In re: Pacific Cargo Services, LLC ( 2015 )

FILED
FEB 19 2015
SUSAN M. SPRAUL, CLERK
1 NOT FOR PUBLICATION U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
2
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5 In re: ) BAP No. OR-14-1036-KiKuJu
)
6 PACIFIC CARGO SERVICES, LLC, ) Adv. No. 13-03212
)
7 Debtor. ) Bk. No. 13-30439-TMB
)
8 )
KYLE MCCRACKEN; GUY OAKES, )
9 )
Appellants, )
10 )
v. ) M E M O R A N D U M1
11 )
STEPHEN P. ARNOT, Chapter 7 )
12 Trustee, )
)
13 Appellee. )
______________________________)
14
Submitted Without Oral Argument
15 on January 22, 20152
16 Filed - February 19, 2015
17 Appeal from the United States Bankruptcy Court
for the District of Oregon
18
Honorable Trish M. Brown, Bankruptcy Judge, Presiding
19
20 APPEARANCES: Toby J. Marshall and Michael D. Daudt of Terrell
Marshall Daudt & Willie PLLC on brief for
21 appellants Kyle McCracken and Guy Oakes; David A.
Foraker of Greene & Markley, P.C. on brief for
22 appellee Stephen P. Arnot, Chapter 7 Trustee.
23
24
1
25 This disposition is not appropriate for publication.
Although it may be cited for whatever persuasive value it may have
26 (see Fed. R. App. P. 32.1), it has no precedential value. See 9th
Cir. BAP Rule 8024-1.
27
2
On September 16, 2014, the parties filed a joint
28 stipulation to waive oral argument.
1 Before: KIRSCHER, KURTZ and JURY, Bankruptcy Judges.
2
3 Appellants Kyle McCracken and Guy Oakes ("Appellants") appeal
4 a judgment determining that the prepetition assignment of certain
5 legal malpractice claims from Pacific Cargo Services, LLC
6 ("Debtor") to Appellants was a voidable preferential transfer
7 under § 547(b).3 We AFFIRM.
8 I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY
9 A. Prepetition events
10 The facts in this appeal are undisputed. Debtor, an Oregon
11 limited liability company, provided courier services in Oregon and
12 Washington. Just three days before filing its chapter 11
13 bankruptcy case, Debtor and its five affiliates merged.
14 Appellants are former employees of Debtor. In August 2011,
15 Appellants filed a class action lawsuit against Debtor in
16 Washington state court alleging Debtor violated wage and hour laws
17 in both Oregon and Washington ("Class Action").
18 On January 3, 2013, after approximately 18 months of
19 litigation, Appellants (on behalf of the class claimants) and
20 Debtor entered into a settlement agreement ("Settlement
21 Agreement").4 Debtor agreed to a stipulated judgment of
22
23
3
Unless specified otherwise, all chapter, code and rule
24 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. The
25 Federal Rules of Civil Procedure are referred to as “Civil Rules.”
26 4
One of Debtor's insiders, Mr. Holman, was also a party to
the Class Action and the Settlement Agreement. Mr. Holman,
27 however, was not a party to Trustee's preference action. Thus,
any assignment of the claims at issue have not been avoided as to
28 him.
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1 approximately $1.6 million in actual and exemplary damages arising
2 from hour and wage violations. Debtor also agreed to assign to
3 Appellants any legal malpractice claims (the "Malpractice Claims")
4 Debtor had against the attorneys who advised Debtor on its wage
5 and hour practices. In exchange for the assigned Malpractice
6 Claims, Appellants agreed not to execute on the stipulated
7 judgment.
8 The Settlement Agreement included the following provisions:
9 1.l. "Malpractice Claims" shall mean any and all claims for
malpractice that Defendants individually or collectively have
10 or will have against Nancy Cooper, any other person at Garvey
Schubert Barer, and the law firm of Garvey Schubert Barer over
11 any advice or other professional services provided to
Defendants before the commencement of this Action regarding
12 Defendants' Wage and Hour Practices, including but not limited
to Defendants' Flat Rate Pay Practice.
13
. . .
14
3.d. Defendants represent and warrant that they relied on the
15 legal advice of lawyer Nancy Cooper in the Portland, Oregon
office of Garvey Schubert Barer in developing, implementing,
16 and maintaining Defendants' Flat Rate Pay Practice and in not
providing Overtime Compensation to Plaintiffs and Class
17 Members. Defendants further represent and warrant that their
practice of not paying Overtime Compensation to Class Members
18 was carried out in accordance with the legal advice provided by
Nancy Cooper and Garvey Schubert Barer.
19
3.e. Defendants represent and warrant that they believe in
20 good faith they have valid claims for legal malpractice against
Nancy Cooper and Garvey Schubert Barer arising out of the legal
21 advice referenced in the preceding subsection.
22 3.f. Defendants represent and warrant that they do not have
the financial resources or the time necessary to continue
23 properly defending themselves in the Action.
24 3.g. Defendants represent and warrant that they do not have
the resources to pursue the Malpractice Claims.
25
26 (emphasis added).
27 The Settlement Agreement further provided that if the state
28 court failed to grant final approval of the settlement or if
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1 Appellants were precluded from pursuing the Malpractice Claims
2 assigned by Debtor, the agreement would become null and void and
3 the parties would be returned to the status quo ante, as if they
4 had never entered into or agreed to the terms of the Settlement
5 Agreement. If that occurred, the parties would continue
6 litigating the Class Action.
7 B. Postpetition events
8 On January 28, 2013, twenty-five days after the parties
9 executed the Settlement Agreement but before the state court
10 approved it, Debtor filed a chapter 11 bankruptcy case. Due to
11 the automatic stay, the state court overseeing the Class Action
12 did not rule on a motion to approve the Settlement Agreement.
13 On August 2, 2013, the bankruptcy court converted Debtor’s
14 chapter 11 case to a chapter 7 case. The U.S. Trustee appointed
15 Stephen Arnot ("Trustee") as trustee. Debtor's unsecured debts of
16 approximately $8.3 million far exceeded the value of its assets,
17 so Debtor's unsecured creditors did not expect to receive any
18 distribution.
19 1. Trustee's preference action
20 On August 27, 2013, Trustee filed his complaint against
21 Appellants seeking to avoid Debtor's prepetition assignment of the
22 Malpractice Claims as a preferential transfer under § 547(b).
23 Appellants' answer denied the operative allegations of Trustee's
24 complaint, raised a number of affirmative defenses and asserted
25 counterclaims for declaratory relief and for an award of
26 attorney's fees under Washington law
27 2. Malpractice action is filed
28 On September 17, 2013, to avoid any statute of limitations
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1 defenses, Appellants filed a malpractice action in the Oregon
2 state court against Debtor's former counsel. The state court
3 abated further proceedings in the case on November 5, 2013,
4 pending the outcome of Trustee's preference action.
5 3. The parties' cross-motions for summary judgment on the
preference action
6
7 Trustee moved for summary judgment on his preference claim
8 ("MSJ"). With virtually no analysis, Trustee asserted that the
9 assigned Malpractice Claims constituted "an interest of the debtor
10 in property," as that phrase is used in § 547(b). Trustee further
11 asserted that Appellant's counterclaim for attorney's fees should
12 be dismissed because fees for prosecuting or defending a
13 preference action are not allowed under federal law; Appellants'
14 reliance on Washington law did not alter that argument.
15 Appellants opposed the MSJ and filed a cross-motion for
16 summary judgment on their claims for declaratory relief and
17 attorney's fees ("Cross MSJ"). In short, Appellants argued that
18 because the Malpractice Claims had not accrued under Oregon law
19 before Debtor filed its bankruptcy petition, Debtor had no
20 interest in them on the petition date (outside of the Settlement
21 Agreement, which had not yet been approved). As a result, argued
22 Appellants, the Malpractice Claims did not belong to the estate,
23 and the first element of Trustee’s preference claim — that Debtor
24 transferred "an interest of the debtor in property"5 – could not
25 be established. Thus, argued Appellants, the MSJ should be denied
26
27 5
The remaining elements for a claim under § 547(b) are
undisputed by Appellants; they do not dispute the bankruptcy
28 court's determination with respect to them on appeal.
-5-
1 and their Cross MSJ should be granted to include an award of
2 attorney's fees.
3 Appellants contended that under Washington law, employees are
4 entitled to reasonable attorney's fees in a case where they
5 recover wages that are owed them or in any subsequent proceeding
6 related to the action in which wages are recovered. In the Class
7 Action, Debtor agreed to a stipulated judgment of $1.6 million to
8 compensate employees for lost overtime wages. On behalf of
9 Debtor's estate, Trustee in his preference action sought relief
10 that, if granted, would nullify the stipulated judgment.
11 Appellants argued this subsequent proceeding related directly to
12 the Class Action providing for the recovery of wages, including
13 attorney’s fees against the Trustee, if they prevailed against
14 Trustee.
15 In opposition to the Cross MSJ, Trustee argued the relevant
16 issue involved whether the Malpractice Claims, when assigned to
17 Appellants, constitiuted an "interest of the debtor in property,"
18 as that phrase is used in § 547(b). He further argued the issue
19 did not involve whether the Malpractice Claims accrued under
20 Oregon law after the petition date and as a consequence did not
21 become part of the bankruptcy estate. Trustee asserted that:
22 (1) all causes of action in the case of a non-individual debtor,
23 such as a limited liability company, become property of the
24 debtor's estate under § 541 because a non-individual debtor has no
25 existence or identity separate from its estate after the filing of
26 a bankruptcy case; (2) absent the transfer/assignment, the
27 Malpractice Claims would have been part of Debtor's estate; and
28 (3) no authority supported the notion that a cause of action of a
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1 non-individual debtor is excluded from the debtor's bankruptcy
2 estate based on when it accrues for state law purposes.
3 4. The bankruptcy court's ruling on the preference action
4 The bankruptcy court held a hearing on the parties'
5 cross-motions for summary judgment and announced its oral ruling
6 granting Trustee's MSJ and denying Appellants' Cross MSJ in its
7 entirety. Hr'g Tr. (January 6, 2014) 3:7-9; 18:19-38:15.
8 The court disagreed with Appellants' contention that a legal
9 malpractice cause of action in Oregon does not accrue for purposes
10 of determining a property interest until a client has suffered
11 damages in the form of an adverse "judgment" as a result of his
12 attorney's negligent advice. Id. at 28:7-12. Instead, the cases
13 hold that a "[legal malpractice] cause of action does not accrue
14 until the party has incurred some damage, including expenses
15 incurred in defending a cause of action[,] and is aware that there
16 is a substantial possibility that the damage resulted from the
17 attorney's advice." Id. at 28:12-17. Here, Debtor represented in
18 the Settlement Agreement that it relied upon its attorneys' advice
19 with respect to Debtor's flat rate pay practices and in not
20 providing overtime compensation to the class members. Debtor's
21 practice of not paying overtime compensation to the class members
22 occurred as a result of the legal advice provided by its
23 attorneys. In addition, Debtor represented that it believed in
24 good faith that it possessed valid claims for malpractice against
25 its attorneys arising out of the legal advice provided by them.
26 Given these representations, the bankruptcy court determined that
27 at the time Debtor executed the Settlement Agreement, Debtor
28 suffered damages and believed those damages resulted from its
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1 attorney's malpractice. Id. at 29:9-13. Therefore, the
2 Malpractice Claims when assigned to Appellants constituted an
3 "interest of the debtor in property" within the meaning of
4 § 547(b). Id. at 30:18-23.
5 Alternatively, because Debtor also assigned to Appellants any
6 malpractice claims it may have in the future against its former
7 counsel, the bankruptcy court determined that even if the
8 Malpractice Claims had not yet accrued as of the petition date,
9 the court could avoid the transfer. Id. at 29:14-22.
10 In denying the Cross MSJ, the bankruptcy court observed the
11 general proposition that an individual debtor's prepetition causes
12 of action are property of the estate, while an individual debtor's
13 postpetition causes of action are not property of the estate. Id.
14 at 36:5-20). However, no authority appeared to support
15 Appellants' contention that a cause of action of a non-individual
16 debtor is excluded from the debtor's bankruptcy estate based on
17 when it accrues for state law purposes. The court found that
18 absent Debtor's prepetition assignment to Appellants, the
19 Malpractice Claims would have been property of the estate. As for
20 the attorney's fees requested by Appellants, the court determined
21 that no legal basis existed to award a party attorney's fees for
22 prosecuting or defending a preference action.
23 The bankruptcy court entered a judgment avoiding the
24 prepetition transfer of the Malpractice Claims to Appellants on
25 January 10, 2014. Appellants timely appealed the judgment on
26 January 24, 2014.
27 II. JURISDICTION
28 The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334
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1 and 157(b)(2)(F). We have jurisdiction under 28 U.S.C. § 158.
2 III. ISSUES
3 1. Did the bankruptcy court err in granting summary judgment to
4 Trustee and avoiding the assignment of the Malpractice Claims as a
5 preferential transfer under § 547(b)?
6 2. Did the bankruptcy court err in not awarding reasonable
7 attorney's fees to Appellants for defending the preference action?
8 IV. STANDARDS OF REVIEW
9 A grant of summary judgment is reviewed de novo. Fresno
10 Motors, LLC v. Mercedes Benz USA, LLC, 771 F.3d 1119, 1125 (9th
11 Cir. 2014). "We may affirm 'on any ground supported by the
12 record, regardless of whether the [bankruptcy] court relied upon,
13 rejected, or even considered that ground.'" Id. (citation
14 omitted). Whether a debtor's cause of action belongs to the
15 bankruptcy estate is a question of law we review de novo. State
16 Farm Life Ins. Co. v. Swift (In re Swift), 129 F.3d 792, 795 (5th
17 Cir. 1997). The bankruptcy court's decision to deny a party's
18 request for attorney's fees under § 547(b) is reviewed de novo.
19 See Bertola v. N. Wisc. Produce Co. (In re Bertola), 317 B.R. 95,
20 99 (9th Cir. BAP 2004).
21 V. DISCUSSION
22 A. The bankruptcy court did not err in granting summary judgment
to Trustee and avoiding the assignment of the Malpractice
23 Claims as a preferential transfer under § 547(b).
24 1. Summary judgment standards
25 Summary judgment is appropriate when "there is no genuine
26 dispute as to any material fact and the movant is entitled to
27 judgment as a matter of law." Fresno Motors, LLC, 771 F.3d at
28 1125 (citing Civil Rule 56(a)). Civil Rule 56(a) applies in
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1 adversary proceedings under Rule 7056. Celotex Corp. v. Catrett,
2 477 U.S. 317, 322 (1986); Ilko v. Cal. State Bd. of Equalization
3 (In re Ilko), 651 F.3d 1049, 1052 (9th Cir. 2011).
4 2. Preference actions under § 547(b)
5 Under § 547(b), a trustee may recover certain transfers made
6 by the debtor within 90 days before the bankruptcy petition is
7 filed. Hansen v. MacDonald Meat Co. (In re Kemp Pac. Fisheries,
8 Inc.), 16 F.3d 313, 315 (9th Cir. 1994). A transfer constitutes
9 an avoidable preference if the following six elements are
10 satisfied: (1) a transfer of an interest of the debtor in
11 property; (2) to or for the benefit of a creditor; (3) for or on
12 account of an antecedent debt; (4) made while the debtor was
13 insolvent; (5) made on or within 90 days before the date of the
14 filing of the petition; and (6) enables the creditor to receive
15 more than such creditor would receive in a chapter 7 liquidation
16 of the estate. In re Kemp Pac. Fisheries, Inc., 16 F.3d at 315
17 n.1. Appellants dispute the bankruptcy court's determination as
18 to only the first element — that the Malpractice Claims constitute
19 an interest of the Debtor in property within the meaning of
20 § 547(b).
21 The reach of § 547 is limited to preferential transfers of
22 "an interest of the debtor in property." Taylor Assocs. v.
23 Diamant (In re Advent Mgmt. Corp.), 104 F.3d 293, 295 (9th Cir.
24 1997). "In its simplest terms, property of the debtor may be said
25 to be that which would have been property of the bankruptcy estate
26 had the transfer not taken place." Mitsui Mfrs. Bank v. Unicom
27 Computer Co. (In re Unicom Computer Co.), 13 F.3d 321, 324 (9th
28 Cir. 1994)(citing Begier v. I.R.S., 496 U.S. 53, 58 (1990)).
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1 3. Section 541(a) and accrual of causes of action
2 The question before us is whether the Malpractice Claims
3 accrued prior to the petition date and, thus, would have been
4 property of the estate had Debtor not assigned them to Appellants.
5 Appellants argue that Debtor's interest in the Malpractice Claims
6 against their former counsel did not exist at the commencement of
7 Debtor's bankruptcy case because the claims had not accrued under
8 state law.
9 An "estate" is created when a bankruptcy petition is filed.
10 See § 541(a); Cusano v. Klein (In re Cusano), 264 F.3d 936, 945
11 (9th Cir. 2001). "Property of a bankruptcy estate includes 'all
12 legal or equitable interests of the debtor in property as of the
13 commencement of the case.'" In re Cusano, 264 F.3d at 945
14 (quoting § 541(a)(1)). "In fact, every conceivable interest of
15 the debtor, future, nonpossessory, contingent, speculative, and
16 derivative, is within the reach of § 541." In re Yonikus,
17 996 F.2d 866, 869 (7th Cir. 1993), abrogated on other grounds by
18 Law v. Siegel, 134 S. Ct. 1188, 1196 (2014)(citing Neuton v.
19 Danning (In re Neuton), 922 F.2d 1379, 1382-83 (9th Cir. 1990)).
20 Although state law defines the nature of a debtor's interest in
21 property, Butner v. United States, 440 U.S. 48, 55 (1979), whether
22 this interest is property of the estate is a matter of federal
23 bankruptcy law. Crowson v. Zubrod (In re Crowson), 431 B.R. 484,
24 489 (10th Cir. BAP 2010). See Bd. of Trade of Chi. v. Johnson,
25 264 U.S. 1, 10 (1924)(Property for purposes of federal bankruptcy
26 law is construed broadly to include any state-law right or
27 interest that has some potential value to the debtor.).
28 Assets of the estate properly include any of the debtor's
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1 existing causes of action. In re Cusano, 264 F.3d at 945 (citing
2 Sierra Switchboard Co. v. Westinghouse Elec. Corp., 789 F.2d 705,
3 708 (9th Cir. 1986)); see also United States v. Whiting Pools,
4 Inc., 462, U.S. 198, 205 (1983). A cause of action that has
5 accrued prior to the debtor's petition date is an estate asset
6 that must be scheduled. Boland v. Crum (In re Brown), 363 B.R.
7 591, 604 (Bankr. D. Mont. 2007)(citing In re Cusano, 264 F.3d at
8 947). However, a debtor generally has no duty to schedule a cause
9 of action that did not accrue prior to bankruptcy. In re Cusano,
10 264 F.3d at 947.
11 To determine when a cause of action accrues and, therefore,
12 whether it accrued prior to a debtor's petition date and is an
13 estate asset, we look to state law. In re Cusano, 264 F.3d at 947
14 (citing CBS, Inc. v. Folks (In re Folks), 211 B.R. 378, 394 (9th
15 Cir. BAP 1997)). Because the Malpractice Claims stem from legal
16 advice Debtor received from its attorneys in Oregon, we look to
17 Oregon law to determine whether the Malpractice Claims accrued
18 prepetition.
19 Initially, we note the importance of distinguishing between
20 "accrual" of an action for purposes of ownership6 in a bankruptcy
21 proceeding and "accrual" for purposes of statute of limitations.
22 In re Cusano, 264 F.3d at 947 (citing In re Swift, 129 F.3d at
23 796, 798); In re Brown, 363 B.R. at 605. The Ninth Circuit has
24 determined that the inquiry is different, and the fact a statute
25 of limitations has not yet begin to run at the time of petition
26 does not necessarily bear on whether the cause of action has
27
6
In this memorandum and in this context we equate
28 “ownership” with “an interest of the debtor in property.”
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1 accrued for purposes of ownership in bankruptcy. In re Cusano,
2 264 F.3d at 947. In this context of an interest in property,
3 “accrual” of a cause of action is a right to institute and
4 maintain a suit against a person because some form of legal injury
5 has occurred even though the type and extent of injury is unknown,
6 although some specific and concrete risk of harm affects a
7 person’s interest. In re Swift, 129 F.3d at 795-96. Accrual in
8 the context of a statute of limitations commences the clock
9 running to bar litigation of stale claims. Id. at 796.
10 In Cusano, the debtor had contended that because his
11 prepetition music royalty claims had not accrued until after his
12 bankruptcy case was filed, the claims belonged to him and not the
13 bankruptcy estate. Id. at 946-47. The Cusano court disagreed,
14 holding:
15 We conclude that Cusano's open book account claim accrued
for bankruptcy purposes to the extent that sums were owed
16 on that account at the time he filed his petition. An
action could have been brought for those sums at that
17 time. Our conclusion is not affected by the fact that
limitations on such an action had not yet begun to run.
18
19 Id. at 947.
20 Nonetheless, even though the inquiry of when an action
21 accrues is different than when the statute of limitations begins
22 to run, "it is often necessary to look to state law on the statute
23 of limitations to determine when a cause of action accrues because
24 accrual is rarely discussed apart from the issue of the running of
25 the statute of limitations." In re Swift, 129 F.3d at 796 n.18;
26 In re Brown, 363 B.R. at 605.
27 ///
28 ///
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1 4. The Malpractice Claims constituted an "interest of the
debtor in property," accrued prior to the petition date,
2 and would have been property of the estate absent the
preferential transfer to Appellants.
3
4 Appellants contend that a claim for legal malpractice does
5 not accrue under Oregon law "until the underlying lawsuit has
6 concluded" or "a final order is entered in the underlying action."
7 In other words, Appellants' position is that the Malpractice
8 Claims will not accrue until the state court enters a final
9 adjudication against Debtor in the underlying Class Action. We
10 agree that an adverse ruling against a client in the underlying
11 action certainly may provide the outer limit for when the statute
12 of limitations begins to run on a legal malpractice claim;
13 however, a court's adjudication of that underlying action is not
14 required for accrual of a legal malpractice claim under Oregon law
15 or, more importantly for our purposes here, a determination of an
16 interest in property.
17 A claim for legal malpractice must be filed within two years
18 of the date on which the claim accrues. OR. REV. STAT. 12.010;
19 OR. REV. STAT. 12.110(1). Oregon follows the "discovery" rule for
20 determining when a legal malpractice claim accrues. Guirma v.
21 O'Brien, 316 P.3d 318, 319 (Or. App. 2013)(citing U.S. Nat'l Bank
22 v. Davies, 548 P.2d 966, 968 (Or. 1976)). Under the discovery
23 rule, a legal malpractice claim accrues "when a client knows or,
24 in the exercise of reasonable care, should know that there is a
25 substantial possibility that she has an actionable injury." Id.
26 (citing Kaseberg v. Davis Wright Tremaine, LLP, 265 P.3d 777, 781
27 (Or. 2011)(en banc)). An actionable injury in a legal malpractice
28 claim consists of harm, causation and tortious conduct. Id.
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1 (citing Kaseberg, 265 P.3d at 781).
2 Thus, under the discovery rule, a claim for legal malpractice
3 in Oregon "accrues, and the statute of limitations begins to run,
4 when the client knows or, in the exercise of reasonable care,
5 should know that there is a substantial possibility that (1) he or
6 she has suffered harm, (2) the harm was caused by the lawyer's
7 acts or omissions and, [sic] (3) the lawyer's acts or omissions
8 were tortious." Id. (citing Kaseberg, 265 P.3d at 781).
9 "Although a mere suspicion of wrongdoing is insufficient to
10 trigger the accrual of a claim, it is also unnecessary, under the
11 rule of discovery, for the plaintiff to know to a certainty that
12 each particular element exists. The 'quantum of awareness' is
13 between the two extremes." Cairns v. Dole, 99 P.3d 781, 784 (Or.
14 Ohio App. 2004). See also Melgard v. Hanna, 607 P.2d 795, 796 (Or.
15 App. 1980)("When discovery of professional negligence may be said
16 to occur is an objective matter, for a claimant is charged with
17 knowledge which exercise of reasonable care would disclose when
18 facts are known from which the inference flows.").
19 "Harm" in this instance is limited to harm in the legal
20 sense, "i.e., a collection of facts that the law is prepared to
21 recognize as constituting the 'harm' element of a claim for
22 professional negligence." Stevens v. Bispham, 851 P.2d 556, 560
23 (Or. 1993)(en banc).
24 The question of when a person reasonably should have known
25 facts that would make a reasonable person aware of a substantial
26 possibility that the harm suffered from an attorney's negligence
27 is generally a question of fact, Stevens, 851 P.2d at 560, unless
28 the facts are such that no triable issues exists and the matter
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1 may be resolved as a matter of law. Cairns, 99 P.3d at 784.
2 Here, the parties agree that no triable issues exist, and we
3 discern none on the record. Thus, this matter was properly
4 resolved on summary judgment.
5 None of the cases cited by Appellants or that we located
6 hold, as Appellants contend, that a client's claim for legal
7 malpractice does not accrue until some final adjudication has been
8 entered in the underlying action. In fact, in one case cited by
9 Appellants, Jaquith v. Ferris, 687 P.2d 1083, 1085-86 (Or.
10 1984)(en banc), the Oregon Supreme Court rejected that exact
11 argument.
12 In Jaquith, the plaintiff retained a real estate agent to
13 sell her real property. Id. at 1083. The agent negligently
14 represented that the listed sale price of the property equaled its
15 fair market value. Id. at 1084. The fair market price exceeded
16 its sale price. Plaintiff sued the agent for professional
17 negligence after losing a specific performance suit brought by the
18 buyer. Id. In defense of the agent's statute of limitations
19 argument, the plaintiff claimed that her cause of action did not
20 accrue until she was forced to convey her property at a
21 substantial loss pursuant to the Court of Appeals decision in the
22 underlying suit. Id. at 1085. Determining that plaintiff had
23 become aware of her agent's negligence four months after she
24 signed the sale contract and not when the underlying litigation
25 had been resolved, the Oregon Supreme Court concluded that the
26 occurrence of harm occurred when Plaintiff discovered the property
27 value discrepancy and that discovery determined the accrual of her
28 claim. Id. at 1085-86. Thus, based on the facts of the case, the
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1 court determined that the limitations period began to run as soon
2 as the plaintiff knew of the negligence and of the resulting harm,
3 which included attorney's fees she incurred defending the
4 underlying action.
5 Appellants also cite Fliegel v. Davis, 699 P.2d 674 (Or. App.
6 1985), rev den. 704 P.2d 513 (1985). Appellants point to the
7 Oregon Court of Appeals' statement that "[i]t is unrealistic to
8 require a client to recognize that the lawyer's advice is bad,
9 even after being sued for acting on it, until there no longer
10 exists a realistic possibility that a court will hold that the
11 advice was good." Id. at 675-76. Notably, Fliegel, as with all
12 cases cited by Appellants, involved a statute of limitations
13 involving specific facts and not the accrual of a claim for
14 purposes of determining a property interest. In Fliegel, the
15 plaintiff did not know and could not have known of the attorney’s
16 negligent advice until the Oregon Supreme Court reversed the
17 Oregon Court of Appeals in a related contract case. Id. at 676.
18 While Fliegel may support Appellants' argument to an extent,
19 it certainly does not stand for the absolute "final adjudication"
20 rule Appellants advocate. Further, Oregon courts have repeatedly
21 held that a claim for legal malpractice accrues when the client
22 knows or "should know" a substantial possibility exists that he or
23 she has an actionable injury. Kaseberg, 265 P.3d at 781; Stevens,
24 851 P.2d at 559; Guirma, 316 P.3d at 319; Cairns, 99 P.3d at 784.
25 In other words, certainty of harm is not required and to impose
26 such a requirement as Appellants suggest would render the
27 discovery standard of "should know" nugatory.
28 Contrary to Appellants' argument, the underlying action need
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1 not be finally resolved for a legal malpractice claim to accrue in
2 Oregon, even for statute of limitations purposes. It may be,
3 depending on the facts of the case, that no such claim will accrue
4 until a final resolution occurs as the Oregon Supreme Court found
5 in Davies. 548 P.2d at 969-70. However, Appellants are incorrect
6 that no such claim can ever accrue until then. Appellants make
7 the same mistake made by the plaintiff in Jaquith; they conflate
8 the discrete concepts of cognizable "harm" with "extent of
9 damages." Appellants' position is further undermined by the fact
10 that they filed a malpractice action against Debtor's attorneys in
11 September 2013, before the bankruptcy court ruled on the cross
12 motions for summary judgment, where they argued (and still argue)
13 that the claims had not yet accrued. Clearly, Appellants must
14 have had a good faith belief even then that the Malpractice Claims
15 had accrued for statute of limitations purposes. They cannot,
16 therefore, credibly argue on appeal that the Malpractice Claims
17 will not accrue until the state court renders a final disposition
18 against Debtor in the Class Action.
19 Whether we analyze accrual of the Malpractice Claims for
20 purposes of determining the debtor’s interest in property or the
21 expiration of the statute of limitations, assuming under Cusano
22 that a different standard applies, we conclude the Malpractice
23 Claims accrued prior to Debtor filing its chapter 11 bankruptcy
24 petition.7 Debtor's representations in the Settlement Agreement
25 clearly establish that the Malpractice Claims accrued prepetition.
26
27 7
When a chapter 11 case is converted to a case under
chapter 7, the preference period is measured from the date of the
28 filing of the chapter 11 petition. See § 348(a).
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1 The $1.6 million stipulated judgment against Debtor is a
2 cognizable harm and Debtor knew a substantial possibility existed
3 that it suffered harm as a consequence of its attorneys' negligent
4 legal advice. Even if for some reason the stipulated judgment is
5 not a cognizable harm because the Settlement Agreement has not
6 been approved by the state court overseeing the Class Action,8 no
7 one disputes that Debtor had incurred expenses in defending itself
8 against Appellants on claims Debtor knew, at some point
9 prepetition, resulted from its attorney's professional negligence.
10 See Jaquith, 687 P.2d at 1086 (the incurrence of attorney's fees
11 in defending the underlying action can constitute cognizable
12 "harm")(citing Davies, 548 P.2d at 969).
13 Absent Debtor's prepetition assignment to Appellants, the
14 Malpractice Claims would have been property of the estate. As
15 such, the assignment was an avoidable preferential transfer under
16 § 547(b). Accordingly, the bankruptcy court properly granted
17 summary judgment to Trustee and denied summary judgment to
18 Appellants. Because we are affirming the judgment on this basis,
19 we need not address Appellants' arguments that the bankruptcy
20 court erred in concluding the transfer would still be avoidable
21 even if the Malpractice Claims had not yet accrued as of the
22 petition date or that the bankruptcy court erred in determining
23 that a non-individual debtor is unable to acquire property
24
25 8
Washington Court Rule 23(e) provides:
26 Dismissal or Compromise. A class action shall not be
dismissed or compromised without the approval of the court,
27 and notice of the proposed dismissal or compromise shall be
given to all members of the class in such manner as the court
28 directs.
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1 postpetition.
2 B. The bankruptcy court did not err in denying an award of
attorney's fees to Appellants.
3
4 Appellants contend the bankruptcy court erred in not awarding
5 them attorney's fees for defending against Trustee's preference
6 action, an action they claim is a subsequent proceeding related to
7 the Class Action which involved recoverable wages. The bankruptcy
8 court ruled, without citing to any authority, that as a matter of
9 federal law a party defending a preference action is generally not
10 entitled to recover attorney's fees. The bankruptcy court is
11 correct.
12 This Panel has held that attorney's fees are not recoverable
13 in an action under § 547(b) (absent certain exceptions not
14 relevant here), even if the parties' underlying contract provided
15 for attorney's fees. See Alvarado v. Walsh (In re LCO Enters.,
16 Inc.), 180 B.R. 567, 570-71 (9th Cir. BAP 1995), aff'd, 105 F.3d
17 665 (9th Cir. 1997). This conclusion is because a preference
18 action under § 547(b) is based wholly in bankruptcy law, is unique
19 to bankruptcy and is not an action under the contract which gives
20 effect to the attorney's fees clause in the contract. Id. We see
21 no reason to make any distinction here, where the fees are
22 provided under a state statute. Trustee's action against
23 Appellants did not involve the recovery of wages; it involved the
24 avoidance of a preferential transfer made to them. Further,
25 Appellants did not prevail in this litigation.
26 VI. CONCLUSION
27 For the reasons stated above, we AFFIRM.
28
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