In Re: Anne L. O'DOwD Anne L. O'DOwD v. Howard C. Trueger David B. Biunno Vincent D. Commisa Marisa A. Taormina Biunno, Commisa and Taormina, P.C

Citations: 233 F.3d 197; 2000 U.S. App. LEXIS 30169; 37 Bankr. Ct. Dec. (CRR) 1; 2000 WL 1752901Docket: 99-5479

Court: Court of Appeals for the Third Circuit; November 27, 2000; Federal Appellate Court

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The case involves Anne L. O'Dowd appealing a decision regarding two legal malpractice actions related to her bankruptcy proceedings. The key issue is whether a second malpractice action, which O'Dowd claims is personal property since it arose four years after her bankruptcy filing, should be considered part of her bankruptcy estate. The District Court ruled that it is part of the estate because the second action stems from alleged errors in the first malpractice case, which harmed the bankruptcy estate. 

The factual background outlines that O'Dowd purchased an apartment building in 1990 for about $1 million but later discovered structural issues and misrepresented rental income, leading her to file for Chapter 11 bankruptcy in March 1992. She initially hired attorney Howard C. Trueger to handle her bankruptcy and to sue her previous attorney, Milton Sevack, for malpractice. Trueger filed a malpractice claim in 1993, which became part of the bankruptcy estate. O'Dowd's bankruptcy was later converted to Chapter 7, and she was discharged in December 1994. Following Trueger's withdrawal due to ethics issues, she engaged the law firm Biunno, Commisa, Taormina, P.C. The appellate court upheld the District Court's decision, affirming that the second malpractice action is indeed property of the bankruptcy estate under 11 U.S.C. § 541(a)(7).

In May 1995, the Trustee proposed a $10,000 settlement for the Sevack Action, which O'Dowd objected to as insufficient. The Bankruptcy Court denied the settlement on July 24, 1995, allowing O'Dowd to proceed with the case in state court, stipulating that the Trustee would receive the first $10,000 of any net proceeds, while the debtor could retain any additional recovery as abandoned property. Following this, O'Dowd dismissed her attorney Biunno and hired Hilton L. Stein, who settled the Sevack Action in 1996 for an undisclosed amount.

Subsequently, O'Dowd discovered that Trueger had omitted several claims from the Sevack Action, which were now barred by the New Jersey statute of limitations. In November 1996, she sued Trueger and Biunno in the New Jersey Superior Court for legal malpractice, alleging that Trueger failed to plead all potential claims and that Biunno did not inform her of this mistake, which led her to settle for less than she could have recovered.

Biunno moved to dismiss O'Dowd's complaint, arguing that the malpractice claims were part of the bankruptcy estate, thus O'Dowd lacked standing. The state court directed her to seek a ruling from the Bankruptcy Court regarding the status of these claims. In December 1997, O'Dowd sought that determination.

On July 21, 1998, the Bankruptcy Court ruled the Trueger/Biunno Action constituted property of the bankruptcy estate, referencing the Supreme Court's Segal v. Rochelle decision. The court found the claims were rooted in O'Dowd's past under 11 U.S.C. § 541(a)(1) and also under § 541(a)(7) as property the estate acquired post-bankruptcy. It further held that O'Dowd was barred from bringing the action as she failed to have the Trustee pursue the claims.

O'Dowd appealed to the United States District Court for the District of New Jersey, which on May 19, 1999, rejected the Bankruptcy Court's § 541(a)(1) analysis but upheld the inclusion of the Trueger/Biunno Action under § 541(a)(7). O'Dowd contested this ruling, while Trueger and Biunno supported the District Court's decision under both provisions. The Bankruptcy Court had jurisdiction under 28 U.S.C. § 157, and the District Court under § 158, with the appellate court having jurisdiction under § 1291 and § 158(d), conducting plenary review of the District Court's affirmation of the Bankruptcy Court's order.

Legal interests of the debtor in property at the commencement of a bankruptcy case include all assets owned at the time of filing and any interests acquired thereafter, except as specified in certain subsections. The term "estate" encompasses the debtor's assets available to creditors, broadly defined by Congress to include all types of property—tangible, intangible, and causes of action—moving away from complex state law references. Federal law outlines what constitutes property of the estate, while state law determines the debtor's specific interests in that property. The Supreme Court has indicated that property interests should be uniformly addressed by state and federal courts to minimize uncertainty and prevent forum shopping.

In this context, O'Dowd claims her legal malpractice action against her former attorneys is not part of the bankruptcy estate. She argues that her claims did not accrue until 1996, four years after her bankruptcy petition was filed in 1992, asserting that the relevant events occurred after the case's commencement. Therefore, she contends the claims were not legally cognizable at that time and cannot be included in the federal bankruptcy estate. Additionally, O'Dowd argues that legal malpractice claims inherently belong only to the debtor, suggesting they cannot be acquired by the estate. The analysis will further consider New Jersey law to determine the accrual of the claims and address her argument regarding the nature of legal malpractice claims in relation to 11 U.S.C. § 541(a)(7).

Under New Jersey law, the accrual of a legal malpractice action occurs when an attorney's breach causes damages to a plaintiff, with the discovery rule allowing for postponement of this accrual if the plaintiff is unaware of the underlying facts. The Trueger/Biunno Action only accrued in 1996, when O'Dowd became aware of omitted claims from the Sevack Action, meaning her property interest in this malpractice claim did not exist until after her bankruptcy filing. O'Dowd argues that since this action is a post-petition tort claim, it belongs solely to her as the debtor, citing cases where post-petition claims were not considered property of the estate. However, the Trueger/Biunno Action is distinct because it directly relates to O'Dowd's pre-petition dealings with the Sevack Action. The malpractice claim stems from the negligence of her prior attorneys, which diminished her potential recovery in the Sevack Action, thus conceptually linking it to events pre-dating her bankruptcy. Unlike other cited cases where the wrongful conduct affected the debtor personally without impacting the estate, the alleged malpractice here impacts the estate’s value, as it relates to the Sevack Action, which is part of the estate’s assets. Therefore, the malpractice claim is determined to belong to the estate rather than O'Dowd personally.

O'Dowd contends that the District Court should have conducted a balancing test to assess the harm suffered by herself versus the estate. However, it was determined that the omitted claims are estate property, meaning O'Dowd cannot prove personal harm from the alleged malpractice in the Trueger/Biunno Action. Consequently, any harm would be attributed to the estate, which is the true injured party. The estate owned the omitted claims and should be compensated if the malpractice allegations are valid. The court concluded that the Trueger/Biunno Action falls under estate property as per § 541(a)(7) of the Bankruptcy Code, encompassing any interest acquired after the bankruptcy case commenced. Therefore, the District Court's ruling is affirmed. The document also clarifies that the abandonment of claims by the Trustee was not supported by evidence of intent and that O'Dowd's claim regarding personal property status was rejected. Additionally, the District Court's comments on the Bankruptcy Court's ruling regarding § 108 were noted as non-essential to the current determination. The court did not need to address alternate arguments for affirmance due to the primary conclusion regarding the estate property status of the Trueger/Biunno Action.