Lawyer could not sue bankruptcy counsel

A patent attorney who was unhappy with his bankruptcy lawyer’s performance cannot sue the lawyer because his malpractice claim belongs to the bankruptcy estate, an Alexandria federal judge said on April 14.

Embroiled in litigation from a failed venture with a biotech company, the patent attorney later was denied a discharge in bankruptcy because of his lawyer’s failure to disclose a property transfer that occurred months before the bankruptcy filing.

When the patent attorney filed a malpractice claim in state court, the bankruptcy lawyer removed the case to federal court and won a dismissal for lack of subject matter jurisdiction.

Because the malpractice claim also was not disclosed to the bankruptcy court, the patent lawyer could not take it up again. The bankruptcy court, not the debtor, had standing to pursue the malpractice claim.

The federal court remanded the claim back to the Alexandria Circuit Court.

Bankruptcy case

In 2006, patent lawyer Marc R. Labgold became chief executive officer of a biotechnology company, Antara Biosciences. The company was unsuccessful and Labgold left in July 2007, according to Judge Anthony J. Trenga’s opinion in Labgold v. Regenhardt (VLW 017-3-196).

Trenga’s opinion recounts allegations about the sequence of events leading to the malpractice action.

Investors and former employees sued Antara in late 2007. In September 2012, Labgold was joined as a defendant in a lawsuit filed by former employees.

Labgold married on Dec. 21, 2012. On Jan. 7, 2013, on the advice of counsel not a party to the case before Trenga, Labgold transferred ownership of his house to himself and his wife as tenants by the entirety. At the time, his law practice was generating “significant monthly revenues and he expected the Antara litigation against him to be settled,” Labgold alleged.

In spring 2013, however, settlement talks failed and the monthly revenues from Labgold’s law practice declined significantly. He consulted defendant Linda Regenhardt about possibly filing a Chapter 11 bankruptcy. She advised him to file a Chapter 7 petition, which he filed on July 23, 2013.

The bankruptcy trustee filed an adversary proceeding regarding the undisclosed property transfer of Labgold’s home, which he eventually settled for $180,000. At a hearing on the trustee’s second adversary proceeding objecting to discharge, Regenhardt testified that she made a number of mistakes in Labgold’s petition, including failing to disclose the property transfer, which Labgold had disclosed to her, according to his complaint.

On Jan. 15, 2015, the bankruptcy court denied Labgold’s discharge of unsecured debts in excess of $600,000, finding that the T by E transfer of his home to himself and his wife was intended to hinder his creditors.

Although Labgold was not a real estate lawyer, he “went to law school and would have understood” that the effect of transferring the property to himself and his wife would have put the property beyond the reach of the Antara creditors, the bankruptcy judge said.

Malpractice action

Before his bankruptcy case was closed, Labgold filed a malpractice suit against Regenhardt in Alexandria Circuit Court. He alleged Regenhardt was negligent in advising him to file the Chapter 7 petition within a year of the property transfer, and by failing to tell the bankruptcy court about the real estate transfer, which he had disclosed to her.

Regenhardt removed the suit to federal court. Trenga granted her motion to dismiss the suit for lack of subject matter jurisdiction.

The issue, the judge said, was whether Labgold’s malpractice claim existed at the time he filed his Chapter 7 petition.

Under Virginia law, Labgold’s malpractice cause of action accrued as of the commencement of the case, and the cause of action became the property of the bankruptcy estate, Trenga said. The patent lawyer did not have standing to bring that claim.

Labgold sought to amend his complaint to allege his malpractice claim was based solely on the lawyer’s post-petition breaches and advice provided after the petition was filed, which led to the denial of a bankruptcy discharge.

Labgold’s later position did not square with Virginia case law, specifically, the 2004 Supreme Court decision in iiiShipman v. Kruck,iii the federal judge said.

In Labgold’s case, all of the alleged breaches, both pre- and post-petition, arose out of a continuous course of representation pertaining to a single scope of representation – Labgold’s bankruptcy – the court said. There was no “distinct injury” based on post-petition negligence rather than pre-petition negligence.

Because the malpractice claim was not disclosed in the bankruptcy case, it was not abandoned back to Labgold when the bankruptcy case was closed.

By statute, Trenga had to remand the case to the state court.