What Happens To A Tort Claim Upon Abandonment By The Chapter 7 Trustee? (Martineu v. Wier)

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When a Chapter 7 bankruptcy trustee abandons the debtor’s tort claims, what happens to those tort claims?

Such question is addressed in a recent opinion of the U.S. Fourth Circuit Court of Appeals,[fn. 1] by describing a prior bankruptcy ruling (Martineau v. Wier, 934 F.3d 385 (4th Cir. 2019)) like this:

Martineau files Chapter 7 bankruptcy, scheduling certain tort claims;
the tort claims become property of the bankruptcy estate immediately upon filing, and the bankruptcy trustee becomes the real party in interest for those tort claims; but
the bankruptcy trustee later abandons those tort claims, taking them outside the bankruptcy estate; and
in such a circumstance, bankruptcy law treats the bankruptcy debtor “as having owned the claims continuously.”

What follows is a summary of the Martineau v. Wier opinion on such issue.

The Bankruptcy & The Lawsuit

Years after entering into a settlement that releases certain tort claims, Debtor files a Chapter 7 bankruptcy. After the discharge is granted and the bankruptcy is closed, Debtor sues in federal District Court to, (i) rescind the settlement agreement as fraudulently induced, and (ii) pursue tort claims.

The District Court rejects that effort and rules against Debtor on summary judgment because, inter alia, Debtor lacks standing.

On appeal, the Fourth Circuit reverses and remands because, inter alia:

the District Court’s “standing” determination conflates Article III constitutional requirements with the distinct real-party-in-interest analysis; and
when the two are untangled, it is clear that Debtor has both Article III standing and the legal entitlement to pursue the tort claims.

The Tort Claims

Debtor’s underlying tort claims stem from a grisly attack on her by Defendant:

Debtor is visiting her boyfriend in an apartment building and encounters Defendant, who lives in the same building;
according to the police report, Defendant stabs Debtor repeatedly with an eight-to-ten-inch kitchen knife in an unprovoked assault;
police arrest Defendant, who is charged with assault and battery with intent to kill and kidnapping; but
Defendant is found incompetent to stand trial and is civilly committed to a mental health facility.

In following years, Debtor retains counsel to investigate potential claims against Defendant and against Defendant’s sister and brother-in-law, who own the apartment building (the “Relatives”).

According to Debtor:

the Relatives had assured her that, (i) their only relationship with Defendant was as landlords, and (ii) they had no reason to know of Defendant’s severe mental illness or potential dangerousness;
relying on those representations, Debtor concluded that the Relatives could not be held liable, as owners of the apartment building, for negligence in connection with the attack; and
so Debtor, still represented by counsel, agreed to release all claims against the Relatives in exchange for a payment of $20,000 — a sum Debtor says represents only a fraction of her damages.

Roughly a year later, prosecutors in Defendant’s criminal case give Debtor access to Defendant’s criminal file for the first time—at which point, Debtor learns that the Relatives had ample knowledge of Defendant’s long history of mental illness and propensity for violence, including:

attempting to have Defendant involuntarily committed years earlier;
serving as trustee of a long-standing mental health trust established because of Defendant’s incompetence to manage funds; and
discovering poems by Defendant describing bloody stabbings.

Despite these revelations, Debtor takes no legal action, believing the settlement agreement bars her from proceeding against either Defendant or the Relatives.

The First Bankruptcy

Eighteen months after reviewing Defendant’s criminal file, Debtor files Chapter 7 bankruptcy, acting pro se.

In Debtor’s bankruptcy:

Debtor does not disclose any potential claims against Defendant or the Relatives;
the Chapter 7 trustee abandons all interests in Debtor’s assets; and
the Bankruptcy Court discharges Debtor’s debts and closes Debtor’s bankruptcy case.

The Lawsuit & A Re-Opened Bankruptcy

A year after the closing of the first bankruptcy, Debtor files this suit in federal District Court against Defendant and the Relatives to:

rescind the 2009 settlement agreement as fraudulently induced; and
assert a series of tort claims (i) against Defendant arising from the assault on her, and (ii) against the Relatives for negligence in allowing Defendant to live unsupervised in their apartment complex.

All three defendants move for summary judgment against Debtor on numerous grounds, including because Debtor lacks “standing” to pursue the claims against them: because the tort claims belong to Debtor’s bankruptcy estate and can be asserted only by the bankruptcy trustee.

In response, Debtor petitions the bankruptcy court to re-open her bankruptcy and files amended bankruptcy schedules that list her tort claims against Defendant and the Relatives.

The Bankruptcy Court, (i) grants Debtor’s motion to re-open, and (ii) appoints a trustee to administer the newly disclosed claims. Then, the new Chapter 7 bankruptcy trustee abandons all interests in Debtor’s claims against Defendant and the Relatives.

So, the Bankruptcy Court closes Debtor’s Chapter 7 case for the second time.

“Standing” Reversal

The District Court had ruled against Debtor on summary judgment because, inter alia, “the bankruptcy trustee alone had exclusive standing to pursue this action” at the time Debtor filed her complaint.

The Fourth Circuit reverses. Here’s why:

Debtor’s allegations satisfy the Article III requirements for standing—Debtor’s complaint “alleges a distinct injury” at the hands of Defendant and the Relatives, “traceable to their conduct, and redressable by a favorable decision on her tort claims”;
“the question in this case” is whether Debtor “was legally entitled to pursue these tort claims on her own behalf, or whether the claims belonged solely to her estate”; and
- such a question “implicates not Article III standing doctrine, but rather the ‘real-party-in-interest’ requirement.”

The Fourth Circuit explains its reversal rationale like this:

under Fed.R.Civ. P. 17(a), “an action must be prosecuted in the name of the real party in interest,” and in a Chapter 7 bankruptcy, it is the bankruptcy trustee and not the debtor who is the real party in interest with the right to bring any legal claims that belong to the estate;
when Debtor filed this lawsuit, her tort claims belonged to the bankruptcy estate, making the bankruptcy trustee the real party in interest at that time—the District Court erroneously deems this fact dispositive based on Article III standing rules: but
there is no analogous rule for the real-party-in-interest requirement—to the contrary, Rule 17(a)(3) clarifies that date of filing circumstances do not control: prohibiting courts from dismissing a complaint on real-party-in-interest grounds without first providing the real party in interest an opportunity to “ratify, join, or be substituted into the action.”

The Fourth Circuit adds:

because the District Court miscategorizes the question as one of constitutional standing, it improperly focuses on whether Debtor had the right to sue at the time of the lawsuit’s filing;
- this is a critical error, because events after Debtor’s bankruptcy filing make Debtor, and not the bankruptcy trustee, the real party in interest under Rule 17; and
- after Debtor files this lawsuit, Debtor’s reopens her bankruptcy and the trustee abandons Debtor’s legal claims, bringing them outside the bankruptcy estate—making Debtor the real party in interest;
once the trustee abandons the claims, bankruptcy law treats Debtor as having owned the claims “continuously” — not only as of the lawsuit filing but at all points prior as well — “free to seek redress as if no bankruptcy petition had been filed”; and
“Debtor is now — and has been from the start — the real party in interest, legally entitled to bring this action.”

Conclusion

Good to know.

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Footnote 1. The recent opinion is Software Automation Holdings, Inc. v Insurance Toolkits, LLC, Case No. 5:23-CV-140, U.S. District Court for Eastern North Carolina (decided July 3, 2025; Doc. 80).

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