Opinion
CIVIL ACTION NOS. 97-40055-GAO, 97-40056-GAO, BANKRUPTCY NO. 90-40350.
February 6, 2002
MEMORANDUM AND ORDER
The debtor, Francis P. Tomaiolo, appeals two related decisions made by the Bankruptcy Judge. First, he appeals the Bankruptcy Judge's determination that Tomaiolo's legal malpractice claims belong to the bankruptcy estate and thus are to be prosecuted by the Trustee, Stephen M. Rodolakis. Second, he appeals the Bankruptcy Judge's refusal to stay the turn-over order pending Tomaiolo's appeal. After consideration of the parties' briefs and oral arguments, this Court affirms the decisions by the Bankruptcy Judge.
A. Summary of Facts
The relevant facts are substantially undisputed. Francis P. Tomaiolo was the sole proprietor of the Tomaiolo Development Company, which engaged in real estate development and construction. In the 1980s, after the company ran into some financial difficulties, Tomaiolo consulted with the law firm of Labovitz Burdick. Represented by John A. Burdick, Jr., Tomaiolo filed a Chapter 11 petition on March 15, 1990. Tomaiolo continued to operate his business as a debtor-in-possession. On September 11, 1991, the United States Trustee, Stephen M. Rodolakis, moved to convert the case to a Chapter 7 case, and the Bankruptcy Judge granted the motion on October 3, 1991. Although initially Tomaiolo received a discharge, the Bankruptcy Judge later granted a motion by Rodolakis to reopen the matter because Tomaiolo's original petition had been incomplete.
There were several defects and problems with Tomaiolo's original Chapter 11 petition. For example, the petition did not list all of the transfers Tomaiolo had made within the year before the filing, and the attached asset schedules were inaccurate. Tomaiolo also alleges that his attorneys did not apprise him of the fact that his bankruptcy petition had been converted to Chapter 7 and that they failed to give him proper instructions on how to run his business during the bankruptcy proceedings. During the course of the pendency of the bankruptcy case, Burdick's partner, Stanley Labovitz, was indicted, sentenced, and disbarred for bankruptcy fraud. After Labovitz's indictment, Burdick formed a new firm with Lucille A. DiLeo, named Burdick DiLeo.
Tomaiolo was also indicted on thirteen counts of bankruptcy fraud. On March 11, 1994, a jury returned a guilty verdict against Tomaiolo on three of the twelve counts submitted to it (the prosecution withdrew one count before trial). After his conviction, Tomaiolo and his wife, June K. Tomaiolo, commenced a law suit against Labovitz, Burdick, and DiLeo in the Massachusetts Superior Court. Tomaiolo made claims against the three attorneys for negligence, and his wife made a separate claim against the three attorneys for loss of consortium. The negligence counts allege that each of the defendants breached his or her "duty to handle [Tomaiolo's] bankruptcy with the skill and care ordinarily possessed by the average practitioner." The three defendants asserted defenses to the claims and made counterclaims for breach of contract and quantum meruit.
Thereafter, Rodolakis filed a motion asking the Bankruptcy Judge to order the Tomaiolos to turn over control of the malpractice suit to the bankruptcy estate. The Bankruptcy Judge granted the motion, finding that Tomaiolo's malpractice suit was property of Tomaiolo's estate. Tomaiolo appealed the turn-over order to the District Court and asked the Bankruptcy Judge to stay the order pending its appeal in the District Court. The Bankruptcy Judge denied the motion to stay for "lack of likelihood of success" of Tomaiolo's appeal, and Tomaiolo has appealed that decision as well. The Trustee then removed the Tomaiolos' state court action to the bankruptcy court, and a bench trial was scheduled on Francis Tomaiolo's claims. The Bankruptcy Judge severed June Tomaiolo's claims for loss of consortium and remanded them to the Superior Court. Shortly before trial of the malpractice claims was to begin in the Bankruptcy Court, this Court granted Tomaiolo's motion to stay the trial pending this appeal.
B. The Malpractice Claims Are Property of the Estate
When a debtor files for bankruptcy protection, "all legal or equitable interests of the debtor in property as of the commencement of the case" become property of the bankruptcy estate. 11 U.S.C. § 541(a)(1). In other words, as soon as Tomaiolo filed his petition, he surrendered to his estate all of his legal or equitable interests in property. The pivotal inquiry for present purposes is whether "as of the commencement" of his bankruptcy case, Tomaiolo's malpractice claim was sufficiently in existence to qualify as an interest in property. State law is the starting point for an analysis of a debtor's property rights. See Butner v. United States, 440 U.S. 48, 55-57 (1979); see also Anderson v. McGowan (In re Anderson), 128 B.R. 850, 853 (Bankr.D.R.I. 1991).
Under Massachusetts law, Tomaiolo's malpractice cause of action arose when Tomaiolo was harmed by his attorneys' failure to exercise reasonable care in handling his bankruptcy. See Colucci v. Rosen, 515 N.E.2d 891, 894 (Mass.App.Ct. 1987). Tomaiolo argues that at the time he filed his bankruptcy petition, his malpractice claims had not accrued because he had not yet discovered and suffered from his attorneys' negligence. See Hendrickson v. Sears, 310 N.E.2d 131, 132 (Mass. 1974) (holding that a malpractice claim "does not accrue until the misrepresentation is discovered or should reasonably have been discovered"). The argument is not persuasive. One of Tomaiolo's central claims against his attorneys is that they improperly prepared the schedules attached to his Chapter 11 petition. As the Bankruptcy Judge correctly held, because these schedules related to Tomaiolo's own assets and financial affairs, Tomaiolo would have had no difficulty in assessing the quality of his counsel's services in preparing them; "[a]ll he had to do was read them." In re Tomaiolo, 205 B.R. 10, 14 (Bankr.D.Mass. 1997). As a result, Tomaiolo was or should have been aware prior to the filing of his petition that his attorneys were acting negligently.
Even if Tomaiolo's malpractice claim had not "accrued" under Massachusetts law at the time of his filing, his claims were sufficiently in existence at the time of filing to have become part of his estate.See Swift v. Seidler (In re Swift), 198 B.R. 927, 932 (Bankr.W.D.Tex. 1996) ("Although a finding that a cause of action accrued pre-petition would conclusively establish that the cause did become estate property upon filing, the inverse would not necessarily be true."). Property rights that the debtor attains post-petition can still be estate property if they are "sufficiently rooted in the pre-bankruptcy past" and do not overly impair "the bankrupt's ability to make an unencumbered fresh start." Segal v. Rochelle, 382 U.S. 375, 380 (1966) (finding that a right to a tax refund stemming from a tax return that the debtor filed before his bankruptcy petition was property of the estate). The proper characterization of Tomaiolo's malpractice claim therefore depends on the degree to which events prior to the filing date gave rise to the claim.
The Bankruptcy Judge correctly found that the malpractice claim had a substantial connection to events which occurred before Tomaiolo filed for bankruptcy. In re Tomaiolo, 205 B.R. at 15. Tomaiolo's relationship with his attorneys began well before he filed for Chapter 11, as did the advice and document preparation which eventually culminated in Tomaiolo's conviction for bankruptcy fraud. The degree to which Tomaiolo's malpractice claim is "rooted in the pre-bankruptcy past" is apparent when his situation is compared to that of a debtor whose claim is entirely post-petition. In In re Doemling, 127 B.R. 954, 957 (Bankr.W.D.Pa. 1991), the debtor was hit by an automobile five months after filing her bankruptcy petition. The District Court determined that the money the debtor recovered for her medical expenses was not part of her estate because the debtor clearly did not have a tort cause of action at the time her bankruptcy commenced. Id. at 954-55. The court also pointed out that the money the debtor received was compensation for injuries suffered by the debtor, not for injuries suffered by the estate. Id. at 956. In contrast, Tomaiolo's malpractice claims are part of the estate because events which led up to the claims occurred prior to the filing and because the resulting harm affected the estate as well as Tomaiolo separately.
These conclusions are also supported by several recent decisions by other courts. See e.g., Johnson v. Alvarez (In re Alvarez), 224 F.3d 1273, 1276 (11th Cir. 2000) (holding that the debtor's malpractice claim was "rooted in the pre-bankruptcy past"); Wheeler v. Magdovitz (In re Wheeler), 137 F.3d 299, 301 (5th Cir. 1998) (when the debtor could easily tell that his attorneys were not properly filling out bankruptcy schedules, the debtor's malpractice claim is estate property); In re Richards, 249 B.R. 859, 861 (Bankr.E.D.Mich. 2000) ("in determining whether a claim is property of the bankruptcy estate, the test is not the date that the claim accrues under state law[,] . . . the appropriate inquiry is whether the claim is `sufficiently rooted in the prebankruptcy past'.") (citations omitted).
Tomaiolo argues that permitting the Trustee to prosecute the claims will deprive him of the opportunity to recover personal damages that do not belong to the estate, citing the statutory exemption for future earnings. 11 U.S.C. § 522(d)(11)(E). However, the Bankruptcy Judge specifically allowed Tomaiolo the benefit of that exemption. In re Tomaiolo, 205 B.R. at 16. Damages that the Trustee recovers through the malpractice claim which are compensation for Tomaiolo's loss of future earnings will be paid to Tomaiolo. The remainder of the award will be distributed among Tomaiolo's creditors who also suffered from the attorneys' failure to properly handle Tomaiolo's assets.
C. Conclusion
Tomaiolo's malpractice claims are property of his bankruptcy estate and were properly turned over to the Trustee. The Bankruptcy Judge's decision is AFFIRMED and the stays issued by this Court during the pendency of the appeals are dissolved.