At U.S. Supreme Court: Judicial Estoppel For Failure To Disclose A Claim—But What About Interests Of Creditors? (Keathley v. Buddy Ayers), Part 1

By: Donald L Swanson

A Petition for Writ of Certiorari has been granted by the U.S. Supreme Court in Keathley v. Buddy Ayers Construction, Inc., Case No. 25-6, on a ruling from the U.S. Fifth Circuit Court of Appeals.[Fn. 1]

The Question Presented in Kethley v. Buddy Ayers is this:

• “Whether the doctrine of judicial estoppel can be invoked to bar a plaintiff who fails to disclose a civil claim in bankruptcy filings from pursuing that claim . . .”

Three views

On such question there is a two-way split of authority among the circuit courts of appeals: one applies a harsh standard (i.e., debtor almost always looses) and the other applies a less-harsh standards (i.e., an all facts and circumstances test). 

But there is a third view, presented by amicus briefs, that both sides of the circuit split are wrong—because each side ignores the interests of debtor’s creditors.  And, frankly (in my humble opinion), this third view makes sense and is the best of the three views.

I’ll try to explain each of the three views.

Fifth Circuit Approach

–Bankruptcy Chronology

December 27, 2019: Debtor files a voluntary Chapter 13 petition. 

April 2020: Debtor achieves a confirmed Chapter 13 plan.

August 23, 2021 (more than a year after plan confirmation): Debtor is in a car wreck, seeks medical treatment, and retains a personal injury attorney.

December 29, 2021: Debtor sues the other driver and his employer.  Debtor claims to have informed Debtor’s bankruptcy attorney of the lawsuit, but neither Debtor nor his bankruptcy attorney discloses Debtor’s personal injury lawsuit in the bankruptcy.

March 1, 2022: Debtor begins filing several modifications to Debtor’s confirmed Chapter 13 plan—but, again, fails to disclose the personal injury lawsuit in each modification.

July 20, 2022: bankruptcy court confirms Debtor’s modified plan.

–Lawsuit Chronology

March 30, 2023: Defendants move for summary judgment in the lawsuit on Debtor’s personal injury claims, on grounds of judicial estoppel, arguing:

• Debtor failed to notify the bankruptcy court of the personal injury claim and the lawsuit asserting that claim;
• Debtor breached the continuing duty to disclose all assets to the bankruptcy court, including the personal injury claim; and
• the breach is particularly egregious because of the various plan amendments presented after filing the personal injury lawsuit.

April 4, 2023: Debtor files an Amended Schedule in the bankruptcy to disclose the personal injury lawsuit.

August 8, 2023: District Court grants summary judgment in favor of the personal injury defendants, dismissing Debtor’s lawsuit, on grounds of judicial estoppel:

• observing that Debtor “was aware of his cause of action” but nevertheless filed Second, Third and Fourth Amended Chapter 13 Bankruptcy Plans which failed to” disclose this cause of action”; 
• concluding that Debtor’s failure to disclose results in Debtor being judicially estopped from proceeding with the lawsuit, based on longstanding Fifth Circuit rules designed to protect “the integrity of the bankruptcy process and the federal courts as a whole”; and
• finding that such an approach gives clear warning to any debtors thinking of failing to disclose lawsuits because, if their deception is discovered, they will not simply be allowed to plead an honest mistake and file an amended disclosure.

–Legal Standards

The Fifth Circuit’s opinion identifies the following legal standards.

“Judicial estoppel” is a common law doctrine that prevents a party from assuming inconsistent positions in litigation. The purpose of the doctrine is to protect the integrity of the judicial process, by preventing parties from playing fast and loose with the courts to suit the exigencies of self interest.

In bankruptcy:

• the integrity of the entire system depends on full and honest disclosure by debtors of all assets, including contingent and unliquidated claims—and the obligation to do so is ongoing;
• 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; and
• still, judicial 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.

Judicial estoppel has three elements:

1. The party against whom it is sought has asserted a legal position that is plainly inconsistent with a prior position;
2. a court accepted the prior position; and
3. the party did not act inadvertently.

As to the third element, inadvertence can exist only when the debtor either lacks knowledge of the undisclosed claims or has no motive for their concealment:

• Debtor contends that he had no motive to conceal his claims in the bankruptcy because he did not realize he had a duty to disclose them; but
• the motivation sub-element is almost always met if a debtor fails to disclose a claim or possible claim to the bankruptcy court.

Eleventh Circuit Split

The certiorari Petition cites a split on judicial estoppel between the Fifth Circuit’s legal standards and the legal standards applied by the Eleventh Circuit.[Fn. 2]

According to the Eleventh Circuit’s opinion, the equitable doctrine of judicial estoppel is intended to prevent the perversion of the judicial process and protect its integrity by prohibiting parties from deliberately changing positions according to the exigencies of the moment.

• It rests on the principle that, absent any good explanation, a party should not be allowed to gain an advantage by litigation on one theory, and then seek an inconsistent advantage by pursuing an incompatible theory.

The Eleventh Circuit employs a two-part test to guide district courts in applying judicial estoppel: whether,

1. the party took an inconsistent position under oath in a separate proceeding; and
2. these inconsistent positions were calculated to make a mockery of the judicial system.

Judicial estoppel does not apply to inadvertence or mistake: it looks towards cold manipulation and not an unthinking or confused blunder.

–All Facts and Circumstances Test

To determine whether a plaintiff’s inconsistent statements were calculated to make a mockery of the judicial system, says the Eleventh Circuit, a court should look to all the facts and circumstances of the particular case.

Such facts and circumstances include:

• debtor’s level of sophistication;
• whether and under what circumstances debtor corrected the disclosures;
• whether debtor informed the bankruptcy attorney about the civil claims;
• whether trustee or creditors were aware of the civil lawsuit or claims;
• whether debtor identified other lawsuits; and
• any findings or actions by the bankruptcy court after the omission was discovered.

–No Inference Permitted

An inference that debtor intended to make a mockery of the judicial system cannot arise simply because debtor failed to disclose a civil claim.  That’s because an all facts and circumstances inquiry:

1. ensures that judicial estoppel applies only when a party acted with a sufficiently culpable mental state;
2. allows a district court to consider any proceedings that occurred in the bankruptcy court after the omission was discovered; and
3. limits judicial estoppel to those cases in which the facts and circumstances warrant—rejecting a one-size-fits-all approach and reducing the risk that the civil defendant will receive a windfall at the expense of innocent creditors.

Further, amendments of disclosures are permitted in bankruptcy.  For example:

• Fed.R.BAnkr.P. 1009(a) permits a debtor to amend a schedule or statement “as a matter of course at any time before the case is closed”; and
• under § 350(b) of the Bankruptcy Code, bankruptcy courts retain broad discretion to reopen a closed case on a motion of the debtor or other party in interest “to administer” an asset that had not previously been scheduled.

Amicus Briefs—Highlighting Interests of Creditors

Several amicus briefs appear on the U.S. Supreme Court’s electronic docket for the Kethley v. Buddy Ayers case.  Three of those briefs take a third view that focuses on the interests of creditors—instead of on the debtor and the defendant alone.  Here is a brief summary of the positions taken in each of the three amicus briefs, in the order that they appear on the Supreme Court’s docket.

–Brief of the United States

The harsh standard in the circuit split “fails to account for the interests of innocent creditors who may be harmed if the tort claim cannot go forward, or for the other tools that a bankruptcy court may wield to address a debtor’s nondisclosure.”

–Brief of National Association of Bankruptcy Trustees & American College of Bankruptcy

“A debtor’s pre-bankruptcy claims are part of this estate, making the trustee who administers the estate, the real party in interest”; “an undisclosed cause of action remains estate property even after a bankruptcy case is closed”; and “the Bankruptcy Code authorizes reopening the bankruptcy case to administer newly-found assets,”

–Brief of American Association for Justice

“Judicial estoppel is an obscure and outmoded doctrine that is unsuited to address bankruptcy nondisclosure”; “Estoppel of a plaintiff’s cause of action bestows an unfair advantage on the defendant who evades accountability for wrongdoing in the damages lawsuit”; “But an unfair disadvantage is visited upon creditors when dismissal deprives them of a possible source to satisfy outstanding debts.”

Editorial Comment

In my humble opinion, the two splitting circuit views (which look almost exclusively at the interests of debtor and defendant) have it wrong, and the three amicus briefs (which focus, instead, on the interests of debtor’s creditors) have it right.

Conclusion

It will be interesting to see what the U.S. Supreme Court does with this case!

——————-

Footnote 1.  The opinion is Kethley v. Buddy Ayers Construction, Incorporated, Case No. 24-60025, U.S. Court of Appeals for the Fifth Circuit (decided March 3, 2025).

Footnote 2.  The Eleventh Circuit opinion is Slater v United States Steel Corp., 871 F.3d 1174 (11th Cir. 2017).

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