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Morton v. Schlotzhauer

Court of Appeals of Maryland

August 19, 2016

Kevin Morton, Jr., et al.,
v.
Cindy L. Schlotzhauer

          Argued: April 1, 2016

         Circuit Court for Queen Anne’s County Case No. 17-C-12-017577

          Barbera, C.J. [*] Battaglia Greene Adkins McDonald Watts Rodowsky, Lawrence F. (Retired, Specially Assigned), JJ.

          OPINION

          MCDONALD, J.

         This case is about the procedural and substantive effect that a bankruptcy proceeding may have on the prosecution of a personal injury claim in State court. Our disposition of this case is compelled by the respect we accord a decision of the federal Bankruptcy Court and by our own injunction to interpret our rules "to do justice between the parties."[1]

         Bankruptcy allows one overcome by debt to obtain a discharge of debts and have, more or less, a fresh start. Part of the price that the debtor must pay is to detail the debtor's property interests in the bankruptcy case so that it can be determined what is available for distribution to creditors and what the debtor may retain. Among the property interests that must be listed are personal injury claims of the debtor, although such claims typically are exempted from the bankruptcy estate by operation of bankruptcy and Maryland law and, as a result, remain the debtor's property. Failure to list such a claim in the bankruptcy proceeding, however, means that it remains part of the bankruptcy estate.

         Respondent Cindy L. Schlotzhauer was involved in a motor vehicle accident with Petitioner Kevin Morton, Jr., who was employed at the time by Petitioner Uni-Select USA, Inc. t/a Kunkel Service Company. Almost three years later, but within the pertinent statute of limitations, she brought this action against Mr. Morton and Uni-Select asserting that she had suffered personal injuries in the accident allegedly as a result of Mr. Morton's negligence in the course of his employment.

         Between the time of the accident and the filing of this action, Ms. Schlotzhauer happened to file personal bankruptcy and was discharged from her debts. She neglected to list her (then) potential claim for personal injuries as an asset or as exempt property in her bankruptcy petition. It appears to be undisputed that this happened out of ignorance, rather than any deliberate effort to conceal the potential claim. By operation of bankruptcy law, her claim became the property of her bankruptcy estate.

         When the prior bankruptcy proceeding came to light during discovery in this action, thus raising the question of Ms. Schlotzhauer's standing to litigate the claim, the parties began to shuttle back and forth between the Circuit Court and Bankruptcy Court in a race for relief from those tribunals. Mr. Morton and Uni-Select sought to have the Circuit Court dismiss the personal injury action for lack of standing on the ground that the claim did not belong to Ms. Schlotzhauer - a dismissal that would be a dead end for the claim, as the period of limitations had expired in the interim. Ms. Schlotzhauer sought to re-open the bankruptcy process to eliminate the standing question by having the claim exempted and restored to her or by joining the bankruptcy trustee as plaintiff in this action.

         The race ended in a dead heat, more or less. The Bankruptcy Court granted Ms. Schlotzhauer's request to re-open and re-vested her with the claim - a decision it ultimately decided was retroactive to the filing of the bankruptcy petition. In a nearly simultaneous ruling, the Circuit Court, unaware of the Bankruptcy Court's action, awarded summary judgment to Mr. Morton and Uni-Select on the ground that Ms. Schlotzhauer lacked standing. Ms. Schlotzhauer informed the Circuit Court of the Bankruptcy Court's action and asked it to reconsider its award of summary judgment. The Circuit Court declined to do so, without explanation.

         The Court of Special Appeals reversed. It held that, even if Ms. Schlotzhauer was not the proper plaintiff under Maryland law at the time she filed her complaint, Maryland Rule 2-201 allows for substitution of the real party in interest - in this case, the bankruptcy trustee and ultimately Ms. Schlotzhauer herself when she was re-vested with the claim. That rule incorporates the doctrine of "relation back" and allows the real party in interest to prosecute an existing action without need to file a new complaint. In any event, the intermediate appellate court noted that the Bankruptcy Court's ruling re-vested Ms. Schlotzhauer with her claim as of a date well before the filing of her complaint and nullified the prior divestiture of that claim in the bankruptcy proceeding. Accordingly, Ms. Schlotzhauer was an appropriate plaintiff on a timely-filed complaint.

         For the reasons detailed below, we agree with the Court of Special Appeals.

         I

         Background

         A. A Bankruptcy Primer

         To understand the unusual procedural path of this case it is helpful to make a brief excursion into bankruptcy law. Luckily for us, most of the applicable bankruptcy principles are not at issue. In its opinion in this case, the Court of Special Appeals provided an excellent summary, which we draw upon liberally as follows:

         Debtor's Obligation to List Property Interests

When a person files for protection from creditors under federal bankruptcy law, all of the person's property, including personal injury claims, become the property of the bankruptcy estate. Those rights become the property of the estate even if the person intentionally, inadvertently, or innocently fails to disclose them to the trustee, the bankruptcy court, and creditors.

Schlotzhauer v. Morton, 224 Md.App. 72, 75-76, 119 A.3d 121 (2015) (citations omitted).

         Trustee's Rights over Property of Bankrupt Estate

Generally, the bankruptcy trustee alone may assert the person's rights, including the right to pursue a tort claim for personal injuries, unless the trustee abandons the rights or the bankruptcy court declares them to be exempt from creditor claims. If the rights have not been abandoned or exempted, the bankruptcy trustee retains the sole right to assert them even after the bankruptcy court has closed the bankruptcy case and granted the debtor a discharge.

224 Md.App. at 76 (citations omitted).

         Exemption for Personal Injury Claims

The debtor … must list all property that the debtor claims as exempt. A party in interest to the bankruptcy proceeding, in turn, may object to the debtor's claims for exemptions. If an interested party fails to object within the time allowed, a claimed exemption will exclude the subject property from the estate.
Maryland residents can claim exemptions under state law, including an exemption "from execution on a judgment" that is payable in the event of sickness, accident, injury, or death of any person, including compensation for loss of future earnings.

Id. at 88 (citations and quotations marks omitted).

         Discretion to Reopen Bankruptcy Case to Amend Schedules

Debtors may amend or supplement their schedules as a matter of course before the bankruptcy case closes. In addition, the bankruptcy court has discretion to reopen a case to administer assets, to accord relief to the debtor, or for other cause. The bankruptcy court has discretion to permit a party to perform an act, such as the filing of amended asset schedules, even after the specified period in which the act is required or allowed to be done.

Id. at 88 (citations and quotation marks omitted).

         B. Facts and Procedural History

         The Accident

         It is undisputed that, on January 4, 2010, Ms. Schlotzhauer was involved in an automobile collision in the parking lot of the Centreville post office with Mr. Morton while he was driving a pickup truck owned by his employer, Uni-Select. The details of that accident are unimportant to the resolution of the issues in this appeal. Suffice it to say, in the complaint that Ms. Schlotzhauer filed some years later to initiate this case, she alleged that Mr. Morton was talking on a cell phone when he backed his truck into her car, resulting in various physical injuries to Ms. Schlotzhauer.

         Shortly after the automobile accident, Ms. Schlotzhauer retained counsel, who resolved a claim for property damage to Ms. Schlotzhauer's car with Uni-Select's insurer and periodically corresponded with the insurer over the course of the next year and a half concerning her injuries, diagnosis, and treatment, evidently in anticipation of pursuing a personal injury claim. However, her counsel did not file suit until the end of 2012, shortly before the three-year statute of limitations would expire.[2]

         The Bankruptcy Case

         In the meantime, Ms. Schlotzhauer, with the assistance of a different attorney, had sought relief from various debts in the federal Bankruptcy Court. On October 6, 2010, she filed a voluntary petition in bankruptcy under Chapter 7 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Maryland.[3] On the schedules attached to her bankruptcy petition, Ms. Schlotzhauer did not list the potential personal injury claim arising from the January 4, 2010 accident as either an asset or as property claimed to be exempt.[4] On January 19, 2011, the Bankruptcy Court granted Ms. Schlotzhauer a discharge from her debts and closed the case.

         The Personal Injury Case

         On December 26, 2012, Ms. Schlotzhauer initiated this case by filing a complaint in the Circuit Court for Queen Anne's County against Mr. Morton and Uni-Select, seeking damages for her injuries. The complaint alleged that the accident was attributable to Mr. Morton's negligence and that he was operating his vehicle within the scope of his employment. Mr. Morton and Uni-Select (hereafter, collectively, "Uni-Select") answered the complaint with a general denial, as well as a number of affirmative defenses.

         The parties pursued discovery. In response to an interrogatory, Ms. Schlotzhauer indicated that she had filed for bankruptcy in October 2010. In questioning by defense counsel during a subsequent deposition on July 31, 2013, it emerged that she had not listed her potential personal injury claim arising from the accident as an asset in her bankruptcy petition.

         A Question of Ms. ...


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