Wednesday, January 16, 2019

Massachusetts Appeals Court holds insured's bankruptcy estate barred by issue preclusion from bringing bad faith settlement claim against insurer after injured plaintiff lost on the same claim

Valerie Troiano injured Elsa Villanueva in a car accident.  After a jury trial a judgment of $414,500 entered for Villanueva.   Commerce, Troiano's insurer,  paid the $100,000 policy limit.  An execution against Troiano entered in the amount of $552,352.37 (which presumably included interest.)

Villanueva sued Commerce, alleging that it had engaged in unfair settlement practices when it initially failed to settle her claim for the $100,000 policy limit.  After trial a verdict entered in favor of Commerce on that claim. 

Troiano filed a petition for bankruptcy.  The bankruptcy trustee retained  the same attorney who had represented Villanueva in her unsuccessful claim against Commerce, to pursue a bad faith settlement claim against Commerce on behalf of the bankruptcy estate.  

In Cruickshank v. Mapfre U.S.A, __ N.E.3d __, 2019 WL 122947 (Mass. App. Ct.), the Massachusetts Appeals Court held that the lawsuit must be dismissed on the ground of issue preclusion. 

The doctrine of issue preclusion prevents relitigation of an issue decided in an earlier action between the same parties or their privies.  The question before the court was whether the the trustee of Troiano's bankruptcy estate was in privity with Villanueva, the plaintiff in the earlier unsuccessful claim against Commerce.

The court agreed with Commerce that the concept of "virtual representation" applied.  Under that theory, issue preclusion applies if the interests of the parties in the two suits are so closely aligned that the party in the first suit is the virtual representative of the party in the second suit.

The court noted that a trustee in bankruptcy is a fiduciary representing not only the bankruptcy estate but the creditors of the estate.  Therefore, the trustee of Troiano's bankruptcy estate was acting on behalf of Villanueva as a creditor of the estate.  Moreover, the benefit of any recovery on a claim of failure to settle would flow to Villanueva rather than Troiano. Thus, although the trustee (and trustee's attorney) nominally represented Troiano, that representation in the action against Commerce was for the sole benefit of Villanueva.   The doctrine of issue preclusion therefore applied.

Because the holding is based in large part on bankruptcy law, specifically the duties of the bankruptcy trustee, it may not have wider applicability to a situation where the defendant tortfeasor has not declared bankruptcy after a verdict in excess of the policy limit.  That circumstance does not arise very often.  Typically, the defendant will assign to the plaintiff her right to bring a bad faith settlement practices lawsuit against the insurer in exchange for the plaintiff releasing her rights against the defendant.  Few plaintiffs' attorneys see the point in forcing a defendant into bankruptcy, where their client's recovery will be minimal. 

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