A decision by Bankruptcy Judge Gregory L. Taddonio of Pittsburgh underscores the need for the Supreme Court to reconsider the continuing validity of its 1966 decision in Segal v. Rochelle in light of the high court’s 1979 Butner v. U.S. opinion and the adoption of the Bankruptcy Code with its definition of property of the estate contained in Section 541(a).
In Segal, the Court held that after-acquired property in the form of a tax loss carryback was property of the bankrupt estate since it was “sufficiently rooted in the pre-bankruptcy past.” Thirteen years later in a case under the former Bankruptcy Act, the justices held in Butner that property interests are determined by reference to state law.
In the 1978 adoption of the Bankruptcy Code, Congress defined property of the estate to include “all legal or equitable interests of the debtor in property as of the commencement of the case.”
Judge Taddonio’s opinion on May 31 demonstrates the difficulty in applying Segal and Butner to a claim involving a defective medical device where evidence of the defect and injury does not appear until after bankruptcy.
A woman had a hip replacement years before filing her chapter 7 petition. Before bankruptcy, she was notified of a potential defect in the artificial hip. Although she had not manifested any problems, her schedule of assets listed a potential claim against the device manufacturer and assigned a zero dollar value to the potential lawsuit.
Without objection from the bankrupt, the order closing the case and granting a discharge excepted the hip replacement claim from abandonment.
The next year, metal appeared in the woman’s bloodstream, indicating that the artificial hip was failing. She underwent surgery to replace the hip and got a $147,000 settlement offer from the manufacturer.
Judge Taddonio denied the trustee’s motion to compel turnover of settlement proceeds, holding that the claim was not property of the estate. In the process, he observed that courts vary “greatly” in how they apply Segal today.
According to Judge Taddonio, some courts follow Segal with “whole-hearted allegiance,” while others “simply jettison[] the Segal principles entirely.” Other courts apply Segal “to a limited extent.” Judge Taddonio decided to use a “blended approach” by combining elements of the “state law accrual test” with the Segal analysis.
Pennsylvania law erected a major hurdle to applying Segal because state law provides that the cause of action accrues only when the plaintiff has a right to institute suit. With respect to latent injuries such as those arising from defective medical devices, the claim accrues only when the plaintiff discovers or should have discovered injury. Consequently, the claim would not be estate property if state law alone answered the question.
The trustee argued that federal law and Segal command a different result. Although Judge Taddonio conceded that the claim was rooted in the pre-bankruptcy past, he said it was not “sufficiently rooted.” He said that “complete adherence to Segal, without consideration of the state accrual test, is inconsistent with Butner and the plain language of Section 541(a)(1).”
Balancing competing factors, Judge Taddonio said that the most critical elements indicating that the claim “had not taken root” by the filing date were the lack of damages and the absence of manifestation of injury. He therefore held that the personal injury claim was not property of the estate.