Is it Legal Malpractice When Failing to File A Homestead?

In a case that came down from the Massachusetts Bankruptcy Court in late 2016 the issue of who owns the rights to a legal malpractice case in bankruptcy was reviewed.  Who owned a legal malpractice case when a Massachusetts bankruptcy lawyer failed to advise his client to file a Massachusetts Homestead Exemption?

According to the decision, by Judge Panos, the debtor in the case, Robert Mateer retained Attorney Michael Van Dam to file a Chapter 13 bankruptcy.  At some point, Attorney Van Dam converted the case to a Chapter 7 case on behalf of his client.   Of significance in this case is that Mr. Matter had a home and the home had equity in it and, unfortunately, the attorney had neglected to have the client file a Homestead prior to filing the bankrupcy.  IN RE MATEER, Case No. 12-42718-CJP. Adversary Proceeding No. 16-04020-CJP

Massachusetts Homestead Act

In Massachusetts, there is a “statutory exemption” of $125,000 for the equity in your home.  However, for homeowners live, or intend to live, in their house, then they can file a simple form with the Registry of Deeds, and “Homestead” their home, thus protecting it up to $500,000 in equity.  The protection, which excludes the mortgage on the home, otherwise works for most creditors.  Thus, in bankruptcy, only equity outside the $500,000 limit would be reachable by the Trustee in bankruptcy.

Who Owns the Legal Malpractice Claim?

In Mr. Matter’s case, his attorney neglected to file the Homestead before filing the Chapter 13 bankruptcy.  Further, he neglected to dismiss the Chapter 13 bankruptcy before converting it to a Chapter 7 bankruptcy.  Once discovered, Mr. Matter had a claim in legal malpractice against his attorney.  Or did he?

The Trustee of Mr. Matter’s bankruptcy estate is charged with determining any and all available assets for the debtors.  In a typical personal bankruptcy in Chapter 7, there are no assets and after a 341 Creditor’s Hearing, the debts are discharged as a matter of law.  However, in this case, the Trustee seized on the opportunity to secure Mr. Matter’s house, claiming that the bankruptcy estate owned the new “asset”, the legal malpractice claims against Attorney Van Dam.

What is “Standing” in a Lawsuit?

Thus, the Trustee filed an Adversary Proceeding against Attorney Van Dam.  The Bankruptcy Court decided that the Trustee did not have “standing” to file the claim.  Standing is a legal concept that requires the party to be the actual damaged party.  In this case, the Court held that there was no malpractice claim until the moment the case was filed.  Bankruptcy law gives the Trustee powers over all assets prior to or “pre” petition, but not assets acquired after or “post” petition.  Thus, the “asset” here, the legal malpractice claim, did not exist until after the filing, or post petition.  Wherefore, the Trustee had no right, or no “standing” to assert the claim against the attorney.

Legal Malpractice and Pre Bankruptcy Planning

In this case Mr. Matter may himself have a claim against his attorney.  Did he?  And if so, what are his damages?  Personal bankruptcy in Massachusetts involves bankruptcy planning.  If the attorney neglects to advise the client how to protect assets that are clearly protectable, such as a home, the attorney may indeed be negligent.

Attorney Van Dam’s aggressive response to the Trustee was effective.  However, did it lead to setting up claims for Mr. Matter?  In which case, the damages may be similar if not the same.

Legal malpractice claims in bankruptcy are not uncommon.  A victim of bankruptcy legal malpractice needs an experienced advocate to sift through the history of the case, the law, and how to most effectively achieve the results to give the client the “fresh start” that bankruptcy law affords, but the bankruptcy attorney prevented.