October 13, 2017

Judicial Estoppel And Good Faith; Ellis v. Keystone Construction Corporation

Category: Indiana Law Review | Author: | Share:

The doctrine of judicial estoppel punishes parties who “play fast and loose” with the courts by prohibiting them from taking a position that is inconsistent with one asserted in the same or a previous proceeding. As this case shows, the focus of this doctrine is on the effect on the courts, not the effects on opposing parties.

Ersal formed Keystone, a construction company, in 2002. Ersal recruited Ellis to come work for Keystone in 2003. Ellis claims that Ersal offered to make him a “partner” in Keystone with a 20% ownership interest. Ellis agreed and began to work for Keystone as the director of construction.

Ellis’s ownership in Keystone was never formalized, and over the next decade there was continual uncertainty regarding who owned what percentage of Keystone. In 2012, Ellis resigned from the company and asserted his rights as a shareholder. This eventually led to a lawsuit over whether Ellis was a shareholder.

Meanwhile, in 2010 Ellis’s wife, Brooke, filed for dissolution. Ellis and Brooke entered into a settlement agreement which purported to resolve all issues in the dissolution. However, it did not mention any ownership interest in or shares of Keystone. The dissolution court accepted that agreement and incorporated it into its decree in 2011.

In the lawsuit between Keystone and Ellis, Keystone moved for summary judgment on the ground of judicial estoppel, noting that Ellis’s settlement agreement with his exwife Brooke contained no mention of any stock or ownership interest in Keystone and claiming that Ellis was therefore estopped from asserting an ownership interest in the present case. After a hearing, the trial court granted Keystone’s motion and Ellis appealed.

On appeal, Ellis argued that judicial estoppel should not apply against him, because the representations in the dissolution agreement were made in good faith. And as evidence of his good faith, Ellis pointed to affidavits from both himself and Brooke, which showed that the couple intentionally left the Keystone interest out of the settlement agreement because they did not want to delay the dissolution proceedings. As the opposing party was not fooled by anything he did, Ellis argued, he acted in good faith.

The Court said that this is the wrong way of looking at judicial estoppel, because the focus should be on what the court is told, not what the opposing party knows.

Unlike equitable estoppel, which focuses on the relationship between the parties, judicial estoppel focuses on the relationship between a litigant and the judicial system. That is, judicial estoppel is intended to protect the integrity of the judicial system rather than to protect litigants from allegedly improper action by their opponents.

And when applying that doctrine to these facts, the Court used a burden-shifting test: if Keystone could show knowledge of an undisclosed claim and a motive for concealment, then the burden shifted to Ellis to show that the nondisclosure was made in good faith. And in order to meet that burden, Ellis had to show good faith to the dissolution court, not merely to Brooke.

[H]ere, both Ellis and Brooke admitted in their affidavits that they knew about Ellis’s claimed ownership interest in Keystone, yet intentionally left this out of the Settlement Agreement which purported to divide the marital assets. While this evidence might prevent a claim of fraud between the parties, we do not consider this as evidence of good faith as it pertains to the court. To the contrary, it was an intentional act to keep from the dissolution court a potentially large marital asset.

Thus, it did not matter whether Brooke knew of the ownership claim; Ellis intentionally hid this asset from the dissolution court. This justified applying the doctrine of judicial estoppel against Ellis, and he lost his claim to any ownership in Keystone.

Lesson:

Judicial estoppel tests the actions of a party to the judiciary, not to opposing parties, and intentionally hiding facts from the judiciary may be enough to trigger this doctrine.