Getting a Recovery from a Bankrupt Defendant; Injured Clients Face Uncertainty and Great Delay


What happens when a defendant is bankrupt?  Can an injured person still recover for his injuries?

The answer is a little bewildering:  perhaps yes, perhaps no.   It all depends upon the bankrupt defendant.

One answer is certain:  bankruptcy of a defendant is not a good thing for an injured person.  Bankruptcy creates great delays and uncertainty as to getting money into the client’s hands.

Here are a few examples:

  1. The client was struck by a hi-lo operated by a K-Mart employee.  Sometime after the accident K-Mart entered bankruptcy for the purpose of reorganizing, i.e., re-structuring its debts so that it could continue business. Eventually, K-Mart emerged from bankruptcy, and it is a viable, national company.
  2. The client slipped and fell in a Macy’s after Macy’s parent company, Federated Department Stores, declared bankruptcy.  
  3. Two different clients had motor vehicle accidents with bakery trucks from Interstate Bakeries, the makers of Tastee Cakes and Wonder Bread.  Interstate declared bankruptcy after their accidents., and their cases were settled after the bankruptcy filing.

In case # 1, the client’s accident occurred pre-bankruptcy and was subject to the bankruptcy court.  That means that the ulitmate payment of any settlement or judgment would be passed upon by the bankruptcy court.  That means that even if  there were a verdict, the bankruptcy court would decide how much of it would be paid.  The entire verdict would not necessarily be paid.  This is so because the court is preserving the bankrupt’s assets for all creditors, which include federal and state governments, landlords, suppliers of merchandise, employees, etc.    In this case the client sustained a fractured ankle.  Fortunately, we were able to achieve an excellent settlement which was paid in full.  We stipulated that the agreed settlement amount was to be paid in full.  Otherwise, the bankruptcy court could reduce the settlement!

In case # 2, an accident after the bankruptcy filing would not be subject to the bankruptcy if the corporation were an ongoing business, such as Macy’s and Federated.  In these instances, the bankruptcy court would not pass upon the verdict or settlement. 

In case # 3, the two clients settled with Interstate.  However, the bankruptcy court has to approve the settlements and determine how much would be paid on each settlement.  Each settlement would be reduced on a pro rata basis along with the other debts of  Interstate, such as rent, lease payments for vehicles, etc..  The cases were settled almost four years ago, and we have yet to receive any settlement funds.

Therefore, a defendant’s bankruptcy can be a monkey wrench thrown into a client’s lawsuit and ultimate recovery.

If you have been involved in an accident with a bankrupt defendant, please feel free to call me at 800-581-1434 or write to letters@seitelman.com.

Mark E. Seitelman, 10/13/09, www.seitelman.com.

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