Court Rules Unauthorized Post-Petition Settlement Void

27 Jan Court Rules Unauthorized Post-Petition Settlement Void

The recent case of In re Dooley, 2009 WL 95037 (Bkrtcy.D.Mass.2009) serves to highlight a few basic principles about lawsuits and bankruptcy. Dooley was (in this order) injured in a car accident, hired a PI lawyer, filed a Chapter 7 bankruptcy case, and settled his PI case. However, the debtor’s PI lawyer never sought to be employed by the Chapter 7 trustee, nor did he get court permission to settle the case. Both of these omission ultimately destroyed the settlement.

The court pointed out that the pre-petition injury claim passed to the trustee when the bankruptcy case was filed and, consequently, the trustee, and not the debtor, was the only one entitled to settle the case. The PI lawyer continued working for the debtor and did not seek to be employed by the trustee–the person with the injury claim once the case was filed. The Court also held that because the case was settled without court approval, it was void as a violation of the automatic stay. According to the Court, the confusion was not all due to the PI lawyer, but also due to the debtor’s attorney and original trustee who allowed the PI lawyer to continue working without first seeking formal employment.

The bottom line is that pre-petition claims of any kind require special treatment once a case is filed: the lawyer needs to seek to have his employment approved by the court and the court needs to approve the settlement.

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