Keathley v. Buddy Ayres Construction Inc., 25-6 (Sup. Ct.)
Keathley v. Buddy Ayres Construction Inc., 25-6 (Sup. Ct.).The US Supreme Court granted certiorari to resolve a circuit split on the standard to employ before invoking judicial estoppel when a chapter 13 debtor failed to disclose a personal injury claim.
The date for oral argument has not been set, but the case should be heard in time for a decision before the end of the term in June.
The case came to the Supreme Court from the Fifth Circuit, where invocation of judicial estoppel only requires a “plausible” motive for failure to disclose a personal injury claim. One of the judges on the Fifth Circuit panel wrote a concurring opinion that reads like a dissent and urges the circuit to follow the majority of circuits, which require subjective intent to deceive before invoking judicial estoppel.
The Facts
The debtor filed a chapter 13 petition and confirmed a plan with 100% payment to unsecured creditors, without interest, over five years. More than a year after confirmation, the debtor was injured when the truck he was driving collided with another truck. Immediately after the injury, the debtor retained personal injury counsel.
According to the debtor’s certiorari petition, the debtor informed his bankruptcy lawyer about the accident “a few weeks” later, but bankruptcy counsel did not inform the court or amend the schedules. Later, bankruptcy counsel filed an amended chapter 13 plan but did not disclose the personal injury claim on that occasion, either.
The debtor also did not inform the bankruptcy court when he settled a workman’s compensation claim against his employer. The debtor had experience with title 11, having filed bankruptcy on three previous occasions.
While the chapter 13 case was still proceeding, the debtor filed a personal injury suit in federal district court. The defendant responded with a motion for summary judgment based on judicial estoppel. Then, the debtor amended his bankruptcy schedules to disclose the claim.
Granting the defendant’s summary judgment motion, the district court held that the failure to disclose was not inadvertent. Following Fifth Circuit precedent, the district court held that judicial estoppel could be invoked if “potential financial benefit . . . could result from concealment.”
Reviewing for abuse of discretion, the Fifth Circuit affirmed in a per curiam, nonprecedential opinion. Keathley v. Buddy Ayers Construction Inc., 24-60025, 2025 WL 673434 (5th Cir. March 3, 2025). Quoting its own precedent, the appeals court said, “‘[T]he integrity of the bankruptcy system depends on full and honest disclosure by debtors of all of their assets.’” The court went on to say “‘that judicial estoppel is particularly appropriate where a party fails to disclose an asset to a bankruptcy court, but then pursues a claim in a separate tribunal based on that undisclosed asset.’”
Again quoting its own precedent, the appeals court said that “‘[j]udicial estoppel will not apply if the non-moving party’s failure to disclose was inadvertent, meaning that he did not know of his inconsistent position or had no motive to conceal it from the court.’” [Emphasis added.]
In the circuit court, the outcome turned on whether the failure to disclose was “inadvertent” or there was motive to conceal. The debtor contended that he had no motive to conceal because his plan was paying 100%, albeit without interest.
Upholding dismissal via judicial estoppel, the appeals court rejected the idea of inadvertence, noting how the debtor must have been aware of his responsibilities because it was his fourth bankruptcy. Furthermore, disclosure might have resulted in requiring the debtor to pay interest on claims.
Circuit Judge Catharina Haynes concurred in the judgment “only because it is based upon our precedent.” She thought it would be “best to defer to the bankruptcy court’s evaluation regarding whether the plaintiff should be allowed to proceed.” In the case on appeal, she noted there was evidence of “an honest mistake.”
Judge Haynes cited the district court for having “faithfully applied our precedents and determined that the plaintiff had a possible financial motive for the nondisclosure.” She noted how “[o]ther circuits take a more holistic approach than ours, suggesting that judicial estoppel is inappropriate when the bankruptcy proceedings will not suffer and when the alleged bad actors will receive a windfall.”
Judge Haynes concurred “in the judgment in light of our precedent” and “would have dissented if we did not have prior precedents.”
The debtor filed a certiorari petition in June. The Court granted the petition on October 20.
The Circuit Split
According to the debtor, the Fourth, Sixth, Seventh, Ninth and Eleventh Circuits “hold that courts must find that a debtor had a subjective intent to mislead the court before barring his claims, even if the debtor knew about his underlying claim and had some theoretical motive to conceal it.”
On the other side of the fence, the debtor synthesized Fifth and Tenth Circuit precedent to “hold that judicial estoppel is essentially always warranted when a debtor fails to disclose a claim to the bankruptcy court, irrespective of the debtor’s subjective intent to mislead.”
Observations
Judicial estoppel arises in both chapter 7 and chapter 13, often after a debtor has failed to disclose an “asbestos” claim that the debtor might not have known that he or she held at the time of filing.
Even if the case has been closed, an undisclosed claim isn’t abandoned under Section 554(d). If judicial estoppel does not mean automatic dismissal of the suit, the trustee could step in and administer the undisclosed claim for the benefit of the estate.
When a court is considering use of judicial estoppel to dismiss a suit involving an undisclosed claim, the court should give the trustee an opportunity to assert control over the undisclosed claim for the benefit of creditors. Or, if the debtor in chapter 13 or chapter 11 agrees to pursue the claim for creditors, the court should deny the judicial estoppel defense and permit the debtor to pursue the claim. In those cases, some courts have refused to invoke judicial estoppel but have precluded the debtor from recovering after creditors are paid in full.
Let’s hope that the Supreme Court understands the subtleties involved with undisclosed claims and doesn’t hand down a decision that gives defendants a windfall and leaves creditors in the cold. Amicus briefs would benefit the Court by putting the issue in a larger context.