Selling a Cause of Action

The Sixth Circuit announced an interesting decision yesterday. The case is Parker v. Goodman, No. 06-5940. The opinion permits a bankruptcy trustee to sell a cause of action of a debtor in order to realize assets for the benefit of creditors. Here are the facts:

The Debtor filed bankruptcy then had a falling out with his bankruptcy attorney. The debtor sued the bankruptcy attorney for malpractice in Kentucky state court. The debtor's bankruptcy trustee sold the cause of action in the malpractice case to the bankruptcy attorney's malpractice carrier for $10,000.00. The debtor was then enjoined by the bankruptcy court from prosecuting the malpractice case.

Isn't that interesting? Despite Kentucky's strong public policy against selling causes of action, the Sixth Circuit says that it's ok for the bankruptcy trustee to sell the debtor's claim against the attorney because the cause of action is property of the estate and the bankruptcy code, which trumps Kentucky law, gives the trustee the right to sell property of the estate.

But what makes this particularly onerous is that the trustee sold the cause of action to the attorney/defendant's malpractice insurance carrier, arguably for a fraction of its value had the case gone to trial. The malpractice insurance was able to extinguish the claim without the debtor ever having his day in court or even having had a say in the settlement.

Admittedly, the Sixth Circuit gives us an out - the debtor could have contested the actual sale, instead of waiting to contest the injunction against proceeding in state court - but that's of little comfort since the Sixth Circuit basically says that the sale was ok, giving trustees who want to engage in these transactions a green light.

This is another decision that is going to wind up causing issues down the road as a public, already lacking in confidence in the legal profession, will have yet another way to claim that "the lawyers screwed me out of my case." The judges of the Sixth Circuit ought to reconsider their position on this one, after thinking through all of the ramifications.

~Tim