Tort Claims Against a Discharged Debtor with Insurance

It happens all too often. A debtor files for bankruptcy protection, the

deadline to file a proof of claim in bankruptcy passes, and the creditor has

taken no action to recover from the bankruptcy estate. Is the creditor out of

luck? Perhaps not, if the creditor has a claim for which the debtor maintained

liability insurance.

Generally, to retain its claim against a bankrupt debtor, a creditor must

file proof of its claim in the bankruptcy proceeding within a specified time.

When a creditor fails to file notice of its claim, the Bankruptcy Code's

permanent injunction prohibits the creditor from proceeding against a debtor

post-bankruptcy.1 Specifically, section 524(a) of the Bankruptcy Code

operates as a "discharge injunction" against any act to recover a

pre-bankruptcy debt from a discharged debtor personally.

The discharge injunction was designed primarily to protect the debtor and the

bankruptcy estate, by providing the debtor with a fresh start. The discharge

injunction does not, however, prevent a creditor from taking action against

someone else who might also be liable to the creditor. For example, section

524(e) of the Bankruptcy Code permits a creditor to seek recovery from "any

other entity" who may be liable on behalf of the debtor.2 As such, a

creditor may still pursue nondebtors, guarantors, sureties, and insurance

companies post-bankruptcy, to the extent these entities are liable for

pre-petition claims against a discharged debtor.

In Owaski v. Jet Florida Systems, Inc. (In re Jet Florida Systems, Inc.), the

Eleventh Circuit held that a discharge injunction does not affect the liability

of third-party insurers, nor does it prevent a claimant from establishing an

insurer's liability by proceeding nominally against a discharged debtor.3 In

fact, numerous courts have concluded that a discharge injunction does not bar

suit by a tort claimant against a discharged debtor for the sole purpose of

recovering insurance proceeds.4 These courts do, however, generally

condition modification of the discharge injunction on the proviso that the

discharged debtor will not be liable for any costs of the reinstated litigation.

Judge Paskay, Chief Bankruptcy Judge for the Middle District of Florida,

recently considered these issues on a motion to modify the permanent injunction

filed by Martin and Bessie Atabong (the Atabongs)5. Mr. Atabong was injured

on an amusement ride at a carnival sponsored by W.G. Wade Shows, Inc. (Wade

Shows) in Michigan...