Legal Malpractice

Bankruptcy and Legal Malpractice - III

By (Andrew Lavoott Bluestone)

This is part 3 of a series based on the case of ASTON BAKER,  -against- CHARLES SIMPSON, ESQ., WINDELS MARX LANE & MITTENDORF, LLP, STANLEY GALLANT, GALSTER CAPITAL LLC, GARLSTER MANAGEMENT CORP., ALLSTATE INSURANCE COMPANY, AND JP MORGAN CHASE BANK, N.A.,

Here the court discusses the "abstention" question, whether the court should permit state court actions to go on, or to remove them to the Bankruptcy court as a "core" issue.

"Appellant contends that, even if the bankruptcy court had jurisdiction over his claims, it should have abstained from hearing the state court action. Section 1334(c)(1) [*16] gives the district court the power to abstain from hearing civil proceedings arising under Title 11, or arising in or related to cases under Title 11 "in the interest of justice, or in the interest of comity with State courts or respect for State law." 28 U.S.C. § 1334(c)(1). This section "is informed by and interpreted according to 'the principles developed under the judicial abstention doctrine,'" which impose on federal courts a "virtually unflagging obligation . . . to exercise the jurisdiction given them." Norkin, 2006 U.S. Dist. LEXIS 14254, 2006 WL 839079, at *5 (citations omitted). Accordingly, federal courts "may abstain only for a few 'extraordinary and narrow exceptions.'" Id. (quoting Colo. River Water Conservation Dist. v. United States, 424 U.S. 800, 817, 96 S. Ct. 1236, 47 L. Ed. 2d 483 (1976)).

Courts often apply a twelve-factor test, or some variation of it, to decide whether to abstain from hearing a lawsuit related to a bankruptcy under Section 1334(c)(1). See, e.g., In re Bay Point Assocs., No. 07 Civ. 1492 (JS), 2008 U.S. Dist. LEXIS 108402, 2008 WL 822122, at *2-3 (E.D.N.Y. Mar. 19, 2008); In re Twin Labs. Inc., 300 B.R. 836, 841 (S.D.N.Y. 2003). The twelve factors are:
(1) the effect or lack thereof on the efficient administration of the estate if a Court [*17] recommends abstention, (2) the extent to which state law issues predominate over bankruptcy issues, (3) the difficulty or unsettled nature of the applicable state law, (4) the presence of a related proceeding commenced in state court or other nonbankruptcy court, (5) the jurisdictional basis, if any, other than 28 U.S.C. § 1334, (6) the degree of relatedness or remoteness of the proceeding to the main bankruptcy case, (7) the substance rather than form of an asserted "core" proceeding, (8) the feasibility of severing state law claims from core bankruptcy matters to allow judgments to be entered in state court with enforcement left to the bankruptcy court, (9) the burden [on] the court's docket, (10) the likelihood that the commencement of the proceeding in bankruptcy court involves forum shopping by one of the parties, (11) the existence of a right to a jury trial, and (12) the presence in the proceeding of nondebtor parties.
See In re Twin Labs. Inc., 300 B.R. at 841 (citations omitted). Here, these twelve factors do not favor discretionary abstention.

Most significantly, although appellant's causes of action "are styled as New York State law claims, they turn largely on issues that [*18] are intertwined" with his bankruptcy, including the propriety of Simpson and Windel Marx's advice regarding his bankruptcy proceedings. Norkin, 2006 U.S. Dist. LEXIS 14254, 2006 WL 839079, at *5. In Norkin, which also involved allegations of legal malpractice for advice rendered by a law firm during a debtor's Title 11 proceedings, the court refused to exercise discretionary abstention because "[s]tate law issues do not predominate here," and where such issues did arise, "they are in the well settled areas of professional malpractice, negligence, and breach of fiduciary duty." Id. A similar conclusion is warranted here."

Full post as published by New York Attorney Malpractice Blog on September 01, 2009 (boomark / email).