In re Purcell

• Citation: 573 B.R. 859
• Decision Date: 19 July 2017
• Docket Number: Case No. 08–40224–13
• Parties: IN RE: Kelly Sue PURCELL (nka Busby ), Debtor.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Kansas

573 B.R. 859

IN RE: Kelly Sue PURCELL (nka Busby ), Debtor.

Case No. 08–40224–13

United States Bankruptcy Court, D. Kansas.

Signed July 19, 2017

Jill A. Michaux, Neis & Michaux PA, Bankruptcy Law Office, Topeka, KS, for Debtor.

Jan Hamilton, Topeka, KS, for Trustee.

Jordan M. Sickman, Office of U.S. Trustee, Wichita, KS, for U.S. Trustee.

Order Denying Trustee's Motion for Turnover and Directing Clerk to Re–Close Case

Janice Miller Karlin, United States Chief Bankruptcy Judge

This matter is before the Court on Chapter 13 Trustee Jan Hamilton's Motion for Turnover; he seeks turnover of settlement proceeds that Debtor Kelly Sue Purcell¹ is entitled to receive as a result of a class action lawsuit filed in December 2013.² While the Court frequently sees turnover motions, this one is unique because it was filed more than five years after Debtor received her discharge and her case was closed, and the settlement in question is based on a cause of action that Debtor was unaware she had until well after her case was closed. However, the medical procedure giving rise to the ultimate cause of action occurred while the bankruptcy case was still (barely) open, thereby requiring the Court to determine, in the first instance, whether Debtor's cause of action (resulting in the settlement proceeds) is even property of the estate under 11 U.S.C. § 541.³

Because the Court finds that the cause of action did not arise until she discovered the potential injury caused by the device, and that discovery occurred after her bankruptcy case was closed, the settlement proceeds are not property of the estate.

I. Findings of Fact

A. Factual history.

The parties have stipulated to the following facts.⁴ Debtor filed her Chapter 13 petition for bankruptcy relief in March 2008. The Court confirmed Debtor's plan with a 36–month applicable commitment period, she successfully completed her required plan payments in April 2011, and an order of discharge was entered on September 23, 2011. The Trustee filed his Final Report in October 2011, and Debtor's case was then closed on the same date the final decree was entered—November 30, 2011.

Five days after her discharge, on September 28, 2011, Debtor underwent a medical procedure in which a transvaginal mesh device ("pelvic mesh device") was implanted. In the ensuing months, Debtor had several follow-up visits with physicians. No problems with the pelvic mesh device were discovered or disclosed to Debtor during these visits. A portion of the pelvic mesh was removed on April 18, 2012, but Debtor's doctor again reported no defect in the medical device itself.

But in January 2013, Debtor apparently began to experience problems, so Debtor's physician referred her to a specialist. In February 2013, Debtor consulted with that specialist, who discovered through the use of a cystoscope

that there was some mesh exposure. This was the first indication of any problem with the device itself. The specialist apparently recommended to Debtor to have surgery to remove the device, and the surgery to do so occurred on April 8, 2013. Significantly, the parties stipulate that on that date "[f]or the first time, a failed transvaginal mesh sling was discovered and diagnosed. (495 days after the bankruptcy case was closed.)"⁵

Soon after this third surgery, Debtor saw a television commercial regarding pelvic mesh device failure. She contacted counsel eleven days after this third surgery and retained a firm to represent her in a claim against the manufacturer of the pelvic mesh device in a multi-district class action litigation. While Debtor has reached a settlement agreement with the manufacturer of the device, the parties' stipulation does not reveal the net amount or the timeline for disbursement.

B. Procedural history.

The United States Trustee filed a motion to reopen Debtor's case upon learning of the pending personal injury settlement.⁶ The Court granted the motion with the proviso that a party in interest file a pleading addressing the settlement funds within 60 days.⁷ The Chapter 13 Trustee then filed this Motion for Turnover.⁸ The parties have stipulated that the only issue for the Court's consideration is: "Whether the product liability cause of action for personal injuries to debtor and resulting settlement between the debtor and the manufacturer of a medical device that is the subject of the Trustee's Motion for Turnover of Settlement Proceeds is property of the Debtor's bankruptcy estate."⁹

Because this issue exists in several other newly reopened cases pending before this Court—although those cases are still in the fact-finding stage—the Court invited the parties in those cases to submit amicus briefs on this limited legal issue.¹⁰ The Court appreciates, and has fully reviewed, the amicus briefs filed by the debtors in two other cases.¹¹

II. Analysis

The Court has jurisdiction to decide this matter, and it is a core proceeding.¹²

A. Burden of proof.

In a motion for turnover, the burden falls upon the Trustee, as the moving party, to establish a prima facie case that the property sought is property of the estate.¹³ If the Trustee establishes a prima facie case, the burden of proving an exception shifts to the debtor.¹⁴ The Trustee must carry his burden by a preponderance of the evidence.¹⁵

B. Whether the class-action settlement proceeds are property of the estate.

The filing of a bankruptcy petition creates an estate; property that is included in the estate is broadly defined in § 541(a)(1)to include "all legal or equitable interests of the debtor in property as of the commencement of the case." Section 1306(a)(1) expands the property included in Chapter 13 cases to include property "that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted."

Even without the expansion of property of the estate created by § 1306 for Chapter 13 cases, contingent interests that exist upon filing, but that do not fully materialize until after filing, have long been held to be property of the estate.¹⁶ In Segal v. Rochelle ,¹⁷ the United States Supreme Court held that a debtor's tax refund that was received postpetition was property of the estate, because the refund was for business losses suffered prepetition and was "sufficiently rooted in the pre-bankruptcy past" to be included as property of the bankruptcy estate.¹⁸ Segal concerned the 1898 Bankruptcy Act, but in enacting § 541, Congress intended to incorporate Segal 's holding.¹⁹

However, although § 541(a)(1) defines property of the estate as including "all legal or equitable interests of the debtor in property as of the commencement of the case,"²⁰ neither § 101 (which contains definitions used in the Code) nor § 541 define "property." The Supreme Court confronted that omission head-on in Butner v. United States.²¹ It recognized the constitutional authority of Congress to specifically enact a statute that would provide such a definition, but found that in the absence of such statutory authority, state law regarding property interests would control.²²

So for example, while Congress elected to affirmatively include a debtor's interest in rental income in the definition of property of the estate, it has not similarly opted to expressly include a debtor's postpetition legal claim as property of the estate.²³ As a result, and because property interests for Kansas debtors are created by Kansas law, Kansas law governing when a cause of action accrues controls.²⁴

The accrual of Debtor's interest in the product liability claim for personal injuries is controlled by K.S.A. § 60–513. This statute establishes a two-year statute of limitations for most torts.²⁵ Importantly, this statute of limitations is tolled in cases in which the fact of injury is not immediately ascertainable. In such cases, the cause of action does not accrue

"until the act giving rise to the cause of action first causes substantial injury, or, if the fact of injury is not reasonably ascertainable until some time after the initial act, then the period of limitation shall not commence until the fact of injury becomes reasonably ascertainable to the injured party."²⁶

This is commonly referred to as the discovery rule, or theory,²⁷ in contrast with the conduct theory, in which the date of the action giving rise to the injury defines the accrual of the cause of action, irrespective of actual discovery.²⁸

The distinction between a claim of the estate and a claim against the estate is important, however, because while Congress has not opted to preempt state law in defining property interests of the estate, it has defined "claims" against the estate.²⁹ In re Smith, a case with substantially similar facts and cited by both parties, discussed this distinction.³⁰ There, debtor had taken a (later banned) weight-loss medication, Fen–Phen, before she filed her Chapter 7 bankruptcy case, but commenced litigation and reached a settlement agreement with the manufacturer after she received her discharge and her case was closed.³¹ The Trustee moved for an order directing the debtor to turn over the proceeds.³²

The Smith decision noted the scope of the definition of "claim" in § 101(5) as pertaining to a bankruptcy claim, i.e., a claim against the estate, and recognized that an interest could be a bankruptcy claim under the Code even if not recognized as such under state law.³³ On the other hand, a debtor's interest in a potential claim was determined and defined by state law and could not become property of the estate if it did not exist as of the commencement of the case.³⁴ Relying on K.S.A. § 60–513, Smith found that the debtor's cause of action had not accrued until she discovered her injury, which was well after discharge. As a result, the court held that the settlement proceeds were not property of the estate and denied turnover.³⁵

The Trustee relies on In re Parker, where the Tenth Circuit broadly stated that the conduct theory controls the date of accrual of a claim.³⁶ But the facts...