Hershel Easterling, et al. v. Progressive Specialty Ins. Co.: A tortfeasor’s bankruptcy discharge does not operate to relieve any legal liability that may be found against her, and the plaintiff still has an opportunity to prove the merits of his claims but is prevented by law from collecting damages for that harm from the tortfeasor, even after establishing legal entitlement to recover. However, this injunction does not extend to the UIM insurer, from whom a judgment may still be collected.
Facts and Procedural History
Following a December 2014 motor vehicle accident, Hershel and Charlotte Easterling brought suit against Ashley McCartney for negligence and wantonness and against Progressive Specialty Insurance Company seeking underinsured motorist (UIM) benefits. Before trial, McCartney filed a Suggestion of Bankruptcy, informing the court about bankruptcy proceedings she had initiated and asserting that any award for damages for the underlying suit involving the Easterlings would be extinguished by the ensuing bankruptcy discharge and should therefore be ceased.
Subsequently, Progressive filed a Motion for Summary Judgment arguing that the plaintiffs’ UIM claims against Progressive were due to be dismissed because they could only seek to recover UIM benefits if the plaintiffs showed they were “legally entitled to recover damages” from the tortfeasor, McCartney. Progressive contended that because McCartney’s bankruptcy filing foreclosed her legal obligation to pay debts (including any judgment recovered against her by the Easterlings), the Easterlings were not legally entitled to recover from McCartney in excess of her own liability policy limits; therefore, the Easterlings claims for UIM benefits failed as a matter of law. Progressive provided analogous caselaw supporting the proposition that if the Easterlings were precluded from recovery under the bankruptcy statute, they could be statutorily precluded from being entitled to recover UIM benefits.[1]
The Easterlings argued that the Bankruptcy Code did not operate to prevent recovery as alleged by Progressive. In granting Progressive’s motion, the trial court held that because of McCartney’s Chapter 7 bankruptcy filing, the Easterlings could not obtain a judgment for which McCartney would be responsible that would, in turn, invoke recovery of UIM benefits. The Easterlings appealed. Hershel Easterling, et al. v. Progressive Specialty Ins. Co. [Ms. 1150833 Sep. 15, 2017], ___ So.3d ___ (Ala. 2017).
The Effect of a Tortfeastor’s Bankruptcy Discharge on Recovery of UIM Benefits
The issue on appeal was whether the bankruptcy discharge of a tortfeasor prevents a plaintiff from recovering UIM benefits under the plaintiff’s own insurance policy. The Easterlings contended that Progressive’s position, and the subsequent decision by the trial court, were contrary to the effect of the bankruptcy discharge and unsupported by Alabama law. Whereas Progressive argued that the automatic stay and ultimate discharge of a tortfeasor’s personal liability for damages via bankruptcy proceedings foreclosed the legal obligation to pay debts and operated as a logical extension of the phrase “legally entitled to recovery” when applied to UIM benefits.
The Supreme Court of Alabama was not persuaded by Progressive’s framing of the issue. It found that McCartney’s bankruptcy filing did not limit a determination on the merits of McCartney’s liability, but rather, affected the Easterlings ability to collect damages from McCartney if the Easterlings were successful in obtaining a judgment against McCartney. The Alabama Supreme Court concluded there was a clear distinction between a plaintiff’s legal entitlement to recover based on a showing of the tortfeasor’s liability and the plaintiff’s ability to legally collect the demonstrated damages from the tortfeasor/debtor. There was nothing to prevent the Easterlings from establishing they were legally entitled to recover from McCartney on the merits of their claims, regardless of whether they were then barred from actually collecting damages from her.
Conclusions of the Court
Under this interpretation, the entry of summary judgment by the trial court ran contrary to both the United States Bankruptcy Code[2] and Alabama’s UIM Statute (Alabama Code § 32-7-23). McCartney’s bankruptcy discharge did not operate to relieve any legal liability that may be found against her. The Easterlings would still have an opportunity to prove the merits of their claims but were prevented by law from collecting damages for that harm from McCartney, even after establishing legal entitlement to rover. This injunction did not extend to the UIM insurer, from whom a judgment may still be collected.
[1] See Kendall v. United Servs. Auto. Ass’n, 23 So.3d 1119, 1125 (Ala. 2009); Ex parte Carlton, 867 So.2d 332, 338 (Ala. 2003).
[2] 11 U.S.C. § 524(e): “[D]ischarge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt.”; In re Brady, 449 F.Supp. 70, 71 (D.Mont. 1978) (“It seems clear that it is the policy of the law to discharge the bankrupt but not to release from liability those who are liable with him.”).
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