Are Chapter 13 Creditors Entitled to Proceeds from a Post-Confirmation Tort Claim?
The Code and the Rules are unclear about a chapter 13 debtor’s obligation to disclose assets acquired post-petition that were not derived from income.
An opinion by Bankruptcy Judge Scott M. Grossman of Fort Lauderdale, Fla., could be read to imply that a chapter 13 debtor outside the Eleventh Circuit is not required to disclose the receipt of a post-petition asset that was not derived from the debtor’s income.
However, the holding in Judge Grossman’s January 31 opinion is altogether different. He ruled that disclosure was required under Eleventh Circuit authority that may have been incorrectly decided. Although the debtor was not obliged to share her newfound wealth with creditors because they had been paid 100% under the plan, his opinion could be read to suggest that creditors would not have been entitled to share in the new asset even if it were not a 100% plan.
The opinion is a springboard for discussing perplexing issues at the heart of chapter 13.
The 100% Plan and the New Asset
The debtor confirmed a five-year chapter 13 plan paying all creditors in full. On confirmation, the plan revested estate assets in the debtor.
One year before completing plan payments, the debtor slipped and fell at a racetrack. She neither informed the trustee nor amended her schedules to list the claim. A month after completing plan payments and receiving her discharge, the debtor filed a tort suit against the racetrack.
You guessed it. The racetrack moved to dismiss in state court based on judicial estoppel. The racetrack argued that nondisclosures of the claim in the bankruptcy case estopped her from pursuing the claim. In response, the debtor moved to reopen her bankruptcy case and amend her schedules to list the tort claim.
Distinctions Between Chapters 7 and 13
Judge Grossman pointed out the myriad ways in which chapter 13 differs from chapter 7. The opinion is worth reading on that basis alone.
Among other things, Judge Grossman pointed out how a chapter 13 trustee distributes the debtor’s income under a plan and does not pursue claims like a chapter 7 trustee. “[O]nly the individual [chapter 13] debtor can bring a litigation claim,” he said.
The Tort Claim Was Estate Property
Before deciding whether the debtor should have disclosed the claim, Judge Grossman was tasked with analyzing whether the post-petition tort claim was estate property. On one hand, Section 1306 says that the estate includes property described in Section 541 that the debtor acquires after confirmation.
On the other hand, Section 1327(b) revests estate property in the debtor on confirmation.
“Under section 1306(a)(1),” Judge Grossman said, “it seems clear that the Debtor’s litigation claim against [the racetrack] was property of her bankruptcy estate.”
Was Disclosure Required?
While Section 521 requires debtors to disclose their assets, Bankruptcy Rule 1007(h) addresses the disclosure of interests acquired after filing. The section says:
If, as provided by § 541(a)(5) . . . , the debtor acquires . . . any interest in property, the debtor shall within 14 days after the information comes to the debtor’s knowledge or within such further time as the court may allow, file a supplemental schedule in the . . . chapter 13 individual debt adjustment case.
The rule only requires disclosure of property described in Section 541(a)(5), and that section refers to assets like inheritances and life insurance proceeds acquired within 180 days of filing.
Standing alone, the rule and the section do not seem (to this writer) to require disclosure of an asset like the tort claim. Judge Grossman put it this way:
[N]o provision of Rule 1007 contains any requirements as to when or how a chapter 13 debtor is to amend her schedules to disclose a post-confirmation litigation claim that becomes property of her estate under section 1306(a)(1).
Judge Grossman was not required to answer the question on his own because the Eleventh Circuit had held that a chapter 13 debtor has a “continuing duty” to disclose a post-confirmation litigation claim. See, e.g., Robinson v. Tyson Foods, Inc., 595 F.3d 1269, 1274-75 (11th Cir. 2010).
Immediately after saying he was bound by Robinson, Judge Grossman dropped a footnote saying that the “Eleventh Circuit has, however, acknowledged the argument that this line of cases has been incorrectly perpetuated based on dicta from” from an earlier Eleventh Circuit opinion that in turn was based on dicta from the Fifth Circuit. In other words, he was suggesting that the Eleventh Circuit might revisit Robinson en banc.
Even given the obligation to disclose in the Eleventh Circuit, Judge Grossman said it is “less clear” how and when the debtor must fulfill the duty. In that regard, Bankruptcy Rule 1009(a) gives the debtor the right to amend schedules but does not say when.
On the question of whether to allow the debtor to reopen the case and amend the schedules, Judge Grossman noted that the creditors had already received “the maximum amount they are entitled to receive in a chapter 13 case.” He observed that disclosure “would not have, and will not have, any effect on her bankruptcy estate or her creditors.”
“[B]ecause her plan already provided for payment of 100% of her unsecured creditors’ claims, even if she had filed amended bankruptcy schedules to disclose this claim,” Judge Grossman said, “it would not have made any difference to her creditors, the chapter 13 trustee, or her bankruptcy estate.”
[B]ecause in a chapter 13 case the debtor retains the right to pursue litigation claims — whether owned by her or her estate — disclosure would have had no effect on the chapter 13 trustee’s administration of the case, the Debtor’s performance of her obligations under her plan, or the Debtor’s creditors.
Since the debtor would benefit from reopening the case and scheduling the claim, Judge Grossman allowed her to do so and “satisfy a procedural technicality under binding Eleventh Circuit case law.” As for the racetrack, he said that defending the tort claim “cannot be said to prejudice it.”
Judge Grossman said that the court presiding over the tort claim would decide whether to invoke judicial estoppel and dismiss the suit.
What if it were not a 100% plan? Would creditors have been affected by disclosure or nondisclosure? That is to say, would creditors or the chapter 13 trustee in a 10% plan have a right to amend the plan and claim a portion or all of the tort claim?
Some of Judge Grossman’s quoted language could be read to mean that creditors in a 10% plan could not glom the tort claim because it was not derived from the debtor’s post-confirmation income. However, Judge Grossman was writing in the context of a 100% plan, so his words might not be read properly to imply the same result in a typical, low-dividend plan.
Still, the question remains: In a low-dividend plan not in the Eleventh Circuit, must the debtor disclose a post-confirmation tort claim, and are creditors entitled to any of the proceeds?
This writer offers a partial answer: A debtor should disclose, to preclude a motion to revoke discharge for fraud. After disclosure, the debtor would predictably face off against the chapter 13 trustee, but on a question with no threat of losing discharge.