Jeffrey J. Carey - 2020 MATA Convention

Bankruptcy intersects with civil litigation when a party or indemnitor files for bankruptcy. This is written from the perspective of plaintiff’s counsel that either has a client or tortfeasor file for bankruptcy. If you are representing the injured party that files for bankruptcy, you will need to take steps to maximize their recovery despite the bankruptcy, get permission to continue as counsel for the client and estate, and protect your interest in the case. If the tortfeasor files for bankruptcy, you will need to examine available assets and insurance and look for ways to lift the automatic stay.  


Checklist for when the injured party files for bankruptcy.

  • Get copy of bankruptcy pleadings.
  • Review to ensure the claim is on Schedule B. Ensure that any active litigation is disclosed in the Statement of Financial Affairs. You will want to look at Schedules E and F to see how much your client owes
  • Reach out to the trustee.  During this initial contact, you should discuss your client’s share of any recovery if it may be insufficient to pay known claimants. You will also want to discuss the trustee’s willingness to retain you to represent the interests of the estate in the pending or anticipated litigation.
  • You will need to file an application to be employed by the bankruptcy estate. See attached Exhibit A.

Checklist for when the tortfeasor files for bankruptcy.

  • Get copy of bankruptcy pleadings.
  • Reach out to opposing counsel and bankruptcy counsel.
  • Review to ensure the claim is scheduled. You will want to look at Schedules E and F.
  • If the case is in active civil litigation ensure that the Court is notified and the Automatic Stay occurs. Bankruptcy counsel customarily does this. You may wish to confirm.
  • Review 11 USC § 523 for the types of claims that are not dischargeable and examine intersection with the pending litigation.
  • You and your client are now creditors, make sure your client’s claim and your lien are perfected by filing a proof of claim (if notified to do so).
  • If the claim is large and there may be assets to administer, consider joining the creditor’s committee or hiring counsel to serve on the creditor’s committee.
  • Consider conducting financial discovery in the bankruptcy matter.
  • If there are non-dischargeable claims, file a motion to lift the automatic stay.


It is best practice to ask if the client has filed for bankruptcy since the date of injury or, ideally, perform the public records check yourself.  If there has been a bankruptcy, check to see if the potential claim was scheduled. If the claim was not scheduled, you will need to notify bankruptcy counsel for the potential client and may need to re-open the bankruptcy case. If the claim was scheduled, confirm that the trustee filed a Notice of No Distribution and that the case has been fully administered.  


When the injured party files for bankruptcy, the claim is an asset of the estate and is not exempt under Missouri law. When you file for bankruptcy, your assets are the property of the bankruptcy estate, subject to the exemptions granted to the debtor under applicable law. 11 USC § 1541. Missouri debtors’ exemptions are governed by Missouri law. Prior to 2013, there was case law to support the assertion that personal injury claims were exempt from the claims of creditors in bankruptcy.  See generally In re Mitchell, 73 B.R. 93 (1987). In 2013, the 8th Circuit ruled that injured Missourians who had not yet been compensated for their injuries cannot protect their right to compensation in bankruptcy. In re Abdul-Rahim, 720 F.3d 710 (2013). Though the Court acknowledged that “It is true that Missouri courts have long held that personal injury claims are exempt from attachment” the only claims of exemption available to debtors is Missouri’s statutory exemption scheme and that “the Missouri legislature has apparently declined the opportunity to amend its exemption statute, section 513.430, to add unliquidated personal injury claims, even in light of the numerous Missouri bankruptcy court decisions precluding such claims from exemption.” Id. Absent a statutory measure exempting unliquidated injury claims from exemption, the reasoning of In re Abdul-Rahim is unlikely to be re-visited.

Unliquidated and liquidated worker’s compensation claims, however, are exempt in bankruptcy. RSMo § 287.260. Income awarded on a periodic basis in the future, however, must be considered in the debtor’s income available to satisfy the claims of creditors in a Chapter 13 case. In re Jackson, 173 B.R. 168 (Bankr. E.D. Mo. 1994). Once the client receives a lump sum award, however, the cash loses its character as worker’s compensation benefits and is property of the bankruptcy estate.  If you have an injured worker facing bankruptcy, it is beneficial to consider filing bankruptcy while the worker’s compensation claim remains unliquidated.  

It is essential that the lawyer counsels their client that the existence of the claim (even if exempt) must be disclosed to the bankruptcy court. First, concealment of assets is a federal crime. 18 USC 152(1). Second, when a client fails to disclose a potential claim, equity will almost certainly bar them from recovering in the trial court. Strable v. Union Pac. R. Co., 396 S.W.3d 417 (Mo. Ct. App. 2013). Any attorney knowingly prosecuting a claim belonging to a bankruptcy estate and distributing the funds directly to the client, furthermore, would have legal and ethical exposure.

In many cases, the anticipated recovery in the case is not sufficient to satisfy all debts and provide adequate compensation to your client. If you have not reached agreement with the trustee on the division of the claim between the injured party and the trustee (which is advisable) you will want to plead your client’s case for their portion of the recovery before the Bankruptcy Court. Historically, the trustees in the Western District of Missouri would agree to divide the net proceeds of any recovery equally between the injured party and the estate. Recently, however, they have begun to assert a right to the entirety of the claim subject to a showing that they need to induce substantial cooperation with the injured party. Counsel should be prepared to describe the anticipated involvement needed from their client to the trustee during negotiations. If the Trustee cannot successfully recover any money without your client’s cooperation, you have leverage to negotiate, and an even split of the net proceeds would be a good result.    


Your existing attorney’s lien will attach to the injury claim. If you want to continue prosecuting the case, you will need to be retained as counsel for the estate.  After obtaining the trustee’s consent, file a motion to be employed by the bankruptcy estate to complete the litigation. See Exhibit A. Application to Employ Counsel. In order to qualify you must meet the provisions of 11 USC § 327 which provides that “[e]xcept as otherwise provided in this section, the trustee, with the court's approval, may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee's duties under this title.”


When the tortfeasor files for bankruptcy, the automatic stay in bankruptcy will apply to immediately require the plaintiff to cease litigation activities and the trial court will grant a stay. If the potential debt is fully dischargeable, an examination of the assets of the estate and the relief being requested must be performed. After the 341 meeting, the Chapter 7 Trustee is required to either 1) file a report of no distribution or 2) set a claims bar date. If there are assets to be administered, you will want to file a claim on behalf of the injured party and a separate claim for your attorney’s lien.

When the defendant goes bankrupt you should review the facts, conduct legal research, and formulate support for the position that the claim is not dischargeable.  The exceptions to discharge are listed at 11 USC § 523. In personal injury actions, the two most common exceptions are for “willful and malicious” injury and for injury caused by a motor vehicle accident where the debtor was intoxicated by alcohol or any other substance. It will be important to review medical records for prescription medicines which may have been abused or for evidence of alcohol or drug abuse. It is also important to note that the discharge will not apply to the extent there are insurance proceeds available to satisfy the claim. In re Patterson, 297 B.R. 110 (Bankr. E.D. Tenn. 2003). In fact, when the defendant has insurance and you have concluded that no exception from discharge applies, you can consider filing a motion for relief from the automatic stay to obtain permission to resume litigation in the trial court subject to the agreement that you will only collect from insurance proceeds. In re Patterson stands for the proposition that such a motion is not necessary when the case is prosecuted against the tortfeasor in name only to collect from a third party, but while a bankruptcy case is pending, getting permission to proceed is strongly suggested.

The tortfeasor may also be abusing the bankruptcy court to try to evade responsibility for their actions. It is not uncommon for tortfeasors to try to hide assets or undervalue them on their bankruptcy schedules. Either on your own or with the assistance of experienced bankruptcy counsel, you should consider conducting an independent examination of the estate of the debtor. If assets are under-valued or not fully disclosed, the Bankruptcy Code provides a mechanism to conduct financial discovery. You have the opportunity to ask some questions at the 341 meeting regarding the filing. The trustee will be tolerant of a short form examination but not more. If you need to perform detailed discovery, utilize Bankruptcy Rule 2004 for that purpose. If the claim is large and it appears that the estate will contain assets and be administered, consider having your creditor client join the creditor’s committee.  


If your claim has been reduced to judgment and you have reason to believe that the judgment creditor may be insolvent, there are steps you can take to perfect your lien. Your judgment lien automatically applies to all personal property in the state. If the debtor has out of state assets, you will want to register your judgment there. You should also record the judgment so that it will constitute a lien on any real estate held by the judgment debtor. If the defendant seeks an appeal of the judgment, an appeal bond is suggested under Rule 81.09. If they file bankruptcy after the bond is issued, you will be able to collect your judgment from the bonding company.