When may plaintiff bring a state court action for legal malpractice and when may it be removed, as a "core" proceeding, to US Bankruptcy Court. It’s an involved question, and 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., 08-CV-1855 (DLI);
UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF NEW YORK;
2009 U.S. Dist. LEXIS 73098;August 18, 2009, discusses this issue.
"On February 8, 2002, Simpson and Windels Marx, the law firm to which Simpson belonged, were appointed by the bankruptcy court as counsel for appellant and two additional entities for which appellant was the sole or controlling shareholder, in their jointly administered Title 11 cases. (See Order Authorizing Retention of Windels Marx Lane & Mittendorf [*3] as Attorney for Debtor-in-Possession, Dkt. # 20.) Appellant brings claims related to legal malpractice, conversion, negligence, fraud and intentional misrepresentation, based primarily on four incidents that occurred during the course of Simpson’s engagement as counsel in connection with appellant’s bankruptcy petition.
First, appellant independently found a broker that allegedly would refinance all his properties and net him enough money to pay off his creditors. On the advice of Simpson, appellant did not retain such broker, and, instead, refinanced through appellee Galster Capital LLC ("Galster"), whose services were procured by Simpson. The bankruptcy court issued three orders, dated April 17, 2003 (Dkt. # 142), June 4, 2004 (Dkt. # 207), and July 2, 2004 (Dkt. # 214), authorizing and approving mortgage loans from Galster to appellant. Appellant now claims that Galster misrepresented itself as a lender, and, after two years, failed to fund the loan as agreed, causing appellant to forgo offers from other prospective lenders, incur legal fees, and accrue interest on his debt.
Second, at the inception of the Title 11 case, during a status conference before the bankruptcy court, Simpson [*4] allegedly misrepresented that appellant was holding security deposits for the tenants at one of the buildings that formed part of appellant’s bankruptcy estate. Simpson then allegedly produced a document bearing appellant’s forged signature to substantiate said misrepresentation. As a result, all tenants were erroneously added to appellant’s list of creditors pursuant to Rule 1007-1 of the Eastern District of New York’s Local Bankruptcy Rules.
Third, Simpson allegedly arranged an auction sale of two of appellant’s commercial properties that resulted in winning bids by Simpson’s friends or affiliates. Although appellant alleges that Simpson arranged these sales without communicating to appellant his intent to proceed, the record shows that at least one of these sales was approved by the bankruptcy court. (See Order Granting Mot. to Sell Free and Clear of Liens Real Property located at 1801 Pitkin Avenue, Brooklyn, NY on April 23, 2002, Dkt. # 37.) After a prospective buyer moved to reopen the sale, the bankruptcy court issued an order on May 3, 2002 vacating the original sale and scheduling a new sale on notice. (See Decision and Order Granting Mot. to Vacate the Oral Decision of the [*5] Court on April 23, 2002, Approving the Sales of Pitkin Avenue Property & Forest Avenue Property, Dkt. # 52.) 1 The winning bids were for significantly higher amounts than those offered in the initial, allegedly fixed auction arranged by Simpson.
"Appellant contends that the bankruptcy court’s jurisdiction over his claims was circumscribed by the disposal of his estate. Once all the property has been disposed of, he argues, the Title 11 proceeding terminated, and, with it, the court’s original jurisdiction under Section 1334(a) over the instant case.
The court finds that the disposal of appellant’s estate is immaterial to the jurisdictional issue for two reasons. First, "a bankruptcy court retains post-confirmation jurisdiction to interpret and enforce its own orders, particularly when disputes arise over a bankruptcy plan of reorganization." In re Millenium Seacarriers, Inc., 419 F.3d 83, 96 (2d Cir. 2005) (internal quotation [*11] marks omitted). Second, the Title 11 case ends only when it is closed under Section 350(a) of Title 11, and not, as appellant argues, with disposition of the estate. See 11 U.S.C. § 350(a) (2006).
The question of whether the bankruptcy court has exclusive jurisdiction over appellant’s claims is similarly immaterial, as is appellant’s assertion that it is unlikely that his state court claims will have any conceivable effect on the bankruptcy case. For this court to uphold the exercise of jurisdiction, the bankruptcy court need not have exclusive jurisdiction under Section 1334(a), or find that appellant’s claims are "related to" his bankruptcy petition. As set forth below, the court finds that appellant’s claims are civil proceedings arising in a case under Title 11, and are thus subject to the bankruptcy court’s jurisdiction under Section 1334(b). 28 U.S.C. § 1334(b).
District courts in this circuit have found that "[a] matter ‘arises in’ [T]itle 11 when ‘the gravamen of the proceeding arises in the particular bankruptcy case and would have no existence outside of bankruptcy,’" even if the matter is not based on any right expressly created by Title 11. D.A. Elia Constr. Corp. v. Damon & Morey, LLP, 389 B.R. 314, 317 (W.D.N.Y. 2008) [*12] (citation omitted). Since claims arising out of services rendered in connection with a debtor’s bankruptcy proceeding "are inextricably connected to the bankruptcy proceeding," courts generally find "no bar, statutory, constitutional, or otherwise, to the [b]ankruptcy [c]ourt exercising jurisdiction" over such claims. In re SPI Commc’ns & Mktg., Inc., 114 B.R. at 18."