Legal Malpractice

A Curious Intertwining of Legal Malpractice and Bankruptcy

By (Andrew Lavoott Bluestone)

BAKER,  -v.- CHARLES SIMPSON, WINDELS MARX LANE & MITTENDORF, LLP  is the story of a Chapter 7 petitioner whose case was converted into a Chapter 11 proceeding.  He had counsel appointed, who then represented him until the end of the proceedings. The proceedings ended badly, with plaintiff Baker alleging "that: (1) On the advice of counsel, he refinanced through appellee Galster Capital LLC, which he contends misrepresented itself as a lender and failed to fund his mortgage loans as agreed. 1 (2) Galster Capital caused him to incur legal fees, forgo offers from other prospective lenders, and [*4] accrue interest on his debt. (3) During a status conference before the bankruptcy court, attorney Simpson made a misrepresentation concerning the bankruptcy estate. (4) Simpson arranged an improperly "fixed" auction sale of two of his commercial properties without notice to Baker, and after a prospective buyer moved to reopen the sale, the bankruptcy court issued an order vacating the original sale and scheduling a new sale on notice. (5) Allstate Insurance Company acted negligently when, at Simpson's direction, it deposited insurance proceeds into a JPMorgan Chase bank account in Baker's name. (6) And, Simpson improperly converted the funds deposited into the JPMorgan account for his personal use."

How did the Second Circuit handle this matter?  In the end, it ruled that there it had no jurisdiction to determine whether Bankruptcy Court had the right to take the state court legal malpractice action over, and then dismiss. The rules of permissive abstention and mandatory abstention are implicated here.

"Having determined that the bankruptcy court had jurisdiction over this matter, we look to the abstention doctrine to [*10] provide guidance as to the proper exercise of that jurisdiction. See In re Southmark Corp., 163 F.3d at 929-30. As we have previously explained, "the abstention provisions implicate the question whether the bankruptcy court should exercise jurisdiction, not whether the court has jurisdiction in the first instance." In re S.G. Phillips Constructors, Inc., 45 F.3d 702, 708 (2d Cir. 1995).

Mandatory abstention applies when "a proceeding based upon a [s]tate law claim or [s]tate law cause of action" is "related to a case under [T]itle 11" but does not arise under or arise in a case under Title 11. 28 U.S.C. § 1334(c)(2). In the proceeding before the district court, Baker conceded that the mandatory abstention provision set out in section 1334(c)(2) is inapplicable to this case. Baker, 413 B.R. at 42 n.4. Therefore, this Court may properly find any argument that the mandatory abstention provision governs this appeal waived. See United States v. Brown, 352 F.3d 654, 663 (2d Cir. 2003); Billing v. Ravin, Greenberg & Zackin, P.A., 22 F.3d 1242, 1245 n.1 (3d Cir. 1994).

In any event, any argument that -- in the absence of a waiver -- mandatory abstention would apply, is without merit. A bankruptcy [*11] court has "plenary jurisdiction over 'all cases under [T]itle 11 and all core proceedings arising under [T]itle 11, or arising in a case under Title 11'" Mt. McKinley Ins. Co. v. Corning Inc., 399 F.3d 436, 447-48 (2d Cir. 2005) (quoting 28 U.S.C. § 157(b)(1)). As the Fifth Circuit has explained, although the definition of a proceeding "arising in" Title 11 is not entirely clear, it covers claims that "are not based on any right expressly created by [T]itle 11, but nevertheless, would have no existence outside of the bankruptcy." In re Wood, 825 F.2d 90, 97 (5th Cir. 1987)."
 

Result?  State Court action removed to Bankruptcy Court, Bankruptcy Court dismisses, no effective appeal.

Full post as published by New York Attorney Malpractice Blog on August 03, 2010 (boomark / email).