When a debtor files for chapter 11 bankruptcy, three different time periods become important to determine whether the debtor or the estate holds certain rights and interests. The first time period is before a debtor files for bankruptcy. The second time period is after filing for bankruptcy but before conversion. The third time period is post-conversion.
If the misconduct that gives rise to the legal malpractice claim occurs after the filing of a chapter 11 case but before the conversion to a chapter 7 case, the cause of action belongs to the bankruptcy estate. In that situation, the trustee, as the representative of the bankruptcy estate, becomes the real party in interest and is the only party with standing to bring the malpractice claims. But if the legal malpractice occurs after the case has been converted to chapter 7, the cause of action belongs to the debtor.
The first two parts of this article discusses the statutory authority that governs this particular matter. Part I discusses section 541(a)(1) of title 11 of the United States Code (the “Bankruptcy Code”), which defines what is included in a bankruptcy estate’s “property.” Part II discusses section 1115(a)(1) of the Code, which expands the definition of “property” referenced in section 541. Part III examines recent cases in which courts held that causes of action that arose before conversion, including legal malpractice claims, ultimately belonged to a bankruptcy estate. Part IV concludes by examining the implications of this rule for practicing bankruptcy attorneys as well the rights of debtors and bankruptcy estates.