Articles Posted in Bankruptcy Malpractice

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One common issue that can trip up a litigant is the failure to disclose a civil lawsuit in a bankruptcy petition. The lawsuit is an asset of the bankruptcy estate. Failing to disclose the existence of the lawsuit can lead to the dismissal of the civil lawsuit. In Horvath v. Budin, Reisman, Kupferberg & Bernstein, LLP, 2021 N.Y. 30105 (U), the trial court (referred to in New York as the Supreme Court) denied the law firm’s motion to dismiss in just such a case.

After his civil lawsuit was dismissed for failure to include it as an asset of the bankruptcy estate, Horvath sued the law firm for negligence.  The summary of the facts indicates that the civil lawsuit was not disclosed until after Horvath’s Chapter 13 plan was confirmed.

In 2009, plaintiff filed a Chapter 13 Petition in the United States Bankruptcy Court for the District of New Jersey (“the Bankruptcy Court”) under Case No. 09-38537-KCF. Doc. 22. Plaintiff was represented in the bankruptcy proceeding by Jules Rossi, Esq. Doc. 22. On September 15, 2010, plaintiff was allegedly injured while he was a passenger in an elevator in a building in Manhattan. Doc. 21 at par. 4. Plaintiff thereafter retained the Law Offices of Michael Lamonsoff (“Lamonsoff”) to commence a personal injury action on his behalf against Gumley Haft Kleier Inc. (“GHK”) and Eltech Industries (“Eltech”). The action against GHK and Eltech was commenced in the Supreme Court, Bronx County in 2010 under Index Number 310013/10 (“the Bronx County action”). Doc. 17 at par. 16. Lamonsoff also represented plaintiff in an unrelated personal injury action commenced in New York County in 2010 under Index Number 115395/10 (“the New York County action”). Doc. 17 at par. 17.

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In re Bruess, No. 19-2714, was decided by the District Court for the District of Minnesota. The debtor claimed that her bankruptcy lawyer made an error by filing a chapter 7 case on her behalf and thereby making her homestead interest in property subject to creditor claims. The court also held that the malpractice claim was an asset of the bankruptcy court. I don’t doubt that the reasoning was correct, but the practical effect is that the debtor’s interest in the claim will be subject to the claims of her creditors. The result of the case is a double whammy for the debtor.

Background Facts and Procedural History

On January 14, 2013, Plaintiff Sandra Jo Bruess of New Ulm, Minnesota, was granted a one-third interest in her father’s Brown County property (“Homestead”) valued at $562,760.33.[1] (Notice of Appeal, Attachment 4 (“Order on Appeal”) at 2, October 15, 2019, Docket No. 1.) Despite knowing of the Homestead interest, Bruess’s attorney, Stephen Behm, advised her to file for bankruptcy relief. (Id. at 4.) Behm incorrectly assured Bruess that her entire interest in the Homestead would be protected in bankruptcy. (Id.) On December 15, 2014, Bruess filed for Chapter 7 bankruptcy and claimed an exemption on her one-third interest in the Homestead. (Id. at 2.)

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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.

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