Bruess v. Dietz (In re Bruess)
| Decision Date | 30 September 2019 |
| Docket Number | Bky. No. 14-34922,Adv. No. 18-03097 |
| Parties | In re: Sandra Jo Bruess, Debtor. Sandra Jo Bruess, Plaintiff, v. Michael S. Dietz, Trustee, Defendant. |
| Court | United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — District of Minnesota |
This matter came before the Court on cross-motions for summary judgment filed by the Plaintiff, Sandra Jo Bruess ("Debtor"), and the Defendant Michael Dietz, Trustee of the Debtor's Chapter 7 bankruptcy estate ("Trustee"). Each party claims ownership of a legal malpractice claim that arose from negligent legal advice provided to the Debtor prior to her petition for Chapter 7 relief and which resulted in the reduction of the Debtor's claimed homestead exemption. For the reasons stated below, the Court grants the Trustee's motion for summary judgment and declares the bankruptcy estate owns the claim.
The Debtor petitioned for Chapter 7 relief on December 15, 2014. [Dkt. No. 29 at 2, ¶ 6]; see Petition, In re Bruess, No. 14-34922 (Bankr. D. Minn. Dec. 15, 2014).1 The Debtor claimed an exemption of $562,760.33 in her one-third interest in an agricultural homestead property (the "property") under Minn. Stat. § 510.02 and 11 U.S.C. § 522(b). [Dkt. No. 29 at 2, ¶ 7]. The Debtor's father transferred the one-third interest in the property to the Debtor on January 14, 2013, approximately 700 days before the Debtor petitioned for Chapter 7 relief. [Id. at 1, ¶¶ 3, 8]. The property, as a whole, had an appraised value of $1,800,000.00 in April 2014. [Id. at 1, ¶ 4].
On February 6, 2015, the Trustee objected to the amount the Debtor claimed for the homestead exemption because the Debtor acquired her interest in the property within 1215 days of filing the Chapter 7 petition, requiring the Debtor's homestead exemption be limited to $155,675.00 pursuant to 11 U.S.C. § 522(p). [Id. at 2, ¶ 8]; Motion Objecting to Homestead Exemption, In re Bruess, No. 14-34922 (Bankr. D. Minn. Feb. 6, 2015). On March 31, 2015, the Court sustained the Trustee's objection and limited the Debtor's exemption to $155,675.00 because the Debtor acquired the interest within 1215 days of the bankruptcy filing. [Dkt. No. 29 at 2, ¶ 9]. The Debtor appealed the Court's order and the Bankruptcy Appellate Panel for the 8th Circuit affirmed the Court's decision. [Id. at 2, ¶ 10].
The Debtor received a discharge on April 8, 2015. Order Discharging Sandra Jo Bruess, In re Bruess, No. 14-34922 (Bankr. D. Minn. Apr. 8, 2015). On May 17, 2016, the Court approved the Trustee's motion to sell the Debtor's interest in the property to the Debtor's brother for $400,000.00. [Dkt. No. 29 at 2, ¶ 11]; Order for Sale Free and Clear of Interests, In re Bruess, No.14-34922 . The Trustee distributed $155,675.00 of the sale proceeds to the Debtor reflecting the allowed homestead exemption and applied the remaining funds from the sale of the property to the Trustee's fees and attorney's fees and approximately 44% of the total claims of unsecured creditors. [Dkt. Nos. 1 at 4, ¶¶ 19-20; 24 at 1, ¶ 1; 29 at 2, ¶ 12]. The case was closed on January 18, 2017 and the Trustee was discharged as trustee. [Dkt. Nos. 1 at 4, ¶ 21; 24 at 1, ¶ 1]; see Order, In re Bruess, No. 14-34922 (Bankr. D. Minn. Jan. 18, 2017).
On November 7, 2018, the Court granted the U.S. Trustee's application to reopen the Debtor's bankruptcy case to appoint a trustee to investigate the value of, and to administer any proceeds from, a malpractice claim the Debtor pursued against her bankruptcy attorney. [Dkt. Nos. 1 at 4, ¶ 24; 24 at 1, ¶ 2]; United States Trustee's Application to Reopen Case; In re Bruess, No. 14-34922 (Bankr. D. Minn. Nov. 7, 2018); Order to Reopen Case, In re Bruess, No. 14-34922 (Bankr. D. Minn. Nov. 7, 2018). The Trustee was reappointed as trustee. Appointment of Michael S. Dietz and Approval of Bond, In re Bruess, No. 14-34922 (Bankr. D. Minn. Nov. 7, 2018).
This adversary proceeding was commenced on December 7, 2018. [Dkt. No. 1]. The Debtor sought a declaration that the malpractice claim against her former bankruptcy attorney (the "Original Bankruptcy Attorney") accrued after the bankruptcy was filed and, therefore, is not estate property under 11 U.S.C. § 541(a). [Dkt. No. 1 at 5]. The Debtor also sought a declaration that the Trustee lacks standing to pursue the malpractice claim on behalf of the estate because the malpractice claim is not an asset of the estate. [Dkt. No. 1 at 6]. Finally, the Debtor sought a declaration that the malpractice claim replaced the Debtor's homestead exemption under 11 U.S.C. § 522(b)(3) and Minn. Stat. § 510.02 and therefore is an exempt asset. [Dkt. No. 1 at 7]. The Trustee answered and filed a counterclaim requesting a declaration that the malpractice claim isthe sole property of the bankruptcy estate and, therefore, the Debtor holds no interest in it. [Dkt. No. 24]. The parties filed cross-motions for summary judgment and a stipulation of undisputed facts. [Dkt. Nos. 29-31].
The parties agree that the Debtor had an attorney-client relationship with the Original Bankruptcy Attorney and, in the course of that relationship, the Original Bankruptcy Attorney advised the Debtor to file for bankruptcy relief and advised her that the value of her interest in the homestead, $562,760.33, would be protected in bankruptcy. [Dkt. No. 29 at 1-2, ¶ 5]. The parties agree that a malpractice claim exists against the Original Bankruptcy Attorney for his negligent advice. [Id. at 3, ¶ 13]. The parties agree the Debtor had not suffered compensable harm or had an actionable legal malpractice claim prior to the day she filed her petition for relief. [Dkt. Nos. 1 at 5, ¶ 29; 24 at 2, ¶ 3].
The Court held a hearing on the cross-motions for summary judgment on May 28, 2019. The Court granted the parties the opportunity to further address an issue raised by the Debtor concerning whether the Trustee abandoned the estate's interest in the malpractice claim. On June 7, 2019, the Debtor filed a supplemental brief in support of her argument that the Trustee abandoned the estate's interest in the potential malpractice claim. [Dkt. No. 35]. On June 13, 2019, the Trustee filed a supplemental brief denying that he abandoned the estate's interest in the claim. [Dkt. No. 36]. On August 9, 2019, the parties stipulated to the dismissal of Counts II and III of the Debtor's complaint. [Dkt. No. 38]. Following the submission of all supplemental briefs and the dismissal of Counts II and III, the Court took the cross-motions for summary judgment on the issue of ownership of the malpractice claim under advisement.
The Court has jurisdiction over the case pursuant to 28 U.S.C. § 1334(a), (e), and this is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (O). See In re Titan Energy, Inc., 837 F.2d 325, 328-29 (8th Cir. 1988) (). Pursuant to Federal Rules of Bankruptcy Procedure 7008 and 7012, the parties have consented to the entry of a final order or judgment by this Court.
Summary judgment is governed by Federal Rule of Civil Procedure 56, which is made applicable to this adversary proceeding by Federal Rule of Bankruptcy Procedure 7056. A party moving for summary judgment is entitled to summary judgment "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a).
When parties file cross-motions for summary judgment, each motion is considered independently. In re Deppe, 217 B.R. 253, 259 (Bankr. D. Minn. 1998) (citing Wermager v. Cormorant Twp. Bd., 716 F.2d 1211, 1214 (8th Cir. 1983)). In considering a summary judgment motion, a court must determine whether "there are any genuine factual issues that properly can be resolved only by a finder of fact because they may reasonably be resolved in favor of either party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S. Ct. 2505, 2511 (1986). "In making this determination, the court is required to view the evidence in the light more favorable to the non-moving party and to give that party the benefit of all reasonable inferences to be drawn from the facts." AgriStor Leasing v. Farrow, 826 F.2d 732, 734 (8th Cir. 1987). "Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no genuine issue for trial." Torgerson v. City of Rochester, 643 F.3d 1031, 1042-43 (8th Cir. 2011).
The parties agree that the only issue to be decided in this adversary proceeding is whether the estate holds an interest in the malpractice claim against the Original Bankruptcy Attorney under section 541(a). Section 541(a) provides, "The commencement of a case under section 301, 302, or 303 of this title creates an estate." Such estate includes, but is not limited to, "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). The definition of the estate under section 541(a) is broad, but it "was not designed to enlarge the debtor's rights against others beyond those existing at the commencement of the case." In re N.S. Garrott & Sons, 772 F.2d 462, 466 (8th Cir. 1985). The parties, while stipulating to the essential facts of this case, disagree concerning whether the legal malpractice claim existed at the "commencement of the case" or whether it accrued at a later time. The parties agree that if it existed pre-petition, the estate owns the claim but, if it accrued post-petition, the Debtor owns the claim.
The Debtor argues that the cause of action against the Original Bankruptcy Attorney did not arise until post-petition when the Court reduced her claimed homestead exemption, because that was the time at which the Original Bankruptcy Attorney's "negligence ripened to actual prejudice to the Debtor" and the...
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