LaDonna Humphrey Case Highlights Sale Of Appellate Rights

A recent decision from the 8th U.S. Circuit Court of Appeals highlighted the unusual case of a creditor buying a debtor’s appellate rights out of her bankruptcy case.

The case involved LaDonna Humphrey and her former boss, Anthony Christopher, and concerned his purchase of her appellate rights in Arkansas state court. In 2019, Humphrey had been ordered to pay $3.57 million in damages to Christopher and his clinic, Absolute Pediatric Therapy of Bentonville, over allegations that Humphrey schemed to ruin him and his company’s reputation and business.

After the ruling, Humphrey filed for Chapter 7 bankruptcy, which leads to liquidation. She also appealed the $3.57 million judgment.

In bankruptcy, the Chapter 7 trustee can sell assets that a debtor owns that aren’t protected by exemptions, which are usually dictated by state law.

In Humphrey’s case, Christopher and his clinic offered to buy Humphrey’s appellate rights for $12,500. By buying Humphrey’s appellate rights, Christopher would be able to stop her appeal.

Humphrey’s trustee agreed to sell the rights, and the bankruptcy judge approved the sale.

Humphrey appealed the bankruptcy court’s decision to federal court, which ruled in her favor, reversing the bankruptcy court’s decision. Christopher then appealed the federal court’s ruling to the 8th Circuit, which found in Christopher’s favor on procedural grounds.

“To have a debtor that has an active pending appeal is not unheard of, but it’s absolutely not common” for the creditor to buy the appeal rights, attorney James Haller of Chicago told Arkansas Business.

He represented two nonprofits, the Counsel for the National Association of Consumer Bankruptcy Attorneys and the National Consumer Bankruptcy Rights Center, in a friend of the court filing in the Humphrey case at the U.S. Court of Appeals in St. Louis. “When I’ve seen that happen, it’s usually something that’s initiated by the creditor that basically wants to … close the loop on any pending state court activity by buying that appellate right up.”

Haller argued that defensive appellate rights are not a property right under Arkansas law and shouldn’t be included in a debtor’s bankruptcy estate.

The debtor’s estate is “basically all the property or any claims or interest that the debtor has or had before the bankruptcy was filed,” he said. “And it’s designed to be interpreted broadly, but this is kind of a scary slippery slope.”

Haller said that the fear is that if a debtor is appealing a judgment regarding child custody or an adverse decision in a divorce or criminal proceeding, those appellate rights could be bought by a creditor. “And to foreclose an appeal on those because a creditor came in and purchased that appellate right, it would lead to really bad outcomes, and so that’s what we were raising.”

In Humphrey’s case, her appellate right only benefited her, he said. But the trustee’s job includes trying to repay creditors with whatever assets they can sell that are unprotected and reasonable to take and sell, he said.

The ruling from the 8th Circuit last month didn’t address the issue of whether a debtor’s appellate rights are the property of the bankruptcy estate.

A three-member panel of appeals judges said that since Humphrey didn’t get a stay of the order that approved the sale in bankruptcy court, her case is statutorily moot. The panel voided the federal court’s order and dismissed Humphrey’s appeal from bankruptcy court. The 8th Circuit ruling resulted in Christoper winning the case.

“Speaking for the National Consumer Bankruptcy Rights Center, we kind of wish the court would have ruled on the main arguments with regard to defensive rights on appeal,” Haller said. “But I certainly understand their ruling, even though we disagree with it.”