O'Dowd v. Trueger

Opinions of the United
2000 Decisions States Court of Appeals
for the Third Circuit
11-28-2000
O'Dowd v. Trueger
Precedential or Non-Precedential:
Docket 99-5479
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Recommended Citation
"O'Dowd v. Trueger" (2000). 2000 Decisions. Paper 236.
http://digitalcommons.law.villanova.edu/thirdcircuit_2000/236
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Filed November 28, 2000
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 99-5479
IN RE: ANNE L. O'DOWD
ANNE L. O'DOWD
Appellant
v.
HOWARD C. TRUEGER;
DAVID B. BIUNNO;
VINCENT D. COMMISA;
MARISA A. TAORMINA;
BIUNNO, COMMISA AND TAORMINA, P.C.
ON APPEAL FROM THE ORDER OF THE
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY
(D.C. Civ. No. 98-4886)
District Court Judge: The Honorable Mary L. Cooper
Argued: July 20, 2000
Before: SLOVITER, NYGAARD, and FUENTES,
Circuit Judges
(Opinion Filed: November 28, 2000)
Magdalena Schardt
Fox, Rothschild, O'Brien & Frankel,
LLP
Princeton Pike Corporate Center
997 Lenox Drive
Building 3
Lawrenceville, NJ 08648-2311
ATTORNEYS FOR APPELLANT
John Badagliacca
Garrity, Graham, Favetta & Flinn
One Lackawanna Plaza
Box 4205
Montclair, NJ 07042
ATTORNEYS FOR APPELLEE
HOWARD C. TRUEGER
Meredith Kaplan Stoma
Morgan, Melhuish, Monaghan,
Arvidson, Abrutyn & Lisowski
651 West Mt. Pleasant Avenue
Suite 200
Livingston, NJ 07039-1673
ATTORNEYS FOR APPELLEES
DAVID B. BIUNNO, VINCENT D.
COMMISA, MARISA A. TOARMINA,
AND BIUNNO, COMMISA AND
TAORMINA, P.C.
OPINION OF THE COURT
FUENTES, Circuit Judge:
This appeal involves two separate legal malpractice
actions filed after the commencement of the bankruptcy
case. The parties do not dispute that the first of the two
actions constitutes property of the bankruptcy estate. The
principal issue presented by this appeal is whether the
second, successive malpractice action is also pr operty of
2
the estate. The appellant, Anne L. O'Dowd, claims that
since the second malpractice action did not accrue until
four years after the bankruptcy filing, it is personal
property and does not belong to the bankruptcy estate. The
District Court disagreed.
Because O'Dowd's second malpractice action is based on
alleged pleading errors committed in the first malpractice
action, and it is the bankruptcy estate that was har med by
the alleged malpractice that is the subject of the second
action, we conclude that it constitutes an inter est in
property acquired by the bankruptcy estate pursuant to 11
U.S.C. S 541(a)(7). Accordingly, we will affirm the order of
the District Court.
I. Factual and Procedural Backgr ound
A.
In 1990, Anne L. O'Dowd purchased an apartment
building for approximately $1 million. Milton Sevack, a
local attorney, represented her in the transaction. O'Dowd
contends that, after the closing, she learned that the
building contained structural flaws and that the seller had
exaggerated the rental income. She claims that the
investment "placed her in [a] direfinancial situation,"
ultimately leading to her filing a Chapter 11 bankruptcy
petition on March 27, 1992 in the United States
Bankruptcy Court for the District of New Jersey.
Thereafter, O'Dowd hired Howar d C. Trueger to represent
her in the bankruptcy proceedings. She also r etained
Trueger to commence a lawsuit against Sevack to recover
damages arising from his mishandling of several matters
including the purchase of the apartment building. In 1993,
Trueger commenced a legal malpractice action against
Sevack in state court, asserting claims solely with respect
to the apartment building purchase (the "Sevack Action").1
According to O'Dowd, Trueger omitted various other claims
_________________________________________________________________
1. Trueger also asserted malpractice claims against individuals other
than Sevack. For simplicity, we will refer to the entire group of
defendants collectively as "Sevack."
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she had against Sevack. There is no dispute that when the
Sevack Action was filed, it became property of her
bankruptcy estate.
On August 3, 1994, the Bankruptcy Court converted
O'Dowd's Chapter 11 reorganization pr oceeding into a
Chapter 7 liquidation proceeding, and a trustee was named
for the estate (the "Trustee"). The Bankruptcy Court then
discharged O'Dowd on December 23, 1994. Soon thereafter,
because of impending ethics charges unr elated to the
instant case, Trueger withdrew as O'Dowd's counsel. To
replace Trueger, O'Dowd retained the law firm of Biunno,
Commisa & Taormina, P.C.2
In May 1995, the Trustee proposed to settle the Sevack
Action for $10,000. O'Dowd formally objected to what she
believed was a low settlement figure. In an order dated July
24, 1995, the Bankruptcy Court denied the Trustee's
proposed settlement and allowed O'Dowd to pr oceed with
the Sevack Action in state court. In retur n, the Trustee was
to be entitled to the first $10,000 of any net pr oceeds. The
order also provided that "the balance[of any recovery] may
be retained by the debtor, as having been abandoned" by
the Trustee.3 After the Bankruptcy Court's decision,
O'Dowd dismissed Biunno and retained Hilton L. Stein to
represent her in the Sevack Action. In 1996, Stein settled
the suit for an undisclosed amount.
Shortly after the settlement, O'Dowd allegedly discovered
that Trueger had left out a number of her claims in the
_________________________________________________________________
2. The law firm of Biunno, Commisa & Taormina, P.C. includes attorneys
David B. Biunno, Vincent D. Commisa, and Marisa A. Taormina. We will
refer collectively to the firm and these individuals as "Biunno."
3. We reject O'Dowd's contention that the malpractice lawsuit against
Trueger and Biunno constitutes personal pr operty because all claims in
excess of $10,000 were abandoned by the T rustee. Abandonment is an
intentional act and nothing in the recor d supports a finding that the
Trustee intended to abandon the omitted claims. See Hanover Ins. Co. v.
Tyco Indus. Inc., 500 F.2d 654, 657 (3d Cir. 1974); see also Fed. R.
Bankr. P. 6007 (providing for abandonment of property by way of
motion). Moreover, at the time of the bankruptcy order, neither the
Trustee, nor the court, appeared to have had any idea that the
unasserted claims existed.
4
Sevack Action, but that the claims were now time-barred
under the applicable New Jersey statute of limitations.
Thus, in November 1996, O'Dowd brought a second legal
malpractice action against both Trueger and Biunno in the
New Jersey Superior Court (the "Trueger/Biunno Action").
In her complaint, O'Dowd alleged that Trueger had failed to
plead all of her potential claims against Sevack. She also
contended that if Biunno had properly infor med her of
Trueger's pleading mistake, she could have"purchased" the
omitted claims from the Trustee along with the apartment
building claims.4 O'Dowd further asserted that she settled
the Sevack Action for substantially less than what she
could have recovered had Trueger and Biunno properly
raised and pled all of the claims against Sevack.
Biunno filed a motion in state court to dismiss O'Dowd's
complaint on the ground that the Trueger/Biunno Action
constituted property of the bankruptcy estate and therefore
O'Dowd lacked standing to prosecute the matter . The state
court ordered O'Dowd to seek a deter mination in the
Bankruptcy Court as to whether that malpractice action
constituted estate property. In December 1997, O'Dowd
applied to the Bankruptcy Court for a ruling on that issue.
B.
On July 21, 1998, the Bankruptcy Court issued a written
opinion concluding that the Trueger/Biunno Action
constituted property of the bankruptcy estate. Relying on
the Supreme Court's decision in Segal v. Rochelle, 382 U.S.
375 (1966), the Bankruptcy Court held that the malpractice
claims were sufficiently rooted in O'Dowd's past to be
_________________________________________________________________
4. We take O'Dowd to mean that, had she known of the pleading failure,
she would have sought to include the omitted claims under the same
terms ordered by the Bankruptcy Court in denying the Trustee's
settlement proposal. As this would not have involved an acquisition of
property for valuable consideration, O'Dowd would not have technically
"purchased" these omitted claims fr om the Trustee. A true purchase of
the omitted claims would have been void under the New Jersey common
law prohibition against assigning prejudgment tort claims. See generally
Integrated Solutions v. Service Support Specialties, Inc., 124 F.3d 487
(3d
Cir. 1997).
5
considered property of the estate pursuant to 11 U.S.C.
S 541(a)(1).
Under an alternative analysis, the court also held that
the claims constituted property of the estate pursuant to 11
U.S.C. S 541(a)(7), which includes "[a]ny interest in property
that the estate acquires after the commencement of the
case." Finally, the court held that O'Dowd was barred
under 11 U.S.C. S 108 from bringing the T rueger/Biunno
Action in the first instance because she had failed to
request that the Trustee assert the malpractice claims on
her behalf.
O'Dowd appealed the Bankruptcy Court's decision to the
United States District Court for the District of New Jersey.
By order entered May 19, 1999, the District Court rejected
the Bankruptcy Court's S 541(a)(1) analysis, but upheld the
inclusion of the Trueger/Biunno Action in the estate under
S 541(a)(7).5 On appeal from this order, O'Dowd argues that
the District Court incorrectly determined that the
Trueger/Biunno Action constituted property of the estate
under S 541(a)(7). In response, Appellees Trueger and
Biunno argue that the lower court's deter mination should
be upheld under both S 541(a)(1) and S 541(a)(7).6
_________________________________________________________________
5. In a footnote, the District Court declined to address the merits of the
Bankruptcy Court's ruling that the Trueger/Biunno Action was barred
under S 108, finding that it constituted only dictum. O'Dowd challenges
this conclusion on appeal. However, like the District Court, our
determination that the Trueger/Biunno Action constitutes property of
the estate pursuant to S 541(a)(7) obviates our need to address this
issue. See Pennsylvania Dep't of Pub. Welfare v. Markiewicz, 930 F.2d
262, 266 (3d Cir. 1991); accord In re Cassidy, 892 F.2d 637, 640 (7th
Cir. 1990).
6. Appellees may advance this argument even though they did not file a
cross-appeal. See E.F. Operating Corp. v. American Bldgs., 993 F.2d
1046, 1048 (3d Cir. 1993). However, because we conclude that the
Trueger/Biunno Action constitutes property of the estate pursuant to
S 541(a)(7), we find it unnecessary to addr ess Appellee's alternative
basis
for affirming the District Court. Accor dingly, we do not express any
opinion as to the merits of the District Court'sS 541(a)(1) ruling, except
to note that the Trueger/Biunno Action seeks r eimbursement for the
mishandling of the first malpractice action, which clearly had roots in
O'Dowd's pre-bankruptcy past. Ordinarily, the degree of the nexus
between a suit based on pre-petition conduct and a derivative post-
petition malpractice action will determine whether the latter constitutes
property of the estate under S 541(a)(1).
6
The Bankruptcy Court exercised jurisdiction over this
proceeding pursuant to 28 U.S.C. S 157. The District Court
exercised jurisdiction to hear the appeal under 28 U.S.C.
S 158. We have jurisdiction to hear this appeal pursuant to
28 U.S.C. S 1291 and 28 U.S.C. S 158(d). Our review of the
District Court's decision to affirm the Bankruptcy Court's
order is plenary.
II. Discussion
A.
Under Title 11 of the United States Code (the
"Bankruptcy Code"), the filing of a voluntary petition in
bankruptcy court commences a bankruptcy proceeding and
creates an estate. 11 U.S.C. S 541(a). The estate:
is comprised of all the following property, wherever
located and by whomever held:
(1) Except as provided in subsections (b) and (c)(2) of
this section, all legal or equitable interests of the
debtor in property as of the commencement of the
case.
. . . .
(7) Any interest in property that the estate acquires
after the commencement of the case.
Accordingly, with limited exceptions (none of which apply
here), the estate encompasses everything that the debtor
owns upon filing a petition, as well as any derivative rights,
such as property interests the estate acquires after the case
commences. See, e.g., United States v. Whiting Pools, Inc.,
462 U.S. 198, 203-05 (1983) (term "estate" refers to the
grouping of the debtor's assets which ar e subject to the
claims of creditors).
We have previously emphasized Congr ess' intent to
delineate in broad terms what constitutes property of the
estate. See Integrated Solutions, Inc. v. Service Support
Specialities, Inc., 124 F.3d 487, 490-91 (3d Cir. 1997). As
the legislative history for S 541 states,"[i]t includes all
kinds of property, including tangible or intangible property,
7
causes of action . . . and all other forms of property
currently specified in section 70a of the Bankruptcy Act."
H.R. Rep. No. 95-595, at 367 (1977), reprinted in 1978
U.S.C.C.A.N. 5963, 6323. The legislative purpose of this
section was to move away from the "complicated melange of
references to State law" and to "determine[ ] what is
property of the estate by a simple refer ence to what
interests in property that debtor has at the time of the
commencement of the case." Id. at 175, 1978 U.S.C.C.A.N.
at 6136 (footnotes omitted).
While federal law defines what types of pr operty comprise
the estate, state law generally determines what interest, if
any, a debtor has in property. Congr ess Talcott Corp. v.
Gruber, 993 F.2d 315, 319 (3d Cir . 1993) (citing Aquilino v.
United States, 363 U.S. 509, 513 (1960)); In re Roach, 824
F.2d 1370, 1374 (3d Cir. 1987) (quoting Butner v. United
States, 440 U.S. 48, 54 (1979)). As the Supr eme Court has
instructed:
[p]roperty interests are cr eated and defined by state
law. Unless some federal interest requir es 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. Unifor m
treatment of property interests by both state and
federal courts within a State serves to reduce
uncertainty, to discourage forum shopping, and to
prevent a party from receiving "a windfall merely by
reason of the happenstance of bankruptcy."
Butner v. United States, 440 U.S. 48, 55 (1979) (quoting
Lewis v. Manufacturers Nat'l Bank of Detr oit, 364 U.S. 603,
609 (1961)).
O'Dowd argues that the Trueger/Biunno Action does not
constitute property subject to inclusion in the estate. She
maintains that her malpractice claims did not accrue until
1996, while the estate came into existence four years earlier
in 1992 when she filed her petition. It was only in 1996,
she contends, that she became aware of her for mer
attorneys' negligence and that the omitted claims were
time-barred under state law. Thus, accor ding to O'Dowd, all
the legally relevant events that comprise the malpractice
8
action occurred well after the commencement of her
bankruptcy case. Since the claim was not legally cognizable
"as of the commencement of the case," she contends that it
cannot constitute "property" subject to inclusion in a
federal bankruptcy estate. She also asserts that a legal
malpractice claim, by its very nature, can only belong to the
debtor, and thus can be acquired only by the debtor.
Against this background, we turn to New Jersey law to
determine when the Trueger/Biunno Action accrued. We
then address O'Dowd's argument, which implicates 11
U.S.C. S 541(a)(7), that a legal malpractice claim can never
become the property of a bankruptcy estate because it
necessarily inures only to the debtor.
B.
We agree with O'Dowd that, under New Jersey law, the
Trueger/Biunno Action did not accrue until 1996. In New
Jersey, "a legal-malpractice action accrues when an
attorney's breach of professional duty proximately causes a
plaintiff 's damages." Grunwald v. Bronkesh, 621 A.2d 459,
463 (N.J. 1993); accord Olds v. Donnelly , 696 A.2d 633, 641
(N.J. 1997). In special cases, such as malpractice actions,
New Jersey courts have adopted the discovery rule"to
postpone the accrual of a cause of action" when a plaintiff
is unaware of the facts underlying a claim. Bronkesh, 621
A.2d at 463.
Accordingly, the Trueger/Biunno Action did not accrue
until O'Dowd first learned of the omitted claims in the
Sevack Action. Thus, any property inter est that O'Dowd
had in the Trueger/Biunno Action did not come into
existence until 1996, four years after she filed her
bankruptcy petition.
O'Dowd's primary contention is that, since the
Trueger/Biunno Action is a post-petition tort claim, it can
belong only to the debtor. She relies on caselaw in which
courts have found that a debtor's post-petition cause of
action did not constitute property of the estate. See, e.g.,
Bobroff v. Continental Bank, 43 B.R. 746, 750-51 (E.D. Pa.
1984) (debtor's tort claims were not pr operty of estate
where events giving rise to claims occurr ed following filing
9
of debtor's Chapter 7 petition), aff 'd, 766 F.2d 797 (3d Cir.
1985); Brunswick Bank & Trust Co. v. Atanasov (In re
Atanasov), 221 B.R. 113, 116-17 (Bankr. D.N.J. 1998)
(debtor's malicious prosecution claim was not property of
estate as it arose post-petition when indictment was
dismissed); In re Doemling, 127 B.R. 954, 955-57 (Bankr.
W.D. Pa. 1991) (debtors' tort claim arising from automobile
accident five months after filing of bankruptcy petition was
not property of estate); Mathews v. United States (In re
Mathews), 184 B.R. 594, 601 (Bankr. S.D. Ala. 1995)
(Chapter 7 debtors' compensatory damages awar d against
IRS was awarded to debtors personally, and not as estate
property, where award was premised on IRS actions that
primarily took place post-discharge).
However, none of these cases involved claims that could
be traced directly to pre-petition conduct in the way that
the Trueger/Biunno Action can be traced to the Sevack
Action. The injury alleged in the Trueger/Biunno Action is
that O'Dowd suffered a diminished r ecovery in the Sevack
Action as result of her former attor neys' negligence. Put
differently, the misconduct of O'Dowd's former bankruptcy
attorneys reduced the value of her malpractice lawsuit
against Sevack. While we acknowledge that the conduct
giving rise to the malpractice claim occurred post-petition,
we find it conceptually impossible to sever the
Trueger/Biunno Action from the underlying Sevack Action.
Moreover, even though O'Dowd did not r etain Trueger and
Biunno until after she had filed her Chapter 11 petition,
the malpractice claims are traceable dir ectly to O'Dowd's
pre-bankruptcy dealings with Sevack.
Moreover, in the cases cited by O'Dowd, the alleged
wrongful conduct damaged the debtor personally and had
no effect on the estate. Indeed, the courts in these cases
emphasized that the inquiry often depends on whether the
estate or the debtor suffers the harm. Accordingly, only in
the post-petition situation where the debtor is personally
injured by the alleged malpractice, while the estate is
concomitantly not affected, is it appr opriate to assign the
malpractice to the debtor. See, e.g., Osborn v. Durant Bank
& Trust Co. of Durant, Okla. (In re Osborn), No. 95-7118,
95-7124, 95-7121, 83 F.3d 433, 1996 WL 196695, at *4-5
10
(10th Cir. Apr. 24, 1996) (table) (legal malpractice claim was
property of debtors because it sought r ecovery for injury to
debtors personally and not to estate).
Here, any alleged malpractice resulting fr om the omission
of claims in the Sevack Action would affect only the estate,
not O'Dowd, because it would have reduced the value of the
Sevack Action, which was property of the estate. In other
words, because the Sevack Action belonged to the estate,
including the claims that could have been but wer e not
asserted, a malpractice suit in connection with those
omitted claims likewise belongs to the estate and the
estate's creditors.
Finally, O'Dowd argues that the District Court should
have performed a balancing test to deter mine whether
O'Dowd or the estate suffered the gr eatest harm. While we
decline to address the propriety of r esorting to such a
balancing test, we note that since the omitted claims
constitute estate property, O'Dowd cannot demonstrate that
she suffered any harm as a r esult of the malpractice alleged
in the Trueger/Biunno Action. Thus, she personally was
not affected by any diminishment in their value, and
consequently any balancing would weigh overwhelmingly in
favor of the estate.
O'Dowd's bankruptcy estate is the true injur ed party. It
owned the omitted claims in the Sevack Action and, if the
allegations in the Trueger/Biunno Action ar e true, it is the
estate that deserves to be made whole. We therefore
conclude that since the estate acquired the T rueger/Biunno
Action after the commencement of the case, the lawsuit
constitutes estate property under S 541(a)(7) of the
Bankruptcy Code, which provides that pr operty of the
estate includes "[a]ny interest in pr operty that the estate
acquires after the commencement of the case."
III. Conclusion
For all the foregoing reasons, we hold that the
Trueger/Biunno Action constitutes property of O'Dowd's
bankruptcy estate under 11 U.S.C.S 541(a)(7), and therefore
11
we will affirm the District Court.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
12