Elizabeth D. Katz, United States Bankruptcy Judge.
Before the Court is an order directed at Anne J. White (the "Trustee"), the plaintiff in this adversary proceeding and trustee in the underlying Chapter 7 bankruptcy case filed by Steven C. Lloyd (the "Debtor"), requiring the Trustee to show cause as to why the adversary proceeding should not be dismissed for lack of jurisdiction. If the claims brought by the Trustee against Michael T. Gaffney ("Gaffney"), the Debtor's former attorney, are property of the bankruptcy estate pursuant to 11 U.S.C. § 541(a)(1),
In 2015, the Debtor sought Gaffney's professional assistance after a judgment creditor had obtained an attachment on the Debtor's residence. Seeking to protect a lot of undeveloped land in Maine, the Debtor and his wife (allegedly acting on Gaffney's advice) transferred their interest in that property to a trust, of which the Debtor's two children and his son-in-law were the beneficiaries. Shortly thereafter, in June 2016, and with the assistance of a
The Trustee then commenced the present adversary proceeding against Gaffney. In the complaint, the Trustee raises several claims, each premised on the Trustee's allegation that Gaffney committed malpractice when he advised the Debtor to transfer the Maine property (together, the "malpractice claims").
The Trustee maintains that the malpractice claims are property of the bankruptcy estate both because they had accrued under state law at the time the bankruptcy case was filed and because the claims are "sufficiently rooted in the pre-bankruptcy past and so little entangled with the [Debtor's] ability to make an unencumbered fresh start that [they] should be regarded as `property' [of the estate]." Segal v. Rochelle, 382 U.S. 375, 380, 86 S.Ct. 511, 15 L.Ed.2d 428 (1966). According to the Trustee, the transfer of the Maine property harmed the Debtor by exposing him "to claims from creditors that he had engaged in fraud and had violated the Uniform Fraudulent Transfer Act, G.L. ch. 109A." Further, the Trustee argues, the Debtor was aware of that harm prepetition as evidenced by a statement signed by the Debtor after retaining bankruptcy counsel in which the Debtor indicated that he understood "that the bankruptcy trustee will likely view this conveyance as a fraudulent transfer."
Gaffney argues that the claims are not property of the bankruptcy estate because the claims (if any) arose postpetition. Discounting the impact of the signed statement acknowledging the likelihood that the Trustee would view the transfer as fraudulent, Gaffney notes instead that the Debtor did not list a potential malpractice claim or any other claims against Gaffney in his bankruptcy schedules, nor did the Debtor testify to the possible existence of the malpractice claims at the meeting of creditors. Gaffney further contends that the Debtor was not harmed — the Debtor could not have claimed an exemption in the Maine property even if he had not transferred it, and he received a discharge without challenge under 11 U.S.C. § 727(a)(1) (allowing for the denial of a debtor's bankruptcy discharge based on a prepetition transfer made with the intent to hinder, delay, or defraud creditors).
"[S]tanding is a `threshold question in every federal case, determining the
"Section 541(a) defines what interests of the debtor are transferred to the estate but does not address the existence and scope of the debtor's interest in a given asset." In re Brown, 601 B.R. 514, 517 (Bankr. C. D. Ill. 2019) (citing Dumas v. Mantle, 153 F.3d 1082, 1084 (9th Cir. 1998)). In determining whether a particular cause of action is property of the estate, some courts "have looked to whether, as of the petition date, a cause of action had accrued under applicable state law." In re de Hertogh, 412 B.R. 24, 28 (Bankr. D. Conn. 2009). Other courts, including several in this district, have held that the accrual of a cause of action is not determinative. Instead, relying on Segal v. Rochelle, 382 U.S. 375, 380, 86 S.Ct. 511, 15 L.Ed.2d 428 (1966) (decided under the former Bankruptcy Act), those courts have considered whether the cause of action is "sufficiently rooted in the pre-bankruptcy past and so little entangled with the bankrupt's ability to make an unencumbered fresh start," that "the claim is more properly categorized as prepetition property that should come into the estate...." Riccitelli, 320 B.R. at 490-91 ("The extent of a claim's accrual as of the petition date is relevant to determining the extent of its prepetition roots, but it is not the only factor and not necessarily a dispositive one); see also Mateer, 559 B.R. at 7 (the accrual of a cause of action as of the petition date is "not dispositive," but is a factor to be considered in determining the sufficiency of the prepetition roots of the claim); Tomaiolo v. Rodolakis (In re Tomaiolo), 2002 WL 226133, *3 (D. Mass. 2002) (ruling that malpractice claims that had not accrued under state law as of the petition date were nevertheless property of the estate because the "claims were sufficiently in existence at the time of filing to have become part of [the] estate"). However, as the Mateer court noted, "[t]here does not appear to be any controlling authority in the First Circuit" as to whether the determination of estate property is to be made with reference to "Segal's multifaceted inquiry" or should be limited to "considering only whether a cause of action has accrued under state law when the bankruptcy petition is filed." Mateer, 559 B.R. at 6 n.5.
This Court begins its inquiry where it must begin all statutory inquiries, "with the language of the statute itself" United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989). Section 541(a)(1) clearly states that property of the estate consists only of those property interests that are extant at the time the petition is filed. "Section 541(a)(1)'s phrase `as of the commencement of the case' operates as a temporal cutoff point, meaning that property
And, as the Brown court has recently observed, the "continuing viability of the `sufficiently rooted' test must also be measured against the Supreme Court's decision in Butner v. U.S., 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979)." Id. at 519. In Butner, also decided under the Bankruptcy Act, but postdating the Segal decision, the Supreme Court made no reference to the Segal analysis when it held that, unless a federal property interest is at issue, the nature and extent of a debtor's property interests are to be determined according to relevant state law. Butner, 440 U.S. at 54-55, 99 S.Ct. 914. The Supreme Court has only twice cited to the Segal decision following its issuance, and has not cited to Segal at all following the enactment of the Bankruptcy Code. In contrast, in interpreting provisions of the Bankruptcy Code, the Court has continued to cite to Butner in reiterating that "Congress has generally left the determination of property rights in the assets of a bankrupt's estate to state law." Butner, 440 U.S. at 54, 99 S.Ct. 914. See Stern v. Marshall, 564 U.S. 462, 495, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011); Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 549 U.S. 443, 451, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007); Raleigh v. Illinois Dep't of Revenue, 530 U.S. 15, 20, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000); Nobelman v. Am. Sav. Bank, 508 U.S. 324, 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993); Barnhill v. Johnson, 503 U.S. 393, 398, 112 S.Ct. 1386, 118 L.Ed.2d 39 (1992); Ohio v. Kovacs, 469 U.S. 274, 285-86, 105 S.Ct. 705, 83 L.Ed.2d 649 (1985).
Furthermore, while "[i]t is stated in the legislative history to section 541 that the `result' of Segal is followed," that statement is made "without any reference to the `sufficiently rooted test." Brown, 601 B.R. at 518.
Given the plain language of § 541(a)(1), the subsequent issuance of and continued reliance on the Butner analysis, and the relevant legislative history, this Court agrees with the Brown court's conclusion that the Segal analysis did not survive the enactment of the Bankruptcy Code and that
Brown, 601 B.R. at 520.
"Accordingly, the Court's analysis focuses on when (pre- or post-petition) and to whom (the estate or the post-petition debtor) a legally cognizable interest in the cause of action arose under the applicable state law." de Hertogh, 412 B.R. at 29. "If the resulting harm occurred prepetition, then the cause of action accrued prepetition and the Debtor['s] interest therein became property of the estate upon commencement of the bankruptcy case. If, however, the Debtor[] suffered no prepetition harm, [he] had no legally cognizable interest in [the malpractice claims] as of the Petition Date; any such interest would have arisen only post-petition when the cause of action accrued." Id. at 30-31.
Having narrowed the analysis to whether, as of the petition date, the malpractice claims had accrued under applicable Massachusetts law, the Court easily concludes that they did not. The Debtor's awareness or knowledge of potential claims is not dispositive; "the Court attributes no relevance to the date on which the Debtor became aware of [potential claims]. His awareness of the claim might be relevant to the statute of limitations but not to the accrual of the claim itself." Riccitelli, 320 B.R. at 492 n.17. The Trustee asserts that the malpractice claims arose prepetition based on the Debtor's "exposure" to possible prepetition fraudulent transfer claims and in light of the Debtor's awareness of potential "issues" with the transfer of the Maine property. However, the Trustee has not indicated any actual prepetition harm to the Debtor that would have resulted in the accrual of the claims alleged in the complaint.
In re Tomaiolo, 205 B.R. 10, 14 (Bankr. D. Mass 1997).
This result, though not the "sufficiently rooted" analysis, clearly survived the passage of the Bankruptcy Code as Congress intended. "The tax refund claim at issue in Segal was treated by the Court as a property interest in existence on the petition date.... The amount of the refund was uncertain, but the statutory right to a refund was unconditionally established as of the petition date." Brown, 601 B.R. at 518.