March 24 2015
DA 14-0483
Case Number: DA 14-0483
IN THE SUPREME COURT OF THE STATE OF MONTANA
2015 MT 92
JOHN PATRICK STOKES,
Plaintiff and Appellant,
v.
GREG W. DUNCAN and KATHLEEN M. GLOVER,
Defendants and Appellees.
APPEAL FROM: District Court of the First Judicial District,
In and For the County of Lewis and Clark, Cause No. CDV-2012-156
Honorable Kathy Seeley, Presiding Judge
COUNSEL OF RECORD:
For Appellant:
Edward A. Murphy, Murphy Law Offices, PLLC, Missoula, Montana
For Appellees:
Michael F. McMahon, Denny K. Palmer, McMahon, Wall
& Hubley, PLLC, Helena, Montana
Submitted on Briefs: February 11, 2015
Decided: March 24, 2015
Filed:
__________________________________________
Clerk
Chief Justice Mike McGrath delivered the Opinion of the Court.
¶1 John Stokes appeals from the District Court’s order of July 23, 2014 granting
summary judgment to Greg Duncan and Kathleen Glover. We affirm.
¶2 The issue on appeal is whether the District Court erred in granting summary
judgment to Duncan and Glover.
BACKGROUND
¶3 In 2008 a jury in a defamation case in Flathead County returned a verdict against
John Stokes for approximately $4 million. Stokes appealed the judgment in the
defamation case to this Court, and in February 2009 retained attorney Greg Duncan to
advise him on how to maintain his appeal of the judgment while discharging the
obligation in bankruptcy. Stokes contends that Duncan advised him that he could
discharge the judgment in bankruptcy and maintain his appeal. In March 2009 Duncan
filed a Chapter 11 bankruptcy petition on Stokes’ behalf in the United States Bankruptcy
Court for the District of Montana. After a meeting of creditors in April 2009, Duncan
moved to withdraw as Stokes’ attorney in the bankruptcy because of disagreements with
Stokes over who was responsible for Stokes’ incomplete disclosure of assets. In June
2009 the Bankruptcy Court granted Duncan’s motion to withdraw and Stokes proceeded
with the bankruptcy proceeding. In September 2009 the Bankruptcy Court granted the
motion of the United States Bankruptcy Trustee, converting Stokes’ proceeding from a
Chapter 11 to Chapter 7 bankruptcy and appointing a Trustee.1
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The Trustee subsequently dismissed the appeal to this Court.
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¶4 On February 28, 2012, while the bankruptcy was pending, Stokes filed the
complaint in the present action in Montana District Court against Duncan and his
paralegal Kathleen Glover. Stokes sought damages for legal malpractice, breach of
contract and breach of fiduciary duty. The complaint alleges that Duncan failed to advise
Stokes that the defamation judgment would not be discharged by filing bankruptcy, and
that he would lose control over the appeal of that case. The bankruptcy Trustee moved to
intervene in this action as the real party in interest, claiming the malpractice action as an
asset of the bankruptcy estate. In May 2012 the District Court granted the Trustee’s
motion to stay all proceedings in the malpractice action.
¶5 In the bankruptcy action, the Trustee proposed to sell the bankruptcy estate’s
interest in Stokes’ state court action against Duncan and Glover. The Bankruptcy Court
approved the sale of the action at auction. Duncan outbid Stokes and in September 2012
purchased the bankruptcy estate’s interest in the action for $12,000. The Trustee sold the
bankruptcy estate’s interest in the malpractice action to Duncan “as is” with no warranty
of title. The Bankruptcy Court approved the sale to Duncan and no party challenged the
transaction.
¶6 In October 2012 Duncan and Glover petitioned the Bankruptcy Court for an order
declaring that the malpractice claim was the property of the bankruptcy estate and that it
had been sold to Duncan. Stokes’ Chapter 7 bankruptcy proceeding was discharged in
January 2013, and in February 2013 the Bankruptcy Court granted Duncan and Glovers’
motion for summary judgment on their petition. The Bankruptcy Court reviewed the law
governing the determination of when a cause of action becomes an asset of the
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bankruptcy estate, and considered Stokes’ argument that the suit against Duncan and
Glover did not accrue prior to bankruptcy because he was not damaged until his
bankruptcy was converted to a Chapter 7 proceeding. The Bankruptcy Court examined
Stokes’ complaint in the malpractice action and determined that “[m]uch of this alleged
malpractice took place prior to the filing of [Stokes’] Chapter 11 petition.” The Court
explained: “A fair reading of the complaint in [the malpractice action] shows clearly that
the malpractice in the form of advice and preparation of Stokes’ schedules occurred prior
to the filing of the Chapter 11 petition, with further malpractice after the petition.” Given
the “broad scope” of Federal bankruptcy law in 11 USC § 541, the Bankruptcy Court
concluded that Stokes’ claims against Duncan and Glover in State court were property of
the bankruptcy estate that had been purchased by Duncan.
¶7 Stokes appealed to the United States Bankruptcy Appellate Panel of the Ninth
Circuit. In September 2013 the Appellate Panel vacated the Bankruptcy Court judgment,
holding that the Court lacked subject matter jurisdiction to determine ownership of the
malpractice action against Duncan and Glover because it had been sold and was no
longer part of the estate.
¶8 In October 2013 Duncan and Glover appeared in the State District Court
malpractice action and moved to lift the stay and for summary judgment. In July 2014
the District Court lifted the stay and granted Duncan and Glover’s motion for summary
judgment, holding that Stokes’ claims against them were property of the bankruptcy
estate and had been purchased by Duncan. Stokes appeals.
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STANDARD OF REVIEW
¶9 This Court reviews a district court’s decision on a motion for summary judgment
using the same criteria as the district court under Rule 56, M. R. Civ. P. We review the
district court’s conclusions of law to determine whether they are correct and the findings
of fact to determine whether they are clearly erroneous. Pilgeram v. Greenpoint Mort.
Funding, 2013 MT 354, ¶ 9, 373 Mont. 1, 313 P.3d 839.
DISCUSSION
¶10 Issue: Whether the cause of action against Duncan and Glover is now owned by
Stokes or by Duncan.
¶11 Filing a bankruptcy petition creates an estate in bankruptcy consisting of all legal
and equitable interests held by the debtor as of the commencement of the bankruptcy
action. 11 USC § 541; Cusano v. Klein, 264 F.3d 936, 945 (9th Cir. 2001). The
bankruptcy estate includes any of the debtor’s civil causes of action that “accrued” prior
to the date of the petition. These pending claims belong to the estate and not the debtor.
Lucas v. Stevenson, 2013 MT 15, ¶ 18, 368 Mont. 269, 294 P.3d 377.
¶12 While courts “look to” state law to determine when a cause of action accrues,
bankruptcy accrual does not necessarily coincide with accrual of the claim for purposes
of applying the statute of limitations under state law. A claim can accrue for Federal
bankruptcy purposes before the state statute of limitation has begun to run. Cusano, 264
F.3d at 947; § 27-2-102, MCA (specifying the elements of claim accrual for purposes of
the statute of limitations). Under Federal bankruptcy law, a debtor’s legal claim can be
an asset of the bankruptcy estate if it is “sufficiently rooted in the pre-bankruptcy past.”
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In re Brown, 363 B.R. 591, 607-08 (U.S. Bank. Ct., D. Mont. 2007). A claim is
“sufficiently rooted” if the “wrongdoing and redressable harm occurred before or at the
time of filing, even though other damage was alleged to have occurred postpetition.”
Brown, 363 B.R. at 608-09.
¶13 Stokes’ complaint against Duncan and Glover alleges that Stokes was damaged by
Duncan’s erroneous advice concerning the effects of filing a petition in bankruptcy.
While Stokes contends that his claims did not accrue because he was not damaged until
later in his bankruptcy proceeding, “it is not necessary to know immediately the type and
extent” of injury, and “[a]ll that is needed is a specific and concrete risk of harm to the
party’s interest.” In re Swift, 129 F.3d 792, 795-96 (5th Cir. 1997).
¶14 Stokes argues on appeal that his legal injury or damage did not occur until his
petition was converted from Chapter 11 to Chapter 7 because of Duncan’s negligence.
But this is inconsistent with the allegations of his complaint. In part, the complaint
alleged that Duncan negligently failed to advise Stokes “that filing for bankruptcy could
never be successful in discharging the Defamation Judgment and that the bankruptcy
petition could never accomplish the results Stokes sought by filing the bankruptcy.” The
complaint also alleged that Duncan either knew or should have known that, “upon filing
of the bankruptcy petition, the appeal of the Defamation Judgment would be within the
control of the bankruptcy trustee and that Stokes would require the bankruptcy court’s
permission to continue pursuit of any appeal.” (Emphases added.)
¶15 Although Stokes emphasizes on appeal the damage he allegedly sustained upon
conversion to Chapter 7, Stokes acknowledges that—even under Chapter 11—his state
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court appeal could not have advanced unless the Bankruptcy Court granted a motion to
modify the stay. 11 U.S.C.A. § 362. This demonstrates that Stokes lost the ability to
control his own appeal at the moment the bankruptcy petition was filed. In Re Alvarez,
224 F.3d 1273, 1277 (11th Cir. 2000).
¶16 As the court noted in Brown, a claim accrues under Montana law for purposes of
determining whether it is a bankruptcy estate asset “when an action can be brought[,]”
even if “limitations on such an action had not yet begun to run.” Brown, 363 B.R. at
605-06. Stokes’ malpractice complaint alleged damages for Duncan’s negligent acts both
pre- and post-filing, including the claim that “he incurred unnecessary fees in filing for
bankruptcy.” (Emphasis added.) Even if his post-petition damages continued to mount
due to separate acts of negligence post-petition, Stokes alleged claims that are sufficient
on their face to demonstrate that he was damaged and could have brought an action
against Duncan at the time the petition was filed.
¶17 We are assisted in this matter by the decision of the United States Bankruptcy
Court determining that as a matter of Federal bankruptcy law Stokes’ claims were part of
the bankruptcy estate. While that decision was vacated on appeal, the appellate decision
was not based upon the merits of the analysis, but upon the fact that the asset was no
longer in the estate. Stokes’ claims against Duncan and Glover accrued at or before the
filing of the bankruptcy petition, were sufficiently rooted in the pre- bankruptcy past, and
were therefore an asset of the estate in bankruptcy. The Trustee was authorized to sell
the claims and did so. The claims do not belong to Stokes and the District Court properly
granted summary judgment to Duncan and Glover.
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¶18 Affirmed.
/S/ MIKE McGRATH
We Concur:
/S/ MICHAEL E WHEAT
/S/ BETH BAKER
/S/ JAMES JEREMIAH SHEA
Justice Cotter, dissenting.
¶19 I dissent from the Court’s decision to affirm the entry of summary judgment in
favor of Duncan and Glover. The question of when Stokes’ claims against Duncan and
Glover accrued requires resolution of factual issues and thus is not amenable to summary
judgment.
¶20 As the Court notes in ¶ 13 of its Opinion, Stokes contends that his claims did not
accrue at or before the filing of the Chapter 11 bankruptcy, because he was not damaged
until later in his bankruptcy proceeding. Specifically, he alleges that he did not suffer
damage until after the Bankruptcy Court Trustee converted his Chapter 11 bankruptcy to
a Chapter 7 proceeding. This occurred approximately 6 months after Duncan filed the
Chapter 11 bankruptcy petition on Stokes’ behalf. Stokes maintains that because adverse
legal results occurred well after the filing of the petition, his malpractice claim against
Duncan is not an asset of the bankruptcy estate. Although Stokes attributes the
involuntary conversion from Chapter 11 to Chapter 7 to Duncan’s negligence—a
contention that Duncan denies—we need not reach the issue of blame for the conversion
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at this juncture. The only question for resolution at this point is whether Stokes’ claims
against Duncan and Glover are owned by him or the bankruptcy estate. The
determination of ownership of these claims hinges upon the time at which Stokes’ claims
against Duncan and Glover accrued.
¶21 Relying on In re Brown, the Court concludes that Stokes’ malpractice claim is
“sufficiently rooted in the prebankruptcy past” so as to belong to the bankruptcy estate.
Opinion, ¶¶ 12, 17. In Brown, citing In re Alvarez, 224 F.3d 1273, 1278-79 (11th Cir.
2000), the United States Bankruptcy Court for the District of Montana observed that
claims are “sufficiently rooted” in the debtor’s prebankruptcy past “where the
wrongdoing and redressable harm occurred before or at the time of filing” of the petition.
Brown, 363 B. R. at 609. The Court in Alvarez upheld a District Court’s determination
that Alvarez’s legal malpractice cause of action was the property of his bankruptcy estate
because the crux of his claim was Alvarez’s contention that his attorneys disregarded his
instructions to file a Chapter 11 case and instead filed a liquidating bankruptcy case under
Chapter 7. The Alvarez court concluded Alvarez’s legal malpractice claim came into
fruition or accrued at the precise moment the Chapter 7 petition was filed because his
harm occurred at that point. Alvarez, 224 F.3d at 1277.
¶22 In contrast to the Alvarez situation, Stokes contends that he suffered no immediate
harm when Duncan filed his Chapter 11 petition, as he still had the opportunity to amend
his petition and schedules at any time before the closing of the case. In the words of
Brown, he had no “redressable harm” at the time the Chapter 11 petition was filed.
Stokes maintains that the damage to him did not occur until the conversion of his case
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from a Chapter 11 to Chapter 7, months after the initial petition was filed, at which point
he lost complete control of his assets, his radio station was sold out from under him, and
his appeal of the defamation judgment against him was dismissed by the trustee.
¶23 Stokes’ argument that his harm did not accrue until the conversion to Chapter 7
occurred has arguable legal merit. As observed in a footnote by the Court of Appeals in
Alvarez, “[t]he legal consequences of . . . creating a Chapter 7 estate are quite different
than those attendant to a Chapter 11 petition . . . . Chapter 7 establishes a . . . radical
solution to indebtedness, requiring the liquidation of the debtor’s property . . . . In a
Chapter 11 case, the debtor-in-possession generally manages and administers his own
bankruptcy estate, with the goal of reorganizing his affairs rather than liquidating them.”
(Internal citations omitted.) Alvarez, 224 F.3d at 1277, FN 9.
¶24 If Stokes maintained control over his property and affairs while the Chapter 11
petition was pending and the actionable harm did not occur until the conversion to
Chapter 7, then Stokes’ cause of action against Duncan and Glover would be deemed a
post-petition cause of action. Post-petition causes of action are not part of the bankruptcy
estate. Brown, 363 B.R. at 608, citing In re Witko, 374 F.3d 1040, 1042 (11th Cir. 2004).
As stated in Witko, if at the time the bankruptcy petition is filed a petitioner has not yet
suffered harm, his legal malpractice claim did not yet exist and thus it was not the
property of the bankruptcy estate. Witko, 374 F.3d at 1044.
¶25 In my judgment, the Court errs in disregarding Stokes’ accrual argument and
summarily concluding that Stokes’ claims against Duncan and Glover accrued at or
before the filing of the Chapter 11 bankruptcy petition. Because there are conflicting
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assertions regarding when Stokes’ claims accrued, I would reverse and remand to the
District Court for resolution of these factual disputes. I therefore dissent from the Court’s
determination that summary judgment was appropriate.
/S/ PATRICIA COTTER
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