Kathleen M. AH QUIN, Plaintiff-Appellant,
COUNTY OF KAUAI DEPARTMENT OF TRANSPORTATION, Defendant-Appellee.
Argued and Submitted Feb. 12, 2013.
[Copyrighted Material Omitted]
William H. Burgess (argued) and Dominic E. Draye, Kirkland & Ellis LLP, Washington, D.C., for Plaintiff-Appellant.
Barbara A. Petrus (argued), Shannon H. Sagum, and Jordan M. Odo, Goodsill Anderson Quinn & Stifel LLP, Honolulu, HI, for Defendant-Appellee.
Appeal from the United States District Court for the District of Hawaii, Barry M. Kurren, Magistrate Judge, Presiding. D.C. No. 1:08-cv-00507-BMK.
Before: SUSAN P. GRABER, JAY S. BYBEE, and MORGAN CHRISTEN, Circuit Judges.
Opinion by Judge GRABER; Dissent by Judge BYBEE.
GRABER, Circuit Judge:
Plaintiff Kathleen M. Ah Quin contends that her employer, Defendant County of Kauai Department of Transportation, discriminated against her because she is a woman. While pursuing this action, however, Plaintiff filed for Chapter 7 bankruptcy protection and initially failed to list this action in her bankruptcy schedules. The district court held that judicial estoppel prohibits her from proceeding and, therefore, granted summary judgment to Defendant. We hold that the district court applied the wrong legal standard in determining whether Plaintiff's bankruptcy omission was " mistaken" or " inadvertent." Accordingly, we vacate the judgment and remand for further proceedings.
FACTUAL AND PROCEDURAL HISTORY
Plaintiff initiated this employment-discrimination action on November 10, 2008. She alleges that, because of her gender, Defendant reduced her work hours and denied her full-time status, in violation of various discrimination statutes and under the common law. On December 18, 2009, the district court denied Defendant's motion for summary judgment on the merits. The court scheduled the case for a jury trial in April 2010.
Meanwhile, Plaintiff had obtained bankruptcy protection. Represented by a different lawyer than her lawyer in this case, Plaintiff filed for Chapter 7 bankruptcy on April 4, 2009. A debtor must list all pending lawsuits in the bankruptcy schedules, but Plaintiff checked the box " None" next to this line item: " List all suits and administrative proceedings to which the debtor is or was a party within one year immediately preceding the filing of this bankruptcy case." (Emphasis omitted.) At a bankruptcy hearing, Plaintiff testified that she had listed all of her assets and that the answers in her petition and schedules are " true and correct." She did not mention this pending action. During a colloquy concerning her husband's losing his job, Plaintiff responded to a question about whether she had a claim by saying: " No. No."  On September 1, 2009, the bankruptcy court issued an order of discharge and closed the case.
At some point, Plaintiff's lawyer in this case became aware of the potential effect of Plaintiff's bankruptcy proceeding. At a settlement conference on December 21, 2009, Plaintiff's lawyer informed Defendant of Plaintiff's bankruptcy filing.
On December 29, 2009, Defendant wrote a letter to the district court setting forth
the position that it could move to dismiss the action under the doctrine of judicial estoppel. The next day, the district court vacated all dates and deadlines, and it scheduled a status conference for January 14, 2010.
On January 13, 2010, Plaintiff moved to reopen her bankruptcy case and to set aside the discharge. The motion, accompanied by declarations from her bankruptcy lawyer's staff and from Plaintiff, explained that Plaintiff had never disclosed the pending lawsuit to her bankruptcy lawyer or his staff and that Plaintiff's failure to list the lawsuit as an asset stemmed from Plaintiff's misunderstanding of what she was required to do. The bankruptcy court reopened the case the same day. Plaintiff amended her bankruptcy schedules to list this pending claim as an asset.
On February 10, 2010, Defendant filed a motion for summary judgment in the discrimination action, on the ground that judicial estoppel prohibits Plaintiff from proceeding. The district court agreed and granted summary judgment in an order dated April 1, 2010. Plaintiff timely appeals.
On June 20, 2010, the bankruptcy trustee filed a report that abandoned the trustee's interest in the pending discrimination action. Plaintiff's unsecured creditors did not object to that action by the trustee. On July 21, 2010, the bankruptcy court closed the reopened case.
STANDARDS OF REVIEW
We review de novo a grant of summary judgment. Hamilton v. State Farm Fire & Cas. Co., 270 F.3d 778, 782 (9th Cir.2001). We review " the district court's application of the doctrine of judicial estoppel to the facts of [a] case for an abuse of discretion." Id. " The district court ... necessarily abuses its discretion when it bases its decision on an erroneous legal standard...." Farris v. Seabrook, 677 F.3d 858, 864 (9th Cir.2012) (internal quotation marks omitted).
" [J]udicial estoppel is an equitable doctrine invoked by a court at its discretion." New Hampshire v. Maine, 532 U.S. 742, 750, 121 S.Ct. 1808, 149 L.Ed.2d 968 (2001) (internal quotation marks omitted). " [I]ts purpose is to protect the integrity of the judicial process by prohibiting parties from deliberately changing positions according to the exigencies of the moment." Id. at 749-50, 121 S.Ct. 1808 (citation and internal quotation marks omitted).
Although judicial estoppel is " probably not reducible to any general formulation of principle, ... several factors typically inform the decision whether to apply the doctrine in a particular case." Id. at 750, 121 S.Ct. 1808 (citations and internal quotation marks omitted). " First, a party's later position must be ‘ clearly inconsistent’ with its earlier position." Id. " Second, courts regularly inquire whether the party has succeeded in persuading a court to accept that party's earlier position, so that judicial acceptance of an inconsistent position in a later proceeding would create the perception that either the first or the second court was misled." Id. (internal quotation marks omitted). " A third consideration is whether the party seeking to assert an inconsistent position would derive an unfair advantage or impose an unfair detriment on the opposing party if not estopped." Id. at 751, 121 S.Ct. 1808. " In enumerating these factors, we do not establish inflexible prerequisites or an exhaustive formula for determining the applicability of judicial estoppel. Additional considerations may inform the doctrine's
application in specific factual contexts." Id.
In the bankruptcy context, the federal courts have developed a basic default rule: If a plaintiff-debtor omits a pending (or soon-to-be-filed) lawsuit from the bankruptcy schedules and obtains a discharge (or plan confirmation), judicial estoppel bars the action. See, e.g., Payless Wholesale Distribs., Inc. v. Alberto Culver (P.R.) Inc., 989 F.2d 570, 571 (1st Cir.1993) (" Conceal your claims; get rid of your creditors on the cheap, and start over with a bundle of rights. This is a palpable fraud that the court will not tolerate, even passively." ); Hay v. First Interstate Bank of Kalispell, N.A., 978 F.2d 555, 557 (9th Cir.1992) (holding that " [f]ailure to give the required notice [to the bankruptcy court] estops [the plaintiff-debtor] and justifies the grant of summary judgment to the defendants" ). The reason is that the plaintiff-debtor represented in the bankruptcy case that no claim existed, so he or she is estopped from representing in the lawsuit that a claim does exist. That basic rule comports fully with the Supreme Court's decision in New Hampshire: (1) the positions are clearly inconsistent (" a claim does not exist" vs. " a claim does exist" ); (2) the plaintiff-debtor succeeded in getting the first court (the bankruptcy court) to accept the first position; and (3) the plaintiff-debtor obtained an unfair advantage (discharge or plan confirmation without allowing the creditors to learn of the pending lawsuit). The general rule also comports fully with the policy reasons underlying the doctrine of judicial estoppel: to prevent litigants from playing " fast and loose" with the courts and to protect the integrity of the judicial system. New Hampshire, 532 U.S. at 749-50, 121 S.Ct. 1808.
Of particular relevance here, though, the Supreme Court held in New Hampshire, that " it may be appropriate to resist application of judicial estoppel when a party's prior position was based on inadvertence or mistake." 532 U.S. at 753, 121 S.Ct. 1808 (internal quotation marks omitted). We have not addressed the effect of an inadvertent or mistaken omission from a bankruptcy filing, but several of our sister circuits have. Eastman v. Union Pac. R.R. Co., 493 F.3d 1151, 1157 (10th Cir.2007); Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282, 1286-87 (11th Cir.2002); Browning v. Levy, 283 F.3d 761, 776 (6th Cir.2002); Browning Mfg. v. Mims (In re Coastal Plains, Inc.), 179 F.3d 197, 206 (5th Cir.1999). Those courts generally have interpreted this factor narrowly. The courts have asked not whether the debtor's omission of the pending claim from the bankruptcy schedules was inadvertent or mistaken; instead, they have asked only whether the debtor knew about the claim when he or she filed the bankruptcy schedules and whether the debtor had a motive to conceal the claim. See, e.g., Eastman, 493 F.3d at 1157 (" Where a debtor has both knowledge of the claims and a motive to conceal them, courts routinely, albeit at times sub silentio, infer deliberate manipulation." ). This interpretation of " inadvertence" is narrow in part because the motive to conceal claims from the bankruptcy court is, as several courts have explained, nearly always present. Jethroe v. Omnova Solutions, Inc., 412 F.3d 598, 601 (5th Cir.2005); Coastal Plains, 179 F.3d at 212-13.
Here, the district court applied that narrow interpretation. Defendant argued repeatedly to the district court that, to overcome Plaintiff's inadvertence argument, all it had to show was that Plaintiff (1) knew of her claim and (2) had a motive to conceal the claim from the bankruptcy court. Defendant argued that the doctrine of judicial estoppel " should be and must be
applied" to Plaintiff's circumstances. The district court appeared to adopt Defendant's argument. It reasoned: " I think the Court is bound to apply that law to the circumstances we have here and accordingly, summary judgment will be entered in favor of the defense."  (Emphasis added.) The district court's belief that it was bound to preclude Plaintiff from bringing her discrimination claim is mistaken and fundamentally at odds with equitable principles. Judicial estoppel is a discretionary doctrine, applied on a case-by-case basis. See New Hampshire, 532 U.S. at 751, 121 S.Ct. 1808 (refusing to " establish inflexible prerequisites or an exhaustive formula for determining the applicability of judicial estoppel" ). A court is not " bound" to apply judicial estoppel, particularly when " a party's prior position was based on inadvertence or mistake."  Id. at 753, 121 S.Ct. 1808 (internal quotation marks omitted).
The court held that Plaintiff's bankruptcy filing was not " inadvertent" because, as Plaintiff concedes, she knew about the existence of this action when she filed for bankruptcy and because, as is true in practically all bankruptcy cases, Plaintiff had a motive to conceal the claim: keeping any potential proceeds from creditors.
The parties dispute whether the district court applied the correct legal standard when it found that Plaintiff's omission was not a result of inadvertence or mistake. See, e.g., Milton H. Greene Archives, Inc. v. Marilyn Monroe LLC, 692 F.3d 983, 992 (9th Cir.2012) (holding that, when reviewing applications of judicial estoppel, we first must determine " whether the trial court identified the correct legal rule" ). The starting point for our analysis is that our cases have not addressed the effect of an inadvertent or mistaken omission from a bankruptcy filing. Many of the dissent's arguments hinge on its repeated assertions that our previous cases have already answered this question, dissent at 279-80, 282-86, despite the fact that not one of our previous cases has even considered it. We are unwilling to glean the legal standard for what constitutes " inadvertence or mistake" in a bankruptcy filing from cases that plainly did not concern that factor. As explained below, we agree with Plaintiff that the district court erred in applying the narrow interpretation of " inadvertence" because, in the circumstances, that interpretation is too stringent.
A key factor is that Plaintiff reopened her bankruptcy proceedings and filed amended bankruptcy schedules that properly listed this claim as an asset. When a plaintiff-debtor has not reopened bankruptcy proceedings, a narrow exception for good faith is consistent with New Hampshire and with the policies animating the doctrine of judicial estoppel. The three primary New Hampshire factors are still met (inconsistency, bankruptcy court accepted the contrary position, to the debtor's unfair advantage). And, as courts repeatedly
stress, the importance of full disclosure in bankruptcy proceedings " cannot be overemphasized." Coastal Plains, 179 F.3d at 208; see also, e.g., Ryan Operations G.P. v. Santiam-Midwest Lumber Co., 81 F.3d 355, 362 (3d Cir.1996) (" [T]he importance of full and honest disclosure cannot be overstated." ); Oneida Motor Freight, Inc. v. United Jersey Bank, 848 F.2d 414, 417 (3d Cir.1988) (holding that " we cannot overemphasize the debtor's obligation" to provide full disclosure). In sum, given the strong need for full disclosure in bankruptcy proceedings and the fact that the plaintiff-debtor received an unfair advantage in the bankruptcy court, it makes sense to apply a presumption of deliberate manipulation. See Eastman, 493 F.3d at 1159 (" That he well knew of his pending lawsuit and simply did not disclose it to the bankruptcy court is the only reasonable inference to be drawn from the evidence." ). But where, as here, the plaintiff-debtor reopens bankruptcy proceedings, corrects her initial error, and allows the bankruptcy court to re-process the bankruptcy with the full and correct information, a presumption of deceit no longer comports with New Hampshire.
Along with most of our sister circuits, we have held that— at least where the plaintiff-debtor does not claim inadvertence or mistake— the reopening of a bankruptcy case is generally irrelevant to the analysis of judicial estoppel. Eastman, 493 F.3d at 1160; Barger v. City of Cartersville, 348 F.3d 1289, 1297 (11th Cir.2003); Burnes, 291 F.3d at 1288; Hamilton, 270 F.3d at 784;  Oneida, 848 F.2d at 418. That is, even if a plaintiff-debtor corrects the initial mistake and no longer receives a benefit in bankruptcy court, judicial estoppel still applies— wiping out a potentially meritorious action against an unrelated third party. Courts have provided three primary justifications for the rule.
First, as noted above, supra pp. 272-73, full disclosure in bankruptcy is essential to the functioning of the bankruptcy system, a fact that " cannot be overemphasized." Coastal Plains, 179 F.3d at 208. Second, the initial disclosures failed to tell the creditors about the lawsuit. See, e.g., Hamilton, 270 F.3d at 784 (holding that an initial " discharge of debt by a bankruptcy court, under these circumstances, is sufficient acceptance to provide a basis for judicial estoppel, even if the discharge is later vacated" ); Oneida, 848 F.2d at 418
(" [The original bankruptcy plan] was informationally deficient, and not cured by the later modification. The original plan failed to alert the creditors to the possible financial benefits enuring to them upon the successful prosecution of the claim." (footnote omitted)). Finally, and perhaps most importantly, courts have held that application of judicial estoppel is necessary in order to incentivize future debtors (and their lawyers) to provide full disclosure. In an oft-quoted passage, one court wrote:
The success of our bankruptcy laws requires a debtor's full and honest disclosure. Allowing [the debtor] to back-up, re-open the bankruptcy case, and amend his bankruptcy filings, only after his omission has been challenged by an adversary, suggests that a debtor should consider disclosing potential assets only if he is caught concealing them. This so-called remedy would only diminish the necessary incentive to provide the bankruptcy court with a truthful disclosure of the debtors' assets.
Burnes, 291 F.3d at 1288.
As the Seventh Circuit has recognized in unanimous opinions, Biesek v. Soo Line R.R. Co., 440 F.3d 410 (7th Cir.2006), and Cannon-Stokes v. Potter, 453 F.3d 446 (7th Cir.2006), and as Judge Stapleton recognized in dissent in Oneida, those justifications do not withstand scrutiny. First, and perhaps most importantly, once a plaintiff-debtor has amended his or her bankruptcy schedules and the bankruptcy court has processed or re-processed the bankruptcy with full information, two of the three primary New Hampshire factors are no longer met. Although the plaintiff-debtor initially took inconsistent positions, the bankruptcy court ultimately did not accept the initial position. The Supreme Court put it well: " Absent success in a prior proceeding, a party's later inconsistent position introduces no risk of inconsistent court determinations and thus poses little threat to judicial integrity." New Hampshire, 532 U.S. at 750-51, 121 S.Ct. 1808 (citation and internal quotation marks omitted).
Moreover, the plaintiff-debtor did not obtain an unfair advantage.  Indeed, the plaintiff-debtor obtained no advantage at all, because he or she did not obtain any benefit whatsoever in the bankruptcy proceedings. See Dunmore v. United States, 358 F.3d 1107, 1113 n. 3 (9th Cir.2004) (holding that the district court's allowing the plaintiff-debtor to reopen his bankruptcy case, thereby preventing the plaintiff-debtor " from having his cake and eating it too," " was a permissible alternative to judicial estoppel that prevented [him] from deriving an unfair advantage if not estopped" ). Cases such as Oneida, 848 F.2d at 418, which justify the application of judicial estoppel because the creditors were not told initially of the pending action are wrong for two reasons: The creditors
are told eventually, and the doctrine of judicial estoppel is concerned with the integrity of the courts, not the effect on parties. See, e.g., Ryan, 81 F.3d at 360 (" Judicial estoppel is intended to protect the courts rather than the litigants." (internal quotation marks omitted)).
Next, there is some intuitive appeal to the deterrence justification— punishing wrongdoers will incentivize future debtors to list their assets exhaustively. But that justification is a very awkward fit for the doctrine of judicial estoppel. Judicial estoppel typically operates to protect the integrity of the judicial system with respect to the particular litigant in front of the court. In the context of judicial estoppel, it is odd to punish a present litigant merely in order to discourage inconsistent positions by future litigants. Moreover, the courts that have mentioned this justification phrase it in terms not of protecting the courts but of promoting the efficient operation of the bankruptcy system. That aim— protecting the bankruptcy system— differs from the goal of judicial estoppel— protecting the integrity of the courts. To the extent that the bankruptcy system lacks adequate protections, that is a shortcoming not of the court system, but of the bankruptcy laws.
In any event, the bankruptcy system already provides plenty of protections. The bankruptcy court or trustee may reopen a case if it uncovers deception, as occurred in Hamilton, 270 F.3d at 781. (Here, Plaintiff voluntarily initiated the reopening.) A case may be reopened even if it has long been closed. 11 U.S.C. § 350(b); Fed. R. Bankr.P. 5010. A bankruptcy court or trustee can impose sanctions, including denial of a discharge. Fed. R. Bankr.P. 9011. And, of course, a case may be referred to the United States Attorney's office for criminal prosecution. See 18 U.S.C. § 152 (criminalizing the concealment of assets, false oaths, and claims). " The availability of such a course of action would in most cases adequately deter nondisclosure." Oneida, 848 F.2d at 423 (Stapleton, J., dissenting).
Finally, the application of judicial estoppel in these circumstances operates to the detriment primarily of innocent creditors and to the benefit of only an alleged bad actor. When a plaintiff-debtor amends his or her bankruptcy schedules to include the previously omitted lawsuit, the creditors may now stake a claim in that lawsuit. By not permitting the civil action to go forward, the creditors lose out on a potential recovery. See Cannon-Stokes, 453 F.3d at 448 (" Judicial estoppel is an equitable doctrine, and it is not equitable to employ it to injure creditors who are themselves victims of the debtor's deceit." ); Oneida, 848 F.2d at 422 (Stapleton, J., dissenting) (" The [Bankruptcy] Code's disclosure requirements are intended to protect those creditors whom a debtor's failure to disclose hidden assets would prejudice. A fortiori, a court's response to nondisclosure should do likewise." ).
Perversely, the only " winner" in this scenario is the alleged bad actor in the estopped lawsuit. See Oneida, 848 F.2d at 422-23 (Stapleton, J., dissenting) (" The only real winner in the case as decided is the [defendant], whom the court has relieved of the responsibility of justifying its allegedly improper behavior." ). If Defendant here did, in fact, discriminate against Plaintiff, it will not have to pay the consequences of its actions, for the entirely unrelated reason that Plaintiff happened to file for bankruptcy and, possibly due to inadvertence, happened to omit the claim from her initial schedules. Further, because the application of judicial estoppel
does not look to the nature of the underlying claim, the alleged bad actor could be someone who clearly does not warrant a windfall (e.g., someone who physically assaulted the plaintiff and badly injured him or her). It seems hard to justify a policy that takes money from innocent third-party creditors and gives it, for example, to a violent criminal. See Oneida, 848 F.2d at 420 (Stapleton, J., dissenting) (" [The debtor's] unsecured creditors ... should not be required to contribute towards a windfall for an alleged wrongdoer." ).
Writing for a unanimous panel of the Seventh Circuit, Judge Easterbrook summarized:
Judges understandably favor rules that encourage full disclosure in bankruptcy. Yet pursuing that end by applying judicial estoppel to debtors' self-contradiction would have adverse effects on third parties: the creditors. [The debtor's] nondisclosure in bankruptcy harmed his creditors by hiding assets from them. Using this same nondisclosure to wipe out his [statutory] claim would complete the job by denying creditors even the right to seek some share of the recovery. Yet the creditors have not contradicted themselves in court. They were not aware of what [the debtor] has been doing behind their backs. Creditors gypped by [the debtor's] maneuver are hurt a second time by the district judge's decision. Judicial estoppel is an equitable doctrine, and using it to land another blow on the victims of bankruptcy fraud is not an equitable application. Instead of vaporizing ...