Filing a petition in bankruptcy falls into three well-settled paths, Chapters 7,11 and 13. The rules and the effects of such a filing vary strongly between them. In a legal malpractice case, the debtor loses its capacity to sue and damages which might go to the litigant now go to the trustee. As Nicke v Schwartzapfel Partners, P.C. 2017 NY Slip Op 02437 Decided on March 29, 2017 Appellate Division, Second Department shows us, Chapter 13 is different.
“In contrast to Chapter 7 proceedings, the object of a Chapter 13 proceeding is the [*3]rehabilitation of the debtor under a plan that adjusts debts owed to creditors by the debtor’s regular periodic payments derived principally from income. Thus, in a Chapter 13 proceeding, a debtor generally retains his property, if he so proposes, and seeks court confirmation of a plan to repay his debts over a three- to five-year period (see 11 USC §§ 1306[b]; 1322, 1327[b]). Payments under a Chapter 13 plan are usually made from a debtor’s “future earnings or other future income” (11 USC § 1322[a]). “Accordingly, the Chapter 13 estate from which creditors may be paid includes both the debtor’s property at the time of his bankruptcy petition, and any wages and property acquired after filing” (Harris v Viegelahn, __US __, __, 135 S Ct 1829, 1835; see 11 USC § 1306[a]). Assets acquired after a Chapter 13 plan is confirmed by the court are not included as property of the estate, unless they are necessary to maintain the plan (see 11 USC §§ 1306[a]; 1326), or the trustee seeks a modification of the plan to remedy a substantial change in the debtor’s income or expenses that was not anticipated at the time of the confirmation hearing (see 11 USC § 1329[a]; In re Solis, 172 BR 530, 532 [Bankr SD NY]). Unlike Chapter 7 proceedings, there is no separation of the estate property from the debtor under a Chapter 13 proceeding, except to the extent that the plan, as confirmed by order of the court, places control over an asset in the hands of the trustee (see Harris v Viegelahn, __ US at __, 135 S Ct at 1835). This is the basis for the conclusion that, while Chapters 7 and 11 debtors lose capacity to maintain civil suits, Chapter 13 debtors do not (see Giovinco v Goldman, 276 AD2d 469; Olick v Parker & Parsley Petroleum Co., 145 F3d at 515-516). Thus, a Chapter 13 debtor keeps all, or at the very least some, of the income and property he or she acquires during the administration of the repayment plan. Accordingly, in this action, it was never the bankruptcy estate, or its creditors, that was damaged by a decrease in the amount awarded in the underlying personal injury action due to the alleged conduct of the defendants. Only the plaintiffs had an interest in the recovery of damages in the personal injury action (see Olick v Parker & Parsley Petroleum Co., 145 F3d at 516). Moreover, it was the plaintiffs and the defendants who were engaged in a face-to-face relationship in the underlying personal injury action and to the extent the defendants allegedly breached a duty in that action the foreseeable harm was to the plaintiffs, not the trustee or the bankruptcy estate. Thus, under the circumstances presented here, the relationship of the plaintiffs to the personal injury action is unique and demands an exception to the general rule regarding privity (see Baer v Broder, 86 AD2d 881).
Accordingly, the Supreme Court erred in granting those branches of the defendants’ separate motions which were pursuant to CPLR 3211(a)(3) to dismiss the complaint insofar as asserted against each of them for lack of capacity and/or standing to sue.”