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In Bruess v. Dietz, No. 14-34922 (Bankr. D. Minn. Sept. 30, 2019), the bankruptcy court held that under Minnesota law, a legal malpractice claim against a debtor’s attorney for inaccurate advice about the debtor’s homestead exemption accrued upon filing the debtor’s petition and is thus property of the estate under 11 U.S.C. § 541(a).

Prior to the petition date, counsel advised the debtor that Minn. Stat § 510.02 would allow her to claim a $562,760 exemption in agricultural homestead property.  However, counsel neglected to advise the debtor that 11 U.S.C. § 522(p) would limit the exemption available in her case because she had acquired the property less than 1,215 days before the petition date. The trustee objected to the claimed exemption.  The court eventually sustained such objection, the property was sold, and the trustee distributed more than a hundred thousand dollars in sale proceeds to unsecured creditors.

After the case was closed, the debtor pursued a malpractice claim against her attorney. The bankruptcy case was reopened so the trustee could investigate the value of and administer the proceeds from the legal malpractice claim. This prompted the debtor to commence an adversary proceeding seeking a declaratory judgment that the malpractice claim was not property of the estate, or in the alternative, that the trustee should not be allowed to administer the malpractice claim. On cross motions for summary judgment, both sides agreed that there were no material issues of fact and that the primary legal question was when the claim accrued.

Minnesota courts apply the “damage rule” to determine when a  legal malpractice claim accrues: a malpractice claim accrues at the point in time when the client “lost a legal right,” regardless of possible future contingencies such as the trustee’s objection to the claimed exemption. The court concluded that the debtor lost a legal right, namely the right to claim the full Minnesota homestead exemption, when she filed the petition.  The court further held the plain meaning of “as of” within 11 U.S.C. § 541 is that any claim that arises simultaneously with the filing of the petition constitutes property of the estate.

The debtor argued, among other things, that it would be inequitable for the estate to benefit from both the loss of her homestead exemption as well as the claim arising from the loss of the homestead exemption.  However, the court was bound by the plain language of Section 541(a)(1) and “powerless to consider fairness to the Debtor.”