The Effects of Bankruptcy on Pending Civil Litigation
| Publication year | 1984 |
| Pages | 803 |
| Citation | Vol. 13 No. 5 Pg. 803 |
1984, May, Pg. 803. The Effects of Bankruptcy on Pending Civil Litigation
As debtors more frequently seek relief under bankruptcy laws from foreclosure, repossession, eviction and claim litigation, general practitioners are drawn into an area that seems arcane and foreign. This article is designed to describe for the general civil litigator the effects of bankruptcy on pending litigation, and to discuss some alternatives available upon commencement of a bankruptcy case.
The filing of a petition in bankruptcy creates an estate. All legal and equitable interests of the debtor in property, including causes of action, vest in the estate.(fn1) The representative of the estate has the capacity to sue and be sued, and he acts on behalf of the debtor in any pending litigation, whether as plaintiff or defendant.(fn2) A pending action does not perish merely because the plaintiff files for bankruptcy.(fn3)
In a Chapter 11 reorganization case the debtor is the representative of the estate, and in that capacity is referred to as the "debtor-in-possession."(fn4) The debtor-in-possession may operate the debtor's business routinely unless the court orders otherwise. The debtor-in-possession ceases to represent the estate when a trustee is appointed.(fn5)
In Chapter 13 reorganization cases the debtor retains possession of property of the estate and may routinely operate his business, but the Standing Chapter 13 Trustee exercises certain rights and bears certain duties to the exclusion of the debtor.(fn6) In a Chapter 7 liquidation case a trustee must be appointed.(fn7) In terms of rights and responsibilities in administering any bankruptcy estate the words "trustee" and "debtor-in-possession" are generally interchangeable, and this article treats them as such.(fn8)
Although the trustee represents the estate in pending litigation, courts disagree on whether the trustee may exercise all the rights and privileges of the debtor. For instance, some courts have held that the trustee may assert or waive the debtor's attorney-client privilege,(fn9) while another had found that the trustee's waiver of the corporate debtor's privilege did not bar the officers' assertion of their own privilege and another that the trustee may not waive any privilege.(fn10) On the other hand, the different entity which is the estate often has rights greater than those of the debtor.(fn11) For instance, in many circumstances, the trustee cannot be estopped by the debtor's voluntary acts, even when the debtor himself would be estopped.(fn12)
Counsel for the trustee, debtor or committee of creditors or equity security holders is a professional employed at the expense of the estate.(fn13) His employment must be approved by an order of the court upon proper application. The application must include specific information such as a statement of the necessity and purpose of the employment, the reason for the choice of named counsel, disclosure of any proposed arrangement for compensation and all the attorney's connections with the case.(fn14)
The application typically is supported by an affidavit of counsel stating that he is a "disinterested person." Counsel representing the debtor must also file a statement of payments and fee agreements made within one year before the petition for services rendered and to be rendered in connection with the case.(fn15)
Any partner or regular associate of the attorney so employed may act without further court order. No relative of, or person closely associated with, a
judge of the appointing court may serve as an attorney employed at the expense of the estate. If this rule disqualifies an individual, it also disqualifies the firm with which that individual is connected.(fn16)
Fees for the debtor's, trustee's and committee's counsel are an expense of administration entitled to priority, but may be allowed and paid only after application made no more frequently than once every 120 days.(fn17) Counsel may apply more often if the court so orders. The application must be supported by a detailed statement of services performed, time expended, expenses incurred, amounts requested, amounts previously paid or promised, the source of such amounts, whether such amounts were shared and whether any sharing agreement exists.(fn18)
Any agreement for sharing as a member or associate of a firm of attorneys need not be disclosed, although any "party in interest" may object to counsel's fee application.(fn19) Attorney's fees are entitled to priority over many other types of claims, but they are only one item in the class of administrative costs and should assets be insufficient to pay all such costs in full, attorneys and other claimants in the class will share pro rata.(fn20)
Another general effect on pending litigation of the filing of a petition in bankruptcy is the sixty-day extension of time allowed to the trustee for filing pleadings, giving notices, and doing similar acts within time periods set by applicable law, orders entered in proceedings, and agreements.(fn21) For instance, answer and response deadlines, discovery due dates and cutoffs, and the like, are extended automatically for sixty days. Enforcement of such extended deadlines against the debtor, however, such as by motion for default judgment or motion to compel responses to discovery, is, along with most actions against the debtor, automatically stayed by the filing of the bankruptcy petition.(fn22)
The general extension does not give the estate more rights than the debtor had upon commencement of the case---it only extends those rights which exist. For example, if the debtor has a claim which, upon filing of the bankruptcy petition, is barred by a statute of limitations, the estate is also barred. However, if the statute has not expired when the bankruptcy case is commenced, the claim will survive, for the estate's benefit, for at least two years.(fn23)
On the other side, if a potential plaintiff has a claim against the debtor which is not barred by the statute of limitations upon commencement of the bankruptcy case, the statutory period will not expire either until the later of thirty days after notice of termination of the automatic stay or the end of the statutory period.(fn24)
Parties litigating with the debtor upon commencement of the bankruptcy case probably will be "parties in interest" in the bankruptcy proceeding. The term "party in interest" is not defined in the U.S. Bankruptcy Code ("Code") or Rules. One Code section, however, implies that the phrase includes the debtor, the trustee, a creditors' committee, an equity security holders' committee, a creditor, an equity security holder and an indenture trustee.(fn25) Consistent with this suggestion, the Bankruptcy Rules mention a debtor, creditor, equity security holder...
To continue reading
Request your trial