In re Alvarez

• Citation: 224 F.3d 1273
• Decision Date: 30 August 2000
• Docket Number: No. 99-12918,99-12918
• Parties: (11th Cir. 2000) In re: Fernando R. ALVAREZ, Debtor. Johnson, Blakely, Pope, Bokor, Ruppel & Burns, P.A., Plaintiff-Appellee, v. Fernando R. Alvarez, Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (11th Circuit)

Page 1273

224 F.3d 1273 (11th Cir. 2000)

In re: Fernando R. ALVAREZ, Debtor.

Johnson, Blakely, Pope, Bokor, Ruppel & Burns, P.A., Plaintiff-Appellee, v. Fernando R. Alvarez, Defendant-Appellant.

No. 99-12918.

United States Court of Appeals,

Eleventh Circuit.

Aug. 30, 2000.

Sept. 12, 2000

[Copyrighted Material Omitted] Appeal from the United States District Court for the Middle District of Florida. (No. 98-02261-CIV-T-23B), Steven D. Merryday, Judge.

Before ANDERSON, Chief Judge, and DUBINA and HILL, Circuit Judges.

ANDERSON, Chief Judge:

Fernando Alvarez appeals from the district court's order reversing an order of the bankruptcy court. His appeal raises the question of whether his legal malpractice cause of action, relating to the filing of his petition for bankruptcy, is property belonging to him as an individual or is property of his bankruptcy estate. We conclude that the malpractice claim is property of Alvarez's bankruptcy estate, and accordingly, we affirm the order of the district court.

I. FACTUAL & PROCEDURAL BACKGROUND

Fernando Alvarez filed a complaint against the law firm of Johnson, Blakely, Pope, Bokor, Ruppel & Burns ("Johnson Blakely") in Florida state court, alleging legal malpractice. The crux of Alvarez's malpractice claim is his allegation that Johnson Blakely negligently disregarded his instructions to file a reorganizational bankruptcy case (Chapter 11) on his behalf and instead filed a liquidating bankruptcy case (Chapter 7). Alvarez's complaint alleged that as a result of Johnson Blakely's negligent actions, Alvarez "sustained damages including, but not limited to, the loss of control and ownership of substantial assets, including ownership interests in stocks and a chose in action, loss of opportunity, loss of use of the assets, and other damages recoverable at law."

Johnson Blakely removed the malpractice action to the United States Bankruptcy Court for the Middle District of Florida.¹ Johnson Blakely subsequently filed a motion for judgment on the pleadings contending that the claims asserted in Alvarez's complaint are property of Alvarez's bankruptcy estate, not property of Alvarez the debtor, and that, accordingly, those claims can only be asserted by the bankruptcy trustee or, at least, the trustee is an indispensable party to the litigation. Thus, Johnson Blakely argued that unless the trustee is joined, the complaint should be dismissed.

The bankruptcy court held that the claims in Alvarez's complaint are not property of the estate and that, as a result, the trustee is not an indispensable party to the litigation. The bankruptcy court denied Johnson Blakely's motion for judgment on the pleadings, and Johnson Blakely appealed to the district court. The district court reversed, holding that the malpractice action is property of Alvarez's bankruptcy estate and that the bankruptcy trustee is indispensable to maintenance of the action. The district court remanded the case to the bankruptcy court for further proceedings consistent with its order. From the district court's order, Alvarez now appeals to this Court.²

II. DISCUSSION

The issue we must decide is whether or not Alvarez's legal malpractice cause of action is property of his bankruptcy estate. Section 541(a)(1) of the Bankruptcy Code defines "property of the estate" to include "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. 541(a)(1).³ The question, then, is whether this malpractice claim constituted a "legal or equitable [interest] of [Alvarez] in property" "as of" the commencement⁴ of his bankruptcy case, such that the malpractice claim became property of his estate. We note that the parties disagree about whether this question is governed by state law⁵ or federal bankruptcy law.⁶ We decline to decide the question of which law governs this determination, because in either event, we conclude that this legal malpractice claim is property of Alvarez's bankruptcy estate.

A. Florida Law

Under Florida law, a cause of action for legal malpractice has three elements: (1) the attorney's employment; (2) the attorney's neglect of a reasonable duty; and (3) the attorney's negligence was the proximate cause of loss to the client. See Steele v. Kehoe, 747 So.2d 931, 933 (Fla.1999). The third element of a legal malpractice claim, that the attorney's negligence be the proximate cause of loss to the client, is also referred to as the concept of "redressable harm." Lenahan v. Russell L. Forkey, P.A., 702 So.2d 610, 611 (Fla. 4th DCA 1997). Pursuant to Fla. Stat. Ann. 95.031(1), a cause of action accrues "when the last element constituting the cause of action occurs."⁷ Alvarez argues that the third element of his malpractice cause of action, that of redressable harm, did not occur until after the filing of his bankruptcy petition.⁸ We disagree.

At the moment Alvarez's bankruptcy petition was filed, his Chapter 7 bankruptcy estate was created, see 541(a) ("The commencement of a case under section 301 ... of this title creates an estate."), his interests in property vested in the estate, and all of the legal ramifications attendant to creation of such an estate came into existence.⁹ The transfer of Alvarez's interests in property to a Chapter 7 bankruptcy estate rather than a Chapter 11 bankruptcy estate as Alvarez intended is sufficient injury to indicate that Alvarez had a cognizable interest in this legal malpractice claim at the precise moment his Chapter 7 petition was filed. Alvarez suggests, without pointing to any relevant authority, that the harm to him did not occur until some later time, for example when the trustee in bankruptcy failed to realize from one of the assets as much as Alvarez alleges should have been realized. We disagree. Alvarez's loss of ownership and control of his assets upon the bankruptcy filing constitutes a significant and tangible change which obviously caused harm to him. No one would suggest that the victim of a conversion is not harmed when deprived of ownership and control of an asset.¹⁰ While we have found no Florida cases directly on point,¹¹ we readily conclude that redressable harm occurred at the moment of bankruptcy filing.

To the extent that Alvarez suggests that redressable harm occurring at the instant of filing is insufficient to make this cause of action part of his bankruptcy estate because the estate includes only interests the debtor holds immediately prior to filing,¹² and not those interests arising simultaneously with filing, we again disagree. The plain language of 541(a)(1) includes in the estate interests of the debtor "as of" filing, not interests of the debtor "before" or "prior to" filing. See Jones v. Hyatt Legal Services (In re Dow), 132 B.R. 853, 860 (Bankr.S.D.Ohio 1991) (noting that the language "as of" is significant and holding that where damages caused by alleged malpractice occurred at the point of filing of the petition, the cause of action was property of the estate). Moreover, Congress intended the scope of 541(a)(1) to be broad. See United States v. Whiting Pools, Inc., 462 U.S. 198, 204-05, 103 S.Ct. 2309, 2313, 76 L.Ed.2d 515 (1983); S.Rep. No. 95-989, at 82 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5868; H.R.Rep. No. 95-595, at 367 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6323. We thus conclude that, looking to state law, this interest in property arising simultaneously with the filing of Alvarez's bankruptcy petition was an interest of Alvarez in property "as of" the commencement of the case, and thus, property of the estate under 541.

B. Federal Bankruptcy Law

We reach the same conclusion by applying federal bankruptcy law. In Segal v. Rochelle, 382 U.S. 375, 86 S.Ct. 511, 15 L.Ed.2d 428 (1966), the Supreme Court considered the question, under the former Bankruptcy Act,¹³ of whether or not the debtors' claims for loss-carryback tax refunds were property of the debtors' bankruptcy estates or property of the individual debtors. Under the tax laws, the loss-carryback refund claims could be asserted only when the tax year had closed, which was post-petition; thus, the tax refunds in Segal were sought and received after the filing of the bankruptcy. In reaching the conclusion that these potential claims for refunds were property of the bankrupts at the time their bankruptcy petitions were filed, the Court did not look to state law. Instead, the Court noted:

Whether an item is classed as "property" by the Fifth Amendment's Just- Compensation Clause or for purposes of a state taxing statute cannot decide hard cases under the Bankruptcy Act, whose own purposes must ultimately govern.

The main thrust of 70a(5) is to secure for creditors everything of value the bankrupt may possess ... when he files his petition. To this end the term "property" has been construed most generously and an interest is not outside its reach because it is novel or contingent or because enjoyment must be postponed.

382 U.S. at 379, 86 S.Ct. at 515. The Court determined that two key elements pointing toward realization of a tax refund existed at the time the bankruptcy petitions were filed: 1) taxes had been paid on net income in prior years, and 2) the year of bankruptcy, at that point, exhibited a net operating loss. See id. at 380, 86 S.Ct. at 515. The Court concluded that the loss-carryback refund claims were "sufficiently rooted in the pre-bankruptcy past ... that [they] should be regarded as 'property' " under the Bankruptcy Act. Id.¹⁴

Applying the rationale of Segal to the instant case, we conclude that Alvarez's legal malpractice cause of action is also sufficiently rooted in his pre-bankruptcy past that it should be considered property of Alvarez as of the commencement of his bankruptcy case, and thus property of his estate. Alvarez established an attorney-client relationship with Johnson Blakely prior to his filing for bankruptcy, and this cause of action arises directly out of Alvarez's...