The Subro Scoop: When Subrogation Intersects with Bankruptcy

Subrogation recovery is a complex issue. When it intersects with a bankruptcy case, even more questions need to be answered.

Fortunately, our recent #AskAPro webinar session tackled this increasingly common occurrence. Weltman’s own Ted Traut (Shareholder, Cleveland office Managing Attorney and Subrogation Group Chair) and Cameron Deane (Attorney, Philadelphia Office Managing Attorney, and regular #WhatsOnTap Webinar Panelist) brought their joint expertise to the table and shared how to navigate subrogation claims when bankruptcy proceedings come into play!

Whether you are a creditor, claims professional or legal practitioner, the webinar is packed with actionable guidance on protecting recovery rights when pursuing subrogation. Watch the full webinar at your convenience - in addition, check out our top takeaways below! 
 

Subrogation is a legal right held by parties such as insurance carriers, that allow them to legally pursue damages against the party that caused a loss to their insured. In many subrogation cases, an individual’s insurance company pays the individual on the claim for losses directly, and will then seek reimbursement from the “at-fault” party's insurance company. 

Subrogation cases are common in the automotive industry, but also occur in property, casualty and healthcare insurance industries. 
 

When a debtor files for bankruptcy, the Automatic Stay halts all collection efforts, including subrogation claims. You also cannot send a demand letter or pursue post-judgment activity, such as driver’s license suspension, bank attachment, wage garnishment, etc., once the bankruptcy petition is filed. 

Collection efforts cannot resume until the Stay is lifted, such as when is dismissed or discharged, or after request is made to the bankruptcy court. The Stay is enforced under Section 362 of the U.S. Bankruptcy Code and takes effect immediately, regardless of creditor notice or court orders. The last thing you want to happen is to be called into bankruptcy court for violating the Automatic Stay. 
 

So, how do creditors overcome the Automatic Stay? 

In Section 362(d)(1) of the Bankruptcy Code, the court can grant Relief from the Stay for “cause, including the lack of adequate protection of an interest in property of such party in interest.” Although the grounds for Relief from a bankruptcy Stay for cause includes lack of adequate protection of an interest in property, Relief from the Stay is not limited to that reason. In the context of subrogation, Relief from the Stay is most often sought to pursue a bankrupt debtor’s insurance coverage for a particular loss. In such cases, the basis for relief would be to pursue property that is not property of the “bankruptcy estate”. However, permission (Relief from the Stay) must still be obtained because in order to go after the insurance coverage, the bankrupt debtor often needs to be named as a defendant in your subrogation action. 

A Relief motion should be filed by the “real party of interest,” meaning a creditor or insurer must seek their own relief and file it with the bankruptcy court overseeing the case docket. When you file the motion, the debtor, debtor’s counsel or bankruptcy trustee may object to your claim, stating they will not enter a stipulation granting relief. In those cases, it is necessary to prove to the court why you should be entitled to relief. As stated above, doing so in order to recover insurance proceeds that may be available is often a sufficient basis to do so. 
 

Let’s say you are pursing an adverse party in bankruptcy that is uninsured, and therefore, there are no insurance proceeds to seek after obtaining Relief from the Automatic Stay. In that case, you would not pursue Relief from the Stay, but instead, will likely need to file a proof of claim. Proof of claims are filed most often in Chapter 13 and Chapter 11 bankruptcies but can also come up in asset Chapter 7 cases. In these cases, you will file a proof of claim in order to assert your claim against the debtor. If you already obtained a state court judgment, you will likely be filing a “secured” claim, otherwise, your claim is likely “unsecured.” Secured claims are a higher priority under the bankruptcy code, meaning they are more likely to be paid from the bankruptcy estate than unsecured claims.

Another issue with unsecured claims is its possible your claim is considered “unliquidated”, meaning damages have yet to be determined by a court. In those cases, while its possible bankruptcy court will conduct a hearing for a determination of your claim balance, more often than not, they will kick you back to state court for such determination, as deciding damages on a negligence claim is not what bankruptcy court considers a “core proceeding” under its limited jurisdiction.
 

When the debtor files for bankruptcy and the Automatic Stay takes effect, the statute of limitations (SOL) is tolled while the Stay is in place. However, if the SOL would normally lapse during a pending bankruptcy, it is only tolled an additional 30 days after the Stay is terminated. Once you receive notice that a discharge, dismissal or if a Relief from the Automatic Stay is obtained to your benefit, you should file your state court action right away. 

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Watch the full webinar

To learn more about the crossover between subrogation recovery and bankruptcy, watch the entire #AskAPro webinar. You can also reach out directly to our experts, Ted and Cameron, to discuss these topics or to learn more about Weltman’s consumer collections, subrogation, and/or bankruptcy recovery solutions. 

This blog is not a solicitation for business, and it is not intended to constitute legal advice on specific matters, create an attorney-client relationship or be legally binding in any way.