Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca5-14-40597/USCOURTS-ca5-14-40597-0/pdf.json

Parties Involved:
Marco A. Cantu

Roxanne Cantu

Michael B. Schmidt
Appellee

Document Text:

REVISED April 17, 2015

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 14-40597

In the Matter of: MARCO A. CANTU, ROXANNE CANTU

 Debtors

------------------------------

MARCO A. CANTU; ROXANNE CANTU, 

 Appellants

v.

MICHAEL B. SCHMIDT, Trustee, 

 Appellee

Appeal from the United States District Court

for the Southern District of Texas

Before BENAVIDES, SOUTHWICK, and COSTA, Circuit Judges.

GREGG COSTA, Circuit Judge:

In bankruptcy, as in life, timing can be everything. After their 

bankruptcy was converted from a chapter 11 reorganization to a chapter 7 

liquidation, Marco and Roxanne Cantu sued their bankruptcy attorney Ellen 

Stone for causes of action related to her representation prior to the conversion 

United States Court of Appeals

Fifth Circuit

FILED

April 16, 2015

Lyle W. Cayce

Clerk

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of their case. The chapter 7 trustee, Michael Schmidt, intervened in the action 

against Stone contending that the claims belonged to the estate. The parties

eventually settled the malpractice case and the funds were deposited into the 

court registry pending a determination whether the settlement proceeds 

belonged to the Cantus individually or to the bankruptcy estate. 

The resolution of that question depends on timing. If the causes of action 

against Stone arose before conversion of the Cantus’ bankruptcy to a chapter 

7, the settlement belongs to the estate; otherwise, the Cantus own the 

proceeds. The bankruptcy court held that the proceeds belonged to the estate, 

and the district court affirmed. Finding that the estate suffered injuries from 

Stone’s representation that would have allowed it to assert claims against her 

prior to conversion, we affirm.

I

We begin with an overview of the bankruptcy proceedings. In May 2008, 

facing foreclosure on a number of real estate holdings, Marco and Roxanne 

Cantu filed a chapter 11 bankruptcy petition as did their wholly owned 

corporation, Mar-Rox, Inc. Schmidt v. Cantu (In re Cantu), 2011 WL 672336, 

at *1 (Bankr. S.D. Tex. Feb. 17, 2011). At the time of filing, the Cantus had 

personally taken on over $37.4 million in secured debt and over $10.7 million

in unsecured debt. Mar-Rox had incurred over $20.9 million in secured debt. 

Id. These debts had been used to obtain personal property such as four 

vehicles, furs, and jewelry; purchase over $20 million in commercial and 

residential real estate (some owned by Mar-Rox, Inc.); and finance the Cantus’

business interests including Mr. Cantu’s law practice. Id. 

About a month into the bankruptcy, the Cantus hired Ellen Stone. She 

represented the Cantus and Mar-Rox from June 2008 until July 2009, during 

which time she charged $202,915.06 for legal services and expenses that the 

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bankruptcy court ultimately approved. In re Cantu, No. 08-70260 (Bankr. S.D. 

Tex.), Docket Entry Nos. 1098, 1274.1 

The bankruptcy was complex. It resulted in numerous adversarial 

proceedings, many of which involved the Cantus challenging the validity of 

their creditors’ claims; dozens of hearings; objections and subsequent 

amendments to the disclosure statement and the reorganization plan; and 

thousands of docket entries. 

In December 2008, a number of creditors moved to convert the 

bankruptcy to a chapter 7 liquidation, pointing to the decreasing value of the 

Cantus’ assets and unlikelihood that the Cantus would “be able to stem the 

losses and place themselves back on a solid financial footing within a 

reasonable amount of time.” Cantu Bankruptcy, Docket Entry No. 548. After 

much briefing and multiple hearings, the bankruptcy court agreed. Finding 

that the plan of reorganization was not confirmable, in part because it violated 

the absolute priority rule,2 the court converted the case to a chapter 7 

bankruptcy and appointed Schmidt as trustee. Cantu Bankruptcy, Docket 

Entry No. 1034. 

Once the case was converted, the bankruptcy court held a two-day trial 

on the issue of discharge and determined that the Cantus should not be allowed 

to discharge their debts. In its exhaustive opinion, the court detailed the 

1 Entries from the Cantus’ bankruptcy, In re Cantu, No. 08-70260 (Bankr. S.D. Tex.

filed May 6, 2008), are referred to as “Cantu Bankruptcy” followed by the relevant docket 

entry number. 2 “A plan of reorganization may not allocate any property whatsoever to any junior 

class on account of the members’ interest or claim in a debtor unless all senior classes consent, 

or unless such senior classes receive property equal in value to the full amount of their 

allowed claims, or the debtor’s reorganization value, whichever is less.” 11 COLLIER ON 

BANKRUPTCY ¶ 1129.03[4][a][i] (16th ed.); see also Norwest Bank Worthington v. Ahlers, 485 

U.S. 197, 202 (1988) (“[T]he absolute priority rule ‘provides that a dissenting class of 

unsecured creditors must be provided for in full before any junior class can receive or retain 

any property [under a reorganization] plan.’”). 

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“omissions, misstatements, and controversies” that plagued the Cantu and 

Mar-Rox bankruptcies. See In re Cantu, 2011 WL 672336, at *2. The court 

highlighted the Cantus’ failure to disclose “significant assets and 

transactions,” including $134,575 in jewelry sales, two of Mr. Cantu’s 

contingency fee cases, and two life-sized bronze horses worth $20,000. Id. Mr. 

Cantu also improperly transferred $50,000 of what should have been estate 

property to a close friend during the pendency of the bankruptcies. Id. In 

addition to “suspicious and frequently undocumented” use of estate cash

throughout the bankruptcies, the Cantus were also “uncooperative with the 

Court and the Trustee,” and Mr. Cantu often interfered with the sale of the 

estate’s assets and filed frivolous lawsuits that “unnecessarily multiplied the 

proceedings in the [bankruptcies] and therefore unreasonably increased the 

Estate’s cost of administration.” Id. at *16.3

In November 2011, the Cantus obtained new counsel to investigate 

potential malpractice claims against Stone and her firm. Cantu Bankruptcy, 

Docket Entry No. 2369-1. The trustee notified the Cantus’ new attorney that 

he believed the claims against Stone were “property of the estate and under 

[the trustee’s] sole authority” to prosecute. The bankruptcy court authorized 

the trustee to investigate and pursue claims against Stone, though it did not 

rule on whether the property belonged to the estate. 

A lawsuit was then filed in state court against Stone asserting the 

following claims: (1) legal malpractice, in part for failing to file a plan of 

reorganization that satisfied the disposable income and the absolute priority 

rules; (2) vicarious liability for the negligence of the associate who worked on 

3 After denying the Cantus discharge based on their misrepresentations and omissions 

in the bankruptcy case, the bankruptcy court sent its opinion discussing Mr. Cantu’s conduct

to the State Bar of Texas and the United States District Court for the Southern District of 

Texas. See In re Cantu, 2011 WL 672336, at *5 n.19. 

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the Cantus’ case; (3) violations of the Texas Deceptive Trade Practices Act; (4) 

gross negligence for accepting the Cantus’ complex bankruptcy case despite an 

alleged lack of experience; and (5) fraudulent misrepresentation and 

inducement based on statements Stone made regarding her experience in 

chapter 11 bankruptcies. “Fee forfeiture and reimbursement” was among the 

relief requested.

Stone removed the case to federal court, where it survived a remand 

motion. The parties eventually settled for $281,710.54, which was deposited 

into the court registry pending a determination whether the settlement 

proceeds belonged to the Cantus or the bankruptcy estate. The district court 

referred the case to the bankruptcy court to make that initial determination.

That brings us to the rulings that are the subject of this appeal. The 

trustee moved for summary judgment in the bankruptcy court, arguing that 

the settlement proceeds were property of the estate. The district court had 

earlier indicated in its denial of the Cantus’ Motion to Remand that the 

proceeds belonged to the bankruptcy estate.4 The bankruptcy court agreed 

that under either of two different approaches used to determine ownership—

the “middle ground” or “prepetition relationship” approach, which the district 

court had applied in its remand ruling, and the “accrual approach”—the 

settlement proceeds belonged to the estate. The Cantus sought review of the 

bankruptcy court’s decision in the district court, which affirmed the grant of

summary judgment. The Cantus timely appealed. 

4 The district court found removal was proper under 28 U.S.C. § 1334 because the 

claims arose prior to conversion and were therefore owned by the bankruptcy estate. If we 

were to find instead that the claims belonged to the Cantus individually, we would have to 

reconsider that jurisdictional ruling.

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II

The property of a chapter 11 bankruptcy estate includes “all legal or 

equitable interests of the debtor in property as of the commencement of the 

case.”5 11 U.S.C. § 541(a)(1). A 2005 amendment to the Bankruptcy Code 

expanded that definition for individual chapter 11 debtors to encompass “all 

property of the kind specified in section 541 that the debtor acquires after the 

commencement of the case but before the case is . . . converted to a case under

Chapter 7.” 11 U.S.C § 1115(a)(1). Causes of action that belong to the debtor

“at the time the case is commenced” or that are acquired after commencement 

but before conversion are therefore property belonging to the estate. See 

Yaquinto v. Segerstrom (In re Segerstrom), 247 F.3d 218, 223–24 (5th Cir. 

2001); Torch Liquidating Trust v. Stockstill, 561 F.3d 377, 386 (5th Cir. 2009); 

11 U.S.C. § 1115. But if a cause of action is acquired at or after the time of 

conversion, it belongs to the individual debtor.

How do we determine when a cause of action arises? The question seems 

to answer itself: it is a matter of accrual. That is the approach we took in State 

Farm Life Ins. Co. v. Swift (In re Swift), 129 F.3d 792, 795 (5th Cir. 1997), 

holding that the determining factor was when “Swift’s causes of action had 

accrued” under state law. As is often the case under tort law, wrongful conduct

alone was not sufficient for accrual of the negligence and fiduciary duty claims 

in Swift; “some form of legal injury must [have] occur[ed] before these causes 

of action accrue[d].” Id. Other circuits follow this accrual approach. See, e.g.,

O’Dowd v. Trueger (In re O’Dowd), 233 F.3d 197, 203 (3d Cir. 2000) (relying on 

New Jersey law to determine that “a legal-malpractice action accrues when an 

attorney’s breach of professional duty proximately causes a plaintiff’s 

damages”); Johnson, Blakely, Pope, Bokor, Ruppel & Burns, P.A. v. Alvarez (In 

5 The statute exempts certain property not relevant here. 

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re Alvarez), 224 F.3d 1273, 1276–77 (11th Cir. 2000) (applying Florida law to 

determine that a malpractice cause of action accrued against debtor’s 

bankruptcy attorney who filed a chapter 7 bankruptcy instead of a chapter 11 

bankruptcy the moment of the chapter 7 filing, and therefore belonged to the 

estate). But as the court below took two different paths to resolving this issue, 

this case presents an opportunity to clarify that the “accrual approach” is the 

appropriate one to use when determining whether a cause of action is property 

belonging to the estate or the debtor individually.

The confusion that has seeped into this timing issue stems from Wheeler 

v. Magdovitz (In re Wheeler), 137 F.3d 299 (5th Cir. 1998) (per curiam). That 

decision, coming just a year after Swift, applied the accrual approach to find 

that a legal malpractice claim arose prior to the filing of the bankruptcy

petition and thus belonged to the estate. See id. at 301. But it also analyzed 

the timing question according to a different test: the “middle ground” or 

“prepetition relationship” approach in which “a claim arises at the time of the 

negligent conduct forming the basis for liability,” even if no injury has yet 

occurred, so long as a prepetition relationship between debtor and claimant 

existed. Id. at 300–01 (citing In re Piper Aircraft Corp., 162 B.R. 619 (Bankr. 

S.D. Fla. 1994), and Lemelle v. Universal Mfg. Corp., 18 F.3d 1268 (5th Cir. 

1994)). Although applied in Wheeler to determine whether a cause of action

belonged to the estate or the debtor individually based on the timing of the 

claim, this test arose in the context of personal injury claims asserted against 

companies that had previously been in bankruptcy. It addresses whether a 

third-party plaintiff can bring a tort claim against a reorganized company or 

whether that claim was discharged in the company’s earlier bankruptcy. See 

Lemelle, 18 F.3d at 1277–78 (products liability for mobile home); Piper, 162 

B.R. at 627–28 (plane crash). In Lemelle, for example, the defendant company

argued that the plaintiff’s product liability claim was a discharged debt that 

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should be dismissed, even though the injury did not occur until years after the 

bankruptcy. 18 F.3d at 1277–78. 

To answer this timing question for claims asserted against a debtor,

courts have taken three different approaches. Some look to when the negligent 

conduct occurred (thus labelled the “conduct test”), which is typically prior to 

or during the bankruptcy and thus results in the claim being discharged. See, 

e.g., Jeld-Wen, Inc. v. Van Brunt (In re Grossman’s Inc.), 607 F.3d 114, 125 (3d 

Cir. 2010); Grady v. A.H. Robins Co., Inc., 839 F.2d 198, 199, 203 (4th Cir. 

1988). Others use an accrual test that would typically allow the lawsuit to go 

forward when the plaintiff’s injury does not occur until after the bankruptcy

because the tort claim does not accrue until the injury is manifested. See, e.g., 

Avellino & Bienes v. M. Frenville Co., Inc. (In re M. Frenville Co., Inc.), 744 

F.3d 332, 337 (3d Cir. 1984), overruled by In re Grossman’s, 607 F.3d at 121. 

An attempt to find a position between these two, thus its “middle ground” 

moniker, the “prepetition relationship” test uses the conduct test only if there 

is “evidence that would permit the debtor to identify, during the course of the 

bankruptcy proceedings, potential victims and thereby permit notice to these 

potential victims of the pendency of the proceedings.” Lemelle, 18 F.3d at 1277; 

Placid Oil Co. v. Williams (In re Placid Oil Co.), 463 B.R. 803, 813–14 (Bankr. 

N.D. Tex. 2012) (applying middle ground approach to determine that plaintiffs 

filing asbestos claims against reorganized company had prepetition 

relationship with defendant warranting discharge). Absent such evidence of 

notice, potential claimants might be denied due process if their later-arising 

claims were discharged in an earlier bankruptcy they knew nothing about. See 

Lemelle, 18 F.3d at 1277. 

As should be apparent by now, this line of cases assessing whether a tort 

claim asserted against a reorganized debtor is a dischargeable one that arose 

prepetition is quite different from the situation we face concerning the timing 

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of a claim asserted by the debtor. The former situation turns on the scope of a

“claim” subject to discharge, a term defined in section 101(5)(A) of the 

Bankruptcy Code as a “right to payment” from a debtor, not the definitions of 

property belonging to the estate set out in sections 541 and 1115. A bankruptcy 

court explained this key distinction in declining to apply the section 101(5) 

“claim” analysis to the question whether a cause of action is property belonging 

to the estate: “the fundamental decisional issue behind the definition of ‘claim’ 

is decisively different from the decisional issue that drives the definition of 

‘property of the estate,’” because the definition of “claim” must be broad enough 

to “protect the debtor’s potential ‘fresh start,’” but it is unnecessary that “any 

and all assets arising from pre-petition conduct be includable in the estate in 

order to protect the debtor’s ‘fresh start.’” Swift v. Seidler (In re Swift), 198 

B.R. 927, 935–36 (Bankr. W.D. Tex. 1996) (emphasis in original).6 And 

concerns about the notice provided to potential personal-injury plaintiffs who 

did not yet file a claim, which gave rise to the focus on a “prepetition 

relationship,” do not translate to this situation in which the debtor is the 

plaintiff seeking to bring a claim.

We thus clarify that the “prepetition relationship” or “middle ground”

test, which we first adopted in Lemelle to address whether a claim asserted 

against a restructured company had been discharged, does not apply to 

determining whether a claim that a debtor seeks to assert constitutes property 

of the estate. Although Wheeler applied the Lemelle test in this latter situation, 

that reasoning was not essential as Wheeler also applied the accrual test to 

reach the same result. See Wheeler, 137 F.3d at 301 (concluding that 

Mississippi law dictated that the debtor’s malpractice claim against his

6 This is the companion case for attorney malpractice to In re Swift, 129 F.3d at 792, 

in which the debtor brought suit against the administrator of his retirement plan. 

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attorney accrued prepetition). Moreover, to the extent Swift and Wheeler

cannot be reconciled, Swift—which is consistent with the law in other 

circuits—is the earlier decision and thus governs under our rule of 

orderliness.7 See E.E.O.C. v. LHC Grp., Inc., 773 F.3d 688, 695 (5th Cir. 2014). 

And Swift’s accrual approach ensures a focus on whether the alleged wrongful 

conduct harmed the estate, in which case any recovery should benefit the 

estate under the broad command that property of the estate includes “all legal 

or equitable interests of the debtor in property.” See 11 U.S.C. § 541(a)(1); 

Highland Capital Mgmt. LP v. Chesapeake Energy Corp. (In re Seven Seas

Petroleum, Inc.), 522 F.3d 575, 584 (5th Cir. 2008) (holding that section 

541(a)(1) should be construed “broadly”). 

III

We now turn to the more difficult task in this case: applying the accrual 

approach. “The accrual of a cause of action means the right to institute and 

maintain a suit, and whenever one person may sue another a cause of action 

has accrued.” In re Swift, 129 F.3d at 795 (quoting Luling Oil & Gas Co. v. 

Humble Oil & Refining Co., 191 S.W.2d 716, 721 (Tex. 1946)); see also Apex 

Towing Co. v. Tolin, 41 S.W.3d 118 (Tex. 2001) (explaining that a claim accrues 

“when facts have come into existence that authorize a claimant to seek a 

judicial remedy”).

The parties agree that Stone’s misconduct in handling the bankruptcy 

occurred preconversion. As Judge Wisdom explained in Swift, however, under 

state law most causes of action do not accrue until the wrongful act caused an 

injury. 129 F.3d at 795 (“[S]ome form of legal injury must occur before these

7 Wheeler did not even cite Swift, applying the accrual test only because that test has 

also been used by some courts to answer the section 101(5) question of when a “claim” against 

a bankruptcy estate includes a claim for unaccrued tort liability. See Wheeler, 137 F.3d at 

300. 

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causes of action accrue.”). The Cantus argue that in this case that necessary 

injury occurred only after conversion when their assets were liquidated and 

the bankruptcy court denied them discharge. The trustee acknowledges that 

this injured the Cantus as they are still liable for their debts. But he contends 

that the estate also suffered injuries from Stone’s misconduct, and those 

injuries arose earlier, prior to the conversion. If that is the case, then the 

settlement funds belong to the estate. See 11 U.S.C. § 1115(a)(1). That is true 

even if a preconversion injury to the estate did not encompass the full 

settlement amount; “as a rule . . . a cause of action accrues when a wrongful 

act causes some legal injury, even if the fact of injury is not discovered until 

later, and even if all resulting damages have not yet occurred.” Murphy v. 

Campbell, 964 S.W.2d 265, 270 (Tex. 1997) (emphasis added) (quoting S.V. v. 

R.V., 933 S.W.2d 1, 4 (1996)); see also In re Swift, 129 F.3d at 795–96 (“But, it 

is not necessary to know immediately the type and extent of [the] injury. All 

that is needed is a specific and concrete risk of harm to the party’s interest.”

(citation omitted)). 

Determining whether the estate suffered a preconversion injury that 

would have allowed it to file suit against Stone is not as simple to discern as it 

has been in previous cases in which the cause of action focused on a discrete 

act of tortious conduct. In Swift, for example, that single event was the 

conversion of a Keogh plan to an IRA, which caused the plaintiff to lose a tax 

advantage and a bankruptcy exemption. 129 F.3d at 799. The Cantus’ 

allegations cast a much wider net, asserting the various malpractice- and 

fraud-based claims listed above, and the settlement agreement is not 

attributable to a specific one. As for the conduct that gave rise to these causes 

of action, the Cantus alleged that Stone failed to timely request permission for 

use of cash collateral, failed to schedule certain transfers of assets, employed 

an incompetent associate, failed to inform one of the Cantus’ witnesses when 

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he would testify, failed to prepare the expert, and failed to file a confirmable 

plan of reorganization. They further contended that Stone misrepresented her 

experience in complex bankruptcy cases. The bankruptcy court agreed with 

these allegations, finding systemic malpractice in concluding that Stone’s

conduct was “so egregious and so outside the bounds of acceptable, professional 

conduct of a fiduciary that (at some point well before the conversion) the acts 

created ‘a specific and concrete risk of harm’ to the Cantus’ interests sufficient 

to constitute legally cognizable injury.” ROA 20 (quoting Swift, 129 F.3d at 

795–96). 

In reviewing that accrual determination, we focus on whether the

allegations and causes of action in the Cantus’ petition injured the estate in a 

manner that would have enabled the trustee to file the lawsuit prior to 

conversion. We conclude that Stone’s misconduct injured the creditor body in 

a number of ways during the pendency of the chapter 11 bankruptcy that would 

have allowed the estate to file suit prior to conversion.

For starters, Stone’s misconduct led to the depletion of assets that could 

have otherwise gone to pay creditors. The Cantus alleged that Stone failed to 

timely file a request for use of cash collateral, which led to their “unauthorized

use of cash collateral.” ROA 82; see 11 U.S.C. 363; FED. R. BANKR. P. 4001(b) 

(requiring debtor to file motion for use of cash collateral). The Cantus contend 

this ended up harming them because the lack of authorization was one of the 

grounds cited for conversion. See In re Cantu, 2011 WL 672336, at *5; 11 

U.S.C. § 1112(b)(4)(D) (listing reasons that a bankruptcy court may convert a 

case to chapter 7 for cause). Of course, a more direct consequence of their 

unapproved use of cash for personal expenses was the depletion of assets that

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could have been used to pay creditors.8 Diversion of property otherwise 

available to the estate was also a consequence of Stone’s failure to schedule 

assets like the jewelry the Cantus sold, contingency fees obtained in lawsuits 

Mr. Cantu handled, and property they gratuitously transferred to a friend. See 

In re Cantu, 2011 WL 672336, at *2, *10. In addition, transferring assets away 

from the estate made it more difficult to confirm a plan of reorganization, 

which requires a sufficient corpus of cash to make necessary payments upon 

confirmation. See WILLIAM L. NORTON III & ROGER G. JONES, NORTON 

CREDITORS’ RIGHTS HANDBOOK § 18:19 (2014 ed.) (explaining that 

“[c]onfirmation of a plan of reorganization is costly,” and cash is required to 

pay costs of administration, to cover reinstated loans and leases, and to make 

“payments to prepetition creditors shortly after confirmation”).

This brings us to a more fundamental point. Submitting an

unconfirmable plan, which was the culmination of Stone’s misconduct, did not 

just hurt the Cantus personally because it led to conversion and an eventual 

ruling against discharge. It also harmed the estate. A reorganization plan 

must either be accepted by each creditor or satisfy the Code’s “best interests of 

the creditor” rule, which requires that the holder of a claim receive under the 

reorganization plan at least as much as the holder would receive in the event 

of chapter 7 liquidation. See 11 U.S.C. § 1129(a)(7)(A); see also 11 COLLIER,

supra note 2, ¶ 1129.02[7] (providing that the “best interests of creditors” rule

“is one of the cornerstones of chapter 11 practice”). Although creditors being 

8 The cash used without authorization was more than mere pocket change. A bank 

that had a lien on rental property owned by the Cantus filed an administrative claim for 

$155,628.39, contending the Cantus had spent money without court approval. In re Cantu, 

2011 WL 672336, at *18. The unauthorized use of cash continued. In its order denying the 

Cantus discharge from their chapter 7 bankruptcy, the bankruptcy court found that the 

Cantus continued to use cash income from some of their properties after the authorization 

for use of cash collateral expired. Id. at *18.

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“at least as well off” is the statutory requirement for plan confirmation, 

ordinarily creditors are better off when the debtor is reorganized into a going 

concern than when a liquidation occurs. See Canadian Pac. Forest Prods. Ltd. 

v. J.D. Irving, Ltd. (In re Gibson Grp., Inc.), 66 F.3d 1436, 1442 (6th Cir. 1995) 

(explaining that the purpose of chapter 11 is to allow debtors the opportunity 

to reorganize, “and thereby to provide creditors with going-concern value 

rather than the possibility of a more meager satisfaction through liquidation”); 

RICHARD I. AARON, 1 BANKRUPTCY LAW FUNDAMENTALS § 1:4 (2014 ed.) (“The 

premise of Chapter 11 rests upon an obvious business truth. An ongoing 

business commands a greater going concern value than the piecemeal 

liquidation through the sale of its component parts . . . often called the going 

concern bonus.” (citation omitted)). And to the extent Stone should have never 

filed the case as a chapter 11 bankruptcy in the first place, something the 

bankruptcy court suggested may have been the case,9 the delay and cost 

resulting from the more than 12 month effort to create a plan of reorganization 

harmed the estate. See Elizabeth Warren & Jay L. Westbrook, The Success of 

Chapter 11: A Challenge to the Critics, 107 MICH. L. REV. 603, 625 (2009) 

(“[F]ees and other expenses associated with a Chapter 11 case diminish the 

value available to creditors, a consequence that is felt most sharply if the 

reorganization fails and liquidation follows. In addition, the time spent in 

bankruptcy itself leads to the loss of value.”). 

This mention of the expenses associated with the chapter 11 process 

brings us to the final reason why the estate had an injury that would have 

permitted suit against Stone prior to conversion. The bankruptcy court 

9 The bankruptcy court explained that the case “was resting on the cusp of conversion 

to chapter 7, [and] was not converted to 7 originally, primarily because the Debtor was able 

to compromise and settle with the majority of the creditors in this case.” Cantu Bankruptcy, 

Docket Entry No. 1212. 

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approved $202,915.06 in attorneys’ fees and expenses for Stone’s 

representation, almost all of which related to chapter 11 work as she was 

terminated soon after conversion and much of which was paid prior to 

conversion. Cantu Bankruptcy, Docket Entry No. 1274. The fraudulent

inducement claim alleging that Stone misrepresented her qualifications thus 

resulted in injury to the estate through the payment of these fees, and the 

estate could have asserted a preconversion claim seeking to recover them. See 

Dallas Farm Mach. Co. v. Reaves, 307 S.W.2d 233, 238–39, 10 (Tex. 1957) (“[I]t 

is well settled that one who is induced by fraud to enter into a contract . . . may 

. . . rescind the contract, and . . . receive back what he paid.”). 

The Cantus’ primary argument in response to any preconversion injury 

the estate may have suffered is that the injury was still correctable prior to 

conversion. For example, they point out that even if the deficient confirmation 

plan Stone submitted injured the estate, she could have submitted a second, 

better plan that would have remedied any injury. This ignores that she did 

not try to correct her errors. In any event, we see two problems with this 

reasoning. First, some of the injury suffered by the estate—at least the 

depleted assets and unnecessary attorneys’ fees and costs—likely could not be 

undone. Second, and more basic, a claim accrues when an injury occurs; that 

injury need not be an irrevocable one. Consider a simple breach of contract 

claim in which delayed, even post-lawsuit, performance might mitigate or 

eliminate damages. One would not say there is no claim for breach just 

because the defendant could still fix the problem. The possibility that Stone’s 

later conduct could have minimized harm to the estate thus does not

undermine our conclusion that the estate had suffered sufficient preconversion 

injury to permit a lawsuit.

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* * *

For these reasons, we conclude that the widespread misconduct alleged 

against Stone resulted in numerous injuries to the creditor body during the 

pendency of the Chapter 11 case. The causes of action against Stone therefore 

accrued prior to conversion and belong to the estate. The district court is 

AFFIRMED.

16

Case: 14-40597 Document: 00513009698 Page: 16 Date Filed: 04/17/2015