Bankruptcy and legal malpractice are often paired in real estate and in general corporate situations. The legal malpractice claim is often accompanied by severe financial loss, and bankruptcy can play a role is bringing a standstill to collection or take-over situations. There is a complex set of rules concerning who has the standing to bring a legal malpractice action in a bankruptcy setting: trustee or debtor?
Golden Jubilee Realty, LLC v Castro 2021 NY Slip Op 04541 Decided on July 28, 2021 Appellate Division, Second Department gives some guidance.
“The Supreme Court erred in granting that branch of Pacht’s motion which was pursuant to CPLR 3211(a)(3) to dismiss the amended complaint insofar as asserted against him based on Golden Jubilee’s alleged lack of standing. “On a defendant’s motion to dismiss the complaint based upon the plaintiff’s alleged lack of standing, the burden is on the moving defendant to establish, prima facie, the plaintiff’s lack of standing” (BAC Home Loans Servicing, LP v Rychik, 161 AD3d 924, 925; see CPLR 3211[a]; Gobindram v Ruskin Moscou Faltischek, P.C., 175 AD3d 586, 591). “To defeat a defendant’s motion, the plaintiff has no burden of establishing its standing as a matter of law; rather, the motion will be defeated if the plaintiff’s submissions raise a question of fact as to its standing” (Deutsche Bank Trust Co. Ams. v Vitellas, 131 AD3d 52, 60). As relevant to this appeal, in actions where a plaintiff voluntarily commenced a bankruptcy proceeding prior to the instant action, “[t]he 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'” (Potruch & Daab, LLC v Abraham, 97 AD3d 646, 647, quoting Whelan v Longo, 23 AD3d 459, 460, affd 7 NY3d 821; see Nicke v Schwartzapfel Partners, P.C., 148 AD3d 1168, 1170).
Here, Pacht’s submissions in support of his motion established that Golden Jubilee filed a bankruptcy petition in March 2016 which did not list the claim against Pacht as an asset, and that Golden Jubilee knew or should have known of the existence of its claim against Pacht prior to the filing of the bankruptcy petition (see Keegan v Moriarty-Morris, 153 AD3d 683, 684; Positive Influence Fashion v City of New York, 2 AD3d 606, 606-607). Accordingly, Pacht met his burden of establishing, prima facie, that Golden Jubilee lacked standing to bring this action against him (see Potruch & Daab, LLC v Abraham, 97 AD3d at 647). In opposition, however, the plaintiffs raised a question of fact as to Golden Jubilee’s standing, thus warranting denial of that branch of Pacht’s motion which was pursuant to CPLR 3211(a)(3) to dismiss the amended complaint insofar as asserted against him based on Golden Jubilee’s alleged lack of standing (see Arch Bay Holdings, LLC-Series 2010B v Smith, 136 AD3d 719, 720). The plaintiffs’ submissions established that Golden Jubilee’s bankruptcy petition was dismissed in January 2017. Thus, all property owned by Golden Jubilee, including the present claim against Pacht, revested with Golden Jubilee upon dismissal of the bankruptcy petition (see 11 USC §§ 349, 541[a]; Crawford v Franklin Credit Mgt. Corp., 758 F3d 473, 485 [2d Cir]).
For the same reasons, the Supreme Court erred in granting that branch of the Castro defendants’ motion which was pursuant to CPLR 3211(a)(3) to dismiss the amended complaint insofar as asserted against them based on Golden Jubilee’s lack of standing due to its failure to list the claims against the Castro defendants in its bankruptcy petition (see Crawford v Franklin Credit Mgt. Corp., 758 F3d at 485).”