Divergent lines of authority are developing to determine when a claim becomes property of the estate because it was “sufficiently rooted” in the pre-bankruptcy past.
One year apart, a district judge in New York and a bankruptcy judge in Georgia reached opposite results in cases involving the same defective medical device and functionally identical facts.
In a May 15 opinion, Bankruptcy Judge James R. Sacca of Atlanta ruled that a claim arising from a defective pelvic mesh sling was estate property, even though the statute of limitations had not begun to run and the debtor was not aware of the existence of the claim before her chapter 7 filing.
More specifically, the debtor had the sling implanted about three months before filing. The debtor was not aware of problems regarding the sling until she saw a television commercial about the defect one year after filing.
Whether the “discovery of harm rule” applies in determining ownership of a claim was an issue of first impression in his district, Judge Sacca said.
The debtor urged the court to follow Mendelsohn v. Ross, 251 F. Supp. 3d 518 (E.D.N.Y. May 9, 2017), where a pelvic mesh sling was implanted six years before bankruptcy, but the debtor was not aware she had a claim until six years after filing. In Mendelsohn, District Judge Joseph F. Bianco of Central Islip, N.Y., affirmed the bankruptcy court, interpreting Segal v. Rochelle, 382 U.S. 375, 380 (1966).
Although the claim was rooted in the pre-bankruptcy past, it was not estate property, Judge Bianco ruled, because it was not “sufficiently” rooted in the past, using the rubric of Segal.
The trustee in the Georgia case contended that the claim had accrued and was estate property at the time of filing, although the statute of limitations had not begun to run before bankruptcy.
Adopting the trustee’s analysis, Judge Sacca felt bound by Eleventh Circuit authority, Johnson v. Alvarez (In re Alvarez), 224 F.3d 1273 (11th Cir. 2000), cert. denied, Alvarez v. Johnson, 531 U.S. 1146 (2001).
In Alvarez, the Eleventh Circuit held that discovery of a claim is irrelevant, because “a cause of action can accrue for ownership purposes in a bankruptcy proceeding before the statute of limitations begins to run.” Id. at 1276, n.7.
The claim was estate property, according to Judge Sacca, because all elements of the claim other than discovery had occurred before bankruptcy. Discovery, he said, “only pertains to the inquiry for the purposes of the statute of limitations.”
“For the purposes of ownership in the bankruptcy case, the requisite elements for the claim occurred prepetition” when the debtor had the sling inserted, Judge Sacca said.
The result in Judge Sacca’s case is also at odds with Sikirica v. Harber (In re Harber), 553 B.R. 522 (Bankr. W.D. Pa. May 31, 2016), where the debtor had a hip replaced years before bankruptcy. The debtor was aware before bankruptcy that the device was potentially defective, so she scheduled the claim with a value of zero.
A year after bankruptcy, the debtor discovered that her device indeed was defective and had it replaced. Later, the manufacturer offered a $147,000 settlement, which the trustee claimed as estate property.
In Harber, Bankruptcy Judge Gregory L. Taddonio of Pittsburgh ruled that the claim did not belong to the estate. Interpreting both Segal and Butner v. U.S., 440 U.S. 48 (1979), he held that the personal-injury claim was not estate property because there were no damages and no manifestation of injury before bankruptcy.
Judge Taddonio’s opinion demonstrates the need to reconsider the continuing validity of Segal in light of the later decision in Butner and the adoption of the Bankruptcy Code with its definition of property of the estate contained in Section 541(a).
To read ABI’s discussions of Mendelsohn and Harber, click here and here.