Judicial Estoppel—And Interests Of Debtor’s Creditors (Royal American v. Roofing Design), Part 2

By: Donald L Swanson

Here’s a judicial estoppel hypothetical:

• debtor files Subchapter V bankruptcy and achieves a confirmed plan;
• in the bankruptcy debtor fails to disclose a pre-petition lawsuit claim;
• after plan confirmation, debtor files suit on the pre-petition lawsuit claim; and
• defendant seeks dismissal of the lawsuit, with prejudice, on grounds of judicial estoppel—i.e., for debtor/plaintiff’s failure to disclose the claim in bankruptcy.    

Question: Who should be the ultimate beneficiary of a lawsuit claim that debtor fails to disclose: 

• should it be debtor—who might get a windfall from receiving both a discharge of debts and a recovery on the claim (instead of giving that recovery to creditors)?
• should it be defendant—who could get a windfall by the dismissal? or
• should it be debtor’s creditors—who could receive proceeds of the lawsuit, if a recovery is achieved and brought into debtor’s bankruptcy estate?

Despite the fact that such question is currently before the U.S. Supreme Court [see this linked article], there is a new opinion on such question that gives the windfall to defendant: Royal American Construction, Inc. v. Roofing Designs by JR, L.L.C., Case No. 25-20048, U.S. Fifth Circuit Court of Appeals (decided January 13, 2026, Not for Publication). 

The Royal American v. Roofing Design opinion; 

• barely even mentions, let alone evaluates, the interests of debtor’s creditors on the judicial estoppel question; and
• makes no effort, whatever, to see if the interests of debtor’s creditors might be protected.

Moreover, no one represented or spoke for debtor’s creditors in the Royal American v. Roofing Design case, at either the Fifth Circuit or the Federal District Court levels.  It’s as if the interests of debtor’s creditors don’t exist—or, at least, none of the parties nor either of the courts in the case bother with them. 

What’s right or fair about that? How is it possible to ignore the interests of debtor’s creditors? Such interests should be obvious and in plain sight throughout the Royal American v. Roofing Design proceedings in both the Fifth Circuit and the Federal District Court.

What follows is an attempt at (i) summarizing the Fifth Circuit opinion, and (ii) providing some editorial comments at the end.

Facts

In 2020, Debtor enters into subcontracts with General Contractor.  Debtor does not complete its work but files both a mechanics lien and a bond claim for the work it did perform.

General Contractor sues Debtor in Federal District Court, and Debtor responds with a counterclaim against General Contractor and a third-party claim on the bond, seeking $600,000 in damages and fees.

Then, Debtor files a Subchapter V bankruptcy.  Debtor’s schedules list the claim against General Contractor as “Unknown” on line 74, Part 11 (under the “Current value of debtor’s interest” column) and as “$0.00” in the “Amount requested” category.  The same “$0.00” amount also appears on line 78 as the “Total of Part 11 . . . lines 71 through 77.”

A few months later, Debtor files its Subchapter V plan.  In the “Analysis and Valuation of Property” portion of the plan, Debtor notes that it “has numerous litigation claims” but that such claims “are speculative and cannot be counted on to provide funds to the estate.”

Debtor’s plan also states that Debtor:

• is “unaware of any litigation which could be brought for the benefit of the creditors of the estate”;
• is currently “involved in litigation” with General Contractor; and
• “fully believes in the litigation” but that General Contractor “has denied any liability.”

The Bankruptcy Court confirms Debtor’s plan.

Then, Debtor files amended schedules that add the Bonding Company to the list of entities against whom it holds causes of action—but, again, Debtor lists the “Current value of debtor’s interest” in such claims as “Unknown” and the amount requested as “$0.00.”

In the Federal District Court lawsuit, General Contractor and Bonding Company jointly move for summary judgment, maintaining that Debtor’s claims against them should be barred by judicial estoppel. The District Court grants the motion and dismisses Debtor’s claims with prejudice. 

Debtor appeals to the U.S. Fifth Circuit, which affirms.  Here is its rationale.

Legal Standards Identified

“Judicial estoppel” is a common law doctrine by which a party who has assumed one position in pleadings may be estopped from assuming an inconsistent position thereafter.

A court may invoke this equitable doctrine at its discretion to protect the integrity of the judicial process, looking to whether:

• the party against whom judicial estoppel is sought has asserted a legal position which is plainly inconsistent with a prior position;
• a court accepted the prior position; and
• the party did not act inadvertently.

Because the doctrine is intended to protect the judicial system, rather than the litigants, detrimental reliance by the opponent is not a factor.

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 the undisclosed asset.

Legal Standards Applied

In this case, Debtor insists that it fully disclosed its claims against General Contractor and Bonding Company in the bankruptcy.  But Debtor’s “Unknown” and “$0.00” disclosures show otherwise and are plainly inconsistent with Debtor’s positions in the Federal District Court lawsuit—where it seeks $600,000 in damages and attorneys’ fees. 

Additionally, “judicial acceptance” means only that the first court has adopted the position urged by the party, either as a preliminary matter or as part of a final disposition.  Here, the Bankruptcy Court accepted Debtor’s position on the value of Debtor’s claims when it confirmed Debtor’s plan.

Further, Debtor did not act inadvertently.  Debtor obviously knew about the claims and had a motive to conceal—because the “Unknown” and “$0.00” disclosures would allow Debtor to discharge its debts while keeping the full value of its claims against General Contractor and Bonding Company.

Editorial Comment

Debtor’s Subchapter V plan was confirmed under § 1191(b) (i.e., as a non-consensual plan).  So, only the Debtor can file a post-confirmation amendment to the confirmed plan (see § 1193(c)). But the Fifth Circuit’s opinion makes no mention of such details.  Nor does the opinion give Debtor an opportunity to amend its plan to provide for pursuit of the claims for the benefit of creditors. 

Nor does the Fifth Circuit make any attempt to hear from debtor’s creditors, who have rights back in the Bankruptcy Court to protect their interests by such means as:

• seeking appointment of a committee and authority for the committee to pursue the claim on the bankruptcy estate’s behalf;
• seeking removal of debtor from possession so the Subchapter V trustee can pursue the claim for the bankruptcy estate, and/or
• seeking conversion of the case to Chapter 7 so the Chapter 7 trustee can pursue the claim for the bankruptcy estate.

Thus, the sole beneficiary of Debtor’s failure to disclose are the defendants (General Contractor and Bonding Company), who may be receiving a windfall, to the detriment of debtor’s creditors. 

Debtor’s creditors are the ones who are completely out of luck because of Debtor’s nondisclosure — through no fault of their own. 

Conclusion

Who should be the ultimate beneficiary of a debtor’s failure to disclose a pre-petition lawsuit claim in the debtor’s bankruptcy schedules?

I suggest:

• when the choice is exclusively between debtor and defendant(s), the defendant’s interests should generally prevail; but
• when the previously-undisclosed claims can still be pursued for the benefit of debtor’s creditors, then the interests of debtor’s creditors should prevail and be protected.

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