The Fifth Circuit has long applied judicial estoppel aggressively when a debtor fails to list a cause of action. It once held (in a panel opinion overruled by the en banc court) that a trustee was bound by a debtor's failure to disclose assets. Reed v. City of Arlington, 620 F.3d 477 (5th Cir. 2010), rev'd en banc 650 F.3d 571 (5th Cir. 2011). More recently, the Fifth Circuit held that a chapter 13 debtor who failed to disclose a post-petition cause of action would be barred from pursuing the claim due to judicial estoppel despite having confirmed a plan which paid all creditors 100% of their claims. A unanimous Supreme Court has now reversed that decision and remanded for determination under a totality of the circumstances test. Case No. 25-6, Keathley v. Buddy Ayers Construction, Inc. (U.S. 6/11/26). The opinion can be found here.
What Happened
The Keathleys filed chapter 13 bankruptcy in Arkansas in 2019. They confirmed a plan which paid unsecured creditors 100% of their claims, albeit without interest. In August 2021, Mr. Keathley was in an auto accident. He retained a personal injury attorney and informed his bankruptcy lawyer of the claim. The bankruptcy lawyer did not amend the debtor's schedules to disclose the claim. He filed suit in the Northern District of Mississippi in December 2021. In March 2023, the defendant moved for summary judgment based on failure to disclose the cause of action to the bankruptcy court. Keathley filed an affidavit affirming that the had informed his bankruptcy counsel of the claim. Nevertheless, the district court granted summary judgment.
The Fifth Circuit affirmed, although Judge Haynes filed a concurrence questioning whether the purposes behind judicial estoppel were served when nondisclosure resulted from an honest mistake. The standard in the Fifth Circuit was that failure to schedule a claim could only be inadvertent if (1) the debtor did not know the facts underlying the claim, or (2) there was no potential motive to conceal the claim. Long v. GSDMIdea City, LLC, 798 F. 3d 265, 273 (5th Cir. 2015). The District Court and the Fifth Circuit found that Keathley knew about the facts giving rise to the claim and he might possibly have not disclosed the claim to avoid having to pay his creditors interest.
The Supreme Court Ruling
In a unanimous opinion the Supreme Court reversed. Curiously, the Supreme Court assumed without deciding that judicial estoppel could apply in the bankruptcy context and that inadvertence or mistake could be an exception to the doctrine. It held that under these assumptions, "the Fifth Circuit’s understanding of 'inadvertence or mistake' is simultaneously too rigid and too broad." Opinion, p. 7. The Court found that the Fifth Circuit failed to apply equitable principles when applying an equitable doctrine.
The Fifth Circuit’s rule is not only overly rigid; it is also overly broad. In particular, the Fifth Circuit holds that an omission falls outside of the exception any time a debtor knows certain facts or could potentially benefit from nondisclosure of a claim. But it is rare for a debtor to be unaware of the underlying facts of his claim, and a debtor will almost always hypothetically benefit from not revealing such a claim to his creditors. In essence, then, the Fifth Circuit’s approach is a one-size-fits-all test that requires courts to view as purposeful nearly every bankruptcy omission. . . .
The overbreadth of the Fifth Circuit’s rule (the fact that it almost always is satisfied) makes it patently incompatible with an inadvertence-or-mistake standard, which suggests that circumstances—and outcomes—may vary. A near-dispositive criterion is a poor fit for a fair inquiry into whether an omission is actually the result of inadvertence or mistake.
Opinion, pp. 8-9. As a result, the Supreme Court remanded the case to the Fifth Circuit.
What Does It Mean
Unfortunately, the Supreme Court did not give much guidance on what the Fifth Circuit should do on remand. It just said that if there is going to be a mistake or inadvertence standard, the court should look at whether there was actually mistake or inadvertence. This would seem to give latitude for trial courts to make a fact intensive inquiry and decide whether equity applies. Of course, it could also give cover to the Fifth Circuit come up with a different formulation of an overly broad test.
What is more fun about this opinion is the concurrences. Justice Thomas, joined by Justice Gorsuch said that:
Lower federal courts have applied this doctrine broadly without clear authority to do so, and with only limited support from this Court’s precedents. In a future case, we should reexamine it.
Justice Sotomayor wrote that
I write to address why it may not ever make sense to apply judicial estoppel when bankruptcy proceedings are pending, and why, in any context, judicial estoppel should always turn on the totality of the circumstances.
and
I write to address why it may not ever make sense to apply judicial estoppel when bankruptcy proceedings are pending, and why, in any context, judicial estoppel should always turn on the totality of the circumstances.
Thus, while the majority opinion was narrow, cautious and largely unhelpful, there are three justices from two different wings of the court who would go further. This should be enough to cast doubt on the haphazard and arbitrary application of the doctrine going forward.
