Where the attorney was sued for malpractice by his former client, the district court did not err in allowing the circuit court malpractice suit to proceed. While the attorney argued that the circuit court lacked jurisdiction over the suit, the district court determined that the record did not necessarily support that argument.
Smith Development built luxury residential housing before it filed for bankruptcy in early 2009. Martin Conway and his law firm assisted the company in filing its Chapter 11 bankruptcy petition and represented it in the subsequent Chapter 11 proceedings.
As the bankruptcy progressed, Smith Development initiated three adversary proceedings against home buyers who had defaulted on contracts. While those actions were pending, the bankruptcy court converted the bankruptcy to a Chapter 7 case. Post-conversion, the Chapter 7 trustee retained Conway as special counsel to represent the trustee in the pending adversary actions. With the approval of the trustee and the bankruptcy court, Conway settled all three actions.
In April 2017, Smith Development sued Conway in the Alexandria circuit court, alleging legal malpractice arising from Conway’s representation of Smith Development during the Chapter 11 proceedings and representation of the trustee in the Chapter 7 proceedings. Smith Development later nonsuited the action. In April 2019, the company filed a new malpractice action in Alexandria circuit court, reprising many of the same theories as its earlier suit.
The company then moved in bankruptcy court for permission under Barton v. Barbour, 104 U.S. 126 (1881), to proceed with the lawsuit. In Barton, the Supreme Court held that “before another court may obtain subject-matter jurisdiction over a suit filed against a receiver for acts committed in his official capacity, the plaintiff must obtain leave of the court that appointed the receiver.” The bankruptcy court denied the request and Smith Development’s motion to reconsider.
Undeterred, Smith Development forged ahead and amended its state-court complaint, dropping the Chapter 11 allegations and alleging malpractice arising only from Conway purportedly representing Smith Development and the trustee simultaneously in the Chapter 7 proceedings. According to Smith Development, the conflict of interest arising from the alleged concurrent representation influenced Conway to settle the three adversary actions for far less than their actual value.
Conway asked the bankruptcy court to enjoin Smith Development’s pending malpractice suit under Barton and to award Conway damages for the expenses it incurred defending against the malpractice suits. The bankruptcy court issued a report and recommendation with findings and conclusions to the district court.
The district court rejected the bankruptcy court’s report and recommendation. It instead relied on 28 U.S.C. § 1334(c)(1) to abstain in favor of the state-court proceedings.
“Any decision to abstain or not to abstain” made by the district court under § 1334(c)(1) “is not reviewable by appeal or otherwise by the court of appeals.” Conway acknowledges the obstacle § 1334(d) poses but offers several reasons why that provision does not apply.
Underlying Conway’s arguments is an implicit request to recognize an exception to § 1334(d) that would allow this court to review a district court’s permissive abstention decision when it exceeds the scope of the court’s authority. Such an exception arguably exists; the Supreme Court has recognized a similar limitation on an analogous bar to appellate review in 28 U.S.C. § 1447(d), which limits review of certain orders remanding a case to the state court from which it was removed.
Courts that recognize an exception have interpreted § 1334(d) to “preclude appellate review of the reasoning contained in many remand orders” but not to “deprive appellate courts of jurisdiction to vacate a remand order issued in excess of a district court’s statutory authority.” The court need not resolve this lurking question, however, because even if it were to recognize the exception to § 1334(d) that Conway’s arguments presuppose, it would not apply here, as the district court’s order was well within its statutory authority.
Conway primarily argues that a district court is without authority to abstain in favor of a state court that lacks subject-matter jurisdiction due to a Barton violation. This argument falters because it assumes a Barton violation occurred. Yet the district court abstained in part because it determined the record did not yet show that Barton “would categorically deny the [state] court jurisdiction.”
Conway v. Smith Development, Case No. 22-1059, April 4, 2023. 4th Cir. (Rushing), from EDVA at Alexandria (O’Grady). Danny Mark Howell for Appellants. John Simon Lopatto III, Washington, D.C., for Appellee. VLW 023-2-093. 10 pp.