Before we discuss who owns a “claim” in the Bankruptcy context we must ask the fundamental question:
Q: What are claims in a Bankruptcy?
A: There are several types of claims:
Today we will briefly examine Claims against the Estate then proceed to Claims of the Estate – the kind you may have pursued before the Plaintiff filed Bankruptcy.
A creditor is any party to whom the Debtor owes money.
11 USC 101(5) defines a claim as
(A) A right to payment, whether or not reduced to judgment, and whether liquidated, unliquidated, fixed, contingent, matured, un-matured, disputed, undisputed, legal, equitable, secured, or unsecured; or
(B) A right to an equitable remedy for breach of performance, whether or not reduced to judgment, and whether fixed, contingent, matured, un-matured, disputed, undisputed, secured, or unsecured, that results in a right to payment.
Definition: Claim Types
Claims held by Creditors are broken down into secured, unsecured, and administrative.
Secured Claims include mortgages or liens on real estate, a lien on a vehicle, a UCC lien, perfected judgment liens, and tax liens. 11 U.S.C. §502.
Unsecured Claims include credit cards, medical bills, back rent, certain taxes, and any other debt not secured by a lien in property of the Debtor. 11 U.S.C. §502.
Administrative Claims include Attorneys’ fees, Trustee fees, and other claims by professions related to the Bankruptcy Estate. 11 U.S.C. §503.
Creditors are entitled to file a written Proof of Claim in the case and, where called for, seek special treatment of their claims via an Adversary Complaint.
Q: Assume you represent the Plaintiff in an action seeking money damages. If your client files Bankruptcy what becomes of that action? Are you still the Debtor’s Attorney? Is it even the Debtor’s action to pursue any longer?
A: Once they become a debtor in bankruptcy any asset the Plaintiff has or is entitled to, including claims and chose in action, becomes property of the Bankruptcy Estate. 11 U.S.C. §541.
Items deemed to be property of the Estate may only be administered by the Trustee. But who is the Trustee?
In Chapter 7 cases the Trustee is appointed by the Bankruptcy Court. Since Debtor’s property, including causes of action, now belong to the Estate you must be hired by the Estate to continue representing the Debtor. To be hired you must present a Motion to Employ.
If The case is far along or calls for special qualifications
Then The Trustee will most likely not object. You continue as Attorney for the Debtor and remit proceeds to the Estate, less fees permitted by the Court (usually 33% contingency).
If The case is new or of a general nature Then The Trustee will seek to appoint itself or a member of its office to move on the case. Why? Because the Trustee may seek fees from the recovery and distribute the balance to Creditors of the Estate.
In Chapter 13 the Debtor is deemed to be their own Trustee (Debtor in Possession or DIP) but there is a Chapter 13 Trustee who handles distributions to creditors. As in a Chapter 7, your continued employment must be preceded by a Motion to Employ. It is considerably easier to be hired in a Chapter 13 because while the Chapter 13 Trustee receives a % of payments received (about 4%), unlike the Chapter 7 Trustee it gets no additional fees to pursue an action on behalf of the Estate.
In Chapter 11 the Debtor is likewise deemed to be a DIP (See Chapter 13). As in the Chapter 7 and 13 contexts, the Bankruptcy Court must approve your continued employment following presentation of a Motion to Employ.
See Attached Motion to Employ
DIS: If the damages sought in the Pre-Bankruptcy Court case would be exempt (i.e. would not be property of the Bankruptcy Estate anyway) then the Trustee will not object to your employment. Examples of exempt damages include: