The Ninth Circuit holds the bankruptcy court has jurisdiction over a legal malpractice action against an attorney for an unsecured creditors’ committee, and the attorney did not owe a duty of care to individual committee members.
Plaintiffs Richard Schultze, Lorenze Zunino, Robert Bechetti, and Richard Questoni (Schultze) were investors in Colusa Mushroom, Inc., which filed a Chapter 11 bankruptcy petition. The unsecured creditors’ committee employed David Chandler as its counsel. The court approved a secured installment sale of Colusa to Premier Mushroom, LP, and a pro rata distribution to creditors.
Chandler did not participate in the closing. Colusa’s attorney failed to perfect the estate’s junior security interest, and Premier was able to take on additional loans and over-encumber secured assets. Schultze recovered significantly less than he would have had the security interest been perfected.
Schultze sued Chandler in state court alleging Chandler was negligent in failing to ensure Colusa’s attorney perfected the security interest. Chandler removed the matter to bankruptcy court. The bankruptcy court denied Schultze’s motion to remand to state court, and granted Chandler’s motion to dismiss because he had no duty to the individual plaintiffs.
The Ninth Circuit affirmed, holding the bankruptcy court had jurisdiction over the legal malpractice action as a “core” proceeding. The bankruptcy court approved the employment and compensation of Chandler, and his duties pertained solely to the administration of the bankruptcy estate. Moreover, Schultze’s claim was based solely on acts that occurred in the administration of the estate.
Chandler did not owe the individual creditors a duty of care. Chandler was appointed by the bankruptcy court to represent the Committee; the written agreement was between Chandler and the Committee; and he was paid for his role as counsel for the Committee. He acted as counsel for the Committee; not the individual creditors.
Further, the Committee was not involved in the sale. Chandler was not tasked with recordation of the financing statement, and did not have a right to do so. That duty fell solely to Colusa’s attorney.
Comment: This is one opinion representing divergent views on whether a legal malpractice claim, based on state law, is a “core” proceeding subject to exclusive bankruptcy court jurisdiction.