by The district court abused its discretion when it mechanically applied judicial estoppel to bar the plaintiff’s personal injury lawsuit after he and his wife successfully completed their 100% plan. Clark v. Advanced Composites Grp., No. 17-1727 (2d Cir. March 30, 2018).
Michele and John Clark had one more payment due on their five-year chapter 13 plan when Mr. Clark was diagnosed with mesothelioma which he believed to have been caused by exposure to asbestos through his service with the United States Air Force and in his subsequent private sector work. The Clarks notified their bankruptcy counsel of his diagnosis and their intention to commence litigation, but their counsel did not notify the bankruptcy court. The Clarks successfully completed their plan payments. One year later, and one week prior to formal discharge and closure of their bankruptcy, Mr. Clark filed a personal injury complaint against Boeing and numerous other corporations. The case was removed to district court. Boeing then moved to dismiss the lawsuit on grounds of judicial estoppel. Finding that the Clarks’ failure to disclose Mr. Clark’s diagnosis to the bankruptcy court amounted to a false representation which the bankruptcy court acted upon by discharging them, the district court granted the motion. Mr. Clark died during the pendency of the appeal.
The Second Circuit began by determining that the standard to be applied when addressing a district court’s application of the “amorphous” doctrine of judicial estoppel is “abuse of discretion.” Applying this deferential standard, the court balanced the equities and found the district court abused its discretion in dismissing Mr. Clark’s personal injury lawsuit.
The circuit court found that the district court erred in its mechanical application of judicial estoppel upon finding that the elements of false representation and reliance were satisfied. The circuit court found that while those elements are essential to application of judicial estoppel, they are not the end of the inquiry. A district court must consider the overall balance of equities including whether the debtor got an unfair advantage over the party seeking estoppel or other creditors by virtue of the nondisclosure. Considering that factor, the court found the balance tipped in favor of the Clarks. Boeing admitted to not being prejudiced by the non-disclosure and the bankruptcy trustee assured the court that, because the Clarks’ plan paid their creditors in full at the standard interest rate, an earlier disclosure would not have altered the bankruptcy case. The court found it “implausible” that any creditor would have demanded and obtained a better return had it known of the potential litigation.
Finally, the court found that while preserving the integrity of the courts is relevant factor weighing in favor of estoppel, it did not tip the balance here. There was no reason to believe the Clarks were trying to game the system by non-disclosure or that they had anything to gain by doing so. The court concluded that “to hold on the facts of this case that Mrs. Clark’s claims are barred by an equitable doctrine would be to deprive the concept of equity of any meaning.”