Have you heard of Judicial Estoppel? Well, you need to if someone owes you money and you’re thinking of suing while contemplating bankruptcy. The doctrine of 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 in another phase. What this means is that what you disclose on your bankruptcy papers become public record in a legal proceeding; a judicial record. So, if you’re owed money or have a potential creditor harassment suit and you fail to list these potential claims on your bankruptcy papers and later file suit, that subsequent lawsuit can be dismissed on a judicial estoppel theory.
A recent 6th Circuit case, White v. Wyndham Vacation Ownership, 617 F.3d 72 (6th Cir. August, 2010) illustrates this point. The question presented before the court was whether the failure of the debtor to disclose in her schedules, a sexual harassment claim she had was grounds to dismiss the harassment case on the basis of judicial estoppel. The court held yes. In this case, the Debtor filed bankruptcy under Chapter 13 but did not list a sexual harassment claim she had against the defendants in this district court action. About a week after the plan confirmation hearing, she file a lawsuit in district court seeking more than $1 million in damages. A month later, the defendants filed a motion to dismiss the harassment case on the basis of judicial estoppel. The Debtor later filed an amendment to her schedules disclosing the case, but not the amount.
The court cited two circumstances in which a debtor’s failure to disclose might be deemed inadvertent or mistake as:
1. Where Debtor lacks knowledge of the factual basis of the undisclosed claims; and
2. Where the debtor has no motive for concealment and an absence of ‘bad faith.’
The reasoning behind this important decision is that your creditors should be entitled to any proceeds or the value thereof in your bankruptcy case. So, while you will likely be able to keep your stuff and claims too, it’s wise to disclose potential claims to preserve your right to sue later. Remeber that you sign your bankruptcy papers under penalty of perjury that you have fully disclosed all assets, claims, debts and liabilities, so there’s no having it both ways in bankruptcy.