In Keathley v. Buddy Ayers Construction, Inc., the U.S. Supreme Court unanimously ruled that courts must take a totality-of-the-circumstances approach when determining whether a debtor’s failure to disclose a legal claim during bankruptcy was inadvertent.
The Court rejected the Fifth Circuit’s rigid two-part test, which focused only on whether the debtor knew about the claim and had a motive to conceal it. Instead, courts must now consider all relevant facts to determine whether the omission was an honest mistake.
The decision is significant for bankruptcy practitioners because it makes it more difficult to dismiss a debtor’s claims based solely on a disclosure oversight. The ruling also raises broader questions about the future of the judicial estoppel doctrine, with several Justices expressing skepticism about its application in bankruptcy cases.
While the Supreme Court did not establish a new bright-line test, the decision shifts the focus toward a more fact-specific analysis and leaves lower courts to further define what factors should be considered under the “totality of the circumstances” standard.
McPhail Sanchez will continue monitoring developments as lower courts interpret and apply this important ruling.
Authored by Cindy Cohly, Esq.
