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First Circuit Court of Appeal Addresses Bankruptcy Issues Stemming from Medical Malpractice Settlement

Any award of damages in a Massachusetts injury case, whether through a plaintiff’s verdict or settlement agreement, can still present challenges if the defendants either fail to pay or cannot pay the ordered amount.  The federal First Circuit Court of of Appeals addresses this in Vargas-Colon v. Foundation Damas, Inc. (Nos. 16-1213 and 16-1620).  The underlying injury happened to a child who was born by cesarean section after the mother had been in the hospital for several hours.Operating room  Because of this delay, the child did not receive enough oxygen and suffered permanent neurological defects.

The parents initiated a medical malpractice action in the federal district court, alleging the doctor and hospital were negligent in the care and delivery of the child.  The parties reached a settlement agreement with the defendants paying $1.5 million in eight installments.  This was entered into a judgment, and the district court retained jurisdiction over the terms of the settlement.  After the first payment of $400,000, the hospital failed to make the scheduled payments.  Instead, the hospital filed for bankruptcy.  The plaintiffs moved to dismiss the hospital’s bankruptcy petition alleging several claims including fraud and bad faith.

The bankruptcy case proceeded, and a reorganization plan was confirmed for the hospital for the court.  Within the plan was a supplement that assured any medical malpractice claimant that they could still file a motion or legal action against the hospital in the pursuit of an action or collection of funds.  The plan also did not preclude medical malpractice claimants from pursuing actions against third parties.  At this point the plaintiffs only received a little under $645,000 – less than half of the $1.5 million agreed upon in the settlement agreement. 

The plaintiffs then pursued a business entity tied to the hospital, arguing that the corporation owned and operated the hospital utilized and therefore also liable to the injured parties.  The injured attempted to add this company to the original medical malpractice action and filed an action against the bankruptcy trustee for wrongfully impairing their ability to collect the settlement proceeds from the Trust, an account set aside in the bankruptcy proceeding created to pay creditors and claimants.  The motion to add was denied and the action against the Trustee was dismissed without prejudice. 

The circuit court affirmed the dismissal of complaints by the uncles of the injured infant, finding their allegations confusing and murky.  The court also struggled to see the arguments put forth on behalf of the infant regarding the claims against the trustee.  The court pointed out the argument focused on the court’s ability to pursue claims against the company associated with the hospital instead of why the district court erred in its dismissal.  The argument offered for the injured child failed to address why the trustee did in fact owe her a duty to her as a claimant, and why the circuit court of appeal did in fact have jurisdiction over the matter instead of the insurance commissioner.  Because the brief was essentially silent on the arguments necessary to proceed, the court considered this issue waived, allowing the district court’s ruling to stand on this issue.

The lower court dismissed the medical malpractice claim on the grounds the injured child could not proceed against the company as it was barred under issue preclusion stemming from the decision of the bankruptcy court.  Issue preclusion, also known as collateral estoppel, keeps parties from re-litigating issues of fact or law that were already adjudicated in an earlier proceeding.  The company argued the matter was already adjudicated in the bankruptcy proceeding, and is required to show four things: 1) that both proceedings involve the same issue of law or fact, 2) the parties actually litigated the issue, 3) the prior court decided the issue in a final judgment, and 4) that the resolution of that issue was essential to judgment on the merits.  Unfortunately, the injured child did not argue the company failed to do any of these. 

The injured child argued that the language of the bankruptcy plan did not exclude issue preclusion.  She argued that the company was not actually a party to the bankruptcy proceeding, and therefore not privy to issue preclusion.  The circuit court dismissed both arguments, noting the language did not mention anything related to issue preclusion and that it is not necessary for the company to be a party to the earlier proceeding for issue preclusion to exist.  Limited to the narrow arguments made on behalf of the child, the court declined to speculate on better arguments to support the infant’s case and affirmed the lower court’s dismissals. 

Personal injury litigation experience matters.  The Massachusetts attorneys at Karsner & Meehan can help you with your suit.  Call our office today at 508.822.6600.

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