Grausz v. Englander ( 2003 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
HENRY GRAUSZ, M.D., 
Plaintiff-Appellant,
v.
 No. 01-2317
BRADFORD F. ENGLANDER;
LINOWES AND BLOCHER, L.L.P.,
Defendants-Appellees.

Appeal from the United States District Court
for the District of Maryland, at Greenbelt.
Peter J. Messitte, District Judge.
(CA-01-2174-PJM)
Argued: September 23, 2002
Decided: March 6, 2003
Before MICHAEL and GREGORY, Circuit Judges, and
Rebecca Beach SMITH, United States District Judge
for the Eastern District of Virginia,
sitting by designation.
Affirmed by published opinion. Judge Michael wrote the opinion, in
which Judge Gregory and Judge Smith joined.
COUNSEL
ARGUED: Joseph Daniel Gallagher, GILL & SIPPEL, Rockville,
Maryland, for Appellant. Andrew Jay Graham, KRAMON &
GRAHAM, P.A., Baltimore, Maryland, for Appellees. ON BRIEF:
2 GRAUSZ v. ENGLANDER
Geoffrey H. Genth, KRAMON & GRAHAM, P.A., Baltimore, Mary-
land, for Appellees.
OPINION
MICHAEL, Circuit Judge:
This is a professional malpractice action filed by a Chapter 11
debtor against the law firm that represented him in his bankruptcy
case. We hold that the district court had bankruptcy jurisdiction over
this action under 28 U.S.C. § 1334 because the malpractice claim
arose in the bankruptcy case. In addition, we affirm the district court’s
award of summary judgment to the law firm because the malpractice
claim is barred on res judicata grounds by an earlier order of the
bankruptcy court.
I.
The facts and procedural history are not disputed. On December
29, 1997, Henry Grausz, M.D., filed a Chapter 11 bankruptcy petition
in the District of Maryland. Grausz was represented by Bradford F.
Englander and his law firm, Linowes & Blocher, LLP (collectively,
the "Linowes firm"). One of Grausz’s major creditors was John F.
Sampson, who was acting in his capacity as liquidator of GFI Com-
mercial Mortgage, L.P. In October 1997, shortly before Grausz filed
for bankruptcy, Sampson’s predecessors had obtained a judgment for
$5.17 million plus interest against Grausz in California state court.
Grausz appealed the California judgment, and based on the judgment,
Sampson filed a proof of claim for approximately $6.5 million in
Grausz’s bankruptcy case. These events prompted communication
between Grausz and Sampson. Grausz, with the assistance of
Englander, negotiated and entered into a settlement agreement with
Sampson that was approved by the bankruptcy court on June 8, 1998.
Several provisions of the settlement agreement are pertinent. First,
Grausz agreed to withdraw his appeal from the California judgment.
In return, Sampson agreed to accept an allowed, unsecured, non-
priority claim of $4 million in Grausz’s bankruptcy case. Second,
Grausz agreed to file amended schedules of assets and liabilities. He
GRAUSZ v. ENGLANDER 3
warranted that the amended schedules would contain a complete and
accurate listing of all of his assets as of the date of his bankruptcy
petition. Third, Grausz agreed that if he should breach this warranty,
Sampson would be free to object to the discharge of Grausz’s debts.
Fourth, Grausz agreed that any breach by him of the warranty would
be deemed a post-petition breach, making him liable for a claim for
damages by Sampson that would survive any resolution of the bank-
ruptcy case.
Englander prepared the amended schedules in consultation with
Grausz, and Grausz filed them on June 22, 1998. The amended
Schedule B (listing personal property) identified Grausz’s household
goods and furnishings as "goods held in storage" and itemized in a
"packing list" attached as an exhibit. According to Grausz, the pack-
ing list — which was prepared by others — was supposed to be a list
of households items allocated to him when (in September 1996) he
and his wife divided the personal property in their California home
pursuant to their separation. In any event, Grausz says that the house-
hold items not taken by his wife were shipped to a storage unit in
Maryland to await his retrieval. The amended Schedule B did not
make any reference to community property, even though Grausz was
still married when he filed his petition, and his matrimonial domicile
was in California, a community property state. Grausz contends that
Englander assured him that the packing list attached to amended
Schedule B was adequate to identify his household property and that
it would not be necessary to verify the accuracy of the list. Grausz
also claims that Englander failed to advise him that it would be neces-
sary to list his community property interests on the amended sched-
ules.
The unsecured creditors’ committee, chaired by Sampson, arranged
for an inventory of Grausz’s storage unit in October 1999. The inven-
tory revealed that valuable items on the packing list were missing. In
January 2000 the creditors’ committee objected to Grausz’s disclo-
sures, in part because of inaccuracies in the listing of household goods
and furnishings. On February 18, 2000, the Linowes firm filed its first
interim fee application to collect for its work as Grausz’s bankruptcy
counsel through November 30, 1999. Grausz did not object to the
application. On March 6, 2000, Sampson commenced an adversary
proceeding against Grausz by filing a complaint to have Sampson’s
4 GRAUSZ v. ENGLANDER
claim declared nondischargeable and to deny Grausz’s discharge.
Sampson alleged that Grausz breached the warranty in the settlement
agreement by filing an amended Schedule B (incorporating the pack-
ing list) that contained an incorrect and incomplete list of Grausz’s
personal property. Sampson claimed, among other things, that Grausz
had failed to account for a significant number of valuable articles,
including antiques and works of art. After the Sampson nondischar-
geability suit was filed, Grausz asked Englander what the Linowes
firm would charge to defend him (Grausz) in the litigation. When
Englander requested a $25,000 retainer, Grausz replied that he would
not, or could not, pay it. Grausz then accused Englander of incompe-
tence in negotiating the settlement agreement with Sampson. Grausz
said that the settlement agreement had gotten him into the problem
with Sampson, that entering the agreement was a mistake, and that he
entered it only because of Englander’s bad advice. Englander replied
that "if [Grausz] had genuine concerns about the quality of [England-
er’s] work in connection with [the] Sampson [settlement], he should
hire substitute counsel rather than continue with an attorney in whom
he claimed to have lost confidence." On April 26, 2000, the bank-
ruptcy court approved the Linowes’ firm’s first interim fee applica-
tion, awarding fees of nearly $250,000. On May 18, 2000, Englander,
on behalf of the Linowes firm, moved to withdraw as Grausz’s coun-
sel, and the bankruptcy court granted the motion on May 25, 2000.
On July 28, 2000, the Linowes firm filed its second and final fee
application. In the second application, the firm sought final approval
of the interim fees awarded for the period through November 30,
1999, and about $15,000 for the services rendered between December
1, 1999, and May 25, 2000. Grausz did not object to the second fee
application. The bankruptcy court entered an order on October 23,
2000 (the "final fee order"), finalizing the first interim fee award and
allowing the additional fees of about $15,000.
Sampson’s case against Grausz to determine dischargeability was
tried before the bankruptcy court on March 6 and 7, 2001, and the
court issued its decision on March 9. The court found, among other
things, (1) that Grausz breached the warranty in the settlement agree-
ment by his failure to list substantial community property interests on
his amended Schedule B, (2) that the packing list attached to the
amended schedule did not satisfy disclosure requirements, and (3) that
Grausz, by resorting to vague and indefinite statements, failed to sat-
GRAUSZ v. ENGLANDER 5
isfactorily explain the loss of certain of his assets, including several
valuable paintings. Based on these findings, the bankruptcy court
entered an order denying Grausz a discharge. Grausz asserts that the
denial of discharge exposes him to liabilities in the neighborhood of
$30 million.
On June 21, 2001, following the denial of his discharge, Grausz
filed this legal malpractice action against the Linowes firm in the Cir-
cuit Court for Prince George’s County, Maryland. He alleges that the
Linowes firm (1) negligently failed to advise him to list his commu-
nity property interests on his amended Schedule B and (2) negligently
failed to advise him to verify the accuracy of the packing list that was
attached to the schedule. The Linowes firm’s negligence, Grausz says,
caused him to breach the full disclosure warranty in the settlement
agreement. This breach, in turn, allowed Sampson to obtain the order
denying Grausz’s discharge. Grausz seeks damages for his liability to
creditors resulting from the nondischargeability order. The Linowes
firm promptly removed the action to the U.S. District Court for the
District of Maryland, asserting bankruptcy jurisdiction under 28
U.S.C. § 1334. The Linowes firm filed a motion to dismiss or, in the
alternative, for summary judgment on the ground that under res judi-
cata principles the bankruptcy court’s final fee order (approving fees
for the Linowes firm) barred the malpractice claim. Grausz, in turn,
moved to remand the case to state court, arguing that the district court
lacked federal subject matter jurisdiction. After briefing and oral
argument, the district court, in a ruling from the bench, held that prin-
ciples of res judicata barred Grausz’s malpractice claim. The court
then entered a formal order granting the Linowes firm’s motion for
summary judgment. The court declined to rule on Grausz’s motion to
remand, saying that it was moot. Grausz appeals.
II.
Grausz first argues that the district court lacked subject matter
jurisdiction to hear this case, which he commenced in Maryland state
court by filing a complaint for legal malpractice against the Linowes
firm. The Linowes firm removed the case, asserting bankruptcy juris-
diction under 28 U.S.C. § 1334(b). Section 1334(b) gives district
courts "original but not exclusive jurisdiction of all civil proceedings
arising under title 11, or arising in or related to cases under title 11."
6 GRAUSZ v. ENGLANDER
We agree with the Linowes firm that Grausz’s malpractice claim,
which originated in the firm’s work for Grausz in his bankruptcy case,
is a claim "arising in" the bankruptcy case. As a result, there is federal
jurisdiction.
In A.H. Robins Co. v. Dalkon Shield Claimants Trust, 86 F.3d 364(4th Cir. 1996), we examined the scope of "arising in" jurisdiction
under § 1334(b). We held that proceedings or claims arising in Title
11 are those that "are not based on any right expressly created by Title
11, but nevertheless, would have no existence outside of the bank-
ruptcy." A.H. Robins, 86 F.3d at 372 (quotation omitted). In other
words, a "controversy arises in Title 11" when "it would have no
practical existence but for the bankruptcy." Id. (emphasis added).
A.H. Robins did not discuss bankruptcy jurisdiction over a profes-
sional malpractice claim. Nevertheless, the case’s broad interpretation
of "arising in" jurisdiction surely means that jurisdiction exists over
a malpractice claim against a lawyer for providing negligent advice
to a debtor in a bankruptcy case. See, e.g., In re Simmons, 205 B.R.
834, 841 (Bankr. W.D. Tex. 1997) (citing A.H. Robins and stating that
"claims of malpractice which originated out of pre- and post-petition
advi[c]e of counsel concerning the bankruptcy itself are matters that
fall within ‘arising in’ jurisdiction").
Grausz argues that there is no federal bankruptcy jurisdiction
because his malpractice claim is personal to him and is not the prop-
erty of his bankruptcy estate. But the claim arises in the bankruptcy
case, regardless of whether it belongs to him or the estate. Grausz’s
claim is that the Linowes firm committed malpractice in his bank-
ruptcy case by, among other things, (1) negligently failing to advise
him to list his community property interests on the amended Schedule
B and (2) negligently failing to advise him to verify the accuracy of
the packing list attached to the amended schedule. This malpractice
claim "would have no practical existence but for the bankruptcy"
case. See A.H. Robins, 86 F.3d at 372. The claim thus arises in Title
11, and the district court had subject matter jurisdiction under 28
U.S.C. § 1334(b).
III.
Grausz argues that even if the district court had subject matter
jurisdiction over his malpractice action, the court erred in granting
GRAUSZ v. ENGLANDER 7
summary judgment to the Linowes firm on the ground that the bank-
ruptcy court’s final fee order barred the malpractice claim under prin-
ciples of res judicata. After reviewing the district court’s decision de
novo, see Keith v. Aldridge, 900 F.2d 736, 739 (4th Cir. 1990), we
hold that Grausz’s malpractice claim is barred.
We look to res judicata principles developed in our own case law
to determine whether an earlier federal judgment, including the judg-
ment of a bankruptcy court, bars a claim asserted in a later action.
Keith, 900 F.2d at 739; see also Harnett v. Billman, 800 F.2d 1308,
1312-13 (4th Cir. 1986). The later claim is precluded when:
1.) the prior judgment was final and on the merits, and ren-
dered by a court of competent jurisdiction in accordance
with the requirements of due process; 2) the parties are iden-
tical, or in privity, in the two actions; and, 3) the claim[ ] in
the second matter [is] based upon the same cause of action
involved in the earlier proceeding.
In re Varat Enters., Inc., 81 F.3d 1310, 1315 (4th Cir. 1996).
We agree with the district court’s determination on the first ele-
ment, which is not contested, that the bankruptcy court’s final fee
order approving the Linowes firm’s second and final fee application
is a final judgment on the merits. This order resolved all issues relat-
ing to the Linowes firm’s fee applications in the Grausz bankruptcy,
including the matter of finalizing the interim fee award.
As to the second element, Grausz argues that there is not a suffi-
cient identity of parties in the two actions — the fee application pro-
ceeding and the legal malpractice case — to support a res judicata
defense. Specifically, he claims that he was not a "party in interest"
in the fee application proceeding. See 11 U.S.C. § 502(a) (allowing a
"party in interest" to challenge claims made against the estate). By the
time the Linowes firm filed its fee applications, a trustee had been
appointed to administer Grausz’s bankruptcy estate. According to
Grausz, the trustee, as the representative of the estate, was the party
in interest opposite the Linowes firm in the fee applications. Grausz
says that he had no interest in the outcome of the fee proceeding. We
disagree. In the bankruptcy context a party in interest is one who has
8 GRAUSZ v. ENGLANDER
a pecuniary interest in the distribution of assets to creditors. Wille-
main v. Kivitz, 764 F.2d 1019, 1022 (4th Cir. 1985). Here, Grausz’s
disclosure statement and plan of liquidation projected that there
would be insufficient funds in the estate to pay off all nondischarge-
able priority claims, including claims for taxes and for back alimony
and support. If legal fees were reduced or disallowed, there would be
more money available in the estate to pay the nondischargeable prior-
ity claims, and Grausz’s personal liability would be reduced. Grausz
therefore had a pecuniary interest in the outcome of the fee applica-
tions, making him a party in interest to that proceeding. Cf. McGuirl
v. White, 86 F.3d 1232, 1234-35 (D.C. Cir. 1996). As a result, there
is an identity of parties in the fee proceeding and the malpractice case.
We turn to the third element in the res judicata analysis, whether
"the claim[] in the second matter," the malpractice action, is "based
upon the same cause of action involved in the earlier [fee] proceed-
ing." Varat, 81 F.3d at 1315. Our court recognizes that "[n]o simple
test exists to determine whether [claims are based on the same cause
of action] for claim preclusion purposes." Pittston Co. v. United
States, 199 F.3d 694, 704 (4th Cir. 1999). Generally, we say that
"claims are part of the same cause of action when they arise out of
the same transaction or series of transactions, or the same core of
operative facts." Varat, 81 F.3d at 1316 (citations omitted). The "core
of operative facts" in the two actions here — the fee application pro-
ceeding and the malpractice action — are the same. Both actions
relate to the nature and quality of legal services the Linowes firm pro-
vided to Grausz in connection with the bankruptcy proceeding. See In
re Iannochino, 242 F.3d 36, 47 (1st Cir. 2001); In re Intelogic Trace,
Inc., 200 F.3d 382, 387 (5th Cir. 2000) (noting that the "central trans-
action" involved in the fee application and malpractice claim was the
provision of professional services). The fee application proceeding
necessarily included an inquiry by the bankruptcy court into the qual-
ity of professional services rendered by the Linowes firm. The court
was required to "consider the nature, the extent, and the value of such
services" before awarding fees. 11 U.S.C. § 330(a)(3). See also Ian-
nochino, 242 F.3d at 47; Intelogic, 200 F.3d at 387. By granting the
Linowes firm’s second and final fee application, the bankruptcy court
impliedly found that the firm’s services were acceptable throughout
its representation of Grausz. The order approving the second and final
fee application finalized the fees awarded on the first interim fee
GRAUSZ v. ENGLANDER 9
application. The first application included the Linowes firm’s billings
for advice and services to Grausz in preparing the amended schedules.
Grausz’s malpractice claim, which alleges that the firm was negligent
in advising him about disclosure requirements, addresses this very
same work. We conclude, therefore, that the fee applications and
Grausz’s legal malpractice claim arise out of the same "core of opera-
tive facts." The malpractice claim is rooted in the same cause of
action as the earlier claim for fees.
Although the three formal elements for claim preclusion are pres-
ent, our inquiry is not complete, at least not in this case. Because it
might not appear at first blush that a malpractice claim should be
asserted in a bankruptcy fee proceeding, two practical considerations
should be taken into account. See Pittston, 199 F.3d at 704; see also
Restatement (Second) of Judgments § 24(2). These are (1) whether
Grausz knew or should have known before the fee proceeding ended
of the real likelihood of a malpractice claim, see Intelogic, 200 F.3d
at 388; and (2) whether the fee proceeding in bankruptcy court pro-
vided Grausz an effective forum to litigate his malpractice claim, see
id. at 389.
We look at the date the final fee order was entered, October 23,
2000, and ask whether by that time Grausz knew or should have
known there was a real likelihood that he had a malpractice claim
against the Linowes firm. By that time (1) Sampson had filed the non-
dischargeability suit against Grausz, alleging that Grausz’s amended
Schedule B (incorporating the packing list) was an inadequate disclo-
sure of his personal property; (2) Grausz knew that the schedule chal-
lenged by Sampson had been prepared by the Linowes firm; (3)
Grausz had accused Englander (of the Linowes firm) of incompe-
tence, saying that the settlement agreement negotiated by Englander
had gotten him (Grausz) into his problem with Sampson; and (4) the
Linowes firm had withdrawn as Grausz’s bankruptcy counsel due to
his dissatisfaction with the firm’s services.
Despite the above, Grausz argues that he could not have under-
stood that he would have a malpractice claim against the Linowes
firm before the final fee order was entered. Before that order was
entered, Sampson was only alleging that Grausz breached the settle-
ment agreement by filing an inadequate list (the packing list) of per-
10 GRAUSZ v. ENGLANDER
sonal property. Sampson’s suit was not tried until after the final fee
order; and, according to Grausz, the bankruptcy court relied on a dif-
ferent breach of the settlement agreement — failure to list community
property interests — to deny Grausz a discharge. Grausz contends
that he could not have anticipated that the court would find that his
nondisclosure of community property was a breach, and thus he could
not have foreseen the need to object (at the time of the fee proceed-
ing) on the ground that the Linowes firm negligently failed to advise
him on community property issues. This argument ignores that the
bankruptcy court relied in part on the inadequacy of the packing list
to deny the discharge. Moreover, it ignores that Grausz’s malpractice
complaint alleges that the Linowes firm was negligent in allowing
him to use the packing list in amended Schedule B without verifying
it, and it ignores that Grausz knew — by the time the final fee order
was entered — about the problems with the packing list and his dis-
satisfaction with the firm’s work. Again, before the final fee order
was entered, Grausz knew that the Linowes firm had advised him
about the use of the packing list in amended Schedule B, he knew that
Sampson relied on the inadequacy of the packing list to allege breach
of the settlement agreement in the nondischargeability suit, and he
believed that Englander had performed incompetently in negotiating
the settlement agreement with Sampson. In short, by the time the
bankruptcy court entered the final fee order for the Linowes firm,
Grausz knew or should have known there was a real likelihood that
he had a malpractice claim against the firm.
We turn to the second practical consideration, whether the fee pro-
ceeding in bankruptcy court provided Grausz with an effective oppor-
tunity to litigate his malpractice claim. Grausz could have objected to
the Linowes firm’s fee application and included with his objection a
claim for affirmative relief on account of the firm’s alleged malprac-
tice. See Intelogic, 200 F.3d at 389-90. In that event, the matter would
have become an adversary proceeding. See Fed. Bankr. R. 3007. Pro-
cedural mechanisms were therefore available for Grausz to raise his
malpractice claim in connection with the fee proceeding.
Grausz claims, however, that forcing him to assert his malpractice
claim in bankruptcy court deprives him of his right to a jury trial. If
there is a right to a jury trial, there are procedures to accommodate
that right. An adversary proceeding brought by a debtor to assert a
GRAUSZ v. ENGLANDER 11
malpractice claim against his bankruptcy lawyer is a case that falls
within a bankruptcy court’s core jurisdiction under 28 U.S.C. § 157.
See In re Southmark, 163 F.3d 925, 930-32 (5th Cir. 1999). Such a
case may be tried before a bankruptcy judge and a jury with the
authorization of the district court and the consent of the parties. See
28 U.S.C. § 157(e). In any event, an adversary proceeding may be
transferred to the district court if a jury trial is required. See In re
Stansbury Poplar Place, Inc., 13 F.3d 122, 128-29 (4th Cir. 1993);
compare Southmark, 163 F.3d at 935 n.16 ("[D]ebtor does not waive
the right to a jury trial by filing a voluntary bankruptcy case."), with
Billing v. Ravin, Greenberg & Zackin, P.A., 22 F.3d 1242, 1253 (3rd
Cir. 1994) (treating debtors’ malpractice claim, asserted as a defense
to lawyers’ fee petition, as an equitable dispute that did not give rise
to the right to a jury trial).
Grausz also argues that he could not have raised his malpractice
claim in the fee proceeding for a more fundamental reason. He says
his claim was not mature because he had no damages before the final
fee order was entered. He said that he suffered no damages until later,
when Sampson’s nondischargeability trial concluded, and the court
denied Grausz a discharge. Grausz, however, did have damages to
allege before the final fee order was entered. Up until the time the
final fee order was entered, the matter of the $250,000 payment of
interim fees to the Linowes firm was not settled. If those fees were
paid for substandard work, Grausz was damaged before the final fee
order was entered. Recovery of all or part of the interim fees would
have made more money available to pay nondischargeable debt, thus
reducing Grausz’s personal liability. Moreover, if Grausz was con-
cerned about not being able to finalize his malpractice damages at the
time of the fee proceeding, he could have requested a stay of that pro-
ceeding pending the court’s resolution of Sampson’s nondischargea-
bility suit. See Intelogic, 200 F.3d at 390. (It is worth noting that in
his malpractice complaint filed after the nondischargeability order
was entered, Grausz alleges that the amount of his damages are "yet
to be finally determined.") It is important to hold Grausz’s feet to the
fire, for if he could pursue his malpractice claim now and obtain a
judgment, that judgment could undermine the validity of the final fee
order, which finalizes the award of some $265,000 in fees to the
Linowes firm for work held to meet acceptable professional stan-
dards. Because "a bankruptcy court can order professionals to dis-
12 GRAUSZ v. ENGLANDER
gorge fees that it had previously awarded them," Grausz’s successful
prosecution of a malpractice action at this stage could impair rights
accorded the Linowes firm in the final fee order. Iannochino, 242
F.3d at 43. Such a result would undermine a fundamental purpose of
the doctrine of res judicata: "preventing inconsistent decisions, [and]
encourag[ing] reliance on adjudication." Bay State HMO Mgmt., Inc.
v. Tingley Sys., Inc., 181 F.3d 174, 181 (1st Cir. 1999) (quotation
omitted).
Because all of the elements of res judicata are present, and no prac-
tical considerations prevent the fair application of the doctrine, we
hold that Grausz’s legal malpractice claim is barred by the final fee
order in the bankruptcy case.
IV.
The district court had subject matter jurisdiction, and its summary
judgment order barring Grausz’s malpractice action on grounds of res
judicata is affirmed.
AFFIRMED