December 6, 2016

Chapter 13 and Post Discharge

In our previous two entries, we examined the interaction between the bankruptcy estate and a cause of action, and the timing of claims and whether they are sufficiently rooted in the pre bankruptcy past of the Debtor.  With this final entry, we look a bit more closely at claims of the Debtor and chapter 13 bankruptcy cases and claims arising post discharge.

The Chapter 13 - An Expansive Definition

In chapter 13 bankruptcy, the concept of “property of the estate” is broadened and is not so rigidly defined as simply pre-petition and post-petition property. In chapter 13, “property of the estate” is “broadened to include not only the property brought into the estate via § 541, but also all legal or equitable interests of the debtor in property, including earnings from services performed by the debtor, that the debtor acquires after the commencement of the case but before the case is closed, dismissed or converted to a case under chapter 7, 11 or 12, whichever occurs first. 11 U.S.C. § 1306(a)(1) and (a)(2).” In other words, in a chapter 13, property of the estate may include causes of action that arise post-confirmation.

Courts have reasoned that Section 1306’s extension of a Chapter 13 bankruptcy’s estate is a “rational response to the relevant situation.” Carroll v. Logan, 735 F.3d 147, 151 (4th Cir., 2013). Chapter 13 proceedings provide debtors with significant benefits: For example, debtors may retain encumbered assets and have their defaults cured, while secured creditors have long-term payment plans imposed upon them and unsecured creditors may receive payment on only a fraction of their claims. See 11 U.S.C. §§ 1322, 1325. In exchange for those benefits, a Chapter 13 debtor makes a multi-year commitment to repay obligations under a court-confirmed plan. The repayment plan remains subject to modification for reasons including a debtor's decreased ability to pay according to plan, as well as the debtor's increased ability to pay. See 11 U.S.C. § 1329.

Take the case of in In re Granville, ___BR___; 2014 Bankr. LEXIS 1373, at *1 (Bankr ED Ky, Apr. 4, 2014), as an example. In Granville, the debtor totaled her car post-confirmation. The debtor was not at fault in the accident. The insurance company for the driver who was at fault settled the claim with the debtor. The debtor moved the bankruptcy court to keep the proceeds from the settlement and purchase another vehicle. The secured creditor on the totaled vehicle objected and requested that it receive the insurance proceeds because it had a secured lien on the totaled vehicle.

The Granville Court determined that the settlement proceeds were property of the estate. In reaching this conclusion, the bankruptcy court stated, “The [at-fault driver] has. . . committed a tort against the Debtor and the Debtor is entitled to compensation. . . the tort only became property of the estate under 11 U.S.C. § 1306 when the right to payment arose.” Id. At *3. After determining that the settlement proceeds were property of the estate, the bankruptcy court permitted the debtor to purchase a new vehicle and grant the secured creditor a first priority lien on the new vehicle. The secured creditor was adequately protected under the circumstances. 

Granville emphasizes the expansive scope of Section 1306. Unlike a case under chapter 7, a cause of action that matures post-petition and post-confirmation was determined to be property of the estate. This is an important distinction because debtors sometimes acquire a cause of action post-confirmation. Debtor’s counsel needs to be familiar with the Bankruptcy Code and the treatment of proceeds generated from successful litigation of the cause of action.

A different conclusion was reached in the case of In re Van Stelle 354 B.R. 157 (Bankr. W.D. MI, 2006).  The debtors’ confirmed plan provided for payment of a creditor’s claim which was secured by the vehicle, and the debtors proposed to purchase a new vehicle with the insurance proceeds and grant the creditor a lien in the new vehicle as substitute collateral. The debtors contended that 11 U.S.C. § 363 allowed the debtors to use estate property to the same extent as the trustee, and thus the debtors could compel the creditor to accept the substitute collateral.  The bankruptcy court held, however, that the insurance proceeds were not property of the debtors’ estate and therefore § 363 did not authorize the debtors’ use of the proceeds without the creditor’s consent.  The debtors’ plan expressly and properly provided that all property of the estate vested in the debtors upon confirmation of their plan, and such vesting constituted an absolute conveyance of the estate’s property back to the debtors. However, disposable income is also an issue to consider as a mechanism to require the debtor to apply proceeds to the Plan.

What about Post-Discharge?

Whether a cause of action is “property of the estate” post-discharge turns on whether the debtor filed for a Chapter 7 or Chapter 13 bankruptcy.

If the debtor filed a Chapter 7, the determination turns on when the violation occurred and matured. For example, the bankruptcy court in Sikirica v. Harber (In re Harber), 553 B.R. 522 (Bankr. W.D. Pa. 2016) determined that a medical malpractice claim for debtor’s hip replacement was not property of the estate, despite the hip surgery occurring pre-petition. The bankruptcy court rested its determination on Pennsylvania law, which stated, 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. Because damages were not ascertainable, the bankruptcy court determined that the medical malpractice associated with the hip replacement was a post-petition cause of action belonging to the debtor. However, if the malpractice occurred pre-petition despite the lack of knowledge does that claim “arise” pre-petition?

Under Chapter 13, the analysis is the same with the exception that the concept of the bankruptcy estate is broadened. In other words, if a cause of action matures pre-petition or post-confirmation, but before the debtor receives his or her discharge, the cause of action is considered to be property of the estate.

Conclusion

The distinction between pre-petition, post-petition, post confirmation, and post discharge as it relates to causes of action is an important one. The distinction is especially important when a debtor’s cause of action has the ability to pay all of the debtor’s creditors. Bankruptcy practitioners should be mindful of these distinctions and advise their debtors accordingly. And as always, disclose, disclose, disclose.

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