Early Dismissal Strategies When Dealing with a Dishonest Plaintiff

Omission of Employment Claim in Bankruptcy Filings

One of the first things a defense attorney should do when he or she receives a new lawsuit is to run a background check on the plaintiff, including for prior bankruptcy filings. If the plaintiff filed for bankruptcy after being terminated by the defendant-employer (i.e, after the plaintiff's employment claim against the defendant “accrued”), the plaintiff's employment claim is just like any other asset that must be disclosed by the plaintiff in his/her bankruptcy petition and financial schedules in support of the same. If the plaintiff omits the employment claim from his/her bankruptcy filings, and the bankruptcy court discharges the plaintiff's debts in bankruptcy, the defendant would have a strong argument that the plaintiff should be judicially estopped from pursuing the employment claim. See, e.g., De Leon v. Comcar Indus., Inc., 321 F.3d 1289, 1291-92 (11th Cir. 2003) (dismissing discrimination claim on judicial estoppel grounds based on the plaintiff's failure to include claim in bankruptcy filings).

Judicial estoppel applies where a party asserts a claim or position in a legal proceeding that is inconsistent with the claim or position taken by that party in a previous proceeding. New Hampshire v. Maine, 532 U.S. 742, 749, (2001). “Its purpose is to protect the integrity of the judicial process and to prevent parties from playing fast and loose with the courts.” Id. Thus, the defendant-employer may move to dismiss the employment claim outright on judicial estoppel grounds. Specifically, the defendant-employer may argue that the plaintiff's representation to the bankruptcy court that he/she possessed no legal claims against any party and the bankruptcy court's discharge of all debts based on this misrepresentation judicially estops the plaintiff from pursuing the omitted claim in a different judicial forum.

However, some courts have criticized the use of judicial estoppel in this context because it results in harm to the innocent creditors of the plaintiff. These courts have reasoned that innocent creditors should not be required to forfeit a valuable asset due to the debtor's misconduct. See, e.g., Taylor v. Comcast Cablevision of Ark., Inc., 252 F.Supp.2d 793, 797 (E.D. Ark. 2003) (“An overly strict application of judicial estoppel has been criticized as providing a windfall to the alleged wrongdoer and possibly depriving creditors, who are not parties to the nonbankruptcy action, of a potential bankruptcy asset.”).

But even if the court is not willing to dismiss the employment claim on judicial estoppel grounds, the claim belongs to the bankruptcy estate and not the plaintiff. See Cannon-Stokes v. Potter, 453 F.3d 446, 448 (7th Cir. 2006). Under these circumstances, the bankruptcy trustee ' as representative of the estate ' has the exclusive power to prosecute or defend pre-petition claims. 11 U.S.C. ' 323(b); Biesek v. Soo Line R.R. Co., 440 F.3d 410, 413 (7th Cir. 2006). Experience demonstrates that bankruptcy trustees generally prefer a quick settlement over protracted litigation with uncertain results. Accordingly, the defendant-employer typically can resolve a case in this procedural posture fairly quickly and cheaply. Moreover, the defendant-employer often finds this type of resolution more palatable because the plaintiff does not receive any portion of the settlement proceeds (in contrast to the settlement of a garden variety employment claim in which the plaintiff receives 67% or more of the settlement proceeds with the plaintiff's attorney receiving the balance).

Thus, whether the court dismisses the employment claim on judicial estoppel grounds or simply permits the bankruptcy trustee to substitute into the case as the real party in interest, the plaintiff loses control over, and ownership of, the employment claim.

Misrepresentations on IFP Applications

Pro se plaintiffs often seek IFP status to avoid payment of the $350 federal court filing fee. In most jurisdictions, the plaintiff must complete a fairly detailed questionnaire on a court-approved form relating to the plaintiff's assets, income, living expenses, and related topics. “The purpose of requiring an indigent plaintiff to complete an affidavit in support of an IFP is to encourage forthrightness, and discourage fraud on the court.” Roberts v. Rest Haven Central, No. 06 C 3303, 2007 WL 489156, at *3 (N.D. Ill. Feb. 7, 2007). To further these goals, 28 U.S.C. ' 1915 provides, in pertinent part: “Notwithstanding any filing fee, or any portion thereof, that may have been paid, the court shall dismiss the case at any time if the court determines that ' (A) the allegation of poverty is untrue ' .” 28 U.S.C. ' 1915(e)(2)(A) (emphasis added). Accordingly, the courts have held that the
' 1915(e)(2)(A) mandates the dismissal of a lawsuit in which the plaintiff has made a false statement in his IFP Affidavit. See Thomas v. General Motors Acceptance Corp., 288 F.3d 305, 306 (7th Cir. 2002) (“Because the allegation of poverty was false, the suit had to be dismissed; the judge had no choice.”). In addition, the courts have opined that dismissal with prejudice may be the only appropriate sanction:

Dismissal with prejudice may have been the only feasible sanction for this perjury designed to defraud the government. Dismissal without prejudice would have been no sanction at all, unless perchance the statute of limitations had run in the interim, which it must not have done or the plaintiff would not be complaining about the fact that his suit was dismissed with prejudice. And a monetary sanction would probably be difficult to collect from a litigant assiduous in concealing assets. Even dismissal with prejudice wouldn't be much of sanction unless the plaintiff's suit was a winner, or at least had some settlement value, which it may not have had.

Thomas, 288 F.3d at 306-07.

A simple asset search is a good place to start the investigation into the truthfulness of an IFP application. For example, an asset report should reveal all real estate and automobiles owned by the plaintiff, and the omission or undervaluation of either category of assets by a plaintiff is grounds for dismissal. See, e.g., Mathis v. New York Life Ins. Co., 133 F.3d 546, 547-48 (7th Cir. 1997) (affirming the dismissal with prejudice of a pro se litigant's complaint based on his failure to disclose on his IFP Application $14,000 in equity in real property owned by him).

The truthfulness of the IFP application also should be explored through written and oral discovery. Written discovery requests should track the topics covered in the IFP application and documents should be requested to support each of the plaintiff's representations. Third-party subpoenas may also be used to obtain bank account records and income-related information from subsequent employers of the plaintiff. Any omissions, exaggerations, or misrepresentation in the IFP application concerning any of these subjects may be grounds for dismissal of the plaintiff's claims. See, e.g., Jeffery v. Kraft Foods Global, Inc., No. 05C6458, 2007 WL 611277, at *4 (N.D. Ill. Feb. 22, 2007) (dismissing with prejudice complaint of a plaintiff who never graduated from high school who claimed she had made “honest mistakes” in not disclosing approximately $5,000 earned doing odd jobs, not identifying a checking account with a balance exceeding $200, and not disclosing the salary of her husband from whom she was separated and not living with); Eleby v. Unilever Food Solutions, No. 05C4509, 2006 WL 644022, at *2 (N.D. Ill. March 3, 2006) (dismissing with prejudice pursuant to '1915(e)(2)(A) the plaintiff's ADA case based on his failure to disclose in his IFP Application $7,135.64 in deposits to his bank account within eight months of filing his IFP Application); Lukaneva v. Levy Restaurants at McCormick, No. 05 C 6159, 2006 WL 1823169, at *6 (N.D. Ill. June 29, 2006) (dismissing with prejudice based on nondisclosure of approximately $10,000 in part-time income).

Of course, the court has discretion concerning how much discovery may be taken on this topic. The defendant will argue that the plaintiff has placed his/her financial condition at issue by seeking IFP status, while the plaintiff will contend that the defendant is harassing the plaintiff by seeking private financial information through a “fishing expedition.” The better view is to permit discovery on these topics so long as it is narrowly tailored to determining the veracity of the plaintiff's IFP application. Any concern regarding the plaintiff's privacy can be addressed through the entry of a protective order limiting the use and disclosure of confidential information for purposes of the litigation. If the plaintiff has been truthful, he/she should have nothing to hide. Notably, if the plaintiff opposes disclosure of this information, loses the motion to compel, and the discovery reveals that the plaintiff's IFP application was not truthful, the defendant would have an excellent argument that the plaintiff compounded the fraud on the court by not “coming clean” when the defendant first raised the issue. Generally speaking, the courts are not forgiving when a plaintiff delays correction of the IFP application. See Jeffery, 2007 WL 611277, at *4 (“Claiming she made 'honest mistakes' only after being deposed does not negate the consequences of her misrepresentations.”).

Conclusion

In sum, these early dismissal strategies are fairly cheap to pursue and may result in the dismissal of a plaintiff's claims. They also serve an important function by protecting the integrity of the judicial process and punishing dishonest litigants.

William (Bill) Wortel, a member of this newsletter's Board of Editors, has represented management in a variety of litigation at the administrative level, in state and federal courts and in the U.S. Courts of Appeal. His experience includes defense of actions alleging violations of both federal and state statutes.

Dishonest plaintiffs can make it difficult, and in some cases impossible, to move successfully for summary judgment. Indeed, a dishonest plaintiff who understands the legal landscape can easily defeat summary judgment by claiming that there exists “direct evidence” of discrimination in the form of an admission by management that the challenged employment action was motivated by discriminatory animus (e.g., “my supervisor told me he was firing me because of my age”). No matter how much evidence the employer has to establish the falsity of the plaintiff's statement, the court sometimes has no choice but to deny the employer's motion for summary judgment and allow the case to proceed to a jury trial.

While there sometimes is nothing that can be done about a dishonest plaintiff other than to attack his/her credibility in front of a jury, it is critical to ensure that all early dismissal strategies are explored before reaching the dispositive motion stage of case. These early dismissal strategies include examination of the plaintiffs' representations in their post-employment bankruptcy petitions and in forma pauperis (IFP) applications.

Those new to employment litigation may be surprised by the percentage of plaintiffs who file for bankruptcy and/or seek IFP status. Given that the majority of employment-related lawsuits allege wrongful termination of employment, there is one thing that many plaintiffs have in common ' financial hardship resulting from the termination of their employment, especially given the current state of the economy and abysmal job market. Thus, it is not uncommon for plaintiffs to have filed for bankruptcy following the termination of their employment. Nor is it uncommon for plaintiffs, especially those proceeding pro se, to request permission from the court to proceed without the payment of a filing fee (i.e., to proceed in forma pauperis). Of course, these mechanisms serve an important function in society, and this article is not intended to discourage their use by honest litigants. Rather, this article outlines defense strategies for dealing with dishonest litigants who seek the discharge of their debts in bankruptcy and/or the waiver of a federal court filing fee through fraud.

Omission of Employment Claim in Bankruptcy Filings

One of the first things a defense attorney should do when he or she receives a new lawsuit is to run a background check on the plaintiff, including for prior bankruptcy filings. If the plaintiff filed for bankruptcy after being terminated by the defendant-employer (i.e, after the plaintiff's employment claim against the defendant “accrued”), the plaintiff's employment claim is just like any other asset that must be disclosed by the plaintiff in his/her bankruptcy petition and financial schedules in support of the same. If the plaintiff omits the employment claim from his/her bankruptcy filings, and the bankruptcy court discharges the plaintiff's debts in bankruptcy, the defendant would have a strong argument that the plaintiff should be judicially estopped from pursuing the employment claim. See, e.g., De Leon v. Comcar Indus., Inc. , 321 F.3d 1289, 1291-92 (11th Cir. 2003) (dismissing discrimination claim on judicial estoppel grounds based on the plaintiff's failure to include claim in bankruptcy filings).

Judicial estoppel applies where a party asserts a claim or position in a legal proceeding that is inconsistent with the claim or position taken by that party in a previous proceeding. New Hampshire v. Maine , 532 U.S. 742, 749, (2001). “Its purpose is to protect the integrity of the judicial process and to prevent parties from playing fast and loose with the courts.” Id . Thus, the defendant-employer may move to dismiss the employment claim outright on judicial estoppel grounds. Specifically, the defendant-employer may argue that the plaintiff's representation to the bankruptcy court that he/she possessed no legal claims against any party and the bankruptcy court's discharge of all debts based on this misrepresentation judicially estops the plaintiff from pursuing the omitted claim in a different judicial forum.

However, some courts have criticized the use of judicial estoppel in this context because it results in harm to the innocent creditors of the plaintiff. These courts have reasoned that innocent creditors should not be required to forfeit a valuable asset due to the debtor's misconduct. See, e.g., Taylor v. Comcast Cablevision of Ark., Inc. , 252 F.Supp.2d 793, 797 (E.D. Ark. 2003) (“An overly strict application of judicial estoppel has been criticized as providing a windfall to the alleged wrongdoer and possibly depriving creditors, who are not parties to the nonbankruptcy action, of a potential bankruptcy asset.”).

But even if the court is not willing to dismiss the employment claim on judicial estoppel grounds, the claim belongs to the bankruptcy estate and not the plaintiff. See Cannon-Stokes v. Potter , 453 F.3d 446, 448 (7th Cir. 2006). Under these circumstances, the bankruptcy trustee ' as representative of the estate ' has the exclusive power to prosecute or defend pre-petition claims. 11 U.S.C. ' 323(b); Biesek v. Soo Line R.R. Co. , 440 F.3d 410, 413 (7th Cir. 2006). Experience demonstrates that bankruptcy trustees generally prefer a quick settlement over protracted litigation with uncertain results. Accordingly, the defendant-employer typically can resolve a case in this procedural posture fairly quickly and cheaply. Moreover, the defendant-employer often finds this type of resolution more palatable because the plaintiff does not receive any portion of the settlement proceeds (in contrast to the settlement of a garden variety employment claim in which the plaintiff receives 67% or more of the settlement proceeds with the plaintiff's attorney receiving the balance).

Thus, whether the court dismisses the employment claim on judicial estoppel grounds or simply permits the bankruptcy trustee to substitute into the case as the real party in interest, the plaintiff loses control over, and ownership of, the employment claim.

Misrepresentations on IFP Applications

Pro se plaintiffs often seek IFP status to avoid payment of the $350 federal court filing fee. In most jurisdictions, the plaintiff must complete a fairly detailed questionnaire on a court-approved form relating to the plaintiff's assets, income, living expenses, and related topics. “The purpose of requiring an indigent plaintiff to complete an affidavit in support of an IFP is to encourage forthrightness, and discourage fraud on the court.” Roberts v. Rest Haven Central , No. 06 C 3303, 2007 WL 489156, at *3 (N.D. Ill. Feb. 7, 2007). To further these goals, 28 U.S.C. ' 1915 provides, in pertinent part: “Notwithstanding any filing fee, or any portion thereof, that may have been paid, the court shall dismiss the case at any time if the court determines that ' (A) the allegation of poverty is untrue ' .” 28 U.S.C. ' 1915(e)(2)(A) (emphasis added). Accordingly, the courts have held that the
' 1915(e)(2)(A) mandates the dismissal of a lawsuit in which the plaintiff has made a false statement in his IFP Affidavit. See Thomas v. General Motors Acceptance Corp. , 288 F.3d 305, 306 (7th Cir. 2002) (“Because the allegation of poverty was false, the suit had to be dismissed; the judge had no choice.”). In addition, the courts have opined that dismissal with prejudice may be the only appropriate sanction:

Dismissal with prejudice may have been the only feasible sanction for this perjury designed to defraud the government. Dismissal without prejudice would have been no sanction at all, unless perchance the statute of limitations had run in the interim, which it must not have done or the plaintiff would not be complaining about the fact that his suit was dismissed with prejudice. And a monetary sanction would probably be difficult to collect from a litigant assiduous in concealing assets. Even dismissal with prejudice wouldn't be much of sanction unless the plaintiff's suit was a winner, or at least had some settlement value, which it may not have had.

Thomas, 288 F.3d at 306-07.

A simple asset search is a good place to start the investigation into the truthfulness of an IFP application. For example, an asset report should reveal all real estate and automobiles owned by the plaintiff, and the omission or undervaluation of either category of assets by a plaintiff is grounds for dismissal. See, e.g., Mathis v. New York Life Ins. Co. , 133 F.3d 546, 547-48 (7th Cir. 1997) (affirming the dismissal with prejudice of a pro se litigant's complaint based on his failure to disclose on his IFP Application $14,000 in equity in real property owned by him).

The truthfulness of the IFP application also should be explored through written and oral discovery. Written discovery requests should track the topics covered in the IFP application and documents should be requested to support each of the plaintiff's representations. Third-party subpoenas may also be used to obtain bank account records and income-related information from subsequent employers of the plaintiff. Any omissions, exaggerations, or misrepresentation in the IFP application concerning any of these subjects may be grounds for dismissal of the plaintiff's claims. See, e.g., Jeffery v. Kraft Foods Global, Inc., No. 05C6458, 2007 WL 611277, at *4 (N.D. Ill. Feb. 22, 2007) (dismissing with prejudice complaint of a plaintiff who never graduated from high school who claimed she had made “honest mistakes” in not disclosing approximately $5,000 earned doing odd jobs, not identifying a checking account with a balance exceeding $200, and not disclosing the salary of her husband from whom she was separated and not living with); Eleby v. Unilever Food Solutions, No. 05C4509, 2006 WL 644022, at *2 (N.D. Ill. March 3, 2006) (dismissing with prejudice pursuant to '1915(e)(2)(A) the plaintiff's ADA case based on his failure to disclose in his IFP Application $7,135.64 in deposits to his bank account within eight months of filing his IFP Application); Lukaneva v. Levy Restaurants at McCormick , No. 05 C 6159, 2006 WL 1823169, at *6 (N.D. Ill. June 29, 2006) (dismissing with prejudice based on nondisclosure of approximately $10,000 in part-time income).

Of course, the court has discretion concerning how much discovery may be taken on this topic. The defendant will argue that the plaintiff has placed his/her financial condition at issue by seeking IFP status, while the plaintiff will contend that the defendant is harassing the plaintiff by seeking private financial information through a “fishing expedition.” The better view is to permit discovery on these topics so long as it is narrowly tailored to determining the veracity of the plaintiff's IFP application. Any concern regarding the plaintiff's privacy can be addressed through the entry of a protective order limiting the use and disclosure of confidential information for purposes of the litigation. If the plaintiff has been truthful, he/she should have nothing to hide. Notably, if the plaintiff opposes disclosure of this information, loses the motion to compel, and the discovery reveals that the plaintiff's IFP application was not truthful, the defendant would have an excellent argument that the plaintiff compounded the fraud on the court by not “coming clean” when the defendant first raised the issue. Generally speaking, the courts are not forgiving when a plaintiff delays correction of the IFP application. See Jeffery, 2007 WL 611277, at *4 (“Claiming she made 'honest mistakes' only after being deposed does not negate the consequences of her misrepresentations.”).

Conclusion

In sum, these early dismissal strategies are fairly cheap to pursue and may result in the dismissal of a plaintiff's claims. They also serve an important function by protecting the integrity of the judicial process and punishing dishonest litigants.

William (Bill) Wortel, a member of this newsletter's Board of Editors, has represented management in a variety of litigation at the administrative level, in state and federal courts and in the U.S. Courts of Appeal. His experience includes defense of actions alleging violations of both federal and state statutes.