Casey Cotton rear-ended Caleb Crabtree, who declared Bankruptcy. The Bankruptcy Court allowed the personal-injury action to proceed to trial, and the Crabtrees were awarded over $4 million – making the Crabtrees judgment creditors in the Bankruptcy proceeding. In the meantime, the Defendant in the underlying injury action (i.e. Cotton) asserted a bad-faith claim against his insurer, Allstate, which bad faith claim was considered to be an asset of the estate. To facilitate a settlement, the Bankruptcy Court allowed the Crabtrees to purchase Cotton’s bad-faith claim for $10,000. The Crabtrees, however, could not afford to pay the $10,000, so they engaged Court Properties, Inc., to finance the transaction. Specifically, they assigned the claim to Court Properties, in exchange for payment of $10,000 to the Bankruptcy Trustee, plus interest at 8%, with repayment contingent on successful recovery from Allstate. The Crabtrees then sued Allstate in Federal Court, asserting Cotton’s bad-faith claim. The District Court dismissed the action for lack of subject-matter jurisdiction, as the Crabtrees lacked Article III standing.
On appeal, the U.S. Fifth Circuit certified the quetsion to the Mississippi Supreme Court. Specifically: “If either Cotton’s assignment to Court Properties or Court Properties’s assignment to the Crabtrees is champertous and therefore void, the Crabtrees do not lawfully possess Cotton’s claim, meaning Allstate’s bad-faith has not injured them, and they lack standing to sue on that ground. So, this case may proceed in federal court if and only if both assignments were valid.”
On certification, the Mississippi Supreme Court found that “the plain language of Mississippi Code Section 97-9-11 prohibits a disinterested third party engaged by a bankruptcy creditor from purchasing a cause of action from a debtor’s estate.” Crabtree v. Allstate, No.2024-00827, 2025 WL 1409047 at *1 (Miss. May 15, 2025).
“That means” the Fifth Circuit concluded, “that the assignment of Cotton’s claim by the bankruptcy trustee to Court Properties was champertous and void under Mississippi law. Because Court Properties never acquired Cotton’s claim, it could not have assigned it to the Crabtrees. Accordingly, the Crabtrees do not possess Cotton’s bad-faith claim against Allstate, so they lack standing to sue in federal court.”
Crabtree v. Allstate, No.23-60537, 2025 WL 1662279 (5th Cir. June 12, 2025).
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