Malpractice Action against Bankruptcy Attorneys Not Part of Estate

Posted by NCBRC - May 14, 2019

Where the only injury alleged was the denial of discharge, the debtors’ legal malpractice cause of action against their bankruptcy attorneys did not arise pre-petition and, therefore, was not part of the bankruptcy estate. Church Joint Venture v. Blasingame, No. 18-8017 (B.A.P. 6th Cir. April 5, 2019).

The debtors’ bankruptcy attorneys committed malpractice prior to and during the course of the debtors’ chapter 7 case, resulting in denial of discharge. The debtors sued their attorneys for malpractice in state court, and the bankruptcy court granted creditor, Church Joint Venture (CJV), derivative status to pursue a malpractice action in the bankruptcy court on behalf of the estate based on the same conduct. CJV filed an adversary complaint and sought a declaratory judgment that the cause of action for malpractice constituted estate property. On cross-motions for summary judgment, the bankruptcy court found that the cause of action arose post-petition and, therefore, belonged to the debtors rather than the estate.

CJV appealed to the bankruptcy appellate panel for the Sixth Circuit.

Relying on Underhill v. Huntington National Bank (In re Underhill), 579 F. App’x 480 (6th Cir. 2014), the panel affirmed.

The panel began with the premise that, while property interests are determined by state law, federal law determines if and when those property interests become part of the bankruptcy estate. Here, the parties agreed that even though some of the conduct giving rise to the malpractice action took place pre-petition, the debtors did not suffer an injury until they were denied discharge. The panel found that, based on these facts, the debtors did not have a cause of action against the malpractice defendants at the time they filed their petition.

CJV argued that the bankruptcy court erred in looking at when the cause of action accrued under state law instead of looking to when the conduct leading to the denial of discharge took place. It maintained that, because some of that conduct took place prior to the bankruptcy petition, the cause of action was sufficiently rooted in the pre-petition past to render it part of the bankruptcy estate. The panel disagreed. In Underhill, the Sixth Circuit held that pre-petition conduct alone will not root a cause of action in the pre-bankruptcy past but that there must be a pre-petition violation: “[t]hat is, a cause of action qualifies as bankruptcy estate property only if the claimant suffered a pre-petition injury.” Underhill, 579 F. App’x at 482-83. Here, the only injury was the denial of discharge – a post-petition event.

For the same reason, the panel rejected CJV’s argument that the bankruptcy court should have split the complaint into pre- and post-petition causes of action and allowed the pre-petition cause of action to go forward. The panel found that, in the absence of injury, there was no pre-petition cause of action.

CJV has appealed to the Sixth Circuit. Church Joint Venture v. Blasingame, No. 19-5505 (6th Cir., filed, May 10. 2019).

Blasingame BAP 6th Cir. April 2019




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