Bankruptcy Code Trumps State Law For Time Provision of Trustees Claim

By: Lauren Kiss
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
 
Federal and state authority sometimes conflict with each other. This was illustrated in Stanley v. Trinchard (In re Hale), in which the Fifth Circuit held that 11 U.S.C. § 108(a), which grants a bankruptcy trustee a time extension to commence suit on behalf of the debtor, superseded Louisiana’s peremption period for legal malpractice claims.[1] In April 2002, Hale’s bankruptcy trustee filed suit in federal court in Louisiana against Trinchard, alleging that Trinchard had committed malpractice in its mishandling of the settlement negotiations. Trinchard argued the claim was time barred under Louisiana law.[2]  In 1991, Gerald Burge (“Burge”) filed a civil rights action against the St. Tammany Parish Sheriff, the former Sheriff’s Deputy Hale (“Hale”), and their insurer, Northwestern National Insurance Company of Milwaukee, Wisconsin (“NNIC”).  In May 1995, NNIC appointed Trinchard, Trinchard, & Trinchard LLC (“Trinchard”) to represent the sheriff and Hale.  In November 2000, a settlement was reached between Trinchard, NNIC’s counsel, and Burge’s counsel, which fully released NNIC from liability, but only partially released the sheriff and Hale from liability. In January 2001, Hale consented to the settlement.  In May 2001, judgment was entered against the sheriff and Hale in the amount of $4,075,000 on Burge’s remaining claims. In October 2001, Burge brought suit against Hale to collect the entire judgment in Mississippi and Hale was forced into bankruptcy on October 15, 2001.
 
Under Louisiana law a legal malpractice action must be filed “within one year from the date of the alleged act, omission, or neglect, or within one year from the date that the alleged act, omission or neglect is discovered or should have been discovered . . . .”[3] The trustee and Trinchard disagreed as to when Hale’s cause of action had to have been filed because the result would be different under Louisiana law or under the Bankruptcy Code. The trustee argued that Hale discovered his attorneys’ alleged malpractice on September 11, 2001, making that the operative date of accrual for the cause of action.[4] Thus, according to the trustee, the filing of the action in April 2002 was timely under section 108(a). Trinchard, however, argued that the statue of limitations began to run sometime in March 2001, as that was when Burge’s attorney allegedly informed Hale of a malpractice claim against his attorneys.[5] Relying on that date, Trinchard argued that under Louisiana law, the claim had to have been filed by March 2002 and, as such, the malpractice action was time barred when brought by the trustee in April 2002. 
 
Federal and state laws were in conflict and the district court had to decide which would apply. The district court agreed with Trinchard, holding that the claim was time-barred because applying section 108(a) to peremptive periods would impermissibly alter substantive property rights.[6] However, the Fifth Circuit reversed the lower court’s decision and allowed the claim under section 108(a).[7] 
 
Section 108(a) of the Bankruptcy Code allows a trustee to commence an action on behalf of the debtor within the period allowed by state law for such an action or within two years after the order for relief, whichever is later.[8] The Fifth Circuit noted that Congress expressed an overriding interest in allowing bankruptcy trustees sufficient time to discover possible causes of action on behalf of the debtor’s estates when it enacted section 108(a).[9] The court discussed further that Congress drew no distinction among the different state law techniques that govern time limits for filing suit, such as statute of limitations or peremption or repose periods. Thus, the time extension can apply to an action that would otherwise be time-barred under state law, provided the original limitation period has not expired. The court found that the cases cited by Trinchard in support of its argument that Louisiana law applied were irrelevant because the cases did not apply to periods within which a debtor may commence an action.[10] Finally, the court decided that it did not need to determine whether the malpractice claim accrued in March or September of 2001 because the action was timely filed in either event. The trustee was allowed to bring claims on behalf of the estate until October 2003.[11]
 
The Fifth Circuit affirmed that under section 108(a) of the Bankruptcy Code a trustee is given a two year time extension to bring a claim, in this case a legal malpractice claim, to protect the estate and debtor’s rights, assuming the original limitation period for the state filing has not expired before the date of the filing of the bankruptcy petition. This decision will give more protection to the debtor and the estate by allowing the trustee to pursue claims for an extended period of time.


[1] 579 F.3d 515, 516 (5th Cir. 2009).
[2] Id. at 517.
[3] La. Rev. Stat. Ann. § 9:5605 (2007).
[4] Stanley v. Trinchard, Civ.A. No. 02-1235, 2005 WL 2037543, at *7 (E.D. La Aug. 1, 2005). The trustee appealed this district court decision and the Fifth Circuit reversed and remanded the case. On remand the district court again granted summary judgment to Trinchard, and the trustee appealed to the Fifth Circuit, where final resolution of the case took place. 
[5] Id. at *6.
[6] Stanley v. Trinchard, Civ.A. No. 02-1235, 2008 WL 2686364, at * 6 (E.D. La July 8, 2008).
[7] Stanley v. Trinchard, 579 F.3d 515, 520 (5th Cir. 2009).
[8] 11 U.S.C. § 108(a) (2006).  
[9] Stanley, 579 F.3d at 516.
[10] Id. at 519.
[11] Id. at 520.