1-9 Bankruptcy Cases

• Jurisdiction: United States

1-9 Bankruptcy Cases

If a malpractice claim arises before a client seeks bankruptcy protection, it becomes part of the estate and any recovery is for the benefit of the debtor's creditors. If the claim arises after the bankruptcy proceedings begin, it ordinarily is treated as post-petition property and therefore belongs solely to the debtor.

In In re: Witko,³³⁵ the U.S. Court of Appeals for the Eleventh Circuit explained the foregoing while distinguishing its earlier decision in In re Alvarez³³⁶:

Witko's legal malpractice cause of action did not exist until his alimony action concluded with an adverse outcome that was proximately caused by his attorney's negligence. . . . Witko did not suffer any harm from the alleged legal malpractice prior to or contemporaneous with filing his bankruptcy petition. Witko filed his bankruptcy petition on September 8, 1999. The judicial proceedings underlying his malpractice claim did not conclude until months later on January 13, 2000[.] These facts distinguish the instant matter from In re Alvarez, where a legal malpractice cause of action was found to be sufficiently rooted in the pre-bankruptcy past. In re Alvarez, 224 F.3d at 1279. There, the harm occurred at the same time Alvarez's attorneys filed his bankruptcy petition. Id. ("Simultaneous with the filing, Alvarez suffered significant harm from the firm's alleged negligence, i.e. the loss of control of assets."). When Witko filed his bankruptcy petition he had not yet suffered any harm. Witko's malpractice cause of action was unknown, not even rising to a hope; the most pessimistic curmudgeon could not anticipate that, months later, Witko would lose his alimony claim due to his attorney's malpractice. Witko's legal malpractice cause of action did not exist at the time he filed his bankruptcy petition and, consequently, is not property of his bankruptcy estate.³³⁷

If the legal malpractice claim is determined to be property of the estate, the trustee, standing in the shoes of the debtor, becomes the plaintiff.³³⁸ The trustee then bears the same pleading burdens, and is subject to the same defenses, as any other legal malpractice plaintiff.³³⁹ Likewise, the legal malpractice defendant proceeds in the usual manner.³⁴⁰

Quite distinct is the issue of legal malpractice that occurs in the handling of the bankruptcy estate. While the proceedings are ongoing, such malpractice must be brought to the attention of the bankruptcy court.³⁴¹ Once the proceedings are closed...