A $105,000 settlement for the implantation of a medical device prior to bankruptcy was not property of the estate because no one knew the device was defective until years after the debtor filed a chapter 7 petition.
Bankruptcy Judge Robert E. Grossman of Central Islip, N.Y., rested his April 14 decision on the admitted fact that no one in the medical community, much less the bankrupt herself, knew the device was defective until six years after the debtor received her chapter 7 discharge.
In a situation involving what Judge Grossman called a “potential tort claim,” a cause of action belongs to the estate if the claim was “viable” when the petition was filed. If the cause of action exited on the filing date, it belongs to the estate regardless of whether the debtor knew it existed, the judge said.
In the case at bar, the device was implanted and removed before bankruptcy. The debtor did not know the device was defective until several years after receiving a discharge when she read that the manufacturer had issued a warning.
Although the bankrupt had sustained no injury, she agreed to accept $105,000 in a settlement for waiving any past or future claims. Judge Grossman grounded his decision on a trio of Supreme Court cases: Whiting Pools from 1983 (estate property includes causes of action existing on the filing date); Butner from 1979 (property interests are defined by state law); and Segal v. Rochelle from 1966.
Among the three, the most critical to the outcome was Segal. The potential claim was “not sufficiently rooted in the Debtor’s pre-petition past” because no warning had been issued and no one in the medical community knew the device was defective when the bankrupt filed her petition.
Judge Grossman said that all elements of a cause of action must exist before filing for the claim to be estate property. In the case of a tort, the claim will not be estate property, he said, if there was no manifestation of injury before filing, even if all of the conduct giving rise to the claim occurred before filing.
If the potential claim were property, Judge Grossman said every Section 341 meeting would become a “health examination” permitting “opportunistic trustees” to “latch onto every possible claim that may someday arise.”