A client of mine from almost 20 years ago, recently had his Chapter 7 Bankruptcy case reopened on motion of the United States Trustees Office. I’ve only seen this a half dozen times in the almost three decades that I have been practicing consumer bankruptcy law here in metro Detroit. Lately however, it seems to be on the uptick.
The reason these bankruptcy cases are being reopened is typically because in the years since the filing of the case, the debtors have some sort of lawsuit that is about to settle and the defendant’s attorneys or the fund which is about to pay the settlement amount after many months if not years of litigation, alerts the bankruptcy trustee who was assigned to the case years or sometimes even close to decades before, as in the case above.
These cases most frequently involve products liability litigation with the most common injuries involving asbestos or glyphosphate (Round-Up) exposure causing cancer or trans-vaginal mesh implants that have resulted in injuries or additional surgeries to be removed. Since there have usually been a number of years that have passed when my clients begin the litigation, they understandably do not feel that their lawsuit could somehow be part of their bankruptcy case, since that was closed many years ago.
The bankruptcy trustee and the United States Trustee’s office take a different view. Their argument is that the exposure to the asbestos or Round-Up or the date the mesh was installed are the key dates in time as to when the right to the lawsuit arose and as long as this date was before the bankruptcy petition was filed, it should have been listed on the debtor’s schedule of assets along with the other property (such as household items and clothing). Their position is that this asset now needs to be administered by the Trustee and paid out to those creditors that were listed in the original bankruptcy.
My clients are always surprised that the trustee would even make such an argument. “I wasn’t diagnosed with cancer until 15 years after I filed bankruptcy, and now the trustee wants to take my settlement money?” is usually my clients most typical reaction. So, what happens and who wins in this scenario? The trustee or the debtor?
Like many areas of consumer bankruptcy law, the answer is not quite black and white. It is in a gray area of law which is presently evolving as more and more cases like this are being heard by bankruptcy judges across the nation. In my research, I see the law evolving in the favor of the clients that I represent, the debtors in the case rather than the trustee. However, we must keep in mind that the decision is ultimately up to the bankruptcy judge in the case and here in metro Detroit, we presently have six bankruptcy judges sitting on the bench, with more to come in the near future.
When you file a bankruptcy petition, be it a Chapter 7 or a Chapter 13 bankruptcy case, the law requires that you list all of your assets. The commencement (filing) of a bankruptcy estate “creates an estate comprised of all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). As you can see, the definition of assets is very broad. It includes everything you own and rights that you presently have that may result in future assets. For example, if you were involved in an automobile accident and injured as a result of another driver’s negligence and have initiated a lawsuit against that other driver, you would be required to list that pending lawsuit as a potential asset in your bankruptcy case, even if no settlement has been reached. This is easy to understand and it makes sense, because the injury that let to the litigation occurred before the bankruptcy case was filed or as we bankruptcy attorneys refer to it, “pre-petition”. The date the bankruptcy case was filed, the “filing date” is a key date and a “snapshot” of a debtor’s assets are taken at that time. For example, if you purchased a Powerball ticket the day before you filed bankruptcy for $2, that is an asset of the bankruptcy estate, and if that ticket hits the jackpot even days after the case is filed, that jackpot is part of the bankruptcy estate. If the ticket is purchased the day after the case is filed and it hits the jackpot, the bankruptcy trustee cannot claim it as property of the estate as the right to the jackpot (i.e., the ticket purchase), occurred after the filing date or “post-petition”.
THE CASE LAW
Bankruptcy law consists of both statutory law which is written law as passed by the United States Congress (US Bankruptcy Code) and case law as interpreted by judges. Despite Congress’ attempt to write and pass clearly written statutes, there is often much disagreement as to what Congress’ intent was when the law was written and attorneys representing debtors and trustees representing creditors often disagree as to what the law means. Judges, usually bankruptcy judges, interpret these laws via their written opinions. Bankruptcy judges, even in the same district such as the Eastern District of Michigan which presently has six judges, do not have to follow another bankruptcy judge’s opinion. A written opinion by another bankruptcy judge can be persuasive, but it is not binding upon that judge. Contrast that with a written opinion from the local United States District Court, the United States Circuit Court of Appeals (the 6th Circuit in our district) or the United States Supreme Court, which becomes the law of the land and is binding precedent to lower Federal court judges, including bankruptcy judges and is considered mandatory authority.
SUFFICIENTLY ROOTED IN THE PRE-BANKRUPTCY PAST
With regard to products liability matters and whether or not they are considered property of the estate, there is what we lawyers call a split of authority on the subject. The United States Supreme Court, way back in 1966, in the case of Segal v. Rochelle gave some guidance on the subject and stated that to constitute property of the debtor and so to come into the bankruptcy estate at the time the petition is filed, the right to that property must be “sufficiently rooted in the pre-bankruptcy past”. Most of the subsequent litigation revolves around this phrase and lower courts have struggled with it over the years since this case was decided. The 6th Circuit Court of Appeals expanded on the above principle in 2013 in the case of Tyler v. DH Capital Management and opined that “all causes of action that hypothetically could have been brought pre-petition are property of the estate. This is the case “even if the debtor was unaware of the claim.” Ten months later the 6th Circuit in Underhill v. Huntington National Bank held that “a cause of action qualifies as bankruptcy estate property only if the claimant suffered a pre-petition injury.”
As I stated earlier in this post, the trend seems to be in the favor of the debtors rather than the trustees in these types of cases. In 2018 the United States Bankruptcy Court for the Eastern District of Tennessee provided an excellent summary of the existing law and found in favor of the debtor in the matter finding that the bankruptcy estate does not include the debtor’s product liability case because the cause of action arose post-petition. See the full text of the opinion In re Davis.
In 2019, a Louisiana bankruptcy court issued an opinion and found in favor of the debtor holding that “Even where some of the tortious conduct may have occurred pre-petition, where the damages have not manifested until post-petition, the cause of action is not property of the estate.” The court in this case likewise thoroughly analyzed case history and the opinion can be read here: In Re GRUNDMEYER
Most recently in 2021, the 6th Circuit Court Bankruptcy Appellate Panel weighed in on the subject of the timing of when property becomes part of the bankruptcy estate or when it remains property of the debtor. In the case of In re Blasingame the court basically followed the decision in Underhill and found that if there was no pre-petition injury, the cause of action (right to sue) arose post-petition and is therefore not property of the bankruptcy estate. This case was later affirmed by the 6th Circuit Court of Appeals (see the In re Blasingame) so it is now binding upon lower Federal Courts which includes bankruptcy courts.
CASES OFTEN SETTLE
Despite the trend in favor of the debtors, most of these cases between debtor and the bankruptcy trustee end up settling to avoid long, drawn out expensive litigation with an uncertain outcome. Bankruptcy judges almost always encourage the parties to settle prior to a lengthy trial. In most cases the settlement amount is nominal in comparison to the amount of debt listed on debtor’s bankruptcy schedules so the debtors are usually happy with the settlement. The trustee likewise is usually happy because there will be sufficient funds for the trustee to collect a trustee fee as well as be compensated for their time and expenses incurred in administering the case, which has now become an asset case.