State Farm Life Insurance v. Swift

United States Court of Appeals,

Fifth Circuit.

No. 96-50917.

In the Matter of: David Marvin SWIFT, doing business as State
Farm Insurance Companies, Debtor.

STATE FARM LIFE INSURANCE COMPANY, Appellant,

David Marvin SWIFT, Appellee.

Dec. 8, 1997.

Appeal from the United States District Court for the Western
District of Texas.

Before WISDOM, JOLLY and EMILIO M. GARZA, Circuit Judges.

WISDOM, Circuit Judge:

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,

1
A Keogh plan is a retirement plan for self-employed
individuals that was authorized by the Self-Employed Individuals
Tax Retirement Act of 1962. Bittker and Lokken, Federal Taxation
of Income, Estates, and Gifts (2d ed.) ¶ 62.2 (1990). This plan
allows the self-employed taxpayer to deduct certain contributions
made to qualifying retirement plans from the taxpayer's annual tax
return. It also allows for the deferral of taxes on the

1
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

contributions and the gains attributable to the retirement plan
until such time as the taxpayer receives a distribution from the
plan. See id. at ¶ 61.1.1.
2
See 11 U.S.C. § 522(b)(1).
3
Tex. Prop.Code. Ann. § 42.0021 (West 1997).
4
In re Swift, 124 B.R. 475, 483-86 (Bankr.W.D.Tex.1991).
5
In re Swift, 126 B.R. 725 (Bankr.W.D.Tex.1991).
6
In re Swift, 3 F.3d 929 (5th Cir.1993).

2
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.

II.

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

7
For purposes of this appeal only, we assume that Swift's
causes of action are viable.
8
In re Swift, 198 B.R. 927 (Bankr.W.D.Tex.1996).
9
See Peaches Entertainment Corp. v. Entertainment Repertoire
Assoc., Inc., 62 F.3d 690, 693 (5th Cir.1995).

3
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

10
11 U.S.C. § 541(a)(1).
11
Louisiana World Exposition v. Federal Ins. Co., 858 F.2d 233,
245 (5th Cir.1988).
12
"Property interests are created and defined by state law."
Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59
L.Ed.2d 136, 141-42 (1979); In the Matter of Educators Group
Health Trust, 25 F.3d 1281, 1284 (5th Cir.1994).
13
Luling Oil & Gas Co. v. Humble Oil & Refining Co., 144 Tex.
475, 191 S.W.2d 716, 721 (1946). See also Educators Group Health
Trust, 25 F.3d at 1284; General Motors Acceptance Corp. v. Howard,
487 S.W.2d 708, 710 (Tex.1972).
14
See Greater Houston Transp. Co. v. Phillips, 801 S.W.2d 523,
525 (Tex.1991).
15
See Lumbermens Mutual Casualty Co. v. Shaw, 684 S.W.2d 195,
196 (Tex.Ct.App.1984), holding that an insurance company could not
appeal the decision of the Industrial Accident Board when the
insurance company prevailed before the Board; see also Philips v.
Giles, 620 S.W.2d 750, 751 (Tex.Ct.App.1981) dismissing a suit as

4
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

premature after the court found that no damages had occurred.
16
Atkins v. Crosland, 417 S.W.2d 150, 153 (Tex.1967).
17
Zidell v. Bird, 692 S.W.2d 550, 557 (Tex.Ct.App.1985).
18
See In re Ellwanger, 140 B.R. 891, 897 (Bankr.W.D.Wash.1992).
Although these inquiries are different, it is often necessary to
look to state law on the statute of limitations to determine when
a cause of action accrues because accrual rarely is discussed apart
from the issue of the running of the statute of limitations. When
this is the case, the court must be careful to extract accrual
principles only, and not principles of discovery and tolling.

Swift suggests that this case is governed by Lawrence v.
Jackson Mack Sales, Inc., a case in which the district court
applied statute of limitations cases to determine whether a
cause of action accrued for bankruptcy purposes. 837 F.Supp.
771 (S.D.Miss.1992), aff'd 42 F.3d 642 (5th Cir.1994).
Principles of stare decisis of course bind this panel to
follow previous decisions of other panels of this Court. In
Lawrence, however, this Court did not consider the issue of
when the cause of action accrued because that issue was not
raised on appeal. See Briefs filed in Lawrence v. Jackson
Mack Sales, Inc., No. 94-60006.
19
"The purpose of actual damages in civil actions is to
compensate the injured plaintiff, rather than to punish the
defendant. Consequently, a prevailing plaintiff is entitled to

5
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

actual damages that will most nearly put him in the position that
he would have been, but for the defendant's negligence." Deloitte
& Touche v. Weller, 1997 WL 572530 (Tex.Ct.App.1997) (internal
citations omitted).
20
Lumbermens Mutual Casualty Co., 684 S.W.2d at 196.
21
Deloitte & Touche v. Weller, 1997 WL 572530, *4
(Tex.Ct.App.1997).
22
Ponder v. Brice & Mankoff, 889 S.W.2d 637, 641
(Tex.Ct.App.1994); Hoover v. Gregory, 835 S.W.2d 668, 671
(Tex.Ct.App.1992).

6
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

23
417 S.W.2d 150 (Tex.1967).

7
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

24
Id. at 153.
25
835 S.W.2d 668 (Tex.Ct.App.1992).

8
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 otherwise".27 This

language, while discussing the concept of accrual, is clearly

couched in terms consistent with the discovery rule.

In Bankruptcy Estate of Rochester v. Campbell,28 the Austin

Court of Appeals found that a cause of action for accountant

malpractice accrued when the taxpayer received a notice of

deficiency from the IRS. The court applied the legal injury rule

and concluded that the notice of deficiency gave rise to a concrete

and specific risk of loss that was actionable. The court explained

its reasoning:

[W]e hold that the formal IRS notice of deficiency triggers
the requisite concrete risk of tax liability for purposes of
the legal injury rule. Prior awareness of IRS activity, such
as a preliminary notice of deficiency, informs the taxpayer of
some risk, but the risk is not sufficiently definite or
concrete until the IRS has issued its formal notice of
deficiency. As a matter of policy, it is important that a
taxpayer clearly know the time at which potential causes of
action involving tax liability accrue[.]29

Again, this case is analyzed in terms of discovery of the injury.

26
Id. at 672.
27
Id. at 673.
28
910 S.W.2d 647 (Tex.Ct.App.1995).
29
Id. at 651-52.

9
Discovery is relevant to the determination of when the statute of

limitations begins to run, but it is not an element necessary for

the cause of action to accrue for purposes beyond the statute of

limitations.

Finally, in Ponder v. Brice & Mankoff,30 the Houston Court of

Appeals reached a decision similar to those cases we have just

discussed. This case involved a cause of action for legal

malpractice stemming from bad advice given in relation to the tax

consequences of a partnership. The court found that the causes of

action accrued for purposes of the statute of limitations when the

taxpayer received the first notice of deficiency from the IRS.

Relying upon Hoover, the court found that the taxpayer "knew or

should have known that there was a risk of harm to his economic

interest".31 This too is language of discovery.

The three cases just cited show a natural tendency to blend

the issue of accrual and the start of the statute of limitations

because of the luxury of the discovery rule in a statute of

limitations case. Even if a cause of action accrued before the

receipt of the IRS's notices of deficiency in each of those cases,

the discovery rule would toll the start of the statute of

limitations until the assessment of the deficiency by the IRS.32

Those courts did not need to separate the inquiry. In the present

30
889 S.W.2d 637 (Tex.Ct.App.1994).
31
Id. at 643.
32
See e.g., Hoover v. Gregory, 835 S.W.2d 668
(Tex.Ct.App.1992).

10
case, we have neither the luxury nor the margin for error provided

by the discovery rule. We are determining when the causes of

action accrued for purposes of ownership in a bankruptcy

proceeding. The time of discovery of the injury is not relevant to

this inquiry. A cause of action can accrue for ownership purposes

before the statute of limitations for that cause of action has

begun to run. Our focus, then, is upon the moment the injury

occurred. The three statute of limitations cases cited are not

helpful in this case because of their reliance upon discovery.33

In the present case, Swift maintains that his causes of

action against State Farm accrued when his creditors objected to

his bankruptcy exemption. He argues that he did not suffer any

legal injury until this additional event because there was no

concrete and specific risk of harm to his economic interests before

this point. State Farm maintains that Swift's damages, if any,

occurred at the moment his retirement plan failed to qualify as

exempt.

From Swift's previous proceedings before this court, we take

the following as given: (1) the Keogh plan that Swift participated

in until 1990 was not qualified as exempt under the Internal

Revenue Code as amended by the Tax Reform Act of 1986 and (2)

Swift's IRA was not qualified as exempt under either the Texas

33
Based upon Atkins and subsequent cases applying the Atkins
legal injury rule, Swift's causes of action were viable at the time
his creditors objected to his exemption of his IRA. That does not
end our inquiry, however, because we must determine whether those
causes of action accrued earlier.

11
Property Code or the Internal Revenue Code.34 We conclude that

Swift suffered damage sufficient to give rise to the current causes

of action at the time he converted his Keogh plan to an IRA in

1990.35

A retirement account is an unusual creature; it receives

favorable treatment under both the tax code and the Texas Property

Code.36 Because Swift's retirement plan was defective, Swift

suffered damage in at least two different ways: (1) Swift lost the

tax advantages of the Keogh plan and the IRA,37 and (2) he lost his

bankruptcy exemption under Texas law. If either of these damages

occurred pre-petition, the causes of action against State Farm

accrued pre-petition.

The lost bankruptcy exemption is easily analyzed so we begin

there. Under the Bankruptcy Code, a claimed exemption is

34
See In re Swift, 124 B.R. 475 (Bankr.W.D.Tex.1991).
35
Swift's causes of action accrued before the filing of his
petition in bankruptcy if the cause of action accrued at the time
of the conversion. We need not look back any further in time.
Therefore, we express no opinion as to whether Swift's damages
occurred before the conversion in 1990. In determining whether
Swift could have maintained a cause of action for State Farm's
conduct at any point prior to his filing bankruptcy, we do not
consider the effect of the subsequent filing of bankruptcy and loss
of the funds from the defective IRA.
36
See 26 U.S.C. § 408; Tex. Prop.Code. § 42.0021.
37
In the present action, Swift is seeking to recover for his
lost bankruptcy exemption. He has not sued for lost tax benefits.
We must consider the tax consequences anyway. A cause of action
accrues when any damage is suffered, even if the injured party is
not seeking recovery for those particular damages.

12
presumptively valid unless a creditor objects.38 Only upon

objection can the debtor lose his exemption. Conduct that

ultimately results in the loss of an exemption is not unlawful in

itself, as referred to in Atkins, because something more is needed

to bring about the damage. Just as the tax claim did not accrue in

Atkins until the deficiency was assessed, a cause of action to

replace a lost bankruptcy exemption does not accrue until the

creditors object to the exemption. By necessity, an objection can

occur only after the bankruptcy petition is filed. This damage

from the lost exemption, then, is post-petition and the causes of

action accrued post-petition unless some other damage occurred

before the filing.

In this case, however, we must also consider the tax

consequences of the defective retirement plan. Negligence can

result in additional tax liabilities in at least two ways. First,

negligence in the preparation or computation of tax liability can

lead the IRS to assess a tax deficiency including interest and

penalties. In this situation, the taxpayer is not injured by being

forced to pay his back taxes. These taxes were already owed to the

IRS.39 Instead, the taxpayer's injury is the interest and penalties

38
11 U.S.C. § 522(l ). That section provides:

The debtor shall file a list of property that the debtor
claims as exempt under (b) of this section.... Unless a
party in interest objects, the property claimed as exempt
on such list is exempt.
39
See 26 U.S.C. § 6151 (1997). "As of a certain date the
taxpayer has a duty to file a return for the previous fiscal year
and pay the amount of tax due for that year ... the taxpayer ha[s]
a positive obligation to the United States; a duty to pay its

13
that the taxpayer must pay as a direct result of the late payment

of his taxes, a payment that is late only because of the negligence

in the preparation or computation of the taxpayer's tax liability.

In these circumstances, an IRS assessment is a predicate to a

finding of a legal injury because, in the absence of the

assessment, no penalties or interest are owed.40 This was the

situation in Atkins, not the present case.

Damages can also arise from acts of negligence that result in

the taxpayer owing additional tax liabilities that would not be

owed in the absence of the negligence. No assessment for this

liability is necessary because, under the Internal Revenue Code,

taxes are owed and payable to the IRS at a given time.41 A cause

tax." Manning v. Seeley Tube & Box Co., 338 U.S. 561, 565-66, 70
S.Ct. 386, 389, 94 L.Ed. 346 (1950). See also P.H. Glatfelter Co.
v. Lewis, 746 F.Supp. 511, 518-19 (E.D.Pa.1990).
40
See, e.g., Atkins v. Crosland, 417 S.W.2d 150 (Tex.1967)
(finding that a taxpayer's cause of action for negligence in the
preparation of tax returns did not accrue until that IRS assessed
a tax deficiency); Streib v. Veigel, 109 Idaho 174, 706 P.2d 63
(1985) (finding that a cause of action for professional malpractice
in the preparation of tax returns did not accrue until the IRS
assessed interest and penalties).
41
In Moran v. United States, the Seventh Circuit Court of
Appeals summed up the importance of a tax assessment rather
succinctly. The Court wrote:

[A]n assessment is not a prerequisite to tax liability.
Though the [taxpayers] make it out to be more, an
assessment is only a formal determination that a taxpayer
owed money. It is more or less a bookkeeping procedure
that permits the government to bring its administrative
apparatus to bear in collecting a tax. Indeed, our tax
system would function poorly were not most taxes
"self-assessed." A formal IRS assessment is an important
determination in many cases, and the threat of one is a
significant means of maintaining a system of voluntary
compliance, but it is neither the beginning nor the end

14
of action for this type of negligence, then, accrues on the date

that the tax liability is owed to the IRS. The present case falls

in this category. But for the negligence of State Farm, Swift

would have no tax liability arising from his retirement plan. That

is, without the negligence of State Farm, the gains on Swift's

Keogh plan and the IRA would accumulate tax free, and Swift's

contributions to the plan would be tax deductible. Because the

Keogh plan was defective, however, Swift incurred an additional

liability to the IRS due to the taxable nature of the income from

the Keogh plan and the IRA. Swift incurred this liability even if

he did not know or discover that he owed additional taxes. This is

a legal injury that gave rise to a cause of action at least by the

time he converted his Keogh plan into the defective IRA.42 Even

though the IRS has not assessed a deficiency for this liability,

Swift was injured.43 We shall not find a lack of injury merely

of tax liability.

63 F.3d 663, 666 (7th Cir.1995) (citations omitted). This
language amplifies the distinctions we draw in the present
case. Assessment is an effective tool for notifying a
taxpayer of additional tax liabilities. It is a clear signal
for when the statute of limitations begins to run. It also
creates a concrete and specific risk that penalties and
interest will be assessed. An assessment does not create or
change the taxpayer's initial tax obligation that was owed,
however.
42
For purposes of this appeal, we have assumed that State Farm
could repair the defective Keogh plan by adopting appropriate
amendment. At the time the Keogh plan was converted, however, the
liability was fixed. See In re Swift, 124 B.R. 475, 484
(Bankr.W.D.Tex.1991).
43
Our decision conflicts with that of the Texas Court of Civil
Appeals in Dallas in Philips v. Giles, 620 S.W.2d 750
(Tex.Ct.App.1981). Philips involved a taxpayer who learned that

15
because the taxpayer may be able to escape liability by continuing

to violate the tax laws even if the violation is unintentional and

undiscovered.44 The amount, if any, that Swift ultimately pays to

the IRS is relevant only in the computation of damages. The causes

of action against State Farm accrued pre-petition.

Swift directs our attention to Swift v. Seidler, an

she might owe additional taxes on a divorce settlement even though
she was previously advised that the settlement would result in no
tax liability. The taxpayer paid the additional amounts even
though the IRS had not assessed a deficiency. Then, she filed
suit, attempting to recover the additional taxes she paid due to
the bad advice she received regarding the settlement. The court,
relying upon Atkins v. Crosland, dismissed the suit as premature.
The court wrote:

Although relator believes the taxes are due, she may be
mistaken and, indeed, no tax liability, insofar as we
know, may exist. Relator's cause of action against
defendant, and her injury, if any, arise from her tax
liability, rather than from the duty to report her income
as she believes it to be, accurately. Since it has not
been determined whether relator is liable for the taxes
in question, she has not been harmed and, therefore, her
cause of action has not accrued.

Id. at 751. Our trouble with this decision is on two levels.
First, the court placed the taxpayer in an unfortunate "catch-
22". She could choose to pay the IRS the money she thinks she
owes without being able to recover from the party whose acts
caused her to owe this liability, or she can deliberately defy
the tax code by refusing to pay what she perceives to be her
full tax liability. This is not a fair choice for the
taxpayer because, either way, she loses. We also find the
decision troubling in that the court dismissed the suit
because of a lack of damages when there was a genuine issue of
fact concerning the existence of damages. As such an early
stage, it was premature for the court to make the assumption.

44
We acknowledge that Swift's defective retirement plan may
also result in additional tax consequences. We need to investigate
these no further, however, because our analysis of the accrual of
the causes of action against State Farm depends upon a finding of
some damage. It does not depend upon the amount or extent of that
damage. Atkins, 417 S.W.2d at 153.

16
unpublished opinion of this Court, in which we found that Swift's

causes of action against Martin Seidler, his attorney, accrued

post-petition. In reaffirming our previous decision, we note a few

critical distinctions. In the present case, we find that the

causes of action accrued pre-petition because there was actual

damage from State Farm's conduct before Swift filed for bankruptcy.

Swift's causes of action against Seidler did not result in damage

before the filing. Assuming that Swift has a viable cause of

action against Seidler for malpractice, the attorney's malpractice

resulted in damages stemming from the filing of bankruptcy and the

loss of the IRA exemption. As we pointed out, this damage is

without question a post-petition damage. The loss was not suffered

until the creditor's objected to the exemption after Swift filed

for bankruptcy. Unlike State Farm's actions, Seidler's conduct did

not result in the loss of the tax advantages. The conduct giving

rise to the tax losses occurred well before Swift contemplated

filing for bankruptcy.

III.

Next, Swift argues that the causes of action against State

Farm are themselves exempt property under Texas Prop.Code §

42.0021, the section which exempts qualified retirement accounts

from the bankruptcy estate. In previous proceedings before this

Court, we established that Swift's IRA was not exempt. Our

previous decision did not address the status of any causes of

action aimed at replacing the lost IRA. Today, we hold that Swift's

causes of action against State Farm to replace the lost IRA are

17
exempt property.

To prevent a down-on-his-luck debtor from becoming destitute,

the Texas legislature enacted a scheme of exemptions that limits

the ability of creditors to reach certain essential assets of the

debtor. The decision to exempt property is an important one,

recognizing that the exempt property is vital to the debtor's

continued existence. The Texas legislature recognized the

importance of retirement accounts and exempted them in Tex.

Prop.Code § 42.0021. In addition, the legislature severely limited

the circumstances in which a creditor can attach or garnish the

proceeds of retirement accounts.45 Neither provision expressly

addresses causes of action arising out of exempt retirement

accounts, however. And, we have been unable to find a Texas case

that discusses this issue. Therefore, to determine whether the

causes of action at issue in this case are exempt, we must look to

Texas cases addressing the reach of other exemptions.

Texas courts construe the scope of exemptions liberally, with

most doubts about the existence of an exemption resolved in favor

of the debtor claiming the exemption.46 The courts are driven by

the purpose and intent of the exemption, not just the plain

45
Tex. Civ. Prac. & Rem.Code § 31.002.
46
"Exemption statutes have been traditionally construed
liberally by [Texas] courts. They are never restricted in their
meaning and effect so as to minimize their operation upon the
beneficent objects of the statutes, and questions regarding the
extent of exemptions are generally resolved in favor of one
claiming exemption." Stephenson v. Wixom, 727 S.W.2d 747, 749
(Tex.Ct.App.1987) (internal citations omitted).

18
language of the statutes.47 The Texas courts have made this point

in numerous cases in which a specific exemption has been extended

to include the proceeds from the disposition of exempt property.

For instance, an exemption for household furniture included the

proceeds from an insurance settlement after the furniture was

destroyed,48 an exemption for one "carriage" included the proceeds

paid on an insurance policy after an automobile was damaged,49 and

the homestead exemption included the proceeds paid upon the forced

disposition of the homestead as well as a cause of action filed to

recover damages on a lost homestead.50 One common theme runs

through all of these decisions. The proceeds, insurance, cause of

action, etc., are a substitute for the exempt property that is

lost. To be effective, the substitute must be treated as if it

were the lost item.51 Otherwise, the protection provided by the

exemption would be meaningless, and creditors could attack the

47
See id. at 749-50.
48
Sorenson v. City Nat'l Bank, 121 Tex. 478, 49 S.W.2d 718, 721
(Tex. Comm. App., Sec. A 1932).
49
Willis v. Schoelman, 206 S.W.2d 283 (Tex.Ct.App.1947).
50
In re Osborn, 176 B.R. 217, 219-20 (Bankr.E.D.Okla.1994).
51
In Tex. Civ. Prac. & Rem.Code § 31.002, the Texas legislature
protected the proceeds of exempt property from the reach of
creditors. That provision provides:

A court may not enter or enforce an order under this
section that requires the turnover of the proceeds of, or
the disbursement of, property exempt under any statute,
including Section 42.0021, Property Code.

Tex. Civ. Prac. & Rem.Code § 31.002(f). This statute shows
legislative approval of earlier decisions liberally construing
the Texas exemptions.

19
unfortunate debtor more effectively than they could the average

debtor who is less in need of the protection.

When a retirement account that should have been exempt is

lost, the cause of action to replace that account is exempt so that

the injured party can be placed in a position that is as near as

possible to his original or intended position. The fundamental

purpose of a cause of action—to make an injured party

whole—dictates this conclusion. State Farm maintains that Swift's

causes of action are not exempt, however, because his IRA was

defective at the time Swift's creditors objected to the exemption.

State Farm's argument fails to account for one critical fact:

Swift is seeking recovery for the original acts that made the

account defective as well as the eventual loss of the bankruptcy

exemption. State Farm cannot escape liability simply because its

alleged actions resulted in damage at two separate stages. But for

the actions of State Farm, or the failure to act by State Farm,

Swift would have a valid, exempt IRA. Swift's causes of action

against State Farm, then, are to replace what would have been a

valid IRA, not the non-exempt account of which State Farm speaks.

As a replacement for exempt property, we hold that Swift's causes

of action are exempt property for purposes of his bankruptcy

proceedings.

IV.

In conclusion, we find that Swift's causes of action against

State Farm accrued before Swift filed his bankruptcy petition

because he suffered actual damage before the filing. Those causes

20
of action became the property of the bankruptcy estate under 11

U.S.C. § 541. But, they are exempt property under Texas Prop.Code

§ 42.0021. Swift has standing to pursue these causes of action

against State Farm. The district court's decision is AFFIRMED.