In a ruling that puts bankruptcy petitioners on notice of the perils of “gamesmanship,” the U.S. Court of Appeals for the Sixth Circuit has ruled that, where a petitioner asserts a position before a bankruptcy court contrary to that later asserted before a district court and where she had a motive to act in bad faith in so doing, the proper judicial remedy is to estop the petitioner from proceeding in district court, irrespective of the merits of her claim.

In White v. Wyndham Vacation Ownership, Inc. (6th Cir., Case No. 09-5626, Aug. 11, 2010) (PDF) the Court found that Betsy White (“White”), a petitioner for Chapter 13 bankruptcy, failed to inform the bankruptcy court in any of her sworn submissions that, prior to filing her bankruptcy petition, she had lodged a sexual harassment complaint with the Tennessee Human Rights Commission and the federal Equal Employment Opportunity Commission against former employer Wyndham Vacation Ownership (“Wyndham”). One day after the bankruptcy court conducted a confirmation hearing for White’s bankruptcy plan, White filed suit in district court against Wyndham for a total of $1.25 million in damages.  Wyndham moved to dismiss based upon judicial estoppel, citing White’s failure to mention her claim in her Chapter 13 matter, and the district court granted summary judgment against White.  On appeal, the Sixth Circuit affirmed, finding that White’s subsequent efforts to amend her Chapter 13 filings were “inadequate” and that White had a motive to act in bad faith by not disclosing the claim: “if the harassment claim became a part of her bankruptcy estate, then the proceeds from it could go towards paying White’s creditors, rather than simply to paying White.”  By affirming the district court, the Sixth Circuit required that White live with the consequences of her omission and dismissed her suit against Wyndham.

White serves as an object lesson for bankruptcy petitioners.  The Court repeatedly emphasized that candor and full disclosure is essential in bankruptcy and that belated attempts to correct omissions or misrepresentations may not suffice to prevent judicial estoppel.  In the words of the Court, “We will not consider favorably the fact that White updated her initial findings after [Wyndham’s] motion to dismiss was filed.  To do so would encourage gamesmanship, since White only fixed her filings after the opposing party pointed out that those filings were inaccurate.”  The Court emphasized that the filing of a bankruptcy petition was a serious and legally binding matter: “By signing, [White] swore, under penalty of perjury, that the filing was accurate.”  By affirming the application of judicial estoppel, the Court required White to live with her filing’s inaccuracy.

Circuit Judge David W. McKeague wrote the majority opinion for the three-judge panel that also included Circuit Judge Eric L. Clay and District Judge Dan A. Polster of the Northern District of Ohio.  Judge Clay dissented, stating that the “majority’s approach to this case fails to appreciate the absurdity of the result of its erroneous application of judicial estoppel.”  The proper disposition, according to Judge Clay, would have been to permit White’s harassment claim to proceed, with any damages accruing to her estate, which would then have been available to her creditors in the bankruptcy proceeding.  Instead, Judge Clay found that the effect of the majority opinion was effectively to excuse Wyndham, whose employees had been accused of sexual harassment, from “paying any damages to any party whatsoever.”