FILED FEB 19 2015 SUSAN M. SPRAUL, CLERK 1 NOT FOR PUBLICATION U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT 2 3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. OR-14-1036-KiKuJu ) 6 PACIFIC CARGO SERVICES, LLC, ) Adv. No. 13-03212 ) 7 Debtor. ) Bk. No. 13-30439-TMB ) 8 ) KYLE MCCRACKEN; GUY OAKES, ) 9 ) Appellants, ) 10 ) v. ) M E M O R A N D U M1 11 ) STEPHEN P. ARNOT, Chapter 7 ) 12 Trustee, ) ) 13 Appellee. ) ______________________________) 14 Submitted Without Oral Argument 15 on January 22, 20152 16 Filed - February 19, 2015 17 Appeal from the United States Bankruptcy Court for the District of Oregon 18 Honorable Trish M. Brown, Bankruptcy Judge, Presiding 19 20 APPEARANCES: Toby J. Marshall and Michael D. Daudt of Terrell Marshall Daudt & Willie PLLC on brief for 21 appellants Kyle McCracken and Guy Oakes; David A. Foraker of Greene & Markley, P.C. on brief for 22 appellee Stephen P. Arnot, Chapter 7 Trustee. 23 24 1 25 This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have 26 (see Fed. R. App. P. 32.1), it has no precedential value. See 9th Cir. BAP Rule 8024-1. 27 2 On September 16, 2014, the parties filed a joint 28 stipulation to waive oral argument. 1 Before: KIRSCHER, KURTZ and JURY, Bankruptcy Judges. 2 3 Appellants Kyle McCracken and Guy Oakes ("Appellants") appeal 4 a judgment determining that the prepetition assignment of certain 5 legal malpractice claims from Pacific Cargo Services, LLC 6 ("Debtor") to Appellants was a voidable preferential transfer 7 under § 547(b).3 We AFFIRM. 8 I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY 9 A. Prepetition events 10 The facts in this appeal are undisputed. Debtor, an Oregon 11 limited liability company, provided courier services in Oregon and 12 Washington. Just three days before filing its chapter 11 13 bankruptcy case, Debtor and its five affiliates merged. 14 Appellants are former employees of Debtor. In August 2011, 15 Appellants filed a class action lawsuit against Debtor in 16 Washington state court alleging Debtor violated wage and hour laws 17 in both Oregon and Washington ("Class Action"). 18 On January 3, 2013, after approximately 18 months of 19 litigation, Appellants (on behalf of the class claimants) and 20 Debtor entered into a settlement agreement ("Settlement 21 Agreement").4 Debtor agreed to a stipulated judgment of 22 23 3 Unless specified otherwise, all chapter, code and rule 24 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. The 25 Federal Rules of Civil Procedure are referred to as “Civil Rules.” 26 4 One of Debtor's insiders, Mr. Holman, was also a party to the Class Action and the Settlement Agreement. Mr. Holman, 27 however, was not a party to Trustee's preference action. Thus, any assignment of the claims at issue have not been avoided as to 28 him.
-2- 1 approximately $1.6 million in actual and exemplary damages arising 2 from hour and wage violations. Debtor also agreed to assign to 3 Appellants any legal malpractice claims (the "Malpractice Claims") 4 Debtor had against the attorneys who advised Debtor on its wage 5 and hour practices. In exchange for the assigned Malpractice 6 Claims, Appellants agreed not to execute on the stipulated 7 judgment. 8 The Settlement Agreement included the following provisions: 9 1.l. "Malpractice Claims" shall mean any and all claims for malpractice that Defendants individually or collectively have 10 or will have against Nancy Cooper, any other person at Garvey Schubert Barer, and the law firm of Garvey Schubert Barer over 11 any advice or other professional services provided to Defendants before the commencement of this Action regarding 12 Defendants' Wage and Hour Practices, including but not limited to Defendants' Flat Rate Pay Practice. 13 . . . 14 3.d. Defendants represent and warrant that they relied on the 15 legal advice of lawyer Nancy Cooper in the Portland, Oregon office of Garvey Schubert Barer in developing, implementing, 16 and maintaining Defendants' Flat Rate Pay Practice and in not providing Overtime Compensation to Plaintiffs and Class 17 Members. Defendants further represent and warrant that their practice of not paying Overtime Compensation to Class Members 18 was carried out in accordance with the legal advice provided by Nancy Cooper and Garvey Schubert Barer. 19 3.e. Defendants represent and warrant that they believe in 20 good faith they have valid claims for legal malpractice against Nancy Cooper and Garvey Schubert Barer arising out of the legal 21 advice referenced in the preceding subsection. 22 3.f. Defendants represent and warrant that they do not have the financial resources or the time necessary to continue 23 properly defending themselves in the Action. 24 3.g. Defendants represent and warrant that they do not have the resources to pursue the Malpractice Claims. 25 26 (emphasis added). 27 The Settlement Agreement further provided that if the state 28 court failed to grant final approval of the settlement or if
-3- 1 Appellants were precluded from pursuing the Malpractice Claims 2 assigned by Debtor, the agreement would become null and void and 3 the parties would be returned to the status quo ante, as if they 4 had never entered into or agreed to the terms of the Settlement 5 Agreement. If that occurred, the parties would continue 6 litigating the Class Action. 7 B. Postpetition events 8 On January 28, 2013, twenty-five days after the parties 9 executed the Settlement Agreement but before the state court 10 approved it, Debtor filed a chapter 11 bankruptcy case. Due to 11 the automatic stay, the state court overseeing the Class Action 12 did not rule on a motion to approve the Settlement Agreement. 13 On August 2, 2013, the bankruptcy court converted Debtor’s 14 chapter 11 case to a chapter 7 case. The U.S. Trustee appointed 15 Stephen Arnot ("Trustee") as trustee. Debtor's unsecured debts of 16 approximately $8.3 million far exceeded the value of its assets, 17 so Debtor's unsecured creditors did not expect to receive any 18 distribution. 19 1. Trustee's preference action 20 On August 27, 2013, Trustee filed his complaint against 21 Appellants seeking to avoid Debtor's prepetition assignment of the 22 Malpractice Claims as a preferential transfer under § 547(b). 23 Appellants' answer denied the operative allegations of Trustee's 24 complaint, raised a number of affirmative defenses and asserted 25 counterclaims for declaratory relief and for an award of 26 attorney's fees under Washington law 27 2. Malpractice action is filed 28 On September 17, 2013, to avoid any statute of limitations
-4- 1 defenses, Appellants filed a malpractice action in the Oregon 2 state court against Debtor's former counsel. The state court 3 abated further proceedings in the case on November 5, 2013, 4 pending the outcome of Trustee's preference action. 5 3. The parties' cross-motions for summary judgment on the preference action 6 7 Trustee moved for summary judgment on his preference claim 8 ("MSJ"). With virtually no analysis, Trustee asserted that the 9 assigned Malpractice Claims constituted "an interest of the debtor 10 in property," as that phrase is used in § 547(b). Trustee further 11 asserted that Appellant's counterclaim for attorney's fees should 12 be dismissed because fees for prosecuting or defending a 13 preference action are not allowed under federal law; Appellants' 14 reliance on Washington law did not alter that argument. 15 Appellants opposed the MSJ and filed a cross-motion for 16 summary judgment on their claims for declaratory relief and 17 attorney's fees ("Cross MSJ"). In short, Appellants argued that 18 because the Malpractice Claims had not accrued under Oregon law 19 before Debtor filed its bankruptcy petition, Debtor had no 20 interest in them on the petition date (outside of the Settlement 21 Agreement, which had not yet been approved). As a result, argued 22 Appellants, the Malpractice Claims did not belong to the estate, 23 and the first element of Trustee’s preference claim — that Debtor 24 transferred "an interest of the debtor in property"5 – could not 25 be established. Thus, argued Appellants, the MSJ should be denied 26 27 5 The remaining elements for a claim under § 547(b) are undisputed by Appellants; they do not dispute the bankruptcy 28 court's determination with respect to them on appeal.
-5- 1 and their Cross MSJ should be granted to include an award of 2 attorney's fees. 3 Appellants contended that under Washington law, employees are 4 entitled to reasonable attorney's fees in a case where they 5 recover wages that are owed them or in any subsequent proceeding 6 related to the action in which wages are recovered. In the Class 7 Action, Debtor agreed to a stipulated judgment of $1.6 million to 8 compensate employees for lost overtime wages. On behalf of 9 Debtor's estate, Trustee in his preference action sought relief 10 that, if granted, would nullify the stipulated judgment. 11 Appellants argued this subsequent proceeding related directly to 12 the Class Action providing for the recovery of wages, including 13 attorney’s fees against the Trustee, if they prevailed against 14 Trustee. 15 In opposition to the Cross MSJ, Trustee argued the relevant 16 issue involved whether the Malpractice Claims, when assigned to 17 Appellants, constitiuted an "interest of the debtor in property," 18 as that phrase is used in § 547(b). He further argued the issue 19 did not involve whether the Malpractice Claims accrued under 20 Oregon law after the petition date and as a consequence did not 21 become part of the bankruptcy estate. Trustee asserted that: 22 (1) all causes of action in the case of a non-individual debtor, 23 such as a limited liability company, become property of the 24 debtor's estate under § 541 because a non-individual debtor has no 25 existence or identity separate from its estate after the filing of 26 a bankruptcy case; (2) absent the transfer/assignment, the 27 Malpractice Claims would have been part of Debtor's estate; and 28 (3) no authority supported the notion that a cause of action of a
-6- 1 non-individual debtor is excluded from the debtor's bankruptcy 2 estate based on when it accrues for state law purposes. 3 4. The bankruptcy court's ruling on the preference action 4 The bankruptcy court held a hearing on the parties' 5 cross-motions for summary judgment and announced its oral ruling 6 granting Trustee's MSJ and denying Appellants' Cross MSJ in its 7 entirety. Hr'g Tr. (January 6, 2014) 3:7-9; 18:19-38:15. 8 The court disagreed with Appellants' contention that a legal 9 malpractice cause of action in Oregon does not accrue for purposes 10 of determining a property interest until a client has suffered 11 damages in the form of an adverse "judgment" as a result of his 12 attorney's negligent advice. Id. at 28:7-12. Instead, the cases 13 hold that a "[legal malpractice] cause of action does not accrue 14 until the party has incurred some damage, including expenses 15 incurred in defending a cause of action[,] and is aware that there 16 is a substantial possibility that the damage resulted from the 17 attorney's advice." Id. at 28:12-17. Here, Debtor represented in 18 the Settlement Agreement that it relied upon its attorneys' advice 19 with respect to Debtor's flat rate pay practices and in not 20 providing overtime compensation to the class members. Debtor's 21 practice of not paying overtime compensation to the class members 22 occurred as a result of the legal advice provided by its 23 attorneys. In addition, Debtor represented that it believed in 24 good faith that it possessed valid claims for malpractice against 25 its attorneys arising out of the legal advice provided by them. 26 Given these representations, the bankruptcy court determined that 27 at the time Debtor executed the Settlement Agreement, Debtor 28 suffered damages and believed those damages resulted from its
-7- 1 attorney's malpractice. Id. at 29:9-13. Therefore, the 2 Malpractice Claims when assigned to Appellants constituted an 3 "interest of the debtor in property" within the meaning of 4 § 547(b). Id. at 30:18-23. 5 Alternatively, because Debtor also assigned to Appellants any 6 malpractice claims it may have in the future against its former 7 counsel, the bankruptcy court determined that even if the 8 Malpractice Claims had not yet accrued as of the petition date, 9 the court could avoid the transfer. Id. at 29:14-22. 10 In denying the Cross MSJ, the bankruptcy court observed the 11 general proposition that an individual debtor's prepetition causes 12 of action are property of the estate, while an individual debtor's 13 postpetition causes of action are not property of the estate. Id. 14 at 36:5-20). However, no authority appeared to support 15 Appellants' contention that a cause of action of a non-individual 16 debtor is excluded from the debtor's bankruptcy estate based on 17 when it accrues for state law purposes. The court found that 18 absent Debtor's prepetition assignment to Appellants, the 19 Malpractice Claims would have been property of the estate. As for 20 the attorney's fees requested by Appellants, the court determined 21 that no legal basis existed to award a party attorney's fees for 22 prosecuting or defending a preference action. 23 The bankruptcy court entered a judgment avoiding the 24 prepetition transfer of the Malpractice Claims to Appellants on 25 January 10, 2014. Appellants timely appealed the judgment on 26 January 24, 2014. 27 II. JURISDICTION 28 The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334
-8- 1 and 157(b)(2)(F). We have jurisdiction under 28 U.S.C. § 158. 2 III. ISSUES 3 1. Did the bankruptcy court err in granting summary judgment to 4 Trustee and avoiding the assignment of the Malpractice Claims as a 5 preferential transfer under § 547(b)? 6 2. Did the bankruptcy court err in not awarding reasonable 7 attorney's fees to Appellants for defending the preference action? 8 IV. STANDARDS OF REVIEW 9 A grant of summary judgment is reviewed de novo. Fresno 10 Motors, LLC v. Mercedes Benz USA, LLC, 771 F.3d 1119, 1125 (9th 11 Cir. 2014). "We may affirm 'on any ground supported by the 12 record, regardless of whether the [bankruptcy] court relied upon, 13 rejected, or even considered that ground.'" Id. (citation 14 omitted). Whether a debtor's cause of action belongs to the 15 bankruptcy estate is a question of law we review de novo. State 16 Farm Life Ins. Co. v. Swift (In re Swift), 129 F.3d 792, 795 (5th 17 Cir. 1997). The bankruptcy court's decision to deny a party's 18 request for attorney's fees under § 547(b) is reviewed de novo. 19 See Bertola v. N. Wisc. Produce Co. (In re Bertola), 317 B.R. 95, 20 99 (9th Cir. BAP 2004). 21 V. DISCUSSION 22 A. The bankruptcy court did not err in granting summary judgment to Trustee and avoiding the assignment of the Malpractice 23 Claims as a preferential transfer under § 547(b). 24 1. Summary judgment standards 25 Summary judgment is appropriate when "there is no genuine 26 dispute as to any material fact and the movant is entitled to 27 judgment as a matter of law." Fresno Motors, LLC, 771 F.3d at 28 1125 (citing Civil Rule 56(a)). Civil Rule 56(a) applies in
-9- 1 adversary proceedings under Rule 7056. Celotex Corp. v. Catrett, 2 477 U.S. 317, 322 (1986); Ilko v. Cal. State Bd. of Equalization 3 (In re Ilko), 651 F.3d 1049, 1052 (9th Cir. 2011). 4 2. Preference actions under § 547(b) 5 Under § 547(b), a trustee may recover certain transfers made 6 by the debtor within 90 days before the bankruptcy petition is 7 filed. Hansen v. MacDonald Meat Co. (In re Kemp Pac. Fisheries, 8 Inc.), 16 F.3d 313, 315 (9th Cir. 1994). A transfer constitutes 9 an avoidable preference if the following six elements are 10 satisfied: (1) a transfer of an interest of the debtor in 11 property; (2) to or for the benefit of a creditor; (3) for or on 12 account of an antecedent debt; (4) made while the debtor was 13 insolvent; (5) made on or within 90 days before the date of the 14 filing of the petition; and (6) enables the creditor to receive 15 more than such creditor would receive in a chapter 7 liquidation 16 of the estate. In re Kemp Pac. Fisheries, Inc., 16 F.3d at 315 17 n.1. Appellants dispute the bankruptcy court's determination as 18 to only the first element — that the Malpractice Claims constitute 19 an interest of the Debtor in property within the meaning of 20 § 547(b). 21 The reach of § 547 is limited to preferential transfers of 22 "an interest of the debtor in property." Taylor Assocs. v. 23 Diamant (In re Advent Mgmt. Corp.), 104 F.3d 293, 295 (9th Cir. 24 1997). "In its simplest terms, property of the debtor may be said 25 to be that which would have been property of the bankruptcy estate 26 had the transfer not taken place." Mitsui Mfrs. Bank v. Unicom 27 Computer Co. (In re Unicom Computer Co.), 13 F.3d 321, 324 (9th 28 Cir. 1994)(citing Begier v. I.R.S., 496 U.S. 53, 58 (1990)).
-10- 1 3. Section 541(a) and accrual of causes of action 2 The question before us is whether the Malpractice Claims 3 accrued prior to the petition date and, thus, would have been 4 property of the estate had Debtor not assigned them to Appellants. 5 Appellants argue that Debtor's interest in the Malpractice Claims 6 against their former counsel did not exist at the commencement of 7 Debtor's bankruptcy case because the claims had not accrued under 8 state law. 9 An "estate" is created when a bankruptcy petition is filed. 10 See § 541(a); Cusano v. Klein (In re Cusano), 264 F.3d 936, 945 11 (9th Cir. 2001). "Property of a bankruptcy estate includes 'all 12 legal or equitable interests of the debtor in property as of the 13 commencement of the case.'" In re Cusano, 264 F.3d at 945 14 (quoting § 541(a)(1)). "In fact, every conceivable interest of 15 the debtor, future, nonpossessory, contingent, speculative, and 16 derivative, is within the reach of § 541." In re Yonikus, 17 996 F.2d 866, 869 (7th Cir. 1993), abrogated on other grounds by 18 Law v. Siegel, 134 S.Ct. 1188, 1196 (2014)(citing Neuton v. 19 Danning (In re Neuton), 922 F.2d 1379, 1382-83 (9th Cir. 1990)). 20 Although state law defines the nature of a debtor's interest in 21 property, Butner v. United States, 440 U.S. 48, 55 (1979), whether 22 this interest is property of the estate is a matter of federal 23 bankruptcy law. Crowson v. Zubrod (In re Crowson), 431 B.R. 484, 24 489 (10th Cir. BAP 2010). See Bd. of Trade of Chi. v. Johnson, 25 264 U.S. 1, 10 (1924)(Property for purposes of federal bankruptcy 26 law is construed broadly to include any state-law right or 27 interest that has some potential value to the debtor.). 28 Assets of the estate properly include any of the debtor's
-11- 1 existing causes of action. In re Cusano, 264 F.3d at 945 (citing 2 Sierra Switchboard Co. v. Westinghouse Elec. Corp., 789 F.2d 705, 3 708 (9th Cir. 1986)); see also United States v. Whiting Pools, 4 Inc., 462, U.S. 198, 205 (1983). A cause of action that has 5 accrued prior to the debtor's petition date is an estate asset 6 that must be scheduled. Boland v. Crum (In re Brown), 363 B.R. 7 591, 604 (Bankr. D. Mont. 2007)(citing In re Cusano, 264 F.3d at 8 947). However, a debtor generally has no duty to schedule a cause 9 of action that did not accrue prior to bankruptcy. In re Cusano, 10 264 F.3d at 947. 11 To determine when a cause of action accrues and, therefore, 12 whether it accrued prior to a debtor's petition date and is an 13 estate asset, we look to state law. In re Cusano, 264 F.3d at 947 14 (citing CBS, Inc. v. Folks (In re Folks), 211 B.R. 378, 394 (9th 15 Cir. BAP 1997)). Because the Malpractice Claims stem from legal 16 advice Debtor received from its attorneys in Oregon, we look to 17 Oregon law to determine whether the Malpractice Claims accrued 18 prepetition. 19 Initially, we note the importance of distinguishing between 20 "accrual" of an action for purposes of ownership6 in a bankruptcy 21 proceeding and "accrual" for purposes of statute of limitations. 22 In re Cusano, 264 F.3d at 947 (citing In re Swift, 129 F.3d at 23 796, 798); In re Brown, 363 B.R. at 605. The Ninth Circuit has 24 determined that the inquiry is different, and the fact a statute 25 of limitations has not yet begin to run at the time of petition 26 does not necessarily bear on whether the cause of action has 27 6 In this memorandum and in this context we equate 28 “ownership” with “an interest of the debtor in property.”
-12- 1 accrued for purposes of ownership in bankruptcy. In re Cusano, 2 264 F.3d at 947. In this context of an interest in property, 3 “accrual” of a cause of action is a right to institute and 4 maintain a suit against a person because some form of legal injury 5 has occurred even though the type and extent of injury is unknown, 6 although some specific and concrete risk of harm affects a 7 person’s interest. In re Swift, 129 F.3d at 795-96. Accrual in 8 the context of a statute of limitations commences the clock 9 running to bar litigation of stale claims. Id. at 796. 10 In Cusano, the debtor had contended that because his 11 prepetition music royalty claims had not accrued until after his 12 bankruptcy case was filed, the claims belonged to him and not the 13 bankruptcy estate. Id. at 946-47. The Cusano court disagreed, 14 holding: 15 We conclude that Cusano's open book account claim accrued for bankruptcy purposes to the extent that sums were owed 16 on that account at the time he filed his petition. An action could have been brought for those sums at that 17 time. Our conclusion is not affected by the fact that limitations on such an action had not yet begun to run. 18 19 Id. at 947. 20 Nonetheless, even though the inquiry of when an action 21 accrues is different than when the statute of limitations begins 22 to run, "it is often necessary to look to state law on the statute 23 of limitations to determine when a cause of action accrues because 24 accrual is rarely discussed apart from the issue of the running of 25 the statute of limitations." In re Swift, 129 F.3d at 796 n.18; 26 In re Brown, 363 B.R. at 605. 27 /// 28 ///
-13- 1 4. The Malpractice Claims constituted an "interest of the debtor in property," accrued prior to the petition date, 2 and would have been property of the estate absent the preferential transfer to Appellants. 3 4 Appellants contend that a claim for legal malpractice does 5 not accrue under Oregon law "until the underlying lawsuit has 6 concluded" or "a final order is entered in the underlying action." 7 In other words, Appellants' position is that the Malpractice 8 Claims will not accrue until the state court enters a final 9 adjudication against Debtor in the underlying Class Action. We 10 agree that an adverse ruling against a client in the underlying 11 action certainly may provide the outer limit for when the statute 12 of limitations begins to run on a legal malpractice claim; 13 however, a court's adjudication of that underlying action is not 14 required for accrual of a legal malpractice claim under Oregon law 15 or, more importantly for our purposes here, a determination of an 16 interest in property. 17 A claim for legal malpractice must be filed within two years 18 of the date on which the claim accrues. OR. REV. STAT. 12.010; 19 OR. REV. STAT. 12.110(1). Oregon follows the "discovery" rule for 20 determining when a legal malpractice claim accrues. Guirma v. 21 O'Brien, 316 P.3d 318, 319 (Or. App. 2013)(citing U.S. Nat'l Bank 22 v. Davies, 548 P.2d 966, 968 (Or. 1976)). Under the discovery 23 rule, a legal malpractice claim accrues "when a client knows or, 24 in the exercise of reasonable care, should know that there is a 25 substantial possibility that she has an actionable injury." Id. 26 (citing Kaseberg v. Davis Wright Tremaine, LLP, 265 P.3d 777, 781 27 (Or. 2011)(en banc)). An actionable injury in a legal malpractice 28 claim consists of harm, causation and tortious conduct. Id.
-14- 1 (citing Kaseberg, 265 P.3d at 781). 2 Thus, under the discovery rule, a claim for legal malpractice 3 in Oregon "accrues, and the statute of limitations begins to run, 4 when the client knows or, in the exercise of reasonable care, 5 should know that there is a substantial possibility that (1) he or 6 she has suffered harm, (2) the harm was caused by the lawyer's 7 acts or omissions and, [sic] (3) the lawyer's acts or omissions 8 were tortious." Id. (citing Kaseberg, 265 P.3d at 781). 9 "Although a mere suspicion of wrongdoing is insufficient to 10 trigger the accrual of a claim, it is also unnecessary, under the 11 rule of discovery, for the plaintiff to know to a certainty that 12 each particular element exists. The 'quantum of awareness' is 13 between the two extremes." Cairns v. Dole, 99 P.3d 781, 784 (Or. 14 App. 2004). See also Melgard v. Hanna, 607 P.2d 795, 796 (Or. 15 App. 1980)("When discovery of professional negligence may be said 16 to occur is an objective matter, for a claimant is charged with 17 knowledge which exercise of reasonable care would disclose when 18 facts are known from which the inference flows."). 19 "Harm" in this instance is limited to harm in the legal 20 sense, "i.e., a collection of facts that the law is prepared to 21 recognize as constituting the 'harm' element of a claim for 22 professional negligence." Stevens v. Bispham, 851 P.2d 556, 560 23 (Or. 1993)(en banc). 24 The question of when a person reasonably should have known 25 facts that would make a reasonable person aware of a substantial 26 possibility that the harm suffered from an attorney's negligence 27 is generally a question of fact, Stevens, 851 P.2d at 560, unless 28 the facts are such that no triable issues exists and the matter
-15- 1 may be resolved as a matter of law. Cairns, 99 P.3d at 784. 2 Here, the parties agree that no triable issues exist, and we 3 discern none on the record. Thus, this matter was properly 4 resolved on summary judgment. 5 None of the cases cited by Appellants or that we located 6 hold, as Appellants contend, that a client's claim for legal 7 malpractice does not accrue until some final adjudication has been 8 entered in the underlying action. In fact, in one case cited by 9 Appellants, Jaquith v. Ferris, 687 P.2d 1083, 1085-86 (Or. 10 1984)(en banc), the Oregon Supreme Court rejected that exact 11 argument. 12 In Jaquith, the plaintiff retained a real estate agent to 13 sell her real property. Id. at 1083. The agent negligently 14 represented that the listed sale price of the property equaled its 15 fair market value. Id. at 1084. The fair market price exceeded 16 its sale price. Plaintiff sued the agent for professional 17 negligence after losing a specific performance suit brought by the 18 buyer. Id. In defense of the agent's statute of limitations 19 argument, the plaintiff claimed that her cause of action did not 20 accrue until she was forced to convey her property at a 21 substantial loss pursuant to the Court of Appeals decision in the 22 underlying suit. Id. at 1085. Determining that plaintiff had 23 become aware of her agent's negligence four months after she 24 signed the sale contract and not when the underlying litigation 25 had been resolved, the Oregon Supreme Court concluded that the 26 occurrence of harm occurred when Plaintiff discovered the property 27 value discrepancy and that discovery determined the accrual of her 28 claim. Id. at 1085-86. Thus, based on the facts of the case, the
-16- 1 court determined that the limitations period began to run as soon 2 as the plaintiff knew of the negligence and of the resulting harm, 3 which included attorney's fees she incurred defending the 4 underlying action. 5 Appellants also cite Fliegel v. Davis, 699 P.2d 674 (Or. App. 6 1985), rev den. 704 P.2d 513 (1985). Appellants point to the 7 Oregon Court of Appeals' statement that "[i]t is unrealistic to 8 require a client to recognize that the lawyer's advice is bad, 9 even after being sued for acting on it, until there no longer 10 exists a realistic possibility that a court will hold that the 11 advice was good." Id. at 675-76. Notably, Fliegel, as with all 12 cases cited by Appellants, involved a statute of limitations 13 involving specific facts and not the accrual of a claim for 14 purposes of determining a property interest. In Fliegel, the 15 plaintiff did not know and could not have known of the attorney’s 16 negligent advice until the Oregon Supreme Court reversed the 17 Oregon Court of Appeals in a related contract case. Id. at 676. 18 While Fliegel may support Appellants' argument to an extent, 19 it certainly does not stand for the absolute "final adjudication" 20 rule Appellants advocate. Further, Oregon courts have repeatedly 21 held that a claim for legal malpractice accrues when the client 22 knows or "should know" a substantial possibility exists that he or 23 she has an actionable injury. Kaseberg, 265 P.3d at 781; Stevens, 24 851 P.2d at 559; Guirma, 316 P.3d at 319; Cairns, 99 P.3d at 784. 25 In other words, certainty of harm is not required and to impose 26 such a requirement as Appellants suggest would render the 27 discovery standard of "should know" nugatory. 28 Contrary to Appellants' argument, the underlying action need
-17- 1 not be finally resolved for a legal malpractice claim to accrue in 2 Oregon, even for statute of limitations purposes. It may be, 3 depending on the facts of the case, that no such claim will accrue 4 until a final resolution occurs as the Oregon Supreme Court found 5 in Davies. 548 P.2d at 969-70. However, Appellants are incorrect 6 that no such claim can ever accrue until then. Appellants make 7 the same mistake made by the plaintiff in Jaquith; they conflate 8 the discrete concepts of cognizable "harm" with "extent of 9 damages." Appellants' position is further undermined by the fact 10 that they filed a malpractice action against Debtor's attorneys in 11 September 2013, before the bankruptcy court ruled on the cross 12 motions for summary judgment, where they argued (and still argue) 13 that the claims had not yet accrued. Clearly, Appellants must 14 have had a good faith belief even then that the Malpractice Claims 15 had accrued for statute of limitations purposes. They cannot, 16 therefore, credibly argue on appeal that the Malpractice Claims 17 will not accrue until the state court renders a final disposition 18 against Debtor in the Class Action. 19 Whether we analyze accrual of the Malpractice Claims for 20 purposes of determining the debtor’s interest in property or the 21 expiration of the statute of limitations, assuming under Cusano 22 that a different standard applies, we conclude the Malpractice 23 Claims accrued prior to Debtor filing its chapter 11 bankruptcy 24 petition.7 Debtor's representations in the Settlement Agreement 25 clearly establish that the Malpractice Claims accrued prepetition. 26 27 7 When a chapter 11 case is converted to a case under chapter 7, the preference period is measured from the date of the 28 filing of the chapter 11 petition. See § 348(a).
-18- 1 The $1.6 million stipulated judgment against Debtor is a 2 cognizable harm and Debtor knew a substantial possibility existed 3 that it suffered harm as a consequence of its attorneys' negligent 4 legal advice. Even if for some reason the stipulated judgment is 5 not a cognizable harm because the Settlement Agreement has not 6 been approved by the state court overseeing the Class Action,8 no 7 one disputes that Debtor had incurred expenses in defending itself 8 against Appellants on claims Debtor knew, at some point 9 prepetition, resulted from its attorney's professional negligence. 10 See Jaquith, 687 P.2d at 1086 (the incurrence of attorney's fees 11 in defending the underlying action can constitute cognizable 12 "harm")(citing Davies, 548 P.2d at 969). 13 Absent Debtor's prepetition assignment to Appellants, the 14 Malpractice Claims would have been property of the estate. As 15 such, the assignment was an avoidable preferential transfer under 16 § 547(b). Accordingly, the bankruptcy court properly granted 17 summary judgment to Trustee and denied summary judgment to 18 Appellants. Because we are affirming the judgment on this basis, 19 we need not address Appellants' arguments that the bankruptcy 20 court erred in concluding the transfer would still be avoidable 21 even if the Malpractice Claims had not yet accrued as of the 22 petition date or that the bankruptcy court erred in determining 23 that a non-individual debtor is unable to acquire property 24 25 8 Washington Court Rule 23(e) provides: 26 Dismissal or Compromise. A class action shall not be dismissed or compromised without the approval of the court, 27 and notice of the proposed dismissal or compromise shall be given to all members of the class in such manner as the court 28 directs.
-19- 1 postpetition. 2 B. The bankruptcy court did not err in denying an award of attorney's fees to Appellants. 3 4 Appellants contend the bankruptcy court erred in not awarding 5 them attorney's fees for defending against Trustee's preference 6 action, an action they claim is a subsequent proceeding related to 7 the Class Action which involved recoverable wages. The bankruptcy 8 court ruled, without citing to any authority, that as a matter of 9 federal law a party defending a preference action is generally not 10 entitled to recover attorney's fees. The bankruptcy court is 11 correct. 12 This Panel has held that attorney's fees are not recoverable 13 in an action under § 547(b) (absent certain exceptions not 14 relevant here), even if the parties' underlying contract provided 15 for attorney's fees. See Alvarado v. Walsh (In re LCO Enters., 16 Inc.), 180 B.R. 567, 570-71 (9th Cir. BAP 1995), aff'd, 105 F.3d 17 665 (9th Cir. 1997). This conclusion is because a preference 18 action under § 547(b) is based wholly in bankruptcy law, is unique 19 to bankruptcy and is not an action under the contract which gives 20 effect to the attorney's fees clause in the contract. Id. We see 21 no reason to make any distinction here, where the fees are 22 provided under a state statute. Trustee's action against 23 Appellants did not involve the recovery of wages; it involved the 24 avoidance of a preferential transfer made to them. Further, 25 Appellants did not prevail in this litigation. 26 VI. CONCLUSION 27 For the reasons stated above, we AFFIRM. 28
-20-