What Plaintiff Attorneys Need to Know

About Bankruptcy After Keathley

Plaintiff attorneys representing personal injury, employment, wildfire, insurance, and civil litigation clients should pay close attention to the Supreme Court’s decision in Keathley v. Buddy Ayers Construction, Inc.

For years, defendants have used bankruptcy nondisclosure as a powerful summary judgment tool. If a plaintiff failed to disclose a lawsuit or potential claim in bankruptcy schedules, the defense would often argue that the plaintiff was judicially estopped from pursuing the claim.

Keathley does not eliminate bankruptcy issues in civil litigation. But it substantially changes the analysis. Courts may no longer rely on a rigid rule that treats knowledge of the claim plus a hypothetical motive to conceal as virtually dispositive.

The Holding in Practical Terms

The Supreme Court held that courts must evaluate the totality of the circumstances when deciding whether an omission was inadvertent or mistaken for purposes of judicial estoppel.

That means plaintiff counsel now has room to present evidence that the omission was an honest mistake, that the debtor acted promptly once the issue was discovered, that bankruptcy counsel had been informed, that the debtor received no actual benefit, and that dismissal would harm creditors by destroying a potential estate asset.

The Good News for Plaintiff Attorneys

  • Defendants should not be able to win summary judgment based only on the debtor’s knowledge of the claim and a theoretical motive to conceal.
  • Affidavits and factual evidence matter.
  • Prompt amendment of schedules matters.
  • Bankruptcy court remedies matter.
  • The impact on creditors matters.
  • The trustee’s position may matter.

The Caution

Keathley is not a reason to ignore bankruptcy. It is a reason to address bankruptcy early.

The Supreme Court did not decide whether judicial estoppel applies in bankruptcy cases, whether bad faith is required, or whether Chapter 13 debtors have a continuing duty to disclose post-petition claims. Those unresolved issues mean that counsel should still treat bankruptcy disclosure as a serious litigation risk.

Key Questions Plaintiff Counsel Should Ask

  1. Has the client ever filed bankruptcy?
  2. Was it Chapter 7, Chapter 11, Chapter 12, or Chapter 13?
  3. When was the bankruptcy filed?
  4. Was the case open when the claim arose?
  5. Was the claim listed on Schedule A/B?
  6. Were exemptions claimed?
  7. Was the trustee notified?
  8. Has the bankruptcy case been discharged, dismissed, converted, or closed?
  9. Does the trustee have an interest in the claim?
  10. Will settlement require bankruptcy court approval?

Why Ownership and Standing Still Matter

Even if judicial estoppel is defeated, bankruptcy may affect who owns the claim and who has authority to settle it. In a Chapter 7 case, prepetition claims generally become property of the estate and may belong to the Chapter 7 trustee unless abandoned. In Chapter 13, the analysis may be different because the debtor remains in possession of property, but post-petition property may be included in the estate while the case remains open.

Plaintiff counsel should not assume that the debtor alone has authority to settle or distribute funds. The trustee, bankruptcy court, or both may need to be involved.

Settlement Planning

Before settlement, plaintiff counsel should determine:

  • Whether the bankruptcy case is still open;
  • Whether the claim was disclosed;
  • Whether amendments are needed;
  • Whether the trustee must approve the settlement;
  • Whether the bankruptcy court must approve the settlement;
  • Whether exemptions protect some or all of the recovery;
  • Whether proceeds must be paid through the trustee or directly to the debtor;
  • Whether attorney fees and costs require separate approval.

Why Early Bankruptcy Review Saves Cases

The worst time to investigate bankruptcy issues is after the defense files a summary judgment motion. By that point, discovery may be closed, settlement leverage may be reduced, and the client may be facing unnecessary risk.

Early bankruptcy review allows counsel to amend schedules, notify the trustee, seek abandonment or court approval, address exemptions, and develop a record of good faith before the defense weaponizes the omission.

Practice Tip

Every plaintiff intake form should ask whether the client has ever filed bankruptcy. If the answer is yes, counsel should request the petition, schedules, statement of financial affairs, docket, discharge order, closing order, and any trustee correspondence.

For ongoing Chapter 13 cases, counsel should coordinate with bankruptcy counsel before filing suit, settling, or distributing funds.

Keathley gives plaintiff attorneys better tools to defeat overbroad judicial estoppel motions. But the decision does not eliminate bankruptcy problems. It makes early coordination with bankruptcy counsel even more important.

Handled correctly, many claims can be preserved, disclosed, administered, exempted, settled, and distributed without jeopardizing the client’s bankruptcy or the civil case.

Need More Information?

At the Law Office of Daniela Romero, we believe in relationships that are based on trust. Before we work together, we would like to get to know you and we would like you to get to know us. We want you to be sure you are the right fit for us and that we are the perfect fit for you. This will allow you to be completely comfortable sharing intimate and difficult details of your case, so we can offer you representation to the fullest extent of the law. Call us today to set up a free consultation.