Be careful what you disclose… or don’t disclose.
In an unusual Massachusetts Appeals Court case involving a bankruptcy case filed by one of the litigants, the Appeals Court examined certain deficiencies in the bankruptcy case to determine whether a litigant should be “estopped” from making contradictory claims in the corresponding state court case.
In Mahabir v. Crocker, 235 N.E.3d 322 (Mass. App. Ct. 2024), the plaintiff and her spouse filed a Chapter 13 bankruptcy case in 2017, a few months after the plaintiff had been allegedly wrongfully terminated. The plaintiff did not disclose the potential claim against her former employer in the bankruptcy petition, but two years later filed suit against her former employer in Superior Court alleging sexual harassment and other torts. The defendant in the Superior Court case noticed the omission in the bankruptcy case and filed a motion for judgment on the pleadings, arguing that the plaintiff is judicially estopped from prosecuting her claim because of her failure to disclose the claim in the bankruptcy case. After the motion was served, but before it was filed, the plaintiff moved to amend her bankruptcy petition to include the claim as property of the bankruptcy estate, which was promptly allowed by the Bankruptcy Court, and also filed a motion to employ her state court attorney to prosecute the case on behalf of the bankruptcy estate. The plaintiff filed an opposition to the motion for judgment on the pleadings and noted, among other things, that the amendment had already been allowed. The Superior Court judge granted the defendant’s motion without a hearing, stating that the plaintiff had benefited from the nondisclosure, but without taking into consideration that the omission had been cured and that the plaintiff’s attorney had been employed to prosecute the case. The Appeals Court reversed.
Judicial estoppel stands for the proposition that a litigant who has taken a contrary position in a different proceeding is barred from taking a directly contradictory position in another proceeding. There is no formulaic application, and courts have recognized exceptions where the litigant had acted in good faith or had some legitimate reason rather than simply to gain an advantage.
The Appeals Court explained the rather complicated interplay between the two legal proceedings. In a Chapter 13 case, a debtor must use future income to fund a repayment plan to creditors. The amount that must be paid in order for a plan to be confirmed (approved) by the court depends, in part, on the value of the debtor’s assets and whether or to what extent those assets are exempt under either state law or the Bankruptcy Code. If a debtor’s assets are not exempt or are not fully exempt, the debtor must pay the equivalent value to his or her unsecured creditors over the term of the plan – effectively ‘buying back’ those non-exempt assets from the claims of creditors. The Appeals Court recognized that the non-disclosure of the claim could be prejudicial to creditors in the bankruptcy case, but that by disclosing the claim (albeit very late) and prosecuting the claim on behalf of the bankruptcy estate would potentially benefit all creditors. While admonishing the plaintiff for correcting the issue late and only after having been called out by the defendant, the Appeals Court was ultimately persuaded by the fact that the plaintiff had amended the bankruptcy petition while the case was still pending, during the repayment period, and before discharge had entered, and that the Bankruptcy Court had allowed the amendment. Although not specifically cited in the opinion, Federal Bankruptcy Rule 1009 states that a petition can be amended by a debtor “as a matter of course at any time before the case is closed.” Bankruptcy Courts usually permit amendments freely unless the amendment is requested in bad faith.
