By Ryan C. Wood
The issue here is what happens when the person that files for bankruptcy protection and then is sued in an adversary proceeding passes away while the adversary proceeding is still pending? An adversary proceeding is a fancy way to say lawsuit. So issues must be resolved in a bankruptcy case by lawsuit or adversary proceeding. A commonly filed adversary proceeding is an adversary proceeding filed by a creditor objecting to the discharge of the debt they are owed due to some alleged fraud [See Bankruptcy Code Section 523(a)(2)] by the bankruptcy filer. If successful the debt owed to the creditor is deemed not discharged and the creditor may continue to seek collection of the debt.
But what if the debtor defendant [the person filing for bankruptcy protection and defendant in the adversary lawsuit] dies after the adversary lawsuit is filed and is still ongoing?
In a recent Ninth Circuit Bankruptcy Appellate Panel case this is exactly what was addressed. The debtor defendant unfortunately passed away while the adversary proceeding was ongoing. A trial date was set and I assume they were in the discovery phase of the adversary proceeding when the debtor defendant passed away. The attorney for the debtor defendant filed a suggestion of death document with the court. The plaintiff creditor, representing himself with no retained bankruptcy attorney, failed to file a motion for substitution of the defendant debtor given he had passed away, so the Bankruptcy Court dismissed the adversary proceeding with prejudice.
It is also a point of interest that the plaintiff creditor, an individual, in this adversary proceeding was an assignee by the original creditor of a general unsecured debt owed by the debtor defendant. In short the adversary proceeding sought to have the debt owed deemed not dischargeable pursuant to section 523(a)(2)(A) and deny the debtor defendant’s right to a discharge of any debt pursuant to Sections 727(a)(2)(A); 727(a)(3) and 727(a)(4)(A).
First off what is the point in seeking a judgment that a debt is not discharged if the person owing the debt passes away? Well, in theory the creditor could obtain some sort of return or payment through the probate estate of the person that passes away if there is in fact a probate estate. There may not be any estate of the decedent that requires probate.
Second, is a person entitled to a discharge even though they passed away? In chapter 7 the answer is yes depending upon when the person passes away. If there is nothing more to do in the chapter 7 case and the only thing that needs to happen is time to expire pursuant to FRBP 4007 the deceased debtor has still fulfilled all requirements to obtain a discharge.
I looked up this particular case and it appears that the deceased debtor did fulfill all requirements to obtain a discharge prior to death. The petition was filed. The meeting of creditors attended. The chapter 7 trustee filed a report of no distribution of assets to creditors and abandoned all property of the bankruptcy estate back to the debtor. The debtor completed the second required course and filed the certification of completion of instructional course concerning personal financial management. As of the writing of this article the court had not yet entered the order of discharge for the deceased debtor. The filing of the adversary proceeding objecting to the debtor receiving a discharge at all delayed the entry of the order of discharge. Now that the appeal by the plaintiff was not successful the bankruptcy court should enter an order of discharge for the deceased debtor and close the chapter 7 case.
If A Party Passes Away What Must Be Done And When?
Federal Rule of Civil Procedure 25(a)(1) provides:
(a) Death.
(1) Substitution if the Claim Is Not Extinguished. If a party dies and the claim is not extinguished, the court may order substitution of the proper party. A motion for substitution may be made by any party or by the decedent’s successor or representative. If the motion is not made within 90 days after service of a statement noting the death, the action by or against the decedent must be dismissed.
The federal courts have had electronic case filing for over a decade now. This means when a document is filed with the court electronic notice is emailed to all registered participants in the ECF (electronic case files) system of that particular case. The email has a link to obtain the filed document in PDF format. In the present case the debtor defendant’s attorney filed the suggestion of death, but appears to have failed to serve the suggestion of death document pursuant to FRCP 4 or FRCP 5. It was also not clear of the plaintiff creditor received electronic notice of the suggestion of death. The plaintiff creditor filed a motion for summary judgment on his 727(a)(4) claim to bar entry of an order of discharge. Of course no opposition was filed given the debtor defendant passed away. The court at hearing found that the plaintiff creditor had proven by a preponderance of evidence the 727(a)(4) claim but nevertheless dismissed the adversary lawsuit for failing to file a motion to substitute party within 90 days after being served with the suggestion of death pursuant to FRBP 7025 incorporating FRCP 25(a)(1).
The plaintiff creditor filed a various motions to reconsider the dismissal of the adversary proceeding. In the motions the plaintiff creditor admitted knowing about the suggestion of death filing since it was filed and failed to file the motion to substitute party. He argued he did not file the substitution of party motion because the suggestion death had not been properly served on nonparties pursuant to 25(a) so the 90 day time period did not start and he could not identify what party should be substituted into the case. The plaintiff creditor provided that the personal representative of the estate of the deceased debtor defendant nor attorney for the deceased debtor defendant were served with the suggestion of death. He also provided neither wanted to be substituted in so the plaintiff creditor believed the motion for substitution would be opposed.
Let me pause to provide a couple of notes to illustrate why you should retain a bankruptcy attorney. The plaintiff creditor argued he believed the motion to substitute party would be opposed so he did not file it. While that could be a factor in not filing a particular motion it can never be a reason to excuse the timely filing of a motion. That was his choice. He believed it would be opposed and chose not to file the motion for substitution. Second, the plaintiff creditor told the court neither the personal representative nor the attorney for the probate estate would be involved in the bankruptcy case unless so directed by the chapter 7 trustee. Okay, well, the chapter 7 trustee filed the report of no distribution and abandoned all property of the estate back to the debtor defendant on April 7, 2017. The adversary proceeding lawsuit was filed well after that on June 6, 2017. No part of this matter has anything to do with the chapter 7 trustee. The chapter 7 has no power or dog in this fight. There are all kinds of misconceptions regarding a chapter 7 trustee’s role in a chapter 7 bankruptcy case. In this particular case the chapter 7 trustee’s job was done and the chapter 7 trustee told everyone their job was done by filing the notice of no distribution and abandoning assets of the bankruptcy estate back to the debtor defendant.
The Appeal
In the appeal the Ninth Circuit Bankruptcy Appellate Panel upheld the lower bankruptcy court’s dismissal of the adversary proceeding lawsuit. The 90-day deadline to file the motion to substitute party is triggered by: (1) a party must formally suggest the death of the party on the record, and (2) the suggesting party must serve other parties and nonparty successors or representatives of the deceased with a suggestion of death in the same manner as required for service of the motion to substitute.
There are mixed decisions regarding what happens with the personal representative of the deceased party cannot be ascertained and when the 90-day deadline is triggered. Based upon the plain language of the statute and that there is no argument that it is the plaintiff’s burden to prosecute its case. In this particular appeal the plaintiff creditor admitted receiving the suggestion of death and knew the identity of the personal representative and probate attorney for the deceased defendant debtor. Many lawsuits are filed without an identifiable defendant so the lawsuit is filed and subsequent discovery is initiated to identify defendants. If the personal representative is not known the court may provide more time to research the issue and extend the 90-day time period. The plaintiff creditor is this case did nothing though.
One of the arguments the plaintiff creditor brought up is perfectly understandable. The original bankruptcy court did not provide any advance notice that it intended to dismiss the adversary proceeding until the hearing at which it in fact dismissed the adversary proceeding. Imagine showing up at a hearing on motion for summary judgment and expecting the court to enter a judgment in your favor but instead dismissing the entire case. The appellate court noted that the plaintiff creditor was able to raise this issue when filing the motions to reconsider the dismissal; which were denied……… so if there was any error in giving advance notice it was harmless error. The dismissal of the adversary proceeding with prejudice was upheld.
In this case the debtor defendant passed away. But what if the plaintiff creditor unfortunately passes or becomes incompetent? If a plaintiff creditor is ill the plaintiff creditor should transfer the right to the claim to another party. Then a motion for substitution should be filed. If the court grants the motion the adversary proceeding will continue with the substituted party.
Federal R. Civ. P. 25(c) provides:
(c) Transfer of Interest. If an interest is transferred, the action may be continued by or against the original party unless the court, on motion, orders the transferee to be substituted in the action or joined with the original party. The motion must be served as provided in Rule 25(a)(3).
Barlow v. Ground, 39 F.3d 231, 233 (9th Cir. 1994)
KOB v. Brand (In re Brand), 545 B.R. 37, 39 (Bankr. C.D. Cal. 2016) (citing Hawkins v. Eads (In re Eads), 135 B.R. 380, 385-86 (Bankr. E.D. Cal. 1991)
Unicorn Tales v. Banerjee, 138 F.3d 467 (2d Cir. 1998); McSurely v. McLellan, 753 F.2d 88 (D.C. Cir. 1985); and Rende v. Kay, 415 F.2d 983 (D.C. Cir. 1969)
