Justices to consider rules pardoning omissions by bankrupt debtors

Next week’s argument in Keathley v. Buddy Ayers Construction involves a technical question about bankruptcy procedure – the standards for overlooking the failure of a debtor in bankruptcy to mention one of its assets to the court.

To give context, the debtor is Thomas Keathley, who with his spouse filed for bankruptcy in Arkansas in December 2019. The bankruptcy court approved a plan under Chapter 13 of the Bankruptcy Code, obligating the Keathleys to repay their creditors out of future income; the plan promised payment of 100% of their debts, albeit without interest. Later, while the Keathleys were making payments on the plan, a truck driven by an employee of Buddy Ayers Construction struck Keathley’s car, injuring him seriously. Although a lay person might regard the accident as an unfortunate incident, bankruptcy law regards the accident as a benefit to Keathley’s creditors, because it gives him a claim against Buddy Ayers that could produce money for those creditors.

As it happens, though Keathley told his bankruptcy lawyer about the accident, his lawyer did not disclose the accident to the bankruptcy court. Later, when Keathley sued Buddy Ayers in federal court in Mississippi to recover for the accident, the lower courts dismissed Keathley’s complaint under a doctrine of “judicial estoppel.” Because Keathley had a motive to conceal the accident from the bankruptcy court – the potential ability to keep a tort recovery to himself – the lower courts held that he was “estopped” (that is, barred) from pursuing the tort claim against Buddy Ayers, allowing Buddy Ayers to walk away scot-free.

The justices are hearing this case because the lower courts have two distinct approaches to the doctrine of judicial estoppel. One group of courts – including the U.S. Court of Appeals for the 5th Circuit, which issued the decision under review here – emphasizes the “potential benefit” of nondisclosure and applies the doctrine to bar pursuit of the claim whenever there is a “hypothetical motive” to conceal. Another group of courts applies a “totality of the circumstances” test that turns for the most part on whether the debtor intentionally concealed assets from the bankruptcy court.

In a way, this is a case presenting what my mother would have called a “sob story.” Keathley has a sob story and his lawyer wants to sell it to the justices. That take on the case might make light of Keathley’s position, but his story is presented ably and well might appeal to some of the justices. Most obviously, there is nothing deceitful to a lay person about being in a car accident that is not your fault and not knowing that you need to run immediately to the bankruptcy court to disclose a newfound asset.

Also, for Keathley’s part, he did tell his lawyer, and it is hard to blame Keathley personally for his lawyer’s failure to understand that a bankruptcy court would view Keathley’s car accident as a windfall for his creditors. More generally, as Keathley points out, there is something perverse about the application of judicial estoppel here, as it leaves the malefactor (Buddy Ayers) exempt from responsibility for the car accident and deprives Keathley’s creditors of the chance to get paid out of funds from Buddy Ayers.

The other side of it, of course, is the attractiveness of clear rules. Buddy Ayers argues that judicial estoppel always has been judged by an objective standard, and that it would leave things in an unacceptably unpredictable state if courts must consider the “17-plus factors” that Buddy Ayers sees in Keathley’s proposed mode of analysis. Buddy Ayers repeatedly underscores the opportunity for abuse of gullible courts, characterizing Keathley’s position as allowing the debtor to avoid responsibility “by claiming a pure heart and making belated disclosure once caught.”

It is pretty clear that there is no case sufficiently on point to tie the justices’ hands in any serious way, so the result here well may turn on how the story lands with the justices. My best guess is that some of them will think there is something a bit “off” about a purely equitable doctrine like judicial estoppel being applied as rigidly as Buddy Ayers suggests. Justice Neil Gorsuch often is the first to sense the plight of “everyman,” and I can see this as the kind of case that might draw him in. I’m looking forward to seeing what they think next week.