Mendelsohn v. Ross
2017 U.S. Dist. LEXIS 70982, 2017 WL 1900288, 251 F. Supp. 3d 518 (2017)
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Rule of Law:
Post-petition settlement proceeds for a claim arising from pre-petition conduct are not property of the bankruptcy estate under 11 U.S.C. § 541 if the critical events that established the viability of the claim, such as the discovery of a defect or injury, occur after the bankruptcy petition is filed, rendering the interest not 'sufficiently rooted in the pre-bankruptcy past.'
Facts:
- Barbara G. Ross had a mesh pelvic sling (medical device) implanted in 1999.
- Barbara G. Ross filed a voluntary petition for Chapter 7 bankruptcy on November 23, 2004, but did not list any product liability or personal injury claims on her schedules.
- On July 13, 2011, the FDA issued an advisory opinion regarding possible defects with the medical device.
- In 2012, Barbara G. Ross became aware of the possible defects in her medical device and contacted a product liability counsel.
- Barbara G. Ross subsequently asserted a product liability claim related to the defective medical device.
- Her claim resulted in a settlement award of $105,172.26.
Procedural Posture:
- Barbara G. Ross received a discharge from Chapter 7 bankruptcy on March 22, 2005.
- Her bankruptcy proceeding was closed by Final Decree on August 2, 2006.
- Allan B. Mendelsohn, as Former Chapter 7 Trustee, filed a motion on September 30, 2015, seeking to reopen Barbara G. Ross's bankruptcy proceeding to administer the settlement proceeds as an undisclosed asset.
- Barbara G. Ross objected to the motion, arguing the cause of action arose post-petition.
- The Bankruptcy Court denied the Trustee's motion to reopen in an order dated April 14, 2016, finding that no cause of action had accrued as of the petition date and therefore the settlement proceeds did not constitute property of the estate.
- Allan B. Mendelsohn (appellant) filed a Notice of Appeal of the Bankruptcy Order on April 25, 2016, to the U.S. District Court for the Eastern District of New York.
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Issue:
Does a settlement for a product liability claim, where the injury and awareness of the defect occurred post-bankruptcy petition, constitute property of the bankruptcy estate under 11 U.S.C. § 541, even if the defective medical device was implanted pre-petition?
Opinions:
Majority - Joseph F. Bianco, District Judge
No, the settlement proceeds for a product liability claim are not property of the bankruptcy estate under 11 U.S.C. § 541 when the critical elements that created the interest, such as the discovery of the defect and the claim becoming viable, occurred post-petition, even if the underlying device implantation was pre-petition. The District Court affirmed the Bankruptcy Court's denial of the motion to reopen, although it corrected the Bankruptcy Court's reasoning. The District Court agreed that the standard inquiry of whether a cause of action accrued pre-petition does not strictly apply to unaccrued claims settled post-petition. Instead, the court applied the 'sufficiently rooted in the pre-bankruptcy past' test from Segal v. Rochelle for post-petition acquired property. The court determined that while the implantation of the medical device occurred pre-petition, the 'most critical elements' that created the interest in the settlement—the FDA advisory opinion in 2011 and Barbara G. Ross's awareness of the defect in 2012—occurred well after her bankruptcy petition was filed in 2004. The court reasoned that without these post-bankruptcy events, the pre-bankruptcy event (device implantation) would have been meaningless in terms of Barbara G. Ross's ability to obtain settlement proceeds. Therefore, her interest was not 'sufficiently rooted' in her pre-bankruptcy past to render the settlement proceeds property of the bankruptcy estate. The court distinguished this case from Chartschlaa v. Nationwide Mut. Ins. Co., where post-petition acquired property was deemed estate property because it was a 'continuation of a longstanding business relationship' and merely a change in form of a pre-existing interest. Here, Barbara G. Ross's interest did not exist in any real sense pre-petition.
Analysis:
This case clarifies the application of the 'sufficiently rooted in the pre-bankruptcy past' test, instructing courts to conduct a nuanced analysis beyond mere pre-petition conduct for post-petition acquired assets like tort settlements. It underscores that while an initial event may be pre-petition, if the critical elements that make a claim viable or result in a settlement—such as discovery of injury or defect—occur post-petition, the resulting asset may not be considered part of the bankruptcy estate. This ruling helps define the boundaries of what constitutes 'property of the estate' under § 541, balancing creditors' rights with a debtor's fresh start, especially in latent injury scenarios. It guides future courts to scrutinize the full chronology of events giving rise to a claim, not just the earliest possible originating act.
