In re Ross

548 B.R. 632

In re: Barbara G. Ross, Debtor,

Case No.: 8–04–87445 (REG)

United States Bankruptcy Court, E.D. New York.

Signed April 14, 2016

Michael G. McAuliffe, Melville, NY, for Debtor.

MEMORANDUM DECISION

Robert E. Grossman, United States Bankruptcy Judge

Before the Court is the Trustee's motion ("Motion") seeking to reopen the bankruptcy case of Barbara G. Ross (the "Debtor") pursuant to 11 U.S.C. § 350(b) in order to administer settlement proceeds offered to the Debtor in connection with a medical device implanted in the Debtor and removed pre-petition. The Debtor opposes the Motion, claiming that the settlement proceeds do not fit within the definition of property of the bankruptcy estate pursuant to 11 U.S.C. § 541. The parties agree that neither the Debtor nor the medical community had knowledge that the device could cause the Debtor harm as of the date the petition was filed, and in fact the Debtor has yet to suffer physical harm from the device. However, the Trustee argues that because the device was implanted pre-petition, any cause of action that may ultimately accrue based upon possible harm from the device, including the settlement proceeds, constitutes property of the estate under applicable statutory and case law.

This case presents the Court with the challenge of applying the relevant statutes and case law in an environment that is constantly changing, as advances in science and technology permit the detection of risk of harm at earlier stages, often before any actual symptoms manifest themselves. What standard should the Court adopt in determining whether a cause of action, based upon an unrecognized injury to a debtor, is property of the bankruptcy estate? If the Trustee's position is taken to its logical conclusion, the Court would be adopting a standard that would capture for the benefit of the estate any proceeds recovered by a debtor in his or her lifetime, so long as the right to recover the proceeds can be traced to a prepetition event. In this case, determining whether the settlement proceeds are property of the estate is complicated by the fact that the Debtor suffered no injury prepetition or post-petition. The settlement payment was made in exchange for the Debtor's agreement not to bring a suit in the future. In cases such as this involving potential tort claims, the proper focus is on whether there was a viable cause of action the Debtor could bring under applicable law on the date the petition was filed. If an action existed, regardless of what the Debtor knew, then that cause of action and all its proceeds would constitute property of the estate. If, however, as is true in this case, no cause of action had matured, it is irrelevant whether the Debtor ultimately develops an injury: the cause of action resulting from that injury would not be property of the estate under § 541.

This analysis is consistent with applicable case law, including the seminal Supreme Court case Segal v. Rochelle, 382 U.S. 375, 86 S.Ct. 511, 15 L.Ed.2d 428 (1966). As of the date the petition was filed, the Debtor had no expectation that a device implanted in her and removed prepetition, for which no warning had ever been issued, would create a right to receive the settlement proceeds several years later. Had the medical community been aware of any danger inherent in using the device pre-petition, and had the Debtor suffered an injury, the answer would be different. Because the elements necessary to commence an action under state law were not present as of the date of the petition, the right to receive the settlement proceeds are not sufficiently rooted in the Debtor's prepetition past to warrant inclusion of the settlement proceeds in the Debtor's bankruptcy estate.

For the reasons detailed below, the Motion is denied.

FACTS

In 1998, the Debtor underwent a surgical procedure to implant a transvaginal surgical mesh used to treat stress urinary incontinence (the "Device"). In 1999, the Debtor, for reasons not specified in the record, underwent another surgical procedure to remove the Device. On November 23, 2004 (the "Petition Date"), the Debtor filed a voluntary Chapter 7 petition and did not report any assets pertaining to the Device in her bankruptcy schedules. On March 12, 2005, the Debtor received her discharge. On July 13, 2011, the FDA issued a public alert primarily regarding "serious complications" and health risks associated with transvaginal surgical mesh used to treat pelvic organ prolapse, which is different than the mesh implanted in the Debtor. In 2012, after viewing a television advertisement from which the Debtor first learned that the Device may be "defective," the Debtor retained mass tort counsel to seek recovery. Although the Debtor was not eligible to join the class action in connection with the Device, the Debtor was offered settlement proceeds in the amount of $105,172.26—which is funded by a surplus from the existing class action—in exchange for the Debtor's release of all present or future claims in connection with the Device. The parties did not specify whether the Debtor filed an action and provided few details regarding the class action. The record is devoid of evidence of any injury to the Debtor resulting from the Device, and according to the Debtor's mass tort counsel, the Device is still being used by the medical community.

On October 7, 2015, after the Debtor's mass tort counsel informed the Trustee of the settlement offer, the Trustee filed a motion to reopen the case to administer the settlement proceeds for the benefit of the Debtor's creditors. On November 4, 2015, the Debtor filed an objection to the Trustee's motion. On November 12, 2015 and January 27, 2016, the Trustee filed replies to the Debtor's objection. On February 17, 2016, the Debtor filed a supplemental opposition.

DISCUSSION

I. Standard to Reopen

Pursuant to Rule 5010 of the Federal Rules of Bankruptcy Procedure, a debtor or other party in interest may make a motion to reopen a case. Pursuant to section 350(b), "[a] case may be reopened in the court in which such case was closed to administer assets, to accord relief to the debtor, or for other cause." The statute's permissive language provides the Court with broad discretion to determine whether a party filed a motion to reopen in good faith or has demonstrated good cause. In re Olejnik, No. 09–76714, 2010 WL 4366183 (Bankr.E.D.N.Y. Oct. 28, 2010) ; In re Meneses, No. 05–86811, 2010 WL 813975 (Bankr.E.D.N.Y. Mar. 3, 2010) ; In re Lowery, 398 B.R. 512, 514 (Bankr.E.D.N.Y.2008). The Court will only exercise its discretion to reopen a case in circumstances where relief may ultimately be afforded to a party, but not where reopening is futile or a waste of judicial resources. See In re Polynar Mardy & Marie D. Joseph, No. 10–73819, 2011 WL 917545 (Bankr.E.D.N.Y. Mar. 15, 2011).

The Court must determine whether the Trustee has met his burden of establishing that there is sufficient "cause" under section 350(b). The Bankruptcy Code does not define section 350(b)'s "cause." See State Bank of India v. Chalasani (In re Chalasani), 92 F.3d 1300, 1307 (2d Cir.1996). The only purpose of reopening this case would be to administer the settlement proceeds for the benefit of the Debtor's creditors. To determine whether cause exists, the Court must resolve the issue of whether the settlement proceeds are pre-petition assets that the Trustee is entitled to administer or whether the settlement proceeds belong to the Debtor, and therefore reopening the case would serve no purpose.

II. Property of the Estate

a. Bankruptcy Code Section 541.

Upon the filing of a chapter 7 petition, a bankruptcy estate is created. Subject to the limitations enumerated in subsections 541(b), (c), and (d), subsections 541(a)(1) and (a)(2) define the initial pool of property interests that forms the estate. Section 541(a)(1) provides that "all legal or equitable interests of the debtor in property as of the commencement of the case" become property of the estate. Section 541(a)(2) provides that spousal community property becomes property of the estate. Sections 541(a)(3) through (a)(7) expand the estate property pool to include certain post-petition property, including inheritances, divorce settlements, and life insurance policies acquired within one hundred eighty days after the bankruptcy filing. Section 541(a)(6) provides that property of the estate includes "[p]roceeds, product, offspring, rents, or profits of or from property of the estate," but expressly excludes "earnings from services performed by an individual debtor after the commencement of the case." Section 541(a)(7) is a catch-all that sweeps into the estate "[a]ny interest in property that the estate acquires after the commencement of the case." 11 U.S.C. § 541(a)(7) (emphasis added). Congress enacted section 541(a)(7) in order (1) to clarify its intention that section 541 is an "all-embracing definition"; and (2) to ensure that property interests created with or by property of the estate are themselves property of the estate. See 124 Cong. Rec. H11096 (daily ed. Sept. 28, 1978).

Section 541(a)(1)'s "property" is broad and encompasses "all legal or equitable interests of the debtor in property." United States v. Whiting Pools, Inc., 462 U.S. 198, 203, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983) ; In re Jackson, 593 F.3d 171, 176 (2d. Cir.2010). Legislative history indicates that section 541 is given a broad definition to include "all kinds of property, including tangible or intangible property ... and all other forms of property." H.R.Rep. No. 95–595, at 367 (1977), reprinted in 1978 U.S.C.C.A.N. 5787, 5963, 6323. "Property" is "construed most generously and an interest is not outside its reach because it is novel or contingent or because enjoyment must be postponed." Segal v. Rochelle, 382 U.S. 375, 379, 86 S.Ct. 511, 515, 15 L.Ed.2d 428 (1966). Congress intended to bring "anything of value" that a debtor owns into the estate. H.R.Rep. No. 95–595, at...