Opinion ID: 52295
Heading Depth: 5
Heading Rank: 1

Heading: McClarty v. Gudenau

Text: We first address the Trinchard defendants’ request that we apply the holding of a Michigan Bankruptcy Court in McClarty v. Gudenau.17 In McClarty, a Chapter 7 trustee brought a legal malpractice suit against an attorney who had represented the debtor in a lawsuit stemming from a pre-petition car accident. The malpractice suit alleged that the attorney’s negligence caused the debtor to incur a judgment in excess of her insurance policy limits.18 The trial court found that “[the trustee] will be unable to prove damages in the amount of the excess judgment because the Debtor, in whose shoes [the trustee] stands, no longer owes this debt as a result of her discharge.”19 The court based its ruling on the interrelation of Bankruptcy Code § 524(a),20 which states that “[a] discharge . . . voids any judgment at the time obtained, to the extent that such judgment is a determination of the personal liability of the debtor with respect 17 176 B.R. 788 (E.D. Mich. 1995). 18 Id. at 789-90. 19 Id. at 790. 20 11 U.S.C. § 524(a). 11 to any debt discharged,” and the well-settled rule that “when a trustee assumes a debtor’s cause of action, he ‘obtains rights of action belonging to the bankrupt subject to the same defenses or limitations that a defendant might have asserted against the bankrupt himself.’”21 The McClarty court concluded that a trustee of the bankruptcy estate of a discharged debtor could not overcome the defense that the debtor suffered no damages as a result of the purportedly negligent attorney’s actions. The district court declined to apply McClarty in this case, however, recognizing that our decisions in In re Edgeworth22 and In re Segerstrom23 established that a bankruptcy discharge eliminates only the debtor’s personal liability and not the debt itself. Accordingly, the court ruled that summary judgment for the Trinchard defendants “based on Hale’s discharge” was not warranted. We agree with that ruling. In Segerstrom, a Chapter 7 trustee brought suit against a debtor’s attorney for legal malpractice and against the debtor’s liability insurer for breach of fiduciary duty and breach of contract.24 The district court, citing McClarty, 21 McClarty, 176 B.R. at 790 (quoting In re Giorgio, 862 F.2d 933, 936 (1st Cir. 1988) (emphasis added)). 22 993 F.2d 51 (5th Cir. 1993). 23 247 F.3d 218 (5th Cir. 2001). 24 Id. at 221. 12 granted summary judgment to the attorney on the legal malpractice claim, reasoning that the trustee could not prove any compensable damages, because the debtor’s personal liability had been discharged.25 Although we affirmed summary judgment on other grounds, we expressly refused to adopt the district court’s holding based on McClarty: [T]he district court determined that [the trustee] would be unable to prove any damages because Segerstrom’s personal liability to the [judgment creditors] had been discharged. [citing McClarty]. We do not adopt the district court’s holding. In In re Edgeworth, this Court held that a discharged debt “continues to exist” and judgment creditors “may collect from any other source that may be liable.” We noted in Edgeworth that the bankruptcy code’s fresh start policy was not intended to allow insurers to escape obligations simply based on the “financial misfortunes of the insured.” Though Edgeworth does not control the present case . . . its rationale could be extended to include cases like this one. [I]t makes little sense to allow those who have committed torts to escape liability because of the financial misfortunes of their victims. Moreover, allowing a cause of action to go forward on the facts of this case would not threaten financial harm to the debtor, thus the primary purpose behind the discharge would be protected.26 The Trinchard defendants insist that even though the Segerstrom court endorsed the rationale of Edgeworth, that rationale does not apply to the facts of this case, because (1) Edgeworth involved a nominal suit against the debtor to recover from the debtor’s liability insurer; (2) the liability insurer in 25 Id. at 223. 26 Id. at 225 n.4 (internal citations omitted). 13 Edgeworth was contractually obligated to make a payment for the injury, so the liability proceeds were not a part of the insurance policy and not subject to the discharge; and (3) the plaintiffs in Edgeworth were relatives of the deceased patient, not the trustee of the debtor’s bankruptcy estate. That the facts of the instant case thus differ from those operative in Edgeworth is of no moment here. As the district court recognized, Segerstrom presented facts “on all four corners” with the instant case, and we acknowledged that Edgeworth was not directly controlling precedent.27 We also acknowledged in Segerstrom, however, that the rationale for Edgeworth’s holding could properly be extended to cases such as this one. We accept that we are not bound, in the strictest sense, to follow the path laid out in Segerstrom, but we see no compelling reason not to do so. We remain convinced that (1) it would be improper to excuse the malpractice liability of a potentially negligent attorney because of the “financial misfortunes” of his client/tort victim; and (2) allowing a legal malpractice cause of action to go forward despite the purported tort victim’s bankruptcy discharge would not threaten “the primary purpose behind the discharge,” i.e, avoiding financial harm to the debtor.28 Accordingly, we reject the rationale of McClarty and hold that Stanley, as trustee for Hale’s 27 Id. 28 Id. 14 bankruptcy estate, is not barred by Hale’s bankruptcy discharge from asserting a legal malpractice claim that had accrued to Hale before commencement of his bankruptcy proceedings.