Opinion
No. 00-41657 TK; Chapter 7
December 28, 2001
MEMORANDUM OF DECISION
Thomas Swihart ("Debtor"), a chapter 7 debtor, objects to the claim of Daniel Marcus ("Marcus") and Christine Simon ("Simon") (collectively the "Clients") for legal malpractice. The Debtor contends that the Clients' claim has no merit and that the Clients have no standing to assert the claim. For the reasons stated below, the Court concludes that a portion of the claim has merit and a portion does not. The claim is allowed in the amount of $9,673.60, the amount paid by Marcus after his bankruptcy to satisfy his student loans. The balance of the claim, as it pertains to the amount paid by Simon to satisfy her student loans, is disallowed. In addition, the Court concludes that the Clients do have standing to assert the claim.
SUMMARY OF FACTS AND PROCEDURAL BACKGROUND
The Clients hired the Debtor to file a chapter 7 bankruptcy petition on their behalf on March 18, 1998. At that time, the Clients' debt consisted of approximately $35,000 in student loan debt and approximately $30,000 in credit card debt. Of the student loan debt, $9,222.93 of the debt represented student loans made to Daniel Marcus ("Marcus") and $25,000 represented student loans made to Christine Simon ("Simon"). These figures are taken from the bankruptcy schedules filed in the Clients' bankruptcy case.
In March 1998, when the Clients first hired the Debtor to file their bankruptcy petition, student loans, other than HEAL loans (i.e., Health Education Assistance Loans), were dischargeable in bankruptcy if they had been in payment status for at least seven years. If a borrower obtained a deferment after the loans went into payment status, the period during which the repayment was deferred would not count toward the seven year period. The Clients informed the Debtor that they wished to discharge their student loans and that they believed that the loans were dischargeable in bankruptcy. They also informed him that they wished to file for bankruptcy quickly because they understood that bankruptcy legislation was pending that would make it more difficult for them to qualify as chapter 7 bankruptcy debtors (the "Bankruptcy Reform Legislation"). The Debtor did not take this concern seriously because he knew that the Bankruptcy Reform Legislation had a deferred effective date with respect to most of its provisions. In fact, to date, the Bankruptcy Reform Legislation has still not been enacted.
The Debtor did not fully understand the law applicable to the discharge of student loans in bankruptcy. However, he advised the Clients that, based on what they told him, he believed the loans were dischargeable. He did not undertake any research or investigation to make certain that his opinion was correct. He testified that, for the retainer he had quoted the Clients, he could not afford to do this. Because of the Debtor's uncertainty concerning whether the Clients' student loans were old enough to be dischargeable, he decided that it would be better to wait a while to file their petition.
Over the next seven months, the Clients repeatedly urged the Debtor to prepare and file their petition. Eventually, the Clients informed the Debtor that they intended to hire another attorney and asked him to return the portion of the retainer they had paid him in March. At this point, the Debtor finally prepared the Clients' petition and delivered it to them for their signatures. On October 1, 1998, the Clients signed the petition and gave the Debtor a check for the balance of the retainer. Despite his knowledge that the Clients wanted the petition filed immediately, without telling them that he intended to do so, the Debtor waited an additional eight days to file the petition to make sure that the Clients' check had cleared. The petition was finally filed on October 9, 1998.
On October 2, 1998, Congress passed legislation other than the Bankruptcy Reform Legislation (the "Student Loan Legislation") that made student loans nondischargeable no matter how long they had been in payment status unless their payment would impose an undue hardship on the debtor. The Clients could not qualify for an undue hardship discharge. The Student Loan Legislation became effective immediately, as soon as the bill was signed by the President. The bill was signed and thus became effective on October 8, 1998, one day before the Clients' bankruptcy petition was filed.
The Debtor was unaware of the enactment of the Student Loan Legislation until well after it became effective. The Debtor would have learned about its enactment in time to file the Clients' bankruptcy petition before the Student Loan Legislation became effective if he had subscribed to a bankruptcy newsletter or had regularly checked a bankruptcy news website available through the Internet (the "ABI website").
The Clients did not schedule the malpractice claim as an asset in their bankruptcy estate. They first became aware of the Student Loan Legislation and that their student loans had not been discharged in February 1999, when the lenders attempted to collect the loans. When they realized that their student loans had not been discharged in February 1999, they repaid the loans. The Clients' claim in this case is based on the repayment amounts.
The Debtor filed this bankruptcy case on March 17, 2000. The Clients timely filed a proof of claim for legal malpractice. The Debtor filed an objection to the claim. The objection was scheduled for an evidentiary hearing on September 20, 2001. On the day of the hearing, the Debtor filed a motion to dismiss on the ground that, because the malpractice claim had not been scheduled in the Clients' bankruptcy case, it was still an asset of their estate even though their bankruptcy case had been closed. Therefore, only their chapter 7 trustee (the "Trustee") had standing to assert the claim.
Because the motion was filed on the day of trial, the Court proceeded with the trial without ruling on the motion. At the conclusion of the trial, the Court set a briefing schedule and hearing date for the motion to dismiss. The Court also directed the parties to give notice of the standing issue to the chapter 7 trustee in the Clients' bankruptcy case. In due course, the Trustee filed an opposition to the motion to dismiss, asserting an interest in the legal malpractice claim on behalf of the Clients' bankruptcy estate. At the conclusion of the hearing on the motion to dismiss, the Court took the matter under submission.
DISCUSSION A. SUMMARY OF ARGUMENTS AND EXPERT TESTIMONY
The Clients contend that the Debtor commmitted legal malpractice in his representation of them in their bankruptcy case. They contend that one of the primary reasons that they wished to file bankruptcy was to discharge their student loans. As a result, they urged the Debtor to file their bankruptcy petition quickly before their right to discharge their debts was removed or limited by a change in the law. They contend that, at the time they hired the Debtor and until October 8, 1998, their student loans were dischargeable.
The Clients further contend that the Debtor failed to follow their instructions to file their bankruptcy petition quickly. By the time their bankruptcy petition was filed, the law had changed to make the formerly dischargeable loans nondischargeable. As a result, Marcus was forced to pay $9,673.60 in student loans and Simon was forced to pay $25,736.97. The Clients contend that the Debtor's negligence proximately caused them damage in the amount of these payments.
The Debtor contends that his conduct did not constitute legal malpractice. He concedes that he did not have sufficient information or sufficiently understand the law applicable to the dischargeability of student loans when he met with the Clients in March 1998. He also concedes that he did nothing to investigate the facts or to research the law to cure this deficiency. However, he contends that he was not negligent in failing to do so because the fee the Clients had agreed to pay him was insufficient to cover this work. He contends that, under these circumstances, it was reasonable for him to delay filing the Clients' bankruptcy petition so as to increase the likelihood that the loans would be dischargeable. The Debtor also contended that much of the delay was due to the Clients. The Clients testified to the contrary. The Court believed the Clients and did not believe the Debtor.
The Debtor also contends that his failure to learn about the passage of the Student Loan Legislation before it became effective was not negligent. He contends that, given the speed with which the Student Loan Legislation was enacted, he would only have learned of it in time to file the petition before it became effective if he had checked the ABI website on a daily basis. He contends that it does not constitute negligence for a bankruptcy attorney to fail to check the ABI website on a daily basis. Moreover, he contends that it was not negligent to delay filing for the petition for an additional eight days after the petition was signed and he received a check for the balance of the retainer without advising the Clients of his intention to do so.
Finally, the Debtor contends that the Clients failed to prove that they were damaged by the delay in filing. He asserts that the Clients failed to prove that their student loans were nondischargeable before the Student Loan Legislation was enacted.
Both the Clients and the Debtor called attorneys who were bankruptcy specialists as expert witnesses. The Clients' expert, Larry Szabo ("Szabo"), testified that he learned of the passage of the Student Loan Legislation a few days after Congress passed it and several days before the President signed the bill. He learned of it from a bankruptcy newsletter to which he subscribes. He testified that he believed that it did fall below the standard of care owed by an attorney representing a debtor in a bankruptcy case not to keep current with changes in the law, either by subscribing to a newsletter or by checking the Internet regularly.
The Debtor's expert, Fayedine Coulter ("Coulter"), testified that she did not believe that failing to subscribe to a newsletter or to check the Internet regularly fell below the standard of care for a bankruptcy attorney. She testified that, like the Debtor, she did neither and instead relied on periodic conversations with colleagues to keep up to date with changes in the law. However, she admitted that, if she had had clients with student loan debt in the fall of 1998, she probably would have paid close attention to any pending legislation that might have affected the dischargeability of student loans.
B. DISCUSSION
The four elements of a legal malpractice claim are duty, breach of duty, proximate cause, and damages. Ishmael v. Millington, 241 Cal.App.2d 520, 523 (1966). The burden of proof is on the plaintiff to show each element. Sukoff v. Lemkin, 202 Cal.App.3d 740, 744 (1988). Based on the evidence presented at trial, the Court concludes that the Debtor breached a variety of duties to the Clients. The Court also concludes that these breaches were the proximate cause of the portion of the Clients' damages attributable to Marcus's student loans. However, the Court concludes that the Clients have failed to establish that Simon's student loans were dischargeable before the Student Loan Legislation was enacted. Therefore, they have failed to establish that the Debtor's breaches proximately caused any damage attributable to Simon's student loans.
1. Duty and Breach of Duty
The creation of the attorney-client relationship imposes upon the attorney the duty to represent the client with "such skill, prudence, and diligence as lawyers of ordinary skill and capacity possess and exercise in the performance of the tasks which they undertake." Neel v. Magana, Olney, Levy, Cathcart Gelfand, 6 Cal.3d 176, 180 (1971); Wright v. Williams, 47 Cal.App.3d 802, 809 (1975). The standard for the degree of care expected of the attorney is that of a figurative lawyer of ordinary skill and capacity in the same locality under similar circumstances.Ishmael v. Millington, 241 Cal.App.2d 520, 526 (1966).
A member of the State Bar shall not take on or continue representation in a legal matter when he knows that he does not have sufficient time, resources, and ability to perform the matter with competence. Calvert v. State Bar of California, 54 Cal.3d 765, 782 (1991). An attorney is obliged to decline the case if he lacks the time and resources to pursue the client's case with reasonable diligence. Segal v. State Bar of California, 44 Cal.3d 1077, 1084 (1988). At trial, the Debtor admitted that he did not sufficiently understand the law concerning the dischargeability of student loans and that he was unwilling to spend the time to research the issue. Under those circumstances, he had a duty to decline the representation.
An attorney owes to his client a duty of diligence. Wright v. Williams, 47 Cal.App.3d 802, 809 (1975). This duty requires an attorney either to know the law or conduct diligent research regarding the law.Wright v. Williams, 47 Cal.App.3d 802, 809 (1975). This duty of diligence exists without regard to how much the attorney has been paid.Segal v. State Bar of California, 44 Cal.3d 1077, 1084 (1988) (attorneys owe the same duty of diligence to pro bono clients as to paying clients). Thus, the Debtor's excuse for failing to research the law affecting the dischargeability of student loans once he did take the case — i.e., that he was not being paid enough by the Clients — is inadequate.
An attorney also has a duty to follow the instructions of his client. If he fails to do so, he is liable for all losses resulting from his failure to follow those instructions "with reasonable promptness and care." Lally v. Kuster, 177 Cal. 783, 786 (1918). Despite the Clients' repeated urging that the Debtor file their bankruptcy petition promptly, the Debtor failed to do so for a period of months. Even when the petition was prepared and signed and the Clients had given the Debtor a check for the balance of the retainer, the Debtor delayed an additional eight days. By this conduct, the Debtor clearly breached his duty to follow the Clients' instructions. At trial, there was considerable testimony and argument regarding whether a bankruptcy attorney is negligent if he or she fails to subscribe to a bankruptcy newsletter or to check the Internet for changes in the law every day or so. Given the Court's conclusion that the Debtor was negligent in accepting the case in the first place and thereafter in failing to follow the Clients' instructions, the Court need not decide this issue.
2. Proximate Cause and Damage
However, to establish a claim for legal malpractice, it is not enough to establish that an attorney breached a duty of care owed to a client. The claimant must also establish that the breach proximately caused the Clients' damage. An attorney's breach is the proximate cause of a Clients' damage if, but for the attorney's breach, the client's legal action would have been successful. Sukoff v. Lemkin, 202 Cal.App.3d 740, 744 (1988). Here, to establish this element, the Clients were required to prove that, but for the Debtor's delay in filing their bankruptcy petition, their student loans would have been dischargeable.
Before the enactment of the Student Loan Legislation, in 1998, student loans were nondischargeable if they were HEAL loans or if they had not been in payment status for at least seven years when the petition was filed. See 42 U.S.C. § 292f(g) (HEAL loans nondischargeable); In re Peel, 240 B.R. 387, 391 (Bankr.N.D.Cal. 1999) (noting that 11 U.S.C. § 523(a)(8) was amended to eliminate the seven year repayment exclusion by the Higher Education Amendments of 1998, Pub.L. No. 105-244, 112 Stat. 12581, 1837). It was undisputed that Marcus's loans were not HEAL loans. Marcus testified competently that he began paying back his student loans in 1989, that he received about nine months of forbearance, and that he had been paying back his student loans for over seven years as of March 1998. (Trial Transcript, page 101, line 21-page 102, line 4.) Thus, the Clients adequately established proximate cause with respect to Marcus's student loan debt.
Originally, some of Simon's student loans were HEAL loans. However, Simon testified competently that she had paid these loans off before the Clients hired the Debtor and that her remaining loan were not HEAL loans. There is some evidence that suggests that Simon's student loan was in payment status some time in or about April 1989, more than seven years before the Clients first consulted the Debtor. [Trial Transcript, page 87, lines 7-9.) However, there was no testimony concerning whether or not Simon received any deferments between April 1989 and March 1998. Therefore, the Court is unable to find by a preponderance of the evidence that Simon's student loans were dischargeable in bankruptcy prior to the enactment of the Student Loan Legislation.
Although Marcus scheduled his student loan debt in his bankruptcy case in the amount of $9,222.93, after his bankruptcy, he was required to pay $9,673.60 to satisfy the debt. The additional amount is presumably attributable to accrued interest. Thus, the Court will allow the Clients' claim in this amount and disallow the remainder of the claim.
B. STANDING TO ASSERT THE LEGAL MALPRACTICE CLAIM?
As noted above, on the day of trial, the Debtor filed a motion to dismiss this adversary proceeding on the ground that the Clients had no standing to assert the claim set forth therein. The Debtor contends that the claim was the Clients' property on the day their bankruptcy petition was filed and thus became property of their bankruptcy estate pursuant to 11 U.S.C. § 541. According to the Debtor, because the Clients failed to schedule the claim, the claim remained property of their estate even though the case was closed. If a debtor properly schedules an asset in his or her bankruptcy schedules and the trustee closes the estate without administering (or otherwise disposing of) the asset, the asset is deemed abandoned to the debtor. Otherwise, it remains property of the estate even after the case is closed. See 11 U.S.C. § 554(c). The chapter 7 trustee assigned to the Clients' bankruptcy case has intervened and asserted an interest in the legal malpractice claim for the benefit of their estate.
The Clients contend that the legal malpractice claim was not their property when their bankruptcy case was filed and is not property of their bankruptcy estate. They contend that, under state law, they did not acquire the claim until they discovered it. The evidence at trial was that the Clients did not discover that their student loans were not discharged until February 1999.
Under state law, a legal malpractice claim accrues when the plaintiff discovers it or when the plaintiff should have discovered it, using reasonable diligence. Cal. Civ. Proc. Code § 340.6. However, the claim may not be filed more than four years after the wrongful act or omission occurred. Cal. Civ. Proc. Code § 340.6. The attorney has the burden of proving when the plaintiff discovered or should have discovered the claim. Samuels v. Mix, 22 Cal.4th 1, 6-7 (1999). The Debtor contends that the Clients should have discovered their legal malpractice claim by the time their bankruptcy petition was filed. The Debtor notes that the Clients were concerned about possible changes in bankruptcy law and were monitoring those changes carefully. Thus, using reasonable diligence, they should have learned about the Student Loan Legislation soon after it passed Congress.
The Court disagrees. The Clients were not attorneys. They were aware of the Bankruptcy Reform Legislation pending in Congress in 1998. However, no evidence was provided that they were aware of the Student Loan Legislation while it was still pending. There was also no evidence that they had access to a bankruptcy newsletter or knew of the existence of a bankruptcy website. As stated above, it was the Debtor's burden to provide such evidence. Moreover, the Debtor's contention is particularly hard to swallow given his earlier argument that he, an attorney handling a bankruptcy case, was not negligent in failing to learn about the passage of the Student Loan Legislation before it became law.
Moreover, the legal malpractice claim did not accrue until after the petition was filed for another reason. Section 340.6(2) of the California Code of Civil Procedure provides that the accrual of a legal malpractice is tolled while the attorney guilty of the malpractice continues to represent the plaintiff. Cal. Civ. Proc. Code § 340.6(2); Lockley v. Law Office of Cantrell, Green, Pekich, Cruz McCort, 91 Cal.App.4th 875, 887-888 (2001). The Debtor continued to represent the Clients after their bankruptcy case was filed. Therefore, the claim could not have accrued prior to the filing of the petition.
CONCLUSION
The Clients are entitled to a claim against the Debtor's bankruptcy estate in the amount of $9,673.60 representing the amount of Marcus's student loan repaid after the Clients' bankruptcy case. Although they established that the Debtor was negligent in having accepted their case and in failing to follow their instructions to file the case quickly, they failed to establish that Simon's student loans were dischargeable prior to October 9, 1998. As a result, they failed to establish that the Debtor's negligence proximately caused damage in the amount of Simon's student loan repaid after the Clients' bankruptcy case.
The Clients do have standing to assert the claim. It is not property of their chapter 7 bankruptcy estate. The claim did not accrue under state law until after their bankruptcy petition was filed for two reasons. First, they did not discover, nor with reasonable diligence should they have discovered, the existence of the claim prior to the filing of their bankruptcy petition. Second, the accrual of their claim was tolled as long as the Debtor represented them: i.e. during their bankruptcy case. Counsel for the Clients is directed to submit a proposed form of order allowing their claim in the amount of $9,673.60.