Ninth Circuit 2-1 Departs From Other Courts, OKs Claims Not Initially Listed in Bankruptcy
By Chris Opfer
Rejecting precedent set by other federal appellate courts, the U.S. Court of Appeals for the Ninth Circuit July 24 expanded the circumstances in which a worker who does not initially disclose potential discrimination claims in bankruptcy filings may nevertheless proceed with the claims (Quin v. Cnty. of Kauai Dep’t of Transp., 9th Cir., No. 10-16000, 7/24/13).
The appellate court held that Kathleen Ah Quin was not barred from suing the County of Kauai Department of Transportation for sex discrimination under Title VII of the 1964 Civil Rights Act and state law, despite failing to list the claims on a bankruptcy schedule filed after initiating the discrimination case. Quin later moved to reopen the bankruptcy case and amended the filings to include the pending discrimination case after the county argued that it was barred by judicial estoppel.
The Ninth Circuit ruled that a district court used the wrong legal standard in finding that Quin’s omission was neither a mistake nor inadvertent because she was aware of the claims at the time and had a motive for not disclosing them. In a 2-1 decision, the court vacated the lower court’s ruling granting summary judgment to the county based on judicial estoppel.
Given that Quin later amended the bankruptcy filings, Judge Susan P. Graber found that the lower court must consider her subjective intent to determine whether the omission was inadvertent or a mistake, based on an understanding of these terms as they are commonly used.
Under this standard, the court said Quin raised a triable issue as to whether the omission was intentional by alleging that she was confused by the bankruptcy disclosure requirements and had no intention of hiding her claims against the county.
Judge Morgan Christensen joined in the majority opinion.
Dissenting, Judge Jay S. Bybee said the majority contradicted Ninth Circuit precedent as well as the law of “sister circuits” in adopting the new rule. He also argued that Quin failed to show that her omission was a mistake or inadvertent, even under the majority’s broad interpretation of those terms.
First Lawsuit, Then Bankruptcy
Quin filed the sex discrimination lawsuit Nov. 10, 2008, in the U.S. District Court for the District of Hawaii. She asserted that the county reduced her hours as a bus driver to prevent her from earning full-time status because she is a woman.
Quin filed for Chapter 7 protection on April 4, 2009. She was represented by a different lawyer in the bankruptcy proceeding than in her case against the county.
In a schedule submitted to the bankruptcy court, Quin checked a box marked “None” next to a line that read: “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.”
The bankruptcy court issued an order of discharge and closed the case Sept. 1, 2009. Quin’s counsel in the employment discrimination action later became aware of the bankruptcy and informed opposing counsel of it during a Dec. 21, 2009, settlement conference.
The county sent a letter to the district court soon thereafter, asserting that the claims should be dismissed based on judicial estoppel. The court scheduled a status conference on the matter for Jan. 14, 2010.
“If Defendant here did, in fact, discriminate against Plaintiff, it will not have to pay [for] 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,” Judge Graber said.
Quin moved to reopen the bankruptcy proceeding one day before the status conference, explaining that she neglected to previously disclose the claims against the county because she did not understand that they qualified as an asset. She later amended the bankruptcy schedules to reflect the claims.
Meanwhile, the lower court granted summary judgment to the county in the employment discrimination case April 1, 2010, ruling that judicial estoppel prohibited the action from going forward.
After a bankruptcy trustee abandoned any interest in the lawsuit against the county, the bankruptcy court closed the matter July 21, 2010.
Court Widens Legal Standard
Vacating the district court’s decision, the Ninth Circuit said the lower court used the wrong legal standard to determine whether Quin’s initial failure to list the claims in the bankruptcy schedules was a mistake or inadvertent.
A debtor who omits a pending or soon-to-be-filed lawsuit from bankruptcy schedules is generally barred from proceeding with those claims, the court explained, citing New Hampshire v. Maine, 532 U.S. 742 (2001). However, when the omission is inadvertent or by mistake, judicial estoppel may not apply, according to the court.
The lower court found that Quin’s failure to list the claims in the bankruptcy proceedings was not inadvertent or by mistake because she knew of the claims at the time and stood to benefit from concealing them.
Acknowledging that several other federal appellate courts have invoked the same standard, the Ninth Circuit nevertheless found it was not appropriate in Quin’s case because she reopened the bankruptcy proceedings and amended the schedules to include her claims against the county.
The appeals court decided that the lower court’s test was “too stringent” under the circumstances, noting that the question was one of first impression for the Ninth Circuit.
“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,” Graber wrote. “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.”
The appeals court held that the mistake and inadvertence inquiry should be based on an understanding of these terms as they are commonly used.
“The relevant inquiry is, more broadly, the plaintiff’s subjective intent when filling out and signing the bankruptcy schedules,” Graber wrote.
While the court observed that it was departing from the test articulated in other circuits–focusing on whether the debtor had a motive to conceal the separate claims–it nevertheless found that interpretation of the more strict standard “has not been as rigid as one might expect.”
The court also found that the stricter test was not necessary to protect bankruptcy proceedings. “To the extent that the bankruptcy system lacks adequate protections, that is a shortcoming not of the court system, but of the bankruptcy laws,” Graber explained.
Rather, the court said application of the stringent standard adopted by the lower court under these circumstances was more likely to protect “an alleged bad actor.”
“If Defendant here did, in fact, discriminate against Plaintiff, it will not have to pay [for] 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,” Graber said.
Jury to Consider Omission
Under the broader standard, the court held that Quin raised a triable question as to whether her initial failure to disclose the claims was inadvertent or mistaken.
The Ninth Circuit pointed out that Quin did not move to reopen the bankruptcy case until after the county raised the judicial estoppel issue. The court found that her testimony in those proceedings seemed to indicate that she should have been aware that her claims against the county were relevant.
While explaining in questioning during the bankruptcy proceedings that her husband had recently lost his job following a scuffle at work and that the couple was considering pursuing legal action against his former employer, Quin replied “no, no,” when the judge asked her whether she had any claims, the appeals court said.
“We agree that one could interpret the colloquy as having put Plaintiff on notice that a lawsuit was relevant, but the colloquy is far from the smoking gun that the dissent portrays it to be,” Graber wrote. Instead, a jury could find that Quin was referring only to claims against her husband’s employer, according to the court.
It further noted that Quin said she found the schedules “vague” and difficult to understand. She also listed her lawyer in the case against the county as a creditor on the schedules, an indication that she did not intend to hide the claims, the court said.
Dissent Says Ruling Contradicts Precedent
In a dissenting opinion, Bybee wrote that the new rule adopted by the majority “is not only contrary to the law of our sister circuits … but is also plainly at odds with” previous Ninth Circuit decisions.
Bybee cited Hamilton v. State Farm Fire & Casualty Co., 270 F.3d 778 (9th Cir. 2001), a case in which the Ninth Circuit held that a debtor was barred from pursuing claims of which he was aware, but did not disclose in bankruptcy proceedings.
“[T]he majority’s holding is not saved by the fact that it is limited to cases where the debtor has moved to reopen bankruptcy proceedings to vacate the inappropriate discharge and is made worse by the majority’s disparagement of applying judicial estoppel to protect the bankruptcy system,” Bybee wrote.
Even under the broader standard advanced by the majority, Bybee asserted, Quin failed to show that her omission in the initial bankruptcy filings was inadvertent or a mistake. Quin claimed that she was entitled to $6 million in damages from the county, according to Bybee, yet said she was not a party to any outstanding lawsuits when she later sought to relieve herself of less than $80,000 in debt.
“[O]n this record, it is hard to see anything but a debtor who was caught in a lie and now seeks to avoid the consequences,” Bybee concluded.
William H. Burgess and Dominic Draye of Kirkland & Ellis in Washington, D.C., represented Quin. The county was represented by Barbara A. Petrus and Jordan M. Odo of Goodsill Anderson Quinn & Stifel in Honolulu.