December 5, 2020

The State of Michigan Court of Appeals (“Michigan Appellate Court”) held in its unpublished opinion dated October 15, 2020: “it is undisputed that plaintiffs claimed an exemption for this medical malpractice claim when they filed their petition for Chapter 7 bankruptcy without objection. Therefore, the exemption claimed for the medical malpractice cause of action was valid and vested plaintiffs with a present and substantial interest in this case … Because plaintiffs had standing to bring this action, the trial court erred by granting summary disposition in favor of defendants under MCR 2.116(C)(10) and by denying plaintiffs’ motion for reconsideration … Minimally, the information contained in Schedule C of the bankruptcy petition and the affidavits that plaintiffs filed with their motion for reconsideration created a genuine issue of material fact regarding whether plaintiffs properly claimed an exemption for this malpractice action and, therefore, had standing as real parties in interest … Consequently, summary disposition pursuant to MCR 2.116(C)(10) was inappropriate.”

The Underlying Facts

On December 31, 2015, plaintiff Christopher Karas (“Karas”) sought treatment from the defendants for multiple ailments, including back pain and fatigue. Defendant Melanie Ranta (“Ranta”), a nurse practitioner, purportedly recommended a change in the plaintiff’s medication. The Michigan medical malpractice complaint alleged that defendant Ranta’s course of treatment did not follow the medication manufacturer’s recommendation that a gradual reduction in dosage occur instead of an abrupt discontinuation. The plaintiff’s claim of medical malpractice was premised on this sudden change of medication without being appropriately advised of the risks. The plaintiff alleged that his conditions worsened as a result of the ill-advised medication change and caused other problems.

On November 29, 2016, the plaintiffs filed a petition for Chapter 7 bankruptcy. On Schedule C of their voluntary petition for bankruptcy, the plaintiffs claimed an exemption for the plaintiff’s potential medical malpractice action. The plaintiffs’ bankruptcy was discharged on April 7, 2017, and an order of final decree, closing the bankruptcy estate and discharging the bankruptcy trustee, was entered. However, the bankruptcy trustee filed an application to employ special counsel “to represent the estate for all claims related to the medical malpractice claim involving the debtor.” Consequently, on May 9, 2017, the bankruptcy case was reopened for continued administration. On June 14, 2017, an order appointing special counsel for the bankruptcy trustee was entered. On December 27, 2017, the plaintiff filed his Michigan medical malpractice complaint against the defendants.

The defendants filed a motion for summary disposition pursuant to MCR 2.116(C)(5) and (C)(8), asserting that the plaintiffs did not have standing and failed to assert a claim upon which relief could be granted, arguing that all of the plaintiffs’ assets, including the medical malpractice action, became the sole property of the bankruptcy estate as controlled by the bankruptcy trustee once the plaintiffs filed for Chapter 7 bankruptcy. The defendants argued that the bankruptcy trustee was the only real party in interest and the only party who had standing to pursue the action. The defendants requested that the trial court dismiss the plaintiffs’ Michigan medical malpractice action because the plaintiffs were not the proper parties in interest and did not have standing. The defendants further alleged that amendment of the complaint was futile because the addition of the bankruptcy trustee, a new party, was not permitted in light of the expiration of the statute of limitations.

The Michigan Appellate Court stated that when a debtor files a Chapter 7 bankruptcy petition, all of the debtor’s assets become property of the bankruptcy estate, subject to the debtor’s right to reclaim certain property as “exempt.” 11 USC § 522(l). A debtor’s interest in a potential cause of action constitutes an asset under the bankruptcy code, and a debtor has a duty to disclose a potential action even if the claim is contingent, dependent, or conditional. Accordingly, a debtor’s interest in a potential cause of action generally vests in the trustee for the benefit of the estate when the debtor files for bankruptcy, and the debtor loses standing to pursue the cause of action.

However, an exception to this general rule arises when a debtor claims an exemption for his interest in a potential cause of action. Specifically, a debtor is entitled to claim an exemption for a potential cause of action under 11 USC 522(d)(11)(D) of the bankruptcy code and the claimed exemption is valid provided no objections are filed. 11 USC 522(l). Although any amounts recovered from a properly exempted cause of action above the amount of the statutory exemption would flow to the bankruptcy estate, a debtor’s interest in the cause of action through the statutory exemption represents a present, substantial interest and provides the necessary standing for the debtor to pursue the action. Consequently, when a Chapter 7 bankruptcy debtor properly claims an exemption for a potential cause of action, the debtor has standing and may pursue the exempted cause of action. “Because plaintiffs had standing to bring this action, the trial court erred by granting summary disposition in favor of defendants under MCR 2.116(C)(10) and by denying plaintiffs’ motion for reconsideration.”

Source Karas v. Mercy Health Physician Partners East Beltline, No. 348943.

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