Legal Malpractice

Why is this Legal Malpractice Case in Bankruptcy Court?

By (Andrew Lavoott Bluestone)

Plaintiff is a corporation,and it files a Chapter 11 petition.  It then brings a traditional legal malpractice action in state court.  Plaintiff commences the action against Defendant DLA Piper LLP and then itself removes the case to US District Court.  The matter then is transferred to Bankruptcy Court.  How does this play out?  Why does plaintiff want the case in Bankruptcy Court?

in In re JOSEPH DELGRECO & COMPANY, INC., Debtor. JOSEPH DELGRECO & COMPANY, INC. And JOSEPH DELGRECO, Plaintiffs, - against - DLA PIPER LLP (US), Defendant.;10 CV 6422 (NRB);UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK ; 2011 U.S. Dist. LEXIS 10972;January 26, 2011, Decided
 

"District courts have original jurisdiction over "all civil proceedings arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. § 1334 (b). However, a district court may refer such matters to the bankruptcy courts. 28 U.S.C. § 157(a) Indeed, in the Southern District of New York, the district [*5] court automatically refers all such cases to the bankruptcy court in the first instance. See Official Comm. of Unsecured Creditors of the VWE Grp., Inc. v. Amlicke (In re VWE Grp., Inc.), 359 B.R. 441, 446 (S.D.N.Y. 2007); Kenai Corp. v. Nat'l Union Fire Ins. Co. (In re Kenai Corp.), 136 B.R. 59, 60 (S.D.N.Y. 1992).

District courts also have authority to "withdraw . . . any case or proceeding referred [to the bankruptcy court] on its own motion or on a timely motion of any party, for cause shown." 28 U.S.C. § 157(d); see also Orion Pictures Corp. V. Showtime Networks, Inc. (In re Orion Pictures Corp.), 4 F. 3d 1095, 1101 (2d Cir. 1993), cert. denied 511 U.S. 1026, 114 S. Ct. 1418, 128 L. Ed. 2d 88 (1994) Although section 157 (d) does not define "cause," the Second Circuit has instructed district courts to consider: (1) whether the claim is core or non-core; (2) whether the claim is legal or equitable and thus whether a right to jury trial exists; and (3) whether other factors -- including the efficient use of judicial resources, delay and cost to the parties, uniformity of bankruptcy administration, and the prevention of forum shopping -- counsel in favor of withdrawal. In re Orion, 4 F. 3d at 1101; see also South St. Seaport Ltd. P'ship v. Burger Boys, Inc. (In re Burger Boys, Inc.), 94 F.3d 755, 762 (2d Cir. 1996); [*6] Northwest Airlines Corp. v. City of Los Angeles (In re Northwest Airlines Corp.), 384 B.R. 51, 56 (S.D.N.Y. 2008)"

'In this Circuit, "[a] district court considering whether to withdraw the reference should first evaluate whether the claim is core or non-core, since it is upon this issue that questions of efficiency and uniformity will turn." In re Orion, 4 F.3d at 1101. This evaluation is relatively straight-forward. [*7] "A proceeding that involves rights created by bankruptcy law, or that could arise only in a bankruptcy case, is a core proceeding." United Orient Bank v. Green (In re Green), 200 B.R. 296, 298 (S.D.N.Y. 1996) (collecting cases); see also Kerusa Co. LLC v. W10Z/515 Real Estate Ltd. P'ship, 04 Civ. 708 (GEL), 2004 U.S. Dist. LEXIS 8168, 2004 WL 1048239, at *2 (S.D.N.Y. May 7, 2004); 1800Postcards, Inc. v. Morel, 153 F. Supp. 2d 359, 366-67 (S.D.N.Y. 2001) By contrast, "[a]n action that does not depend on the bankruptcy laws for its existence and which could proceed in a court that lacks federal bankruptcy jurisdiction is non-core." In re Green, 200 B.R. at 298 (collecting cases); see also Kerusa, 2004 U.S. Dist. LEXIS 8168, 2004 WL 1048239, at *2; Morshet Israel, Inc. v. Irmas Charitable Found. (In re Morshet Israel, Inc.), No. 97 Civ. 1852 (SHS), 1999 U.S. Dist. LEXIS 4127, 1999 WL 165699, at *2 (S.D.N.Y. Mar. 24, 1999)."

"First, withdrawing the reference at this stage in the adversary proceeding would promote judicial economy. Because the malpractice claims against DLA Piper are non-core, the case must ultimately be tried by this Court or by a state trial court. Thus, the efficiency question reduces to whether judicial economy is served by permitting the bankruptcy court to oversee discovery and other pre-trial proceedings. Here, plaintiffs do not assert, credibly or otherwise, that the bankruptcy court is particularly familiar with the facts that underlie the legal malpractice claims or better equipped to handle any pre-trial proceedings. Accordingly, we cannot conclude that retaining the reference until the case is trial-ready would further judicial economy.

Second, plaintiffs have not argued that withdrawing the reference would delay the case or would result in excess costs to the parties. Thus, we cannot reasonably conclude that withdrawing the reference now, as opposed to at a later date, would burden the parties [*14] with delays or additional expenses.

Third, withdrawing the reference would not undermine uniform administration of the law. This case involves state law claims, which arose prior to the bankruptcy filing, and which do not raise substantive issues of bankruptcy law. "

Full post as published by New York Attorney Malpractice Blog on February 08, 2011 (boomark / email).