Bankruptcy Subrogation Interest

Posted by Sylvius von Saucken

Question:
I am representing a client in a PI case. We have reached a settlement with the tortfeasor's carrier and gotten the check. Then, as we were starting to finalize the settlement, my client was laid off from his job and is now facing bankruptcy -- even despite getting the settlement money. I have not distributed any money yet from the settlement.

Here is the issue. My client had 2 different medical insurers during the treatment he had for the accident. Each has claimed a subrogation interest that I had not yet negotiated before I got notice from my clients about their financial problems. My clients now absolutely do not want me to pay these subrogation claims at all. They are no longer covered by those carriers. My concern is whether I have any potential personal liability if I do not pay the subrogation claims. I have not promised the subrogation carriers anything and the clients are not worried about the subrogation carriers trying to come after them. However, I do not want to be stuck somehow myself if I distribute all of the money to the clients instead of paying any of the subrogation claims or still-outstanding medical bills. The client proposes to simply list the subrogation carriers as creditors in the bankruptcy since the clients will owe the carriers this money back. Does anyone have any experience with these issues? I need to move this forward. They are likely going to wait until the preference period has passed after they get and use the settlement money before they file the bankruptcy.

Anyone have any experience or can offer any advice?

Thanks in advance,
Ohio Attorney

Answer:
The clients are not wrong - they can treat the subrogation carriers as creditors in a Ch 7 or a Ch 11; provided however, they put the settlement money into the estate. They cannot, however, treat subrogation carriers as creditors and then keep or spend the settlement money. If they hold off accepting and then file, the trustee (if a 7) would likely accept for them. On the other hand, if they put the settlement money into the estate, depending on how much money, they would be paying all creditors, including subrogation carriers something in exchange for federal bankruptcy protection (via an automatic stay order).

Our best,
Sylvius von Saucken