Discovery Rule Applies to Accrual of Cause of Action

Posted by NCBRC - July 28, 2017

Where the debtor did not discover the injury giving rise to a medical product liability class action suit until after her bankruptcy was closed, the settlement proceeds from that cause of action were not property of the estate even though the debtor underwent the medical procedure while the bankruptcy was still pending. In re Purcell, No. 08-40224 (Bankr. D. Kan. July 19, 2017).

After discharge but before her chapter 13 bankruptcy case was closed, debtor, Kelly Sue Purcell, underwent a surgical procedure involving implantation of a medical device. Well after the bankruptcy was closed, she discovered that the device had caused her harm. She joined a class action suit against the manufacturer and reached a settlement agreement. Catching wind of the agreement, the chapter 13 trustee moved to reopen the bankruptcy and for turnover of the settlement proceeds.

To determine whether the settlement proceeds should be deemed property of Ms. Purcell’s estate, the bankruptcy court turned to section 541(a)(1) which provides that the bankruptcy estate is comprised of “all legal or equitable interests of the debtor in property as of the commencement of the case,” including contingent interests. In chapter 13, pursuant to section 1306(a)(1), such property also includes property “that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted.” The trustee argued that Ms. Purcell acquired the cause of action against the manufacturer when the medical device was implanted. Ms. Purcell argued that the claim did not accrue until she discovered the harm.

Generally, under Segal v. Rochelle, 382 U.S. 375, 380 (1966), property received post-petition must be “sufficiently rooted in the pre-bankruptcy past,” to fall within the heading of “estate property” and state law determines what constitutes “property.”

Under Kansas law, a claim accrues when “the fact of injury becomes reasonably ascertainable to the injured party,” (discovery theory) as opposed to when the action giving rise to the injury took place (conduct theory).

The bankruptcy court distinguished Watson v. Parker (In re Parker), 313 F.3d 1267, 1269 (10th Cir. 2002), cited by the trustee, where that court broadly endorsed the conduct theory with respect to claims against the estate. There, the debtor, a lawyer, failed to include one of his former clients as a creditor in his bankruptcy schedules. The former client filed a malpractice case against the debtor post-petition for conduct that occurred pre-petition. The circuit court found that the bankruptcy was properly reopened to allow the debtor to list the former client as a creditor because the conduct giving rise to the claim occurred before the debtor filed for bankruptcy. In so holding, however, the court did not address the distinction between a claim against the estate and a claim of the estate that would bring assets into the estate. The Purcell court found this distinction dispositive and the Parker court’s adoption of conduct theory inapplicable.

The court also distinguished Shields v. U.S. Bank Nat’l Ass’n ND, No. 05-2073, 2006 WL 3791320 (D. Kan. 2006), where, after his chapter 7 was closed, the debtor filed suit against U.S. Bank for conduct that took place pre-petition. The Shields court cited Parker but relied on the Supreme Court case of Segal when it found the claim to be sufficiently rooted in the pre-bankruptcy past to belong to the bankruptcy estate.

Ms. Purcell relied on In re Ross, 548 B.R. 632, 638-40 (Bankr. E.D. N.Y. 2016); Mendelsohn v. Ross, No. 16-CV-2071, 2017 WL 1900288 (E.D. N.Y. May 9, 2017), which involved the identical issue and the same medical device in the context of a chapter 7 bankruptcy. There, the district court applied Segal to determine that the claim was not rooted in the pre-bankruptcy past and affirmed denial of the trustee’s motion to reopen.

Acknowledging that property of a chapter 13 estate is more expansive than that of a chapter 7 estate, the court in Purcell found that Ms. Purcell did not have a property interest in the product liability claim while her bankruptcy case was open. Even though the act giving rise to the cause of action occurred while the bankruptcy was pending, Ms. Purcell possessed no facts which would have allowed her to discover her injury until after the bankruptcy was closed. Therefore, the trustee was not entitled to turnover of the settlement proceeds.

Purcell Bankr Kans opinion July 2017

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