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Galloway v. Ford (In re Galloway)

Galloway v. Ford (In re Galloway), 9th Cir. B.A.P., (AZ-13-1085-PaKiTa) August 27, 2014 [Not for Publication]
In an unpublished opinion, the 9th Circuit Bankruptcy Appellate Panel affirmed the ruling of the bankruptcy court which denied Debtors’ 2nd motion to dismiss their chapter 7 case as well as denied Debtors’ motion to abandon property. However, the 9th Circuit Bankruptcy Appellate Panel vacated provisions of the order that approved the compromise of the Debtor's medical malpractice claim and remanded the matter back to the bankruptcy court for further proceedings.
Procedural context:
Chapter 7 debtors Christopher E. Galloway (“Christopher”) and Rhonda A. Galloway (“Rhonda” and, together, “Debtors”) appeal an order of the bankruptcy court which denied Debtors’ motion to dismiss the chapter 7 case, denied Debtors’ motion to abandon property, and granted the motion of trustee Jill H. Ford (“Trustee”) to approve a compromise.
The dispute in this appeal centers on a malpractice lawsuit Debtors had prosecuted in Maricopa County Superior Court (the “Superior Court”) against physician Appellee Gary D. Purcell, M.D. (“Purcell”) arising out of procedures performed on Co-Debtor Christopher Galloway (the “Malpractice Action”). The Superior Court dismissed the Malpractice Action in April 4, 2008. Over two years later, Debtors filed a Motion to Refile and Appeal Judgment Due to Attorney Misrepresentation (the “Refile/Appeal Motion”). At a hearing, the Superior Court denied the Refile/Appeal Motion, but allowed Debtors to file an Arizona Rules of Court 60(c)6 Motion for Relief from the Order of Dismissal. Debtors filed such a motion, but at the hearing, the Superior Court denied the motion. On February 29, 2012, Debtors appealed the denial of their Refile/Appeal Motion to the Arizona Court of Appeals (the “State Appeal”). /p/ /p/Debtors filed a chapter 7 bankruptcy petition on March 21, 2012. They did not disclose the existence of the Malpractice Action or the pending State Appeal in their petition, schedules, or statement of financial affairs. Trustee filed a no-asset report in the bankruptcy case on June 13, 2012. When Purcell apparently notified the Arizona Court of Appeals that Debtors had filed a bankruptcy petition, the court stayed the State Appeal. Debtors then informed Trustee of the stay of the State Appeal on July 2, 2012, and, on the same day, Trustee withdrew her no-asset report. On July 9, 2012, Debtors, acting pro se, filed a motion to dismiss the bankruptcy case (the “First Dismissal Motion”). Debtors argued that they had filed for bankruptcy relief with the understanding that the State Appeal had not been acted on by the Arizona Court of Appeals and had no value. Trustee responded, pointing out that Debtors had no absolute right to dismiss a chapter 7 case, and that the Malpractice Action was property of the estate that Debtors failed to disclose in their petition. The bankruptcy court heard arguments on the First Dismissal Motion on August 31, 2012. The court denied the First Dismissal Motion because “[i]t would cause plain legal prejudice to other parties, the Trustee and the beneficiaries of the Trustee, who are the creditors, to close this case without investigating this cause of action.”. The order denying the First Dismissal Motion was not appealed. Debtors were granted a discharge on September 24, 2012. The Arizona Court of Appeals, after receipt of notice of the discharge, reactivated the State Appeal on October 5, 2012. The record is not clear regarding the current status of the appeal. Debtors filed a Second Motion to Dismiss (“Second Dismissal Motion”) on December 10, 2012, generally restating their arguments in the First Dismissal Motion. Trustee responded, restating her position, and arguing further that the creditors could be harmed by premature dismissal of the case. Trustee states following the denial of the First Dismissal Motion, she “determined that the Appeal would be limited to a nuisance value. As a result, the Trustee negotiated a nuisance settlement with [Purcell].” On January 2, 2013, Trustee filed a motion to approve a compromise whereby Purcell would pay the estate $4,000 to fully settle the claims asserted in the Malpractice Action. In support of the settlement, Trustee noted that: (1) the Malpractice Action had been dismissed by the state court four years ago for Debtors’ failure to diligently pursue the litigation; (2) Debtors’ proposed expert witness did not meet the qualifications standards required by A.R.S. § 12-2602(c); (3) Debtors had admitted in at least two pleadings in the bankruptcy case that several attorneys have advised them that their State Appeal was a “Hail Mary attempt with little or no chance of success”; (4) there were inconsistencies in Debtors’ pleadings as to which of Christopher’s knees was injured, and that a claim for injury to his left knee would, potentially, be barred by the Arizona statute of limitations; and (5) collection of any judgment Debtors might obtain would require authorization from Medicare.
PAPPAS, KIRSCHER, and TAYLOR, Bankruptcy Judges.

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