Supreme Court Eases Path for Debtors Who Omit Bankruptcy Claims

The US Supreme Court shifted federal courts away from near-automatic dismissals of debtors’ legal claims based on bankruptcy nondisclosures and signaled skepticism of the court-created judicial estoppel doctrine.

In a win for bankrupt people and entities, Justice Ketanji Brown Jackson, writing for a unanimous court, vacated on Thursday a Fifth Circuit ruling in Keathley v. Buddy Ayers Construction Inc. The justices held that courts weighing whether a debtor’s failure to disclose a legal claim was inadvertent must look at the totality of the circumstances rather than apply “mechanical” tests.

The Fifth Circuit’s two-prong test for applying the doctrine, which is meant to prevent parties from deliberately changing positions across cases to gain an unfair advantage, asked only whether debtor Thomas Keathley knew of the claim’s facts and a had motive to conceal that knowledge. The justices said that analysis was “too rigid and too broad,” and that courts must examine the facts to determine if there was an honest mistake.

The decision means lower courts must now define “totality of the circumstances” and introduces questions about the future of judicial estoppel in and out of bankruptcy.

“The decision sets out a more lenient standard for excusing nondisclosure in bankruptcy cases which does not unduly penalize the debtor for honest mistakes or create an inequitable windfall to a defendant,” said Irve J. Goldman, a Pullman & Comley LLC attorney.

Disclosure Duties

Keathley filed for Chapter 13 in the US Bankruptcy Court for the Eastern District of Arkansas in 2019. In August 2021, he was in a car crash with a Buddy Ayers driver and sued the company that December. His bankruptcy repayment plan was approved in July 2022 and his case was discharged in 2024.

Keathley didn’t disclose the personal injury claim as an asset to the bankruptcy court until April 2023, after Buddy Ayers raised the judicial estoppel issue in a Mississippi court that was hearing the suit. A judge granted the company’s motion for summary judgment and dismissed the case.

The Fifth Circuit eventually affirmed, holding an omission is only inadvertent if the debtor lacked knowledge of the facts or had no motive to conceal. Keathley’s suit failed because he knew of the accident and had a hypothetical motive to avoid paying interest to creditors.

The decision shows the importance of selecting the right case to appeal, said Ed Boltz, a bankruptcy attorney and board member of the National Consumer Bankruptcy Rights Center, which filed an amicus brief seeking a reversal.

Keathley’s circumstances were unusually favorable: Creditors were being paid in full; the potential harm from nondisclosure was modest; he told his bankruptcy counsel about the claim; and the party seeking dismissal was allegedly the one at fault, Boltz said.

“Had this case involved a debtor hiding a valuable asset while paying little to creditors, the result might have been very different,” Boltz said.

The court also sidestepped a question about whether Chapter 13 debtors must disclose assets acquired after filing. The duty is clear in Chapter 7, but there’s no rule or statute imposed in Chapter 13 cases, said Henry Sommer, president of the NCBRC.

His group’s amicus brief argued the question is unresolved and asked the justices to leave it alone, which they did.

“The court made clear, citing our brief, that it was not deciding whether such a duty exists,” Sommer said.

Judicial Estoppel Blow

The opinion’s concurrences signaled that judicial estoppel, especially in bankruptcy cases, “has gotten out of control and needs, at a minimum, to be dialed back,” Sommer said.

The court-created doctrine often arises in bankruptcy when a civil defendant argues a claim, often a tort, can’t proceed because the debtor didn’t disclose it, Sommer said.

It’s now unclear if the justices will uphold the doctrine at all in bankruptcy, said bankruptcy attorney Larry Ball of Hall Estill.

Justice Clarence Thomas, in a concurrence joined by Justice Neil Gorsuch, questioned judicial estoppel’s legitimacy in any context, saying it lacks a basis in statute, federal civil procedure rules, courts’ inherent powers, or a “founding-era antecedent.”

Justice Sonia Sotomayor in her own concurrence said the doctrine most likely should never apply in pending bankruptcy cases, because it could produce windfalls for those not involved and “vaporizes assets” that could be used to pay creditors, she said.

“This case is also a larger shot across the bow that judicial estoppel in general is not a favored legal theory by any of the 9 justices,” Boltz said in an email.

New Frontier

By rejecting the Fifth Circuit’s rigid test and not replacing it, lower courts must now work out what the “totality of the circumstances” means. The high court has generally declined to create new tests when it scraps an overbroad one, Boltz said.

“SCOTUS is leaving lower courts to flesh out other factors under its ‘totality of the circumstances’ test,” Boltz said.

Those factors could include bad faith, a statutory duty to disclose assets after a bankruptcy filing, dividends owed to creditors, and existing federal exemptions, Boltz said.

Thomas also raised potential harm to the estate and creditors as a factor to consider.

Some courts have already carved out inadvertence or mistake exceptions to judicial estoppel, Ball said. But the decision leaves the landscape unsettled.

“We are left with no defined standard to apply and a doctrine that is clearly not on solid footing at all,” Ball said. “It will be interesting to see what the lower courts do the next time they are presented with a judicial estoppel defense.”

The case is Keathley v. Buddy Ayers Construction, Inc., U.S., No. 25-6, 6/11/26.