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Craig D. Robins, Esq. New York Bankruptcy Attorney, Longisland bankruptcy attorney

“ Craig D. Robins, Esq., has been a practicing Long Island bankruptcy attorney for over twenty-four years ”

Craig D. Robins, Esq.

Personal Injury and Bankruptcy

What Happens When a Debtor Forgets to Schedule a Personal Injury Suit

Posted on Tuesday (August 21, 2012) at 3:43 pm to Bankruptcy Practice
Chapter 7 Bankruptcy
Personal Injury and Bankruptcy
Recent Bankruptcy Court Decisions
Suffolk Lawyer

bankruptcy and personal injury -- make sure causes of action and law suits are scheduled in the bankruptcy petitionWritten by Craig D. Robins, sale Esq.

 
A Consumer Bankruptcy Debtor Can Lose Standing to Litigate if Lawsuits Are Left Out of the Petition
 
There is one question that Chapter 7 bankruptcy trustees like to ask debtors twice at the meeting of creditors: “Are you currently suing anyone or do you have the right to sue anyone?”
 
The reason trustees like to ask this question twice is because many debtors forget to tell their attorneys that they have a cause of action, decease which can be a valuable asset worth administering.
 
Causes of action are considered assets that must be disclosed in the bankruptcy petition.  Because of their unusual nature (they’re intangible, mind unliquidated and contingent), many consumer debtors just don’t think about them like they would a more typical asset like a car or bank account.
 
Consequently, many debtors don’t tell their bankruptcy attorneys about them even when asked.
 
A debtor who neglects to list such an asset can end up in a heap of trouble – sometimes losing the possibility of exempting the asset or seeking recovery, or in extreme cases, losing the ability to obtain a bankruptcy discharge.
 
Judge Alan S. Trust, sitting in the Central Islip Bankruptcy Court, issued a decision a few years ago in which he denied a debtor’s application to re-open a case to pursue a P.I. cause of action.  In this month’s column I will discuss non-disclosed causes of action which can be a P.I. case or any other right to sue.
 
Bankruptcy Code Provides for Duty of Disclosure
 
The debtor’s obligation to disclose a cause of action is based on Code section 521(a) which requires a debtor to schedule “contingent and unliquidated claims of every nature” and provide an estimated value of each one.
 
The trustee has the ability to step into the debtor’s shoes and pursue any litigation claims the debtor has.  It is therefore essential that the debtor disclose all contingent and unliquidated claims so that the trustee can make a determination of whether to pursue those claims for the benefit of the debtor’s estate.  In re: Costello, 255 B.R. 110 (Bankr. E.D.N.Y. 2000).
 
When a debtor inadvertently omits a cause of action or pending suit from the bankruptcy schedules in the petition, and the trustee catches this at the meeting of creditors, the resolution is usually simple.  The trustee directs debtor’s counsel to amend the schedules and the trustee investigates the viability of pursuing the cause of action.
 
However, resolving a non-disclosed cause of action becomes much trickier once the bankruptcy case is closed, and that has a lot to do with the concept of standing.
 
There are Issues with Re-Opening a Bankruptcy Case to Amend Schedules to Include an Omitted Law Suit or Cause of Action
 
Here’s the typical scenario:  Debtor had a cause of action stemming from injuries suffered in an accident.  However, the debtor neglected to tell his or her bankruptcy attorney about it.  Then, for whatever reason, when questioned by the trustee about the right to sue anyone, the debtor testified that he or she did not have the right to sue anyone.  The case then was routinely closed and the debtor received a discharge.
 
Then, a year or two passes during which time the debtor’s personal injury attorney brings suit and is about to settle the case.  However, defense counsel advises P.I. counsel that they did a bankruptcy search and discovered that the plaintiff filed for bankruptcy relief but failed to schedule the cause of action for the accident.  They tell the surprised P.I. attorney, “Sorry, there’s no longer any settlement money on the table because your client lacks standing as a plaintiff in the P.I. case!” 
 
That’s because even after a bankruptcy case is closed, non-disclosed causes of action and litigation remain the property of the bankruptcy estate, unless abandoned by the trustee.  Case law provides that if the trustee never knew about the potential estate property, the trustee could not have abandoned it. 
 
Thus, even though the bankruptcy case was closed, the cause of action is still the sole property of the trustee, and the debtor lacks standing to commence or continue a the suit.  Upon learning of this, P.I. counsel will invariably make a frantic call to debtor’s former bankruptcy counsel.
 
So what can bankruptcy counsel do in this situation after getting the frantic call?  Nationally, there are two schools of thought – estopping the trustee and estopping the debtor.  In the Fifth, Seventh, Tenth, and Eleventh Circuits, the Courts have found that the trustee should not be estopped from commencing or continuing a suit, as the trustee is the real party in interest.
 
These Courts, however, punish the debtor, who they say should be estopped so that any excess proceeds, instead of going to the debtor, instead go back to the defendant.
 
The reasoning here is to protect the integrity of the bankruptcy process while preserving assets of the estate for distribution to creditors.  Doing so deters dishonest debtors who fail to disclose assets, while at the same time, protecting the rights of creditors.
 
However, there does not seem to be any appellate authority in the Second Circuit.  My personal experience with these situations is that the court will permit trustees to reopen a case to administer a non-disclosed asset in most situations, provided that there is no egregious evidence of bad faith on the part of the debtor.
 
Keep in mind that if the asset was not disclosed, then the debtor did not avail him or herself of any applicable exemption, such as the personal injury exemption, now a minimum of $7,500.
 
If debtor’s counsel were to try to re-open the case and amend the schedule of exemptions, the trustee would likely object.  The best case scenario may be to negotiate a disposition with the trustee in which the debtor gets half the exemption.
 
In one case before Judge Trust, the debtor sought to re-open the case to amend schedules to include a non-disclosed P.I suit against the Long Island Rail Road.
 
Even though the debtor had already retained separate P.I. counsel prior to the bankruptcy, the debtor did not tell his bankruptcy attorney about it and did not truthfully answer the trustee’s questions about pending lawsuits.
 
The District Court, where the P.I. case was pending, permitted the suit to be dismissed upon learning of the prior bankruptcy filing, stating that the debtor lacked standing.  When the debtor sought to re-open the bankruptcy case to get standing, Judge Trust refused to permit the debtor to do so, citing the debtor’s lack of good faith.
 
In the March 2010 opinion, Judge Trust, using colorful football terminology, stated that debtor’s motion to re-open appeared to be “an effort to make an end run around the District Court’s dismissal order.”  In re: Carlos Meneses (05-86811-ast,  Bankr.E.D.N.Y.).
 
The practical tip here is to question your client and question again about possible causes of action or potential claims.  Also, if you later discover an omitted asset, amend your schedules immediately.
 
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Congress Considers Amending Bankruptcy Code to Make it Easier for Consumers to Discharge Medical Debt

Posted on Tuesday (July 28, 2009) at 9:03 pm to Issues Involving New Bankruptcy Laws
Personal Injury and Bankruptcy

medical-debt-illustrationWritten by Craig D. Robins, cialis Esq.
 
This afternoon, the House Judiciary Subcommittee on Commercial and Administrative Law held a hearing examining the role that medical debt plays in consumer bankruptcy.
 
The hearing, which was titled “Medical Debt – Is Our Healthcare System Bankrupting Americans?,” focused on a recent study I wrote about last week —  Are Americans Being Driven Into Bankruptcy by the Health Crisis?
 
The chairman, Congressman John Conyers, Jr. (D-MI), in his opening statement, said that he wanted to see, at the very least, revisions to the 2005 Bankruptcy Amendment Act, particularly with respect to debtors dealing with significant medical issues.
 
He suggested eliminating the credit counseling requirement for such debtors, calling it a waste of time and money.  He also wanted medical debt debtors to be relieved from the onerous means test requirements.
 
President Obama previously suggested the need to re-write some of the bankruptcy law (see:  Bankruptcy Change Under President-Elect Obama ).  Hopefully we will see proposed legislation in the near future.
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Many Bankruptcies Are Caused by Medical Bills According to Harvard Study

Posted on Thursday (June 4, 2009) at 10:00 pm to Bankruptcy and Society
Benefits of Bankruptcy
Personal Injury and Bankruptcy

High medical debt hits Long Island middle class families hard, and bankruptcy has provided reliefWritten by Craig D. Robins, Esq.
 
High medical debt hits Long Island middle class families hard, and bankruptcy has provided relief
 
In a study released today, Harvard professor Elizabeth Warren, whose work I’ve cited extensively, concluded that medical problems contributed to almost two-thirds of all bankruptcy cases filed in 2007.
 
She also found that between 2001 and 2007, the proportion of all bankruptcy cases attributable to medical problems rose by 50 percent. President Obama has widely cited Ms. Warren’s previous findings.
 
The study indicated that many solid middle class families were hard-hit by the high cost of serious medical illness, resulting in financial disaster.
 
One of the study’s co-authors, which included several prominent doctors, commented that:
 
“Our findings are frightening. Unless you’re Warren Buffett, your family is just one serious illness away from bankruptcy. For middle-class Americans, health insurance offers little protection. Most of us have policies with so many loopholes, co-payments and deductibles that illness can put you in the poorhouse. And even the best job-based health insurance often vanishes when prolonged illness causes job loss – precisely when families need it most. Private health insurance is a defective product, akin to an umbrella that melts in the rain.”
 
These are very sobering words which explain why so many middle class families are seeking bankruptcy relief in New York and on Long Island.  When one considers the high expense of health care on Long Island, it is understandable that Long Island families are confronting a panoply of social forces that make it terribly difficult to maintain financial stability.
 
Most of my clients are typical middle class Long Island families.  I wrote about this phenomenon several years ago in an article, Consumer Bankruptcy: Bankruptcy has Become a Middle Class Phenomenon.
 
Also, for more info on how bankruptcy can eliminate medical debt, see my earlier post:  How to Eliminate Medical Bills .
 
A copy of the Harvard study is available at http://pnhp.org/new_bankruptcy_study/Bankruptcy-2009.pdf.
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What Happens If Your Personal Injury Client Files for Bankruptcy

Posted on Thursday (April 7, 2005) at 11:06 am to Bankruptcy Exemptions
Bankruptcy Practice
Chapter 7 Bankruptcy
Nassau Lawyer
Personal Injury and Bankruptcy

bankruptcy and personal injury exemptionWritten by Craig D. Robins, Esq.

There are many issues facing the plaintiff negligence attorney whose personal injury client files for bankruptcy. Here are some bankruptcy fundamentals that you should be aware of.

Bankruptcy Involves Different Statutes and Rules. Most personal injury attorneys practice relatively little in Federal Court, let alone Bankruptcy Court. Thus, when their P.I. client files for bankruptcy, a different world opens up with intimidating statutes and rules much different than those usually encountered in the typical Supreme Court action. Bankruptcy practice is governed by the United States Bankruptcy Code and the Bankruptcy Rules. The Bankruptcy Courts in New York employ the Federal Rules of Civil Procedure as opposed to the C.P.L.R. In addition, there are “local rules” for the two Bankruptcy Courts that comprise the Eastern District of New York, located in Central Islip and Brooklyn.

Personal Injury Suits and Causes of Action are Assets. A serious injury that gives a debtor the right to sue for personal injury is an asset of the bankruptcy estate. The debtor can exempt the first $7,500 in net proceeds, but anything over and above that belongs to the bankruptcy estate.

All Causes of Action Must be Scheduled. It is very important to make sure that the debtor scheduled the P.I. suit or cause of action in the bankruptcy petition. The debtor’s failure to schedule a potential cause of action may actually work as a meritorious defense to the entire P.I. case, which can result in having the P.I. case dismissed. Current New York case law states that if a P.I. plaintiff filed a chapter 7 petition but failed to list a potential cause of action for personal injuries, then the plaintiff lacks standing to bring the P.I. action.

What to Do If Your P.I. Client Failed to List the Cause of Action. If your P.I. client failed to list the cause of action, then you should immediately contact the attorney who prepared the bankruptcy petition to discuss why this happened, and to determine whether any amendments were ever filed, or whether the matter was addressed at the first meeting of creditors. Unfortunately, some attorneys who prepare bankruptcy petitions are not thorough enough to cross-examine their clients as to such intangible assets as causes of action. Nevertheless, a debtor has the duty to amend his or her petition upon learning of any defects in the petition.

What to Do If You’ve Already Initiated Your P.I. Case and Your Client Files for Bankruptcy or Wants to File for Bankruptcy. Hopefully, your client discussed his or her intentions to file bankruptcy with you prior to actually doing so. In any event, you should contact your client’s bankruptcy attorney to make sure that all information about the suit has been, or will be, properly scheduled in the petition. Again, the main concern focuses around the value of the P.I. case and whether the trustee will deem the case to be valuable enough to administer. You should expect to provide the trustee with copies of the pleadings and the bill of particulars. If the case may have significant value, the trustee will get in touch with you

Always Ask Your New P.I. Client if They Filed for Bankruptcy. Many P.I. clients neglect to tell their attorney that they filed for bankruptcy after their accident. If you learn that your client filed for bankruptcy, then you should look at a copy of the bankruptcy petition to make sure the client listed the cause of action as an asset. Also make sure the debtor claimed the exemption for personal injury. If the client already filed for bankruptcy and did list the potential suit, then you will need to determine what action the trustee took.

The Trustee May Abandon the P.I. Case or Cause of Action. Most trustees will consider the right to sue for a relatively small injury as being of “inconsequential value to the bankruptcy estate” and may have already decided to abandon the trustee’s interest in the cause of action. Generally, if a P.I. case will not result in any significant non-exempt recovery (usually a gross award or settlement of less than $15,000 before attorney’s fees and disbursements), then the trustee will not care about administering it.

If the case appears to be of inconsequential value, then consider contacting the trustee and requesting him to provide you with a letter indicating that he intends to abandon the trustee’s interest in the matter.

Another option is to wait until the case is closed, as any property which is listed on the debtor’s schedules that is not otherwise administered before the case is closed, is deemed abandoned to the debtor. Thus, as long as the Court closes the bankruptcy, you will not need to get involved in Bankruptcy Court and you can continue with the case as you would have.

If more than a few months have passed since the debtor attended the First Meeting of Creditors, consider having the bankruptcy attorney check the court’s docket to see if the Bankruptcy Court closed the case or if the trustee formally abandoned the asset. The fact that the debtor received a discharge does not necessarily mean that the trustee abandoned the asset or that the court closed the case. Also, closing the first meeting of creditors is not the same thing as closing the bankruptcy case. If the case is still open, contact your client’s bankruptcy attorney to see if the trustee expressed any interest in administering the P.I. cause of action.

The Trustee May Want to Administer the P.I. Claim as an Asset of the Estate. If the case may be worth more than $15,000, it is likely that the trustee will not abandon the cause of action and will want to administer the bankruptcy as an asset case.

Representing a Debtor with a P.I. Suit That Is Being Administered by a Trustee Requires Court Approval. The Bankruptcy Code requires that all attorneys who render services to a debtor must be approved by the court. A trustee may employ as special counsel under a contingency fee arrangement, any attorney who has represented the debtor in pre-petition litigation, when it is in the best interests of the bankruptcy estate and the attorney has no interest adverse to that of the debtor or the estate. Theoretically, the trustee can hire any attorney of the trustee’s choosing to represent the debtor in the P.I. suit, and can even take the case away from the existing P.I. attorney. In practice, however, this rarely occurs. The trustee will almost always permit the existing P.I. attorney to continue with the P.I. case because a relationship already exists between the debtor and counsel, and because the P.I. attorney may be in the best position to represent the debtor with a negligence matter. Nevertheless, it would behoove you to co-operate fully with the trustee.

Handling a Debtor’s P.I. Case Requires a Retention Application. It will be necessary for you to file an application with the court to be retained as special counsel to the trustee for the purposes of prosecuting the P.I. claim. Annexed to the application should be a copy of the written retainer agreement between you and your client. The legal fee must be reasonable and it is subject to court review at the conclusion of the case.

The application will also include an affidavit of disinterest in which you must state that you have no claim that is adverse to the interests of the debtor’s estate. This means that you cannot be a creditor for legal fees not related to the pending P.I. case.

The trustee will usually prepare these documents (as well as any other necessary documents in the course of the bankruptcy) and submit them to the court after you sign them.

Appearances in Bankruptcy Court by P.I. attorneys are rarely necessary. The application to approve your fee after the case is settled is usually brought by the trustee and should not require your appearance.

Who Is Your Client Now? Once the trustee seeks your formal retention on behalf of the bankruptcy estate, you client is technically the trustee, rather than the plaintiff. Sometimes this can lead to some unusual ethical issues.

Will the P.I. Case Be Transferred to the Bankruptcy Court? A personal injury case is considered a non-core proceeding which means that it involves issues not directly involving the bankruptcy code. You can therefore anticipate that the P.I. case will be litigated in Supreme Court.

Will it Be Necessary to Amend the Existing Caption? Some trustees may require you to amend the caption to reflect the fact that the trustee has become the party plaintiff. Most trustees will not require this.

Effect of the Automatic Stay on P.I. Litigation. The automatic bankruptcy stay imposed by Code sec. 362 does not operate to stay any actions brought by the debtor. The stay only acts to stay actions brought against the debtor including cross-claims, counter-claims and third-party claims.

Settlement. Some trustees will require you to review all settlement negotiations with the trustee Other trustees will be content on hearing from you when you’ve reached a tentative settlement. All settlements will require the trustee to bring a motion to obtain Bankruptcy Court approval. The insurance carrier will thereafter want releases from the trustee as well as the plaintiff. It is important to maintain communications with the trustee as to all major settlement negotiations. The settlement is generally made payable to the trustee.

Your Legal Fee. Once the matter is settled, you will be required to submit an application for a “final fee allowance” in order to be paid. This is something that the trustee should assist you with.

Concluding Advice. The biggest variable in handling a valuable personal injury case of a debtor in bankruptcy is the attitude and disposition of the trustee. Contact the trustee at your earliest opportunity to get an idea of the trustee’s disposition and preferences.

Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a frequent columnist for the Nassau Lawyer, the official publication of the Nassau County Bar Association in New York. This article appeared in th April 2005 issue of the Nassau Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Medford, Commack, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com

 

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Craig D. Robins, Esq. is a Long Island bankruptcy lawyer, who is focused primarily on helping individuals and families, find solutions to their debt problems. Read more »

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Craig D. Robins, Esq.
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