Morlan v. Universal Guaranty Life Insurance Co.Morlan v. Universal Guaranty Life Insurance Co.
- Reporters:
- ,
- Before:
- Bauer, Posner, Williams
POSNER, Circuit Judge. This appeal from the dismissal of a class action presents novel issues at the intersection of bankruptcy and class action law. A procedural chronology will help in framing them.
April 1999. David Morlan files this class action suit as the representative of a class of insurance agents of the defendants, affiliated insurance companies that maintain employee welfare benefit plans.
May 1999. Morlan files for bankruptcy.
September 1999. The bankruptcy court (1) orders Morlan’s debts discharged, on the basis of the trustee’s report that the estate in bankruptcy has no assets and that consequently the trustee has made no distribution to the creditors, and (2) dismisses the bankruptcy proceeding.
January 2000. Morlan files an amended complaint in the class action suit.
August 2000. The suit is certified by the district court as a class action with Morlan the only named plaintiff.
September 2001. Having learned about the bankruptcy, the district judge decertifies the class in Morlan’s ERISA suit and dismisses the suit without prejudice. Morlan’s claim under ERISA, the judge reasons, became an asset of the estate in bankruptcy and was not abandoned by the trustee. So when the class was certified, the named plaintiff (Morlan) had no standing to sue because he did not own the claim that he was suing upon.
Morlan asks us to reverse the dismissal of his suit.
The dismissal presupposes the assignability of Morlan’s ERISA claim to the trustee in bankruptcy; if it was assignable and assigned, it became property of the estate in bankruptcy, as in In re Polis, 217 F.3d 899, 901 (7th Cir. 2000); if it was not assignable, Morlan rather than the trustee was entitled to sue to enforce it.
ERISA requires pension plans to include a provision forbidding the assignment or alienation (these are synonyms,
ERISA imposes no similar requirement on welfare plans; nor do the plans at issue in this case contain a clause forbidding assignment or alienation. Since, however, Morlan’s claim is in part a claim for pension benefits, in part it is indeed nonassignable; and so the dismissal of his suit was improper. But it will make a difference on remand whether he can sue on all or only the pension part of his claim; and so we proceed to a consideration of whether the part of his claim that concerns welfare benefits was assignable.
Several cases hold that welfare benefits are generally nonassignable, just as pension benefits are, despite the absence of a counterpart to section 1056(d)(1) applicable to welfare benefits. These cases reason that because ERISA authorizes suits for plan benefits only by participants, beneficiaries, fiduciaries, or the Secretary of Labor,
The cases, it is true, carve an exception for medical benefits assigned to a health-care provider in exchange for health care, a common method of financing such care. See, e.g., Principal Mutual Life Ins. Co. v. Charter Barclay Hospital, Inc., 81 F.3d 53, 55-56 (7th Cir. 1996). That would not support a conclusion that Morlan’s ERISA claim for welfare benefits was assignable to the trustee in bankruptcy, however, because the trustee is not a health-care provider. Our court has a case of that sort, but our opinion in that case takes no position on whether other types of welfare benefit are assignable and if so whether there is any restriction on who the assignees may be. Plumb v. Fluid Pump Service, Inc., supra, 124 F.3d at 863 and n. 15. However, in Kennedy v. Connecticut General Life Ins. Co., 924 F.2d 698, 700 (7th Cir. 1991), we rejected the reasoning later adopted in cases like Simon by holding that a properly assigned ERISA claim makes the assignee a participant or beneficiary within the meaning of the Act.
Only the Fifth Circuit has actually held that claims for such benefits are assignable without restrictions. The principal case is Hermann Hospital v. MEBA Medical & Benefits Plan, 845 F.2d 1286, 1289 (5th Cir. 1988), which, though it too concerned health benefits, based its holding that they are assignable on the absence of a statutory provision forbidding their assignment, a ground independent of the nature of the welfare benefits or whom they are assigned to. Another Fifth Circuit decision, Texas Life, Accident, Health & Hospital Service Ins. Guaranty Ass’n v. Gaylord Entertainment Co., 105 F.3d 210, 214-15 (5th Cir. 1997), holds that claims for welfare benefits are assignable regardless of their nature, though the ground of the decision (a ground equally
Now that we must decide the issue, we hold that claims for welfare benefits, not limited to health-care benefits, are assignable, provided of course that the ERISA plan itself permits assignment, assignability being a matter of freedom of contract in the absence of a statutory bar. Kennedy v. Connecticut General Life Insurance Co., supra, 924 F.2d at 700. The absence of a counterpart to the anti-assignment provision for pension plans is telling; and in this regard we do not understand how the courts that have held welfare benefits nonassignable square their conclusion with the Supreme Court’s decision in Mackey v. Lanier Collection Agency & Service, Inc., 486 U.S. 825, 837-38 (1988), which held that, precisely because there is no anti-assignment provision for welfare plans, ERISA does not prohibit a state from garnishing benefits payments due plan participants. See In re Taft, 184 B.R. 189, 191 (E.D.N.Y. 1995). Garnishment and an assignment for the benefit of creditors are the same kind of animal.
Pertinent too is the general principle of the law that contractual claims (which is the essential character of claims to benefits pursuant to private pension or welfare plans) for the payment of money are assignable. In re New Era, Inc., 135 F.3d 1206, 1210 (7th Cir. 1998); Citibank, N.A. v. Tele/Resources, Inc, 724 F.2d 266, 268 (2d Cir. 1983); Collins Co. v. Carboline Co., 532 N.E.2d 834, 841 (Ill. 1988); E. Allan Farnsworth, Contracts § 11.2, p. 707 (3d ed. 1999). This principle, however, comes with an important exception,
Insofar as Morlan is seeking past monetized or monetizable benefits, this problem does not arise, because such a claim is independent of all personal differences between Morlan on the one hand and the trustee or creditors on the other, and so it is assignable. But he is claiming both past and future benefits, and, consistent with the “personal obligations” doctrine, the future benefits are not assignable—so here is another piece of his claim that, like his claim for pension benefits, clearly remained with him despite the bankruptcy. Still, the conclusion from the analysis thus far is that the trustee could take over at least a chunk, for all we know the biggest chunk, of Morlan’s claim as an asset of the bankrupt estate, and this conclusion requires us to consider whether that chunk was revested in Morlan, enabling him to sue to enforce it in his class action suit. If it was not revested, if it was not his property, he did not have standing to sue for it. For if it was not his property he would not benefit from an order requiring the defendants in the class action suit to render up the property.
After a suit is certified as a class action, a loss of standing by the named plaintiff does not destroy or (if it affects just
That might seem too late to save Morlan’s standing to sue on the entire claim were it not for his having filed an amended complaint in January 2000. That filing cured any problem. Quite apart from the relation-back doctrine of
Clearly, then, if the assignable part of Morlan’s ERISA claim, having been transferred to the estate in bankruptcy by operation of law when Morlan filed for bankruptcy, was abandoned before the amended complaint was filed, he could sue to enforce it, because the effect of a trustee’s abandoning a claim is to revest the ownership of it in the debtor. E.g., Koch Refining v. Farmers Union Central Exchange, Inc., 831 F.2d 1339, 1346 n. 9 (7th Cir. 1987); Catalano v. Commissioner, 279 F.3d 682, 685 (9th Cir. 2002); In re Interpictures Inc., 217 F.3d 74, 76 (2d Cir. 2000) (per curiam). And actually, despite the attention we’ve been paying to getting the sequence right, the sequence doesn’t matter; for when property of the bankrupt is abandoned, the title “reverts to the bankrupt, nunc pro tunc, so that he is treated as having owned it continuously.” Wallace v. Lawrence Warehouse Co., 338 F.2d 392, 394 n. 1 (9th Cir. 1964); see also Sessions v. Romadka, 145 U.S. 29, 51-52 (1892); Catalano v. Commissioner, supra, 279 F.3d at 685; In re Dewsnup, 908 F.2d 588, 590 (10th Cir. 1990) (per curiam). The purposes of retroactive vesting include to protect against the running of the statute of limitations, Sessions v. Romadka, supra, 145 U.S. at 52, and to compensate the trustee for any cost he may have incurred in maintaining the property during his custody of it. Brown v. O’Keefe, 300 U.S. 598, 602-03 (1937) (Cardozo, J.).
No doubt the trustee wanted and intended to abandon Morlan’s claim. But the defendants argue, and the district court agreed, that the trustee’s attempt to abandon failed because the trustee failed to comply with the statutory requirements for abandoning an asset that is part of the debtor’s estate. The requirements are exacting, in recognition of the potential harm to creditors from the trustee’s abandoning property to which they would otherwise be entitled because it is property of the estate in bankruptcy, and of the fact that “abandonment is revocable only in very limited circumstances, such as ‘where the trustee is given incomplete or false information of the asset by the debtor, thereby foregoing a proper investigation of the asset.’ ” Catalano v. Commissioner, supra, 279 F.3d at 686.
So let us consider the requirements for effective abandonment. The Bankruptcy Code provides that “after notice and a hearing,” the trustee, either on his own volition or under order by the bankruptcy court, “may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate.”
Section 521(1), to which subsection 554(c) refers, requires the debtor to file (so far as bears on this case) a schedule of his assets. Morlan did so, but he did not list his ERISA claim on the schedule, and so abandonment was not authorized by section 554(c). As for section 554(a), the trustee did not notify the creditors that he was considering abandoning Morlan’s claim, or conduct a hearing on the matter. Of course, if after notice the creditors don’t want a hearing, the failure to conduct one would not nullify the abandonment. A requirement of “notice and a hearing” really means notice and the opportunity for a hearing. In fact the Bankruptcy Code is explicit in defining “after notice and a hearing” as “authorizing an act without an actual hearing if such notice is given properly” and no interested party requests a hearing.
As for subsection (d), the bankruptcy judge’s order closing the case as a no-asset, no-distribution bankruptcy in part on the basis of a “statement of abandonment” might seem interpretable as the “order[ing] otherwise” to which the subsection refers. But no, because the statement of abandonment that the trustee submitted to the bankruptcy court and that the court in effect incorporated by reference
We conclude that the abandonment of the assignable and thus assigned part of Morlan’s claim by the trustee was not in compliance with section 554 and was therefore ineffective. But this does not end the case. We must decide what the consequences of noncompliance were and specifically whether they included dismissal of the class action. Clearly not dismissal in its entirety, since part of Morlan’s claim was nonassignable; but dismissal of the assignable part of the claim. In addressing this question we begin by noting that it was virtually inevitable that the trustee would abandon the claim, precisely because it was the claim of the representative plaintiff in a class action suit, albeit a suit not yet certified for class action treatment. What trustee in bankruptcy would think it worthwhile to insert himself in the place of the named plaintiff? We are not surprised to find very few cases in which trustees in bankruptcy have done so. Compare In re Polis, supra, 217 F.3d at 903-04. The named plaintiff in a class action usually has only a small stake in the action, Culver v. City of Milwaukee, 277 F.3d 908, 910, 913 (7th Cir. 2002); White v. Sundstrand Corp., 256 F.3d 580, 586 (7th Cir. 2001), and while the stakes for the class as a whole may be large, very few of the benefits of settling the class action or prosecuting it to judgment would be received by the trustee (which is to say the creditors), since he would just be the named plaintiff’s surrogate. Most of the benefits would go to the other members of the class and to the lawyers for the class, so that the trustee, as class representative yet having fiduciary obligations exclusively to the estate in bankruptcy, would have a potential conflict of interest, as noted in the only cases we’ve found in which a trustee in bankruptcy did attempt to prosecute a class claim. Maddox & Starbuck,
Likewise it is doubtful that any of Morlan’s creditors would have wanted the trustee to involve himself in the class action, though this would depend on the value of Morlan’s claim, which we don’t know. The expenses the trustee incurred in prosecuting the claim would be subtracted from the assets of the estate in bankruptcy, though it turned out there were no other assets—another good reason for abandonment of the debtor’s claim: how was the trustee to finance the class action? The creditors, or at least those who attended the creditors’ meeting (a potentially significant qualification), knew from Morlan’s statement at the creditors’ meeting that Morlan had another, an unscheduled, asset, consisting of a legal claim of some sort, and so they could have objected, invoking section 554, when they learned that the trustee intended to treat the bankruptcy as a no-asset, no-distribution bankruptcy. We cannot find any indication in the record that the trustee formally notified the creditors in advance that he would treat Morlan’s bankruptcy so, though they could have guessed it from the fact that Morlan’s schedule of assets filed in the bankruptcy proceeding lists only some clothing and other personal effects of small value. The creditors didn’t object to the closing of the case without any payment to them and it is now nearly three years since it was closed and
By this time, any claim the creditors might have to step into Morlan’s shoes in the class action may well have been abandoned or otherwise forfeited. See In re FBN Food Services, Inc., 82 F.3d 1387, 1395-96 (7th Cir. 1996); In re Haker, 411 F.2d 568, 569 (5th Cir. 1969) (per curiam). With no fixed time limits on reopening a bankruptcy proceeding analogous to the limits in some subsections of
This way of putting their argument suggests, moreover, an alternative basis for rejecting the defendants’ challenge to Morlan’s standing. The steps that the trustee took to abandon Morlan’s claim would suffice to establish abandonment under the ordinary principles applicable to abandonment, e.g., United States v. Locke, 471 U.S. 84, 98 (1985); Vieux v. East Bay Regional Park District, 906 F.2d 1330, 1341 (9th Cir. 1990); People ex rel. Illinois Historic Preservation Agency v. Zych, 710 N.E.2d 820, 825 (Ill. 1999), a fundamental doctrine of property law; it is only the provisions of the Bankruptcy Code regarding abandonment that cast doubt on whether Morlan’s claim really did revest in him. But those provisions are intended for the benefit of creditors, none of whom complained or is complaining about the trustee’s failure to comply with them. They are not intended for the benefit of alleged violators of the debtor’s legal rights, and so the defendants are the ones who lack standing—standing to object to the abandonment of Morlan’s claim. See Warth v. Seldin, 422 U.S. 490, 500 n. 12 (1975); North Shore Gas Co. v. E.P.A., 930 F.2d 1239, 1243 (7th Cir. 1991). The possession of a legally protectable interest is a prerequisite to suing because otherwise the possessor of that interest would find himself unable to enforce it if another person, an officious intermeddler, had brought suit to enforce it (like a bounty hunter) first. Singleton v. Wulff, 428 U.S. 106, 114 (1976) (plurality opinion); People Organized for Welfare & Employment Rights
The judgment is reversed with directions to reinstate Morlan’s class action suit.
REVERSED AND REMANDED.
A true Copy:
Teste:
Clerk of the United States Court of Appeals for the Seventh Circuit
USCA-97-C-006—7-26-02