FILED
MAR 5 2019
NOT FOR PUBLICATION
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. NV-18-1175-KuTaB
JAN GLASER and TATYANA Bk. No. 2:16-bk-15483-ABL
KHOMYAKOVA,
Debtors.
SHELLEY D. KROHN, Chapter 7 Trustee,
Appellant,
v. MEMORANDUM*
JAN GLASER; TATYANA
KHOMYAKOVA,
Appellees.
Argued and Submitted on February 21, 2019
at Las Vegas, Nevada
Filed – March 5, 2019
Appeal from the United States Bankruptcy Court
for the District of Nevada
*
This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
Honorable August B. Landis, Bankruptcy Judge, Presiding
Appearances: Jeanette McPherson of Schwartzer & McPherson Law
Firm argued for appellant Shelley D. Krohn, Chapter 7
Trustee; Vernon Bailey argued for appellees Jan Glaser
and Tatyana Khomyakova.
Before: KURTZ, TAYLOR, and BRAND, Bankruptcy Judges.
Chapter 71 trustee, Shelley D. Krohn (Trustee), appeals from the
bankruptcy court's order denying her motion for (1) a determination that
the malpractice cause of action of debtors, Jan Glaser and Tatyana
Khomyakova (collectively, Debtors), against their bankruptcy attorney was
property of Debtors' bankruptcy estate and (2) damages for Debtors'
violation of the automatic stay. We AFFIRM.
FACTS
The facts are undisputed. Attorney Marjorie Guymon of Goldsmith
and Guymon, P.C. (collectively, Ms. Guymon) represented Debtors in their
bankruptcy case. Debtors sought to discharge unsecured federal income tax
claims for the tax years 2011 and 2012. They received their discharge in
February 2017. Ms. Guymon told Debtors in an e-mail that all unsecured
debts were discharged, including the debt owed to the Internal Revenue
1
Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532, and “Rule” references are to the Federal Rules
of Bankruptcy Procedure.
2
Service (IRS).
In June 2017, Debtors received a letter from the IRS notifying them
that they owed $257,570.46 for the 2012 tax year plus accruing interest and
penalties. As it turned out, because they had received a six month
extension from the IRS in connection with their 2012 tax debt, Debtors filed
their bankruptcy case approximately six days too early to discharge that
debt.
Debtors engaged attorney Vernon L. Bailey to represent them in
connection with Ms. Guymon's alleged legal malpractice. Settlement
negotiations ensued but were ultimately unsuccessful because counsel for
Ms. Guymon required Mr. Bailey to notify Trustee about the malpractice
claims and potential settlement. Mr. Bailey declined to do so and thereafter
filed a state court complaint on behalf of Debtors and against Ms. Guymon
alleging claims for legal malpractice. Debtors alleged that Ms. Guymon was
negligent for having failed to discuss the legal consequences of the six
month extension they had received from the IRS regarding their 2012
income taxes. Had she done so, Debtors maintained they would have
waited the six days (or more) before filing their petition to assure discharge
of their 2012 tax debt. Or, they alternatively noted, they could have
voluntarily dismissed their case, and after the appropriate period, re-filed.
Debtors alleged as damages that after discharge their passports were
revoked due to delinquent tax debt in excess of $50,000. They further
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alleged that Mr. Glaser was precluded from being a loan officer because he
could not meet the financial criteria due to the tax debt. Debtors claimed
total damages in the amount of the tax owed plus interest and penalties
and over $1 million additional damages due to Mr. Glaser's lost wages and
commissions.
In January 2018, Trustee sent a letter to Mr. Bailey contending that
the malpractice claims against Ms. Guymon were property of Debtors'
estate. She further maintained that Debtors and Mr. Bailey violated the
automatic stay by filing the state court malpractice complaint. Mr. Bailey
disagreed with Trustee's contentions.
Trustee subsequently filed a motion in the bankruptcy court seeking
a determination that the malpractice claims were property of the estate and
that the filing of the state court complaint was a violation of the automatic
stay (Determination Motion). Trustee argued that Debtors had a contingent
interest in the malpractice claims which were sufficiently rooted in Debtors'
pre-bankruptcy past as Ms. Guymon's legal representation began
prepetition. Debtors opposed, contending that the malpractice claims
accrued postpetition and were not property of their estate.
Around the same time, Ms. Guymon removed the state court
malpractice action to the bankruptcy court initiating an adversary
proceeding. Debtors responded with a motion to remand, contending that
the malpractice claims were not property of their estate.
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In April 2018, the bankruptcy court heard the Determination Motion
and the motion to remand and took the matters under submission.
On June 14, 2018, the bankruptcy court issued its oral ruling.
Applying Nevada law, the court found that the malpractice claims were
not property of Debtors' estate because actual damages were an essential
part of a malpractice claim. Therefore, a malpractice claim did not accrue
until damage was caused. The bankruptcy court found that the damage or
harm occurred postpetition when Ms. Guymon did not dismiss Debtors'
bankruptcy case before discharge and when Debtors received the June 2017
letter from the IRS. Trustee filed a timely appeal from the bankruptcy
court's order denying her Determination Motion.
JURISDICTION
The bankruptcy court had jurisdiction pursuant to 28 U.S.C. §§ 1334
and 157(b)(2)(A). We have jurisdiction under 28 U.S.C. § 158.
ISSUE
Whether the bankruptcy court erred in finding that Debtors'
malpractice claims against Ms. Guymon were not property of their estate.
STANDARD OF REVIEW
Whether property is property of the estate is a question of law
reviewed de novo. Anderson v. Rainsdon (In re Anderson),
572 B.R. 743, 747
(9th Cir. BAP 2017).
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DISCUSSION
A. Legal Standards: Property of the Estate
The filing of a bankruptcy case creates an estate and § 541(a)(1)
defines "property of the estate" to include "all legal or equitable interests of
the debtor in property as of the commencement of the case." "Legal causes
of action are included within the broad scope of § 541." Goldstein v. Stahl (In
re Goldstein),
526 B.R. 13, 21 (9th Cir. BAP 2015) (citing Sierra Switchboard Co.
v. Westinghouse Elec. Corp.,
789 F.2d 705, 707 (9th Cir. 1986) ). Pre-petition
causes of action are part of the bankruptcy estate and post-petition causes
of action are not. Property of the estate also includes a debtor's contingent
interest in future payments, as long as that interest is "sufficiently rooted"
in the debtor's prepetition past, even if that interest is reliant on future
contingencies that have not occurred as of the filing date. Segal v. Rochelle,
382 U.S. 375, 379–80 (1966).
In Segal, the Supreme Court concluded that the debtor's
loss-carryback tax refund claims were property of the estate because they
were "sufficiently rooted in the pre-bankruptcy
past." 382 U.S. at 380, 86
S.Ct. at 515. Although the Segal debtor could not claim the refunds until the
tax year closed, which was post-petition, the only predicates for receiving
the refunds (payment of taxes in prior years and a net operating loss)
occurred pre-petition.
Id. The debtor had more than a mere hope that his
losses might generate revenue in the future; he possessed an existing
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interest at the time of filing, even though his enjoyment of that interest was
postponed. The Supreme Court did not allow the Segal trustee to assert
more rights than the debtor had at the commencement of the case; it merely
allowed the trustee to seek the interests existing, though still undetermined
in quantity, at the time the debtor filed his petition.
Although Segal was decided under the Bankruptcy Act, the legislative
history of § 541(a)(1) explains that the result in Segal survived enactment of
the Bankruptcy Code in 1978. See S. Rep. 95–989, 82, 1978 U.S.C.C.A.N.
5787, 5868 (observing that “[t]he result of Segal v. Rochelle,
382 U.S. 375
(1966) is followed [under the Code], and the right to a refund is property of
the estate.”).
Indeed, the Ninth Circuit has applied the result of Segal to a variety of
contingent interests, finding such interests are property of the estate as
long as they are "sufficiently rooted in the pre-bankruptcy past." See Jess v.
Carey (In re Jess), F.3d 1204, 1207 (9th Cir. 1999) (finding portion of
contingent attorney fee attributable to pre-petition work was an estate asset
notwithstanding the work on case continued and judgment arose post-
petition); Neuton v. Danning (In re Neuton),
922 F.2d 1379, 1382–83 (9th Cir.
1990) (contingent beneficial interest in an inter vivos trust constituted
property of the bankruptcy estate notwithstanding that debtor's right to
receive income vested only upon the death of the preceding beneficiary
which occurred after the bankruptcy petition was filed); Minoco Group of
7
Cos., Ltd. v. First State Underwriters Agency of New England Reinsurance Corp.
(In re Minoco Group of Cos., Ltd.),
799 F.2d 517, 518 (9th Cir. 1986)
(pre-petition insurance contract insuring the debtor company against
claims made by its officer and directors was property of the estate); Rau v.
Ryerson (In re Ryerson),
739 F.2d 1423, 1425–26 (9th Cir. 1984) (contingent
interests in payments due under a prepetition contract were property of the
estate and passed to the trustee).
The common thread among these cases is that they "all involved
payments pursuant to binding pre-existing contracts with well-defined
contingency provisions." See Sliney v. Battley (In re Schmitz),
270 F.3d 1254,
1258 (9th Cir. 2001). As a result, this Panel has held that to be "sufficiently
rooted in the prebankruptcy past," the payment must arise from some
prepetition right or entitlement. In re Bender,
385 B.R. 800 (Table),
2007 WL
4896288, *4 (9th Cir. BAP 2007), appeal dismissed,
586 F.3d 1159 (9th Cir.
2009)("[The Ninth Circuit] has limited its use of Segal to situations where a
debtor received a post-petition benefit pursuant to a pre-petition right or
entitlement."); see also In re Bolton, 584 B.R. 44, 55 (Bankr. D. Idaho 2018).
"The party seeking to include property in the estate bears the burden
of showing that the item is property of the estate." MacKenzie v. Neidorf (In
re Neidorf),
534 B.R. 369, 372 (9th Cir. BAP 2015). We conclude that Trustee
has failed to meet her burden for the reasons discussed below.
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B. Analysis
Federal law determines whether an interest is property of the
bankruptcy estate,
Segal, 382 U.S. at 379, and "[p]roperty interests are
created and defined by state law. Unless some federal interest requires a
different result, there is no reason why such interests should be analyzed
differently simply because an interested party is involved in a bankruptcy
proceeding." Butner v. United States,
440 U.S. 48, 55 (1979); see also Barnhill v.
Johnson,
503 U.S. 393, 398 (1992) ("In the absence of any controlling federal
law, 'property' and 'interests in property' are creatures of state law.").
State law thus controls whether Debtors' legal malpractice cause of
action existed at the time they filed their bankruptcy petition. Cusano v.
Klein, 264 F.3d 936, 947 (9th Cir. 2001) (to determine when a cause of action
accrues, we look to state law); see also Canatella v. Towers (In re Alcala),
918
F.2d 99, 102 (9th Cir. 1990) (causes of action which accrued before Chapter
7 petition is filed are part of the estate vested in the trustee).
Under Nevada law, Debtors' cause of action for legal malpractice
against Ms. Guymon could not arise until, among other things, damage
had been sustained. Semenza v. Nev. Med. Liability Ins. Co.,
104 Nev. 666, 668
(1988) (citing Jewett v. Patt,
95 Nev. 246, 247 (1979). If damage has not been
sustained, or where it is too early to know whether the damage has been
sustained, a legal malpractice action is premature and should be dismissed.
Id. at 668. Accordingly, under Nevada law, since actual damages are an
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essential part of a legal malpractice suit, a tort action cannot accrue until
damage has occurred.
Although Ms. Guymon failed to make certain inquiries before filing
Debtors' petition2, Debtors did not suffer any the damages asserted in their
complaint from the alleged malpractice before or even contemporaneous
with their filing. After the filing, Ms. Guymon could have moved to
dismiss Debtors' case prior to their discharge and then waited the
appropriate period of time before refiling. If she had taken this course of
action, the malpractice action would not have arisen. After their discharge,
Debtors suffered damages as a result of their discharge and the IRS’s
decision to pursue the claim as evidenced by the notification from the IRS
in June of 2017 that the 2012 tax debt was due. In short, the malpractice
claims cannot be deemed to have accrued prepetition as the damages
caused by Ms. Guymon's negligence were suffered by Debtors entirely
postpetition.
Because Debtors' malpractice cause of action had not accrued
prepetition as a matter of state law, it follows that it is not "sufficiently
2
Debtors alleged in their complaint against Ms. Guymon that she (1) failed to
discuss with Debtors the legal consequences of a six-month extension Debtors had
obtained from the IRS for the filing of their 2012 income taxes; (2) failed to inquire
whether Debtors had requested or applied for an extension of time to file their 2012
federal income tax return; and (3) failed to order a transcript of their 2012 federal
income tax return, or failed to adequately review such transcript and know of the
extension to October 15, 2013, for Debtors to file their 2012 federal income tax return.
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rooted in the prebankruptcy past." Unlike the debtor in Segal who had an
existing interest in the tax refunds on the petition date, Debtors had no
prepetition right or entitlement to commence a malpractice action against
Ms. Guymon because under Nevada law, without damages, no cause of
action existed prepetition. Although it was possible that Debtors would
suffer damages from Ms. Guymon's negligence, that possibility had no
value on the petition date. A mere hope, expectancy, or nebulous
possibility does not rise to the level of a "legal or equitable interest" in
property such that it might be considered property of the estate. In re
Schmitz, 270 F.3d at 1258 (citing Drewes v. Vote (In re Vote),
261 B.R. 439, 444
(8th Cir. BAP 2001)).
In sum, contrary to Trustee's arguments, it is not enough that a cause
of action has some root in prepetition conduct or facts. Rather, under Segal,
it must be "sufficiently" rooted. Here, under Nevada law, no property
interest could come into existence until Debtors suffered damages which
happened postpetition. Accordingly, the bankruptcy court properly found
that their cause of action for malpractice against Ms. Guymon was not
property of their estate.
CONCLUSION
For the reasons stated, we AFFIRM.
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