Employees who sue their employers must disclose that lawsuit if they file for bankruptcy—right? Maybe not. In Slater v. U.S. Steel Corp., the Eleventh Circuit overruled prior precedent and impaired a valuable defense for early dismissal or settlement with bankrupt plaintiffs. This decision will affect strategy for employers that face litigation from bankrupt plaintiffs.

Legal Background

Judicial estoppel is an equitable defense that bars a plaintiff’s claim when he or she takes differing positions in court cases with an intent to make a mockery of the judicial system. Until now, courts in the Eleventh Circuit (that is federal courts in Alabama, Georgia and Florida) have applied the defense when a plaintiff pursues a lawsuit in one court and then files for bankruptcy without disclosing the employment lawsuit as an asset in the bankruptcy case. Courts apply the judicial estoppel defense in these circumstances to prevent plaintiffs from obtaining a windfall by concealing an asset that could be used to pay creditors (i.e., the potential recovery in the employment lawsuit).

Companies defending claims filed by bankrupt plaintiffs have prevailed on the judicial estoppel defense by reviewing sworn bankruptcy filings to see if their plaintiff failed to disclose the employment claim. If the plaintiff failed to notify the bankruptcy court about the employment claim, the employer could win the case based entirely on that failure to disclose.

The Slater Case

Ms. Slater was pursuing gender discrimination and retaliation claims against her former employer, U.S. Steel. After the company learned that Ms. Slater had filed for bankruptcy but failed to list her employment claim as an asset, U.S. Steel moved for summary judgment based on judicial estoppel. Relying on prior Eleventh Circuit caselaw, the district court granted the motion. Unfortunately, in an en banc decision (which means the entire court participated), the Eleventh Circuit not only overturned the district court’s decision, it overruled prior precedent, changing the law in the circuit. As a result, defendants will be less likely to prevail on this defense at the early stages of litigation.

The Eleventh Circuit reaffirmed that courts may apply judicial estoppel only when the employer can establish two things:

• First, the plaintiff took a position under oath in the bankruptcy proceeding that was inconsistent with the plaintiff’s pursuit of the lawsuit; and
• Second, the plaintiff intended to make a mockery of the judicial system.

What evidence is necessary to find that a plaintiff intended to make a mockery of the judicial system? Prior Eleventh Circuit decisions (Barger v. City of Cartersville and Burnes v. Pemco Aeroplex) endorsed a rule that the mere fact of the plaintiff’s nondisclosure is sufficient to show such intent, even if the plaintiff later corrected her bankruptcy disclosures. In the Slater case, the court granted en banc review to reconsider this precedent and overruled the prior Barger and Burnes decisions. Accordingly, courts in the Eleventh Circuit may no longer infer a plaintiff’s intent to misuse the judicial system without considering the individual plaintiff and the circumstances surrounding the nondisclosure of a lawsuit in the bankruptcy schedules. Among other factors, courts may consider the plaintiff’s level of sophistication, her explanation for the omission, whether she subsequently corrected the disclosures, and any bankruptcy court motions or orders concerning the nondisclosure.

According to the en banc panel, overruling prior precedent on judicial estoppel brings the Eleventh Circuit in line with the law in the Sixth, Seventh, and Ninth Circuits. On the other hand, the Fifth and Tenth Circuits still recognize that knowingly omitting a cause of action from bankruptcy schedules is enough to support the “intent to make a mockery of the judicial system” prong of the judicial estoppel defense.

Now What?

In the Eleventh Circuit, winning a case based on judicial estoppel because a plaintiff did not disclose a claim on bankruptcy disclosures just got harder. Merely relying on plaintiffs’ sworn bankruptcy schedules is no longer sufficient to prove the intent element of the judicial estoppel defense. Courts must now undertake a more rigorous inquiry of the plaintiff’s intent. Plaintiffs will be able to present self-serving factual arguments regarding the circumstances surrounding nondisclosure of a cause of action in bankruptcy.

Fortunately for defendants, Chief Judge Carnes wrote a concurring opinion clarifying that the judicial estoppel defense is not eradicated. In spite of the Eleventh Circuit’s new requirement to consider the “surrounding circumstances,” courts are “not required to accept the testimony of the plaintiff that her misstatements . . . were not made with intent to mislead, even if that testimony is uncontradicted.” If a bankrupt plaintiff denies any intent to mislead the court or creditors by not disclosing a cause of action, the court has the “authority and responsibility to find the facts and not blindly accept [such] testimony.”