While individual debtors are permitted to use power of attorneys during bankruptcy proceedings, there are rare circumstances that obtaining a guardian ad litem for an incompetent individual may be beneficial to administering the bankruptcy estate. As such, this blog will analyze the law and rare request for a guardian ad litem for purposes of a bankruptcy proceeding.
“The questions of whether a guardian ad litem may be appointed by a bankruptcy court during the pendency of a case for its general administration is an issue that doesn’t come up often.” In re Soto, 534 B.R. 460, 463 (Bankr. D.P.R. 2015)(citing In re Moss, 239 B.R. 537, 538 (Bankr. D. Mo. 1999). In reviewing the validity of a filed bankruptcy petition and whether a bankruptcy court should subsequently appoint a guardian ad litem, the Court must first analyze Bankruptcy Rule 1004.1, titled “Petition for an Infant or Incompetent Person”, stating:
If an infant or incompetent person has a representative, including a general guardian, committee, conservator, or similar fiduciary, the representative may file a voluntary petition on behalf of the infant or incompetent person. An infant or incompetent person who does not have a duly appointed representative may file a voluntary petition by next friend or guardian ad litem. The court shall appoint a guardian ad litem for an infant or incompetent person who is a debtor and is not otherwise represented or shall make any other order to protect the infant or incompetent debtor.
Fed. R. Bankr. P. 1004.1 (emphasis added).
The bankruptcy court may also look towards Rule 1016, which is also implicated in circumstances of incapacity, which provides in relevant part:
Death or incompetency of the debtor shall not abate a liquidation case under chapter 7 of the Code. In such event the estate shall be administered and the case concluded in the same manner, so far as possible, as though the death or incompetency had not occurred. If a reorganization, family farmer's debt adjustment, or individual's debt adjustment case is pending under chapter 11, chapter 12, or chapter 13, the case may be dismissed; or if further administration is possible and in the best interest of the parties, the case may proceed and be concluded in the same manner, so far as possible, as though the death or incompetency had not occurred.
Fed. R. Bankr. P. 1016 (emphasis added). “The difference between Fed. R. Bankr. P. 1004.1 and Fed. R. Bankr. P. 1016 is that the former rule applies when the debtor is incompetent at the time of the commencement of the bankruptcy case, while the later rule governs if the debtor becomes incompetent during the pendency of the bankruptcy case.” In re Sniff, No. 15-18086 TBM, 2015 WL 7351477, at *2 (Bankr. D. Colo. Oct. 6, 2015).
If a lawsuit is initiated on behalf of the incompetent individual or an adversary proceeding is filed during the pendency of the bankruptcy, then the court’s analysis may also look to the Federal Rules of Civil Procedure. As provided by Federal Rule of Civil Procedure 17(c):
(1) With a Representative. The following representatives may sue or defend on behalf of a minor or an incompetent person: (A) a general guardian; (B) a committee; (C) a conservator; or (D) a like fiduciary.
(2) Without a Representative. A minor or an incompetent person who does not have a duly appointed representative may sue by a next friend or by a guardian ad litem. The court must appoint a guardian ad litem—or issue another appropriate order—to protect a minor or incompetent person who is unrepresented in an action
F.R.Civ.P.17(c). As stated by the Court in In re Zawisza:
We begin our analysis of F. R. Civ. P. 17(c) by recognizing that Bankruptcy Rule 7017 incorporates F. R. Civ. P. 17 for adversary proceedings, thus permitting an incompetent, by his or her next friend, to initiate or defend an adversarial proceeding in bankruptcy. We conclude that a next friend is thus logically also a proper party to file a voluntary petition for an incompetent. Since the next friend may file every other type of federal action pursuant to F. R. Civ. P. 17, there is simply no reason to preclude a next friend from filing a bankruptcy petition and several reasons support the allowance of such an action.
In re Zawisza, 73 B.R. 929, 935 (Bankr. E.D. Pa. 1987). “F.R.Civ.P.17(c) has been interpreted to mean that, if an incompetent does not have a validly-appointed representative, the federal court in which the suit is brought may name a guardian ad litem or next friend to represent him, regardless of state law.” In re Zawisza, 73 B.R. at 935 (Bankr. E.D. Pa. 1987).
The powers of the bankruptcy court to appoint a guardian ad litem is best articulated in In Re Moss, 239 B.R. 537 (Bankr. W.D.Mo. 1999), the court stated:
The Bankruptcy Codes does not specifically provide for the appointment of a guardian ad litem or, as is the case here, a limited guardian, for the general administration of a case, so we turn to the equitable powers accorded the bankruptcy court pursuant to 11 U.S.C. § 105. We also take direction from the liberal manner in which Rule 7017 has been interpreted as authorizing a guardian ad litem to file bankruptcy for a minor or incompetent.... Since we have already determined that the appointment of a limited guardian is necessary and appropriate, our only inquiry here is whether the appointment of a limited guardian is necessary or appropriate to carry out the provisions of this title. The Court finds the appointment necessary and appropriate to carry out the provisions of this title because it will aid in the administration of the case, advance the goals of the Bankruptcy Code and process, and most importantly, follows directly from the way in which Rule 7017 has been interpreted and applied.
See In Re Moss, 239 B.R. 543-44.
Having examined the law concerning the appointment of a guardian ad litem, we can now discuss the guardian’s powers. These powers can include the ability to: (1) make all financial, business, and legal related decisions; (2) execute settlement agreements; (3) consummate a sale or assignment of an asset; (4) execute and deliver an operating agreement; (5) execute and deliver credit and funding agreements; (6) open and close bank accounts; (7) file a plan of reorganization and disclosure statement; (8) endorse checks; (9) obtain loan modifications on real property; (10) submit monthly operating reports to the US Trustee’s office; (11) obtain insurance; and (12) file lawsuits.
Generally, the guardian’s authority shall specifically exclude any obligation to the debtor for their overall general welfare, including but not limited to health, healthcare, personal care, food, shelter, and clothing. Likewise, the guardian is generally immune from suit for their actions/decisions taken in furtherance of their duties. Notwithstanding, the guardian may be required to obtain a bond by the bankruptcy court.
If you are interest in filing a bankruptcy petition for an incompetent individual, please contact our firm for a free consultation and speak with one of our experienced attorneys.