An Injured Bankrupt’s Right of Action: Further Civil Hearing 1996/19

In Further Civil Hearing 1996/19 (Kogan v. B.T.B. — Industrial Buildings Be’er Sheva Ltd.), decided on 11 January 2021, a five-justice panel of Israel’s Supreme Court upheld the reversal of the Yedidia precedent. The decision was reached by a majority of four justices — Amit, Fogelman, Sohlberg and Willner — against Justice Elron’s dissent. The Court held that both an injured bankrupt’s entitlement to compensation for loss of earning capacity and the corresponding right of action vest in the trustee. However, the majority clarified that, in practice, the injured person continues to conduct the claim under the trustee’s supervision. Justice Amit opened with the description of a person injured twice: physically in an accident and financially upon entering bankruptcy. The question was whether a wall should stand between the two proceedings, as it had for more than fifty years. Background: from Yedidia to the appeal judgment Under Yedidia (Civil Appeal 38/68, 1968), personal injury compensation received by a bankrupt was a personal entitlement that did not enter the bankruptcy estate. On 17 January 2019, in three consolidated appeals (Civil Appeals 10217/16, 5613/17 and 6447/17), the Supreme Court overturned that precedent. The appeal judgment unanimously held that compensation for loss of earning capacity replaces wages. A bankrupt’s wages vest in the trustee, so there is no reason to distinguish them from compensation replacing them. Other components, such as third-party assistance, medical expenses and pain and suffering, remain with the injured person. The disagreement concerned another question: who holds the right of action? Justices Sohlberg and Willner considered that it also passes to the trustee. Justice Elron, dissenting, distinguished the right to conduct proceedings, which should remain with the injured person, from entitlement to their proceeds. The further hearing and the remaining question On 12 November 2019, President Hayut ordered a further hearing on two questions: who is entitled to compensation for loss of earning capacity and, if the trustee is entitled, who holds the right of action? At the hearing on 3 January 2021, the applicant accepted the panel’s recommendation and withdrew the first question, unanimously decided on appeal. The discussion therefore focused on the right of action and the practical consequences of the ruling. The applicant and the Israel Bar Association, participating as amicus curiae, argued that trustee involvement would obstruct settlements, complicate proceedings and harm bankrupts, all for small additions to the estate. The majority: the trustee holds the right; the injured person conducts the claim Justice Amit, writing for the majority, did not change the rule but substantially limited its practical implications. Transferring the right of action does not mean that the trustee files a separate action or that two claims proceed in parallel. Ordinarily, the injured bankrupt files the claim or continues an existing claim, with court approval. Only exceptionally, when the injured person refuses in bad faith to claim for an accident, may the trustee step into that person’s shoes and sue in their name. This also requires approval from the insolvency court. The trustee’s role is primarily supervisory rather than active involvement. The degree of involvement depends on the circumstances; a cooperative debtor acting in good faith differs from one who does not. The Court also rejected concerns that the trustee might force the injured person to claim for psychiatric or other disability against their wishes or undergo intrusive examinations, regarding such a scenario as difficult to envisage. Conflicting interests: present in theory, moderated in practice The majority acknowledged a potential conflict: the debtor wants as little compensation as possible allocated to lost earnings, while the trustee wants as much as possible allocated to that component. In practice, however, both rational parties want to conclude bankruptcy, reducing the risk of derailing settlements in the personal injury claim. The Court observed that the concerns raised by the applicant and the Bar had not materialized in the two years since the appeal judgment. It therefore declined to provide further guidelines, leaving practical experience to speak. Implementation issues would be resolved case by case at the insolvency court’s discretion. Justice Amit referred in support to Further Civil Hearing 4011/04, Jerusalem Municipality v. Ettinger Estate, which refused a further hearing on the “lost years” doctrine. That decision held that difficulty implementing a new rule is not a reason to reconsider it; courts applying it will resolve questions as they arise. Identifying the lost-earnings component: estimation and living needs The lost-earnings component must be identified within the total award and limited to the period relevant to bankruptcy. Ideally, the personal injury judgment, including one based on a settlement, should expressly assess this component. Where Justice Willner’s framework creates practical difficulties, the bankruptcy court need not undertake complex arithmetic. In appropriate cases, it may estimate a single lump sum from the compensation reflecting earning capacity during bankruptcy. The key clarification concerns living needs. The amount, if any, transferred to the estate depends on the circumstances. Under section 111 of the Bankruptcy Ordinance, the court must consider the sums required for the bankrupt and dependants to live with dignity, as when setting a payment order. In some cases, leaving part of the lost-earnings compensation with the debtor may therefore be justified. Privacy: an intrusion already inherent in both proceedings Justice Amit answered privacy concerns by observing that disclosure is inherent in both proceedings. In a tort claim, bringing an action entails disclosure. The claimant submits a medical confidentiality waiver under regulation 15(a)(3) of the Civil Procedure Regulations, 2018, and must undergo examination by an expert appointed by the defendant or the court. Insolvency proceedings also expose the debtor’s affairs. The debtor signs a broad confidentiality waiver under section 17(a)(3) of the Ordinance and section 104(b)(3) of the Insolvency and Economic Rehabilitation Law. An officeholder may also take control of the debtor’s mail under section 58 of the Ordinance. The trustee supervises personal proceedings too, such as maintenance and inheritance matters. Conversely, the trustee owes confidentiality duties under section 52 of the Insolvency Law, as does the Official Receiver under section 18c(e) of the Ordinance. The majority presumed that the trustee, Official Receiver and court would avoid unnecessary intrusion into privacy. Closed hearings can reduce it further. Prospective application only? No The applicant asked that the new rule apply only prospectively, excluding his case. The request was rejected, primarily because it fell outside the questions set for the further hearing. The appeal court had already applied the rule to him, remitting the matter to the insolvency court to determine whether part of his compensation should enter the estate. The majority also saw no substantive reason to exempt him. Justice Amit concluded that the appeal judgment remained intact in every respect. The dissent: only a partial change to Yedidia Justice Elron maintained his position from the appeal. In his view, the right of action for loss of earning capacity should always remain with the injured person. Only its proceeds could pass to the estate in appropriate cases under section 42 of the Ordinance. The scale of the problem. Justice Elron considered that settlement compensation generally covers mainly medical and basic living needs. He cited the special administrator of Giner’s assets, who had encountered a difficulty applying Yedidia in only one of more than 300 completed cases. There was therefore no need to overturn the entire rule to address the few cases in which an injured person benefits at creditors’ expense. Three difficulties with transferring the right of action to the trustee: Privacy and autonomy. A bankrupt’s consent to disclosure is not genuine consent given their circumstances. Disclosure of financial information differs from disclosure of all medical information. Conflicting interests. An injured person may prefer a quick settlement to fund treatment, while the trustee may refuse and insist on pursuing the case to its conclusion. The wording of section 21 of the Civil Wrongs Ordinance. It transfers only the right to sue for a tort causing pecuniary damage. Personal injury claims include non-pecuniary heads of loss; trustee control undermines the autonomy that the provision grants the bankrupt. Addressing the agency problem. Justice Elron acknowledged that someone whose compensation would partly go to creditors might lose the incentive to sue. He proposed two tools: increased payments under section 111 for a debtor who fails to pursue the claim, and allowing the trustee to present a position before judgment or settlement approval without access to the tort file. He compared this with the Attorney General’s role in class action settlements. The spirit of the Insolvency Law. Justice Elron noted that the new law starts from the premise that debtors are not presumed delinquent or acting in bad faith. In his view, the majority’s suspicion toward debtors conflicts with that premise. Majority and minority compared The majority — Justices Amit, Fogelman, Sohlberg and Willner — held that proceeds for lost earnings pass to the trustee, subject to the debtor’s living needs under section 111. The right of action also vests in the trustee, but the injured person conducts the claim under supervision. If that person refuses to sue in bad faith, the trustee may sue in their name with court approval. The majority considered that privacy intrusion already exists in both proceedings and that the trustee is bound by confidentiality. Section 21 of the Civil Wrongs Ordinance did not, in its view, prevent transfer of the right. Justice Elron considered that proceeds should enter the estate only in appropriate cases where the injured person would otherwise benefit at creditors’ expense, while the right of action should always remain with the injured person. For refusal to sue, he proposed increased payments under section 111. He regarded the debtor’s consent to disclosure as not genuine and distinguished medical from financial information. In his interpretation, section 21 applies only to torts causing pecuniary damage. The majority’s response to the dissent Justice Amit addressed several points: The assertion that settlement compensation generally covers only basic needs was not grounded in reality. Lost earnings form the main component in most tort claims and are assessed by actual and potential earnings loss rather than living needs. Yedidia was not overturned because of a few cases of enrichment. It was overturned because earnings-loss compensation replaces wages, which is true in most cases. Privacy concerns were “rather negligible”: the debtor must report the claim to the trustee anyway, does not even enjoy a privilege against self-incrimination in the proceedings, and injured persons’ names were routinely published in judgments until Amendment 77 to the Courts Law in 2014. Autonomy concerns were remote: a good-faith injured person would be unlikely to refuse to exercise their rights unless waiting for discharge, and the Court did not seek to protect such conduct. The trustee should not present speculation based on incomplete information. Without access to the tort file, the trustee would not know the disability assessment or contributory negligence, making supervision necessary. Justice Sohlberg, joining the majority, observed that the Bar’s submissions focused on tort law; the Official Receiver’s submissions completed the broader insolvency perspective. Conclusion Formally, Further Civil Hearing 1996/19 left the appeal judgment unchanged: compensation for loss of earning capacity and its right of action belong to the trustee. Practically, the judgment considerably softened the rule. The injured person continues the claim while the trustee supervises rather than intervenes, and trustee-led proceedings are reserved for bad-faith refusal to sue. The amount entering the estate may be estimated and must account for the debtor’s and family’s living needs. Ultimately, the gap between majority and dissent is smaller than it appears. Both agree that part of the compensation should reach creditors. They disagree on how much trust to place in the debtor: the majority prefers supervision, while the dissent leaves proceedings with the debtor and relies on incentives. This article is based solely on the judgment and does not constitute legal advice.