Personal Injury Attorney’s Duty of Reasonable Inquiry of a Client’s Bankruptcy

By Michael B. Joseph, Esq.

An attorney meets with a potential client about a recent auto accident personal injury claim. The client suffered severe injuries and may be entitled to a large award. The client fails to mention that he is a debtor in an active bankruptcy. The client also has failed to advise his bankruptcy attorney about the personal injury claim. The debtor/client does not realize the importance of disclosure of the claim.

What duty does a personal injury attorney have to discover or determine the existence of a client’s or a prospective client’s bankruptcy? Failure to do so may prove disastrous to the personal injury attorney’s case. A debtor’s failure to disclose such claims in a bankruptcy has ramifications for the debtor, the debtor’s attorney, and the non-bankruptcy personal injury attorney. This discussion however is limited to a review of the non-bankruptcy personal injury attorney’s duties.

Let us review these scenarios:

  1. Unknown pre-petition injury exists but has not manifested at time of bankruptcy filing.
  2. Known pre-petition personal injury claim exists at time bankruptcy is filed and no lawsuit commenced
  3. Pre-petition action is pending at time a bankruptcy case is filed.
  4. At time of bankruptcy filing the nature of the personal injury action is:
    1. Lawsuit or court proceeding in process
    2. Administrative proceeding
    3. Arbitration

INITIAL DISCLOSURE

In Paragraph #9 of the Statement of Financial Affairs filed with the bankruptcy petition the debtor is required to disclose the following:

“Within 1 year before you filed for bankruptcy were you a party to any lawsuit, court action, or administrative proceeding? List all such matters, including personal injury cases, small claims action, divorces, collection suits, paternity actions, support or custody modifications and contract disputes.”

And as a part of the Paragraph #9 answer the debtor must fill in the blank as to the status of any case whether it is “Pending, On Appeal, or Concluded.”

Many personal injury lawyers do inquire if potential clients have any current or prior bankruptcy cases. Should the non-bankruptcy attorney take additional steps to verify such status? Can you rely only on a client’s response? What is reasonable?

UNKNOWN PRE-PETITION INJURY

Examples of types of injury claims that may arise after the filing of a bankruptcy include pre-petition exposure to toxic or harmful substances, medical device failures, and other mass or class action tort claims.

Unknown pre-petition claims are troublesome for plaintiff’s attorneys. They present a myriad of issues. First and foremost, as soon as a plaintiff’s attorney learns of the bankruptcy the best practice for the attorney is to give notice regardless of the timing or status of the case. As the non-bankruptcy attorney, you do not want to be in the position of trying to make a determination of how a court or the trustee may view the cause of action as property of the estate.

The conundrum is whether a claim is estate property. Bankruptcy courts and federal appellate courts do not uniformly agree how to answer this question. One basis used by the courts is a finding that the elements of the claim are sufficiently “rooted” in the pre-petition past. Another is the” accrual approach” or looking to state law when did the claim accrue? The third approach some courts apply is a blended approach combining the 2 approaches and focusing on time of discovery.See Mendelsohn v. Ross, 251 F. Supp. 3d 518 (E.D.N.Y2017), Also see In re: Harber 553 BR 522 (Bankr. Ct, WD PA, 2016), and “A Debtor’s Dilemma: Undisclosed Claims” Lassman, ABI Journal February 14, 2018. Also see: Keith M. Lundin, Lundin on Chapter 13, Section 46.11 “Causes of Action Including Judicial Estoppel Issues” reviews Wolfork v. Tacket 526 SE2nd 436 GA Ct App 1999) the case that sent the insurance defense bar to raise judicial estoppel when debtors failed to list causes of action in their personal bankruptcies. Lundin states: “Although the holding in Wolfork is questionable, the message is clear. Don’t take chances of non-disclosure of causes of action in chapter 13 cases.” Id. Paragraph 7 Section 46.11

Of course, the plaintiff’s attorney will need the consent of the debtor/client to provide such notice. Should the client refuse or fail to cooperate, it may be necessary to withdraw from the personal injury action. To be sure, not a good outcome.

KNOWN PRE-PETITION INJURY AT TIME OF BANKRUPTCY

The bankruptcy schedules require disclosure of all claims as follows in Schedule B, Paragraphs 33 and 34:
33. Claims against third parties, whether or not you have filed a lawsuit or made a demand for payment Examples: Accidents, employment disputes, insurance claims, or rights to sue. Describe each claim.
34. Other contingent and unliquidated claims of every nature, including counterclaims of the debtor and rights to set off claims. Describe each claim

Full disclosure is required of debtors regardless of whether an action has been commenced. It is also to be disclosed whether the case is pending, or in an administrative action or arbitration.
Accordingly, the attorney should inquire at the initial consultation if a bankruptcy case has been filed or if the client is contemplating bankruptcy. At the same time, it is a best practice to perform a PACER search about existing or past bankruptcies by the potential client.

Again, the requirement of full and complete disclosure is mandatory. Notice is the same whether in the claim is in litigation, arbitration or mediation. As soon as non-bankruptcy attorney learns of the existence of client’s bankruptcy notice should be given. Should the debtor/client refuse to consent to giving notice, withdrawal from representation may be necessary.

DIFFERENCE BETWEEN CHAPTER 7 vs CHAPTER 13

The reasonable inquiry will involve finding the existence of a bankruptcy, and the status and type of bankruptcy case. Is there a different notice requirement if the debtor/client is a chapter 7 or chapter 13 debtor? This is important since if the debtor/client is a chapter 7 debtor, and the cause of action arose entirely post-petition there is no duty to disclose. However, if an injury could be traced to a pre-petition event, and the debtor failed to report a post-petition cause of action and/or a recovery, a trustee, a creditor or the United States Trustee may request a revocation of discharge. Under 11USC Sec. 727(d)(2) such action must be brought within the later of one year after the discharge or the closing of the case. Such a motion undoubtedly would involve re-opening the case and pursuing the fruits of the cause of action.

On the other hand, a personal injury claim is very important in an open chapter 13 bankruptcy as there is an ongoing requirement to disclose. See 11 USC Section 1306. Also, after a reasonable inquiry notice should be given in a where a cause of action occurred while the chapter 13 case is pending before the debtor receives a discharge. Some bankruptcy courts have struggled with the effects of confirmation of a chapter 13 plan, vesting, and completion of plan payments. For example, in the case of In re: Frank 638 BR 463 (Bankr. D. Col 2022) the court refused to dismiss a chapter 13 case for bad faith although the debtor failed to disclose the existence of an auto accident. The court held that since the plan payments were complete it was required to grant the discharge. Surely an unusual resultin light of the debtor’s conduct.However, it not recommended that the non-bankruptcy attorney make these determinations. It is better to give notice of the claim to the bankruptcy attorney, the chapter 13 trustee, and if appropriate to the US Trustee.

CONCLUSION

Reasonable inquiry by a non-bankruptcy personal injury lawyer should include a PACER search of all potential clients. A PACER search will alert the lawyer to any current or past bankruptcy case. If one does appear, the lawyer should follow up with the potential client about the details and status of the case. These steps will help protect the client, the personal injury lawyer’s engagement,and future administration of the claim.

___________________________

michaeljosephMichael B. Joseph was the Chapter 13 Trustee for the District of Delaware (appointed in 1987) and has served as a Chapter 7 Bankruptcy Trustee (appointed in 1981) and a Chapter 12 Case Trustee. He also is a partner in the Wilmington, Delaware law firm of Ferry, Joseph, P.A.  Mr. Joseph received his B.A. from Rutgers University (1972) and his J.D. from Widener University (1975). He is admitted to practice in Delaware (1976), New Jersey (1977), United States District Court for the District of Delaware (1977) and the Third Circuit Court of Appeals (1990). Mr. Joseph is a Fellow of the American College of Bankruptcy. Mr. Joseph is a Past President of the National Association of Chapter 13 Trustees (2010-2011) He is also has served as a member of the Liaison Committee to the U.S. Department of Justice Executive Office for United States Trustees in Washington, D.C. (2006-2011). He is a member of the Delaware Bankruptcy American Inn of Court, the Bankruptcy Section of the Delaware State Bar Association, the American Bankruptcy Institute, the American Bar Association, and the Local Rules Committee of the United States Bankruptcy Court for the District of Delaware.

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