Potter v. Pierce , 2015 NMSC 2 ( 2015 )

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integrity of this document
New Mexico Compilation
Commission, Santa Fe, NM
'00'05- 11:10:11 2015.02.04
IN THE SUPREME COURT OF THE STATE OF NEW MEXICO
Opinion Number: 2015-NMSC-002
Filing Date: January 8, 2015
Docket No. 34,365
JEFFREY POTTER,
Plaintiff-Petitioner,
v.
CHRIS PIERCE, WILLIAM DAVIS,
DAVIS & PIERCE, P.C., and
JOHN DOE LAW FIRM,
Defendants-Respondents.
ORIGINAL PROCEEDING ON CERTIORARI
Carl J. Butkus, District Judge
Law Office of Daymon Ely
Daymon B. Ely
Albuquerque, NM
Law Office of William G. Gilstrap
William Grant Gilstrap, II
Albuquerque, NM
for Petitioner
Domenici Law Firm, P.C.
Pete V. Domenici, Jr.
Lorraine Hollingsworth
Albuquerque, NM
for Respondents
OPINION
DANIELS, Justice.
1
{1} Res judicata is a judicially created doctrine designed to promote efficiency and
finality by giving a litigant only one full and fair opportunity to litigate a claim and by
precluding any later claim that could have, and should have, been brought as part of the
earlier proceeding. In this case, we examine the preclusive effect of a fee proceeding in
bankruptcy court on a later lawsuit for legal malpractice allegedly committed in the course
of the bankruptcy. We hold that the elements of res judicata are met and that Petitioner was
sufficiently aware of his malpractice claim, which he could and should have brought in the
bankruptcy proceeding. We affirm the dismissal of Petitioner’s subsequent malpractice suit
but emphasize that barring a claim on res judicata grounds requires a determination that the
claimant had a full and fair opportunity to litigate the claim in the earlier proceeding.
I. BACKGROUND
{2} One month prior to filing for voluntary Chapter 11 bankruptcy on May 19, 2005,
Petitioner Jeffery Potter sold his interest in a limited partnership known as Monte Mac.
Petitioner was represented in the bankruptcy proceedings by Respondents. During these
proceedings, Petitioner, through Respondents as counsel, filed his schedules and his
statement of financial affairs (SOFA). The SOFA requires that the debtor list all property
transferred within the year immediately preceding the bankruptcy petition, other than
property transferred in the ordinary course of business or financial affairs. See Official and
Procedural Bankruptcy Forms, Form 7, 11 U.S.C. (2003). Petitioner testified under oath that
he had reviewed the schedules and the SOFA and that they were true and correct. Neither
the schedules nor the SOFA listed Petitioner’s sale of the Monte Mac interest.
{3} Referring to “a fundamental disagreement,” Respondents filed a motion to withdraw
as counsel for Petitioner, which the bankruptcy court granted one year after Petitioner’s
Chapter 11 filing. After moving for withdrawal, Respondents also filed an application for
fees, to which Petitioner filed an objection on May 22, 2006. The objection from Petitioner
did not specifically mention the undisclosed Monte Mac transfer but alleged, among other
things, that Respondents had threatened Petitioner with their withdrawal, had caused
Petitioner to file inaccurate financial disclosures, and had obtained his signature on these
disclosures by fraud. The bankruptcy court held a fee hearing on April 10, 2007. After
hearing objections, the bankruptcy court analyzed billing records and disallowed some fees
as excessive, duplicative, clerical, or administrative in nature. The bankruptcy court
approved the rest in a final fee award entered on June 4, 2007, addressing the services
performed, rates charged, and time billed but not specifically mentioning the allegations
made in the objections. Petitioner did not appeal or move the bankruptcy court to reconsider
its judgment.
{4} Following Respondents’ withdrawal, the bankruptcy court converted Petitioner’s
bankruptcy from Chapter 11 to Chapter 7. When questioned about the Monte Mac sale on
the day after the fee hearing and prior to the entry of the final fee judgment, Petitioner
testified to his creditors that he had owned an interest in Monte Mac but had sold it for
$72,000 and could not recall when he sold it.
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{5} On March 21, 2008, Petitioner filed a motion in bankruptcy court alleging damages
from malpractice that included over one million dollars for his exposure to a denial of his
discharge.
{6} Petitioner never filed an amended schedule or SOFA to include the sale of his interest
in the Monte Mac partnership. Finding this to be a knowing and fraudulent omission, the
bankruptcy court denied the discharge of Petitioner’s debts on June 23, 2009.
{7} Petitioner then brought a separate action for legal malpractice, breach of fiduciary
duty, and misrepresentation in the Second Judicial District Court. In his complaint, Petitioner
made broad allegations of malpractice against Respondents. Respondents moved to dismiss
Petitioner’s complaint as barred by the res judicata effect of the bankruptcy court fee award.
Petitioner responded that his malpractice claim had not accrued until he had been denied a
discharge, because until then he had not suffered injury, and so approval of the fee award did
not bar his claim. The district court found that this argument “fails on the facts” because
Petitioner alleged both malpractice and damages sustained from that malpractice in the
bankruptcy fee proceedings and in subsequent pleadings prior to the denial of his discharge.
The district court granted summary judgment for Respondents on grounds of res judicata.
Petitioner appealed, the Court of Appeals affirmed, and we granted certiorari. Potter v.
Pierce, 2014-NMCA-002, ¶ 1, 315 P.3d 303, cert. granted, 2013-NMCERT-011.
II. STANDARD OF REVIEW
{8} Summary judgment is appropriate where there are no genuine issues of material fact
and the movant is entitled to judgment as a matter of law. Zamora v. St. Vincent Hosp., 2014-
NMSC-035, ¶ 9, 335 P.3d 1243; Rule 1-056(C) NMRA. We review a grant of summary
judgment de novo. Zamora, 2014-NMSC-035, ¶ 9. In reviewing an order on summary
judgment, we examine the whole record, considering the facts and drawing all reasonable
inferences in a light most favorable to the nonmoving party. Id. “Whether the elements of
claim preclusion are satisfied is a legal question, which we [also] review de novo.” Kirby v.
Guardian Life Ins. Co. of Am., 2010-NMSC-014, ¶ 61, 148 N.M. 106, 231 P.3d 87.
III. DISCUSSION
{9} Petitioner argues that New Mexico precedent does not allow a nonadversarial fee
proceeding to preclude a later claim for legal malpractice; and he reasons that because he did
not suffer any injury until the denial of his discharge, his malpractice claim could not have
been brought earlier.
{10} “[R]es judicata is designed to relieve parties of the cost and vexation of multiple
lawsuits, conserve judicial resources, . . . prevent [] inconsistent decisions, [and] encourage
reliance on adjudication.” Computer One, Inc. v. Grisham & Lawless, P.A., 2008-NMSC-
038, ¶ 31, 144 N.M. 424, 188 P.3d 1175 (alterations in original) (internal quotation marks
and citation omitted). Federal law and New Mexico law are consistent on the general
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standards governing claim preclusion. Deflon v. Sawyers, 2006-NMSC-025, ¶ 2, 139 N.M.
637, 137 P.3d 577. A party asserting res judicata or claim preclusion must establish that (1)
there was a final judgment in an earlier action, (2) the earlier judgment was on the merits,
(3) the parties in the two suits are the same, and (4) the cause of action is the same in both
suits. Kirby, 2010-NMSC-014, ¶ 61. In addition to those elements, as we discuss in this
opinion, res judicata will preclude a malpractice claim only if the claim reasonably could and
should have been brought during the earlier proceeding. The decision rests on the prior
opportunity to litigate, and neither the type of proceeding nor the damages sought are
determinative. We address the two elements contested by Petitioner, whether the cause of
action was the same in both proceedings and whether Petitioner’s malpractice claim could
and should have been brought in the bankruptcy proceedings.
A. The Legal Malpractice Claim Involves the Same Cause of Action for Res
Judicata Purposes as the Fee Claim Because Both Were Based on the Nature
and Quality of Respondents’ Legal Services During the Bankruptcy
Representation
{11} Both the Tenth Circuit and New Mexico have adopted the transactional approach in
analyzing the single-cause-of-action element of res judicata. See Petromanagement Corp.
v. Acme-Thomas Joint Venture, 835 F.2d 1329, 1335-36 (10th Cir. 1988) (adopting the
Restatement (Second) of Judgments §§ 24-25 (1982) in determining what constitutes a single
cause of action for res judicata purposes in the Tenth Circuit); Three Rivers Land Co. v.
Maddoux, 1982-NMSC-111, ¶ 27, 98 N.M. 690, 652 P.2d 240 (same in New Mexico),
overruled on other grounds by Universal Life Church v. Coxon, 1986-NMSC-086, ¶ 9, 105
N.M. 57, 728 P.2d 467. The transactional approach considers all issues arising out of a
“common nucleus of operative facts” as a single cause of action. Anaya v. City of
Albuquerque, 1996-NMCA-092, ¶ 8, 122 N.M. 326, 924 P.2d 735 (internal quotation marks
and citation omitted). The facts comprising the common nucleus should be identified
pragmatically, considering (1) how they are related in time, space, or origin, (2) whether,
taken together, they form a convenient trial unit, and (3) whether their “treatment as a single
unit conforms to the parties’ expectations or business understanding or usage.” Id. ¶ 12.
{12} Neither New Mexico nor the Tenth Circuit has specifically considered the preclusive
effect of a final fee award in bankruptcy court on a later action for legal malpractice, but
other jurisdictions that have addressed this issue have uniformly concluded that they are the
same cause of action for the purposes of res judicata. See, e.g., Capitol Hill Group v.
Pillsbury, Winthrop, Shaw, Pittman, LLC, 569 F.3d 485, 491 (D.C. Cir. 2009) (holding that
a fee application in bankruptcy court and a malpractice claim based on the same legal
services arise out of the same nucleus of facts and satisfy the cause-of-action identity
requirement of res judicata); Grausz v. Englander, 321 F.3d 467, 473 (4th Cir. 2003)
(holding that fee applications and a legal malpractice claim based on the same
representations arose from the same core of operative facts); Iannochino v. Rodolakis (In re
Iannochino), 242 F.3d 36, 46-49 (1st Cir. 2001) (holding that a fee application and a
malpractice claim based on the same representation met the cause-of-action identity
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requirement of res judicata); Osherow v. Ernst & Young, LLP (In re Intelogic Trace, Inc.),
200 F.3d 382, 388-89 (5th Cir. 2000) (holding that a fee application and a trustee’s
malpractice claims concerned the same nucleus of operative facts and met the transactional
test); Breslin Realty Dev. Corp. v. Shaw, 893 N.Y.S.2d 95, 100 (N.Y. App. Div. 2010)
(holding that res judicata barred a malpractice claim based on legal services considered in
a prior claim for fees, litigated and awarded, for the alleged-negligent services); Stangel v.
Perkins, 87 S.W.3d 706, 710-11 (Tex. App. 2002) (holding that fee-application and
malpractice claims based on the same representations concerned the same nucleus of
operative facts and met the transactional test). Under the United States Bankruptcy Code,
the bankruptcy court must consider “the nature, the extent, and the value” of services to
determine reasonable compensation before awarding fees. See 11 U.S.C. § 330(a)(3) (2012).
In these cases, courts have reasoned that because an action for legal malpractice concerns
the same issues of quality necessarily considered by the bankruptcy court, the claims are
based on the same cause of action.
{13} Although not in the bankruptcy context, New Mexico cases have also concluded that
a claim for attorney fees can have a res judicata effect on a later claim for malpractice. In
Brunacini v. Kavanagh, the Court of Appeals determined that a suit for legal fees and a later
suit for malpractice had a common origin and subject matter. See 1993-NMCA-157, ¶ 21,
117 N.M. 122, 869 P.2d 821. In Moffat v. Branch, the Court of Appeals affirmed a res
judicata bar applied to a contract-related claim for attorney fees in the state district court
after a federal court denied the attorney a charging lien, concluding that the two claims arose
from the common nucleus of the attorney’s representation in the underlying case. See 2005-
NMCA-103, ¶¶ 17-21, 138 N.M. 224, 118 P.3d 732. In Bennett v. Kisluk, addressing res
judicata under the compulsory counterclaim provisions of Rule 1-013 NMRA, the three-
justice majority acknowledged that a claim for attorney fees was “related substantially
enough” to bar a later action for malpractice. See 1991-NMSC-060, ¶ 10, 112 N.M. 221, 814
P.2d 89.
{14} We hold here that this reasoning extends to claims of malpractice after a bankruptcy
fee proceeding concerning the same legal services. Petitioner’s two claims are rooted in a
common nucleus of operative facts. The claim for legal malpractice concerns the same
service period and alleged deficiencies in the same legal services that were the subject of the
bankruptcy fee proceeding. Petitioner’s claims would have formed a convenient trial unit
because the bankruptcy court is already required to consider the quality of these services in
determining the appropriate fees and has procedures available to hear objections and institute
an adversarial proceeding if necessary. See 11 U.S.C. § 330(a)(1), (3)-(4) (requiring the
bankruptcy court to determine that legal services were necessary and reasonable before
approving fees); Fed. R. Bankr. P. 9014(a), (c) (2004) (requiring notice and the opportunity
for a hearing in a contested matter and outlining the procedural rules that will apply).
Treatment as a single unit would also conform to the parties’ expectations because objections
to services rendered must be raised in response to fee applications, see Fed. R. Bankr. P.
9014(a), advisory committee’s note (2004), and because Petitioner did raise malpractice
allegations in his objections to Respondents’ fees. For claim preclusion purposes,
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Petitioner’s malpractice claim constitutes the same cause of action as the earlier fee
proceeding in bankruptcy court.
B. Res Judicata Precludes Petitioner’s Malpractice Claim Because He Had a Full
and Fair Opportunity to Litigate It in the Bankruptcy Fee Proceeding
{15} Even if two actions are the same under the transactional test and all other elements
are met, res judicata does not bar a subsequent action unless the plaintiff could and should
have brought the claim in the former proceeding. In re Intelogic Trace, Inc., 200 F.3d at 388;
see also Bank of Santa Fe v. Marcy Plaza Assocs., 2002-NMCA-014, ¶¶ 24-27, 131 N.M.
537, 40 P.3d 442 (discussing in consideration of res judicata whether a party was aware at
a prior proceeding of its claim of overpayments). “Res judicata is a judicial creation
ultimately intended to serve the interests of justice.” Kirby, 2010-NMSC-014, ¶ 65 (italics
omitted). “[A] party’s full and fair opportunity to litigate is the essence of res judicata.”
Brooks Trucking Co. v. Bull Rogers, Inc., 2006-NMCA-025, ¶ 11, 139 N.M. 99, 128 P.3d
1076. The adjudication of fees does not provide a safe haven to lawyers or other
professionals later charged with malpractice. To the contrary, res judicata will only preclude
a malpractice claim if the facts demonstrate that it could and should have been brought
during the earlier proceeding.
{16} After a bankruptcy fee hearing and after determining cause-of-action identity under
the transactional test, federal courts have considered additional factors in determining
whether res judicata bars a subsequent malpractice claim. These factors “include whether
the fee hearing was an adversary proceeding or contested matter, the nexus between the
order awarding [professional] fees and the claims now being asserted, and ‘the amount of
time that has elapsed since the case commenced.’” In re Intelogic Trace, Inc., 200 F.3d at
388 (quoting In re Howe, 913 F.2d 1138, 1146 n.28 (5th Cir. 1990) (discussing the res
judicata effect of bankruptcy court confirmation of a reorganization plan on a later claim in
a state court for lender liability)). The fundamental determination is the fairness of
preclusion under the totality of the circumstances in each case. This determination rests on
the prior opportunity to litigate, and neither the type of proceeding nor the damages sought
are determinative. See, e.g., In re Howe, 913 F.2d at 1146 & n.28 (“We do not intimate that
whether an adversary proceeding preceded a confirmation hearing is a litmus test for
determining whether the action is barred by res judicata . . . . The critical question for res
judicata purposes is whether the party could or should have asserted the claim in the earlier
proceeding. Whether the proceeding was an adversary proceeding or contested matter,
however, may be an important factor in determining if the claim could or should have been
effectively litigated in the earlier proceeding.”).
{17} Petitioner asserts, relying on this Court’s opinion in Computer One, that litigation
on the issue of attorney fees based on a motion or lien can have no preclusive effect on a
later claim for malpractice. Computer One reversed a grant of summary judgment that had
precluded a legal malpractice claim because of the earlier approval of an attorney’s charging
lien in a suit between the client and a tortfeasor to which the attorney was not a party. 2008-
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NMSC-038, ¶¶ 1-3. Computer One followed Bennett to prohibit using Rule 1-013(A) to
preclude claims of legal malpractice after nonadversarial fee proceedings because that Rule,
applicable only to “‘opposing parties’” to an action, requires a formal adversarial
relationship in order to give such parties fair notice of the obligation to assert all defenses
or compulsory counterclaims. Computer One, 2008-NMSC-038, ¶¶ 23-25. Although the
Computer One Court reserved judgment as to whether broader concepts of res judicata
would apply, it did not expressly decide that issue because the defendant law firm had
conceded in the earlier fee proceeding that the plaintiff client would be able to bring a later
malpractice suit. Id. ¶ 36 & n.3. Accordingly, Computer One did not determine the issue now
before us, whether res judicata will bar a later claim that could have been litigated in an
earlier proceeding initiated by a motion for attorney fees. See Fernandez v. Farmers Ins. Co.
of Ariz., 1993-NMSC-035, ¶ 15, 115 N.M. 622, 857 P.2d 22 (stating the general rule that
“cases are not authority for propositions not considered” (internal quotation marks and
citation omitted)).
{18} In the Rule 1-013 analysis in Bennett that Computer One relied on, the Bennett
majority did suggest a possible distinction between the res judicata effect of a motion for
fees and that of a separate fee lawsuit, but Bennett cited no authority for this distinction
beyond the “opposing party” wording of our compulsory counterclaim rule and did not
address long-established principles of res judicata beyond the requirements of Rule 1-013.
Bennett, 1991-NMSC-060, ¶ 10. To the extent that Bennett could suggest such a rigid
distinction, we clarify here that the application of res judicata does not depend on whether
an earlier claim for fees is initiated procedurally through a motion or as a separate lawsuit,
although the type of proceeding may be a factor in determining if the subsequent claim could
or should have been litigated earlier. The reasoning of Bennett and Computer One
concerning Rule 1-013 does not apply equally to the general principles of res judicata at
issue here because the notion of fairness is built into the doctrine of res judicata and must
be independently considered in its application. Allowing the type of proceeding to be
determinative would defeat the broad case-by-case analysis required to determine whether
there has already been a full and fair opportunity to litigate a claim.
{19} Petitioner does not argue that his earlier bankruptcy fee proceeding did not allow him
to bring a malpractice claim, and it is clear that under federal law bankruptcy court
procedures would have allowed such a claim. See, e.g., Capitol Hill Group, 569 F.3d at
489-90 (holding that malpractice claims stemming from services provided in bankruptcy
proceedings fall within the jurisdiction of the bankruptcy court); Grausz, 321 F.3d at 474
(holding that a claim for affirmative relief from malpractice could have been filed in
bankruptcy court with an objection to a fee application); In re Intelogic Trace, Inc., 200 F.3d
at 389-91 (recognizing that a fee application in bankruptcy court is a contested matter to
which an objection may be filed and that an affirmative malpractice claim may be filed with
such an objection to initiate an adversary proceeding, and holding that bankruptcy court
procedures would allow a malpractice claim to be effectively asserted).
{20} Petitioner contends that because his bankruptcy discharge was not denied until more
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than two years after the proceeding to determine Respondents’ fees, he was unable during
the fee hearing to bring the particular malpractice claim he alleges here, the failure to list the
transfer of the Monte Mac asset in his bankruptcy schedules, because he had not yet suffered
injury from that omission. In New Mexico, a malpractice claim accrues when the plaintiff
suffers actual injury and discovers, or through the exercise of reasonable diligence should
discover, the facts essential to the claim. Sharts v. Natelson, 1994-NMSC-114, ¶ 11, 118
N.M. 721, 885 P.2d 642. Although Petitioner clearly alleged malpractice in his objection to
Respondents’ fees, the factual nature of those allegations is distinct from the failure to list
the Monte Mac asset, the claim at issue here. And to bar this malpractice claim, Petitioner
must have been specifically aware of the failure to list Monte Mac in his bankruptcy
schedules, must have suffered injury attributable to that failure, and must have been aware
of that injury. However, the requirement that Petitioner suffered injury does not mean, as
Petitioner now asserts, that he could not have brought this claim until his discharge was
denied. Bankruptcy courts do not have discretion to deny discharge to a debtor unless certain
rules of that court are violated, including the knowing and fraudulent failure to declare an
asset. See 11 U.S.C. § 727(a)(4) (2012) (listing exceptions to mandatory discharge). By
failing to list the transfer of the Monte Mac asset, Petitioner was exposed to the possibility
that his bankruptcy discharge could be denied. This exposure was the loss of a legal right to
have his debts discharged, in itself an actual injury. See Sharts, 1994-NMSC-114, ¶ 12
(“[W]hen malpractice results in the loss of a right, remedy, or interest, or in the imposition
of a liability, there has been actual injury.” (internal quotation marks and citation omitted)).
{21} The record shows that Petitioner was aware of the sale of his interest in Monte Mac
because that sale occurred only one month prior to his filing for bankruptcy. He was or
should have been aware that this sale was not listed in his bankruptcy schedules because he
reviewed those schedules and testified to their accuracy. He was also aware that those
schedules were not accurate because he stated in his objection to Respondents’ fee
application, filed May 22, 2006, that he had instructed Respondents to withdraw his
disclosure statement because it did not accurately depict his financial affairs. Finally, he was
aware that the failure to disclose this transfer exposed him to a denial of discharge because
he was questioned by creditors regarding the sale and because he alleged this denial of
discharge as damages attributable to malpractice in a motion to the bankruptcy court filed
before the actual denial of his discharge.
{22} We agree with the courts below that Petitioner was aware of his claim and could and
should have brought that claim in the bankruptcy proceeding. Petitioner alleged malpractice
based on inaccuracies in his financial disclosures a year before the bankruptcy fee hearing.
While the questioning regarding Monte Mac did take place after the fee hearing, it was only
one day later and was before the entry of the final fee judgment. Even after the entry of that
judgment, Petitioner had the opportunity to move for a new trial, to move to alter or amend
the judgment, or to appeal. See Fed. R. Bankr. P. 9023 (1983) (applying Fed. R. Civ. P. 59
(1995) (allowing a motion for a new trial, Subsection (b), or the alteration or amendment of
a judgment within 10 days of the entry of judgment, Subsection (e))); Fed. R. Bankr. P.
8002(a) (1997) (allowing a notice of appeal to be filed within 10 days after the entry of
8
judgment). Petitioner’s motion alleging the potential for a denial of discharge as damages
from malpractice was filed over a year before the actual denial of his discharge and less than
a year after the fee judgment, at which point he could still have requested postjudgment
relief. See Fed. R. Bankr. P. 9024 (1991) (applying Fed. R. Civ. P. 60(b) (1987) (allowing
relief from final judgment due to newly discovered evidence within one year of the entry of
judgment)). We therefore conclude that Petitioner had a full and fair opportunity to litigate
his malpractice claim in the bankruptcy court and that res judicata applies to preclude it in
this second proceeding.
IV. CONCLUSION
{23} We affirm the grant of summary judgment to Respondents.
{24} IT IS SO ORDERED.
____________________________________
CHARLES W. DANIELS, Justice
WE CONCUR:
____________________________________
BARBARA J. VIGIL, Chief Justice
____________________________________
PETRA JIMENEZ MAES, Justice
____________________________________
RICHARD C. BOSSON, Justice
____________________________________
LINDA M. VANZI, Judge
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