In Re: Mary L. Polis, Debtor-Appellant Mary L. Polis, Plaintiff-Appellant,. v. Getaways, Inc.
Docket: 99-1025, 99-1577
Court: Court of Appeals for the Seventh Circuit; July 24, 2000; Federal Appellate Court
The case involves Mary L. Polis, who was in Chapter 7 bankruptcy when she identified a potential cause of action against Getaways, Inc. under the Truth in Lending Act and Illinois consumer protection laws for concealing finance charges related to a travel package. Polis attempted to exempt this cause of action from her bankruptcy estate, valuing it at zero. Concurrently, she became the lead plaintiff in a class action lawsuit against Getaways, representing others similarly affected.
After her bankruptcy discharge, both Getaways and the bankruptcy trustee sought to reopen the bankruptcy case, arguing that the cause of action had a value exceeding $900 and was improperly exempted. Under Illinois law, an insolvent debtor can exempt $2,000 of personal property, but Polis had already exempted $1,100 of other assets, limiting her ability to exempt the cause of action if it was valued over $900.
The courts confirmed that a cause of action qualifies as property within the bankruptcy estate, thus subject to valuation. The bankruptcy court and district court supported the objectors' claims, leading to the dismissal of the class action on the basis that the claim ownership resided with the trustee, not Polis. The case highlighted a contradiction where Polis's attorney undervalued the claim to support the exemption, while Getaways's attorney sought to demonstrate its higher value. The legal complexities of the case were compounded by the involvement of different judges for the bankruptcy and class action proceedings.
The trustee has not submitted a brief. The plaintiff contends that her claim has no market value, arguing for a nonmarket value that a court would recognize for damages. However, she also asserts that if there is a market value, it is less than $900. Judges previously ruling against Polis expressed concern over the potential for a debtor to gain valuable assets through exempting legal claims from bankruptcy, which would otherwise be inaccessible to creditors. According to the Bankruptcy Code, the "value" of exempted property is defined as fair market value at the time of the bankruptcy petition, unless the debtor acquires the property later. Since Polis had not sued Getaways at the time of her bankruptcy filing, the legal claim from a prior transaction was considered part of her estate. Although it is assumed that a Truth in Lending Act claim is non-assignable and not subject to market transactions, this does not negate its status as an asset. Legal claims, particularly those for monetary compensation, are valued based on the judgment amount multiplied by the likelihood of winning. This method is typically used in settlement discussions, regardless of whether claims can be assigned.
The valuation date for determining asset exemptions under the Bankruptcy Code is the date the bankruptcy petition is filed, not a later date when the asset may appreciate in value. This can lead to situations where debtors benefit unexpectedly from assets that were initially undervalued, such as a painting or stock that increases in worth post-filing. If the asset appreciates beyond the exemption limit, creditors may reclaim it, but the Code does not disallow exemptions for assets that tend to fluctuate in value, possibly due to the complexities in defining such assets and distributing gains among creditors.
A critical point in valuing uncertain benefits, such as potential monetary awards from lawsuits, is that their value is inherently less than the full amount. For example, a claim with a 50% chance of yielding a $1,000 judgment is valued at approximately $500, adjusted for risk preferences. The bankruptcy and district courts erred by not accounting for this uncertainty. In the specific case involving Polis's claim under the Truth in Lending Act, the total recoverable damages might only be $100, depending on the finance charge and actual damages, indicating that even a guaranteed win would not exceed her personal property exemption limit.
The value of Polis's claim at the time of her bankruptcy petition is assessed at a maximum of $900 unless she had a greater than 90 percent chance of recovering $1,000 in statutory damages, an issue not addressed by the lower courts. Although punitive damages are possible under the relevant Illinois statute, their potential has not been quantified. Getaways made a $1,500 settlement offer to Polis, which was rejected; this offer is seen as evidence of the claim's minimum fair market value. However, the district court was skeptical of this valuation due to the class-action context, particularly since Polis was the only named plaintiff, the statute of limitations had expired, and the bankruptcy trustee showed no interest in pursuing the claim. Getaways could have effectively extinguished the class action by settling with Polis before certification or by arguing the claim should revert to the trustee.
The argument that Polis's "property" for exemption purposes included her strategic position as a named plaintiff is viewed as weak and unasserted. The $1,500 offer cannot substitute for a present-value calculation of her claim, which the lower courts failed to perform. There is insufficient evidence to suggest Polis's claim was worth more than $900 at the time of her bankruptcy filing, placing the burden on Getaways to prove otherwise, which they did not. Consequently, the decision to revoke her exemption and dismiss the class action is reversed. Polis did not exceed her exemption limit, and even if she had, dismissal would unjustly reduce her exemption. She is entitled to exempt $900 of the fair market value of her claim, having already exempted $1,100 of her personal property.
The individual has a legitimate interest in the class action suit, even if her claim's value is less than its fair market worth, due to the estate's share in bankruptcy. The dismissal of the class action for lack of standing was incorrect, regardless of the claim's worth exceeding $900. The question of whether she or the trustee would control the litigation is irrelevant, as the claim is recognized as hers and the trustee has shown no interest in pursuing the case against Getaways. Although the dismissal is reversed, the future of the suit is uncertain. It was filed before her claim was exempted from the debtor's estate, which is managed by the trustee. Consequently, if the district court lacked jurisdiction over her suit at the time of filing and the statute of limitations has expired, she may be prevented from pursuing the case further. This matter is left for resolution on remand. The decision is reversed.
