LIABILITY INSURANCE FOR PRE-PETITION PERSONAL INJURY CLAIMS
Generally, if a Chapter 11 case results in a confirmed plan of reorganisation, a permanent injunction will prohibit creditors from proceeding against the reorganised debtor post-bankruptcy. Likewise, creditors that fail to file a proof of claim by a court-ordered deadline generally cannot receive distributions from the debtor’s bankruptcy estate.
Specifically, section 524(a) of the Bankruptcy Code, along with language in a plan of reorganisation and confirmation order, will protect a reorganised debtor against subsequent action by a creditor. These provisions operate to ‘discharge’ the claim, which means the debtor no longer has a legal obligation to satisfy it. The discharge injunction furthers a basic principle of bankruptcy – providing the debtor with a ‘fresh start’.
Courts, however, sometimes allow personal injury tort claimants to pursue prepetition claims against a reorganised and discharged debtor under a doctrine known as the ‘insurer exception’. In In re Edgeworth (1993), the Fifth Circuit held that a plaintiff may pursue a lawsuit against the discharged debtor as a “nominal defendant” solely for purposes of establishing the debtor’s liability in order to collect from the debtor’s insurance policy.
Importantly, in Edgeworth, the claimant sought only to recover against the insurer, which did not implicate the reorganised debtor’s financial liability. The Fifth Circuit, however, explained that any “threats to Edgeworth’s pocketbook might require a different result under section 524”.
Jul-Sep 2025 issue
King & Spalding LLP