U.S. District Court Has Subject-Matter Jurisdiction over Attorney Malpractice Claim Stemming from Services Provided in Bankruptcy Case

On Aug. 30, 2016, in Roberts Broadcasting v. McKitrick,[1] the U.S. District Court for the Eastern District of Missouri (Eastern Division) decided that a legal malpractice claim against bankruptcy counsel based on services rendered in the bankruptcy case “arises in” a case under the Bankruptcy Code. By concluding that the malpractice claim arose in a case under the Code, the district court determined that it had federal subject-matter jurisdiction over the case pursuant to 28 U.S.C. § 1334(b). The district court then referred the case to the U.S. Bankruptcy Court for the Eastern District of Missouri (Eastern Division) for further adjudication in accordance with the district court’s Local Rule 9.01(B)(1) referring bankruptcy cases to the bankruptcy court.

Background

On Oct. 7, 2011, the plaintiffs filed a chapter 11 bankruptcy case[2] and retained defendants A. Thomas DeWoskin and his employer, Danna McKitrick, P.A., as bankruptcy counsel. The plaintiffs’ bankruptcy case closed approximately two and a half years later on June 20, 2014.

On March 28, 2016, 21 months after the bankruptcy case closed, the plaintiffs filed suit in state court against the defendants alleging negligent representation in their chapter 11 bankruptcy case. On April 25, 2016, the defendants removed the malpractice action to the district court on the basis of federal subject-matter jurisdiction pursuant to 28 U.S.C. § 1334(b). The plaintiffs sought to remand the case back to state court and alternatively argued that the district court should exercise abstention even if subject-matter jurisdiction was present. They argued that the legal malpractice claim did not “arise in a case under Title 11” within the meaning of the statute because only matters that would not exist outside a bankruptcy case “arise in” a case under title 11 pursuant to § 1334(b). Legal malpractice, the plaintiffs contended, is a claim that can be brought outside of a bankruptcy case. The plaintiffs also argued that there was no other jurisdictional basis for the district court to keep the action aside from § 1334(b), which did not apply.

Holding and Reasons in Support of the Holding

As a threshold matter, the district court noted that the defendants had the burden to establish federal subject-matter jurisdiction because they were the parties seeking removal and opposing remand.[3] The district court found that the defendants met their burden and showed that the legal malpractice claim arises in a case filed under the Bankruptcy Code. Therefore, federal subject matter jurisdiction was present pursuant to 28 U.S.C. § 1334(b), which states:

Except as provided in subsection (e)(2), and notwithstanding any Act of Congress that confers exclusive jurisdiction on a court or courts other than the district courts, the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.[4]

The defendants supported their argument that the plaintiffs’ legal malpractice claim “arose in” the bankruptcy case by directing the district court to several other courts across the nation that had already decided the issue. In particular, the defendants referenced the Fourth Circuit Court of Appeals’ decision in Grausz v. Englander.[5] The district court found the Fourth Circuit’s reasoning in Grausz to be sound and decided to follow it.[6]

In Grausz, the Fourth Circuit decided the same question presented in Roberts Broadcasting v. McKitrick on nearly identical facts — i.e., whether the district court had subject-matter jurisdiction under § 1334(b) to determine a professional malpractice action filed by a chapter 11 debtor against the law firm that represented him in his bankruptcy case. In Grausz, the Fourth Circuit decided that a malpractice claim against the debtor’s counsel arose during the bankruptcy case, so bankruptcy jurisdiction was proper under 28 U.S.C. § 1334(b).

In particular, the district court was persuaded by the Fourth Circuit’s conclusion that a malpractice claim filed by a chapter 11 debtor against the law firm that represented him in the bankruptcy case “would have no practical existence” but for the bankruptcy case.[7] The district court also noted other courts that have decided the same question and followed the Fourth Circuit’s reasoning in Grausz.[8]

The district court’s application of Grausz is significant for two reasons. First, it signals that the Missouri District Court, like the Fourth Circuit, views “arising in” jurisdiction under § 1334(b) broadly. Second, the application of Grausz by the district court may also reflect its agreement with the secondary holding in Grausz. Specifically, in addition to holding that federal subject-matter jurisdiction was proper, the Grausz court also determined that res judicata principles apply and that the legal malpractice claim is barred by the bankruptcy court’s final order approving and allowing payment of the defendant’s legal fees in the bankruptcy case. Therefore, if a debtor fails to object to counsel’s final fee application and raise a malpractice claim at that time, the malpractice claim is barred.

Like the defendants in Grausz, defendants Danna McKitrick, P.C. and A. Thomas DeWoskin obtained a final fee order from the bankruptcy court granting their application for fee allowance and allowing final compensation and expense reimbursement.[9] Also, as in Grausz, the debtor, Roberts Broadcasting, failed to object or raise any allegations of malpractice in response to the defendants’ fee application.

Now that the case has been referred to the bankruptcy court, motions practice and briefing continues. At this point, it is too early to determine whether or not a res judicata defense to the plaintiffs’ claims will be raised, and if so, whether the bankruptcy court will rule in accordance with the Fourth’s Circuit’s Grausz decision.

Conclusion

This decision continues a growing line of cases that provide an expansive view of “arising in” jurisdiction under § 1334(b).[10] Hopefully, readers of this case note never find themselves in a position of having to defend against a malpractice claim. However, in the unfortunate event that a malpractice claim is made, attorneys should review the Grausz case and its progeny, including Roberts Broadcasting Company v. McKitrick. It follows that any debtor who wishes to raise a malpractice claim against their bankruptcy counsel should be aware of this case law and the risks associated with failure to object to their counsel’s final fee application.