brought by bankrupt plaintiffs. In a bankruptcy, judicial estoppel applies if a debtor-plaintiff omits any claim that the plaintiff knew of at the time of filing for bankruptcy or learned of while the bankruptcy case was pending. If a defendant succeeds in establishing judicial estoppel, the plaintiff is barred from pursuing a case regardless of the claim’s merits.
The Fourth Circuit has held that judicial estoppel applies when: (1) the party to be estopped is advancing an assertion that is inconsistent with a position taken during previous litigation, (2) the position is one of fact instead of law; (3) the prior position was accepted by the court in the first proceeding; and (4) the party to be estopped has acted intentionally and not inadvertently. Folio v. City of Clarksburg, 134 F.3d 1211, 1217 (4th Cir. 1998). Over the last decade or so the Court’s approach to the third prong of the analysis has shifted in favor of defendants.
Prior to 2013, the third element of the judicial estoppel analysis was satisfied by the confirmation of the debtor-plaintiff’s Chapter 13 plan. That changed in 2013 in a decision handed down by the US District Court for the Eastern District of Virginia in Royal v. R&L Carriers Shared Services, LLC. In Royal the Court refused to allow judicial estoppel on this basis because “the bankruptcy court did not ‘accept’ the plaintiff’s position that he had no legal claims against the defendant, for the bankruptcy court has yet to grant the plaintiff relief or close his bankruptcy action”. Following Royal it was believed that a defendant must wait until the debtor-plaintiff receives their Chapter 13 discharge, which can take up to five years, before the third element can be satisfied.
Two years later, the ruling in Royal was limited by the U.S. Bankruptcy Court of the Eastern District of Virginia In the case of In re Padula, 542 B.R. 753, 760 (Bankr. E.D. Va. 2015), the court was faced with a fact pattern almost identical to that as Royal. In Padula, the debtor, Ms. Padula, was involved in an automobile accident. Her accident occurred after she filed a Chapter 13 bankruptcy petition, after the court confirmed her Chapter 13 plan, but while her bankruptcy case was still pending. Padula filed a tort lawsuit in State court, but she failed to amend her bankruptcy schedules until more than two years after the accident and after the State court Defendants filed a Motion for Summary Judgment in the State court. In addition to amending her schedules, Padula filed a Motion to Authorize Prosecution of a State court personal injury action with the bankruptcy court. In response, the tort case defendant, VPSI, Inc., filed an Objection to the debtor’s bankruptcy court Motion, asserting that the Doctrine of Judicial Estoppel barred Padula from pursuing her personal injury action against the State court Defendants. The court in Padula rejected VSPI’s argument that Padula’s tort lawsuit was barred by the Doctrine of Judicial Estoppel, but it scaled back Royal’s extreme position that acceptance of a factual representation could only occur after relief (or discharge) was granted.
The Padula court held that instead of requiring a full discharge from the bankruptcy court, all that was needed for the court to accept a litigant’s representation would be the occurrence of a “bankruptcy event.” The court then ruled that a “bankruptcy event” had not yet taken place, so there was no Judicial Estoppel. Critically, had a “bankruptcy event” occurred, the court in Padula would have deemed the position accepted for the purposes of Judicial Estoppel.
In 2018 (three years after Padula), the U.S. District Court for the Eastern District of Virginia considered the Royal and Padula rulings and explained when a “bankruptcy event” has occurred. In Crawford, the plaintiff filed a tort case alleging various discrimination claims against a former employer. Both the cause of action and filing of the discrimination lawsuit took place after Crawford filed a Chapter 13 bankruptcy petition, after the court confirmed the Chapter 13 plan, but while the bankruptcy case was still pending. Despite filing his tort lawsuit, Crawford failed to amend his bankruptcy schedules to disclose the existence of his ongoing claim against his former employer. At some time during the pendency of Crawford’s Chapter 13 bankruptcy case but after he filed his tort lawsuit, the Chapter 13 Trustee moved for dismissal of Crawford’s bankruptcy case due to Crawford’s failure to make plan payments. The bankruptcy judge resolved the Motion to Dismiss by ordering Crawford to resume regular plan payments. A few months later, the bankruptcy court issued an Order of Dismissal for the failure of the plaintiff to comply with the Order Settling Motion to Dismiss entered a few months prior. Plaintiff’s former employer moved for summary judgment in the tort lawsuit, arguing that Crawford’s claims were barred by the Doctrine of Judicial Estoppel. Crawford v. Newport News Indus. Corp., 2018 U.S. Dist. LEXIS 56099, 2018 WL 3232827 (E.D. Va. Feb. 12, 2018).
In Crawford, the Eastern District of Virginia expressly ruled that the plaintiff/debtor’s factual assertions in the bankruptcy litigation were accepted by the Bankruptcy Court when it approved a payment plan and subsequently made no modifications to that plan to reflect the existence of the asset. The Court explained its ruling by noting that,
“[h]ad [plaintiff/debtor] disclosed his claim, it undoubtedly would have been incorporated in his Chapter 13 Plan resulting in higher payments to his creditors for the period of time when he was making payments on the Plan. Consequently, [plaintiff/debtor] secured that benefit—reduced payments based on reduced assets—because he did not disclose what he contends in this case is a substantial asset.”
The court further noted that in addition to the acceptance of the plan without modification, the two orders on the Motions to Dismiss after Crawford filed his employment lawsuit further demonstrated the bankruptcy court’s acceptance of the plaintiff’s representations and omissions.
In conclusion, while bringing a challenge based upon judicial estoppel is not as strong in Virginia as it was prior to 2013, recent decisions have slowly swung the pendulum back toward the defendant.