McCracken v. Arnot (In re Pacific Cargo Services, LLC)

Summarized by Lars Fuller , BakerHostetler
11 years 2 weeks ago

Citation:

McCracken, et al. v. Arnot (In re Pacific Cargo Services, LLC), BAP No. )R-14-10136-KiKuJu (BAP 9th Cir. Feb. 19, 2015)

Tag(s):

Ruling:

The 9th Circuit BAP affirmed judgment of the bankruptcy court (D. Or.) avoiding transfer as a preference. The judgment avoided debtor's prepetition transfer of legal malpractice claims to creditors as part of a prepetition settlement of a pending lawsuit. BAP agreed with the bankruptcy court that debtor's malpractice claim had accrued prepetition, and thus, was a prepetition transfer of property of the debtor, notwithstanding that the settlement agreement had not been approved, and judgment by Appellants against debtor had not entered. BAP affirmed the bankruptcy court's rejection of Appellants' argument that notwithstanding the execution of the agreement to transfer the claim prepetition the malpractice claim had not accrued prepetition under state law. BAP affirmed the conclusion that under Oregon law a malpractice claim accrues when the claimant incurs "some damage," including expenses incurred in defending a cause of action, and consequently, debtor's malpractice claim began accruing prepetition when debtor began incurring expenses defending against Appellants' state law claims. BAP affirmed the conclusion that claim did not just accrue when a judgment entered. BAP also agreed that there was no basis to award Appellants attorneys' fees for unsuccessfully defending preference claim, notwithstanding that Appellants' underlying claims against debtor were for wage claims, and state statute provided for attorneys' fees in pursuing unpaid wages.

Procedural context:

Bankruptcy court entered judgment in favor of plaintiff trustee on preference suit. Defendants appealed to BAP for 9th Circuit.

Facts:

Debtor, a limited liability company, provided courier services in Washington and Oregon. Appellants were former employees of debtor. Prior to debtor's chapter 11 case, appellants commenced a class action suit against debtor in Washington state court alleging wage and hour law violations. After 18 months of litigation, Appellants and debtor entered into settlement agreement and stipulated judgment of $1.6 million. Debtor also assigned to Appellants any legal malpractice claims debtor had against its former attorneys. Less than a month later, and before the state court had approved the settlement, debtor filed chapter 11. Debtor's chapter 11 case was subsequently converted to chapter 7. The chapter 7 trustee filed a preference action against Appellants, seeking to avoid debtor's prepetition assignment of the malpractice claims. Appellants counterclaimed for attorneys' fees related to their wage claims. Appellants then filed a malpractice claim against debtor's former attorneys in Oregon state court. Trustee obtained stay of Appellants' state court malpractice claim, then obtained judgment on preference claim from bankruptcy court, avoiding debtor's transfer of malpractice claim.

Judge(s):

Kirscher, Kurtz, and Jury

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