Court Opinion

ID: 4384678
Source: CourtListenerOpinion
Date Created: 2019-04-05 17:00:29.082277+00
Date Added: 2024-06-11T14:22:53.763328
License: Public Domain

RECOMMENDED FOR FULL-TEXT PUBLICATION

                                     File Name: 19b0003p.06

                     BANKRUPTCY APPELLATE PANEL
                                  OF THE SIXTH CIRCUIT

 IN RE: EARL BENARD BLASINGAME; MARGARET                ┐
 GOOCH BLASINGAME,                                      │
                                      Debtors.          │
  ___________________________________________           │
                                                        │
 CHURCH JOINT VENTURE, L.P., on Behalf of Chapter 7     │
 Trustee,                                                >    No. 18-8017
                                                        │
                                 Plaintiff-Appellant,   │
                                                        │
        v.                                              │
                                                        │
                                                        │
 EARL BENARD BLASINGAME; MARGARET GOOCH
                                                        │
 BLASINGAME;  MARTIN   A.    GRUSIN;    MAG
                                                        │
 MANAGEMENT CORPORATION, dba JG Law Firm;
                                                        │
 TOMMY L. FULLEN; LAW OFFICE OF TOMMY L.
                                                        │
 FULLEN,
                                                        │
                         Defendants-Appellees.          │
                                                        ┘

                     On Appeal from the United States Bankruptcy Court
                      for the Western District of Tennessee at Memphis.
                  No. 08-28289; Adv. No. 14-00429—Jennie D. Latta, Judge.

                                  Argued: February 12, 2019

                               Decided and Filed: April 5, 2019

    Before: OPPERMAN, PRICE SMITH, and WISE, Bankruptcy Appellate Panel Judges.

                                     _________________

                                         COUNSEL

ARGUED: Bruce W. Akerly, AKERLY LAW PLLC, Coppell, Texas, for Appellant. Michael
P. Coury, GLANKLER BROWN, PLLC, Memphis, Tennessee, for Appellees. ON BRIEF:
Bruce W. Akerly, AKERLY LAW PLLC, Coppell, Texas, for Appellant. Michael P. Coury,
GLANKLER BROWN, PLLC, Memphis, Tennessee, for Appellees.
 No. 18-8017                            In re Blasingame                                    Page 2

                                       _________________

                                            OPINION
                                       _________________

       DANIEL S. OPPERMAN, Chief Bankruptcy Appellate Panel Judge. In this appeal, the
Panel is asked to determine whether the bankruptcy court erred in holding that a malpractice
action for denial of debtors’ discharges based on errors and omissions contained in a bankruptcy
petition, as well as pre and post-petition legal advice, was not property of the debtors’
bankruptcy estate. The Panel finds the reasoning of Underhill v. Huntington National Bank (In
re Underhill), 579 F. App’x 480 (6th Cir. 2014), to be both persuasive and binding.
Accordingly, we AFFIRM.

                                      ISSUE ON APPEAL

       The issue on appeal is whether the bankruptcy court erred in its holding that the
malpractice cause of action was not property of the bankruptcy estate.

                      JURISDICTION AND STANDARD OF REVIEW

       The United States District Court for the Western District of Tennessee has authorized
appeals to the Panel, and no party has timely filed to have this appeal heard by the district court.
28 U.S.C. §§ 158(b)(6), (c)(1). A final order of the bankruptcy court may be appealed as of
right. 28 U.S.C. § 158(a)(1). Midland Asphalt Corp. v. U.S., 489 U.S. 794, 798, 109 S. Ct. 1494,
1497 (1989) (quotation marks and citation omitted). The order before the Panel grants summary
judgment to the Debtors and fully disposes of the adversary proceeding, making it a final order.
Geberegeorgis v. Gammarino (In re Geberegeorgis), 310 B.R. 61, 63 (B.A.P. 6th Cir. 2004)
(“[A]n order that concludes a particular adversarial matter within the larger case should be
deemed final and reviewable in a bankruptcy setting.”) (citations omitted)).

       An order granting summary judgment is reviewed de novo. Dymarkowski v. Savage (In
re Hadley), 561 B.R. 384, 388 (B.A.P. 6th Cir. 2016). The determination whether a cause of
action is property of the estate is a legal conclusion, reviewed de novo. Underhill, 579 F. App’x
at 481-82.    “Under a de novo standard of review, the reviewing court decides an issue
 No. 18-8017                                In re Blasingame                                         Page 3

independently of, and without deference to, the trial court’s determination.” Matteson v. Bank of
Am., N.A. (In re Matteson), 535 B.R. 156, 159 (B.A.P. 6th Cir. 2015) (citations omitted).

                                                  FACTS

        Earl and Margaret Blasingame (“the Debtors”) filed their chapter 7 bankruptcy petition
on August 15, 2008. Martin Grusin provided legal advice to the debtors prior to the filing and at
the beginning of the bankruptcy case. Tommy L. Fullen filed the petition and represented the
Debtors in the chapter 7 case. (Grusin, Fullen and their law firms are collectively referred to as
the “Malpractice Defendants”).

        On February 22, 2011, the bankruptcy court granted the Trustee’s motion for summary
judgment in an adversary proceeding seeking to deny the Debtors’ discharge. Montedonico v.
Blasingame (In re Blasingame), Adv. No. 09-00482 ECF No. 117 (Bankr. W.D. Tenn.). On July
19, 2011, the bankruptcy court issued an order disqualifying the Malpractice Defendants from
further representation of the Debtors in that case. The Debtors hired new counsel, who was
effective in getting relief from the summary judgment denying discharge. However, following a
trial, on January 15, 2015, the bankruptcy court again entered an order denying the Debtors’
discharge. The BAP affirmed the order on appeal.1

        On January 30, 2012, the bankruptcy court granted Church Joint Venture (“CJV”)
derivative standing to pursue a malpractice action on behalf of the estate against the Malpractice
Defendants. CJV filed its original complaint on February 13, 2012, and a First Amended
Complaint on February 2, 2017. Church Joint Venture, L.P. v. Grusin, et al. (In re Blasingame),
Adv. No. 12-00454 (Bankr. W.D. Tenn.). The Debtors also filed a malpractice complaint in
Tennessee state court on February 21, 2017. Both complaints aver substantially similar actions
by the Malpractice Defendants that allegedly resulted in the denial of the Debtors’ discharges.

        On December 2, 2014, CJV filed another adversary proceeding, seeking declaratory relief
that the claims against the Malpractice Defendants constitute property of Debtors’ estate; this is

        1In  re Blasingame, 559 B.R. 692 (B.A.P 6th Cir. 2016). See also In re Blasingame, 559 B.R. 676 (B.A.P
6th Cir. 2016) (detailing some of the allegations of malpractice in reviewing the bankruptcy court’s order
sanctioning the Malpractice Defendants).
 No. 18-8017                                In re Blasingame                                    Page 4

the case from which this appeal arises. On January 2, 2018, CJV filed a motion for summary
judgment seeking a determination that the malpractice cause of action arose pre-petition and was
property of the bankruptcy estate. The Malpractice Defendants and Debtors each filed individual
responses, to which CJV replied. The parties agreed that there were no genuine issues of
material fact. The issue before the bankruptcy court was solely whether under the facts alleged,
the malpractice cause of action arose pre-petition, and was thus property of the bankruptcy
estates.

           The bankruptcy court treated Debtors’ response to CJV’s motion for summary judgment
as a cross-motion. The court reviewed Tennessee law to determine when the cause of action for
legal malpractice accrued and held that the cause of action arose post-petition. (Order on Motion
for Summary Judgment, Adv. P. 14-00429 ECF No. 94 (May 10, 2018) (the “Summary
Judgment Order”).) CJV timely appealed.

                                              DISCUSSION

    Federal Rule of Bankruptcy Procedure 7056, which incorporates Rule 56 of the Federal
Rules of Civil Procedure, governs summary judgment in bankruptcy adversary proceedings. The
Court of Appeals for the Sixth Circuit has described the standard to grant a motion for summary
judgment as follows:

           A court must grant summary judgment “if the pleadings, depositions, answers to
           interrogatories, and admissions on file, together with the affidavits, if any, show
           that there is no genuine issue as to any material fact and that the moving party is
           entitled to judgment as a matter of law.” Under this test, the moving party may
           discharge its burden by “pointing out to the [bankruptcy] court . . . that there is an
           absence of evidence to support the nonmoving party's case.” The nonmoving
           party cannot rest on its pleadings, but must identify specific facts supported by
           affidavits, or by depositions, answers to interrogatories, and admissions on file
           that show there is a genuine issue for trial. Although we must draw all inferences
           in favor of the nonmoving party, it must present significant and probative
           evidence in support of its complaint. “The mere existence of a scintilla of
           evidence in support of the [nonmoving party's] position will be insufficient; there
           must be evidence on which the jury could reasonably find for the [nonmoving
           party].”
 No. 18-8017                             In re Blasingame                                      Page 5

Buckeye Ret. Co., LLC, v. Swegan (In re Swegan), 383 B.R. 646, 652–53 (B.A.P. 6th Cir. 2008)
(quoting Gibson v. Gibson (In re Gibson), 219 B.R. 195, 198 (6th Cir. BAP 1998) (internal
citations omitted) (alterations in Gibson)).

       In the present case, CJV moved for summary judgment, asserting that there were no
genuine issues of material fact for trial. During the hearing, the Debtors’ attorney stated:

       On the material fact issue, I think we’re in agreement. There is no material fact.
       Both of the complaints that are attached to Mr. Akerly’s motion are substantially
       the same complaint. They both allege the same damage, denial of discharge,
       which was a distinctly post-petition event.

(Tr. of April 19, 2018 Hr’g 19:3-8, Adv.P. 14-00429 ECF No. 110.) The bankruptcy court
agreed and found that there were no genuine issues of material fact for trial. The bankruptcy
court concluded that the malpractice action belonged to the Debtors, not the bankruptcy estate,
and entered judgment for the Debtors.

       Section 541(a) of the Bankruptcy Code explains that, with few exceptions, the
bankruptcy estate includes “all legal or equitable interests of the debtor in property as of the
commencement of the case.” It is axiomatic that “[p]roperty interests are created and defined by
state law.” Butner v. United States, 440 U.S. 48, 55; 99 S. Ct. 914, (1979). It is equally as true
that it is federal law, not state law, that determines when a debtor’s property interest becomes
property of the bankruptcy estate.

       State substantive law determines the “nature and extent” of causes of action, see
       Tyler v. DH Capital Mgmt., Inc., 736 F.3d 455, 461 (6th Cir. 2013), but federal
       bankruptcy law dictates when that property interest becomes property of the estate
       for purposes of § 541, see In re Terwilliger’s Catering Plus, Inc., 911 F.2d 1168,
       1172 (6th Cir. 1990).

Underhill, 579 F. App’x at 482.

       In Underhill, the bankruptcy court and Bankruptcy Appellate Panel looked at the factual
allegations giving rise to a cause of action for tortious interference with a contract and held that
the cause of action was “sufficiently rooted in the pre-bankruptcy past” such that the cause of
action was property of the bankruptcy estate. Underhill, 579 F. App’x at 481. However, the
Sixth Circuit Court of Appeals reversed, holding that: “[p]re-petition conduct or facts alone will
 No. 18-8017                            In re Blasingame                                   Page 6

not ‘root’ a claim in the past; there must be a pre-petition violation. [Tyler] at 462. That is, a
cause of action qualifies as bankruptcy estate property only if the claimant suffered a pre-
petition injury.” Underhill, 579 F. App’x at 482 (emphasis added) (citing Tyler, 736 F.3d at 462;
In re Witko, 374 F.3d 1040, 1044 (11th Cir. 2004) (concluding that legal-malpractice claim
belonged to the debtor because he “did not suffer any harm from the alleged legal malpractice
prior to or contemporaneous with filing his bankruptcy petition”)).

       In the present case, the bankruptcy court provided a detailed review of when a legal
malpractice claim arises under Tennessee law.        Both CJV’s and the Debtors’ malpractice
complaints allege that the Malpractice Defendants were negligent in representing the Debtors
both before and after the Debtors’ bankruptcy filing, and that the Debtors were injured by that
negligence when their discharges in bankruptcy were denied. The bankruptcy court concluded
that

       [n]either of the complaints describes a cause of action that could have been
       pursued by the Debtors prior to the filing of their bankruptcy petition. . . . The
       Debtors had no cause of action against the Malpractice Defendants at the
       commencement of their case, and their complaint is not administrative in nature.
       It is personal to them and is not property of the bankruptcy estate.

(Summary Judgment Order at 11.)

       CJV argues that the bankruptcy court applied the incorrect standard of law in deciding
when the cause of action arose. It asserts that the bankruptcy court should have looked at when
the conduct leading to the injury occurred as opposed to when the injury accrued under state law.
It argues that if the bankruptcy court had done so, it would have determined that “the damage of
the denial of discharge is ‘sufficiently rooted’ in the pre-bankruptcy ‘conduct’ of the Malpractice
Defendants.” (Appellant’s Br. at 11, BAP Case No. 18-8017 ECF 17.)

       Underhill controls and binds the bankruptcy court and this Panel. In Underhill, the Sixth
Circuit rejected the concept that pre-petition conduct alone was sufficient to determine that a
claim was sufficiently rooted to be considered property of the estate. The Court of Appeals held
that a pre-petition violation is required—“[t]hat is, a cause of action qualifies as bankruptcy
estate property only if the claimant suffered a pre-petition injury.” Underhill, 579 F. App’x at
482-83 (citation omitted). Here, the parties’ malpractice complaints assert the same injury, the
 No. 18-8017                            In re Blasingame                                   Page 7

denial of the Debtors’ discharges. Accordingly, there was no pre-petition injury, the malpractice
cause of action arose post-petition and is not property of the bankruptcy estate.

       In the alternative, CJV argues that “the Bankruptcy Court erred because [it] did not
consider splitting the claims and stating that two separate and distinct causes of action exist, one
in the pre-petition period and one in the post-petition period.” (Appellant’s Br. at 25, BAP Case
No. 18-8017 ECF 17.) The Panel finds no merit in this argument. CJV’s complaint does not
state a cause of action for pre-petition malpractice based upon a cognizable pre-petition injury.
Rather, it states a cause of action that identifies the injury as the denial of the Debtors’
discharges. During oral argument, Appellant reiterated its position that the injury from the
malpractice alleged in the complaint was the post-petition denial of discharge. The complaint
does not state two different causes of action. As the Sixth Circuit explained in Underhill,
because there was no pre-petition injury, the cause of action articulated in the complaint belongs
to the Debtors and is not property of the bankruptcy estate.

                                         CONCLUSION

       The Summary Judgment Order holding that the malpractice cause of action is not
property of the bankruptcy estate and granting summary judgment to the Debtors is
AFFIRMED.