Legal Malpractice

Bankruptcy Fee Awards and Legal Malpractice

By (Andrew Lavoott Bluestone)

We've written in the past on the collateral estoppel trap in legal malpractice.  While fee arbitrations in State Court proceedings probably have the greatest absolute number of applications, bankruptcy court fee awards may well cover a greater dollar figure.  Here, in In re D. A. ELIA CONSTRUCTION CORP., Debtor.  07-CV-754,08-CV-103  UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF NEW YORK  2009 U.S. Dist. LEXIS 20443   March 14, 2009, Decided we see a result.  Law firm handles a 10 year bankruptcy for debtor, and is awarded several interim fees.  Law firm then applies for final fee award, and for the first time, debtor raises issue of legal malpractice.  Court considers the fee application, and awards fees.
 

When debtor later sues in State Court, result is: dismissed on the basis of collateral estoppel/res judicata.

"Upon finding that no merit to Elia's claims of malpractice, this Court observed:
As is readily apparent from this Decision and Order, the Court finds Elia's arguments in favor [of] remand and against the motion for summary judgment to be completely without merit. In opposing the motion to dismiss on res judicata grounds, Elia did not even attempt to [*5] distinguish the most obviously relevant case law against it -the First, Fourth and Fifth Circuit rulings holding that a bankruptcy court's grant of fees under 11 U.S.C. § 330 bars any subsequent malpractice claims premised upon those same services. See Grausz v. Englander, 321 F.3d 467 (4th Cir. 2003); In re Iannochino, 242 F.3d 36 (1st Cir. 2001); In re Intelogic Trace, Inc., 200 F.3d 382 (5th Cir. 2000). Instead, Elia attempts to mischaracterize the record by suggesting that the bankruptcy court never considered its claims of malpractice and attorney misconduct. Both this Court and the Second Circuit have expressly rejected that argument and have found that the bankruptcy court gave adequate consideration to Elia's claims of postpetition malpractice. See In re D. A. Elia Constr. Corp., 04-CV-975, Dkt. No. 21, at 20 (this Court's Decision and Order stating that "[t]he bankruptcy court fully considered [Elia's] allegations of misconduct but found them to be without merit"); and id. at Dkt. No. 33, at 3 and 4 (Second Circuit Summary Order stating that the bankruptcy court gave Elia "more than ample opportunity to present its arguments" regarding its claims of "conflicted and negligent [*6] representation").

In light of those express findings, it is difficult to believe that the state court action was filed by Elia in good faith. Even if Elia did have some good faith basis for initially filing its state court claims, it should have been clear that its position was meritless upon reviewing the cases cited in Damon & Morey's motion to dismiss. This is particularly true where, as here, Elia's principal is also an attorney and therefore presumably understood the res judicata arguments being raised. Nevertheless, Elia chose to oppose the motion and filed its own motion to remand.

The foregoing certainly provides sufficient evidence for this Court to conclude that the instant action was brought in bad faith and for the purpose of harassment and delay."

Full post as published by New York Attorney Malpractice Blog on March 18, 2009 (boomark / email).