Wheeler v. Magdovitz

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 97-60673
Summary Calendar

IN THE MATTER OF: LAWYER WHEELER, SR.; RUBY S. WHEELER,
Debtors,

LAWYER WHEELER, SR.,
Appellant,

VERSUS

LAWRENCE M. MAGDOVITZ; ALEX B. GATES,
Appellees.

Appeal from the United States District Court
For the Northern District of Mississippi
March 30, 1998

Before JOLLY, BENAVIDES and PARKER, Circuit Judges.
PER CURIAM:
Lawyer Wheeler, Sr. (“Wheeler”) appeals from a judgment of the
district court sitting as an appellate court over a bankruptcy

matter. Wheeler contends that the district court erred in

affirming the bankruptcy court’s determination that his legal

malpractice claim against Lawrence M. Magdovitz is an asset of the

bankruptcy estate. We affirm.

FACTS AND PROCEDURAL HISTORY

Wheeler, through his attorney Lawrence M. Magdovitz, commenced

a Chapter 7 bankruptcy proceeding on May 1, 1989. The petition,

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prepared by Magdovitz and signed by Wheeler, indicated that the

bankruptcy estate contained no assets. Pursuant to these

misrepresentations, Wheeler’s case was treated as though it had no

assets.

On August 30, 1989, Wheeler received a discharge from his

indebtedness. Approximately five years later, Wheeler was indicted

and convicted for falsifying and concealing assets which should

have been included in the bankruptcy estate.

Wheeler has now filed an action for legal malpractice against

Magdovitz. Wheeler, a man of relatively little formal education,

contends that he hired Magdovitz as his attorney to properly

prepare and file his bankruptcy documents. Wheeler asserts that

his bankruptcy fraud conviction resulted from Magdovitz’s negligent

handling of his bankruptcy action. After a hearing, the bankruptcy

court entered an order finding that the legal malpractice claim

against Magdovitz is owned exclusively by the Chapter 7 bankruptcy

estate. The district court affirmed that decision on appeal.

DISCUSSION

Findings of fact made by a bankruptcy court are reviewed under

the clearly erroneous standard, while conclusions of law are

reviewed de novo. Matter of Transamerican Natural Gas Corp., 978

F.2d 1209, 1415 (5th Cir. 1992).

A bankruptcy estate consists of “all legal or equitable

interest of the debtor in property as of the commencement of the

case.” 11 U.S.C. § 541(a)(1). The issue in this appeal is whether

the state law malpractice claim against Magdovitz arose before the

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commencement of the bankruptcy estate. Under Mississippi law, a

cause of action does not accrue until an injury occurs. Owens-

Illinois v. Edwards, 573 So.2d 704, 706-707 (Miss. 1990). Wheeler

contends that he was not injured by Magdovitz’s malpractice until

he was indicted for bankruptcy fraud on June 10, 1994. He

therefore urges this court to conclude that his malpractice claim

against Magdovitz did not arise pre-petition.

Courts have taken several approaches to the question of how

the term “claim,” as used in the Bankruptcy Code, relates to

unaccrued tort liability. Some courts have agreed with Wheeler’s

position in this case that a “claim” does not arise in bankruptcy

until a cause of action has accrued under non-bankruptcy law. See,

e.g., Avefllino & Bienes v. M. Frenville Co. (In re M. Frenville

Co.), 744 F.2d 332, 337 (3rd Cir. 1984). Other courts have

rejected the accrual theory and have determined that a claim arises

at the moment the conduct giving rise to the alleged liability

occurred. See, e.g., Grady v. A.H. Robins Co. (In re A.H. Robins

Co.), 839 F.2d 198, 202-203 (4th Cir. 1988). Still other courts

have determined that a claim arises at the time of the negligent

conduct forming the basis for liability only if the negligent actor

had some type of specific relationship with the debtor at that

time. See, e.g., In re Piper Aircraft Corp., 162 B.R. 619

(Bankr.S.D.Fla. 1994). In Lemelle v. Universal Mfg. Corp., 18 F.3d

1268 (5th Cir. 1994), after reviewing these various approaches to

the problem, this court held that, at a minimum there must be

evidence of pre-petition contact, privity or other relationship

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between the tort-feasor and the injured claimant, thereby adopting

the Piper middle ground approach to the question. However, the

court added the caveat that:

We do not here decide whether, if evidence of some pre-
petition relationship between [the tort-feasor and the
victims] had been adduced, we might nonetheless conclude
that neither [of the parties] had a “claim”. . . . We
need not reach that question on this record.

Lemelle, 18 F.3d at 1277-78. It is clear in this case that

Wheeler and Magdovitz had a pre-petition relationship sufficient to

meet the Piper and Lemelle requirement.

Further, under Miss. Code Ann. § 15-1-49, a claim accrues when

a plaintiff “discover[s], or by reasonable diligence should have

discovered, the injury.” Both the bankruptcy court and the

district court invoked In re Tomaiolo, 205 B.R. 10 (Bankr. D. Mass.

1997), as authority for their decision. In Tomaiolo, a debtor’s

legal malpractice claim was filed after the debtor had been

convicted of bankruptcy fraud. Id. at 11. Debtor Tomaiolo argued

that the claim was not property of the estate since he had neither

discovered nor incurred harm from the malpractice at the time of

filing the bankruptcy petition. Id. at 13. The court disagreed

with the debtor and found that the claim was property of the

bankruptcy estate. Id. at 14. The court based its decision on the

fact that the “bulk of the Debtor’s claims” was based on the

negligence of the attorney in providing prepetition advice and

prepetition services and in preparing the petition to be signed by

the debtor. Id. at 13. The court found particularly persuading

the fact that the debtor signed the petition and schedules, which

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pertained to his own assets and financial affairs. The court

stated, “[The debtor] obviously should have known of any

misstatements when he signed them. Prior to the filing, he should

have discovered the alleged malpractice. This is sufficient to

meet the discovery requirement under state law.” Id. at 13. In

this case, as in Tomaiolo, Wheeler should have discovered any

discrepancies between his actual assets and those listed on his

bankruptcy petition at the time he signed the petition. The

bankruptcy filing consisted of relatively few pages and clearly

misrepresented Wheeler’s assets and liabilities. We also reject

Wheeler’s “uneducated person” argument. As the Tomaiolo court

held, “Because the documents relate to his own assets and financial

affairs, the Debtor faced no layman’s difficulty in assessing the

quality of his counsel’s services in preparing them. All he had to

do was read them.” Id. at 14.

Finally, Wheeler’s argument that his cause of action did not

arise for bankruptcy purposes until he was “injured” by indictment

is without merit. A debtor need not be aware of the full extent of

his harm, since it is sufficient that he “knew, or should have

known, that any false statements and concealments in his bankruptcy

filing were transgressions which could bring about serious

consequences.” Tomaiolo, 205 B.R. at 14.

CONCLUSION

For the foregoing reasons, we AFFIRM the district court

holding that the Chapter 7 bankruptcy estate owns Wheeler’s cause

of action against Magdovitz for legal malpractice.

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AFFIRMED.

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