Opinion ID: 2031540
Heading Depth: 1
Heading Rank: 1

Heading: Right of Bankruptcy Trustee to Succeed to Debtors' Causes of Action.

Text: Plaintiffs argue that Collinses' claim against attorney Ford was not an interest in property which passed to their trustee in bankruptcy under 11 U.S.C. section 541(a)(1). They further assert that it is not an interest in property which the bankruptcy estate acquired after the commencement of the bankruptcy proceeding so as to qualify as the trustee's property under 11 U.S.C. section 541(a)(7). Notwithstanding defendant Ford's forceful rejoinder, we agree with these contentions as to one of plaintiffs' legal malpractice claims which we find to be divisible from the others. Whether a trustee in bankruptcy succeeds to property of the debtor in a chapter 7 bankruptcy under 11 U.S.C. section 541(a)(1) turns on whether the debtor has a legal or equitable interest in the property under applicable state law at the time the bankruptcy petition is filed. Ownership of causes of action is determined under the same rules that apply to other property interests. The rule on what causes of action are acquired by the trustee under the present bankruptcy code is stated as follows in 4 Collier on Bankruptcy ¶ 541.10[1] (15th ed. 1987): [T]he estate created pursuant to section 541(a) includes causes of action belonging to the debtor at the time the case is commenced. Id. (emphasis added). In light of this distinction, the trial court erred by assuming that it made no difference whether the debtor's cause of action accrued before or after the filing of the federal bankruptcy petition. This error of law requires reversal of the judgment unless it clearly appears as a matter of law that the cause of action arose prior to the filing of the bankruptcy petition. Under the federal bankruptcy act in existence prior to the Bankruptcy Reform Act of 1978, the Supreme Court mandated that, in determining the property of the debtor to be included in the bankruptcy estate, resort must be had to state law. Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136, 141 (1979). This recognition of the paramount role of state law in defining the property interests which pass to the trustee has been extended to interpretation of the phrase all legal or equitable interests of the debtor in property under the current federal bankruptcy code. Matter of Roach, 824 F.2d 1370, 1374 (3d Cir.1987); Wilson v. Bill Barry Enters., 822 F.2d 859, 861 (9th Cir.1987). [1] Under Iowa law there must be actual loss to the interest of another before a cause of action accrues. Wolfswinkel v. Gesink, 180 N.W.2d 452, 456 (Iowa 1970); Chrischilles v. Griswold, 260 Iowa 453, 459, 150 N.W.2d 94, 98-99 (1967). The theory that there is no cause of action until there is an injury which needs to be remedied is aptly expressed in the following excerpt from a federal court opinion: Except in topsy-turvy land, you can't die before you are conceived, or be divorced before you marry, or harvest a crop never planted, or burn down a house never built, or miss a train running on a nonexistent railroad. For substantially similar reasons, it has always heretofore been accepted, as a sort of logical axiom, that [a cause of action cannot accrue] before that cause of action exists, i.e., before a judicial remedy is available to a plaintiff. Dincher v. Marlin Firearms Co., 198 F.2d 821, 823 (2d Cir.1952). We stated this principle as follows in Wolfswinkel: There must be actual loss to the interest of another before a cause of action accrues. Generally, the wrong or negligence of the party charged gives in itself no right of action to anyone. The injury is traceable to the original wrongful or negligent act, but until this act produces injury to claimant's interest by way of loss no damage, no cause of action accrues. Wolfswinkel, 180 N.W.2d at 456 (emphasis added). We have approved this no-harm-no-foul principle in actions for professional negligence. In a case involving a claim that an architect did not prepare design specifications with a reasonable degree of technical skill, we stated that the general rule is that a cause of action accrues when the aggrieved party has a right to institute and maintain a suit.... It is true the injury is traceable to the original wrongful act or negligent act, but until this act produced injury to plaintiff's interest by way of loss or damage, no cause of action accrued. Chrischilles, 260 Iowa at 459, 150 N.W.2d at 99-100. In their legal malpractice claims against defendant Ford, plaintiffs have alleged six separate acts of negligence. Five of the six acts concern defendant Ford's failure to advise the Collinses of their rights under the Federal Land Bank mortgage and failure to prevent a receivership from being established. These allegations appear to involve conduct occurring prior to the filing of the bankruptcy petition which caused prejudice, and conceivable economic loss to the Collinses prior to their bankruptcy filing. The sixth act of negligence, as alleged in subparagraph e of the petition, is that defendant Ford urged the [Collinses] to file the bankruptcy under Chapter [7] rather than under Chapter [11], resulting in their being unable to farm the land as they would have under Chapter [11]. Plaintiffs' theory of injury on that claim is that the election made by the chapter 7 filing mandated liquidation of their farm and deprived them of the opportunity to save the farm through debtor rehabilitation under chapter 11. Plaintiffs seek recovery for the economic consequences of that election. We fail to discern how any adverse economic consequences produced by the chapter 7 election could have impacted on the Collinses until after the chapter 7 petition was filed. The act alleged in subparagraph e states a separate cause of action which exists independently from the other five allegations of negligence. As we have previously noted, no cause of action accrues under Iowa law until the wrongful act produces injury to the claimant. Consequently, for purposes of 11 U.S.C. section 541(a)(1), that cause of action was not in existence at the time the bankruptcy petition was filed. We therefore conclude the court should not have dismissed plaintiffs' claim under subparagraph e of the petition relating to post-bankruptcy injury. The claims arising under the other five specifications of negligence were properly dismissed without prejudice to the right of the trustee in bankruptcy to subsequently seek recovery for those alleged breaches.