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District Court Affirms Legal Malpractice Judgment Against Debtor’s Bankruptcy Lawyers

In this case, a taxi driver was advised by his bankruptcy lawyers to file a Chapter 7 case. The lawyers apparently failed to realize that the taxi driver owned a taxi medallion and that, in a Chapter 7 case, the medallion would be sold by the Trustee to cover the taxi driver’s debts.

The case is unusual because the debtor obtained new counsel who converted his case from Chapter 7 (liquidation) to Chapter 11 (reorganization). Successor counsel also filed a legal malpractice claim in the bankruptcy court. That court held that the first set of bankruptcy lawyers were liable and awarded economic damages. The decision is summarized below:

On September 16, 2013, the Bankruptcy Court issued the PFC. PFC at 27. In the PFC, the Bankruptcy Court found that Defendants committed malpractice by advising Plaintiff to file bankruptcy under Chapter 7. PFC at 18. Specifically the Bankruptcy Court found that: (1) Defendants were aware that Plaintiff owned a taxicab and taxi medallion prior to Plaintiff filing under Chapter 7 bankruptcy, (2) Defendants acknowledged that advising Plaintiff to file under Chapter 7 was error given Plaintiff’s assets, (3) Defendants made numerous errors in preparation of the Chapter 7 petition and failed to adequately correct those errors, (4) Defendants “abandoned” Plaintiff by failing to address the Trustee’s motions or advise Plaintiff of his right to convert to a favorable chapter which led to substantial administrative expenses, and (5) Defendants’ negligent representation was the proximate cause of Plaintiff’s damages. PFC at 14-20.

As a result, the Bankruptcy Court recommended that Plaintiff be entitled to recover: (1) the administrative expenses related to the Chapter 7 bankruptcy, (2) the balance of time Defendants billed during the Chapter 7 bankruptcy,[11] (3) four months of lost wages, and (4) the retainer fee paid to Defendants. PFC at 20-26. The total amount of damages recommended was $134,224.37. PFC at 27.

The district court affirmed the judgment in all respects and had no sympathy for bankruptcy lawyers who filed the wrong type of bankruptcy case for an unsophisticated client.

Additionally, while Defendants disclaim that they knew about the medallion prior to filing, they concede that if they had known about the medallion, they would not have advised Plaintiff to file under Chapter 7. Bankr. Hr’g Tr., 6/5 at 120:24-121:01. Therefore, because the Bankruptcy Court correctly found that Defendants knew about Plaintiff’s medallion prior to filing the Chapter 7 petition, and because filing Plaintiff under Chapter 7 was not a reasonable course of action under the circumstances, Defendants committed legal malpractice by failing to exercise the ordinary reasonable skill and knowledge commonly possessed by a member of thelegal profession.

In addition to Defendants’ negligent advice to file Plaintiff under Chapter 7, Defendants were also negligent in the preparation of Plaintiff’s Chapter 7 petition. As noted above, Plaintiff’s Schedules and SOFA were deficient in several material respects.[13] Had Defendants properly reviewed the Schedules and SOFA, they would have known that they were inaccurate and required further attention. When problems are revealed during an attorney’s independent verification, the attorney should conduct a more thorough examination, “by asking questions, obtaining additional documents, or by some other means”. In re Parikh, 508 B.R. 572, 586 (Bankr. E.D.N.Y. 2014) (citing In re Seare, 493 B.R. 158, 209-11 (Bankr. D. Nev. 2013)). Furthermore, Defendants have a duty to “independently verify publicly available facts to determine if the client representations are objectively reasonable.” See In re Parikh, 508 B.R. at 585-86 (citing Hadges v. Yonkers Racing Corp., 48 F.3d 1320, 1329-30 (2d Cir.1995). Although Defendants met with Plaintiff numerous times and had every opportunity to verify the information on the forms, they failed to do so.

In sum, while this case is unusual in that the bankruptcy court heard the malpractice action, the opinion is well reasoned and thorough.

Edward X. Clinton, Jr.

Source: IN RE LINDO, Dist. Court, SD New York 2015 – Google Scholar