A Chapter 7 trustee could not bring a malpractice claim on a bankruptcy estate's behalf against an attorney who allegedly advised the debtor pre-petition to thwart a creditor by fraudulently transferring property into trust, a US Bankruptcy Court judge has ruled.
After debtor Steven Lloyd filed for bankdruptcy, trustee Anne J. White of Boston brought an adversary claim to recover the property for the estate.
When White sought to recoup additional funds for the estate via a legal malpractice claim against the defendant, attorney Michael T. Gaffney, he countered that no claim had accrued as of the time of Lloyd's petition.
Accordingly, the defendant argued, the trustee lacked standing to bring the claim.
Judge Elizabeth D. Katz agreed rejecting the trustee's argument that the US Supreme Court's 1966 Segal v. Rochelle decision should guide her decision. Segal found that claims sufficiently rooted in a debtor's pre-bankruptcy past and not entangle with the debtor's ability to make a fresh start are property of the bankruptcy estate.
"The Supreme Court...has not cited to Segal at all following the enactment of the Bankruptcy Code. In contrast, in interpreting provisions of the Bankruptcy Code, the Court has continued to cite to (its1979 Butner v. US decision) in reiterating that "Congress has generally left the determination of property rights in the assets of a bunkrupt's estate to state laws," Katz wrote, adding that under Massachusetts law, the operative question is whether the debtor suffered pre-petition harm.
"The Trustee asserts that the malpractice claims arose prepetition based on the Debor's 'exposure' to possible prepetition fraudulent transfer claims and in light of the Debtor's awaremenss of potential 'issues' with the transfer of the ... property," Katz continued, dismissing the complaint.
"However, the Trustee has not indicated any actual prepetition harm to the Debtor that would have resulted in the accrual of the claims alleged in the complaint."
Gaffney's attorney, Avana Anderson of Boston, declined to comment and White, the trustee, could not be reached for comment prior to deadline.
Charles P. Kazarian, Boston, "The court's whole thing about what the debtor knew (at the time he filed his petition) really isn't relevant. It's what he should have known."
