In re J.E. Marion, Inc – Case Brief Summary (Texas)

In In re J.E. Marion, Inc. (Bankr. S.D.Tex. 1996) 199 B.R. 635., an involuntary chapter 7 petition was filed against a corporation and, as occurred in the instant case, the trustee of the debtor corporation's bankruptcy estate filed a motion for an order authorizing the assignment to a creditor group of several potential claims (which the trustee deemed to be assets of the estate) against parties classified as "insiders," including a claim for legal malpractice against former counsel of the bankrupt corporation. (Marion Inc., supra, 199 B.R. at pp. 635-636.)

The issue of first impression before the bankruptcy court in Marion Inc., like the issue presented here, was whether a trustee in bankruptcy may assign a legal malpractice claim against former counsel of a debtor corporation. (Id. at p. 636.)

The Marion Inc. court first determined that the malpractice claims were property of the bankruptcy estate under 11 United States Code section 541, which defines property of a bankruptcy estate.

11 United States Code section 541 provides in part: "(a) The commencement of a case . . . creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held: (1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case. . . . . . . (c)(1) Except as provided in paragraph (2) of this subsection, an interest of the debtor in property becomes property of the estate under subsection (a)(1), (a)(2), or (a)(5) of this section notwithstanding any provision in an agreement, transfer instrument, or applicable nonbankruptcy law-- P(A) that restricts or conditions transfer of such interest by the debtor . . . ."

Following the decision of the Bankruptcy Court for the Western District of Washington in In re Ellwanger (Bankr. W.D.Wash. 1992) 140 B.R. 891, the court in Marion Inc. held that legal malpractice claims arising out of pre-petition and post-petition representation of a debtor that accrue under state law are property of the estate under 11 United States Code section 541. ( Marion Inc., supra, 199 B.R. at pp. 636-637.)

After reviewing the public policy considerations supporting the California Goodley rule that legal malpractice claims are not assignable, and noting that such claims are also not assignable as a matter of law in Texas, the Marion Inc. court concluded that "the costs to the legal system of assigning legal malpractice claims in the bankruptcy context outweigh the benefits," and held as a matter of public policy that the chapter 7 corporate debtor's legal malpractice claims against its former counsel were not assignable by the bankruptcy trustee, even though those claims were property of the bankruptcy estate. (Marion Inc., supra, 199 B.R. at pp. 636-639.)