What happens when a plaintiff fails to disclose its lawsuit as an asset in its bankruptcy case?
The Supreme Court, on June 11, 2026, made it harder for defendants to win automatic dismissal of a plaintiff's lawsuit merely because the plaintiff failed to disclose the lawsuit or underlying claims as an asset in the plaintiff's bankruptcy case. In Keathley v. Buddy Ayers Construction, Inc., the Court held that when courts are deciding whether such a bankruptcy asset disclosure omission was an "honest mistake" rather than a deliberate concealment, they must weigh the totality of the circumstances, not just two narrow factors. For creditors, litigation defendants, insurers, and businesses that monitor bankruptcy filings, this decision changes how undisclosed claims should be investigated and challenged.
Why This Decision Matters
For years, defendants sued by a plaintiff who was simultaneously in bankruptcy have had a powerful defensive tool when the plaintiff failed to timely disclose the lawsuit or underlying claims as an asset in its bankruptcy case: defendants could often use the doctrine of judicial estoppel to bar the plaintiff from pursuing the lawsuit-based claims in any court. Judicial estoppel is an equitable doctrine that prevents a party from taking a position in one judicial proceeding and an opposite position in a different judicial proceeding. In bankruptcy, the theory is that failing to disclose the existence of a claim is an implicit representation that such a claim does not exist, so a plaintiff suing on that same (assumed to be non-existent) claim in a different court is taking an inconsistent position and thus barred by judicial estoppel.
The practical effect of this application of judicial estoppel was often a swift victory for the defendant and a loss for the debtor's creditors, because the creditors lost a potential source of recovery for the debtor's bankruptcy estate. Keathley narrows that tool considerably and invites a broader reexamination of when judicial estoppel should apply in bankruptcy-related litigation.
What Happened
Thomas Keathley filed a Chapter 13 bankruptcy petition in December 2019. As a debtor in bankruptcy, Keathley was required to disclose his assets, including his claims against third parties and any "rights to sue." While his bankruptcy case was still open, Keathley was injured in an August 2021 car accident involving a driver employed by Buddy Ayers Construction. Keathley hired a personal-injury attorney to pursue the car crash claims and also told his bankruptcy counsel he intended to sue, but neither he nor his bankruptcy counsel disclosed the car crash claim as a potential asset to the bankruptcy court.
Keathley filed his personal injury lawsuit in December 2021, still having not disclosed this potential asset to the bankruptcy court. When Buddy Ayers Construction moved for summary judgment in the personal injury litigation on judicial-estoppel grounds, Keathley immediately amended his bankruptcy schedules to disclose the claim and submitted sworn statements contending the omission to have been inadvertent.
The Lower Courts' Approach
The United States District Court for the Northern District of Mississippi and the Fifth Circuit ruled against Keathley by applying a rigid, two-factor judicial estoppel test. Under that test, an omission counts as inadvertent or a mistake only if the plaintiff/debtor either (1) did not know the facts underlying the claim, or (2) had no potential motive to conceal it.
Because Keathley clearly knew about his accident and could have benefited from nondisclosure by not including the car crash claims as an asset for his bankruptcy creditors, the courts found the omission was not inadvertent and dismissed his suit.
The Supreme Court's Holding and Reasoning
The Supreme Court vacated the Fifth Circuit's decision and rejected its two-factor test. The Court held that whether an omission was inadvertent or mistaken must be judged by the totality of the circumstances surrounding the omission.
The Court reasoned that judicial estoppel is an equitable doctrine, and equity "eschews mechanical rules" and depends on flexibility and case-by-case analysis. The Fifth Circuit's rule was, in the Court's words, both "too rigid and too broad." It was too rigid because it let courts look at only two facts and barred consideration of any other evidence that might suggest an honest mistake. It was too broad because debtors almost always know the facts of their own claims and almost always have some hypothetical incentive not to reveal an asset to creditors. In other words, the test would treat nearly every bankruptcy asset disclosure omission as deliberate.
Keathley does not eliminate judicial estoppel in bankruptcy-related litigation. It does, however, make the defense more fact-dependent.
What This Means for You
For litigation defendants. The "gotcha" defense resulting in lawsuit dismissal merely because a plaintiff failed to disclose the lawsuit-based claims in its bankruptcy case is now much weaker. Specifically, a defendant can no longer obtain dismissal on the sole basis that the plaintiff knew about the lawsuit-based claim and had a generic incentive to conceal it. Courts must now pursue a more complete showing of background facts and circumstances regarding the failure to disclose. In response, we anticipate plaintiffs coming forward with affidavits, evidence of prompt correction, assertions of lack of actual benefit, and bankruptcy trustee testimony about the timing and reasonableness of amendments to bankruptcy asset disclosures. Defendants should prepare for a fact-intensive fight rather than a quick dismissal.
For creditors. The Keathley decision results in increased protections for potential bankruptcy creditor recoveries by making it more difficult to obtain dismissal of a debtor's undisclosed lawsuit on judicial estoppel grounds. Creditors who learn of a debtor's undisclosed lawsuit claim should consider immediately raising it with the bankruptcy court (and, preferably, prior to any purported corrective disclosure action by the plaintiff). Creditors should carefully review all available materials (including discovery obtained in connection with the litigation) for any evidence that might suggest the lawsuit concealment was done knowingly or intentionally and be prepared to present such evidence to the reviewing court.
For debtors and their counsel. While the Bankruptcy Code duty to disclose all claims remains firmly in place and is sworn under penalty of perjury, an inadvertent or mistaken omission that is promptly corrected is now more likely to be evaluated on its full merits. Plaintiffs' counsel (particularly in personal injury claims, where bankruptcy disclosure omissions are most common) may wish to implement ongoing and continuing procedures designed to identify their clients who are in bankruptcy, and to facilitate coordination of the litigation claims with their clients' bankruptcy counsel.
How We Can Help
Our bankruptcy and litigation teams are ready to help you evaluate how Keathley affects your pending matters. Whether you are defending a claim brought by a current or former bankruptcy debtor, protecting creditor recoveries in an open bankruptcy case, or assessing exposure across a portfolio of claims, this decision may change how undisclosed claims should be investigated and challenged. If you have questions about how this decision applies to a specific dispute, please contact Alan Smith or James Tulp.