Post-Petition Lawsuit Not Property of Estate

Posted by NCBRC - July 7, 2016

Where the debtor had not suffered any injury from her hip replacement until post-discharge, the claim against the medical device provider was not property of the bankruptcy estate even though the hip replacement took place pre-petition. Sikirica v. Harber (In re Harber), 2016 Bankr. LEXIS 2168, No. 14-20155 (Bankr. W.D. Pa. May 31, 2016).

Elizabeth Harber underwent two hip replacement surgeries using implants produced by DePuy Orthopaedics. Three years later, she received notice that some of the implants were problematic and she was listed among the plaintiffs in a class action lawsuit against DePuy. Three years later, the she and her husband, Brent Harber, filed for chapter 7 bankruptcy. They listed the lawsuit in their schedules as a contingent, unliquidated claim with a value of $0. At that time, Ms. Harber had suffered no injury as a result of the implants. The Harbers’ bankruptcy case was closed with the potential claim against DePuy excepted from abandonment. Ms. Harber then discovered that metal had entered her bloodstream due to the implants and she was advised to have the hip replacement revised. Nonetheless, Ms. Harber dismissed her civil suit without prejudice as a “non-revised” plaintiff. She had the hip revision shortly thereafter. The Harbers’ bankruptcy attorney informed the court of a potential civil case against DePuy. The bankruptcy case was reopened and the trustee filed a turnover motion seeking to require the Harbers to contribute any settlement they might receive to the bankruptcy estate. The Harbers objected arguing that any settlement would not be property of the estate because Ms. Harber did not suffer any injury until after the bankruptcy case was closed.

The bankruptcy court began its analysis with the elements necessary to support a turnover motion under section 541: 1) the property is part of the bankruptcy estate, 2) it is in the possession of someone else, and 3) it has more than inconsequential value to the estate. With respect to the question of whether the civil action was property of the estate the court considered two approaches. The first was the “accrual approach,” advanced by the Harbers, under which the claim comes into existence when the claimant has the right to file it under state law. The second approach, advanced by the trustee, looks to whether the genesis of the lawsuit is “sufficiently rooted” in the pre-bankruptcy past.

Under Pennsylvania law a cause of action “accrues” when the plaintiff could institute the lawsuit. Damages which are “physically objective and ascertainable” are an essential element of a personal injury tort action. In the case of a medical implant which may function without problems for years before it causes injury, the court held that a cause of action for a latent injury accrues when the plaintiff “discovers, or reasonably should discover, that she has been injured and that her injury has been caused by another party’s conduct.”

Applying state law, the court found that, while many of the circumstances giving rise to Ms. Harber’s claim existed at the time of the petition, the claim did not accrue until the day she learned she had been injured by the hip replacement. Up to that point she had not suffered an ascertainable injury and neither she nor the trustee, derivatively, could have filed a valid lawsuit against DePuy. The accrual test, therefore, dictated that Ms. Harber’s claim against DePuy was not property of the bankruptcy estate.

The trustee argued that the court should not apply Pennsylvania’s accrual test, but rather, the test set forth in In re Grossman, 607 F.3d 114 (3rd Cir. 2010) (en banc), where the court held that a personal injury claim accrues when the plaintiff is exposed to a product pre-petition that causes later injury. Grossman involved exposure to asbestos and the issue was whether a “claim” against the debtor existed under section 101(5). The court found the question of whether a creditor had a “claim” against the debtor was different from the question of whether the debtor had an actionable claim against another party at the time she filed her petition. The definition of “claim” for purposes of asserting a claim against a debtor in bankruptcy is broad because the purpose of filing claims is to make sure the bankruptcy deals with all of the debtor’s financial liabilities. Accrual of a cause of action for purposes of determining estate property under section 541, on the other hand, while also broad, “is not intended to expand the rights of the debtor against others more than they exist at the commencement of the case.” Because of this distinction between a “claim” under section 101(5) and “claim accrual” for purposes of determining estate property, the court declined to adopt the Grossman reasoning.

The trustee also argued that under Segal v. Rochelle, 382 U.S. 375 (1966), a cause of action exists on the petition date, if it is “sufficiently rooted” in the pre-bankruptcy past. In that case the Court held that a tax overpayment for the tax year ending post-petition nonetheless was part of the estate because it offset pre-petition taxes.

The Harber court found that blind adherence to Segal would be contrary to the Supreme Court’s decision in Butner v. United States, 440 U.S. 48 (1979), that property is determined with reference to state law, and the plain language of section 541(a). It therefore adopted a blended test under which the state law governing accrual of an action would be considered along with the Segal “sufficiently rooted” test. Under this approach a claim may be part of the bankruptcy estate if it is predominantly rooted in the debtor’s pre-bankruptcy history, but by “happenstance” is not actionable until post-petition. Because the record did not indicate whether the injury was one that developed suddenly or over time, it was impossible to say that the injury existed prior to Ms. Harber’s discharge.  The court found that the existence of an injury was essential to the claim and was not present at the time of the bankruptcy petition. Therefore, the claim did not meet the requirements of the blended approach.

The trustee next argued that the Harbers should be judicially estopped from arguing that the claim was not property of the estate because they listed it on their schedules and did not object when the trustee excepted it from abandonment.

The court found that judicial estopped requires that the inconsistent positions are “tantamount to knowing misrepresentation to or even fraud on the court.” Bankruptcy disclosure requirements strongly encourage debtors to disclose any potential asset even where that asset may not ultimately be found to be property of the estate. In this case, the Harbers listed the potential claim but noted that the hip replacement was operating satisfactorily and Ms. Harber had not suffered any injury. This did not constitute a waiver of the right to challenge whether the claim was property of the estate. “To call this an asset of the estate under the guise of judicial estoppel simply because it was disclosed would have a chilling effect beyond the boundaries of this case,” by discouraging debtors from disclosing potential claims in the first place.

The court denied the motion for turnover.

Harber Bankr. WD Pa opinion May 2016


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