CHAPTER 2, B. Particularly Prickly Pre-Petition Problems

• Jurisdiction: United States

B. Particularly Prickly Pre-Petition Problems

2019 Annual Spring Meeting

April 2019

Donald R. Lassman

Lassman Law

Needham, Mass.

Mysterious Assets

Litigation Recoveries

Pending personal injury recoveries can be very complex and, for that reason, difficult to evaluate. Proper identification of the nature and scope of the recovery is essential to selecting the most advantageous exemption scheme and to protect the recovery for the debtor. If the debtor is pursuing the claim pre-petition, carefully review the matter with any professionals that may have already been engaged by the debtor to explain the impact that a bankruptcy filing may have on their continued employment and that control of the recovery process and any pending litigation may pass to a bankruptcy trustee. If the debtor has yet to take steps to pursue the claim, engage a professional that can provide you with an assessment of possible outcomes.

Bankruptcy schedules require that the debtor place a value on all assets. Careful thought must be given to the value, if any, placed on pending litigation recoveries, because the value listed on the bankruptcy schedule, constituting a sworn statement of the debtor, should be binding on the debtor and could establish a ceiling on recovery possibilities at a later stage in the recovery process.

Further complicating the analysis of this asset class, and perhaps as a result of larger numbers of people undergoing increasingly complex medical procedures, many debtors do not even know that they have a claim to assert at the time of case commencement; they find out only after suffering complications and/or learning of pending or planned class action litigation after the bankruptcy filing. Counsel must check to ensure that the debtor has not received any notifications of any kind in connection with any past medical procedures, or otherwise believes that a recovery of some kind might arise in the future. Many potential recoveries are simply unknowable at the time of case commencement. Fortunately, bankruptcy schedules may be amended as a matter of course¹ until case closing. After case closing, if a case is then re-opened, some courts continue to permit amendment as a matter of course,² while other courts require a showing of excusable neglect.³

Trust Property

Trust interests are particularly vexing. Gathering all documents relating to the Trust, which could include the Trust Document and any amendments thereto, Beneficiary Schedules, tax returns, bank account statements and asset inventories, can be problematic if the Trust was not established by the debtor and the nondebtor is unwilling to cooperate. In some cases, the debtor may be wholly unaware of the Trust and/or their interest in the trust res. For this reason, it is recommended that counsel require debtors to confer with parents and close relatives about possible trust interests.

Assuming the debtor is aware of an interest in trust property, the following line of questioning should enable you to gather information necessary to determine the nature and extent of the debtor's interest in trust property, then analyze the impact that a bankruptcy filing may have on that interest.

What is the debtor's interest in the trust: trustee, beneficiary, settlor, etc.?

Is the trust revocable or irrevocable?

If the debtor is a trustee of the trust, does the trust grant the debtor discretionary powers over trust assets, powers of revocation and amendment to appoint beneficiaries or to use trust property or its proceeds for his benefit? If so, the...