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Protective Order Stricken by District Court, Reversed

Monday, February 24, 2014
Feb. 20 --The U.S. District Court for the District of Nevada found that because the bankruptcy court's protective order in the respondent's consumer bankruptcy case was based upon an order of the district court that had been stricken by a later action, the protective order was reversed (Buenaventura v. Chau (In re Chau), 2014 BL 36681, D. Nev., No. 2:13-cv-00630-JCM-GWF, 2/11/14).

The petitioner/creditor's request for relief from the stay, however, was properly denied.

The case arose out of an accident between the debtors and the petitioner's husband in which the petitioner's husband was killed. The petitioner obtained a judgment of more than $500,000 in state court against the debtors and during the course of that proceeding, the debtors' insurance company obtained a federal court order limiting its liability in the case to $100,000 and finding that no “bad faith” or “legal malpractice” in handling the claims had occurred. In spite of this order, the petitioner then sought the assignment of potential “bad faith” and “legal malpractice” claims held by the debtors.

Before the state court ruled in favor of the petitioner, the debtors filed for Chapter 7 protection. At the petitioner's request, the debtors included the aforementioned tort claims on their schedule of property. Finding no property available for distribution, the trustee issued a no distribution statement and the petitioner filed a motion to examine the assets of the debtors under Rule 2004 of the Federal Rules of Bankruptcy Procedure. In response, the debtors moved for a protective order to prevent the examination and the bankruptcy court granted the debtors' motion.

The bankruptcy court further denied the petitioner's motion to compel the debtors to sell the claims to her or for relief from the stay so that the state court could order the transfer of the debtors' interest in the claims. The district court then struck its earlier order limiting the insurer's liability, finding that the petitioner had been denied her due process rights, as she was not a party to the litigation, but she was the true party-in-interest. The petitioner then appealed the protective order and denial of her motion to compel or for relief from the stay.

The district court stated that the bankruptcy court's protective order denying the petitioner/creditor an examination into the debtor's potential claim(s) against the insurer was based on the premise that the claim(s) had no value, as ruled by the district court. However, because the order to that effect had been stricken, the claim(s) could have substantial value, and the petitioner would be permitted to conduct an examination to evaluate their value before the bankruptcy court decided whether the debtor was entitled to a discharge. On the other hand, the petitioner could cite no authority to support her motion to compel the debtor to sell his interest in the claims. The bankruptcy court also properly denied the motion to lift the stay, as the Bankruptcy Code clearly prohibited that attempt to enforce the judgment against the debtors.

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