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P r e c e de n t i al or N on-P r e c e de n t i al :

D ock e t 99-5479

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. e du/thir dc ir c uit_2000/236Filed November 28, 2000

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 99-5479

IN RE: ANNE L. O'DOWD

ANNE L. O'DOWD

Appellant

v.

HOWARD C. TRUEGER; DAVID B. BIUNNO; VINCENT D. COMMISA; MARISA A. TAORMINA; BIUNNO, COMMISA AND TAORMINA, P.C.

ON APPEAL FROM THE ORDER OF THE

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF NEW JERSEY

(D.C. Civ. No. 98-4886) District Court Judge: The Honorable Mary L. Cooper

Argued: July 20, 2000

Before: SLOVITER, NYGAARD, and FUENTES, Circuit Judges

(Opinion Filed: November 28, 2000)Magdalena Schardt

Fox, Rothschild, O'Brien & Frankel,

LLP Princeton Pike Corporate Center
997 Lenox Drive Building 3 Lawrenceville, NJ 08648-2311

ATTORNEYS FOR APPELLANT

John Badagliacca Garrity, Graham, Favetta & Flinn

One Lackawanna Plaza
Box 4205 Montclair, NJ 07042

ATTORNEYS FOR APPELLEE

HOWARD C. TRUEGER

Meredith Kaplan Stoma Morgan, Melhuish, Monaghan, Arvidson, Abrutyn & Lisowski

651 West Mt. Pleasant Avenue
Suite 200 Livingston, NJ 07039-1673

ATTORNEYS FOR APPELLEES DAVID B. BIUNNO, VINCENT D. COMMISA, MARISA A. TOARMINA, AND BIUNNO, COMMISA AND TAORMINA, P.C.

OPINION OF THE COURT

FUENTES, Circuit Judge:

This appeal involves two separate legal malpractice actions filed after the commencement of the bankrup tcy case. The parties do not dispute that the first of the two actions constitutes property of the bankruptcy esta te. The principal issue presented by this appeal is whether the second, successive malpractice action is also pr op erty of

2the estate. The appellant, Anne L. O'Dowd, claims t hat

since the second malpractice action did not accrue until four years after the bankruptcy filing, it is perso nal property and does not belong to the bankruptcy esta te. The District Court disagreed.

Because O'Dowd's second malpractice action is based on alleged pleading errors committed in the first malp ractice action, and it is the bankruptcy estate that was ha r med by the alleged malpractice that is the subject of the second action, we conclude that it constitutes an inter es t in property acquired by the bankruptcy estate pursuant to 11 U.S.C. S 541(a)(7). Accordingly, we will affirm the order of
the District Court.

I. Factual and Procedural Backgr ound

A.

In 1990, Anne L. O'Dowd purchased an apartment building for approximately $1 million. Milton Sevac k, a local attorney, represented her in the transaction. O'Dowd contends that, after the closing, she learned that the building contained structural flaws and that the se ller had exaggerated the rental income. She claims that the investment "placed her in [a] direfinancial situati on," ultimately leading to her filing a Chapter 11 bankr uptcy petition on March 27, 1992 in the United States Bankruptcy Court for the District of New Jersey.

Thereafter, O'Dowd hired Howar d C. Trueger to repr esent her in the bankruptcy proceedings. She also r etain ed Trueger to commence a lawsuit against Sevack to rec over damages arising from his mishandling of several mat ters including the purchase of the apartment building. I n 1993, Trueger commenced a legal malpractice action agains t Sevack in state court, asserting claims solely with respect to the apartment building purchase (the "Sevack Act ion").1 According to O'Dowd, Trueger omitted various other claims

___________________________________________________ ______________

1. Trueger also asserted malpractice claims against individuals other than Sevack. For simplicity, we will refer to the e ntire group of defendants collectively as "Sevack."

3she had against Sevack. There is no dispute that wh en the

Sevack Action was filed, it became property of her bankruptcy estate.

On August 3, 1994, the Bankruptcy Court converted O'Dowd's Chapter 11 reorganization pr oceeding into a Chapter 7 liquidation proceeding, and a trustee was named for the estate (the "Trustee"). The Bankruptcy Cour t then discharged O'Dowd on December 23, 1994. Soon therea fter, because of impending ethics charges unr elated to t he instant case, Trueger withdrew as O'Dowd's counsel. To replace Trueger, O'Dowd retained the law firm of Bi unno, Commisa & Taormina, P.C.2

In May 1995, the Trustee proposed to settle the Sev ack Action for $10,000. O'Dowd formally objected to wha t she believed was a low settlement figure. In an order d ated July 24, 1995, the Bankruptcy Court denied the Trustee's proposed settlement and allowed O'Dowd to pr oceed with the Sevack Action in state court. In retur n, the T rustee was to be entitled to the first $10,000 of any net pr o ceeds. The order also provided that "the balance[of any recove ry] may be retained by the debtor, as having been abandoned " by the Trustee.3 After the Bankruptcy Court's decision
, O'Dowd dismissed Biunno and retained Hilton L. Stei n to represent her in the Sevack Action. In 1996, Stein settled
the suit for an undisclosed amount.

Shortly after the settlement, O'Dowd allegedly disc overed that Trueger had left out a number of her claims in the

___________________________________________________ ______________

2. The law firm of Biunno, Commisa & Taormina, P.C. includes attorneys David B. Biunno, Vincent D. Commisa, and Marisa A. Taormina. We will refer collectively to the firm and these individual s as "Biunno."

3. We reject O'Dowd's contention that the malpracti ce lawsuit against Trueger and Biunno constitutes personal pr operty b ecause all claims in excess of $10,000 were abandoned by the T rustee. A bandonment is an intentional act and nothing in the recor d supports a finding that the
Trustee intended to abandon the omitted claims. See Hanover Ins. Co. v. Tyco Indus. Inc., 500 F.2d 654, 657 (3d Cir. 1974); see also Fed. R. Bankr. P. 6007 (providing for abandonment of proper ty by way of motion). Moreover, at the time of the bankruptcy or der, neither the Trustee, nor the court, appeared to have had any id ea that the
unasserted claims existed.

4Sevack Action, but that the claims were now time-ba rred

under the applicable New Jersey statute of limitati ons. Thus, in November 1996, O'Dowd brought a second leg al malpractice action against both Trueger and Biunno in the New Jersey Superior Court (the "Trueger/Biunno Acti on"). In her complaint, O'Dowd alleged that Trueger had f ailed to plead all of her potential claims against Sevack. S he also contended that if Biunno had properly infor med her of Trueger's pleading mistake, she could have"purchase d" the omitted claims from the Trustee along with the apar tment building claims.4 O'Dowd further asserted that she settled the Sevack Action for substantially less than what she could have recovered had Trueger and Biunno properl y raised and pled all of the claims against Sevack.

Biunno filed a motion in state court to dismiss O'D owd's complaint on the ground that the Trueger/Biunno Act ion constituted property of the bankruptcy estate and t herefore O'Dowd lacked standing to prosecute the matter . Th e state
court ordered O'Dowd to seek a deter mination in th e Bankruptcy Court as to whether that malpractice act ion constituted estate property. In December 1997, O'Do wd applied to the Bankruptcy Court for a ruling on tha t issue.

B.

On July 21, 1998, the Bankruptcy Court issued a wri tten opinion concluding that the Trueger/Biunno Action constituted property of the bankruptcy estate. Rely ing on the Supreme Court's decision in Segal v. Rochelle, 382 U.S. 375 (1966), the Bankruptcy Court held that the malp ractice claims were sufficiently rooted in O'Dowd's past to be

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4. We take O'Dowd to mean that, had she known of th e pleading failure, she would have sought to include the omitted claims under the same terms ordered by the Bankruptcy Court in denying th e Trustee's settlement proposal. As this would not have involve d an acquisition of property for valuable consideration, O'Dowd would n ot have technically "purchased" these omitted claims fr om the Trustee. A true purchase of
the omitted claims would have been void under the N ew Jersey common law prohibition against assigning prejudgment tort claims. See generally Integrated Solutions v. Service Support Specialties , Inc., 124 F.3d 487 (3d Cir. 1997).

5considered property of the estate pursuant to 11 U. S.C.

S 541(a)(1).

Under an alternative analysis, the court also held that the claims constituted property of the estate pursu ant to 11 U.S.C. S 541(a)(7), which includes "[a]ny interest in property that the estate acquires after the commencement of the case." Finally, the court held that O'Dowd was barr ed under 11 U.S.C. S 108 from bringing the T rueger/Bi unno Action in the first instance because she had failed to request that the Trustee assert the malpractice cla ims on

her behalf.

O'Dowd appealed the Bankruptcy Court's decision to the
United States District Court for the District of Ne w Jersey. By order entered May 19, 1999, the District Court r ejected the Bankruptcy Court's S 541(a)(1) analysis, but up held the inclusion of the Trueger/Biunno Action in the estat e under S 541(a)(7).5 On appeal from this order, O'Dowd arg ues that the District Court incorrectly determined that the Trueger/Biunno Action constituted property of the e state under S 541(a)(7). In response, Appellees Trueger a nd Biunno argue that the lower court's deter mination should be upheld under both S 541(a)(1) and S 541(a)(7).6

___________________________________________________ ______________

5. In a footnote, the District Court declined to ad dress the merits of the Bankruptcy Court's ruling that the Trueger/Biunno A ction was barred under S 108, finding that it constituted only dictu m. O'Dowd challenges this conclusion on appeal. However, like the Distri ct Court, our determination that the Trueger/Biunno Action consti tutes property of the estate pursuant to S 541(a)(7) obviates our nee d to address this issue. See Pennsylvania Dep't of Pub. Welfare v. Ma rkiewicz, 930 F.2d 262, 266 (3d Cir. 1991); accord In re Cassidy, 892 F.2d 637, 640 (7th Cir. 1990).

6. Appellees may advance this argument even though they did not file a cross-appeal. See E.F. Operating Corp. v. American Bldgs., 993 F.2d 1046, 1048 (3d Cir. 1993). However, because we conc lude that the Trueger/Biunno Action constitutes property of the e state pursuant to S 541(a)(7), we find it unnecessary to addr ess App ellee's alternative
basis for affirming the District Court. Accor dingly, we do not express any opinion as to the merits of the District Court'sS 5 41(a)(1) ruling, except to note that the Trueger/Biunno Action seeks r eimb ursement for the mishandling of the first malpractice action, which clearly had roots in O'Dowd's pre-bankruptcy past. Ordinarily, the degre e of the nexus between a suit based on pre-petition conduct and a derivative postpetition malpractice action will determine whether the latter constitutes property of the estate under S 541(a)(1).

6The Bankruptcy Court exercised jurisdiction over th is

proceeding pursuant to 28 U.S.C. S 157. The Distric t Court exercised jurisdiction to hear the appeal under 28 U.S.C. S 158. We have jurisdiction to hear this appeal pur suant to 28 U.S.C. S 1291 and 28 U.S.C. S 158(d). Our review of the District Court's decision to affirm the Bankruptcy Court's order is plenary.

II. Discussion

A.

Under Title 11 of the United States Code (the "Bankruptcy Code"), the filing of a voluntary petit ion in bankruptcy court commences a bankruptcy proceeding and creates an estate. 11 U.S.C. S 541(a). The estate:

is comprised of all the following property, wherever located and by whomever held:

(1) Except as provided in subsections (b) an d (c)(2) of this section, all legal or equitable interes ts of the debtor in property as of the commencement of the

case.

. . . .

(7) Any interest in property that the estate acquires

after the commencement of the case.

Accordingly, with limited exceptions (none of which apply here), the estate encompasses everything that the d ebtor owns upon filing a petition, as well as any derivat ive rights, such as property interests the estate acquires afte r the case commences. See, e.g., United States v. Whiting Pool s, Inc., 462 U.S. 198, 203-05 (1983) (term "estate" refers t o the grouping of the debtor's assets which ar e subject to the claims of creditors).

We have previously emphasized Congr ess' intent to delineate in broad terms what constitutes property of the estate. See Integrated Solutions, Inc. v. Service S upport Specialities, Inc., 124 F.3d 487, 490-91 (3d Cir. 1 997). As the legislative history for S 541 states,"[i]t incl udes all kinds of property, including tangible or intangible property,

7causes of action . . . and all other forms of prope rty

currently specified in section 70a of the Bankruptc y Act." H.R. Rep. No. 95-595, at 367 (1977), reprinted in 1 978 U.S.C.C.A.N. 5963, 6323. The legislative purpose of this section was to move away from the "complicated mela nge of references to State law" and to "determine[ ] what is property of the estate by a simple refer ence to wh at interests in property that debtor has at the time o f the commencement of the case." Id. at 175, 1978 U.S.C.C .A.N. at 6136 (footnotes omitted).

While federal law defines what types of pr operty c omprise the estate, state law generally determines what int erest, if any, a debtor has in property. Congr ess Talcott Co rp. v. Gruber, 993 F.2d 315, 319 (3d Cir . 1993) (citing A quilino v. United States, 363 U.S. 509, 513 (1960)); In re Roa ch, 824 F.2d 1370, 1374 (3d Cir. 1987) (quoting Butner v. U nited States, 440 U.S. 48, 54 (1979)). As the Supr eme Co urt has
instructed:

[p]roperty interests are cr eated and define d by state law. Unless some federal interest requir es a different result, there is no reason why such interest s should be analyzed differently simply because an inter ested party is involved in a bankruptcy proceeding. Unif or m treatment of property interests by both stat e and
federal courts within a State serves to redu ce uncertainty, to discourage forum shopping, a nd to prevent a party from receiving "a windfall m erely by reason of the happenstance of bankruptcy."

Butner v. United States, 440 U.S. 48, 55 (1979) (qu oting Lewis v. Manufacturers Nat'l Bank of Detr oit, 364 U.S. 603, 609 (1961)).

O'Dowd argues that the Trueger/Biunno Action does n ot constitute property subject to inclusion in the est ate. She maintains that her malpractice claims did not accru e until 1996, while the estate came into existence four yea rs earlier in 1992 when she filed her petition. It was only in 1996, she contends, that she became aware of her for mer attorneys' negligence and that the omitted claims w ere time-barred under state law. Thus, accor ding to O' Dowd, all the legally relevant events that comprise the malpr actice

8action occurred well after the commencement of her

bankruptcy case. Since the claim was not legally co gnizable "as of the commencement of the case," she contends that it cannot constitute "property" subject to inclusion i n a federal bankruptcy estate. She also asserts that a legal malpractice claim, by its very nature, can only bel ong to the debtor, and thus can be acquired only by the debtor

.

Against this background, we turn to New Jersey law to determine when the Trueger/Biunno Action accrued. W e then address O'Dowd's argument, which implicates 11 U.S.C. S 541(a)(7), that a legal malpractice claim can never become the property of a bankruptcy estate because it necessarily inures only to the debtor.

B.

We agree with O'Dowd that, under New Jersey law, th e Trueger/Biunno Action did not accrue until 1996. In New Jersey, "a legal-malpractice action accrues when an attorney's breach of professional duty proximately causes a plaintiff 's damages." Grunwald v. Bronkesh, 621 A. 2d 459, 463 (N.J. 1993); accord Olds v. Donnelly , 696 A.2d 633, 641 (N.J. 1997). In special cases, such as malpractice actions, New Jersey courts have adopted the discovery rule"t o postpone the accrual of a cause of action" when a p laintiff is unaware of the facts underlying a claim. Bronkes h, 621

A.2d at 463.

Accordingly, the Trueger/Biunno Action did not accr ue until O'Dowd first learned of the omitted claims in the Sevack Action. Thus, any property inter est that O' Dowd had in the Trueger/Biunno Action did not come into existence until 1996, four years after she filed he r bankruptcy petition.

O'Dowd's primary contention is that, since the Trueger/Biunno Action is a post-petition tort claim , it can belong only to the debtor. She relies on caselaw in which courts have found that a debtor's post-petition cau se of action did not constitute property of the estate. S ee, e.g., Bobroff v. Continental Bank, 43 B.R. 746, 750-51 (E .D. Pa. 1984) (debtor's tort claims were not pr operty of e state where events giving rise to claims occurr ed follow ing filing

9of debtor's Chapter 7 petition), aff 'd, 766 F.2d 7 97 (3d Cir.

1985); Brunswick Bank & Trust Co. v. Atanasov (In r e Atanasov), 221 B.R. 113, 116-17 (Bankr. D.N.J. 1998 ) (debtor's malicious prosecution claim was not prope rty of estate as it arose post-petition when indictment wa s dismissed); In re Doemling, 127 B.R. 954, 955-57 (B ankr. W.D. Pa. 1991) (debtors' tort claim arising from au tomobile accident five months after filing of bankruptcy pet ition was not property of estate); Mathews v. United States ( In re Mathews), 184 B.R. 594, 601 (Bankr. S.D. Ala. 1995) (Chapter 7 debtors' compensatory damages awar d aga inst IRS was awarded to debtors personally, and not as e state property, where award was premised on IRS actions t hat primarily took place post-discharge).

However, none of these cases involved claims that c ould be traced directly to pre-petition conduct in the w ay that the Trueger/Biunno Action can be traced to the Seva ck Action. The injury alleged in the Trueger/Biunno Ac tion is that O'Dowd suffered a diminished r ecovery in the Sevack Action as result of her former attor neys' negligen ce. Put differently, the misconduct of O'Dowd's former bank ruptcy attorneys reduced the value of her malpractice laws uit against Sevack. While we acknowledge that the condu ct giving rise to the malpractice claim occurred post- petition, we find it conceptually impossible to sever the Trueger/Biunno Action from the underlying Sevack Ac tion. Moreover, even though O'Dowd did not r etain Truege r and Biunno until after she had filed her Chapter 11 pet ition, the malpractice claims are traceable dir ectly to O 'Dowd's pre-bankruptcy dealings with Sevack.

Moreover, in the cases cited by O'Dowd, the alleged wrongful conduct damaged the debtor personally and had no effect on the estate. Indeed, the courts in thes e cases emphasized that the inquiry often depends on whethe r the estate or the debtor suffers the harm. Accordingly, only in the post-petition situation where the debtor is per sonally injured by the alleged malpractice, while the estat e is concomitantly not affected, is it appr opriate to a ssign the malpractice to the debtor. See, e.g., Osborn v. Dur ant Bank & Trust Co. of Durant, Okla. (In re Osborn), No. 95 -7118, 95-7124, 95-7121, 83 F.3d 433, 1996 WL 196695, at * 4-5

10(10th Cir. Apr. 24, 1996) (table) (legal malpractic e claim was

property of debtors because it sought r ecovery for injury to debtors personally and not to estate).

Here, any alleged malpractice resulting fr om the o mission of claims in the Sevack Action would affect only th e estate, not O'Dowd, because it would have reduced the value of the Sevack Action, which was property of the estate. In other words, because the Sevack Action belonged to the es tate, including the claims that could have been but wer e not asserted, a malpractice suit in connection with tho se omitted claims likewise belongs to the estate and t he
estate's creditors.

Finally, O'Dowd argues that the District Court shou ld have performed a balancing test to deter mine wheth er O'Dowd or the estate suffered the gr eatest harm. W hile we decline to address the propriety of r esorting to s uch a balancing test, we note that since the omitted clai ms constitute estate property, O'Dowd cannot demonstra te that she suffered any harm as a r esult of the malpracti ce alleged in the Trueger/Biunno Action. Thus, she personally was not affected by any diminishment in their value, an d consequently any balancing would weigh overwhelming ly in

favor of the estate.

O'Dowd's bankruptcy estate is the true injur ed par ty. It owned the omitted claims in the Sevack Action and, if the allegations in the Trueger/Biunno Action ar e true, it is the

estate that deserves to be made whole. We therefore conclude that since the estate acquired the T ruege r/Biunno Action after the commencement of the case, the laws uit constitutes estate property under S 541(a)(7) of th e Bankruptcy Code, which provides that pr operty of t he estate includes "[a]ny interest in pr operty that t he estate acquires after the commencement of the case."

III. Conclusion

For all the foregoing reasons, we hold that the Trueger/Biunno Action constitutes property of O'Dow d's bankruptcy estate under 11 U.S.C.S 541(a)(7), and t herefore

11we will affirm the District Court.

A True Copy:

Teste:

Clerk of the United States Court of Appeals
for the Third Circuit

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