Weinberg v. Scott E. Kaplan, LLC

Summarized by Eduardo Glas , Law Office of Eduardo Glas PC
8 years 6 months ago

Case Type:

Business

Case Status:

Affirmed

Citation:

16-4145 (3rd Circuit, Aug 21,2017) Not Published

Tag(s):

Ruling:

Third Circuit affirmed the dismissal by the District Court of a malpractice lawsuit brought by plaintiffs against their former chapter 11 bankruptcy attorney, on grounds that the lawsuit was barred by previous litigation before the Bankruptcy Court under the doctrine of res judicata

Procedural context:

Initially filed in the Superior Court of New Jersey, the lawsuit was removed by the Defendant to the District Court. Subsequently, the Defendant moved to dismissed the Complaint on grounds that the claim was barred by the doctrine of res judicata. The District Court granted the motion. On appeal, the Third Circuit affirmed.

Facts:

The Plaintiffs hired the defendant to file on their behalf a voluntary petition for reorganization under Chapter 11. In their malpractice action, they alleged two incidents of malpractice. One involved a motion from relief from stay filed by Plaintiffs' largest creditor to continue a pre-petition foreclosure. The Bankruptcy Court granted the motion. Plaintiffs claimed that the Defendant botched the argument and ignored their pleas to file for reconsideration. Eventually, the Defendant did file for reconsideration, and the Bankruptcy Court granted the motion. A month after the Bankruptcy Court wrongly granted the stay relief motion, the Defendant filed a fee application, which included fees for the work performed opposing the relief from stay motion. The Plaintiffs did not contest the fee application. The Bankruptcy Court allowed the fees, after reducing them from approximately $32,000 to $27,000. The second incident of alleged malpractice involved the apparent failure to file monthly operating reports in the bankruptcy case. The U.S. Trustee filed a motion to convert the case to a Chapter 7, which was granted without opposition by the Defendant. The Plaintiffs then fired the Defendant and hired a new bankruptcy counsel, which successfully moved for reconsideration of the conversion Order. The case continued for approximately two more years. Plaintiffs engaged a third bankruptcy counsel who negotiated and filed a proposed plan of reorganization. The filed Plan listed the Defendant's allowed administrative claim for fees and granted the Defendant a right to payment on the effective date of the plan. The Plan was confirmed without objection. Before the Plan was confirmed, the Defendant sought to collect his fees by filing a motion to compel payment. The Plaintiff secured adjournments of the hearing on that motion until after their Plan was confirmed. Subsequently, Plaintiffs objected to payment, indicating that they were prepared to file a malpractice action. The Defendant withdrew that motion to compel and filed a new one, which was ultimately granted by the Bankruptcy Court. More than one year after the confirmation Order was entered, the Plaintiffs filed their malpractice lawsuit. In affirming the District Court, the Third Circuit noted that the Fee Application proceeding squarely presented the issue of the Defendant's legal services in relation with the relief stay motion, which the malpractice complaint alleged had been deficient. Because the same issue of malpractice for those same services that were approved could have been litigated at the time of the fee application, the doctrine of res judicata barred that part of the complaint against the Defendant. Similarly, the plan confirmation proceeding and the motions to compel payment provided the Plaintiffs additional opportunities to challenge the earlier Order allowing the Defendant's fees and the second instance of purported malpractice. The Plaintiffs did not object to the Plan that listed the Defendant's allowed claim for fees and provided for a right to payment. Finally, although they the opportunity to do so, the Plaintiffs did not object to Defendant's motion to compel payment of his fees until the day after their plan confirmed. The Third Circuit noted that this sequence of events tends to show that the Plaintiffs sought to avoid litigating their malpractice claim until after the conclusion of the bankruptcy case -- a concerning development in the Court's view since such a claim belonged to the bankruptcy estate and not to the Plaintiffs. Finally, the Court also noted that the conservation of judicial resources favored the litigation of malpractice claims against estate professionals during the bankruptcy case because the Bankruptcy Court was in the unique position to judge the Defendant's alleged malpractice, having been intimately familiar with the parties and the filings throughout the case.

Judge(s):

Greenaway, R., Shwartz, and Rendell

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