In Keathley v. Buddy Ayers Construction, Inc., the United States Supreme Court, in a unanimous opinion, held that in determining whether a debtor’s omission of a claim from his bankruptcy schedules was the result of inadvertence or mistake for the purposes of judicial estoppel, courts should look to the totality of the circumstances surrounding the omission. The Court vacated the Fifth Circuit’s ruling, which had artificially narrowed its inquiry to just two factors: (1) whether the debtor had knowledge of the underlying facts of the claim or (2) whether the debtor had a potential motive to conceal the claim.
In this case, Thomas Keathley and his wife (collectively, the “Debtors”) filed a Chapter 13 bankruptcy petition in December 2019. In April 2020, the Bankruptcy Court confirmed an amended repayment plan providing for a full interest-free repayment of the creditors’ claims over five years. In August 2021, while the bankruptcy case remained open, Keathley was involved in a car accident with a driver employed by Buddy Ayers Construction, Inc. (“Buddy Ayers”). Keathley retained a personal-injury attorney and informed his bankruptcy attorney that he intended to sue, but Keathley and his counsel did not disclose this potential personal-injury claim in the bankruptcy case. In December 2021, Keathley filed the personal action in U.S. District Court, asserting negligence claims, again, without any disclosure in the bankruptcy case.
In March 2023, Buddy Ayers moved for summary judgment on the grounds that judicial estoppel applied given Keathley’s failure to disclose his personal-injury claims in the pending bankruptcy proceeding. Keathley immediately amended his bankruptcy schedules and submitted affidavits in response to the motion for summary judgment, explaining that his omission was inadvertent as he believed he had satisfied his disclosure obligations by informing his bankruptcy counsel and had received no monetary compensation from the nondisclosure. The District Court, relying on Fifth Circuit precedent that an omission is advertent or mistaken only if the debtor lacked knowledge of the underlying facts or had no potential motive to conceal the claim, found that Keathley knew the facts and hypothetically could have benefitted from avoiding interest payments to creditors. Accordingly, the District Court entered summary judgment for Buddy Ayers, and the Fifth Circuit affirmed.
In line with the Fifth Circuit and Tenth Circuit that adopt a more holistic approach, the Supreme Court explained that judicial estoppel is an equitable doctrine, and equity “eschews mechanical rules” in favor of more flexible case-by-case analysis that considers all relevant facts and circumstances. The Court found that the Fifth Circuit’s two-factor analysis was (1) too rigid, because it barred consideration of any other evidence bearing on inadvertence, and (2) too broad, because it is rare for a debtor to be unaware of the underlying facts of their claim and a debtor will almost always hypothetically benefit from not revealing such a claim to his creditors. The Court reasoned that a test that is nearly always satisfied cannot fairly distinguish inadvertent omissions from deliberate ones. The Court’s holding is narrow, but resolves the analytical framework for analyzing judicial estoppel.
The Keathley case emphasizes that when judicial estoppel is asserted because a debtor fails to disclose a claim in bankruptcy, the courts must undertake a holistic inquiry into all the surrounding circumstances, taking into account good-faith explanations as opposed to merely the knowledge and conceivable benefit from nondisclosure as dispositive.