Legal Malpractice

The Fourth Department, Legal Malpractice and Bankruptcy

By (Andrew Lavoott Bluestone)

In Dischiavi v Calli ;2009 NY Slip Op 09773 ;Decided on December 30, 2009 ;Appellate Division, Fourth Department  we see a discussion of the effects of a bankruptcy filing on a legal malpractice claim.  While the governing principal applies to any cause of action which a plaintiff had when bankruptcy was filed. it seems to come up especially frequently in legal malpractice cases.  Briefly put, any claim at all, whether in suit, or simply in existence, which exists at the time a bankruptcy petition is filed, becomes an asset of the debtor's estate, and thus passes out of the hands of the individual debtor.  The usual scenario is that the debtor obtains a discharge in bankruptcy, then sues an attorney.  Absent some act which allows the debtor to keep the asset [cause of action] it belongs to the estate, and the debtor lacks standing to bring the action.
 

In Dischiavi, the court found it a question of fact whether the debtor [plaintiff] had reason to know of the cause of action at the time of petition filing. "Defendants met their initial burdens in part by establishing that plaintiffs failed to include any of their causes of action against defendants in their schedule of assets for their bankruptcy proceeding, that the causes of action for breach of contract, legal malpractice, breach of fiduciary duty and negligence accrued prior to the commencement of the bankruptcy proceeding, and that plaintiffs obtained a [*2]discharge in bankruptcy (see Wright v Meyers & Spencer, LLP, 46 AD3d 805; Nationwide Assoc., Inc. v Epstein, 24 AD3d 738; see also Whelan v Longo, 23 AD3d 459, affd 7 NY3d 821). Defendants failed, however, to demonstrate that plaintiffs "knew or should have known of" those causes of action against defendants prior to commencing the bankruptcy proceeding (Dynamics Corp. of Am., 69 NY2d at 197; see R. Della Realty Corp. v Block 6222 Constr. Corp., 65 AD3d 1323). Defendants also failed to establish that the fraud cause of action accrued prior to commencement of the bankruptcy proceeding (cf. Wright, 46 AD3d 805). "
 

Full post as published by New York Attorney Malpractice Blog on December 31, 2009 (boomark / email).