In an interesting opinion, Chief Judge Laney of the Middle District of Georgia held that a tort claim that "arose" well before a Chapter 7 filing but was not discovered by the debtor until well after discharge was property of the Chapter 7 case. The case is interesting in that it was before the Court on a motion for reconsideration filed by the Trustee, the Court reversed its prior position on authority not argued by either of the parties, and Judge Laney criticized the Eleventh Circuit opinion on which he ultimately based his decision.
In In re Webb, 484 B.R. 501, 2012 Bankr. LEXIS 5736 (Bankr. M.D. Ga. Dec. 12, 2012), the Debtor was diagnosed with congestive heart failure in July 2007. He subsequently filed a Chapter 7 case in January 2009 and was subsequently discharged in June 2009. The Debtor later became aware of a class action lawsuit from a television commercial over medication he took from 2006-2008, and entered into a confidential settlement. The Trustee moved to reopen the Chapter 7 case to administer the settlement proceeds as property of the Chapter 7 estate.
In an October 2012 opinion, the Court applied the discovery rule and held that the claim did not accrue until after the Debtor became aware of the claim and, therefore, it was a post-petition asset. See In re Webb, 482 B.R. 669 (Bankr. M.D. Ga. October 12, 2012). The Trustee moved for reconsideration of the order.
The Court granted the motion and reversed its earlier ruling, not based on the Trustee’s arguments but based on the Court’s own research and apparent changed view of Eleventh Circuit authority (after the jump).
The Court’s decision was based on a re-analysis of the Eleventh Circuit case of Johnson v. Alvarez, 224 F.3d 1123 (11th Cir. 2000).
The Court’s decision to reconsider and grant the motion to reopen comes from the Court’s reassessment of Johnson v. Alvarez (In re Alvarez), 224 F.3d 1123 (11th Cir. 2000), a decision neither the trustee nor the pro se debtor discusses in the briefs. The issue in Alvarez was ownership of a professional malpractice lawsuit to which the discovery rule would apply under Florida law. As mentioned in the first opinion on this issue, Alvarez contains language strongly suggesting the discovery rule is not applicable when determining whether a lawsuit is estate property. The court states that "accrue" in the statute of limitations context is "irrelevant" and that "a cause of action can accrue for ownership purposes in a bankruptcy proceeding before the statute of limitations begins to run." Id. at 1273 n.7. As explained more fully in the Court’s first Webb opinion, the Court questions the reasoning and conclusions in Alvarez. See In re Webb, 2012 Bankr. LEXIS 4816, 2012 WL 4857042, at *4-5. First, the court in Alvarez states that "accrue" under statutes of limitations is irrelevant, but to determine when the lawsuit at issue accrued, the court uses a definition of "accrue" in another section of the Florida statute of limitations—forgoing "accrue" under the discovery rule for "accrue" under the general statute of limitations. In other words, statutes of limitations are irrelevant, but some statutes of limitations are more relevant than others. Second, the Court believes that, given the Eleventh Circuit’s subsequent opinion Witko v. Monette (In re Witko), 374 F.3d 1040 (11th Cir. 2004), the Alvarez opinion would likely look very different, for a number of reasons, if decided today.
Judge Laney pointed out that the relevant language in Alvarez was dicta, which was persuasive but not binding.
While the Court looks at Eleventh Circuit dicta as strong authority, the Court gives more or less weight to dicta depending on how persuasive the reasoning is. The Eleventh Circuit’s reasoning on this matter isn’t clear, given the conflicting treatment of statutes of limitation, and the opinion as a whole has questionable continuing validity, given the Eleventh Circuit’s reasoning in Witko.
However, after further consideration, Judge Laney concluded that the relevant language in Alvarez was critical to the holding in the case and, therefore, should be given more weight.
The alleged malpractice was advising and filing a Chapter 7 bankruptcy instead of a Chapter 11 bankruptcy and failing to convert, resulting in the trustee selling assets at a price disagreeable to the debtor. See In re Alvarez, 224 F.3d at 1275; In re Alvarez, 228 B.R. 762, 763 (Bankr. M.D. Fla. 1998). The fight over ownership of the claim (malpractice arising from mishandling a bankruptcy case) occurred in the very bankruptcy proceeding that was the subject of the malpractice claim. Under these facts, the debtor necessarily discovered the injury and cause postpetition. The discovery rule not applying is essential for the holding—that the cause of action accrued as of the filing and thus was property of the estate—because there is no logical way the discovery rule could apply and the Court’s holding stay the same. Because In re Alvarez is binding on this Court, and thus all necessary elements of that decision are binding on this Court, the Court can only conclude that the discovery rule does not apply to the present circumstances. The Court will look to whether the elements of the product liability claim occurred before or after filing. It is undisputed that everything, except for knowledge of cause, occurred prepetition. The Court thus holds that the product liability claim accrued prepetition and is estate property.
The proceeds of the settlement, therefore, became property of the Chapter 7 estate. The settlement amount is not disclosed as the Debtor had entered into a confidentiality agreement. Whether the amounts to a meaningful distribution to creditors is not clear, but the holding may have the affect of Trustee’s reopening closed cases when causes of action are discovered by either debtors or the Trustee.
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