In re Brown, 02-53538.

• Decision Date: 01 September 2006
• Docket Number: No. 02-53538.,02-53538.
• Citation: 354 B.R. 100
• Court: U.S. Bankruptcy Court — Northern District of West Virginia
• Parties: In re: Eugene E. BROWN and Debra A. Brown, Debtors.

354 B.R. 100

In re: Eugene E. BROWN and Debra A. Brown, Debtors.

No. 02-53538.

United States Bankruptcy Court, N.D. West Virginia.

September 1, 2006.

Opinion Denying Stay September 29, 2006.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Mark D. Panepinto, Wheeling, WV, for Debtors.

MEMORANDUM OPINION

PATRICK M. FLATLEY, Bankruptcy Judge.

Martin P. Sheehan, the Chapter 7 trustee (the "Trustee") for Eugene and Debra Brown (the "Debtors"), seeks court approval to release the Debtors' pre-petition cause of action against Ameriquest Mortgage Company ("Ameriquest") to the Debtors in exchange for a payment of $40,000. Ameriquest objects to the Trustee's proposed course of action on the grounds that the cause of action against it is not assignable, and even if it is, then the "sale" of the cause of action should be open to higher and better offers. Ameriquest also questions the source of the Debtors' proposed $40,000 payment and requests permission to conduct a Rule 2004 examination of the Debtors and their anticipated lender.

The court held telephonic hearings on these issues in Wheeling, West Virginia on July 11, August 15, and August 22, 2006. All issues are fully briefed and ripe for decision. For the reasons stated herein, the court will grant the Trustee's motion and deny Ameriquest's motion for a yule 2004 examination.

I. BACKGROUND

When the Debtors filed their Chapter bankruptcy on October 24, 2002, they listed their principal residence at 123 Gamble Avenue, Wheeling, West Virginia as having a value of $50,000, and as being subject to a secured claim of $54,700 in favor of Ameriquest. Shortly after the Debtors' bankruptcy filing, Ameriquest obtained relief from the automatic stay to foreclose on the Debtors' residence. On February 3, 2003, the court granted the Debtors a discharge, and on February 21, 2003, the Debtors' case was closed.

On April 9, 2003, Ameriquest purchased the Debtors' residence at foreclosure; the Debtors however, did not immediately abandon the premises. In September 2003, Ameriquest filed an eviction action in the Circuit Court of Ohio County, West Virginia. The Debtors filed a counterclaim alleging, inter alia, lending improprieties by Ameriquest, and violations of the West Virginia Consumer Credit Protection Act. More specifically, the Debtors allege that Ameriquest attempted to collect a debt using threatening, coercive, oppressive, and abusive conduct; engaged in unfair or deceptive acts; engaged in intentional or negligent misrepresentation; breached its covenant of good faith and fair dealing; and caused intentional infliction of emotional distress to the Debtors due to its debt collection activities.

In 2006, the attorney representing the Debtors in their counterclaim against Ameriquest informed the Trustee about the litigation. The Debtors had not listed the lawsuit on their bankruptcy schedules and the Trustee was otherwise uninformed about its existence. Consequently, on April 25, 2006, the Trustee filed a motion to reopen the Debtors' bankruptcy case to administer the lawsuit for the benefit of the Debtors' pre-petition creditors. The court reopened the case, and the Trustee filed a notice to the Debtors' creditors to file claims.

The claims bar date in this case was August 4, 2006, and the total amount of the filed claims is $30,748, which includes Ameriquest's claim for $18,068. The Trustee has objected to Ameriquest's claim, in part,¹ and filed a report with the court that the $40,000 consideration given by the Debtors will be sufficient to pay all claims in the estate in full along with the related costs of administration. The Debtors also represent that if the Trustee ultimately does not have enough money to pay all allowed claims and costs of administration, then they are willing to increase the amount of their consideration to ensure full payment. The Debtors state that they do not have $40,000 to pay the Trustee; rather, the money will be paid from loan proceeds that the Debtors plan to receive from a private businessman.

II. DISCUSSION

Ameriquest contends that the court should deny the Trustee's motion to release the Debtors' counterclaim back to the Debtors in exchange for $40,000 on the grounds that: (A) the cause of action against it is not assignable, (B) the purchase price is insufficient to pay all claims in full and if "sold" then the asset should be auctioned, and (C) the source and terms of the Debtors' purchase funds is undisclosed and may violate West Virginia law.

A. Transfer of Personal Injury Tort Claims

Ameriquest argues that the Debtors' counterclaim against it is a personal injury tort and is therefore not assignable by the Trustee under West Virginia law. E.g., 6 Am.Jur.2d Assignments § 73 (2006) ("The right to bring a personal injury action even for fraud, cannot be assigned or subrogated, except by statute."). The Trustee argues that West Virginia law does not prohibit the sale of such litigation claims. E.g., Currence v. Ralphsnyder, 108 W.Va. 194, 151 S.E. 700, 702 (1908) ("[T]his Court will not nullify the contract merely because it savors of champerty under the common law...."). Whether the Trustee's proposed course of action is labeled an "assignment," a "sale," an "abandonment for consideration," or some other moniker is immaterial in this case inasmuch as the effect of the transfer is to divest the bankruptcy estate's interest in the Debtors' counterclaim against Ameriquest to the Debtors themselves in exchange for full satisfaction of all claims against the estate.

"Maintenance" at common law is "an officious intermeddling in a suit that in no way belongs to the meddler, and signifies an unlawful taking in hand, or upholding of quarrels or sides, to the disturbance or hindrance of common right." Davis v. Settle, 43 W.Va. 17, 26 S.E. 557, 560 (1896). "Champerty" is a species of maintenance, and "is the unlawful maintenance of a suit in consideration of part of the matter in controversy." Id. Traditionally, at common law, maintenance and champerty of personal injury tort claims has been forbidden based on a policy that protected the injured party "so that an unrelated third-party cannot reap a windfall by paying the injured party a pittance for the claim and then prosecute litigation for injuries that the party never suffered." Booth v. Moss (In re Moss), No. 03-12672, 2005 WL 2100964, at *2, 2005 Bankr.LEXIS 1667 at *4 (Bankr.M.D.N.C. Aug. 12, 2005).

Even assuming, however, that the Debtors are purchasing litigation from the Trustee against Ameriquest, and further assuming that the Debtors are intermeddlers in a suit that does not belong to them, Ameriquest lacks prudential standing under West Virginia law to raise maintenance and champerty as a defense to the Trustee's proposed transfer of the bankruptcy estate's interest in litigation to the Debtors. In general, only the parties to the contract of maintenance or champerty have standing to assert those defenses/causes of action. E.g., Work v. Rogerson, 149 W.Va. 493, 142 S.E.2d 188, 194 (1965) ("`Strangers to a champertous contract cannot take advantage of it; only a party to it can do so.'") (citation omitted); Irons v. Croft Hat & Notion Co., 86 W.Va. 685, 104 S.E. 111, 112 (1920) (same); Davis, 26 S.E. at 566 ("[A] stranger cannot set up this defense, as the taint of champerty only invalidates contracts as between the parties to the champerty.'") (dissenting opinion); but see Delaware CWC Liquidation Corp. v. Martin, 213 W.Va. 617, 584 S.E.2d 473, 479 (2003) (determining that "the assignment of legal malpractice claims is contrary to the public policy of West Virginia; therefore, any such assignment is void as a matter of law.").

No public policy reason exists in this case to prevent the transfer of the bankruptcy estate's interest in the Debtors' claim against Ameriquest to the Debtors themselves. The Debtors' bankruptcy estate is the "intermeddler" in the Debtors' cause of action pursuant to § 541(a)(1) of the Bankruptcy Code. 11 U.S.C. § 541(a)(1) (stating that the commencement of a bankruptcy case creates an estate that is comprised of "all legal and equitable interests of the debtor in property as of the commencement of the case. ..."). Because the Trustee is transferring the Debtors' own interest in the lawsuit back to the Debtors, any concern relating to the trading in personal injury tort claims is vitiated. See, e.g., Moss, supra.

Notwithstanding the fact that it is the injured party that is seeking to recover on their own personal injuries against the alleged wrongdoer, Ameriquest asserts that the Trustee's proposed transfer should be denied based on the reasoning set forth in United Techs. Corp. v. Gaines, 225 Ga. App. 191, 483 S.E.2d 357, 358-59 (1997), wherein the court did not give effect to an assignment of a personal injury tort claim from the Chapter 7 bankruptcy trustee the debtor. The Georgia court reasoned that personal injury tort claims could be assigned from the debtor to the bankruptcy estate under federal law (11 U.S.C. § 541(c)(1)) notwithstanding a specific state statute that prohibited such assignments. Id. at 358 (citing Ga.Code Ann. § 44-12-24). Once "title" to the cause of action was transferred to the `bankruptcy estate, however, the court determined that Georgia law prohibited the assignment of that cause of action from the trustee back to the debtor. Id. at 359.

Here, however, West Virginia does not have a specific statutory prohibition on the anti-assignment of personal injury tort claims and resort must be made to common law. See, e.g., W. Va.Code § 55-7-8a(f) ("Nothing contained in this section shall be construed to ... give the right to assign a claim for a tort not otherwise assignable."). For the reasons set forth above, the transfer of a personal injury tort claim from the bankruptcy estate back to a debtor, which originally belonged to the debtor, does not violate any identifiable West Virginia policy that would...