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Court Holds Bankruptcy Malpractice Claim Belongs to Bankruptcy Estate

In re Bruess, No. 19-2714, was decided by the District Court for the District of Minnesota. The debtor claimed that her bankruptcy lawyer made an error by filing a chapter 7 case on her behalf and thereby making her homestead interest in property subject to creditor claims. The court also held that the malpractice claim was an asset of the bankruptcy court. I don’t doubt that the reasoning was correct, but the practical effect is that the debtor’s interest in the claim will be subject to the claims of her creditors. The result of the case is a double whammy for the debtor.

Background Facts and Procedural History

On January 14, 2013, Plaintiff Sandra Jo Bruess of New Ulm, Minnesota, was granted a one-third interest in her father’s Brown County property (“Homestead”) valued at $562,760.33.[1] (Notice of Appeal, Attachment 4 (“Order on Appeal”) at 2, October 15, 2019, Docket No. 1.) Despite knowing of the Homestead interest, Bruess’s attorney, Stephen Behm, advised her to file for bankruptcy relief. (Id. at 4.) Behm incorrectly assured Bruess that her entire interest in the Homestead would be protected in bankruptcy. (Id.) On December 15, 2014, Bruess filed for Chapter 7 bankruptcy and claimed an exemption on her one-third interest in the Homestead. (Id. at 2.)

Defendant, the trustee of Bruess’s bankruptcy estate, objected to the exemption on the grounds that Bruess had acquired her interest fewer than 1215 days before the date of the bankruptcy petition pursuant to 11 U.S.C. ยง 522(p). (Id.) The Bankruptcy Court sustained the objection and, pursuant to statute, limited Bruess’s exemption to $155,675, with the remaining value going to the bankruptcy estate. (Id.).

The Bankruptcy Court found that the malpractice claim accrued the moment the petition was filed and therefore the estate owned the claim, and granted the Trustee’s motion for summary judgment. (Id. at 33). Bruess now appeals that decision, arguing that she is the rightful owner of the malpractice claim and that the bankruptcy court decision should be overturned.

When did the claim accrue?

According to the Court Minnesota law is that the claim accrues when the plaintiff incurs “some damage” from the lawyer’s negligent act. (This is not the same as Illinois law). “Some damage” occurs when the matter passes the point of no return. Unfortunately for the debtor in this case, the filing of the bankruptcy petition was the point of no return. Once she filed the Chapter 7 case, her interest in the homestead became subject to creditor claims. Had she not filed bankruptcy, the homestead would have been exempt.

This is an unfortunate and, in my experience, very rare situation.

Should you have a question about legal malpractice, we would be happy to hear from you and discuss your issue. We can be reached at 312-357-1515.

Ed Clinton, Jr.

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