Stokes v. Duncan

Stokes v. Duncan, 2015 MT 92 (March 24, 2015) (McGrath, C.J.; Cotter, J., dissenting) (4-1, aff’d)

Issue: Whether debtor’s legal malpractice claim accrued at the time of filing bankruptcy, making it part of the bankruptcy estate.

Short Answer: Yes.

Affirmed 

Facts: In 2008, a jury returned a verdict against John Stokes for defamation, with damages of about $4 million. Stokes appealed, and retained attorney Greg Duncan to advise him on how to maintain the appeal while discharging the obligation in bankruptcy. Stokes contends Duncan advised him he could discharge the judgment in bankruptcy and maintain his appeal. Duncan filed a Chapter 11 bankruptcy on Stokes’ behalf in March 2009. After a creditors’ meeting in April 2009, Duncan moved to withdraw as counsel due to disagreements over who was responsible for Stokes’ incomplete disclosure of assets. The bankruptcy court granted Duncan’s motion, and in September 2009, converted Stokes’ bankruptcy to a Chapter 7 proceeding and appointed a trustee.

In February 2012, while the bankruptcy was pending, Stokes filed suit against Duncan and his paralegal for malpractice, breach of contract, and breach of fiduciary duty. The bankruptcy trustee moved to intervene as the real party in interest, claiming the malpractice action was an asset of the bankruptcy estate. The district court granted the trustee’s motion to stay proceedings in the malpractice action in May 2012.

The trustee proposed to sell the estate’s interest in Stokes’ state court action against Duncan at auction, and the bankruptcy court approved. Duncan outbid Stokes and bought the interest in the action for $12,000 “as is,” with no warranty of title. No party challenged the transaction. The bankruptcy court issued an order that the malpractice claim was part of the bankruptcy estate, finding that much of the alleged malpractice took place before the Chapter 11 petition was filed.

Stokes appealed to the Bankruptcy Appellate Panel of the 9th Circuit, which vacated the order and held that the bankruptcy court lacked subject matter jurisdiction to determine ownership of the malpractice action.

Procedural Posture & Holding: Duncan moved to lift the state court stay of the malpractice proceedings, and moved for summary judgment. The district court lifted the stay and granted Duncan summary judgment, holding that the claim was part of the bankruptcy estate and had been purchased by Duncan. Stokes, appeals, and the Supreme Court affirms.

Reasoning: Filing a bankruptcy petition creates a bankruptcy estate consisting of all legal and equitable interests held by the debtor as of the commencement of the bankruptcy. The estate includes all civil causes of action that accrued prior to the date of the petition. Bankruptcy accrual does not necessarily coincide with accrual for purposes of statute of limitations. A debtor’s legal claim can be an asset of the estate if it is “sufficiently rooted” prior to bankruptcy.

The Court looks to Stokes’ complaint, which alleges damages for Duncan’s negligent acts both before and after the bankruptcy petition was filed, and holds the claims were sufficiently rooted in the prebankruptcy past to be an asset of the bankruptcy estate.

Justice Cotter’s Dissent: The question of when Stokes’ claims against Duncan accrued requires the resolution of factual issues and was therefore not amenable to summary judgment. Justice Cotter would reverse and remand.