Grausz v. Englander

• Decision Date: 06 March 2003
• Docket Number: No. 01-2317.,01-2317.
• Citation: 321 F.3d 467
• Parties: Henry GRAUSZ, M.D., Plaintiff-Appellant, v. Bradford F. ENGLANDER; Linowes and Blocher, L.L.P., Defendants-Appellees.
• Court: U.S. Court of Appeals — Fourth Circuit

321 F.3d 467

Henry GRAUSZ, M.D., Plaintiff-Appellant, v. Bradford F. ENGLANDER; Linowes and Blocher, L.L.P., Defendants-Appellees.

No. 01-2317.

United States Court of Appeals, Fourth Circuit.

Argued September 23, 2002.

Decided March 6, 2003.

ARGUED: Joseph Daniel Gallagher, Gill & Sippel, Rockville, Maryland, for Appellant. Andrew Jay Graham, Kramon & Graham, P.A., Baltimore, Maryland, for

Appellees. ON BRIEF: Geoffrey H. Genth, Kramon & Graham, P.A., Baltimore, Maryland, for Appellees.

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.

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 Commercial 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 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 bankruptcy 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 packing 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 household 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 necessary to list his community property interests on the amended schedules.

The unsecured creditors' committee, chaired by Sampson, arranged for an inventory of Grausz's storage unit in October 1999. The inventory revealed that valuable items on the packing list were missing. In January 2000 the creditors' committee objected to Grausz's disclosures, 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 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 packing 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 nondischargeability 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 incompetence 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 [Englander'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 bankruptcy court approved the Linowes' firm's first interim fee application, awarding fees of nearly $250,000. On May 18, 2000, Englander, on behalf of the Linowes firm, moved to withdraw as Grausz's counsel, 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 agreement 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 satisfactorily 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 Circuit Court for Prince George's County, Maryland. He alleges that the Linowes firm (1) negligently failed to advise him to list his community 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 judicata 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 principles 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 jurisdiction under 28 U.S.C. § 1334(b). Section 1334(b) gives district courts "original but not exclusive jurisdiction of all...