Third-party Standing Analysis

In In re Godon Inc., 275 B.R. 555 (Bankr. E.D. Cal. 2002), Bankruptcy Judge Christopher M. Klein provides a thorough discussion of the term "standing," including constitutional standing, which is required of every litigant in federal court. A "second range of standing" is "prudential standing," which subdivides into multiple categories of circumstances in which the courts limit the exercise of federal jurisdiction for reasons related to such considerations as the orderly management of the judicial system. One subcategory of prudential standing is "statutory standing," in which Congress has explicitly made the prudential standing determination by designating persons who are entitled to enforce a particular right created by statute. A second subcategory is "non-statutory standing," which consists of persons that either have not been named by Congress in a statute or who want to enforce some right not created by statute. The court then applied these standards for standing in a bankruptcy context and held that all creditors are "injured in fact" for purposes of constitutional standing because they are able to allege injury that is fairly traceable to the bankruptcy, since at a minimum they face the automatic stay and the risk that debts owed to them will be discharged. Some creditors require statutory standing by virtue of Bankruptcy Code provisions authorizing them to perform a specific trustee task—e.g., where the court grants permission for a creditor to recover property for the benefit of the bankruptcy estate. Non-statutory standing normally entails an analysis of the nature of harm suffered in connection with the dynamics of a particular case. The court then noted that when a creditor seeks to enforce rights that belonged to others, a form of third-party standing analysis is applied, which focuses on what is to be gained by the bankruptcy estate. General third-party standing analysis looks for three features: (1) Congress has undertaken to regulate a particular relation; (2) the third party is better prepared to be an effective advocate than the non-party; and (3) there is little danger of a divergence between the interests of a third party and a non-party. A creditor that obtains permission from the court to recover property for the benefit of the estate and to sue in the name of the bankruptcy trustee has the same statutory standing as the trustee.

Discharge of Medical Malpractice Judgments Under §523(a)

In In re Hanft, 274 B.R. 917 (Bankr. S.D. Fla. 2002), Bankruptcy Judge Larry L. Lessen addressed the issue of whether a debt based on a medical malpractice judgment was non-dischargeable under either §523(a)(2)(A) or §523(a)(4). The debtor/defendant practiced without an active license in violation of the Florida statute for a number of years including the years in which he was alleged to have misdiagnosed the plaintiff's medical condition. The court found that the debtor physician's failure to disclose that he was practicing with inactive and terminated license, coupled with his failure to disclose that he had neither insurance nor assets set aside or had otherwise complied with the statutory requirements of establishments to show the ability to satisfy a malpractice judgment, satisfied the elements under §523(a)(2)(A), showing that the obligation arose from fraud. The court then addressed whether the client's malpractice claim was non-dischargeable under §523(a)(4) as allegedly the result of fraud or defalcation or of the debtor/physician acting in a fiduciary capacity. The court noted that it was well-settled in the Eleventh Circuit that the term "fiduciary capacity" is to be construed narrowly and required the existence of an actual or technical trust. Florida required that as a condition of licensing, a doctor with hospital privileges must follow one of three statutory methods to demonstrate the financial capacity to pay claims and costs of a possible malpractice action. The court found that this Florida statute met the requirements of establishing a technical trust in that the statute required (1) a segregated trust (an insurance policy and escrow account or line of credit), (2) identifiable beneficiaries (the doctors' patients whom they injure) and (3) that affirmative trust duties were established by a contract or statute (phrases such as "a condition of licensing," demonstrating "financial responsibility to pay claims," and establishing and maintaining an escrow account.") There is no requirement that an actual fund be set up to establish the fiduciary capacity—only that there be an obligation to set up a fund. The court found that the doctor's posting the sign and claiming to be a doctor while his license was inactive and terminated disqualified him from the statutory exemption provisions. Therefore, the court found that the §523(a)(4) defalcation was satisfied and that there was a sufficient link between the patient's claim and the failure to maintain the fund and the exception to discharge.

Malpractice Claims Against Pre-petition Counsel

In In re American Metrocomm Corp., 274 B.R. 641 (Bankr. D. Del. 2002), Chief Bankruptcy Judge Peter J. Walsh addressed an increasingly common situation: that of a debtor or its assignee seeking to assert malpractice claims against pre-petition counsel. In this case, there was a post-petition asset agreement pursuant to which a pre-petition creditor had acquired the debtor's claims against that creditor and any interests that the debtor had in certain litigation claims. The agreement also appointed the creditor as the "attorney-in-fact" and specifically provided that all attorney/client and work product and similar litigation privileges would be shared privileges as between the creditor and the debtor. Subsequent to the agreement, the debtor notified certain law firm/defendants that it had transferred its interest in the litigation claims and requested that the law firm/defendants turn over all files, papers and property related to its representation of the debtor to the creditor or its designee. The defendants refused, asserting they had a statutory and/or common-law liens on the files due to the failure to fully pay for the invoices. As a result, an adversary proceeding was filed, seeking to compel turnover of the files. In the motion for summary judgment, the court noted that turnover was sought pursuant to §542(e), which provides that subject to any applicable privilege, the court may order an accountant or attorney to turn over or disclose recorded information relating to the "debtor's property or financial affairs." The court held that the fact that the litigation had been sold was irrelevant to a turnover under §542(e). In addition, the addition of the creditor as a plaintiff did not alter the fact that the debtor may seek turnover on its own behalf. The court also addressed the issue of whether the attorney files are property of the estate, rejecting the argument that since there had been a "sale" to the creditor, they were not property of the estate. The court noted that while §542(a) requires that the information be requested by property of the estate, there is no such requirement in §542(e). Thus, such a determination was not relevant to whether turnover of the files was proper under §542(e). The court then addressed the issue of attorney/client and work product privileges, noting that the debtor had refused to waive the attorney/client privilege. The court found that the law firm/defendants were incorrect on both counts and held that neither privilege bars turnover of attorney's files under §542(e). Federal common law governs control of the debtor's privileges. By arguing that turnover is improper without a waiver of the attorney/client privilege, the law firm/defendants attempted to assert the privilege against their own client. As to the work-product privilege, the court distinguished those cases in which an adversary was seeking work product, noting in those cases that assertion of the work-product privilege benefits a client, which was not the case where the law asserted the privilege to the client's detriment. Finally, the court addressed the validity of the defendant's liens on the files. The court held that the determination of whether the liens were valid would be a determination under state law. The court held that the state of incorporation under these facts had no relationship to the parties or their contractual relationship. Further, the fact that the contract was negotiated and executed in a particular state in which one of the law firms had an office did not make the law of that state determinative. Similarly, the fact that files were located in that state was also insignificant. The court held that "for purposes of choice of law analysis, where a client retains an attorney in connection with an action or proceeding, the place of performance [California and Louisiana] is the jurisdiction where the action or proceeding takes place." The court held that the assertion of attorney liens on the files was invalid under both California and Louisiana decisions.

Miscellaneous

• In re Domina, 274 B.R. 829 (Bankr. N.D. Iowa 2002) (debtor's claim of exemption in voluntary deferred compensation plan excluded from coverage under ERISA is not included in property of the estate under applicable non-bankruptcy Iowa law that created enforceable restrictions on the debtor's transfer of his beneficial interest); and
• In re Parrish, 275 B.R. 424 (Bankr. D. Col. 2002) (§1326(a)(2) mandates that undistributed funds in chapter 13 trustee's possession at time case was dismissed were subject to the statutory duty to distribute funds in accordance with the terms of confirmed chapter 13 plan).