The U.S. Supreme Court agreed on Monday to hear an appeal challenging a "rigid" and "unforgivable" rule used by some bankruptcy courts that permanently blocks a debtor from pursuing litigation if they knew - but didn't disclose - the allegations as part of their bankruptcy case.

The case pits Thomas Keathley Sr., who in 2019 filed for Chapter 13 with his wife in Arkansas, against Buddy Ayers Construction Inc., which won its argument in the Fifth Circuit that Keathley should have known from his previous three bankruptcies about his duty to disclose his personal injury lawsuit, and that he had many chances to do so.

At issue is how bankruptcy courts in various circuits use judicial estoppel, which allows judges to block a debtor's claims if they weren't disclosed inside of the bankruptcy case. The doctrine is meant to ensure fairness by punishing parties for taking inconsistent positions in litigation, but Keathley argues that the circuits are split over how strictly they deploy it.

Keathley, who worked for a trucking company, hit bankruptcy after finding it hard to make ends meet, according to his petition for writ of certiorari filed in June. The couple's Chapter 13 petition lists $184,000 of liabilities and more than $294,000 of assets, principally his house, three Cadillacs and a Honda motorcycle.

In April 2020 the court confirmed his modified bankruptcy plan, which called for repaying his creditors 100% in interest free payments over five years.

More than a year later, in August 2021, Keathley was injured in a crash when his tractor trailer was rear ended at a red light by another tractor trailer driven by an employee of Buddy Ayers Construction, or BAC, a Mississippi construction company, according to the complaint. Keathley had to have surgery and now has reduced "earning capacity," his cert petition noted.

A few weeks after the accident, Keathley mentioned it to his bankruptcy counsel, who did not inform the bankruptcy court. That December, Keathley filed a personal injury suit against BAC in Mississippi federal court.

In 2022, his bankruptcy lawyer filed an amended plan, which did not mention the lawsuit. In March 2023, BAC moved for summary judgment of the lawsuit based on judicial estoppel. Less than a week later, Keathley filed an amended bankruptcy schedule that included the personal injury claim, he said.

"No creditor moved to modify Mr. Keathley's existing repayment plan in light of his personal injury claims, and the bankruptcy court did not sanction Mr. Keathley for any delay," his brief said.

By telling his bankruptcy attorney, Keathley thought he had done all he needed to, and he received no benefit from the litigation not being disclosed earlier in the bankruptcy case, he said. Even so, the district court granted BAC's motion and threw out the litigation in August 2023.

Keathley asked the court to reconsider, with an affidavit of support from his Chapter 13 trustee saying there was nothing "unusual" or "misleading" about the lack of earlier disclosure.

The district court refused to rethink its decision, saying it had no power to change the approach used in the Fifth Circuit. Later, a precedent-bound Fifth Circuit panel affirmed the lower court, according to the petition.

Circuit Split

The Fifth and Tenth circuits each use the same standard for judicial estoppel whenever a debtor knew the facts underlying a claim and there was a "plausible motive to conceal it, which is virtually always present given the financial implications of bankruptcy," Keathley said in his brief.

This means that debtors in those circuits are often barred from asserting claims even when failing to disclose it was an "honest mistake," and the "outlier" rule in the Fifth and Tenth circuits often hands a windfall to the defendant in the separate action when that case is dismissed, he said.

However, five circuits — the Eleventh, Ninth, Seventh, Sixth and Fourth — take a more forgiving approach, employing judicial estoppel only if a debtor intended to mislead the bankruptcy court. These circuits also "consider a wide range of evidence bearing on intent before holding that the claim is barred," Keathley said.

Finally, judicial estoppel is not supposed to be subject to "inflexible prerequisites or an exhaustive formula," he argued.

"Going through a personal bankruptcy is hard enough. This case presents an opportunity to resolve an entrenched circuit conflict over an unforgiving rule applied by a small minority of circuits… that unnecessarily penalizes debtors for honest mistakes," he said in his brief.

The Other Side of the Story

BAC paints a different picture of the nature of the case. Noting that Keathley previously filed for bankruptcy in 2001, 2003 and 2015, BAC said he was well aware of disclosure requirements. In fact, he updated his Chapter 13 plan three times without disclosing the personal injury case, BAC said in its respondent's brief filed with the Supreme Court in September.

Keathley's claim against BAC is "clearly an asset of the bankruptcy estate," BAC said, and though Keathley acknowledged his obligation to disclose it, he waited to do so until only after BAC filed its summary judgment motion on judicial estoppel grounds.

What's more, Keathley also did not tell the bankruptcy court until April 2023 that he had filed and, four months earlier, settled a workers' compensation claim for his injuries in the crash, BAC said.

"With evidence that the omission was knowing and deliberate, together with the timing and motivation for the eventual disclosure, and the obvious motives for concealment, the district court did not abuse its discretion," BAC said. "There was no 'honest mistake' here."

BAC also argued that the "alleged" circuit split is "overplayed" because "the perceived differences in outcome are fact specific" and that Keathley's claim was properly barred because of "direct and circumstantial evidence of intent."

Lawyers for Keathley and BAC did not immediately reply to requests for comment.

Petitioner Keathley is represented by Gregory G. Garre, Christina R. Gay and Kristin C. Holladay of Latham & Watkins LLP and Eric J. Lewellyn of Alders & Lewellyn PLLC.

The respondent is represented by David D. O'Donnell of Clayton O'Donnell PLLC and Dana G. Dearman of Deaton & Berry PLLC.

The case is Thomas Keathley v. Buddy Ayers Construction, Inc., case number 25-6, in the U.S. Supreme Court.