PROCEEDS FROM BANKRUPTCY MALPRACTICE CLAIM ARE POSTBANKRUPTCY ASSET.

[3] At the time Saunders filed his bankruptcy petition, his primary assets were exempt individual retirement accounts ("IRA's") rolled over from a pension due him for his employment as an airline pilot. The IRS issued a Notice of Levy (EXH 4), to Smith Barney Shearson, Inc. ("Smith Barney") on June 9, or 10, 1994 in an effort to collect the taxes due from Saunders' IRA. The automatic stay from Saunders' first bankruptcy petition prohibited Smith Barney from releasing the levied funds to the IRS. The first Chapter 7 petition was filed for the purpose of preventing the IRS from successfully levying upon the Debtor' s IRA account. However, after that petition was filed, the Debtor's attorney, Goldberg, Young and Gravenhorst, PA ("GYG"), determined that the filing on July 6, 1994 would not allow the Debtor to discharge all of the past due taxes pursuant to 11 U.S.C. Sections 507(a)(8)(A)(ii) and 523(a)(1)(A). In an effort to meet the 240 day requirement of the statute, the Debtor sought to dismiss the first bankruptcy and immediately thereafter file a second bankruptcy which he thought would enable him to discharge virtually all of the past due taxes. The first bankruptcy was dismissed on September 8, 1994, at Saunders' request. Immediately following the hearing, IRS counsel instructed a waiting IRS Revenue Officer to file a Notice of Federal Tax Lien (EXH 6), in Broward County, Florida for all of the tax years. The lien was filed before the dismissal Order was docketed. Saunders' second Chapter 7 petition was filed on September 9, 1994.

[4] The IRS filed an amended proof of claim for $513,767.00. (EXH 10). Two other creditors filed proofs of claim, both of which were objected to by the bankruptcy trustee, and disallowed by Order of this Court. (CP 64). The trustee liquidated all of the Debtor's non-exempt assets. The proceeds from the non-exempt assets, $59,923.84, were used to pay administrative expenses and then distributed to the IRS. (CP 90, EXH 15). The IRS received approximately $47,675.71 from the trustee. The trustee filed a Final Report on August 13, 1997. (CP 111).

[5] On April 12, 1995, the Debtor filed an adversary complaint seeking a determination that all of the taxes, except 1986 were dischargeable and that the two Notices of Federal Tax Lien were invalid. The IRS never disputed that 1978, 1979, and 1987 were dischargeable. However, the dischargeability of 1983, 1984 and 1985 and the validity of the tax liens was heavily litigated from 1995 through 2002, with the IRS' right to Saunders' exempt IRA hanging in the balance.¹ On January 26, 1996, this Court held that both IRS liens were avoided, that the taxes for 1978, 1979 and 1987 were discharged, that the taxes for 1983, 1984 and 1985 were not discharged, and that the penalties for all years prior to 1991 were discharged.² Three years later, on February 25, 1999, the District Court affirmed that Order, except with respect to the second IRS lien, which the District Court found to be valid. In re Saunders, 240 B.R. 636 (S.D. Fla. 1999) (Adv. CP 44, EXH 17).³ That decision was affirmed by the Eleventh Circuit on November 28, 2001, and the U.S. Supreme Court denied cert on March 25, 2002.

[6] During 2002, and subsequent to the denial of cert by the Supreme Court, Saunders' entire IRA was either liquidated by Saunders and paid over to the IRS, or levied by the IRS and applied to the tax liabilities at issue, or withheld and paid over to the IRS for the income taxes resulting from the liquidation of the IRA. (EXH 20). In addition, the IRS retained all of Saunders' post-bankruptcy income tax refunds from 1994 through 2001. (EXH 20). The total post- bankruptcy amounts paid over to the IRS are as follows:

   Date            Paid by/from                     Amount

[8] Upon discovering the error, the Debtor, through new counsel, requested that this Court correct this error by amending the long-since final Memorandum Decision, for equitable relief, and by vacating the order dismissing the first bankruptcy. Prior to any evidentiary hearing on that motion, the parties entered into a settlement. (Adv. CP 99). According to the terms of the settlement, the Debtor and the IRS agreed that the IRS will retain all of the payments listed above and in return, will treat 1983, 1984 and 1985 as if they were discharged, and the parties further agreed that the IRS liens will only attach to and be collected from pre-bankruptcy assets. (Adv. CP 101.).

[9] As a result of this error, Saunders suffered damages, including, his lost post-bankruptcy refunds, the additional income tax liabilities for 2002 when the IRA was liquidated, the tax liabilities grew through eight years of unnecessary accumulated interest, the attorney's fees for post-bankruptcy IRS collection proceedings and the malpractice action, and the loss of his entire IRA. Based on the error and its consequences, Saunders has a cause of action for legal malpractice against his original bankruptcy counsel. That malpractice action was settled.

[10] The remaining unpaid balance of the IRS Proof of Claim, due to accumulated interest, is estimated to be somewhere between $100,000 and $200,000. Saunders and the IRS have stipulated that if this Court determines that the proceeds of the malpractice action are a pre-bankruptcy asset, the IRS lien will attach and the IRS will be paid the balance due from those funds. On the other hand, Saunders and the IRS have stipulated that if this Court determines that the proceeds of the malpractice action are a post-bankruptcy asset, the IRS liens will not attach and the IRS will receive no further payments for the remaining unpaid balance.

[12] This Court already determined that the IRA was exempt property, and was not property of the bankruptcy estate, and that this Court has jurisdiction to determine the rights of the parties to the funds held in the IRA, notwithstanding that the funds are exempt property of the Debtor, by Order dated July 2, 1999, (Adv. CP 47, EXH 18).

[13] Federal law governs whether an asset is "property of the estate" on the petition date, but whether the debtor has any right to property is determined by looking at state law. Butner v. United States, 440 U.S. 48 (1979); Southtrust Bank of Alabama v. Thomas (In re Thomas), 883 F.2d 991 (11th Cir. 1989). With respect to the Fla. Stat. existence of a legal malpractice action in Florida, Fla. Stat. 95.031(1) states that "a cause of action accrues when the last element constituting the cause of action occurs." "A cause of action for legal malpractice has three elements: (1) the attorney's employment; (2) the attorney's neglect of a reasonable duty; and (3) the attorney's negligence as the proximate cause of loss to the client." Trizec Properties, Inc. v. Biltmore Construction Co., 767 F.2d 810 11th Cir. 1985). See Steele v. Kehoe, 747 So. 2d 931 (Fla. 1999). The third element of a legal malpractice claim, that the attorney's negligence be the proximate cause of loss to the client is also referred to as the concept of "redressable harm." Lenahan v. Russell L. Forkey, P.A. 702 So. 2d 610 (Fla. 4th DCA 1997)." In re Alvarez, 224 F.3d 1273 (11th Cir. 2000).

[14] In Florida, the two year statute of limitations for professional malpractice is not triggered until the time the cause of action is discovered or should have been discovered with the exercise of due diligence. Fla. Stat. 95.11. In legal malpractice cases, the accrual trigger is also stayed while the plaintiff's underlying action remains viable because he may never suffer any damage. Heard v. Mathis, 344 So. 2d. 651 (Fla. 1st DCA 1977) . Thus, a legal malpractice action does not accrue until the judgment in the underlying case is final and unappealable. Gilbride v. Watkins, 783 So. 2d. 224 (Fla. 2001).

[15] Cases which have applied the accrual analysis to determine the appropriate statute of limitations are: Bismark Diaz v. Piquette, 496 So. 2d 239 (3d DCA 1986) (no cause of action until judgment affirmed on appeal); In re Rochester, 910 S.W. 2d 647 (Tx. App 3d 1995) (accountant malpractice accrues when the IRS issues a notice of deficiency); Atkins v. Crosland, 417 SW 2d 150 (S. Ct. Tx 1967) (accountant malpractice accrues when the additional tax is assessed); and, Peat Marwick et. al. v. Lane, 565 So. 2d 1323 (Fla. 3d DCA 1990) (accountant malpractice does not accrue until Tax Court decision is final.)

[16] However, the accrual analysis is not necessarily determinative of whether a cause of action is, or is not, property of the bankruptcy estate. Thus, even though the state statute of limitations governing how long the plaintiff has to institute a malpractice action may not have begun, a debtor may have a property interest. Courts have used various tests to determine whether causes of action are pre-petition and thus property of the estate, including: was there pre-bankruptcy "redressable harm"; is the negligent conduct rooted in the debtor's pre-bankruptcy past; or did the negligent conduct affect the bankruptcy estate. The Eleventh Circuit applied a three-prong essential elements test to determine whether a bankruptcy legal malpractice action is a pre-bankruptcy asset. In re Alvarez, 224 F.3d 1273 (11th Cir. 2000). In that case, the attorney filed a Ch. 7 instead of an 11 and the debtor's assets were immediately transferred to the bankruptcy estate. The court found that the final element, injury, was the transfer of assets and therefore the cause of action existed at the time of the petition. Similarly, in In re Alipour, 252 B.R. 230 (Bankr. M.D. Fla. 2000), an attorney's failure to exercise the debtor's option to purchase a gas station, causing the debtor to lose his gas station, pre-bankruptcy, resulted in a pre-bankruptcy cause of action because all three prongs occurred pre-bankruptcy. Another case of a pre-bankruptcy act which caused a pre-bankruptcy injury is, Peltz v. Shidler, 952 P. 2d 793 (Colo. App. 1997) . In that case, the debtor's Florida attorney allowed a default fraud judgment to be entered and the debtor's Colorado bankruptcy attorney failed to advise her of the consequences. The final element, the harm, was the default fraud judgment, a pre-bankruptcy harm and thus the causes of action for legal malpractice against both attorneys existed pre- bankruptcy and were assets of the bankruptcy estate. The debtor in State Farm Life Insurance Co. v. Swift, 129 F.3d 792 (5th Cir. 1997), lost his claimed exemption for a Keough plan that was not qualified because of State Farm's negligence in failing to amend the plan. The Fifth Circuit held that the final element, irreversible harm, occurred pre-petition at the time the debtor lost his tax benefit when the non-qualified Keough was converted to an IRA.

[17] The same Mr. Swift sued his bankruptcy attorney for malpractice because his discharge was denied and because he lost the very same exempt IRA. Swift v. Seidler, 198 B.R. 927 (Bankr. W.D. Tx 1996). The Fifth Circuit affirmed the bankruptcy court's holding that even though the negligent acts leading to the state law claim occurred pre-petition, the injury did not occur until an objection to exemption was filed post-bankruptcy. Thus, the court reasoned, because the cause of action was contingent and unaccrued on the date of the petition, it was a post-bankruptcy asset. In dicta, the Swift court stated that the cause of action which replaced the lost IRA only existed because the bankruptcy estate got the IRA, and that it would be an unfair windfall for the bankruptcy estate to take both the IRA and the cause of action that was intended to make the debtor whole from the loss of the IRA.

[18] Another decision which focused on the elements of the cause of action is In re Atanasov, 221 BR 113 (D. Ct. NJU 1998). The bankruptcy court held that the malicious prosecution action which began pre-bankruptcy and for which the indictment was dropped post bankruptcy arose post bankruptcy because an essential element to the claim is that the indictment be dropped.

[19] Courts have also held that attorney malpractice claims which have no impact on the bankruptcy estate are post bankruptcy assets. For example, in a lender liability action which started pre- bankruptcy and was handled by the same attorney representing the debtor and the bankruptcy estate post-bankruptcy, the conflict of interest malpractice action against the attorney was a post- bankruptcy asset because even though the underlying representation was pre-bankruptcy, there was no impact on the property of the estate. In re Stewart. 2603 US App LEXIS 6754 (6th Cir. 2003). Similarly, because the debtor's cause of action for malicious prosecution, defamation, and interference with contract had no effect on the bankruptcy estate, it belonged to the debtor. In re Bobroff v. Continental Bank, 43 B.R. 146 (Bankr. ED Pa 1984).

[20] Courts have consistently found that legal malpractice actions which replace exempt assets are themselves exempt. For example, the proceeds from the pre-bankruptcy cause of action which Mr. Swift had against State Farm for the loss of his exempt IRA were exempt because they replaced an exempt asset. State Farm Life Ins. v. Swift, 129 F.3d 792 (5th Cir. 1997). The legal malpractice claim for failing to claim a homestead exemption and the resulting loss of the homestead was an exempt cause of action because it harmed the debtor and not the bankruptcy estate. In re Osborn, 1996 US LEXIS 9520 (10th Cir. 1996). In In re Kaelin, 308 F.3d 885 (8th Cir. 2002), the debtor had a pre-bankruptcy cause of action against his insurance company for bad faith failure to settle a DUI personal injury case. He also had a legal malpractice action against his attorney for his handling of the bad faith case. The court found the legal malpractice action to be exempt and not property of the estate.

[21] Finally, the Eleventh Circuit made it clear that the bankruptcy estate can only consist of the property in which the debtor had an interest as of the petition date, and nothing more. Southtrust v. Thomas, 883 F.2d 991 (11th Cir. 1989).

[22] In order to determine whether Saunders had a property interest in the legal malpractice cause of action against his bankruptcy counsel, we must first look to the elements of the cause of action and determine when each of the elements occurred. In re Alvarez, 224 F.3d 1273 (11th Cir. 2000) . It is clear that the bankruptcy counsel was hired prior to both the first and second bankruptcy of the adversary proceeding, then the second element was post-bankruptcy. The third requisite element of the legal malpractice cause of action, that the attorney's negligence be the proximate cause of loss to the client, the "redressable harm" prong, must occur prior to the second bankruptcy petition to find that Saunders interest in the legal malpractice action existed at the time of the second bankruptcy.

[23] The Debtor argues that he had no interest in a cause of action as of the petition date for the following reasons: (a) the legal malpractice claim had not accrued pursuant to state law because the underlying action had not run it's [sic] course through a final appeal until 2002, that is, if the courts had ruled that neither tax lien was valid and that the 1983, 1984 and 1985 taxes were dischargeable, Saunders would have had no cause of action against his attorney; (b) Saunders' claim for malpractice has no effect on the bankruptcy estate and therefore is a post-bankruptcy asset; (c) Saunders' bankruptcy estate cannot be more than the sum of its parts, the IRS has been given the full extent of it's [sic] lien through the liquidation of all of Saunders' pre-bankruptcy assets, both exempt and non-exempt, thus, they are not entitled to the replacement proceeds as a result of that liquidation; (d) the IRS got the IRA and benefitted from the attorney's malpractice, which the IRS was a party to, and should not now benefit from that mutual mistake of fact, and their own failure to recognize the error; (e) all of the loss being compensated by the malpractice proceeds occurred post-bankruptcy -- The 1994 through 2001 tax refunds, the tax consequences incurred in 2002 as a result of the liquidation of the IRA, the legal fees for IRS post-bankruptcy collection actions and the malpractice action, and the 2002 liquidation of the IRA; (f) since the negligence was based on a mutual mistake of fact with respect to the Offer in Compromise date, the dismissal order could have been vacated at any time within one year of the dismissal of the first bankruptcy, Federal Rule of Bankruptcy Procedure 9024(b), and F.R.Civ.P. 60(b)(1), and Saunders would have had no redressable harm and no cause of action against his attorney.

[24] Saunders also appears to argue that notwithstanding the fact that his redressable harm was all post-bankruptcy, the negligent act was committed in 1995 and 1996 during the adversary proceeding when the attorney relied on the incorrect Offer in Compromise date and stipulated to the wrong date. In which case, the Debtor argues, two elements of the legal malpractice cause of action occurred post- bankruptcy, the negligence and the redressable harm.

[25] The IRS, on the other hand, argues that the dismissal of the first bankruptcy was the negligent conduct, and that the filing of the second Notice of Federal Tax Lien immediately after the dismissal of the first bankruptcy is the "redressable harm" which gave Saunders a property interest in the legal malpractice cause of action prior to the second bankruptcy. The IRS also argues that the loss of the IRA was not "redressable harm" because the IRS would have gotten the IRA anyway since the Notice of Levy on the IRA was issued prior to the first bankruptcy. The IRS argues that the loss of the IRA in 2002 was not the result of the malpractice, but rather was the result of the Notice of Levy.

[26] The Court will address each of these arguments in turn below.

[27] The Eleventh Circuit makes it clear that the commencement of the running of the statute of limitations for purposes of state law, does not dictate ownership rights in a cause of action for purposes of bankruptcy. In re Alvarez, 224 F.3d 1273 (11th Cir. 2000). Thus, the Debtor's first argument with respect to accrual based on the final appeal in 2002 cannot succeed. Similarly, the post-bankruptcy discovery of the error in 2002 is not determinative as to whether a cause of action existed on the date of the bankruptcy petition.

[28] The case law cited by the Debtor in support of his second argument, i.e. that because the claim for malpractice has no effect on the bankruptcy estate, it is therefore a post-bankruptcy asset supports the conclusion that the bankruptcy estate has no interest in the malpractice claim but is not determinative that the claim arose post-bankruptcy. In most of the cases cited, the conclusion was based on the fact that the claim replaced an exempt asset and therefore belongs to the Debtor and not to the trustee or bankruptcy estate. For example, the loss of the exempt homestead, In re Osborn, 1996 US LEXIS 9520 Cir. 1996), the bad faith failure to settle, In re Kaelin, 308 F.3d 885 (8th Cir. 2002), and the lost IRA as a result of the defective Keough, State Farm Life Ins. v. Swift, 129 F.3d 792 (5th Cir. 1997) . This argument merely determines ownership with respect to the Debtor and the bankruptcy estate, but does not ensure that the asset came into existence post bankruptcy.

[29] The Debtor's third and fourth arguments are similar in nature and appear to be based on mostly equitable grounds -- that is, that the IRS got all of the pre-bankruptcy assets and shouldn't get the replacement for the lost IRA, and that the IRS benefitted from the malpractice by getting the IRA and should not benefit again from the mutual mistake of fact that resulted in the malpractice recovery. The first of these two equitable arguments, relying on Southtrust v. Thomas, 883 F.2d 991 (11th Cir. 1989), seems to say that Saunders could not have owned both the IRA and the right to replace the IRA prior to bankruptcy. The second of the equitable arguments is similar to inheritance statutes which preclude a murderer from inheriting the estate of his/her victim. These equitable arguments may be attractive and are certainly within this Court's equitable powers on which to base a decision.⁵ However, such a conclusion ignores the three essential elements test for the existence of a legal malpractice cause of action required by In re Alvarez, 224 F.3d 1273 (11th Cir. 2000), and because of the discussion below is not the only basis upon which this Court must rely.

[30] The Debtor's last two arguments and the IRS' argument reaches the key question: at what point did the last of the three essential elements of Saunders' legal malpractice cause of action occur?

[31] On July 6, 1994, the Debtor's IRA was subject to one Notice of Federal Tax Lien and one Notice of Levy. On September 9, 1994, the Debtor's IRA was subject to two IRS Notices of Federal Tax Lien and one Notice of Levy.⁶ If the negligent act which is a precondition to the existence of the legal malpractice cause of action was dismissal of the first bankruptcy, as the IRS argues, the only possible redressable harm which could have occurred prior to the second bankruptcy was the filing of the second Notice of Federal Tax Lien. Anytime prior to September 8, 1995, one year from the dismissal date, had the Debtor discovered the mutual mistake of fact which was stipulated to by both the Debtor and the IRS -- the incorrect Offer in Compromise date, the Debtor could have moved to vacate the dismissal of the first bankruptcy. Federal Rule of Bankruptcy Procedure 9024(b) and F.R.Civ.P. 60(b)(1). With the reinstatement of the first bankruptcy, the second Notice of Federal Tax Lien would have been avoided as being in violation of the automatic stay. In that instance, both the IRS' claimed negligent act, the dismissal, and the IRS' claimed redressable harm, the second Notice of Federal Tax Lien would no longer be viable and neither would there exist a viable legal malpractice cause of action.

[32] In addition, both liens were determined to be void in 1996 by this Court. Clearly, at one point, the Debtor was in a much better position post-bankruptcy than he had been pre-bankruptcy because neither tax lien was valid. At that time, the only negligent conduct from which the Debtor could be harmed was the error with respect to the Offer in Compromise date, a post-bankruptcy error. Thus, as of September 9, 1994, the petition date, there was no cause of action.⁷

[33] Finally, the redressable harm suffered by the Debtor did not occur until post-bankruptcy when the IRA was liquidated in 2002, when the additional tax liability was incurred as a result of the liquidation of the IRA in 2002, when the post-bankruptcy refunds were held by the IRS.

[34] In conclusion, I find that the redressable harm required for the existence of a cause of action for legal malpractice did not occur until Saunders suffered the additional tax consequences as a result of the liquidation of his IRA in 2002 and the loss of the IRA itself. Furthermore, the negligent conduct which resulted in the cause of action was the error with respect to the Offer in Compromise date. That conduct occurred post-bankruptcy in 1995 when the parties stipulated to the incorrect date. Even if the negligent conduct element of the legal malpractice claim could be the dismissal of the first bankruptcy, that dismissal order was subject to being vacated at any time prior to September 9, 1995. Thus, as of the petition date, September 9, 1994, the Debtor had no property interest in the yet-to-be accrued cause of action, for legal malpractice.

[35] Based on the foregoing, and the stipulation of the parties, I find that the proceeds of the legal malpractice action is a post-petition asset owned by the Debtor free and clear of any and all IRS liens for tax years 1978, 1979, 1983, 1984, 1985, 1986 and 1987.

²Saunders would have owed the IRS $218,096.81 from either the trustee or his IRA. EXH 3.

³The entire IRS claim of $513,766.58 was secured by Saunders' IRA as a result of the final court decisions. EXH 3.

⁴The parties submitted a Pre-Trial Order which was entered on August 22, 1995 stipulating to the agreed-upon facts to be considered at trial. (Adv. CP 14).

⁵Just as the Swift court stated in dicta, the cause of action which replaced the lost IRA only exists because the IRS got the IRA, and, as in Swift, it would be an unfair windfall for the IRS in this case to take both the IRA and the cause of action that was intended to make the debtor whole from the loss of the IRA. Swift v. Swidler, 198 B.R. 927 (Bankr. W.D. Tx. 1996). This case is even more compelling than Swift because the IRS contributed to the error that resulted in the loss of the IRA, then benefitted from that error be [sic] being the recipient of the IRA. The creditors in Swift had no such participation in the negligent conduct which resulted in the loss of Swift's IRA.

⁶The IRS argument that loss of the IRA is not "redressable harm" because the IRA was lost as a result of the Notice of Levy on the IRA issued prior to the first bankruptcy, merely provides a defense to the malpractice action reducing the additional damage as a result of the negligent conduct. Furthermore, such an argument is contrary to the holding in United States v. Whiting Pools, Inc., 462 U.S. 198 (1983), which makes it clear that a levy, in and of itself, does not transfer ownership of the property seized to the IRS. If the IRA was lost as a result of the levy, rather than the negligent conduct, the IRS would not have needed the second lien and thus, the filing of the second lien would not be the pre-bankruptcy redressable harm so necessary for the IRS' first argument.

⁷At hearing, the Debtor argued that because of the uncertainty with respect to the validity of the federal tax liens, as determined by the various court's rulings, the Debtor could not have suffered a loss pre-petition.