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August 18, 2017

Legal Update
William L. Boesch

Client’s failure to disclose tort claim as a bankruptcy asset doesn’t bar malpractice claim against lawyers who missed statute of limitations

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The Massachusetts Appeals Court has reinstated a legal malpractice case brought by a former personal-injury client who, after hiring the defendant lawyers, obtained a bankruptcy discharge of her debts without disclosing the existence of the personal-injury claim to her creditors. The Appeals Court in Holland v. Kantrovitz & Kantrovitz LLP sought to remedy the client’s non-disclosure by ordering her to notify the bankruptcy trustee (from a case closed more than six years earlier) that he and the creditors may have rights in what is now a malpractice dispute. But the Appeals Court was unwilling to bar the client from bringing her malpractice suit as a matter of law.

The tort case and the bankruptcy.
Briefly, the client, Holland, was injured in January 2008 in a fall on ice outside the building where she worked. A maintenance company had allowed ice to gather from a defective gutter, and had not salted the area. Holland was unable to work for several years because of her injuries. She retained the defendant lawyers in September 2009 to file a tort lawsuit against the maintenance company. Shortly thereafter, her inability to work and mounting debts led her to file a pro se bankruptcy petition. A question on the required forms asked whether Holland had any “contingent and unliquidated claims,” to which she answered “No,” later saying that she did not understand the question to include her unfiled tort case. The subject of the injury came up in a subsequent recorded interview with the bankruptcy trustee, who asked whether Holland had been injured and felt she had the right to sue someone. “Yes,” she answered, and then referred to the fall and to a worker’s compensation claim she had made after the incident. The trustee did not pursue the matter further, and Holland’s debts (about $32,000) were discharged in early 2010.

The missed statute of limitations.
Unaware of the bankruptcy, the tort lawyers continued to represent Holland, but allowed the statute-of-limitations period to elapse in January 2011 without filing suit. In the ensuing malpractice action, Holland initially focused on the blown statute, but later added a second theory, that the lawyers had an affirmative obligation to inquire about her financial situation and thus to help her understand how best to deal with the injury claim in the context of her bankruptcy.

Lawyers: tort claim waived, so no harm.
The lawyers moved for summary judgment, arguing that Holland herself had defeated any personal-injury case as a matter of law by filing for bankruptcy and failing to disclose the claim. She could not have filed any tort case, the lawyers said—her claim belonged to the trustee.

Thus, the lawyers’ subsequent malpractice in failing (after the bankruptcy discharge) to timely file suit could not have caused any harm to Holland. Alternatively, the lawyers argued, having obtained her discharge on the basis that she had no such asset, Holland could not now sue for malpractice based on the position that the personal-injury claim was valuable—a reversal of the sort prohibited by the doctrine of judicial estoppel.

Appeals Court: client was harmed.
A superior court judge agreed with the lawyers’ argument, but the Appeals Court reversed. The result of Holland’s non-disclosure of the injury claim in bankruptcy, the court held, was not a waiver of the claim. Since the “value” of the tort claim (according to expert testimony presented by Holland in the malpractice case) far exceeded the amount of her debts, Holland retained a substantial interest in the claim, which survived until it was extinguished by the statute of limitations. To be sure, the court said, Holland’s non-disclosure of the tort claim meant that the interests of the bankruptcy trustee (and through him, Holland’s creditors) were not protected. For this reason, even now, long after the matter was closed, the trustee and creditors “may have an interest in any recovery on the malpractice claim,” and must be notified immediately. Nonetheless, there was a cognizable additional harm to Holland’s own interests in the tort claim, and on that injury she could now premise a malpractice claim.

More evaluation of estoppel defense needed.
Nor was the malpractice case necessarily barred, the Appeals Court held, by judicial estoppel. While this was an equitable matter for the trial judge to decide, the Appeals Court discerned that at summary judgment the judge had failed to properly consider Holland’s credibility-based arguments (1) that she believed she had adequately disclosed the tort claim in her interview with the trustee, and thus was not reversing an earlier position; and (2) that the equitable nature of the judicial-estoppel doctrine required consideration of Holland’s good faith and lack of intention to conceal anything. The Appeals Court remanded the matter for further consideration of these issues.

The Holland case deals with what is often a difficult obstacle for a plaintiff in a legal malpractice case: proving that with reasonable lawyering, she “probably would have achieved a better result” in the underlying matter. A malpractice claim will fail where the defendant lawyers can show that some legal “defect” in the client’s position in that case—independent of any malpractice—would have prevented her from succeeding in any event. In Holland, the Appeals Court effectively agreed that there was such a flaw in the underlying claim—failure to disclose a bankruptcy asset when required—but directed the lower court to explore further whether the flaw was curable or fatal.