In re Easley–Brooks

• Decision Date: 25 February 2013
• Docket Number: No. 08–12520 (MG).,08–12520 (MG).
• Citation: 487 B.R. 400
• Parties: In re Debra EASLEY–BROOKS, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

487 B.R. 400

In re Debra EASLEY–BROOKS, Debtor.

No. 08–12520 (MG).

United States Bankruptcy Court,

S.D. New York.

Feb. 25, 2013.

Becker Glynn, Muffly, Chassin & Hosinski LLP, By: Alec P. Ostrow, Esq., Chester B. Salomon, Esq., New York, NY, for Debtor.

Martin Clearwater & Bell LLP, By: Barbara D. Goldberg, Esq., Olga Nikiciuk, Esq., New York, NY, for Allen B. Chefitz, M.D.

MEMORANDUM OPINION GRANTING MOTION TO REOPEN CHAPTER 7 CASE

MARTIN GLENN, Bankruptcy Judge.

Debra Easley–Brooks (“Brooks”) moves pursuant to section 350(b) of the Bankruptcy Code, Rule 5010 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”), and Local Bankruptcy Rule 5010–1 to reopen a chapter 7 case (the “Motion”). (ECF Doc. # 20.) Brooks seeks to reopen the case to include a medical malpractice action in her schedule of assets to enable the chapter 7 trustee to prosecute the malpractice action for the benefit of creditors and Brooks (to the extent of any exemption and surplus). Allen B. Chefitz (“Chefitz”), a defendant in a now-dismissed malpractice action that Brooks filed in New York Supreme Court (dismissed on the basis that Brooks lacked standing to prosecute the claims because they were property of Brooks' chapter 7 estate), opposes the motion to reopen the chapter 7 case, asserting that the defendants will be prejudiced by the reopening and that creditors will not benefit from reopening the case (the “Answer”). (ECF Doc. # 25.) Brooks replied to the objection asserting that Chefitz is not a creditor and lacks standing to object (the “Reply”). (ECF Doc. # 28.)

The Court held a hearing on the Motion on February 11, 2013. At the conclusion of the hearing, the Court granted the Motion and indicated that an opinion would follow explaining the basis for the ruling. On February 14, 2013, an Order was entered granting the Motion (ECF Doc. # 31); on February 19, 2013, the U.S. Trustee filed a notice of appointment of John Pereira as the chapter 7 trustee (ECF Doc. # 32).

I. BACKGROUND

Brooks filed a voluntary petition under chapter 13 of the Bankruptcy Code on July 2, 2008. (ECF Doc. # 1.) A plan was confirmed on November 5, 2008. (ECF Doc. # 8.) On December 14, 2008, the Debtor had a serious medical emergency that resulted in her hospitalization until February 8, 2009, allegedly giving rise to her medical malpractice claim. See Mot. ¶ 3. Brooks converted her case to a case under chapter 7 on July 29, 2009. (ECF Doc. # 9.) On September 7, 2009, an amended voluntary chapter 7 petition and amended schedules were filed. (ECF Doc. 14 and 15.) The schedules did not disclose any medical malpractice claims.

The Motion asserts that the case was converted to a case under chapter 7 because Brooks was unable to make the chapter 13 plan payments since she could not work as a result of her health problems. See Mot. ¶ 3. Upon conversion, John Pereira was appointed as the chapter 7 trustee. At the time of conversion, seven creditors held ten claims totaling $107,548.64. See Chapter 13 Standing Trustee's Final Report and Account (ECF Doc. # 17). Debtor's total of scheduled claims was $119,430.37. See Mot. ¶ 11. On October 8, 2009, the chapter 7 trustee filed a report of no distribution. An order of discharge was filed on December 11, 2009 (ECF Doc. # 19), and the case was closed on December 12, 2009.

On June 11, 2011, the Debtor commenced a medical malpractice action in New York Supreme Court in the Bronx, but the state court dismissed the case for lack of Brooks' capacity to sue. See Mot. Ex. G ( Easley–Brooks v. Lee, No. 305314/11 at *2 (N.Y. Sup.Ct., Bronx Cty. October 9, 2012) (holding that “non-disclosure of the plaintiff's medical malpractice claim resulted in the closed bankruptcy's estate being the proper party to maintain this action”)). The Debtor contends in the Motion that the omission of the medical malpractice claim from her amended schedules was “inadvertent” and was the result of malpractice by the Debtor's prior bankruptcy attorney.¹ She asserts that the state court decision dismissing the case was in error because the bankruptcy case was not converted in bad faith and, as a result, the medical malpractice claim did not become part of the chapter 7 estate. See Mot. ¶ 4; Reply ¶ 10. Brooks has appealed the dismissal but has so far not prosecuted the appeal.

Brooks' continued assertion that the conversion was not in bad faith is peculiar in the context of her Motion because her clear purpose in making the motion is to enable the chapter 7 trustee to prosecute the medical malpractice claim; the trustee can do so only if the claim is property of the chapter 7 estate, which, as explained below, only follows if the conversion of the case was “in bad faith.” The Debtor concedes that the claim is property of the chapter 7 estate. See Mot. ¶ 14. The Debtor's counsel in the dismissed state court action is willing to proceed on contingency fee basis if the case is reopened and the appointed trustee elects to proceed. See Mot. ¶ 17. Despite Brooks' assertion to the contrary, the evidence supports the conclusion that the conversion of her chapter 13 case was in bad faith.

Brooks was deposed in the medical malpractice action before it was dismissed. When responding to questions about when she had knowledge of and a desire to proceed with a medical malpractice action, Brooks testified that during her several months hospital stay beginning in December 2008 she concluded that malpractice had occurred and that she wanted the doctors held accountable. See Brooks Dep. 245:2–248:22 (ECF Doc. # 30). Brooks did not tell her bankruptcy counsel about the malpractice claim, and she waited to file the malpractice lawsuit until after she received a discharge and her chapter 7 bankruptcy case was closed. Id. 51:4–52:4. Her motive in waiting to file the malpractice lawsuit is clear: in December 2009, she received a bankruptcy discharge wiping out more than $100,000 in claims; she hoped to keep the full amount of any recovery without having to repay any of her prior debts.

Brooks' failure to tell her bankruptcy attorney about the malpractice claim, although she believed she had such a claim, coupled with waiting until after her chapter 7 case was closed to file the malpractice action, is strong evidence that the chapter 13 case was converted in bad faith. The failure to disclose the existence of the claim was significant; if the chapter 13 trustee and the Court ² were aware of the malpractice claim that was part of the chapter 13 estate at the time of conversion, it is likely that conversion would have been challenged since the malpractice action could have provided a source of recovery for creditors.

Chefitz objects to the Motion, contending that the Debtor's alleged bad faith in knowingly violating her duty of disclosure to the bankruptcy court should bar the Debtor from reopening the case; that the defendants would be prejudiced by allowing a trustee to proceed with the malpractice action by substitution as plaintiff (or filing a new action); and that the passage of three years will make a substantial benefit to the creditors unlikely. See Answer Att'y Decl. ¶¶ 12, 14. In the alternative, if the case is reopened and a trustee substituted for the Debtor, Chefitz contends that the Debtor should be judicially estopped from receiving any surplus by capping damages at the amount of timely filed creditor claims.³See Answer ¶ 23.

II. DISCUSSION

The issue here is whether the Debtor's chapter 7 case should be reopened and whether the medical malpractice claim is property of the chapter 7 estate. Because the alleged medical malpractice occurred while the chapter 13 case was pending, the medical malpractice claim was property of the chapter 13 estate. See11 U.S.C. § 1306(a) (“Property of the estate includes, in addition to the property specified in section 541 of this title(1) all property of the kind specified in such section that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first....”). As explained below, the issue whether the medical malpractice claim is property of the chapter 7 estate hinges on whether conversion of the case was “in bad faith.” See11 U.S.C. § 348(f)(2) (“If the debtor converts a case under chapter 13 of this title to a case under another chapter under this title in bad faith, the property of the estate in the converted case shall consist of the property of the estate as of the date of conversion.”).

The Court concludes that the conversion here, without disclosure of the medical malpractice claim, was in bad faith; upon reopening of the case, the malpractice claim therefore once again became property of the chapter 7 estate to be administered by the chapter 7 trustee. The Debtor must amend her schedules to list the claim and any asserted exemption. In the event the chapter 7 trustee recovers on the claim and a surplus remains after payment of all allowed claims and administrative expenses, nothing in this ruling precludes the Debtor from recovering any surplus.⁴

A. The Authority to Reopen a Case is Predicated on General Bankruptcy Policy: Recovery of Creditors and the Relief of Debtors

1. Authority to Reopen Generally

Fed. R. Bankr.P. 5010 provides: “A case may be reopened on motion of the debtor ... pursuant to § 350(b) of the Code.” Section 350(b) of the Bankruptcy Code permits the bankruptcy court to reopen a case “to administer assets, to accord relief to the debtor, or for other cause.” 11 U.S.C. § 350(b). The Code does not define “other cause,” and the decision to reopen is discretionary. In re Cruz, 254 B.R. 801, 804 (Bankr.S.D.N.Y.2000) (citing In re Chalasani, 92 F.3d 1300, 1307 (2d Cir.1996)). The movant bears the burden to demonstrate cause for reopening the case. In re Otto, 311 B.R. 43, 47 (Bankr.E.D.Pa.2004).

In determining whether “cause” exists, the court “may consider...