Insurance Company that Defended Bad Faith Lawsuit Filed Against it on Behalf of Bankruptcy Estate Could Not Seek Fees from the Debtor Individually

Insurance Company that Defended Bad Faith Lawsuit Filed Against it on Behalf of Bankruptcy Estate Could Not Seek Fees from the Debtor Individually

Debtor’s confirmed Chapter 13 plan provided that she would prosecute a bad faith claim against her insurance company and commit the proceeds of the litigation to the payment of creditors in her case. When the insurance company prevailed in the litigation after serving Debtor with a proposal for settlement, it sought to recover its fees and costs from Debtor under Federal Rule of Civil Procedure 54(d)(1).

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At the time a bankruptcy petition is filed, an estate is created that comprises of all the debtor’s legal and equitable interest in property. The debtor’s legal and equitable interests include all causes of action that the debtor had before filing for bankruptcy. A trustee in Chapter 13 bankruptcy “succeeds to all causes of action held by the debtor at the time the bankruptcy petition is filed.” Under Federal Rule of Bankruptcy Procedure 6009, the “trustee or debtor in possession may . . . prosecute any action or proceeding in behalf of the estate before any tribunal.” The Eleventh Circuit has recognized that, in accordance with Rule 6009, a debtor under Chapter 13 of the Bankruptcy Code “retains standing to pursue legal claims on behalf of the estate.”

Here, there is no dispute that the Bad Faith Action was property of the bankruptcy estate. The plain language of the Confirmation Order evidences that Debtor was required to bring the Bad Faith Action for the benefit of the bankruptcy estate, not herself. Allstate had the opportunity to object to confirmation of the Plan or the Confirmation Order, but did not.

Moreover, the Clarification Order specifically provides that Debtor did not have any authority to accept settlement proposals without Bankruptcy Court approval and would not be liable for “any attorney’s fees or court costs arising from the rejection of any offer of settlement, proposal for settlement or offer of judgment. . . .”22 Allstate had the opportunity to seek reconsideration of or appeal the Clarification Order, but did not do so. Both the Confirmation Order and the Clarification Order are final and binding upon Allstate.

The Court finds that because Debtor brought the cause of action against her insurance company on behalf of the bankruptcy estate, fees or costs awarded to the insurer are recoverable only against the bankruptcy estate and not against Debtor individually.

In re: Shirley M. Kwiatkowski, Debtor

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