Bankr. M.D.N.C.: In re Carter- Standing in Involuntary Bankruptcy; Good Faith in Filing Involuntary Bankruptcy

Summary:

The Debtor caused a fatal motor vehicle accident while under the influence and was subsequently pleaded guilty to felony death by motor vehicle. At the time of the collision, the Debtor was covered by his own insurance with State Farm and the Allstate insurance policy held by the owner of the car the Debtor was driving. The decedent’s estate settled with both Allstate, but after being unable to reach terms with State Farm, ultimately obtained a wrongful death verdict for approximately $2.8 million. When collection efforts failed, the Estate commenced an involuntary Chapter 7, with the Trustee employing special counsel to pursue automobile liability claims against State Farm and Allstate.

State Farm and Allstate sought dismissal of the bankruptcy arguing that while, following Wilson v. Wilson, 121 N.C. App. 662, 468 S.E.2d 495 (1996), North Carolina does not recognize a cause of
action for third-party claimants against the insurance company of an adverse party based on bad
faith and unfair and deceptive trade practices, the decendent’s estate were using the involuntary bankruptcy case to prosecute such the potential claims for its sole benefit.

Agreeing with the Trustee, however, the court held that the potential claims were actually first-party claims belonging to the Debtor, as he had causes of action against the insurers related to when and how to settle claims arising under such insurance policies. See Alford v. Textile Ins. Co., 103 S.E.2d 8 (N.C. 1958). Upon the filing of the bankruptcy, those potential claims against the insurers became assets of the bankruptcy estate.

(That these potential claims were not scheduled in the petition was dispensed with by the court, as all assets, even if unknown or undisclosed are assets of the bankruptcy estate. See Field v. Transcon. Ins. Co., 219 B.R. 115, 119 (E.D. Va. 1998), aff’d, 173 F.3d 424 (4th Cir. 1999) (holding that the trustee was entitled to bring the debtor’s bad faith failure to defend or settle automobile accident claims against insurance company).)

Since the Trustee had only at this point sought to conduct examinations of the insurers pursuant to Rule 2004 and had not yet commenced any Adversary Proceeding, the court held that State Farm had not suffered a “actual or imminent injury” sufficient to have standing to seek dismissal of the bankruptcy. Even if State Farm did have standing, the court alternatively held that the assertion that the involuntary bankruptcy was filed by the decendent’s estate “to prevent wasting of the Debtor’s sole possible asset” was, absent any evidence from State Farm to the contrary, enough to establish the good faith of the filing.

Commentary:

Lest personal injury attorneys look towards this case as a new means to raise third-party claims, the later history is pertinent. Unsurprisingly, this decision was appealed and, after being subsequently cast into doubt in following the dismissal shortly after this opinion in In re Black, the parties also consented to the dismissal of the case.

In Black, the same special counsel had sought to also use an involuntary bankruptcy to similarly assert claims held by that Defendant/Debtor against insurers. Unlike in Carter, however, Black involved a Defendant/Debtor which was not incarcerated and with whom the Plaintiff’s personal injury attorney had sought the assistance of the same attorney who had served as special counsel to the Trustee in Carter to prepare, after some degree of consultation with the Defendant/Debtor, the involuntary bankruptcy petition. After the bankruptcy was filed, Mr. Black sought dismissal of the case himself. The court there found that the Black case had been filed in bad faith because the Debtor/Defendant had generally been paying his debts and, particularly damning, were that the actions of the personal injury attorney and special counsel seemed “duplicitous in nature” and potentially violated the Rules of Professional Conduct. Unlike in Carter, there was no allegation that potential claims were wasting, as Mr. Black could still pursue such claims himself.

These twists and turns of events leave the tactic of using involuntary bankruptcies to bring a Defendant/Debtor’s causes of action against insurers for the benefit of creditors in limbo,  as the problematic behavior in Black cast a shadow on Carter.

For a copy of these opinion, please see:

Carter- Standing in Involuntary Bankruptcy; Good Faith in Filing Involuntary Bankruptcy

Black-Bad Faith Involuntary Bankruptcy

About

1. Bachelor of Arts degree in English Literature from Washington University, 1993.

2. Juris Doctor degree from George Washington University, 1996.

Admissions to Practice of Law:

North Carolina Bar, 1996.
Federal District Courts for the Eastern and Middle Districts of North Carolina.

Specialty Certification:

North Carolina State Bar: Certified as a Specialist in Consumer Bankruptcy.

Areas of Practice:

Practice limited to consumer and business debtor bankruptcy law, 1998 to present.

Memberships:

National Association of Consumer Bankruptcy Attorneys (NACBA).
North Carolina Academy of Trial Lawyers (NCATL).
North Carolina Bar Association, Bankruptcy Section.

Lectures prepared and presented:

North Carolina Academy of Trial Lawyers seminar on bankruptcy; Topic: Counseling the Consumer Debtor Prior to Court – C.Y.A. Forms to Help ‘Gird They Loins’; 2001.
Middle District Bankruptcy Seminar; Topic: Preparing Chapter 13 Plans; 2002.
NACBA National Convention; Topic: Efficient Office Practices; 2003.
NACBA National Convention; Topic: Chapter 7 vs. Chapter 13 Debates; 2004.
Middle District Bankruptcy Seminar; Topic: Chapter 7 & 13 Hot Issues; 2004.

Positions held:

NACBA National Convention; Convention Chair; 2008.
NACBA National Convention; Panel Moderator: Topic: Basic Bankruptcy Issues; 2008.
NACBA National Convention; Panel Moderator; Topic: Chapter 13-Disposable Income and Other Issues; 2007.
NACBA National Convention; Panel Moderator; Topic: Representing Members of the Military and Their Families; 2007.
NACBA, Member of National Board of Directors, 2006 to present.
NCATL, Chair of the Bankruptcy Section, 2003 to 2007.
NACBA, Chair of the North Carolina Section, 2003 to 2007.
NC Bar Association, Bankruptcy Section, Bankruptcy Council Member, 2004 to present.

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