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Appellate Courts Split On Bankruptcy Ownership of Malpractice Claims
The debtors' legal malpractice claim was "not property of their bankruptcy estate," held a split Ninth Circuit on June 30, 2020. In re Glaser, 816 Fed. Appx. 103, 104 (9th Cir. June 30, 2020) (2-1). But the U.S. District Court for the District of Minnesota one week later affirmed a bankruptcy court judgment that "the [debtor's] estate was the proper owner" of such a claim. In re Bruess, 2020 WL3642324, 1 (D. Minn. July 6, 2020). Most recently, the Sixth Circuit held that the debtors' malpractice claim was their property "and not the bankruptcy estate." In re Blasingame, 2021 WL 245300, 1 (6th Cir. Jan. 26, 2021).
All three courts relied on state law in their decisions, purportedly consistent with U.S. Supreme Court precedent. Rodriguez v. FDIC, 589 U.S. ___, 140 S. Ct. 713 (Feb. 25, 2020) (state law determines a "fight over [ownership of] a tax refund."). As shown below, however, federal law should have governed ownership of the claims in all three cases, making them available to creditors as assets of the bankruptcy estate. Judicial hair-splitting, when applying state law to federal bankruptcy cases, creates only uncertainty, but Article I, section 8, of the U.S. Constitution mandates "uniform" bankruptcy law.
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The ownership of malpractice claims is significant in business cases. If the claims are part of the debtor's estate, creditors share in any recovery. When the claims are excluded from the estate, though, creditors receive nothing. As the Sixth Circuit noted in Blasingame, "[t]here is little agreement both inter- and intra-circuit, on how courts should deal … with a claim for legal malpractice against the filing attorneys …." Blasingame, 2021 WL 245300, at 5.
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