Swift, Matter of
| Decision Date | 08 December 1997 |
| Docket Number | No. 96-50917,96-50917 |
| Citation | 129 F.3d 792 |
| Parties | Bankr. L. Rep. P 77,572, 12 Tex.Bankr.Ct.Rep. 22 In the Matter of: David Marvin SWIFT, doing business as State Farm Insurance Companies, Debtor. STATE FARM LIFE INSURANCE COMPANY, Appellant, v. David Marvin SWIFT, Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Laurie A. Weiss, Fulbright & Jaworski, San Antonio, TX, for Appellant.
Robert E. Golden, Charles M. Jefferson, San Antonio, TX, for Appellee.
Appeal from the United States District Court for the Western District of Texas.
Before WISDOM, JOLLY and EMILIO M. GARZA, Circuit Judges.
This bankruptcy case presents a complex issue of ownership of causes of action against the State Farm Insurance Co. (State Farm) for its alleged negligence and breach of fiduciary duty that resulted in the loss of a bankruptcy exemption claimed by David Swift, the debtor. We hold that the causes of action became property of the bankruptcy estate but are exempt under Tex. Prop.Code § 42.0021. We AFFIRM the district court's decision.
Swift was a State Farm insurance agent who participated in a Keogh retirement plan administered by State Farm. 1 In 1986, Congress substantially revised the federal tax code. As of February 1990, State Farm had not amended its Keogh plan to comply with the new laws. In February 1990, Swift contemplated filing bankruptcy. Fearing that his Keogh plan would not qualify as exempt property under the Texas bankruptcy exemptions, Swift converted his Keogh plan into a self-directed Individual Retirement Account (IRA).
On or about March 1, 1990, Swift filed a voluntary petition for bankruptcy under Chapter 7. Swift elected to take the Texas bankruptcy exemptions. 2 He asserted that his IRA valued at $126,798.02 at that time, was exempt. 3 Two creditors objected. The bankruptcy court found that the IRA was not exempt and, therefore, was part of the estate available for distribution to Swift's creditors. 4 The bankruptcy court also denied discharge of the creditors' claims against Swift because it found that Swift transferred, concealed, or disposed of property within one year of filing bankruptcy with the intent to hinder, delay, or defraud creditors. 5 We affirmed the denial of discharge. 6
Swift filed the present suit against State Farm in state court alleging that State Farm is liable for the lost exemption for his IRA under theories of negligence and breach of fiduciary duty. 7 State Farm removed this action to the bankruptcy court. Swift filed a motion to remand the case. State Farm filed a motion for summary judgment, arguing that the causes of action were property of the bankruptcy estate, not of Swift individually. The bankruptcy court denied State Farm's motion. 8 It granted Swift's motion for a partial summary judgment and remanded the case to the state courts. The bankruptcy court stayed its remand order pending the outcome of this appeal. On October 28, 1996, the district court affirmed the bankruptcy court's ruling. State Farm appeals.
The legal issue that we must decide is whether the causes of action against State Farm are property of Swift as an individual or whether those causes of action belong to the bankruptcy estate. Our answer depends upon an interpretation and application of Sec. 541 of the Bankruptcy Code. This is purely a question of law which we review de novo. 9
Upon the filing of bankruptcy, Sec. 541 of the Bankruptcy Code creates an estate that consists of "all legal or equitable interests of the debtor in property as of the commencement of the case". 10 This definition is very broad, and includes causes of action belonging to the debtor at the commencement of the case. 11 Our first task, then, is to determine whether Swift had a property interest in the causes of action against State Farm at the time he filed bankruptcy. Stated differently, we must determine whether Swift's causes of action had accrued. To determine this, we look to Texas law. 12
"The accrual of a cause of action means the right to institute and maintain a suit, and whenever one person may sue another a cause of action has accrued." 13 Swift's causes of action are for negligence and breach of fiduciary duty based upon negligence. Damages are an essential element of each of these theories. 14 Therefore, some form of legal injury must occur before these causes of action accrue. 15 But, it is not necessary to know immediately the type and extent of that injury. 16 All that is needed is a specific and concrete risk of harm to the party's interest. 17 These rules are well-established. Recent cases applying these rules have muddied the waters, however. The basic problem is that the issue of accrual of a cause of action rarely occurs apart from the issue of when the statute of limitations begins to run for a particular cause of action. These are two separate and distinct issues aimed at very different problems. 18
The accrual of a cause of action is a concept closely tied to the fundamental purpose of a cause of action--to make an injured party whole. 19 Damages, then, are a prerequisite to a cause of action. 20 Without damages, there is no injury to remedy.
The purpose of statutes of limitation is different: they bar the litigation of stale claims at a time removed from when the pertinent events occurred. 21 The concept of accrual is important to the statute of limitations because accrual sets the clock in motion. But the running of the statute of limitations is influenced by more than just the concept of accrual. In this connection, to avoid harsh and unfair consequences that may result from the premature running of the statute of limitations, Texas adopted the "discovery" rule. Under this rule, the statute of limitations does not begin to run until the injured party "discovers" or with the exercise of reasonable care and diligence should have discovered that a particular injury has occurred. 22 The result is that the statute of limitations may begin to run on a date other than that on which the suit could first be maintained. A classic example illustrates this. Consider a case of medical malpractice in which the treating physician has left a dangerous metal instrument inside the body of his patient. At the time the doctor finishes the surgery, the doctor has completed a tort. He has violated a legal duty owed to the patient, and the patient was injured by that violation. If the patient instituted suit at this moment, his suit would be viable. The statute of limitations has not begun to run, however. Under the discovery rule, the statute of limitations is tolled until the patient either discovers or should have discovered that an injury has occurred. This example shows that the dates of accrual and the start of the running of the statute of limitations may vary greatly. Unfortunately, many cases applying the principles of the discovery rule are written in terms of accrual.
The blurring of these two issues begins with Atkins v. Crosland, 23 a case whose logic and reasoning is sound. In Atkins, the Texas Supreme Court addressed the concept of accrual for purposes of the statute of limitations in the context of an accountant malpractice suit. The court began:
The test to determine when the statute of limitations begins to run against an action sounding in tort is whether the act causing the damage does or does not of itself constitute a legal injury, that is, an injury giving rise to a cause of action because it is an invasion of some right of plaintiff. If the act is of itself not unlawful in this sense, and plaintiff sues to recover damages subsequently accruing from, and consequent on, the act, the cause of action accrues, and the statute begins to run, when, and only when, the damages are sustained; and this is true although at the time the act is done it is apparent that injury will inevitably result.
If, however, the act of which the injury is the natural sequence is of itself a legal injury to plaintiff, a completed wrong, the cause of action accrues and the statute begins to run from the time the act is committed, even where little, if any, actual damage occurs immediately on commission of the tort. 24
The court reasoned that the causes of action for accountant malpractice were not unlawful in themselves. The decision to use the cash receipts and disbursements method of accounting rather than the accrual method of accounting when preparing tax returns was not one that would result in injury unless something more happened. That additional event was the assessment of a tax deficiency. The causes of action accrued and the statute of limitations began to run when the taxpayer received notification of the tax deficiency.
The "legal injury" principles discussed in Atkins are largely an elaboration on the need for damages for a cause of action to accrue. In subsequent cases, however, Texas courts have blended the legal injury analysis into the holding of Atkins that the cause of action did not accrue until the assessment of the tax deficiency. A few examples illustrate this point.
In Hoover v. Gregory, 25 for instance, the Dallas Court of Appeals addressed the accrual of causes of action for tort and breach of contract resulting from tax shelters that were declared to be shams by the IRS. This inquiry was to determine whether the statute of limitations had run. The court found that it had. It wrote: "Because we determine that the Notices of Deficiency announced facts from which appellants discovered or with reasonable diligence could have discovered their injuries, we conclude that the trial court properly granted summary judgment because each of appellant's claims was barred by the applicable statutes of limitations." 26 That court read Atkins "as establishing a general rule that a taxpayer's cause of action accrues on a fact specific basis when he discovers a risk of harm to his economic interests, whether that be at the time of assessment or...
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