Court Opinion

ID: 770226
Source: CourtListenerOpinion
Date Created: 2012-04-18 10:31:52+00
Date Added: 2024-06-11T15:19:25.235425
License: Public Domain

224 F.3d 1273 (11th Cir. 2000)
In re:  Fernando R. ALVAREZ, Debtor.Johnson, Blakely, Pope, Bokor, Ruppel & Burns, P.A., Plaintiff-Appellee,v.Fernando R. Alvarez, Defendant-Appellant.
No. 99-12918.
United States Court of Appeals,Eleventh Circuit.
Aug. 30, 2000.Sept. 12, 2000

[Copyrighted Material Omitted]
Appeal from the United States District Court for the Middle District of  Florida. (No. 98-02261-CIV-T-23B), Steven D. Merryday, Judge.
Before ANDERSON, Chief Judge, and DUBINA and HILL, Circuit Judges.
ANDERSON, Chief Judge:

1
Fernando Alvarez appeals from the district court's order reversing an order of  the bankruptcy court. His appeal raises the question of whether his legal  malpractice cause of action, relating to the filing of his petition for  bankruptcy, is property belonging to him as an individual or is property of his  bankruptcy estate. We conclude that the malpractice claim is property of  Alvarez's bankruptcy estate, and accordingly, we affirm the order of the  district court.

I. FACTUAL & PROCEDURAL BACKGROUND

2
Fernando Alvarez filed a complaint against the law firm of Johnson, Blakely,  Pope, Bokor, Ruppel & Burns ("Johnson Blakely") in Florida state court, alleging  legal malpractice. The crux of Alvarez's malpractice claim is his allegation  that Johnson Blakely negligently disregarded his instructions to file a  reorganizational bankruptcy case (Chapter 11) on his behalf and instead filed a  liquidating bankruptcy case (Chapter 7). Alvarez's complaint alleged that as a  result of Johnson Blakely's negligent actions, Alvarez "sustained damages  including, but not limited to, the loss of control and ownership of substantial  assets, including ownership interests in stocks and a chose in action, loss of  opportunity, loss of use of the assets, and other damages recoverable at law."

3
Johnson Blakely removed the malpractice action to the United States Bankruptcy  Court for the Middle District of Florida.1 Johnson Blakely subsequently filed a  motion for judgment on the pleadings contending that the claims asserted in  Alvarez's complaint are property of Alvarez's bankruptcy estate, not property of  Alvarez the debtor, and that, accordingly, those claims can only be asserted by  the bankruptcy trustee or, at least, the trustee is an indispensable party to  the litigation. Thus, Johnson Blakely argued that unless the trustee is joined,  the complaint should be dismissed.

4
The bankruptcy court held that the claims in Alvarez's complaint are not  property of the estate and that, as a result, the trustee is not an  indispensable party to the litigation. The bankruptcy court denied Johnson  Blakely's motion for judgment on the pleadings, and Johnson Blakely appealed to  the district court. The district court reversed, holding that the malpractice  action is property of Alvarez's bankruptcy estate and that the bankruptcy  trustee is indispensable to maintenance of the action. The district court  remanded the case to the bankruptcy court for further proceedings consistent  with its order. From the district court's order, Alvarez now appeals to this  Court.2

II. DISCUSSION

5
The issue we must decide is whether or not Alvarez's legal malpractice cause of  action is property of his bankruptcy estate. Section 541(a)(1) of the Bankruptcy  Code defines "property of the estate" to include "all legal or equitable  interests of the debtor in property as of the commencement of the case." 11  U.S.C.  541(a)(1).3 The question, then, is whether this malpractice claim  constituted a "legal or equitable [interest] of [Alvarez] in property" "as of"  the commencement4 of his bankruptcy case, such that the malpractice claim became  property of his estate. We note that the parties disagree about whether this  question is governed by state law5 or federal bankruptcy law.6 We decline to  decide the question of which law governs this determination, because in either  event, we conclude that this legal malpractice claim is property of Alvarez's  bankruptcy estate.

A. Florida Law

6
Under Florida law, a cause of action for legal malpractice has three elements: (1) the attorney's employment; (2) the attorney's neglect of a reasonable duty;  and (3) the attorney's negligence was the proximate cause of loss to the client.  See Steele v. Kehoe, 747 So.2d 931, 933 (Fla.1999). The third element of a legal  malpractice claim, that the attorney's negligence be the proximate cause of loss  to the client, is also referred to as the concept of "redressable harm." Lenahan  v. Russell L. Forkey, P.A., 702 So.2d 610, 611 (Fla. 4th DCA 1997). Pursuant to  Fla. Stat. Ann.  95.031(1), a cause of action accrues "when the last element  constituting the cause of action occurs."7 Alvarez argues that the third element  of his malpractice cause of action, that of redressable harm, did not occur  until after the filing of his bankruptcy petition.8 We disagree.

7
At the moment Alvarez's bankruptcy petition was filed, his Chapter 7 bankruptcy  estate was created, see  541(a) ("The commencement of a case under section 301  ... of this title creates an estate."), his interests in property vested in the  estate, and all of the legal ramifications attendant to creation of such an  estate came into existence.9 The transfer of Alvarez's interests in property to  a Chapter 7 bankruptcy estate rather than a Chapter 11 bankruptcy estate as  Alvarez intended is sufficient injury to indicate that Alvarez had a cognizable  interest in this legal malpractice claim at the precise moment his Chapter 7  petition was filed. Alvarez suggests, without pointing to any relevant  authority, that the harm to him did not occur until some later time, for example  when the trustee in bankruptcy failed to realize from one of the assets as much  as Alvarez alleges should have been realized. We disagree. Alvarez's loss of  ownership and control of his assets upon the bankruptcy filing constitutes a  significant and tangible change which obviously caused harm to him. No one would  suggest that the victim of a conversion is not harmed when deprived of ownership  and control of an asset.10 While we have found no Florida cases directly on  point,11 we readily conclude that redressable harm occurred at the moment of  bankruptcy filing.

8
To the extent that Alvarez suggests that redressable harm occurring at the  instant of filing is insufficient to make this cause of action part of his  bankruptcy estate because the estate includes only interests the debtor holds  immediately prior to filing,12 and not those interests arising simultaneously  with filing, we again disagree. The plain language of  541(a)(1) includes in  the estate interests of the debtor "as of" filing, not interests of the debtor  "before" or "prior to" filing. See Jones v. Hyatt Legal Services (In re Dow),  132 B.R. 853, 860 (Bankr.S.D.Ohio 1991) (noting that the language "as of" is  significant and holding that where damages caused by alleged malpractice  occurred at the point of filing of the petition, the cause of action was  property of the estate). Moreover, Congress intended the scope of  541(a)(1) to  be broad. See United States v. Whiting Pools, Inc., 462 U.S. 198, 204-05, 103  S.Ct. 2309, 2313, 76 L.Ed.2d 515 (1983); S.Rep. No. 95-989, at 82 (1978),  reprinted in 1978 U.S.C.C.A.N. 5787, 5868; H.R.Rep. No. 95-595, at 367 (1977),  reprinted in 1978 U.S.C.C.A.N. 5963, 6323. We thus conclude that, looking to  state law, this interest in property arising simultaneously with the filing of  Alvarez's bankruptcy petition was an interest of Alvarez in property "as of" the  commencement of the case, and thus, property of the estate under  541.

B. Federal Bankruptcy Law

9
We reach the same conclusion by applying federal bankruptcy law. In Segal v.  Rochelle, 382 U.S. 375, 86 S.Ct. 511, 15 L.Ed.2d 428 (1966), the Supreme Court  considered the question, under the former Bankruptcy Act,13 of whether or not  the debtors' claims for loss-carryback tax refunds were property of the debtors'  bankruptcy estates or property of the individual debtors. Under the tax laws,  the loss-carryback refund claims could be asserted only when the tax year had  closed, which was post-petition; thus, the tax refunds in Segal were sought and  received after the filing of the bankruptcy. In reaching the conclusion that  these potential claims for refunds were property of the bankrupts at the time  their bankruptcy petitions were filed, the Court did not look to state law.  Instead, the Court noted:

10
Whether an item is classed as "property" by the Fifth Amendment's Just-  Compensation Clause or for purposes of a state taxing statute cannot decide  hard cases under the Bankruptcy Act, whose own purposes must ultimately  govern.

11
The main thrust of  70a(5) is to secure for creditors everything of value the  bankrupt may possess ... when he files his petition. To this end the term  "property" has been construed most generously and an interest is not outside  its reach because it is novel or contingent or because enjoyment must be  postponed.

12
382 U.S. at 379, 86 S.Ct. at 515. The Court determined that two key elements  pointing toward realization of a tax refund existed at the time the bankruptcy  petitions were filed: 1) taxes had been paid on net income in prior years, and  2) the year of bankruptcy, at that point, exhibited a net operating loss. See  id. at 380, 86 S.Ct. at 515. The Court concluded that the loss-carryback refund  claims were "sufficiently rooted in the pre-bankruptcy past ... that [they]  should be regarded as 'property' " under the Bankruptcy Act. Id.14

13
Applying the rationale of Segal to the instant case, we conclude that Alvarez's  legal malpractice cause of action is also sufficiently rooted in his  pre-bankruptcy past that it should be considered property of Alvarez as of the  commencement of his bankruptcy case, and thus property of his estate. Alvarez  established an attorney-client relationship with Johnson Blakely prior to his  filing for bankruptcy, and this cause of action arises directly out of Alvarez's  interactions with the firm prior to filing-i.e. Alvarez's instructions to  Johnson Blakely to file Chapter 11 and the firm's alleged disregard of those  instructions-i.e. the preparation and filing instead of a Chapter 7 petition.  Simultaneous with the filing, Alvarez suffered significant harm from the firm's  alleged negligence, i.e. the loss of control of assets. The claim in the instant  case is even more firmly "rooted in the pre-bankruptcy past" than the claim in  Segal. See also Tomaiolo, 205 B.R. at 15 (concluding that debtor's legal  malpractice claims, including claim concerning services in the preparation of  documents filed with the bankruptcy petition, were sufficiently rooted in the  pre-bankruptcy past to be includible in bankruptcy estate).

III. CONCLUSION

14
The bankruptcy trustee is the legal representative of the bankruptcy estate,  with capacity to sue and be sued. See 11 U.S.C.  323. Thus, as we have  concluded that the legal malpractice cause of action at issue is property of  Alvarez's bankruptcy estate, and as there is no indication in the record before  us that the trustee has abandoned this claim, Alvarez may not maintain this suit  without participation by the trustee. See Vreugdenhil v. Hoekstra, 773 F.2d 213,  215-16 (8th Cir.1985) (noting that authorities agree, although on varying  rationales, that a debtor may not prosecute on his own a cause of action  belonging to the estate unless that cause of action has been abandoned by the  trustee).15

15
Alvarez also argues that the bankruptcy court erred in denying his motion to  remand or abstain. Assuming arguendo, but not deciding, that we might  appropriately exercise appellate jurisdiction over that issue, we decline to  exercise it. We have held that the malpractice cause of action is property of  the estate. The trustee in bankruptcy, not Alvarez, is the appropriate person to  urge remand or abstention, matters which can be addressed by the bankruptcy  court on remand.

16
The judgment of the district court is AFFIRMED.

NOTES:

1
 Alvarez then filed a "Motion for Remand or, in the Alternative, Motion for  Mandatory Abstention or, in the Alternative, Motion for Permissive Abstention,  and Objection to Designation as Core Proceeding." The bankruptcy court denied  that motion. Alvarez appealed that denial to the United States District Court  for the Middle District of Florida. The district court dismissed the appeal, and  Alvarez appealed to this Court. We dismissed the appeal for lack of  jurisdiction.

2
 The order appealed from is a final and appealable order. See T&B Scottdale  Contractors, Inc. v. United States, 866 F.2d 1372, 1375 (11th Cir.1989) (holding  that a district court's decision to include funds in a bankrupt's estate is  final and appealable and clarifying that, while an order is not final if on  remand the bankruptcy court must exercise "significant judicial activity  involving considerable discretion," such activity must be related to the order  entered by the district court). We thus have jurisdiction to hear this appeal.

3
 Section 541(b) lists exclusions from this broad definition of "property of the  estate," none of which are asserted to be applicable here.

4
 The filing of a petition for bankruptcy marks the commencement of the bankruptcy  case. See 11 U.S.C.  301.

5
 See, e.g., Southtrust Bank of Alabama v. Thomas (In re Thomas), 883 F.2d 991,  995 (11th Cir.1989) (stating that whether an interest of the debtor is property  of the estate is a federal question, but the nature and existence of the  debtor's right to property is determined by looking at state law); Charles R.  Hall Motors, Inc. v. Lewis (In re Lewis), 137 F.3d 1280, 1283 (11th Cir.1998)  (same); State Farm Life Ins. Co. v. Swift (In re Swift), 129 F.3d 792, 795 (5th  Cir.1997) (looking to state law to determine if debtor had a property interest  in a cause of action at the time he filed bankruptcy).

6
 See, e.g., Segal v. Rochelle, 382 U.S. 375, 379, 86 S.Ct. 511, 515, 15 L.Ed.2d  428 (1966) (concluding that a debtor's claim for loss-carryback tax refunds was  property of the bankruptcy estate, and, in reaching that conclusion, stating:  "Whether an item is classed as 'property' by the Fifth Amendment's  Just-Compensation Clause or for purposes of a state taxing statute cannot decide  hard cases under the Bankruptcy Act, whose own purposes must ultimately  govern"); In re Tomaiolo, 205 B.R. 10, 14 (Bankr.D.Mass.1997) (relying on Segal  to conclude that bankruptcy policy considerations, not state law, drive the  determination of whether or not a debtor's chose in action is to be included in  the bankruptcy estate); In re Richards, 249 B.R. 859 (Bankr.E.D.Mich.2000)  (relying on Segal to conclude that the appropriate inquiry for determining  whether the debtor's cause of action is property of the estate is whether the  claim is sufficiently rooted in the pre-bankruptcy past, not the date that the  claim accrues under state law).

7
 We recognize that, under Florida law, the statute of limitations does not begin  to run with respect to an action for professional malpractice until "the cause  of action is discovered or should have been discovered with the exercise of due  diligence." Fla. Stat. Ann.  95.11(4). This fact is irrelevant for our inquiry,  however. As the Fifth Circuit stated in State Farm Life Ins. Co. v. Swift (In re  Swift ), 129 F.3d 792, 798 (5th Cir.1997):
We are determining when the [cause] of action accrued for purposes of ownership  in a bankruptcy proceeding. The time of discovery of the injury is not relevant  to this inquiry. A cause of action can accrue for ownership purposes before the  statute of limitations for that cause of action has begun to run.
Along these lines, we note that a study of relevant Florida caselaw may create  some confusion about use and meaning of the word "accrual." As explained above,  under Fla. Stat. Ann.  95.031(1), "[a] cause of action accrues when the last  element constituting the cause of action occurs." Some Florida cases, however,  suggest that the concept of accrual in the legal malpractice context includes  the discovery aspect of the statute of limitations inquiry. See, e.g., Peat,  Marwick, Mitchell & Co. v. Lane, 565 So.2d 1323, 1325 (Fla.1990) ("Generally, a  cause of action for negligence does not accrue until the existence of a  redressable harm or injury has been established and the injured party knows or should know of either the injury or the negligent act."); cf. Swift, 129 F.3d at  796-98 (noting that recent Texas cases "have muddied the waters" and blended the  issue of accrual and the start of the statute of limitations "because of the  luxury of the discovery rule in a statute of limitations case" and because "the  issue of accrual of a cause of action rarely occurs apart from the issue of when  the statute of limitations begins to run"). As noted, however, a cause of action  can accrue for ownership purposes in a bankruptcy proceeding before the statute of limitations begins to run. Thus, our inquiry is concerned with when Alvarez's  legal malpractice "accrued" in the sense of Fla. Stat. Ann.  95.031(1), i.e.  when the last element constituting his cause of action occurred.

8
 It is clear that the first two elements of the cause of action occurred as of  the filing. Johnson Blakely was employed by Alvarez prior to filing, and the  alleged negligent acts involving the preparation and decision to file a Chapter  7 petition rather than a Chapter 11 petition occurred prior to filing as well.  The alleged negligent act of filing the Chapter 7 petition occurred as of the  time of the filing.

9
 The legal consequences of filing a Chapter 7 petition, and thus creating a  Chapter 7 estate, are quite different than those attendant to a Chapter 11  petition. For instance, in a Chapter 7 case, a trustee is appointed who is  charged with the duty of liquidating the assets in the debtor's bankruptcy  estate with the goal of satisfying as many of the creditors' claims as possible.  See, e.g., Cable v. Ivy Tech State College, 200 F.3d 467, 472 (7th Cir.1999)  ("Chapter 7 establishes a ... radical solution to indebtedness, requiring the  liquidation of the debtor's property, to which end Congress granted the trustee  broad powers without interference from the debtor. The trustee has sole  authority to dispose of property ...."). In a Chapter 11 case, the  debtor-in-possession generally manages and administers his own bankruptcy  estate, with the goal of reorganizing his affairs rather than liquidating them.  See, e.g., Canadian Pacific Forest Products, Ltd. v. J.D. Irving, Ltd. (In re  Gibson Group, Inc.), 66 F.3d 1436, 1442 (6th Cir.1995) ("The purpose of [Chapter  11] is to provide a debtor with legal protection in order to give [him] the  opportunity to reorganize, and thereby to provide creditors with going-concern  value rather than the possibility of a more meager satisfaction through  liquidation."). Indeed, Alvarez alleges that his damages were caused because a  Chapter 7, rather than a Chapter 11, petition was filed.

10
 We note that Alvarez's further allegation of Johnson Blakely's post-filing  failure to convert the case from Chapter 7 to Chapter 11 is more aptly described  as simply a failure to seek to remedy the initial negligent act or ameliorate  the harm, rather than as an independent act of negligence.

11
 Nor has either party cited helpful authority. Unlike the instant case, none of  the cases relied upon by Alvarez or the Bankruptcy Court involved allegations of  pre-petition malpractice resulting in damage to the plaintiff from the loss of  control of assets, which of course occurred here as of the filing of the  petition. Although the facts in Collins v. Federal Land Bank of Omaha, 421  N.W.2d 136 (Iowa 1988) would appear to be similar to the instant facts, a  majority of the Supreme Court of Iowa concluded, without any explanation, that  it failed "to discern how any adverse economic consequences produced by the  chapter 7 election [rather than a Chapter 11] could have impacted on the  Collinses until after the chapter 7 petition was filed." Id. at 139. The Iowa  court apparently overlooked the loss of control of a debtor's assets which  occurs as of a Chapter 7 filing. To the extent that the Iowa court suggested  that such loss of control does not constitute redressable harm, we respectfully  disagree. Under Florida law, a cause of action accrues at the time injury from a  negligent act is first inflicted, and not at the time that the full extent of  the damages is ascertained. See Carter v. Cross, 373 So.2d 81, 82-3 (Fla. 3d DCA  1979).

12
 It is well-settled that causes of action which have accrued prior to bankruptcy  become part of the bankruptcy estate. See Venn v. St. Paul Fire and Marine Ins.  Co., 99 F.3d 1058, 1064 n. 10 (11th Cir.1996); see also Miller v. Shallowford  Community Hosp., Inc., 767 F.2d 1556, 1559 (11th Cir.1985) ("The legislative  history [of 11 U.S.C.  541(a)(1) ] indicates that [the] definition [of property  of the estate] includes causes of action existing at the time of the  commencement of the bankruptcy action.").

13
 The Bankruptcy Act of 1898 was repealed in 1978 and replaced by the current  Bankruptcy Code. See Georgian Villa, Inc. v. United States (In re Georgian  Villa, Inc.), 55 F.3d 1561, 1562 n. 2 (11th Cir.1995). While Segal was decided  under the 1898 Act, nothing in the changed language suggests a change in the  relevant Segal holding. Moreover, the legislative history expressly indicates  that the current Code follows Segal 's result. See S.Rep. No. 95-989, at 82  (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5868; H.R.Rep. No. 95-595, at 367  (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6323; In re Yonikus, 996 F.2d 866,  869 n. 3 (7th Cir.1993).

14
 In reaching its conclusion that these refund claims were property under the Act  at the time of filing, the Court also determined that the claims were "little  entangled with the bankrupts' ability to make an unencumbered fresh start." 382  U.S. at 379, 86 S.Ct. at 515. The Code, however, eliminates this inquiry from  the determination of whether an interest of the debtor is property of the  estate. See S.Rep. No. 95-989, at 82 (1978), reprinted in 1978 U.S.C.C.A.N.  5787, 5868; H.R.Rep. No. 95-595, at 367 (1977), reprinted in 1978 U.S.C.C.A.N.  5963, 6324 ("Paragraph (1) [of subsection (a) of  541] has the effect of  overruling Lockwood v. Exchange Bank, 190 U.S. 294, 23 S.Ct. 751, 47 L.Ed. 1061  (1903), because it includes as property of the estate all property of the  debtor, even that needed for a fresh start. After the property comes into the  estate, then the debtor is permitted to exempt it under proposed 11 U.S.C. 522  ....") (footnote omitted); see also Rau v. Ryerson (In re Ryerson ), 739 F.2d  1423, 1426 (9th Cir.1984).
After concluding that the refund claims were property of the bankrupts as of  filing, the Segal Court then proceeded to make the additional determination,  required under the former Act but not the current Code, that the loss-carryback  refund claims were property "which prior to the filing of the petition [the  bankrupt] could by any means have transferred ...," in order to reach its  ultimate determination that the refunds claims were property of the bankrupts'  estates. 382 U.S. at 381-85, 86 S.Ct. at 516-18.

15
 Alvarez also argues that there is no federal jurisdiction over this malpractice  cause of action. 28 U.S.C.  1334(b) provides that "the district courts shall  have original but not exclusive jurisdiction of all civil proceedings arising  under title 11, or arising in or related to cases under title 11." This  provision creates jurisdiction in three categories of proceedings: those that  "arise under title 11," those that "arise in cases under title 11," and those  "related to cases under title 11." Continental Nat'l Bank of Miami v. Sanchez  (In re Toledo ), 170 F.3d 1340, 1344 (11th Cir.1999). The bankruptcy court's  jurisdiction is derivative of and dependent upon these three bases. See id. As  the malpractice claim belongs to Alvarez's bankruptcy estate, the bankruptcy  court clearly has "related to" jurisdiction over it, as the value of the claim,  if it has any, will inure to the benefit of the estate. Cf. Toledo, 170 F.3d at  1345-47 (holding that there was "related to" jurisdiction over adversary  proceeding where the value and extent of the estate's indirect interest in  partnership property would necessarily be affected by the outcome of the  adversary proceeding and where the outcome could have the conceivable effect of  partially satisfying one secured creditor's claim, thus freeing up additional  money for distribution to unsecured creditors).

HILL, Circuit Judge, concurring dubitante:

17
I concur with the majority. I confess some doubt, however, as to the enthusiasm  with which they reach their result. The term "property of the estate" is  comprised of "all legal or equitable interests of the debtor in property as of  the commencement of the case." 11 U.S.C.  541 (emphasis added). Therefore it  seems to me that whether a claim is "property of the estate" depends upon  whether the claim accrued before or after the filing of the petition. In  Florida, the accrual of a negligence action is measured from the time the  injuries are sustained and not from the time the full extent of the damages have  been ascertained. Trizec Properties, Inc. v. Biltmore Constr. Co., Inc., 767  F.2d 810, 812 n. 4 (11th Cir.1985) (emphasis added).

18
Here I believe the claim accrued at the moment the petition was filed. What we  then have is a single act which produces two conflicting results. When the  petition is filed, the estate is instantly created but the alleged tort is also  completed. If the filing injures the plaintiff, how can the claim be a part of  the estate as of the commencement of the case? Or, if the filing injures the  plaintiff, how can the claim not be a part of the estate, and the plaintiff be  said to have been injured after the commencement of the case, when the last act  producing the injury coincides with the estate creation?1

19
With these doubts expressed, and a belief, as the majority opines, that the term  "property of the estate" should be generously construed, I concur, because I  believe the general purposes of the bankruptcy code are better served by the  panel majority's unraveling of this conundrum.

NOTES:

1
 Decision-makers have been accused of flipping coins-"Heads, it is property of  the estate, tails, it is not." That doesn't decide the issue when the coin  stands on its edge.