“Judicial Estoppel”: When bankruptcy is more than just a financial obstacle to protecting your rights as an employee

Usually when your employer has done something illegal to you, it hits you directly in the pocketbook.  For example, maybe your employer illegally denied you an earned bonus, failed to pay overtime you were owed, or fired you in retaliation for a protected complaint.  Often that loss of income can put you as the employee in a precarious financial position.  Unfortunately, you might have no choice but to declare bankruptcy.  

The intersection between employment law and bankruptcy law can be complex and unintuitive; a full explanation of it is beyond the scope of this article.  However, bankruptcy can impose legal—not just financial—barriers on your ability to protect your rights as an employee.  This article is meant to put employees on notice of some steps they can take in a bankruptcy situation, to reduce the chance of losing their ability to vindicate their rights and recoup their economic losses.   

As part of a bankruptcy, generally you are required to disclose all of your assets to the U.S. Trustee and/or the bankruptcy court.  11 U.S.C. § 521(1).  But you might be surprised to learn that the Bankruptcy Code generally considers legal claims—either before or after a lawsuit is actually filed—to be part of your assets.  Basically, that is because any claims could translate into a settlement or judicial award for you in the future.  Those assets could include situations where you believe your employer violated the law, but have not filed any sort of complaint.  

If you did not disclose that “asset,” as vague as it might seem, and that employment dispute later turns into a full-blown lawsuit, your employer can use that fact against you.  It may assert a defense called “judicial estoppel,” basically arguing that you deliberately concealed an asset from the bankruptcy court and cannot now claim you actually do “have” it by filing a separate lawsuit.  The idea behind this rule is that, to “protect the integrity of the judicial process” a bankrupt person should be penalized if they tried to hide assets from their creditors.  If the court considering your employment claim (or sometimes the bankruptcy court itself) buys the employer’s argument, your employment case might be dead in the water.  That can be an easy way for an employer to get rid of a valid case against it while avoiding scrutiny into what it actually did.               

At first this might not seem to be a huge problem since judicial estoppel requires that the employer prove you did not act inadvertently; the burden of proof is on it.  However, in a conservative state like Texas, in practice you will want to show evidence that either you had no idea you had a claim at all during the bankruptcy, or that you had no motive to conceal it.  That can be a very difficult situation for you that introduces a lot of unnecessary complications into your employment case—not to mention your bankruptcy.  Making it even more complicated, you might go through bankruptcy shortly after you were fired but months or even years before filing your employment claims.  Then, you might be in the position of having to show that you did know about the facts underlying your legal claims.  

The simplest solution is that if you think you might have a legal claim, be sure to disclose it as soon as possible during your bankruptcy—and preferably in writing, like in a list of assets or statement of financial affairs.  It pays to be specific here—be clear about the name of your employer and what law(s) you believe it violated.  That can be especially important if you do not have separate employment counsel at the time of your bankruptcy.  

If you do have counsel for your bankruptcy or your employment dispute, it is still critical you communicate with them.  Your bankruptcy attorney should be made aware of your other claims, and your employment attorney should be made aware of your bankruptcy.  That way, they can coordinate to make sure your disclosure is correct and preserves your rights.  If you initially forget to disclose something, you can at least take steps to amend your disclosure of assets and hopefully avoid judicial estoppel.      

If you believe your employer violated the law and you are (or may be) going through a bankruptcy, in addition to talking to a bankruptcy attorney, you should consult with the employment attorneys at Rob Wiley, P.C.  

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