effect of bankruptcy on a personal injury...

EFFECT OF BANKRUPTCY ON A PERSONAL

INJURY CASE

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FAR REACHING EFFECT OF BANKRUPTCY

So, you think the Bankruptcy Code does notimpact your practice. Think again.Bankruptcy is one area of the law that canreach far and wide and can impact numerousother areas of law.

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ACTION IS PROPERTY OF BANKRUPTCY

A debtor’s pre-petition cause of action –whether for personal injury, breach ofcontract, or other claim – is property of thebankruptcy estate.

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CONSEQUENCES OF FAILING TO TIMELY NOTIFY BANKRUPTCY COURT

You may lose your fee or you may lose yourcase if you are not properly and timelyappointed by the Bankruptcy Court.

The Bankruptcy Court must approveprofessional services, fees and settlements ina timely fashion.

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PROTECT THE CASE AND YOUR FEES

The most important question you can askyour client is: “Are you in a bankruptcy, andhave you ever filed a bankruptcy before?”

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PROTECT THE CASE AND YOUR FEE

Clients do not always understand orremember that they have filed a bankruptcy.Most clients do not understand that a Chapter13 is a bankruptcy.

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PROTECT THE CASE AND YOUR FEES

Search the applicable federal bankruptcy court todetermine if a client has filed for bankruptcy:

1. In-person check with the clerk’s office

2. Telephone search through the VOICEInformation System through theAdministrative office of U.S. Courts;AND/OR

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PACER

Conduct an online search through the PublicAccess to Court Electronic Records (PACER)

http://pacer.psc/uscourts.gov

PACER is a tool you must definitely have andutilize.

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PACER

Obtain a PACER account and run a query on clients to see if:

1) they are currently in a chapter 7 or 13;

2) periodically check to see if a client has filed chapter 7 or 13after you are retained; and,

3) when getting ready to settle a case and/or beforedistribution check to see if there is an intervening chapter 7or 13 filed.

It does not cost that much to use the PACER system, and isworth the investment so as not to lose fees or the client’s case.

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PLAINTIFF’S BANKRUPTCY

If you determine the Plaintiff-Client is inBankruptcy, or files for Bankruptcy duringthe pendency of the litigation, you must takesteps to protect both the client’s case and yourfees.

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When a Plaintiff files for Bankruptcy, the case isautomatically stayed. Nothing can be done onthe civil action unless special arrangements aremade with the Bankruptcy Court.

The case becomes an asset of the BankruptEstate and the trustee takes control of the case.

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Case law among the jurisdictions are consistent andmakes and makes the following points for practitioners:

(1) causes of action or claims must be listed in thedebtor’s bankruptcy schedules, even if no lawsuit hasbeen filed yet, and

(2) absent abandonment, the trustee is the only one withstanding to pursue a debtor’s pre-petition cause ofaction.

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Since the case is an asset of the Bankrupt Estate, the Plaintiff-Debtor is not longer capable of pursuing the action. Upon thebankruptcy filing, the case is the property of the bankruptcyestate, and thus the estate becomes the owner of thatclaim. Consequently, only the Chapter 7 trustee can bring theaction; the debtor has no standing to pursue it alone. SomeJurisdictions hold that the court should either dismiss theaction without prejudice or allow the trustee to be substitutedinto the action as the real party in interest.

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Fortunately, Pennsylvania allows the Plaintiff tocontinue to pursue the case; but the Trustee mustbe notified. You should check with thebankruptcy court to see who the trustee is andcontact him/her directly to discuss futuredirection/resolution. The bankruptcy court mayappoint the present plaintiff counsel as specialcounsel to litigate the case for the trustee.

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Contact the Bankruptcy Trustee and request to beappointed as Special Counsel.

The Trustee will likely require you to lower yourfee from 40% to 33.3% in order to secure theappointment as Special Counsel. It will increaseyour chances of being appointed if you offer toreduce your fee without being prompted to do so.

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EMPLOYMENT OF SPECIAL COUNSEL

Employment of Professional Persons is found at 11 U.S.C.§ 327 of the Bankruptcy Code, and in particular 11 U.S.C.§ 327(e) states:

(e) The trustee, with the court’s approval, may employ, fora specified special purpose, other than to represent thetrustee in conducting the case, an attorney that hasrepresented the debtor, if in the best interest of the estate,and if such attorney does not represent or hold any interestadverse to the debtor or to the estate with respect to thematter on which such attorney is to be employed.

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Bankruptcy Rule 2014 provides further guidance:(a) Application for and Order of Employment

An order approving the employment of attorneys, . . . , or other professional pursuant to§327, . . . of the Code shall be made only on application of the trustee or committee. Theapplication shall be filed and … a copy of the application shall be transmitted by theapplicant to the United States trustee. The application shall state the specific facts showingthe necessity for the employments, the name of the person to be employed, the reasons forthe selection, the professional services to be rendered, any proposed arrangement forcompensation, and, to the best of the applicant’s knowledge, all of the person’s connectionswith the debtor, creditors, any other party in interest, their respective attorneys andaccountants, the United States trustee, or any person employed in the office of the UnitedStates trustee. The application shall be accompanied by a verified statement of the person tobe employed setting forth the person’s connections with the debtor, creditors, any otherparty interest, their respective attorneys and accountants, the United States trustee, or anyperson employed in the office of the United States trustee.

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The risk special counsel take in failing to getappointed in a timely manner:

Special counsel might not receive paymentfor work performed prior to the appointmentby the Bankruptcy Court.

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•Once the Application has been filed, noticed and served,and the time for filing objections to the Application has runwithout an objection having been filed, the bankruptcyattorney must then submit an order to the Court approvingthe retention of special counsel.

•Once the matter for which special counsel has beenemployed has been either settled or adjudicated, it isnecessary to file an Application to settle, distribute, payattorney fees and costs, which is commonly called a Rule9019 compromise or settlement. The relevant rule isBankruptcy Rule 9019(a).

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COURT APPROVAL REQUIRED

Any distribution of funds from such a settlement without theprior approval of the bankruptcy court may be set aside oravoided by the bankrupt court and returned to the bankruptcyestate.Bankruptcy Code section is 11 U.S.C. §549(a) Post-petition transactions:(a) Except as provided in subsection (b) or (c) of this section, the trustee mayavoid a transfer of property of the estate—

1) That occurs after the commencement of the case; and

2) (A) that is authorized only under section 303(f) or 542(c) of this title; or(B) that is not authorized under this title or by the court.

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EXEMPTING A PERSONAL INJURY CLAIM

There are exemptions that can protect all or part of theproceeds of a damages award or settlement. Under thepersonal injury exemption of bankruptcy code, aPlaintiff may be able to keep up to $23,675 from apersonal injury award or settlement, not including painand suffering or compensation for monetary losses. 11U.S.C. 522(d)(11)(D). This number may double to$47,350.00 for a couple filing together if both spousesare plaintiffs.

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DEFENDANT’S BANKRUPTCY

What happens if a Defendant is inBankruptcy?

The Automatic Stay applies to a Defendant in a personal injury action. This includes the commencement of an action.

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• To ensure that the debtor has the opportunity to obtain a“fresh start,” when a bankruptcy case is filed, Section 362(a)of the Bankruptcy Code imposes an automatic stay on mostactions against the debtor. 11 U.S.C. § 362.

• The automatic stay, among other things, holds in abeyancethe collection or recovery of assets from the debtor’s estateand halts the commencement and continuation of judicial orother actions or proceedings that were commenced or couldhave been commenced against the debtor before thebankruptcy case.

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An attorney may find out about a bankruptcyfiling through a number of sources, includingnotices filed and served either in the state court orbankruptcy court. It is also possible that anattorney will not receive direct notice from thedebtor but may only hear about the case fromnotices sent to the client or through publicationnotice or other publicity.

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Defendant-debtor is required to disclose anypotential creditors and put the creditors on noticeof filing of Bankruptcy. However, don’t rely onthe Defendant-debtor to disclose a potentialpersonal action against the Defendant-debtor.Instead, take the steps mentioned before todetermine if the Defendant filed for bankruptcy.

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VIOLATION OF AUTOMATIC STAY

Regardless of the source, once on notice, theattorney must comply with the automatic stay.

Actions taken in violation of the stay – evenwithout notice of the bankruptcy – aregenerally void ab initio and of no force andeffect in the Second and Third Circuits.

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VIOLATION OF AUTOMATIC STAY

If the debtor is an individual, violations of theautomatic stay are subject to sanctions underSection 362(k) of the Bankruptcy Code, whichprovides that the individual may recover actualdamages, including attorneys’ fees, and evenpunitive damages in appropriate circumstances.11 U.S.C. § 362(k)

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RELIEF FROM THE AUTOMATIC STAY

While Section 362(a) of the Bankruptcy Code imposes a stayon actions against the debtor, it is not always necessary to waitfor what could be years until the end of a bankruptcy casebefore proceeding with litigation to recover compensation forinjuries.

Section 362(d) provides that “on request of a party in interestand after notice and a hearing,” the stay may be modified for“cause.” 11 U.S.C. § 362(d).

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The Bankruptcy Code does not define“cause” and courts have established variousfactors for determining whether cause existsto lift the automatic stay.

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Bankruptcy Courts in the Third Circuit generallyconsider three primary factors in determining whetherto grant a claimant relief from the automatic stay. Thefactors are: (1) whether continuation of the civil actionwill greatly prejudice either the bankrupt estate or thedebtor; (2) whether the hardship to the claimant wouldconsiderably outweigh the hardship to the debtor if thestay remained in place; and (3) whether the claimant hasa probability of succeeding on the merits.

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If Defendant is in Bankruptcy either before suit isinitiated or during the pendency of litigation,Plaintiff’s counsel needs to file a Motion forRelief from the Automatic Stay.

• Usually only granted if there is liability insurance to coverthe claim. Claim is then limited to the amount of availableliability insurance.

• There are also limited exceptions to this, including drunkdriving. See 11 U.S.C. 523(a)(9).

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PROOF OF CLAIM

In addition to filing a Motion for Relief from the Automatic StayPlaintiff’s counsel should also file a Proof of Claim.

• Proof of Claim is a pre-printed form, usually provided with the noticeof Bankruptcy or available from the Bankruptcy Court.

• In addition to Proof of Claim, provide supporting documentation. If acomplaint regarding the personal injury claim is already on file,submit the summons and complaint as the supporting documentation.If the claim has not yet been brought, submit a supporting declarationlaying out the basis of the personal injury claim.

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PROOF OF CLAIM

•Claims can only receive distributions from adebtor’s estate if a “proof of claim” is timelyfiled in accordance with the Federal Rules ofBankruptcy Procedure.

•Proof of Claims must be filed before the Proof ofClaim Deadline, especially in a Chapter 7 case.

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ADVERSARIAL PROCEEDING

•Pre-bankruptcy claims based on personal injuryincidents are generally treated as unsecured claims thatcan be discharged.

• It is important to note that certain objections todischarge must be raised by a claimant bycommencing an adversary proceeding in thebankruptcy proceedings in a timely manner shortlyafter the commencement of the bankruptcy case.

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OTHER CONSIDERATIONS

it is important that proper steps be taken to ensure that a claimant’srights are protected, including ensuring that a proof of claim istimely filed and that the statute of limitations does not expire afterthe termination of the stay. Attorneys should also consider whetherthey should actively seek to modify the automatic stay to proceedagainst insurance while the bankruptcy is pending and shouldreview notices and other pleadings filed in the bankruptcy case toensure that orders are not entered that impair the ability to proceedagainst available insurance and should monitor the docket in thebankruptcy case.

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CONCLUSION

As you can see bankruptcy can affect your practice, and impact yourclient’s case as well as your ability to get paid not only on your fees, butthe expenses incurred in the prosecution of the action. Bankruptcy cancomplicate an otherwise simple appearing personal injury case; whetherthe bankruptcy is filed by the Plaintiff or the Defendant. Therefore, inorder to avoid forfeiting your fees and costs, losing your client’spersonal injury case, or being sanctioned for violating the automaticstay, it is strongly recommended that you contact an experiencedbankruptcy practitioner; contact the client’s bankruptcy attorney orcontact the Bankruptcy Trustee. Don’t be that attorney that has a casewritten about them for failing to follow the Bankruptcy Code and Rules.

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