Opinion
No. CV 06-5004131S
May 20, 2010
MEMORANDUM OF DECISION ON DEFENDANT'S MOTION TO DISMISS
In this matter the plaintiff Trustee in Bankruptcy has commenced an action alleging malpractice against the defendant attorney who was retained by the debtors for legal representation in connection with a bankruptcy filing. The Trustee's claim in the present action is based on the alleged negligence of the defendant "in preparing a bankruptcy petition, schedules and statement of financial affairs with the United States Bankruptcy Court, District of Connecticut, on behalf of the Debtors."
The court will quote the statement of facts recited in the preface to the defendant's motion to dismiss. The court has not included references to the complaint and several exhibits — the factual representations do not appear to be in dispute.
This is the second legal malpractice action brought by the Plaintiff against the Defendant. Plaintiff's claim is premised on the alleged negligence of the Defendant in preparing a bankruptcy petition, schedules and statement of financial affairs for filing with the United States Bankruptcy Court, District of Connecticut, on behalf of the Debtors. The first action was identically captioned and commenced by complaint made returnable on July 27, 2004. That action was dismissed for lack of subject matter jurisdiction on October 25, 2005 on the basis that the claims raised were not justiciable because they were contingent upon the outcome of pending litigation in the United States Bankruptcy Court.
The Debtors filed for bankruptcy protection pursuant to Chapter 7 of the United States Bankruptcy Code on or about June 12, 2002. The Plaintiff, Barbara H. Katz, the Chapter 7 Trustee (hereinafter the "Trustee"), who was appointed Trustee for the administration of the Debtor's estate, alleges that the bankruptcy petition, schedules and statement of financial affairs prepared by the Defendant's office for the Debtors' signature and submission to the Bankruptcy Court were materially false, untrue, inaccurate and misleading and that they contained certain omissions. The Trustee further alleges that due to the alleged inaccuracies and omissions in the documents submitted to the bankruptcy court, the Debtors were denied a discharge in bankruptcy and that the denial of discharge was caused by the alleged negligence of the Defendant in preparing those documents.
The denial of discharge was sought by the Trustee pursuant to an adversary proceeding filed in the Bankruptcy Court for the District of Connecticut (hereinafter the "Adversary Proceeding"). The Adversary Proceeding was commenced by a complaint dated February 28, 2003. The adversary complaint alleges that the Debtors should be denied a discharge because they fraudulently made false oaths and accounts in connection with their bankruptcy case, failed to keep or preserve information pertaining to their financial condition, and concealed property of the bankruptcy estate.
Subsequent to the dismissal of the prior malpractice claim against Mr. Kucej, the Trustee filed a motion in the Bankruptcy Court entitled "Motion for Approval of Waiver of Discharges" wherein the Trustee represents that "the Debtors want to waive their discharges." In support of this motion, the Trustee filed a Waiver of Discharges and an Affidavit Re: Waiver of Discharges. The "Waiver of Discharges" is signed by both Debtors and represents that the Debtors, "after consultation with their attorney . . . hereby waive their right to receive discharges of their debts in bankruptcy pursuant to 11 U.S.C. § 727." The "Affidavit re Waiver of Discharges" bears the notarized signatures of both Debtors and attests that it is being filed in support of the Waiver of Discharges and that the Waiver of Discharges "were executed and delivered by us voluntarily and knowingly and represent a conscious and informed judgment as to the consequence of the Discharge Waivers." The Affidavit further attests that "we [the Debtors] are aware that . . . The Discharge Waivers will prevent us from discharging, in any subsequent bankruptcy case we may commence, debts that we owed before the instant bankruptcy case was filed by us."
The Trustee's Motion for Approval of Waiver of Discharges was granted by order dated February 13, 2006, some three and a half years post petition. The Bankruptcy Court's order is entitled "Approval of Waiver of Discharges" and specifically recites that the waivers appear to be "knowing, intelligent and voluntary." The Order states that "Kenneth R. Biebel's waiver of discharge is approved and he shall not received [sic] a discharge of his debts" and that "Am M. Biebel's waiver of discharge is approved and she shall not received [sic] a discharge of her debts."
After the entry of this order by the Bankruptcy Court, the Trustee commenced this matter. In her complaint, the Trustee cites to 11 U.S.C. § 541, alleging that the trustee "acquired all legal and equitable interests of the [D]ebtors as of the commencement of the said case pursuant to 11 U.S.C. § 541(a)." The Trustee further alleged that as a duly qualified trustee of the estate, pursuant to 11 U.S.C. § 323, she has capacity to sue on behalf of the Debtor's estate.
Based on the foregoing the defendant has filed a motion to dismiss claiming the legal malpractice action did not accrue until after the bankruptcy petition was filed. Therefore the action "is the property of the debtors not the bankruptcy estate."
(1)
An examination of the issue presented has to begin with an analysis of Section 541a(1) of the Bankruptcy Code. It quite explicitly says that the Bankruptcy estate includes "all legal or equitable interests of the debtor in property as of the commencement of the case" (i.e. commencement of the case through filing of the petition in Bankruptcy Court.)
In Re Holstein, 321 BR 229 (ND Ill., 2005), states that under the definition in § 541(a)(1) "'virtually all property of the debtor' becomes the property of the bankruptcy estate . . . Included are claims and causes of action belonging to the debtor . . . But although federal law determines when a debtor's interest in property is property of the estate under § 541, whether a debtor has an interest in the first place depends on state law. 'Property interests are created and defined by state law' and in the bankruptcy laws 'Congress has generally left the determination of property rights in the assets of a bankrupt's estate to state law,' Butner v. U.S., 440 U.S. 54-55 . . . (1979)." Id. page 234.
In Re Holstein went on to say at page 235 that: "Even when state law recognizes an interest in property, moreover, section 541(a)(1) places a temporal limit on the interests that become part of the debtor's estate. The estate includes only those legal or equitable interests the debtor has 'as of the commencement of the case' . . . Property interests belonging to a Chapter 7 debtor when the petition is filed are part of the estate to be administered by the trustee. Subject to exceptions specified in Section 541, however, property a debtor acquires post petition belongs to the debtor." Id. page 235. Similarly as said in the Second Circuit Case of Hirsch v. Arthur Andersen Co., 72 F.3d 1085, 1093 (1995), quoting from an earlier case: "'Under the Bankruptcy Code, the bankruptcy trustee may bring claims founded inter alia, on the rights of the debtor and on certain rights of the debtor's creditors . . . Whether the rights belong to debtor or the individual creditors is a question of state law . . .' Bankruptcy courts have long been charged with ascertaining under state law, whether claims belong to the bankruptcy estate or to other claimants.' Thus the trustee stands in the shoes of the debtors, and can only maintain those actions that the debtors could have brought prior to the bankruptcy proceedings . . ."
Finally the court would note the case of Sender v. Buchanan, 84 F.3d 1281 CEA 10 (1996), relied on In Re Holstein, supra. The Sender court at page 1285 said "Under § 541, the estate over which the appointed trustee is given control 'is compromised of . . . all legal or equitable interests of the debtor in property as of the commencement of the case, 11 USC § 541(a)(1). Causes of action belonging to the debtor fall within this definition . . . We emphasize § 541(a)(1) limits estate property to the debtor's interests 'as of the commencement of the case.' This phrase places both temporal and qualitative limitations on the reach of the bankruptcy estate. In a temporal sense, it establishes a clear-cut date after which property acquired by the debtor will normally not become property of the bankruptcy estate. See generally 4 Collier on Bankruptcy § 541.05. In a qualitative sense, the phrase establishes the estate's rights as no stronger than they were when actually held by the debtor . . . Congress intended the trustee to stand in shoes of the debtor and 'take no greater rights than the debtor himself had' (quoting from legislative history).
Interestingly In Re Holstein, supra held that under Illinois law a legal malpractice claim was not the property of the estate since Illinois law required as an element of such an action actual injury and it was not established in the case before it, 321 BR pp. 235 et seq. Also see In Re Swift, 198 BR 927 (W.D. Tex, 1996) (court held contingent interest in unaccrued legal malpractice claim was not property interest under Texas law and thus was not to be included in the property of the bankruptcy estate, id. pp. 930-36.
What all of the foregoing comes down to is that if the cause of action here had not accrued at the time the Bankruptcy Petition was filed, then the Bankruptcy Trustee has no standing to bring this action so it must be dismissed for lack of subject matter jurisdiction of which standing is a variant, see Smith v. Snyder, 267 Conn. 456, 460-61 (2004).
(2)
The court will try to apply the foregoing law to the issue now before it. It would note that In Re DeHertogh, 412 BR 24 (Bankruptcy Conn. 2009), follows the general law in this area and its statements on the law are not an invention of that court. Relying on the holding of the preceding cases and the apparent intention of Congress in passing 11 USC § 501(a)(1) the court here must decide if the legal malpractice action which is the subject of this suit had accrued under Connecticut law when the petition was filed in 2002. If it had not the Trustee had no standing to bring this action and now prosecute it.
Legal malpractice is a form of professional negligence. In Catz v. Rubenstein, 201 Conn. 39, 44 (1986), the court said that: "A breach of duty by the defendant and a causal connection between the defendant's breach of duty and the resulting harm to the plaintiff are essential elements of a cause of action in negligence." Prosser On Torts, 5th ed. § 30, pages 164-65 is cited by the court. There it states the traditional elements of a cause of action in negligence are (1) a duty, (2) a failure to conform to the standards required, (3) a reasonably close causal connection between the conduct and the resulting injury, and (4) actual loss or damage.
A case supporting this observation is Zapata v. Burns, 207 Conn. 496, 508 (1988), which quoted from an earlier case that was commenting on § 52-584, apparently before it was amended. The Zapata court said: "We have stated in dictum that 'there is no reason constitutional or otherwise, which prevents the legislature from enacting a statute such as § 8324 (now § 52-584), which starts the limitations on actions for negligence running from the date of the 'the act or omission complained of, even though at that date no person has sustained damage and therefore no cause of action has come into existence," id. (emphasis by this court) cf Prokolkin v. GMC, 170 Conn. 289, 294-95 (1976), see also Lee v. Harlow, Adams Friedman, LLC, 116 Conn.App. 289, 297 (2009), a legal malpractice case.
The plaintiff cites three cases which it is said more properly answer the question "When does a cause of action accrue?" and thus should lead the court to hold this malpractice action had accrued at the time the Bankruptcy Petition was filed.
The cases cited are Weiner v. Clinton, 100 Conn.App. 753 (2007), Mayer v. Biafore, Florek v. O'Neill, 245 Conn. 88 (1998), and Fontanella v. Marcucci, 89 Conn.App. 690 (2005). These cases are not on point — they discuss the concept of ripeness for adjudication or justiceability of a particular cause of action due, for example, the fact that a separate claim had not been resolved; that an appeal was pending concerning dismissal of a prior action, or failure to determine whether a claim for underinsured benefits was time barred thus preventing a legal malpractice action from proceeding which claimed the lawyer failed to file an action for uninsured benefits against the insurer. The courts cited held the claims were justiable and ripe for adjudication. But these cases did not address the separate question of whether the claims sought to be dismissed in each of them involved claims that had otherwise accrued. A simpler question is presented here — could the debtors have brought an action before the bankruptcy petition at the point the bankruptcy petition was filed? The trustee under the case law steps into the debtor's shoes at that point and if such an action could not have been brought, the Trustee cannot at a later date advance it when it otherwise accrued. Here as noted no ascertainable damage occurred until after the petition was filed, although the claim is made that the defendant lawyer filed documents in the proceeding which contained errors and omissions. That is, at the time such documents were filed any harm had not yet accrued. Or as said in Chapman Lumbar Co. v. Tager, 288 Conn. 69, 86-87 (2008): "Pursuant to Connecticut's ripeness jurisprudence, as long as it is clear that a plaintiff has suffered an injury sufficient to give rise to the cause of action alleged, a lack of certainty as to the precise scope of damages will not prevent the claim from being justiciable." Here no such injury had occurred at the time the petition was filed therefore, on an analytical continuum, at that point the case was not ripe for adjudication and ergo the Trustee here has no standing under the Bankruptcy Code.
To quote from In Re Holstein, supra which, as noted, held that a cause of action for legal malpractice had not accrued at the time the petition was filed: "Bad advice without some adverse consequence, after all, is just bad advice," 321 BR at p. 235. Here the adverse consequences of the lawyers alleged failings had not occurred at the time the petition was filed.
The motion to dismiss is granted.
A. The court should mention a line of cases extending the reach of Butner which is referred to in this court's introductory remarks and forms the basis of this Court's view of the case law that says a cause of action the Trustee may pursue must have accrued at the time the petition was filed. Some courts have interpreted Segal v. Rochelle, 382 U.S. 375 (1966), as standing for the proposition that even after the filing of the petition a cause of action may be the property of the estate if it is "sufficiently rooted in the pre-bankruptcy past," id. at 382 U.S. page 380. Butner post-dated Segal by thirteen years and did not mention the case and In Re Holstein at 321 BR page 237-38, offers good reason why Segal cannot be given such a broad reading. Besides even if Segal were to be considered valid law, the legal malpractice claim here does not appear to evolve out of the mists of some pre-bankruptcy errors by the lawyer. His actions are based on alleged negligence in filing the papers associated with the bankruptcy petition. If the case relied upon by the plaintiff is read closely, In Re Almasri, 378 BR 550 (N.D. Ohio 2007), it does reject the notion that the Trustee could not pursue the legal malpractice action because at the time the petition was filed the third element of legal malpractice had not been met — damage did not occur until the discharge had been revoked which occurred post-petition. But it seemed to rely on a Segal analysis. The malpractice claim was rooted in the pre-bankruptcy past — whatever that means in light of Butner. See In Re Almasri at 555-56. That court also cites another case which rejected the proposition that "a plaintiff suffers damages only when adverse economic consequences arise — rather damages from advising and representing the debtor occurred at the point of the filing of the petition," id. The court respectfully suggests this is circular reasoning which appears to misinterpret Ohio law and thus the federal intent set forth in § 541(a)(1).
B. It should also be noted that the present law in our state is that nominal damages cannot be awarded in a negligence action, Right v. Breen, 277 Conn. 364, 366, 370, 372, 377 (2006). If that is the case, it would be odd to then conclude a negligence action can be brought before actual damage or harm has accrued.