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LEGAL TRENDS Legal Malpractice Claim Survives A Discharge In Bankruptcy By David V. Wilson II The Fifth Circuit recently addressed whether a legal malpractice claim can be maintained after the claimant has been discharged from the underlying debt in a Chapter 7 bankruptcy. In Stanley v. Trinchard, 500 F.3d 411 (5th Cir. 2007), the debtor, Gary Eugene Hale, was placed in involuntary bankruptcy by a judgment creditor named Gerald Burge. Burge had been a homicide suspect who was convicted of murder after an investigation Hale conducted while a detective at the St. Tammany Parrish Sheriff’s Office in Louisiana. Burge was exonerated after it was disclosed that exculpatory evidence consisting of several of Hale’s investigative reports had not been disclosed to the defense before Burge’s trial. In a subsequent civil rights lawsuit, Hale was defended by the Trinchard & Trinchard LLC law firm. This law firm had been retained by the sheriff’s office’s liability insurance carrier. After negotiating a settlement of only part of Burge’s claims, at the behest of the liability carrier, the Trinchard & Trinchard firm withdrew from representing Hale, who went to trial representing himself on the remaining claims. The result was a $4 million judgment against Hale. In the course of collecting the judgment, Burge forced Hale into involuntary bankruptcy. H.S. Stanley, Jr., was appointed trustee of Hale’s bankruptcy estate. As trustee, Stanley filed a legal malpractice claim against the Trinchard defendants alleging they were negligent in their representation of Hale. The Trinchard defendants successfully moved for summary judgment in district court. They argued that Hale’s discharge in bankruptcy, which preceded the legal malpractice lawsuit, made it impossible for Stanley to show that any damages resulted from the Trinchard defendants’ alleged malpractice. In other words, since Hale could never be personally liable for the Burge judgment, Hale could show no damages resulting from the alleged malpractice, and a crucial element of the cause of action was, therefore, not present. Stanley appealed the district court’s grant of summary judgment to the Fifth Circuit. The Fifth Circuit looked to In re Segerstrom, 247 F.3d 218 (5th Cir. 2001) and In re Edgeworth, 993 F.2d 51 (5th Cir. 1993). These cases established that bankruptcy discharge eliminates only the debtor’s personal liability and not the debt itself. Those opinions reasoned that it makes little sense to allow those who have committed torts to escape liability because of the financial misfortunes of the victims. Further, creditors of such debts which have been discharged are free to seek collection from sources other than the debtor. Furthermore, the Fifth Circuit pointed out that the cause of action transferred to Stanley as trustee for the estate at the commencement of the bankruptcy petition, which is necessarily prior to discharge. Therefore, it was an unliquidated claim which was the property of the estate, and the estate was free to seek enforcement of Hale’s rights. Indeed, the estate was obligated to enforce those rights in order to attempt payment of the underlying debt. Thus, the district clerk below was criticized by the Fifth Circuit for failing to distinguish between Hale individually and his bankruptcy estate. As a result, the Fifth Circuit reversed the summary judgment in favor of the law firm and remanded the legal malpractice claims back to the district court for further proceedings. David V. Wilson II is a shareholder with Hays, McConn, Rice & Pickering and practices in both Texas and Nevada. He is a member of The Houston Lawyer Editorial Board, and former editor-in-chief of The Houston Lawyer. |
