Order Denying Trustee's Motion for Turnover and Directing Clerk to Re-Close Case
JANICE MILLER KARLIN, Bankruptcy Judge.
This matter is before the Court on Chapter 13 Trustee Jan Hamilton's Motion for Turnover; he seeks turnover of settlement proceeds that Debtor Kelly Sue Purcell
Because the Court finds that the cause of action did not arise until she discovered the potential injury caused by the device, and that discovery occurred after her bankruptcy case was closed, the settlement proceeds are not property of the estate.
I. Findings of Fact
A. Factual history.
The parties have stipulated to the following facts.
Five days after her discharge, on September 28, 2011, Debtor underwent a medical procedure in which a transvaginal mesh device ("pelvic mesh device") was implanted. In the ensuing months, Debtor had several follow-up visits with physicians. No problems with the pelvic mesh device were discovered or disclosed to Debtor during these visits. A portion of the pelvic mesh was removed on April 18, 2012, but Debtor's doctor again reported no defect in the medical device itself.
But in January 2013, Debtor apparently began to experience problems, so Debtor's physician referred her to a specialist. In February 2013, Debtor consulted with that specialist, who discovered through the use of a cystoscope that there was some mesh exposure. This was the first indication of any problem with the device itself. The specialist apparently recommended to Debtor to have surgery to remove the device, and the surgery to do so occurred on April 8, 2013. Significantly, the parties stipulate that on that date "[f]or the first time, a failed transvaginal mesh sling was discovered and diagnosed. (495 days after the bankruptcy case was closed.)"
Soon after this third surgery, Debtor saw a television commercial regarding pelvic mesh device failure. She contacted counsel eleven days after this third surgery and retained a firm to represent her in a claim against the manufacturer of the pelvic mesh device in a multi-district class action litigation. While Debtor has reached a settlement agreement with the manufacturer of the device, the parties' stipulation does not reveal the net amount or the timeline for disbursement.
B. Procedural history.
The United States Trustee filed a motion to reopen Debtor's case upon learning of the pending personal injury settlement.
Because this issue exists in several other newly reopened cases pending before this Court—although those cases are still in the fact-finding stage—the Court invited the parties in those cases to submit amicus briefs on this limited legal issue.
The Court has jurisdiction to decide this matter, and it is a core proceeding.
A. Burden of proof.
In a motion for turnover, the burden falls upon the Trustee, as the moving party, to establish a prima facie case that the property sought is property of the estate.
B. Whether the class-action settlement proceeds are property of the estate.
The filing of a bankruptcy petition creates an estate; property that is included in the estate is broadly defined in § 541(a)(1) to include "all legal or equitable interests of the debtor in property as of the commencement of the case." Section 1306(a)(1) expands the property included in Chapter 13 cases to include property "that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted."
Even without the expansion of property of the estate created by § 1306 for Chapter 13 cases, contingent interests that exist upon filing, but that do not fully materialize until after filing, have long been held to be property of the estate.
However, although § 541(a)(1) defines property of the estate as including "all legal or equitable interests of the debtor in property as of the commencement of the case,"
So for example, while Congress elected to affirmatively include a debtor's interest in rental income in the definition of property of the estate, it has not similarly opted to expressly include a debtor's postpetition legal claim as property of the estate.
The accrual of Debtor's interest in the product liability claim for personal injuries is controlled by K.S.A. § 60-513. This statute establishes a two-year statute of limitations for most torts.
This is commonly referred to as the discovery rule, or theory,
The distinction between a claim of the estate and a claim against the estate is important, however, because while Congress has not opted to preempt state law in defining property interests of the estate, it has defined "claims" against the estate.
The Smith decision noted the scope of the definition of "claim" in § 101(5) as pertaining to a bankruptcy claim, i.e., a claim against the estate, and recognized that an interest could be a bankruptcy claim under the Code even if not recognized as such under state law.
The Trustee relies on In re Parker, where the Tenth Circuit broadly stated that the conduct theory controls the date of accrual of a claim.
At no point in its decision did the Tenth Circuit discuss, let alone differentiate, between cases involving claims against a bankruptcy estate as opposed to claims a debtor or his estate might have that would bring assets into the estate.
The Trustee also cites an unreported decision from the Kansas District Court, Shields v. U.S. Bank Nat'l Ass'n ND,
The plaintiff in Shields had filed a Chapter 7 bankruptcy petition in 2002, at which time he did not list any claims, contingent or otherwise, against U.S. Bank. In 2005, he brought an action against the bank, claiming it had violated various statutes in its treatment of, and reporting about, his HELOC account with the bank. The bank moved for summary judgment, alleging that Shields lacked standing to bring the claims, as they were prepetition claims that belonged solely to his bankruptcy estate.
The Court granted the motion, holding that under the "unique circumstances of this case," all the claims touched the pertinent checking account and Reserve Line, making them "sufficiently rooted" in the bank's initial (prepetition) acts, such that they belonged to the bankruptcy estate.
Turning to the case law upon which Debtor and the amicus parties rely, all cite to two recent decisions in In re Ross (one from the bankruptcy court and one from the district court hearing the matter on appeal).
On appeal, the district court reached the same result, but only after rejecting the bankruptcy court's reasoning.
In Ross, the District Court did not disagree with the bankruptcy court's analysis of whether the claim had arisen under state law, but said that the bankruptcy court's analysis was incomplete because it failed to take into account whether the underlying facts giving rise to the claim were sufficiently rooted in the pre-bankruptcy past.
In the Tenth Circuit, the Segal analysis has arisen almost exclusively in a Chapter 7 context.
Under either Chapter 7 or 13, however, in order for property to belong to the bankruptcy estate, it must first be property of the debtor. The Tenth Circuit has consistently cited Butner and turned to state law to determine whether something is property.
In Parks v. Dittmar,
Applying the Parks v. Dittmar test, the Court finds it really only has to answer the first part of that test here—whether Debtor had a property interest before her Chapter 13 case was closed in a cause of action against the manufacturer of the device. The answer to that question depends on when Debtor's cause of action arose, which in turn is defined by state law. In Kansas, a cause of action does not arise until the discovery of the injury. In a Chapter 13 case, if the cause of action accrues after commencement, but before the case is closed, dismissed, or converted,
C. Application in this case.
This Debtor's pelvic mesh device was implanted on September 28, 2011—five days after she received her discharge, but 63 days before the final decree was entered and the case closed. Although Debtor had several routine follow-up appointments, it was more than a year after closing before her physician referred her to a specialist in January 2013. The exact date the injury was first discoverable or reasonably ascertainable could be debated—a portion of the mesh device was removed in April 2012 (still post-closing), but based on the parties' stipulation, Debtor's first indication of any problems with the device itself did not occur until either January or March 2013. Because both dates were well after Debtor's case was closed, this Court need not decide the exact discovery date. Under Kansas law, Debtor's cause of action did not accrue until after her bankruptcy was closed, and thus the settlement proceeds are not property of her bankruptcy estate.
The Court would note, as an aside, that even if it went through the exercise of analyzing the other two parts of the Parks v. Dittmar test (essentially the Segal test used by the district courts in Ross and Shields—i.e., whether the interest at stake in a cause of action is sufficiently rooted in Debtor's pre-bankruptcy past so as to require it be deemed property of the estate), the outcome would be identical. First, there is no nexus, let alone a strong one, between the product liability claim and pre-bankruptcy events. In fact, the medical device here was not even implanted until over three years after Debtor filed her case. Instead, it was implanted after Debtor had completed her plan and received her discharge, but before administrative details necessary for case closing had been completed. And like in Ross, the undisputed evidence is that Debtor only became aware that the device was likely defective well over a year after her bankruptcy was closed. Thus, as the District Court held in Ross, the single pre-closing event—placement of the device—"would be rendered meaningless insofar as plaintiff's ability to obtain settlement proceeds is concerned."
The Segal test requires a claim be "sufficiently" rooted in the debtor's pre-bankruptcy past.
This Court must apply Kansas law to determine when Debtor's cause of action accrued in order to determine whether, as of the closing date of her case, she had an actionable property interest in that cause of action. Kansas law is clear on this point. Under K.S.A. § 60-513(b), the discovery rule governs her cause of action. The trustee has failed to meet his burden of proving that Debtor could reasonably have ascertained that she was injured as a result of the medical product before her case was closed.
Instead, the stipulated facts demonstrate that Debtor did not discover the potential problem with the pelvic mesh device until well after she received her discharge and her case was closed, irrespective of the date the device was implanted. For that reason, Debtor's cause of action did not accrue until after her Chapter 13 case was closed, is not property of the estate, and the settlement proceeds from such cause of action need not be turned over to the long-closed bankruptcy estate.
The Trustee's Motion for Turnover