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In re Khabushani

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Loughran v. Wells Fargo Bank, N.A.

Summarizing by Sarah Tomlinson

Church Joint Venture, L.P. v. Earl Blasingame

Case Type:
Case Status:
19-5505 (6th Circuit, Jan 26,2021) Published
Sustaining the Bankruptcy Appellate Panel’s affirmance of the bankruptcy court’s summary judgment grant, the U.S. Court of Appeals for the Sixth Circuit (Circuit) held malpractice claims against two bankruptcy lawyers to be the debtors’, not their joint estate’s, property. In so doing, the Circuit noted Siegel’s flaws and finally gave an answer—the accrual date, tempered by the discovery rule, per applicable nonbankruptcy law (Tennessee’s)—and named the factors relevant—prepetition conduct and violation—to a question of first impression: when and how such a cause becomes an estate’s per § 541.
Procedural context:
The first phase of the underlying chapter 7 case (Case) ended with two appeals. Prepetition, Earl B. and Margaret G. Blasingame (Blasingames or Debtors) had hired two lawyers—Martin A. Grusin and Tommy L. Fullen (the filing attorneys)—to launch their bankruptcy filing and represent them during the Case’s pendency. Unfortunately, the various documents prepared by Fullen with the input of Grusin and submitted by Fullen, most especially the Debtors’ schedules, evidenced flaws and boasted omissions so serious as to justify the denial of the Debtors’ discharge by the United States Bankruptcy Court for the Western District of Tennessee (BC). The BAP and Circuit affirmed this first decision. Predicated on the seemingly incontrovertible—negligence by the filing attorneys simply incompatible with statutory law and professional codes—the next stage involved two different lawsuits. Specifically, both the Debtors and their estate (Estate) sued the filing attorneys, the Debtors in Tennessee state court, the Estate in the BC, for legal malpractice. As to the former, even though the Debtors reached a tentative settlement of their malpractice claims, the BC rejected this proposed, a decision later affirmed by the BAP and Circuit. Meanwhile, before the BC, Church Joint Venture, L.P. (CJV), the creditor who held 95% of the Estate’s unsecured claims, took the lead, having won a grant of derivative standing on behalf of the Estate. Edward L. Montedonico (Trustee), the appointed chapter 7 trustee, had assented to this switch due to his belief that the Estate lacked the resources to pursue the Debtors’ undeniably viable malpractice claims. The appeal before the Circuit centered on CJV’s eventual motion for summary judgment (Relevant MSJ). Therein, CJV asserted that the malpractice claims against the filing attorneys constituted property of the Estate and thus lay outside the Debtors’ purview. The Debtors’ response, which the BC treated as a cross-motion for summary judgment, sought a contrary declaration. The BC and the BAP rejected CJV’s view for somewhat different reasons. Applying Tennessee law to determine when a legal malpractice claims accrues, the BC determined that their malpractice claim arose post-petition and were therefore the property of the Blasingames. The BAP did the same, but on the basis that the malpractice claims arose post-petition and were thus property of the Blasingames because the only injury—denial of the Blasingames’ discharges—occurred post-petition. CJV appealed.
Whatever omens appeared, none noticed them. In July 2008, the Debtors met with Grusin to discuss the mounting pressure of their financial situation. Familiar with the Debtors’ finances due to these conversations, Grusin recommended that the Debtors retain Fullen, a bankruptcy attorney, to assist in a potential filing. All four persons soon joined in the Debtors’ prepetition colloquies. Accordingly, in the weeks preceding the Petition Date, the Debtors signed engagement agreements with both Grusin and Fullen. To any neutral observer’s likely horror, the Case opened badly and only got worse. On August 15, 2008, the Debtors filed for relief under chapter 7 of the Bankruptcy Code (Code) in the BC; the Trustee was soon appointed. Fullen signed the petition as the attorney of record and had prepared the requisite schedules based on financial information obtained from Grusin. As the Circuit concluded in an earlier opinion, these filings grossly failed to disclose millions of dollars in assets that the Debtors controlled through a complex web of family trusts, shell companies, and shifting “clearing accounts.” Cognizant of these defects, the BC granted the Trustee’s motion for summary judgment, denying the Debtors’ discharge, on February 22, 2011 (First MSJ Order). Months later, on July 19, 2011, the BC disqualified the filing attorneys from any further representation of the Debtors. Although the Debtors’ new counsel somehow succeeded in securing relief from the First MSJ Order, the BC again denied the Debtors’ plea for a discharge on January 15, 2015, following a trial. On appeal, the BAP affirmed this denial. The Debtors and the Estate (in another’s guise) thereafter launched their own attack on the filing attorneys. CJV, granted derivative standing, sued in the BC; the Debtors instead sued in Tennessee state court. When the Debtors attempted to settle their malpractice claim for first $1 and then $1.25 million, the BC rebuffed their effort based on the overwhelming likelihood that their malpractice claims would be successful on the merits. The Debtors’ appeal of this denial was dismissed by the BAP and the Circuit for lack of jurisdiction. In the wake of these rulings, the sole issue before the Circuit for the first time—a question of law (and one first impression) as to how a court is to determine the ownership of legal malpractice claims—was teed up by the Relevant MSJ’s filing.
Richard F. Suhrheinrich; Bernice B. Donald; and Eric E. Murphy

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