The Defendant Went Bankrupt; Now What?

Any plaintiff’s lawyer will tell that you that it is never a good thing when a defendant files for bankruptcy.  The conventional wisdom says the chances of ever recovering anything from the “debtor” (the defendant’s new name in the bankruptcy court) is slim to none.  But there are still arrows in the quiver of the prepared and persistent trial counsel.  For example, although a trucking company may file for bankruptcy protection from its creditors, if there is a policy of liability insurance for the company, one can seek relief from the bankruptcy filing by agreeing to limit the recovery to the limits of the company’s liability coverage.  Janssen Malloy LLP partner Michael Crowley pursued such a course in a case involving our client, a woman struck from behind by a flat bed semi while riding her bicycle home from work.  After filing a lawsuit against the driver and the trucking company that employed him, the trucking company filed for bankruptcy.  We sought relief from the bankruptcy “stay” (the bankruptcy action puts a halt to all collection efforts against the debtor who filed for bankruptcy during the pendency of that proceeding), agreeing to limit our client’s recovery to the limits of the company’s commercial liability insurance coverage.  The bankruptcy court granted our petition, since our recovery would not prejudice other creditors seeking payment from the company’s assets.  We were able to resolve our client’s case for the $500,000 limits available under that insurance policy.
But what if there is no applicable insurance policy, and the uninsured defendant files for bankruptcy.  Again, it ain’t over til it’s over, as Yogi Berra would say. In a case handled by Janssen Malloy LLP, a contractor defendant was carrying no worker’s compensation insurance coverage, lacked any commercial liability insurance coverage, and was operating under a suspended state contractor’s license when our client suffered severe injuries on the job site when he fell from a second story deck under construction.  While the California Labor Code allows an injured worker to directly sue the employer when the employer fails to carry worker’s compensation insurance (normally not permitted if the employer follows the law and does carry worker’s compensation coverage), that is cold comfort to the injured plaintiff when the employer files for bankruptcy.  After we filed our lawsuit against the contractor employer, he filed for bankruptcy the day before his deposition was scheduled.  We again sought relief from the Chapter 13 bankruptcy stay (the “reorganizational bankruptcy” permitted under that chapter of the federal bankruptcy code), in order to take the defendant debtor’s deposition (sworn testimony under oath) as a “fact witness,” not for the purpose of collecting money from him outside the bankruptcy action.  We also filed a timely “creditor’s claim,” stating the damages in our client’s case for which the defendant debtor was responsible.  As the debtor made payments into the bankruptcy trustee’s account for the reorganizational plan of the debtor under Chapter 13, our client got pro rata payments proportional to the amount of his creditor’s claim.  Debtors are given five years to complete their Chapter 13 reorganizational plan (a high percentage of debtors never do complete the plan, which denies them the benefit of a discharge of their remaining debts in the bankruptcy).  The defendant debtor in our client’s case did complete the plan, and while the recovery is certainly less than our client deserves, it is better than no recovery at all.
The attorneys at Janssen Malloy LLP are experienced in litigating complex cases, and steering them through defendants’ efforts to avoid responsibility for their misconduct.  We stand ready to assist you and your family when the need arises.