DEFENDING FLORIDA EMPLOYERS: THE LEGAL DOCTRINE OF JUDICIAL ESTOPPEL AS A DEFENSE AGAINST EMPLOYMENT LAWSUITS

Employers may invoke the legal doctrine of judicial estoppel to prevent employees from suing their employers when those employees fail to disclose that claim in bankruptcy. In the recent case of Smith v. Haynes & Haynes P.C., 940 F.3d 635 (11th Cir. 2019), the United States Court of Appeals for the Eleventh Circuit, which governs Florida federal courts, clarified the test for application of the doctrine of judicial estoppel. Peter Mavrick is a Fort Lauderdale employment attorney who defends businesses against claims of discrimination and lawsuits seeking wages.

Judicial estoppel is an equitable doctrine that precludes a party from “asserting a claim in a legal proceeding that is inconsistent with a claim taken by that party in a previous proceeding.” Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282 (11th Cir.2002). The purpose of judicial estoppel is “to protect the integrity of the judicial process by prohibiting parties from changing positions according to the exigencies of the moment.” New Hampshire v. Maine, 532 U.S. 742 (2001).

This doctrine has been upheld in the context of statements made to the bankruptcy court. A debtor seeking shelter under the bankruptcy laws must disclose all assets, or potential assets, to the bankruptcy court. 11 U.S.C. §§ 521(1), and 541(a)(7). A pending lawsuit seeking monetary compensation qualifies as an asset. Parker v. Wendy’s Intern., Inc., 365 F.3d 1268 (11th Cir. 2004). The debtor must swear to, “any pending civil claims, and identifying any lawsuits he has filed against others.” Slater v. United States Steel Corp., 871 F.3d 1174 (11th Cir. 2017).

If an employee fails to disclose overtime claims in bankruptcy, but thereafter sues his or her employer, the employer may invoke the doctrine of judicial estoppel and thereby potentially avoid liability. The doctrine of judicial estoppel is often invoked in overtime and minimum wage cases. Smith v. Haynes & Haynes P.C., 940 F.3d 635 (11th Cir. 2019) (“Judicial estoppel is frequently raised […] against district court plaintiffs who had earlier sought bankruptcy protection”). The likely reason for this is that employees often have no intention of suing their employer until their termination. Further, overtime and minimum wage lawsuits tend to be initiated after the accrual of those claims. As a result, some employees will have had an intervening bankruptcy in which he or she may have failed to report to the bankruptcy court potential overtime or minimum wage claims.

In the important 2017 federal appellate decision in Slater v. United States Steel Corp., 871 F.3d 1174 (11th Cir. 2017) , the Eleventh Circuit Court of Appeals overruled its prior precedent, and allowed courts to consider a wider variety of factors in considering whether judicial estoppel is appropriate. The decision in Slater explained in pertinent part:

We hold today that when determining whether a plaintiff who failed to disclose a civil lawsuit in bankruptcy filings intended to make a mockery of the judicial system, a district court should consider all the facts and circumstances of the case. The court should look to factors such as the plaintiff’s level of sophistication, his explanation for the omission, whether he subsequently corrected the disclosures, and any action taken by the bankruptcy court concerning the nondisclosure.

The recent case of Smith v. Haynes & Haynes P.C., 940 F.3d 635 (11th Cir. 2019), has further clarified the doctrine of judicial estoppel as it relates to overtime wage lawsuits. In Smith the plaintiff employee had previously filed a Chapter 13 bankruptcy action with a plan to ultimately pay back 100% of the amount owed. The employee failed to include an overtime claim in her bankruptcy schedules. Thereafter, she filed a lawsuit against her former employer, a law firm which ironically specialized in representing employees in lawsuits against their employers. In the original complaint, the employee asserted that she had complained about being misclassified and was not paid overtime pay.

The employer in Smith defended the lawsuit at least in part on the grounds of judicial estoppel, pointing to the plaintiff’s previous bankruptcy filing and complaint which indicated that she had known about her own overtime claim. Smith found that “[c]ourts consider the omission of a legal claim from a bankruptcy asset schedule to be a denial that the claim exists. And a complaint in district court seeking damages on the same claim is considered an assertion that the claim does indeed exist.” Smith recognized that, “[t]he results of judicial estoppel are drastic—a party is deprived of the right to pursue a case regardless of the claim’s merits. On the other side, a party escapes potential accountability for wrongdoing without regard to the merits of the claim.”

Smith analyzed the circumstances to determine whether judicial estoppel was appropriate under the legal precedent established in Slater. The appellate court in Smith determined that there was no malicious motive for the employee’s failure to report the potential claim on bankruptcy schedules. Particularly, there was no apparent fraudulent intent because her Chapter 13 bankruptcy plan required her to pay back 100% of her debts over time. While she did not actually fulfill that obligation, the plan requirement of full payment indicated that the employee had no intention to use bankruptcy process to discharge any of her debt. Therefore, she would have gained no personal advantage by failing to include those claims as potential assets in the bankruptcy court proceeding.

The implication of the appellate court’s decision in Smith is that an employer seeking to invoke judicial estoppel may review a plaintiff-employee’s bankruptcy plan to challenge the intentions of the employee. If the plan provides for a discharge of debts, such as in a Chapter 7 discharge, then the court is more likely to find that the subject claim is barred by judicial estoppel.

While recent precedent has weakened the doctrine of judicial estoppel, this legal doctrine remains a powerful tool for employers defending against labor and employment lawsuits.

Peter Mavrick is an experienced Fort Lauderdale employment lawyer who defends businesses. This article does not serve as a substitute for legal advice tailored to a particular situation.