Justices revive PI claim omitted from plaintiff’s bankruptcy

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A federal appeals court improperly narrowed the scope of its inquiry on the question of “inadvertent mistake” in deciding that the doctrine of judicial estoppel applied to bar a personal injury claim the plaintiff omitted from his Chapter 13 bankruptcy case, a unanimous U.S. Supreme Court has ruled.

The petitioner in the case, Thomas Keathley, suffered injuries in an August 2021 motor vehicle accident involving an employee of Buddy Ayers Construction, Inc. At the time, Keathley and his wife had an open Chapter 13 bankruptcy case that had been filed in December 2019. The judge in the bankruptcy case in April 2020 confirmed an amended repayment for interest-free repayment of 100 percent of creditor claims over five years.

Following his accident, Keathley retained a personal injury attorney and advised his bankruptcy lawyer that he intended to sue Buddy Ayers Construction. However, neither Keathley nor his bankruptcy counsel disclosed the potential personal-injury claim to the Bankruptcy Court.

In December 2021 Keathley sued Buddy Ayers Construction for negligence in U.S. District Court. Asserting judicial estoppel, the construction company moved for summary judgment on the ground Keathley failed to disclose his personal injury claims his bankruptcy case.
In response, Keathley immediately filed an amended schedule notifying the Bankruptcy Court of his personal injury lawsuit. In addition, Keathley submitted affidavits in response to the motion for summary judgment, claiming the omission of his personal injury claim from his bankruptcy case had been inadvertent.

The judge in the personal injury case entered summary judgment for Buddy Ayers Construction. In reaching his decision, the judge relied on precedent from the 5th U.S. Circuit Court of Appeals that the omission of a claim on bankruptcy schedules will be considered the result of inadvertence or mistake only if: (1) the debtor did not know the facts underlying the claim; or (2) there was no potential motive to conceal the claim.

A panel of the 5th Circuit affirmed the decision of the district court. The Supreme Court granted certiorari to resolve a conflict between the 5th and 10th Circuits, and the 4th, 6th, 7th, 9th and 11th Circuits, which have adopted more fact-specific approaches without rigid limitations.
In reversing the 5th Circuit’s decision, Supreme Court held that: (1) courts should look to the totality of the circumstances surrounding an omission in determining the application of judicial estoppel; and (2) the 5th Circuit erred by “artificially” narrowing its inquiry to whether the debtor had knowledge of the underlying facts or a potential motive to conceal the claim.

Click here to read the full text of the Supreme Court’s June 11 decision in Keathley v. Buddy Ayers Construction.

To the point

“[T]he Fifth Circuit’s understanding of ‘inadvertence or mistake’ is simultaneously too rigid and too broad.
“The rigidity comes from the Fifth Circuit’s failure to fully recognize that ‘judicial estoppel is an equitable doctrine.’ As such, its ‘examination must be made in the light of the recognized principles of equity.’ Equity, we have said, ‘eschews mechanical rules; it depends on flexibility.’ Thus, when a court conducts an equitable inquiry, it must act ‘on a case-by-case basis,’ considering all relevant facts and circumstances. In other words, equitable doctrines require room to consider all of the particulars.

“By contrast, the Fifth Circuit’s rule allows courts to consider only two circumstances when assessing inadvertence or mistake: whether the debtor knew of the underlying facts of the claim, and whether there was a potential motive to conceal the claim. And under this rule, a court may not look at any other evidence tending to show that the omission was inadvertent. That rigidity is out of step with equity. To determine whether the omission was inadvertent or a mistake, the Fifth Circuit instead should have examined the totality of the circumstances surrounding Keathley’s failure to report his personal-injury claims earlier.

“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.”
— Justice Ketanji Brown Jackson, opinion of the court

“The Court’s opinion correctly concludes that the Fifth Circuit’s approach to judicial estoppel is not defensible on its own terms. I join it in full. I write separately to express doubt about the foundation of the doctrine of judicial estoppel. Judicial estoppel generally prevents a party from asserting a position in one lawsuit that contradicts its position in a previous proceeding. 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 Clarence Thomas, joined by Justice Neil M. Gorsuch, concurring

“Today, the Court correctly holds that, assuming judicial estoppel applies in the bankruptcy context, the Fifth Circuit’s exceedingly narrow test for determining whether an inconsistent position was based on inadvertence or mistake is erroneous. 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.”
— Justice Sonia Sotomayor, concurring