Legal Fees, Legal Malpractice and Bankrutpcy
Client was sued for legal fees and counterclaimed for legal malpractice. As has happened many times before, a bankruptcy filing prior to the law suit deprives client of the capacity to sue the attorneys. How does this happen?
In the Bankruptcy petition, one must schedule all potential claims that one reasonably knows of. This includes a potential, even if inchoate, cause of action against the attorney. The Second Department explains in Potruch & Daab, LLC v Abraham 2012 NY Slip Op 05505
Decided on July 11, 2012 Appellate Division, Second Department :
"The Supreme Court properly granted the plaintiff's motion to dismiss the counterclaims to recover damages for, among other things, legal malpractice. The failure of a party to disclose a cause of action as an asset in a prior bankruptcy proceeding, which the party knew or should have known existed at the time of that proceeding, deprives him or her of "the legal capacity to sue subsequently on that cause of action" (Whelan v Longo, 23 AD3d 459, 460, affd 7 NY3d 821; see Dynamics Corp. of Am. v Marine Midland Bank-N.Y., 69 NY2d 191, 195-196; Santori v Met Life, 11 AD3d 597, 599; 123 Cutting Co. v Topcove Assoc., 2 AD3d 606, 607).
Here, it is undisputed that the defendant did not disclose, in a bankruptcy petition that he filed in September 2007, the existence of the causes of action he now asserts as counterclaims. The plaintiff showed, prima facie, that at the time of the filing of that petition the defendant knew or should have known of the existence of those causes of action, and the defendant failed to raise a triable issue of fact in opposition to that prima facie showing (see Wright v Meyers & Spencer, LLP, 46 AD3d 805; Hansen v Madani, 263 AD2d 881, 883; see also Whelan v Longo, 23 AD3d at 460). Further, under the circumstances of this case, the fact that the defendant's bankruptcy petition was later dismissed does not change this result (see Nationwide Assocs., Inc. v Epstein, 24 AD3d 738, 739; see also Kunica v St. Jean Financial, Inc., 233 B.R. 46, 53-54). Moreover, although the defendant stated in his opposition to the plaintiff's motion that, in 2010, he filed a second bankruptcy petition in which he did disclose his malpractice cause of action, in support of that claim he submitted only a single page of the Schedule of Assets from that petition. He also submitted no evidence as to the ultimate disposition of the second bankruptcy petition. He therefore failed to raise a triable issue of fact as to whether he regained his capacity to assert his legal malpractice claims against the plaintiff by filing the second bankruptcy petition (see Nationwide Assoc., Inc. v Epstein, 24 AD3d at 739). "